Summary of a Recent
Judicial Development in
Secured Transactions

Purchase Money Security Interest is Created When a Loan
is "Closely Allied" With Purchase of Collateral

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In First National Bank in Munday v. Lubbock Feeders, L.P., 183 S.W.3d 875 (Tex. App. 2006), the Eleventh District Texas Court of Appeals held that a creditor may obtain a purchase money security interest when the debtor receives the loan proceeds after purchasing the collateral.

Background

First National Bank sought a writ of sequestration against all livestock owned by the Debtor after he defaulted on numerous notes. Id. at 878. Lubbock Feeders intervened in the action, claiming that it had a superior purchase money security interest in the livestock. Id. The trial court granted summary judgment to Lubbock Feeders, and the Bank appealed. Id.

Arguments

Lubbock Feeders argued that it had a superior purchase money security interest in the livestock because its loans to the Debtor enabled him to acquire his interests in the cattle. Id. at 882.

The Bank argued that the Debtor acquired interests in the cattle before receiving the loan proceeds from Lubbock, and thus the loans did not enable him to acquire interests in the cattle. Id.

Analysis and Holdings

UCC Section 9.103 defines a "purchase-money obligation" as an obligation incurred as all or part of the price of the collateral or for value given to enable the debtor to acquire rights in or the use of the collateral if the value is in fact so used. Id. The Debtor had purchased cattle at a livestock auction before receiving loans from Lubbock Feeders, and based on the fact that the purchase was made prior to the loans, the Bank claimed that the Debtor had already acquired "rights in the collateral" before the obligation to Lubbock Feeders was incurred. Id. The court pointed out, however, that Section 9.103 does not require a debtor to receive the loan proceeds before purchasing the collateral. Id. at 882-83. Rather, a creditor receives a purchase money security interest when the loan advance is "closely allied" with the debtor's purchase of the collateral at issue-the key consideration is whether the loan enables the debtor to acquire rights in the collateral. Id. at 883.

The evidence established that the Debtor had previously obtained 20 similar advances from Lubbock Feeders for purchasing cattle in Lubbock's lots, and had always signed a loan certificate for each transaction showing the amount of the advance and identifying the specific cattle relating to the advance. Id. Therefore the court determined that the loans were "closely allied" to the Debtor's purchase of the collateral, and had enabled him to purchase the cattle. Id. The court further held that because the Debtor had never taken possession of the cattle in dispute, the notification requirement of Section 9.324 was not triggered and Lubbock Feeders was not required to give the Bank notice of its security interest to maintain priority status. Id. at 885. The appellate court therefore affirmed the ruling of the trial court and granted summary judgment in favor of Lubbock. Id.

The case was decided on January 12, 2006.