Summary of a Recent
Judicial
Development in
Secured Transactions
Commercial Reasonableness and Buyers in the Ordinary Course of Business
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In Springing Acres, Inc. v. Michigana Holsteins, Inc., No. 259779, 2006 WL 2035435 (Mich. App. July 20, 2006) the Michigan Court of Appeals held that a defendant who purchased cattle encumbered by the plaintiff's perfected security interest was not a "buyer in the ordinary course of business" and thus had no interest in the cattle.
Background
Plaintiff leased 295 head of cattle to Michigana Holsteins, Inc., and the parties agreed that Michigana would choose which cattle it wanted and tag them for identification. Id. at *1. Michigana failed to identify the cattle and later all of its assets, including Plaintiff's cattle, were sold at a foreclosure sale. Id. The Defendant purchased the cattle, and claimed that Plaintiff's cows could not be specifically identified and so denied responsibility for paying for or returning the cows. Id.
Arguments
Defendant argued that his purchase of the cattle was "commercially reasonable" because he purchased the assets of Michigana pursuant to a Foreclosure Sale Agreement and Judicial Confirmation Order, and he was therefore not liable. Id.
Analysis and Holdings
UCC Article 9 addresses the idea of "commercial reasonableness" and provides that the disposition of collateral in a judicially approved manner is conclusively presumed to be commercially reasonable. Id. However, the court pointed out that that section of the UCC addresses sales of assets by a secured party, whereas here the secured party (Plaintiff) was not involved in the sale between Michigana and the Defendant, and therefore MCL 440.9627 was not applicable to this case. Id. The court stated that regardless of the trial court's reasoning, it came to the correct result because the Plaintiff had a perfected security interest in the cattle and was entitled to payment. Id. at *2. The court further concluded that the Defendant was not a "buyer in the ordinary course of business," which was the only way that he could have taken title to the cattle free and clear of the Plaintiff's perfected security interest, and held him liable for damages resulting from the improper possession and use of the Plaintiff's cattle. Id.
The case was decided on July 20, 2006.