Sunshine Heifers, LLC v. Purdy et al
Filing
13
MEMORANDUM OPINION AND ORDER by Chief Judge Joseph H. McKinley, Jr. on 8/15/2016: The Bankruptcy Court's decision is AFFIRMED. cc: counsel, USBC (Hon. Joan A. Lloyd) (JBM)
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF KENTUCKY
BOWLING GREEN DIVISION
CIVIL ACTION NO. 1:15-cv-00110-JHM
SUNSHINE HEIFERS, LLC
APPELLANT
V.
LEE H. PURDY and
CITIZENS FIRST BANK
APPELLEES
MEMORANDUM OPINION AND ORDER
This matter is before the Court upon an appeal from Bankruptcy Court of the Western
District of Kentucky [DN 7]. Fully briefed, this matter is ripe for decision.
I. BACKGROUND
The relevant facts of this case have been set forth in the opinion of Bankruptcy Court for
the Western District of Kentucky, In re Purdy, No. 12-11592(1)(12), 2015 WL 5176580, at *6
(Bankr. W.D. Ky. Sept. 2, 2015), and there is no need to fully repeat them here. Briefly, this
case involves the competing interests of Sunshine Heifers LLC, (hereinafter “Sunshine”), which
leased cattle to Lee Purdy (hereinafter “Purdy”), and Citizens First Bank (hereinafter “CFB”),
which had a security interest in “all . . . Chattel Paper, Accounts, Equipment, Farm Products,
Livestock including increase and supplies . . . currently owned or hereafter acquired” by Purdy.
Id. Purdy filed bankruptcy and the cattle remaining in his possession were auctioned. Both
Sunshine and CFB claim the auction proceeds.
Initially, the Bankruptcy Court determined that the Dairy Cow Leases were in fact
disguised security agreements and were subject to CFB’s first filed security interest. In re Purdy,
490 B.R. 530, 540 (Bankr. W.D. Ky. 2013), aff’d sub nom. Sunshine Heifers, LLC v. Purdy, No.
1:13CV-00049-JHM, 2013 WL 5407045 (W.D. Ky. Sept. 25, 2013), rev’d and remanded sub
nom. In re Purdy, 763 F.3d 513 (6th Cir. 2014). This Court affirmed the bankruptcy court’s
determination.
Sunshine Heifers, 2013 WL 5407045, at *8.
The Sixth Circuit, however,
reversed the decision, finding that the Dairy Cow Leases were in fact true leases, not disguised
security agreements. In re Purdy, 763 F.3d at 521. The Sixth Circuit remanded the case to the
bankruptcy court “for further proceedings consistent with this opinion.” Id.
Upon remand, the Bankruptcy Court determined that even though the Dairy Cow Leases
were true leases, CFB’s security interest attached to all of the cattle delivered to Purdy’s farm
because all “cattle were delivered to Purdy, incorporated into his operation and were being fed,
cared for and producing milk before Sunshine even had a signed lease with the Purdy.” In re
Purdy, 2015 WL 5176580, at *12. Furthermore, the Bankruptcy Court concluded that Sunshine
did not own any of the cattle at the time of the auction. Id. at *14. Sunshine now appeals that
decision.
II. STANDARD OF REVIEW
A federal district court has jurisdiction to hear appeals from “final judgments, orders, and
decrees” of the bankruptcy court. 28 U.S.C. § 158(a). On appeal, a district court reviews the
bankruptcy court’s finding of fact under a clearly erroneous standard, but reviews de novo the
bankruptcy court’s conclusions of law. Nicholson v. Isaacman (In re Isaacman), 26 F.3d 629,
631 (6th Cir. 1994). A finding of fact is clearly erroneous when “although there is evidence to
support the finding, the reviewing court on the entire evidence is left with a definite and firm
conviction that a mistake has been committed.” Kalamazoo River Study Group v. Rockwell
Intern. Corp., 274 F.3d 1043, 1047 (6th Cir. 2001).
