Opinion
No. 07-22-00025-CV
12-09-2022
AGRIFUND, LLC, Appellant v. FIRST STATE BANK OF SHALLOWATER, a Texas State Financial Institution, Appellee
John C. Sims, Lubbock, for Real party in interest Lone Star State Bank of West Texas. Jody D. Jenkins, Abel Reyna, Jr., Lubbock, for Appellee. Mike Smiley, John T. Smithee, Jr., C. Jason Fenton, Jennie C. Knapp, Amarillo, for Appellant.
John C. Sims, Lubbock, for Real party in interest Lone Star State Bank of West Texas.
Jody D. Jenkins, Abel Reyna, Jr., Lubbock, for Appellee.
Mike Smiley, John T. Smithee, Jr., C. Jason Fenton, Jennie C. Knapp, Amarillo, for Appellant.
Before QUINN, C.J., and PARKER and DOSS, JJ.
Judy C. Parker, Justice
Agrifund, LLC, appeals from the trial court's order on cross-motions for summary judgment. The order arises from a dispute between Agrifund and the First State Bank of Shallowater concerning the priority of their security interests in crop proceeds. We reverse and render in part, affirm in part, and remand.
BACKGROUND
In 2017, farmers Leslie and Jennifer Gary borrowed money from Agrifund to finance their farming operations. The Garys received extensions of credit under a series of promissory notes, with the final note executed in December of 2017. Payment of the final note, which included the unpaid balances owed under prior notes, was secured under a security agreement by collateral that included the Garys’ rights, title, and interest in and to their crops. Agrifund perfected its security interest by recording UCC-1 financing statements with the Texas Secretary of State. The Garys defaulted by failing to pay upon the note's maturity on March 15, 2018.
The Garys then obtained financing from the First State Bank of Shallowater ("the Bank"), which began lending money to them in May of 2018. The Garys used the money from the Bank to purchase cotton seed and chemical for their 2018 crop. They executed a series of promissory notes and a security agreement granting the Bank an interest in all crops grown or to be grown for the 2018 crop year, among other things. The Bank perfected its security interest by recording a UCC-1 financing statement with the Texas Secretary of State on June 4, 2018.
Following the sale of the Garys’ 2018 cotton crop, Plains Cotton Cooperative Association issued eight checks made payable to combinations of payees including the Garys, Agrifund, and the Bank. Agrifund is a payee on all eight checks, while the Bank is a payee on four. The Bank notified Agrifund of its belief that its security interest was superior, then filed suit for declaratory relief when Agrifund did not release the funds. Agrifund filed a counterclaim requesting injunctive relief and seeking declaratory judgment that its security interest in the Garys’ 2018 crop has priority over the Bank's.
Both parties filed motions for summary judgment. Concluding that the Bank held a superior security interest, the trial court granted the Bank's motion for summary judgment and denied Agrifund's motion. The trial court did not award attorney's fees to either party.
STANDARD OF REVIEW
When a trial court resolves a declaratory judgment action on competing motions for summary judgment, "we review the propriety of the declaratory judgment under the same standards that we apply in reviewing a summary judgment." City of Galveston v. Tex. Gen. Land Office , 196 S.W.3d 218, 221 (Tex. App.—Houston [1st Dist.] 2006, pet. denied). We review a trial court's decision to grant or deny a motion for summary judgment de novo. Tex. Mun. Power Agency v. Pub. Util. Comm'n of Tex. , 253 S.W.3d 184, 192 (Tex. 2007). Although the denial of summary judgment is ordinarily not appealable, we may review such a denial when both parties moved for summary judgment and the trial court granted one and denied the other. Id. In such cases, we review the summary judgment evidence presented by each party, determine all questions presented, and render the judgment that the trial court should have rendered. Id.
ANALYSIS OF ISSUE 1: PROPRIETY OF SUMMARY JUDGMENT
In Agrifund's first issue on appeal, it asserts that the trial court erred in denying its motion for summary judgment and in granting the Bank's, because the Bank did not acquire a purchase money security interest in the Garys’ yet-to-be-grown 2018 crop.
