In re Leonard

Charles Leonard (debtor) was a cattle salesman. Leigh Murphy d/b/a Murphy Cattle Company (Murphy) (creditor) sold cattle to Leonard pursuant to a written contract in 2015. Leonard paid $10,000 down and was to pay $802,910 at delivery. Meanwhile, Leonard also had an ongoing relationship with Sweetwater Cattle Company, L.L.C. (Sweetwater) (creditor). Leonard had a $2.5 million line of credit with Sweetwater. Sweetwater would advance money to Leonard to buy more cattle, feed and care for them, and ultimately sell them, taking the first proceeds to repay itself and then sending the rest to Leonard. It also kept a broad security interest in Leonard’s property, including after-acquired cattle. Sweetwater loaned Leonard nearly $600,000 to purchase the cattle from Murphy. Murphy signed a bill of sale for the cattle, but Leonard did not sign it, and it did not contain the parties’ mailing addresses. Leonard gave the bill to Sweetwater along with the cattle in question. Four of the five checks Leonard wrote to Murphy then bounced. Murphy utilized its right to reclaim the property based on nonpayment, obtained a court order allowing it to do so, and then retook the cattle and sold them for $883,073.25. Sweetwater was paid $215,119.87 for feeding and caring for the cattle. The remaining funds were held in escrow. Sweetwater and Murphy filed competing motions for summary judgment. The trial court ruled for Sweetwater, and Murphy appealed. Murphy contended that first, the transfer of the cattle to Leonard was not valid because the form did not contain Leonard’s signature or the parties’ mailing addresses, which meant Sweetwater’s security interest would not attach ahead of Murphy’s reclamation interest in the cattle. However, Murphy did not note on the face of the bill of sale that payment had not been tendered and Leonard lacked power to transfer title. Secondly, Murphy argued that Sweetwater was not a good-faith buyer for value, so its security interest did not trump Murphy’s reclamation rights, and specifically that Sweetwater should be held to the standard of a merchant, such that good faith required not only honesty in fact but also observance of reasonable commercial standards of fair dealing in the relevant trade. Leonard argued that when the cattle entered his possession, he had title. Sweetwater produced several witnesses, indicating that cattle industry veterans commonly would review the bill of sale to confirm ownership of the cattle in question.