Pleasant View Farms, Inc. v. Ness

455 N.W.2d 602, 12 U.C.C. Rep. Serv. 2d (West) 258, 1990 S.D. LEXIS 62, 1990 WL 59867

• Court: South Dakota Supreme Court
• Decided: May 9, 1990
• Docket: 16717
• Status: Published

Opinions

SABERS, Justice.

Pleasant View Farms (Pleasant View) claims the trial court erred when it concluded that LeRoy Ness had sufficient rights in twenty-five calves to allow the security interest of Farmers Home Administration (FmHA) to attach thereto.

Facts

In the fall of 1985, Darold Tomsheck, an officer of Pleasant View, reached an agreement with Ness whereby Ness would provide the care and feeding of certain livestock belonging to Pleasant View

* in exchange for the entire 1986 calf crop. Although no written contract was ever executed by the parties, the trial court found that the oral agreement provided:

Ness was to be liable for all death loss, from any cause whatsoever, exceeding two percent of the number delivered by Tomsheck. Ness was to compensate Pleasant View ... for any and all death loss exceeding said two percent by replacing said death losses with heifer calves of Tomsheck's choosing from the 1986 calf crop.

During April 1986, a severe blizzard killed fifty-one of the heifer cows. The surviving herd produced twenty-five calves.

Prior to the agreement with Pleasant View, Ness granted FmHA a security interest in his presently owned and after-acquired livestock. FmHA perfected its security interest in Ness’ livestock by filing financing statements.

The trial court concluded that Pleasant View was entitled to all twenty-five calves pursuant to the death loss provision of the agreement. However, the court concluded that Ness’ rights in the twenty-five calves were sufficient to enable the security interest of FmHA to attach to the calves. Consequently, FmHA’s perfected security interest in the calves took priority over the interest of Pleasant View. Pleasant View appeals the decision giving FmHA priority over the calves. We affirm.

Ness had rights in the collateral sufficient for a security interest to attach.

Before a security interest may attach to collateral, the debtor must have rights in the collateral. SDCL 57A-9-203(1). Full ownership by the debtor is not necessary, but the security interest will attach to the collateral only to the extent of the debtor’s rights in the collateral. 2 J. White and R. Summers, Uniform. Commercial Code § 24-6 at 322-3 (3d ed. 1988); see also D. Epstein, J. Landers, and S. Nickles, Debtors and Creditors 223 (3d ed. 1987) (“When a debtor has rights in collateral, the security interest she creates is coextensive with her rights.”). In that regard, mere possession of the collateral by the debtor is insufficient to enable a security interest to attach to the collateral. Rohweder v. Aberdeen Prod. Credit Ass’n, 765 F.2d 109 (8th Cir.1985); cf. First Nat’l Bank in Pierre, S.D. v. Feeney, 393 N.W.2d 458 (S.D.1986). Accordingly, “the security interest of a bailee’s creditor does not attach to goods which are the subject of a bailment.” Rohweder, supra at 112.

Although mere possession of collateral does not create sufficient rights in the collateral for a security interest to attach, the necessary rights, otherwise non-existent, may be created by means of estoppel. If the owner of collateral allows another to appear as the owner or to dispose of the collateral, such that a third party is led into dealing with the apparent owner as though he were the actual owner, then the owner will be estopped from asserting that the apparent owner did not have rights in the collateral. In re Pubs, Inc., 618 F.2d 432 (7th Cir.1980).

FmHA does not claim that Pleasant View should be estopped from challenging Ness’ rights in the collateral. As a result, FmHA’s security interest will attach to the calves only to the extent of Ness’ interest therein. Pleasant View claims that Ness held the calves pursuant to a bailment, resulting in insufficient rights for a security interest to attach. However, the oral agreement between Pleasant View and Ness, as found by the trial court, provides otherwise.

Under the agreement, Ness was “to keep the entire 1986 calf crop,” but he was required to “compensate ” Pleasant View out of the calf crop for any death loss to the original herd. This arrangement indicates that the calf crop belongs to Ness because Pleasant View could not be “compensated” with something it presently owned. In other words, a calf belonged to Ness from conception until it was selected as a death loss replacement. Therefore, Ness’ ownership of the calf crop provided sufficient rights in the collateral to enable FmHA’s security interest to attach.

WUEST, C.J., and MORGAN and MILLER, JJ., concur. HENDERSON, J., concurs in result.

We note that some of the livestock belonged to Tomsheck personally, and they are included in our references to Pleasant View’s livestock.