In re Purdy

Lee Purdy (debtor) was a dairy farmer. Purdy borrowed money from Citizens First Bank (Citizens First) (creditor) to expand his operation. In exchange, Purdy gave Citizens First a purchase-money security interest in his farm equipment and livestock, including after-acquired property. Purdy used the funds borrowed from Citizens First to execute five dairy-cow leases with Sunshine Heifers, LLC (Sunshine) (creditor). Each lease had a term of 50 months, called for monthly payments, and required Purdy to return the cattle in resale condition. When Purdy filed for bankruptcy, Citizens First and Sunshine each filed motions to reclaim Purdy’s cows. Citizens First claimed to have a perfected purchase-money security interest in the cows, while Sunshine claimed that the cows were merely leased and still the property of Sunshine. Citizens First argued that Purdy’s leases with Sunshine were not true leases but rather secured sales in disguise. Under state law, a lease was considered a security agreement per se if the lease term was greater than the economic life of the leased goods. The bankruptcy court found that it was industry practice was to cull 30 percent of a typical dairy herd each year. The culled cows were replaced with new cows. Because this practice would have left no original leased cows in the herd at the conclusion of the lease’s 50-month term, the bankruptcy court found that the lease term was longer than the economic life of the leased cows. Therefore, the leases with Sunshine were per se security agreements. Under bankruptcy law, Citizens First’s perfected purchase-money security interests in the cows was superior to Sunshine’s security interest, and the bankruptcy court therefore permitted Citizens First to claim the cows. The district court affirmed the bankruptcy court’s determination, and Sunshine appealed.