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III. DISCUSSION
Sunshine challenges several of the Bankruptcy Court’s conclusions of law including its
decision to reopen the issue of ownership, its determination that the branding statute does not
apply in this case, its decision that CFB’s security interest attached to all cattle, and the ruling
that all proceeds from the auction belong to CFB rather than Sunshine based on the proof and
evidence presented. Accordingly, the Court will address these arguments below.
A. The Sixth Circuit’s Decision Regarding Ownership of the Cattle
Sunshine first argues that the Bankruptcy Court erred when it decided to take testimony
to determine the ownership of the cattle sold at the auction. Sunshine argues that the Sixth
Circuit determined ownership of the cattle and the Bankruptcy Court violated the “mandate rule”
by re-trying the issue on remand. Generally, “[w]hen a superior court determines the law of the
case and issues its mandate, a lower court is not free to depart from it.” Waste Mgmt of Ohio,
Inc. v City of Dayton, 169 F. App’x 976, 986 (6th Cir. 2006). However, “[t]he mandate rule is a
specific form of the law of the case doctrine.” Id. At its heart, “[t]he basic tenet of the mandate
rule is that a [lower court] is bound to the scope of the remand issued by the court of appeals.”
Id. (citations omitted).
Sunshine points to two sentences in the opinion to support its argument. In discussing
whether the cattle leases were true leases or disguised security agreements, the Sixth Circuit
stated that “[o]wnership of this herd—in our view—is a significant asset, and thus, we hold that
Sunshine retained a meaningful reversionary interest.” In re Purdy, 763 F.3d at 521.
The
opinion also stated that “[i]f the agreements are true leases, then Sunshine has a reversionary
interest in [289] head of cattle and is entitled to approximately [$301,000] from the cattle
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auction.”1 Id. at 518. Sunshine argues alternatively that the Sixth Circuit impliedly decided the
question of ownership because “the ownership issue was a necessary step and it was closely
related to the ‘true lease’ or disguised security agreement distinction.” (Sunshine Brief [DN 7] at
16.) Overall, Sunshine contends that since the Sixth Circuit determined that the leases were true
leases, “it logically follows that it resolved the ownership issue as well.” (Id.) Therefore,
according to Sunshine, the Bankruptcy Court erred when it held an evidentiary hearing regarding
the ownership of the cattle sold at auction.
The Court disagrees. The Bankruptcy Court stated that the purpose of the hearing was to
determine “ownership of the cattle on the Debtor’s dairy farm at the time of the auction and
whether any of the cattle sold were owned by the Debtor, if so, how many and whether any of
the cattle were under lease from Sunshine and if so, how many.” In re Purdy, 2015 WL
5176580, at *3. The question presented to the Sixth Circuit was “whether these ‘Dairy Cow
Leases’ are true leases or disguised security agreements.”
In re Purdy, 763 F.3d at 519.
Although the Sixth Circuit looked to the lease terms to determine whether Sunshine owned the
cattle subject to the leases and whether it retained a meaningful reversionary interest in the cattle,
it did not determine that the cattle which were sold at auction were owned by Sunshine and
subject to the Dairy Cow leases. The Court believes the second sentence referred to above was
simply the circuit court restating the position of the parties. Therefore, the Court finds that the
Bankruptcy Court did not violate the mandate rule by holding an evidentiary hearing to
determine who owned the cattle that were auctioned.
1
The figures reflected in the Sixth Circuit’s original opinion were later adjusted to approximately $301,000 because
only 289 of Sunshine’s cattle were actually found to be on Purdy’s farm at the time of the auction. (Sunshine’s
Brief [DN 7] at 15.)
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B. Ownership of the Cattle
The Bankruptcy Court determined that the issue before it was “whether the 415 head of
cattle sold at the auction by the Trustee were cattle subject to the Dairy Cow Leases or whether
the cattle were owned outright by the Debtor and subject to CFB’s security interest.” Id. at *6.