Priority of Liens
In Texas, secured transactions are governed by Chapter 9 of the Texas Business and Commerce Code, also known as the Uniform Commercial Code—Secured Transactions ("UCC"). Franklin Nat'l Bank v. Boser , 972 S.W.2d 98, 101 (Tex. App.—Texarkana 1998, pet. denied). The long-standing general rule of priority of payment between competing security interests in the same collateral, where both interests are perfected by filing, is that the secured party who first properly filed a financing statement prevails. TEX. BUS. & COM. CODE ANN. § 9.322(a) ; Borg-Warner Acceptance Corp. v. Tascosa Nat'l Bank , 784 S.W.2d 129, 133 (Tex. App.—Amarillo 1990, writ denied) (citing previous codification at TEX. BUS. & COM. CODE ANN. § 9.312(e)(1) ). An exception to the "first in time, first in right" general rule is a purchase money security interest ("PMSI"). Boser , 972 S.W.2d at 102. Purchase money liens arise in transactions in which a person who loans money to another to acquire property obtains a lien on the property purchased. In re Christodolou , 383 S.W.3d 718, 721 (Tex. App.—Amarillo 2012, no pet.).
The Bank does not dispute that Agrifund was first to file a financing statement which included a description of crops as collateral for its loans to the Garys. However, the Bank claims that its security interest in the Garys’ 2018 crop takes priority over Agrifund's because the Bank's interest is a perfected PMSI. See TEX. BUS. & COM. CODE ANN. § 9.324(a) (providing for priority of PMSIs over conflicting security interest in the same goods). Thus, if the Bank's security interest qualifies as a PMSI under Chapter 9, summary judgment in the Bank's favor was properly granted.
Further references to provisions of the Texas Business and Commerce Code will be by reference to "section __" or "§ __."
The Bank's Security Interest
A security interest in goods is a PMSI "to the extent that the goods are purchase-money collateral with respect to that security interest." TEX. BUS. & COM. CODE ANN. § 9.103(b)(1). " ‘Purchase-money collateral’ means goods or software that secures a purchase-money obligation incurred with respect to that collateral." § 9.103(a)(1). A "purchase-money obligation" is "an obligation of an obligor 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." § 9.103(a)(2). In transactions other than consumer-goods transactions, the secured party claiming a PMSI has the burden of establishing the extent to which its security interest is a PMSI. § 9.103(g).
Section 9.324 directs that "a perfected purchase-money security interest in goods other than inventory or livestock has priority over a conflicting security interest in the same goods, and ... a perfected security interest in its identifiable proceeds also has priority, if the purchase-money security interest is perfected when the debtor receives possession of the collateral or within 20 days thereafter." § 9.324(a). The definition of "goods" in the Business and Commerce Code is "all things that are movable when a security interest attaches" and includes "crops grown, growing, or to be grown ...." § 9.102(a)(44). The security agreement at issue provides that the property subject to the security interest includes "supplies used or produced in a farming operation" and "crops grown or to be grown for the 2018 crop year."
Thus, the Bank argues, its interest is a PMSI because (1) the Garys pledged as security supplies to be used in their farming operation and their crops to be grown and (2) the Bank's loans to the Garys enabled them to acquire the seed, which it characterizes as a "crop to be grown," and chemical purchased in August of 2018. According to the Bank, it met its burden of establishing it had a PMSI because it "simply had to show it had a perfected security interest in ‘goods’ and that ‘goods’ included crops to be grown."
While we concede the Bank's point that the statute's definition of "goods" includes "crops to be grown," we disagree that this acknowledgement inevitably leads to the conclusion that the Bank has a PMSI in the Garys’ cotton crop. The very term "purchase money security interest" denotes that the security interest must be taken in the items actually purchased. The Bank's loan to the Garys did not enable them to purchase a crop; it enabled them to produce one.
