Agrifund, LLC v. First State Bank of Shallowater

Texas farmers Leslie and Jennifer Gary borrowed money from Agrifund, LLC (defendant) to finance their farming operations. The Garys executed a security agreement stating that their repayment obligation was secured by various collateral, including the Garys’ interest in their crops. Agrifund perfected its security interest by filing a financing statement with the Texas secretary of state. In March 2018, the Garys defaulted on the Agrifund loan. Two months later, the Garys obtained a new loan from First State Bank of Shallowater (bank) (plaintiff), using the borrowed funds to purchase cotton seed and chemicals for their 2018 crop. The Garys executed a security agreement stating that their repayment obligation was secured by an interest in all crops grown by them in 2018. The bank perfected its security interest by filing a financing statement with the secretary of state. When the Garys later sold their 2018 cotton crop to a cotton association, the association issued eight payment checks. Agrifund was a payee on all eight checks, and the bank was a payee on four. The bank argued that it had a superior interest in the crop proceeds because its security interest was a perfected purchase-money security interest. The bank therefore asked Agrifund to release the crop proceeds to the bank. Agrifund refused, arguing that the bank’s security interest was not a purchase-money security interest because the Garys used the borrowed funds to purchase seed and chemicals, not the crop itself. Consequently, Agrifund argued that both parties had regular security interests and Agrifund’s interest was superior because Agrifund was the first in time to perfect its security interest in the crop. The bank sued Agrifund, seeking a declaratory judgment that the bank’s security interest was superior. The trial court granted summary judgment in the bank’s favor. Agrifund appealed.