Judge Lloyd held an evidentiary hearing on July 14, 2015 in which she heard testimony from
Purdy, Jeff Blevins of Sunshine, cattle farmers involved in the various transactions, including
Kendall Branstetter and Danny Layton, CFB representatives, and the auctioneer, Bill Chase. In
re Purdy, 2015 WL 5176580, at *3, *6–*10, *14. Ultimately, the Bankruptcy Court determined
that the cattle sold at auction were not subject to the Dairy Cow Leases.
Sunshine first challenges the Bankruptcy Court’s decision by arguing that it made several
errors of law with respect to the application of KRS 253.060, the branding statute. However,
even if Sunshine is correct as to the legal application of the branding statute, the Bankruptcy
Court made clear that it found the Debtor’s testimony sufficient to rebut any prima facie
evidence presumed by the statute. At the time of the auction 289 out of 415 cattle bore two
indicia of ownership: Sunshine’s brand and CFB’s white ear tags. Id. at *10. Clearly these cattle
were branded mistakenly, tagged incorrectly, or a combination of both. Purdy testified to “over
branding” the cattle and branding regardless of ownership. Id. at *9–*11. Because of the
systemic uncertainty, the Bankruptcy Court determined that the branding and tagging evidence
was inconclusive and “not probative” of ownership. Id. at *10, *14–*15. The Bankruptcy Court
had the opportunity to weigh the evidence and judge the credibility of the witnesses in order to
make this determination. Its findings were not clearly erroneous.
The Bankruptcy Court examined the evidence relating to the transactions of each Dairy
Cow Lease. The Bankruptcy Court and the parties exerted a great deal of effort discussing
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whether the bank’s security interest attached to cattle despite the fact that the cattle were subject
to the Dairy Cow Leases. Sunshine obviously argued that the since the Sixth Circuit had
determined its leases were “true leases”, CFB’s security interest did not attached to the cattle
subject to those leases. However, the bankruptcy court was persuaded by the fact that “the cattle
were delivered to Debtor’s farm, incorporated into his operation and were being fed, cared for
and producing milk before Sunshine even had a signed lease with the Debtor” and that “in some
instances, third parties provided the cattle to Debtor and Debtor was the party actually providing
the funds for the initial purchase of the cattle, funds which came out of the CFB account and
constituted its collateral.” Id. at *12. The court concluded that Purdy “acquired rights in the
collateral at the time funds were used out of the CFB account for their purchase, regardless of the
fact that the funds were later reimbursed by Sunshine.” Id. at *14. The attachment was effective
because of “Debtor’s rights of ownership and control in the collateral.” Id. The Bankruptcy
Court concluded “that based on the testimony of record regarding how the cattle were purchased,
as well as how the replacement cattle were purchased, CFB’s security interest attached to all of
these cattle before Sunshine ever acquired any rights in the cattle.” Id.
The Bankruptcy Court relied on several cases that stand for the proposition that it is “the
‘outward appearance of the Debtor’s rights of ownership and control in the collateral that
determines whether attachment of the security interest is effective and not the rights of the party
who may have title to the collateral,’ as the determining feature in rights in the collateral.” In re
Purdy, 2015 WL 5176580, at *12 (quoting Brown, 622 F. Supp. at 1050). Additionally, the
Bankruptcy Court found persuasive several cases in which Purdy had “sufficient rights in
collateral for a security interest to attach, where the Debtor maintained the collateral, cared for
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the collateral and profited from its use.” Id. (citing In re Webb, 520 B.R.748 (Bankr. E.D. Ark.
2014); In re Williams, 208 B.R. at 885; Hubbard, 382 S.W.3d at 726).
The Court agrees with the Bankruptcy Court’s findings with respect to those instances in
which Purdy purchased the cattle himself and the cattle were delivered to his farm long before a
lease was executed. However, there were instances in which Sunshine bought the cattle, not
Purdy. There is support for an argument that at least in those cases, the bank’s security interest
would not attach since Purdy had no rights in the cattle. While the Court is inclined to agree
with Sunshine on this point, the reality is that this discussion is purely academic because the
Bankruptcy Court ultimately found that all of Sunshine’s cattle had been sold long before the
auction.
