In 2008, the debtor, Lee H. Purdy, obtained a loan from Citizens First Bank, using his dairy cattle herd as collateral. In July 2009, Mr. Purdy refinanced his loan with Citizens First and in connection with the refinance, granted the bank a purchase money security interest in, among other items, all livestock “currently owned [or] hereafter acquired.” Purdy and the bank entered into similar security agreements in August 2010 and in May 2012. All of the bank’s security interests were perfected.
Precautions for creditors to consider
The Purdy litigation contains some important lessons for creditors who wish to take a security interest in livestock, especially in the context of a dairy farmer. Increasingly, dairy farmers are turning to dairy cattle leasing as a way to deal with problems of limited capital. Dairy cattle leasing allows dairy farmers to gain access to higher quality dairy cows than they could normally afford, giving them the ability to free up capital for other purposes and to avoid using credit they may need for other purchases, such as land or machinery.
These precautions will go a long way to avoiding the problems that occurred in the Purdy litigation and will provide secured creditors with a greater likelihood of recovery in the event of a default by the borrower.
Further, in the event a dispute does arise with a lessor of dairy cattle regarding the ownership of certain dairy cattle in possession of the borrower, the Purdy case shows that the following provisions of the lease can be critical:
In the event of a dispute with a lessor, an examination of the lease at issue for the existence of these provisions, as well as any additional provisions indicating that the lessee actually owns the goods and that the lease is therefore actually a security agreement in disguise, will assist a secured creditor in predicting how a court will interpret a lease agreement and will help the secured creditor determine how best to proceed in attempting to recover with respect to its collateral.