Law School Case Brief
Sunshine Heifers, LLC v. Citizens First Bank, (In re Purdy) - 763 F.3d 513
In the context of whether an agreement is a true lease or a security agreement, under Ariz. Rev. Stat. § 47-1203(A), the precise contours of the economics-of-the-transaction test are rather unclear, but courts have largely focused upon two particular factors: (1) whether the lease contains a purchase option price that is nominal; and (2) whether the lessee develops equity in the property, such that the only economically reasonable option for the lessee is to purchase the goods.
Between 2009 and 2012, Sunshine Heifers, LLC ("Sunshine") and Lee H. Purdy, a dairy farmer, entered into several "Dairy Cow Leases." Purdy received a total of 435 cows to milk, and, in exchange, he paid a monthly rent to Sunshine. Unfortunately, Purdy's dairy business faltered in 2012, and he petitioned for bankruptcy protection. When Purdy filed this petition, Sunshine moved to retake possession of the leased cattle. Citizens First Bank ("Citizens"), however, had a perfected purchase money security interest in Purdy's equipment, farm products, and livestock, and it claimed that this perfected security interest gave Citizens First priority over Sunshine with regard to the 435 cattle. In particular, Citizens First argued that the "leases" between Sunshine and Purdy were disguised security agreements, that Purdy actually owned the cattle, and that the subsequently acquired livestock were covered by the bank's security interest. The bankruptcy court ruled in favor of Citizens First, finding that the leases were per se security agreements.
Did the bankruptcy court err when it ruled that the leases were security agreements?
The United States Court of Appeals reversed the decision and remanded the case. The contracts flunked the bright-tine test and were not per se security agreements because the relevant "good" was the herd of cattle, which had an economic life far greater than the lease term, and not the individual cows originally placed on the dairy farmer's farm. The bank failed to carry its burden of establishing that the actual economics of the transactions indicated that the leases were disguised security agreements because the farmer's rental payments were payments per a lease, the farmer had no legal right to purchase the company's herd, and the company retained a meaningful reversionary interest because the farmer had to return the same number of cows that he originally leased in fair condition. The bank failed to demonstrate that the dairy cow leases were actually security agreements in disguise, under Ariz. Rev. Stat. § 47-1203(A).
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