Summary of a Recent
Judicial Development in
Secured Transactions

Parties Estopped from Arguing Debtor Did Not Have Sufficient
Rights in Collateral for a Security Interest to Attach

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In American Bank & Trust v. Shaull, 678 N.W.2d 779 (S.D. 2004), the Supreme Court of South Dakota held that a party was estopped from claiming that a debtor did not have sufficient rights in collateral for a security interest to attach because it had allowed the debtor to appear as the owner of the collateral and a third party was led into dealing with him as though he were the actual owner.

Background

Shaull owned and operated Highmore Auction Sales, Inc., and was also a licensed and bonded cattle broker under the name HS Cattle. Id. at 781. His operations were originally financed by Fin-Ag. Id. He later refinanced with American Bank & Trust, and Fin-Ag subordinated its security interest in his livestock by a subordination agreement and an assignment of security interest. Id. Feldman Bros. had entered into a feeding agreement with Shaull wherein Feldman placed cows with Shaull for feeding and care, and those cows were in Shaull's possession at the time American Bank did its refinancing inspection. Id. at 782. AgStar had a security interest in all cattle owned by Feldman, but had not filed a financing statement in South Dakota. Id. During American Bank's inspection of its collateral, Shaull represented that he owned all the cattle on his property. Id. American Bank did not know of the feeding agreement between Shaull and Feldman, or that Shaull brokered cattle under the name HS Cattle. Id. When Shaull's financial problems became apparent, the South Dakota State Brand Board instigated an investigation of the remaining cows and determined that he had 910 cows in his possession, only 82 of which had Fin-Ag eartags, and 571 which belonged to Feldman. Id. Shaull's creditors brought suit to determine the validity and priority of their security interests. Id. The trial court held that Feldman and AgStar were estopped from arguing that Shaull did not have rights in the cattle, since they had failed to file financing statements and had allowed Shaull to appear as the actual owner of the cattle, and AgStar and Feldman appealed. Id. at 783.

Arguments

Feldman and AgStar argued that American Bank and Fin-Ag's security interests could not attach to the cows he placed with Shaull because the feeding agreement amounted to a bailment, and so they were not required to file a UCC-1 financing statement to protect their interests. Id. at 782-83.

American Bank argued that it would have been put on notice of Feldman and AgStar's interest in the collateral if they had filed financing statements. Id. at 783.

Analysis and Holdings

The court stated the rule regarding this issue as follows: "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." Id. at 784. The majority concluded that the trial court's finding, that AgStar was aware of Feldman's agreement with Shaull and knew that it needed to file financing statements to protect its interest but had failed to do so, was supported the record and so affirmed the trial court's ruling that AgStar and Feldman were estopped from arguing that Shaull didn't have sufficient rights in the cattle for a security interest to attach. Id. at 785.

The case was decided on March 31, 2004.