A creditor may obtain a PMSI in goods when the creditor makes a loan enabling a debtor to acquire an interest in the goods. First Nat'l Bank v. Lubbock Feeders, L.P. , 183 S.W.3d 875, 882 (Tex. App.—Eastland 2006, pet. denied). "To create a PMSI, the value must be given in a manner that enables the debtor to acquire interest in the collateral. This is accomplished when a debtor uses an extension of credit or loan money to purchase a specific item." MBank Alamo Nat'l Ass'n v. Raytheon Co. , 886 F.2d 1449, 1452 (5th Cir. 1989) (citing Ingram v. Ozark Prod. Credit Ass'n , 468 F.2d 564, 565 (5th Cir. 1972) (per curiam) (security interest in progeny of leased cattle was not a PMSI because creditor only enabled debtor to acquire rights in and use of leased cattle, not their progeny), and In re Dillon , 18 B.R. 252, 254 (Bankr. E.D. Cal. 1982) (PMSI lien attaches to item actually purchased)). Here, the items actually purchased by the Garys were the seed and the chemical, not the crop.
Moreover, we are unpersuaded by the Bank's contention that the seed purchased is the equivalent of a "crop to be grown." Seed is just one of several inputs necessary for the production of a crop, others being chemicals, fertilizer, and water, not to mention the soil itself and the farmer's labor upon it. The seed purchased by the Garys would not mature into a crop unless it was planted and cultivated, as it required additional inputs and efforts. The resulting crop is clearly distinguishable from the individual components—including the seed and chemical funded by the Bank—that were combined over time to produce it.
I.e., the cotton crop is fructus industriales, not fructus naturales.
Finally, to the extent that the Bank argues that the crop is the "proceeds" of the seed, we disagree. "Proceeds" are defined as "whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral ...." § 9.102(a)(65)(A). The crop was not the result of the sale, lease, license, exchange, or disposition of the seed. The seed was planted and cultivated, not transferred or disposed of, and the crop is the resulting product. See, e.g., Searcy Farm Supply, LLC v. Merchants & Planters Bank , 369 Ark. 487, 256 S.W.3d 496, 502–03 (2007) (declining to define crops as the identifiable proceeds of seeds under Arkansas Uniform Commercial Code). Therefore, we conclude that the Bank does not have a PMSI in the Garys’ crop.
In its response to Agrifund's motion for summary judgment, the Bank stated that it "has never been [the Bank's] position" that the crops are the proceeds of the seeds. In its brief on appeal, however, the Bank asserts that "[i]t can hardly be said that crops are not identifiable proceeds of seeds."
We note that when the Legislature enacted provisions of the revised Article 9 drafted by the National Conference of Commissioners on Uniform State Laws, it eliminated former section 9.312, which had specifically enabled creditors to obtain a super-priority interest in crops to be grown. See Act of June 18, 1999, 76th Leg., R.S., ch. 414, § 1.01, 1999 Tex. Gen. Laws 2639–2736. We further note that, although the proposed changes to Article 9 included optional provisions that would have created a "production-money security interest" conferring super-priority status to lenders extending credit to enable debtors to produce crops, the Legislature declined to enact those provisions. See REVISION OF UNIFORM COMMERCIAL CODE ARTICLE 9 – SECURED TRANSACTIONS , Appendix II ( NAT'L CONF. OF COMM'RS ON UNIF. STATE LAWS , Draft July 24–31, 1998); §§ 9.101–9.809.
The former statute provided: "A perfected security interest in crops for new value given to enable the debtor to produce the crops during the production season and given not more than three months before the crops become growing crops by planting or otherwise takes priority over an earlier perfected security interest to the extent that such earlier interest secures obligations due more than six months before the crops become growing crops by planting or otherwise, even though the person giving new value had knowledge of the earlier security interest." Id. at 2681.
Because the Bank's security interest is not a PMSI, it is not superior in priority to the security interest of Agrifund. We sustain this part of Agrifund's first issue.
