Morgan County Feeders, Inc. v. James L. McCormick, Jr.
836 P.2d 1051 (1992)
Premium Feature
Subscribe to Lexplug to listen to the Case Podcast.
Rule of Law:
Under the Uniform Commercial Code (UCC), the classification of goods as 'equipment' versus 'inventory' is a factual determination based on the debtor's principal intended use of the property. Goods used as long-term assets in a business are considered equipment, even if those goods are not typically classified as such.
Facts:
- Morgan County Feeders, a secured creditor, had a security agreement with Neil Allen that included an after-acquired property clause.
- Allen purchased 45 longhorn cows and one bull.
- Allen's stated principal purpose for acquiring the cattle was to use them for recreational cattle drives, a business activity with a relatively long period of use.
- Allen entered into an oral agreement to sell the cattle to James L. McCormick.
- The sale from Allen to McCormick was completed without Morgan County Feeders' written consent or receipt of the proceeds.
Procedural Posture:
- Morgan County Feeders obtained a default judgment against Neil Allen in 1990.
- Morgan County Feeders initiated a garnishment proceeding in the trial court to seize cattle in the possession of Roy Creamer.
- Creamer contested the garnishment, and Morgan County Feeders filed a motion to join third-party claimant James L. McCormick.
- The trial court granted the motion, and the parties agreed to sell the cattle and place the proceeds with the court.
- After a hearing, the trial court entered judgment for Morgan County Feeders, finding the cattle were 'equipment' and that McCormick bought them subject to Morgan County Feeders' security interest.
- James L. McCormick, as the interested third-party, appealed the trial court's judgment to the Colorado Court of Appeals (the intermediate appellate court).
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Under the UCC, are cattle used principally for recreational cattle drives properly classified as 'equipment' rather than 'inventory,' thus preventing a subsequent purchaser from taking the cattle free of a prior perfected security interest?
Opinions:
Majority - Judge Rothenberg
Yes, under these unique circumstances, the cattle are properly classified as 'equipment.' The classification of goods under the UCC is determined by their principal use, which is a question of fact. The court's reasoning relied on the test that distinguishes between goods held for immediate or ultimate sale (inventory) and goods used as fixed assets with a relatively long period of use in the business (equipment). Allen's testimony and other evidence demonstrated his primary intent was to use the longhorn cattle for his recreational cattle drive business, not for resale. Therefore, the trial court's finding that the cattle were 'equipment' was supported by the record, and McCormick, the buyer, took the cattle subject to Morgan County Feeders' perfected security interest. The court also found no evidence that Morgan County Feeders had impliedly authorized the sale, as its security agreement required it to receive the proceeds from any sale, which did not happen.
Analysis:
This case serves as a crucial reminder that UCC classifications are functional and fact-dependent, not based on the inherent nature of the goods. By classifying live cattle as 'equipment,' the court demonstrated the flexibility of the UCC framework and prioritized the debtor's intended use over traditional categorizations. This decision establishes that even unusual classifications are permissible if supported by evidence, impacting future cases by requiring a deeper inquiry into the specific business use of collateral. It significantly affects buyers, who cannot assume that certain types of goods (like livestock) are always inventory and must conduct due diligence on potential pre-existing security interests.
Unlock the full brief for Morgan County Feeders, Inc. v. James L. McCormick, Jr.