The Bankruptcy Court credited Purdy’s testimony by stating “Debtor testified that at the
time the Petition was filed, all cattle under the Sunshine Leases had been sold. This makes sense
considering the testimony that Debtor sold approximately 250 head of cattle between September
and November 2012.” Id. Sunshine argues that this was in error; however, it was well within
the Bankruptcy Court’s discretion to weigh the evidence and credibility of the witnesses. Jones
v. Simon, No. 5:13-CV-00161-TBR, 2014 WL 3695818, at *2 (W.D. Ky. July 24, 2014).2 The
Bankruptcy Court found that “[b]y July and August of 2012, Purdy estimated there were
approximately 750 head of cattle on the farm.
2
At a predictable, industry cull rate of
The Bankruptcy Court determined that both parties bore an equal burden on establishing ownership of the cattle
auctioned. In re Purdy, 2015 WL 5176580, at *11. A movant in a contested matter must prove his case by a
preponderance of the evidence. In re Transamerican Natural Gas Corp., 978 F.2d 1409, 1416 (5th Cir. 1992). A
preponderance of the evidence is defined as “the greater weight of the evidence . . . sufficient to incline a fair and
impartial mind to one side of the issue rather than the other.” Preponderance of the Evidence, Black’s Law
Dictionary (10th ed. 2014). The preponderance is found with the party demonstrating the stronger evidence,
“however slight the edge may be.” Id. Sunshine argues that CFB did not carry its burden because it presented no
evidence as to the ownership of the cattle but that Sunshine carried its burden because it had its brand to evidence
ownership. The Bankruptcy Court found the branding evidence to be unreliable and did not consider it probative
evidence. In re Purdy, 2015 WL 5176580, at *11. Instead, the court relied on Purdy’s credible testimony to render
its decision. Id. at *11, *14. Therefore, despite Sunshine’s argument to the contrary, because Sunshine’s evidence
was determined to be unreliable and CFB presented credible evidence (Purdy’s testimony), the Bankruptcy Court’s
determination that CFB carried its burden of proof was not clearly erroneous.
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approximately 30%, he culled and replaced approximately 200 head—all bought with checks
written on the CFB account.” In re Purdy, 2015 WL 5176580, at *10. And, “[b]etween
September and November[] 2012 he sold approximately 250 head, most of which had the
[Sunshine] brand.” Id. Due to these massive sales in 2012, the Bankruptcy Court found Purdy’s
statement that no Sunshine cattle remained on the farm at the time of the auction credible and
persuasive, noting that Purdy’s conclusion “makes sense” considering these sales. Id. at *14.
The question at the end of this case is whether any of the cattle sold at auction were
owned by Sunshine. The Bankruptcy Court determined that none were. These factual findings
regarding the nature and number of the cattle on Purdy’s farm at the time of the auction are to be
reviewed under “the ‘clearly erroneous’ standard of review, giving due regard to the bankruptcy
court’s opportunity to judge the credibility of the witnesses.” Jones, 2014 WL 3695818, at *2
(citation omitted). Thus, “[a] finding is ‘clearly erroneous’ when ‘although there is evidence to
support it, the reviewing court on the entire evidence is left with the definite and firm conviction
that a mistake has been committed.’” Id. (quoting United States v. U.S. Gypsum Co., 333 U.S.
364, 395 (1948)). Without “most cogent evidence of mistake or miscarriage of justice,” a
bankruptcy court’s findings of fact should not be disturbed. In re Caldwell, 851 F.2d 852, 857
(6th Cir. 1988).
Accordingly, this Court must affirm the Bankruptcy Court’s decision that “net sales
proceeds, exclusive of all costs associated with the sale and care of the cattle sold, totaling
$402,354.54 are awarded to Citizens First Bank.” Id. at *16.
IV. CONCLUSION
For the foregoing reasons, the Bankruptcy Court’s decision is AFFIRMED.
cc: counsel of record
Hon. Joan A. Lloyd, U.S.B.C. Judge
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August 15, 2016
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