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In re Purdy

United States Court of Appeals, Sixth Circuit

August 31, 2017

In Re: Lee H. Purdy, Debtor,
v.
Citizens First Bank, Appellee. Sunshine Heifers, LLC, Appellant,

          Argued: July 26, 2017

         Appeal from the United States District Court for the Western District of Kentucky at Bowling Green. No. 1:15-cv-00110-Joseph H. McKinley Jr., District Judge.

         Appeal from the United States Bankruptcy Court for the Western District of Kentucky at Bowling Green. No. 12-11592-Joan A. Lloyd, Judge.

         ARGUED:

          Michael D. Almassian, KELLER & ALMASSIAN, Grand Rapids, Michigan, for Appellant.

          Scott A. Bachert, KERRICK BACHERT PSC, Bowling Green, Kentucky, for Appellee.

         ON BRIEF:

          Michael D. Almassian, Nicholas S. Laue, KELLER & ALMASSIAN, Grand Rapids, Michigan, for Appellant.

          Scott A. Bachert, Ashley D. Gerughty, KERRICK BACHERT PSC, Bowling Green, Kentucky, for Appellee.

          Before: COLE, Chief Judge; BATCHELDER and MOORE, Circuit Judges.

          OPINION

          KAREN NELSON MOORE, Circuit Judge.

         On August 14, 2014, a panel of this court held that Citizens First Bank ("Citizens First" or "CFB") failed to demonstrate that the "Dairy Cow Leases" it had with farmer Lee Purdy ("Debtor") were actually security agreements in disguise. Sunshine Heifers, LLC v. Citizens First Bank (In re Purdy), 763 F.3d 513, 521 (6th Cir. 2014). The case was subsequently remanded to the United States Bankruptcy Court for the Western District of Kentucky "for further proceedings consistent with this opinion." Id. On remand, the bankruptcy court determined that "all cattle sold at the auction in April 2014 were subject to CFB's security interest. Therefore, the Court determines that all the proceeds of the [bankruptcy] auction, less the Trustee's fee, the costs of care and feeding of the cattle and expenses related to the sale, are the property of CFB." In Re Purdy, No. 12-11592(1)(12), 2015 WL 5176580, at *15 (Bankr. W.D. Ky. Sept. 2, 2015). Sunshine Heifers, LLC ("Sunshine") appealed to the district court, which "affirm[ed] the Bankruptcy Court's decision that 'net sales proceeds, exclusive of all costs associated with the sale and care of the cattle sold, totaling $402, 354.54 are awarded to Citizens First Bank.'" Sunshine Heifers, LLC v. Purdy, No. 1:15-cv-00110-JHM, 2016 WL 4392815, at * 5 (W.D. Ky. Aug. 15, 2016). Sunshine now appeals the district court's judgment and argues that the bankruptcy court deprived Sunshine of its right to a portion of the bankruptcy auction proceeds. Sunshine requests that we remand the case to the bankruptcy court and require the bankruptcy court to award to Sunshine $301, 318.63 in proceeds from the bankruptcy auction. For the reasons stated below, we AFFIRM.

         I. BACKGROUND

         A. Factual History[1]

         Lee Purdy operated his dairy farm in Barren County, Kentucky. In 2008, he entered into a loan relationship with Citizens First, using his herd of dairy cattle as collateral. Purdy refinanced his loan on July 3, 2009, executing an "Agricultural Security Agreement" in exchange for additional principal in the amount of $417, 570. As part of the security agreement, Purdy granted Citizens First a purchase money security interest in "all . . . Equipment, Farm Products, [and] Livestock (including all increase and supplies) . . . currently owned [or] hereafter acquired . . . ." Three days later, Citizens First perfected this purchase money security interest by filing a financing statement with the Kentucky Secretary of State. Purdy and Citizens Bank executed two similar security agreements in August 2010 and May 2012. Citizens First perfected these purchase money security interests as well.

         Shortly after refinancing his loan with Citizens First in 2009, Purdy decided to increase the size of his dairy-cattle herd. He contacted Jeff Blevins of Sunshine regarding the prospect of leasing additional cattle. Sunshine was amenable to the idea, and on August 7, 2009, Purdy and Sunshine entered into the first of five contracts, three of which are relevant here: (1) a July 21, 2011 agreement, involving fifty head of cattle; (2) a July 14, 2012 agreement, rolling up two prior agreements and involving 285 head of cattle; and (3) another July 14, 2012 agreement, involving 100 head of cattle.

         Each of these agreements is titled a "Dairy Cow Lease, " and under their terms, Purdy received a total of 435 cattle for fifty months in exchange for a monthly rent. The agreements prohibited Purdy from terminating the leases, and Purdy agreed to "return the Cows, at [his] expense, to such place as Sunshine designate[d]" at the end of the lease term. Additionally, Purdy guaranteed "the net sales proceeds from the sale of the Cows . . . at the end of the Lease term [would] be [a set amount between $290 and $300] per head (the 'Guaranteed Residual Value')." Purdy further promised to maintain insurance on the cattle, to replace any cows that were culled from the herd, and to allow Sunshine the right to inspect the herd. When the parties signed these contracts, they also executed security agreements, and Sunshine filed financing statements with the Secretary of State.

         In the dairy business, farmers must "cull" a portion of their herd every year, replacing older and less productive cows with younger, healthier ones. Many times, dairy farmers will replace the culled cows with their calves. Purdy, in contrast, sold off the calves of Sunshine's cows and purchased more mature replacements. See In re Purdy,490 B.R. 530, 534 (Bankr. W. D. Ky. 2013). This practice contravened the terms of the leases, but Sunshine was aware of Purdy's behavior and acquiesced in it. Nonetheless, the terms of the lease required Purdy to apply Sunshine's brand and a yellow ear tag to the original cows and their replacements. In contrast, Purdy applied a white ear tag to the cattle covered by Citizens First's security interest. In re Purdy, 490 B.R. at 535. By July 2012, ...


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