Secured Lenders Beware: Amarillo Court of Appeals Recognizes Distinction Between the “Disposition” and “Transformation” of Collateral
By Dana Campbell, Attorney/Shareholder
As all secured lenders know, a perfected Purchase Money Security Interest (PMSI) is an exception to the general rule of priority of payment between competing security interests in the same collateral, where both interests are in personal property perfected by filing, and a PMSI generally extends not only to the collateral, but to the identifiable proceeds of the collateral. While these principles are well established, in a case of first impression in Texas, a divided panel of the Amarillo Court of Appeals recently recognized a key distinction that should be carefully considered by any creditor relying on the PMSI exception – namely, there is a difference between the “disposition” and the “transformation” of collateral.
In Agrifund, LLC v. First State Bank of Shallowater, the Amarillo Court of Appeals considered whether a lender obtained a PMSI in a farmer’s crop, where the goods purchased with the loan proceeds were cotton seed and chemicals. While Section 9.102(a)(65)(A) of the Texas Business and Commerce Code defines “proceeds” as ““whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral,“ the majority rejected the argument that the crop was the proceeds of the seed: “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.”
Notably, in holding that the crop was not proceeds of the seed applying the definition in Section 9.102(a)(65)(A), the majority failed to address Section 128.002 of the Texas Agriculture Code, providing that in the context of an agricultural chemical and seed lien, “proceeds are the amounts received by a lien debtor . . . from the sale of. . . the crop produced from the agricultural seed supplied by the lien claimant applied or delivered.” Similarly, the Amarillo Court of Appeals did not consider the definition of “proceeds” in Section 9.102(a)(65)(B), which includes “whatever is collected on, or distributed on account of, collateral.”
While questions remain as to the proper construction of proceeds, the decision in Agrifund demonstrates that a creditor should seek counsel before relying on the PMSI exception or where a competing creditor is relying on the PMSI exception to claim priority in the same collateral.