Agrifund's Request for Injunctive Relief
In a sub-issue of its first issue, Agrifund challenges the trial court's denial of its request for an injunction (1) requiring the Bank to endorse and deliver to Agrifund checks in its possession derived from the sale of the Garys’ 2018 crop and (2) enjoining the Bank from interfering with Agrifund's legal right to the proceeds derived from the sale of the Garys’ 2018 crop. To be entitled to injunctive relief, a party must demonstrate the existence of a wrongful act, imminent harm, irreparable injury, and the absence of an adequate remedy at law. Jim Rutherford Invs., Inc. v. Terramar Beach Cmty. Ass'n , 25 S.W.3d 845, 849 (Tex. App.—Houston [14th Dist.] 2000, pet. denied). Without proof of all four elements, injunctive relief is improper. Agrifund's brief directs us to no authority or summary judgment evidence showing its alleged entitlement to such relief. Therefore, we must conclude that the trial court did not err in denying Agrifund's request for injunctive relief. We overrule this part of Agrifund's first issue.
ANALYSIS OF ISSUE 2: COSTS AND ATTORNEY'S FEES
In its second issue, Agrifund contends that the trial court improperly denied its request for costs and attorney's fees under the Uniform Declaratory Judgments Act ("UDJA"). Agrifund asks that the case be remanded to the trial court for reconsideration of attorney's fees.
The UDJA authorizes the award of attorney's fees to a party in a declaratory judgment action if the court determines the award to be equitable and just and the party presents evidence that the fees are reasonable and necessary. See TEX. CIV. PRAC. & REM. CODE § 37.009. The UDJA does not require an award of attorney's fees to the prevailing party, but rather entrusts the award of reasonable and necessary attorney's fees to the sound discretion of the trial court. Bocquet v. Herring , 972 S.W.2d 19, 20 (Tex. 1998). Thus, while the rendition of a declaratory judgment may allow the award of attorney's fees, the UDJA does not mandate such an award. See Anderton v. City of Cedar Hill , 583 S.W.3d 188, 195 (Tex. App.—Dallas 2018, no pet.). Here, because Agrifund is entitled to a declaratory judgment that it has priority to the proceeds of the Garys’ 2018 crop, we sustain Agrifund's second issue and remand this matter to the trial court for the purpose of determining whether an award of reasonable and necessary attorney's fees is equitable and just under the UDJA. See Morath v. Tex. Taxpayer & Student Fairness Coal. , 490 S.W.3d 826, 885 (Tex. 2016) (stating that "[w]here the extent to which a party prevailed has changed on appeal, our practice has been to remand the issue of attorney fees to the trial court for reconsideration of what is equitable and just").
CONCLUSION
We reverse the trial court's grant of summary judgment on the Bank's claims. We reverse the trial court's denial of Agrifund's motion for summary judgment except as to the portion denying Agrifund's request for injunctive relief, which we affirm. We render judgment that Agrifund have and recover a declaratory judgment declaring that its perfected security interest in the Garys’ 2018 crop is superior to any claim of the Bank. Finally, we remand this matter to the trial court for the sole purpose of determining whether an award of reasonable and necessary attorney's fees to Agrifund is equitable and just under the UDJA.
DISSENTING OPINION
Brian Quinn, Chief Justice
Here is the Bank that loaned the money to the farmer to plant a crop to repay the loan the Bank made. There is the lender that earlier loaned the money to the farmer to plant an earlier crop to repay the loan the lender made. Who's up first? I respectfully dissent from the majority's answer and don my hat and lance to tilt at windmills.
Shades of "The House that Jack Built."
As the majority stated, "if the Bank's security interest qualifies as a PMSI under Chapter 9, summary judgment in the Bank's favor was properly granted." I conclude that the security interest of First State Bank of Shallowater (Bank) was a "PMSI" or purchase money security interest. So, "summary judgment in the Bank's favor was properly granted."
