Summary of a Recent
Judicial Development in
Secured Transactions

Appearance of Ownership Creates Sufficient Rights in Collateral
for Security Interests to Attach

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In First National Bank of Philip v. Temple, 642 N.W.2d 197 (S.D. 2002), the Supreme Court of South Dakota held that because the debtor's father "clothed his son with all the indices of ownership" in collateral actually owned by the father, the debtor had sufficient rights in the collateral to enable his creditor's security interest to attach.

Background

Merle Temple obtained loans from First National Bank (FNB), using his cattle as collateral. Id. at 200. His father, Doug Temple, later put 30 head of his own cattle on Merle's property under the agreement that Merle would care for the cattle, and in return Merle would be entitled to all calves produced from them. Id. Doug later purchased 50 more cattle and placed them on Merle's property, and had them branded with Merle's brand. Id. In a subsequent financial statement, Merle claimed the 50 cattle bearing his brand as his own. Id. FNB was aware of the original agreement between Merle and Doug to care for the 30 cattle, and that Merle would receive the offspring of those cows. Id. The family had a falling out, and Doug removed some of the original 30 cows from Merle's land. Id. Doug then told FNB of his claim of ownership interest in Merle's cattle, and claimed that the 50 head bearing Merle's brand were his and that they were only branded with Merle's brand to distinguish the pasture to which they were assigned (despite the fact that the original 30 head bearing Doug's brand were on that pasture also). Id. Doug then obtained an ex parte order from the Ogalala Sioux Tribal Court and the 50 cattle were seized and sold. Id. The proceeds of the sale were placed in escrow and an action for declaratory judgment was brought. Id. The trial court ruled that FNB had a valid and perfected security interest in the cattle, and Doug Temple appealed. Id. at 204.

Arguments

Doug Temple argued that FNB knew or should have known that the cattle were his, and thus were estopped from asserting or enforcing an alleged security interest in the collateral. Id. at 205. He also argued that he was entitled to a jury trial, and that the trial court should have dismissed the case under the doctrine of comity. Id. at 201-03.

Analysis and Holdings

The court first noted that, contrary to Doug Temple's assertions, he was not entitled to a jury trial, and the trial court had no duty to dismiss the case based upon the doctrine of comity. Id. It then turned to the question of whether a security interest attached to the collateral. Id. at 204.

"A security interest attaches when (1) there is an agreement that it attach; (2) value has been given by the secured party; and (3) the debtor has rights in the collateral. Id. The issue before the court was whether Merle had sufficient rights in the collateral for FNB's security interest to attach." Id. (citing S.D. Codified Laws § 57A-9-203). The court stated the general rule that "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. The court further noted that control over the collateral is the dispositive factor, not actual ownership. Id. at 205. The court concluded that Doug gave Merle the outward appearance of ownership and control over the cattle, even directing that the cattle be branded with Merle's brand, and therefore Merle had sufficient rights in the collateral for FNB to properly perfect its security interest. Id.

The case was decided on March 13, 2002.