Our legislature said: "A security interest in goods is a purchase-money security interest ... to the extent that the goods are purchase-money collateral with respect to that security interest." TEX. BUS. & COM. CODE ANN. § 9.103(b)(1). If the 2018 crop is "purchase-money collateral" with respect to the security interest of the Bank, then the Bank has a PMSI in those crops.
That leads me to the definition of "purchase-money collateral." The same legislature said it "means goods ... that secure[ ] a purchase-money obligation incurred with respect to that collateral." Id. § 9.103(a)(1). Well then, if the 2018 crop is "goods" securing "a purchase-money obligation" with respect to the 2018 crop, then the crop is "purchase-money collateral." But what are "goods"? One need not fret about that for the legislature defined it, too. Among other things, the word includes "crops grown, growing or to be grown ." Id. § 9.102(a)(44) (emphasis added). One may then ask, "How about a ‘purchase-money obligation’? What is that?" To find the answer, I return to section 9.103 and stumble upon its definition as "an obligation of an obligor 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. § 9.103(a)(2).
"Collateral" is simply the "property subject to the security interest." Tex. Bus. & Com. Code Ann. § 9.102(13). The property subject to the security interest of the Bank here is the 2018 crop.
Now, I'm left with the task of weaving the facts at bar into all this statutory framework. No doubt, Leslie and Jennifer Gary are the "obligors" since they owe payment or performance of the obligation, i.e., payment of the debt to the Bank. See TEX. BUS. & COM. CODE ANN. § 9.102(a)(60) (defining "obligor" as the person who, among other things, "owes payment or other performance of the obligation"). They incurred their obligation to the Bank to enable them to acquire rights in the collateral, which collateral is the 2018 crop. That is, they agreed to borrow the money to grow the crop which they would own or at least have some property interests in which interests are superior to third parties, subject, of course, to financial interests of third parties in the same crop. So, it can be said they incurred a "purchase-money obligation" in goods, i.e., the crop to be grown, which "goods" secured that obligation. In other words, the crop was "purchase-money collateral" with respect to the Bank's security interest. Being "purchase-money collateral," then the Bank had a PMSI in them. Having such a security interest then means it was superior to the security interest of Agrifund, LLC. See TEX. BUS. & COM. CODE ANN. § 9.324(a) (stating that "a perfected purchase-money security interest in goods ... has priority over a conflicting security interest in the same goods"). That, in turn, brings me back to the majority's statement that "if the Bank's security interest qualifies as a PMSI under Chapter 9, summary judgment in the Bank's favor was properly granted."
Having a PMSI in the crop, the Bank's superior interest flows to the proceeds recovered from the sale of same. See Tex. Bus. & Com. Code Ann. § 9.315(a)(2) (stating that "a security interest attaches to any identifiable proceeds of collateral").
But, let me dispense with acting like I was the first to crawl through the rabbit hole dug by all that statutory jargon and instead refer to authority that framed the test in simpler terms. "[W]hen a creditor makes a loan enabling a debtor to acquire an interest in goods, the creditor may obtain a purchase money security interest in the goods." First Nat'l Bank v. Lubbock Feeders, L.P. , 183 S.W.3d 875, 882 (Tex. App.—Eastland 2006, pet. denied). The Bank made a loan to Leslie and Jennifer Gary to enable them to acquire an interest in (i.e., grow and own) goods (i.e., the 2018 "crop to be grown") which goods the Bank retained a security interest to repay the loan it made to grow those very crops.
In sum—who's up first?—I agree with the trial court and say the Bank. In all candor, though, I also acknowledge that if higher authority were to address this issue of first impression in Texas, the majority opinion would most likely find approval. It is supported by the work of learned writers, commentary, and authority from neighboring states. My dilemma concerns whether to follow those writers, that commentary, and neighboring authority or apply the plain words incorporated by the Texas Legislature into the statutes in play. Because our Supreme Court mandates that I apply the statute as written, see Lippincott v. Whisenhunt , 462 S.W.3d 507, 508 (Tex. 2015) (per curiam), I follow the course selected at the risk of comparison to Don Quixote.