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RIGHTS OF A SECURED PARTY

Bayer Cropscience, LLC v. Stearns Bank Nat’l Ass’n 837 F.3d 911 (8th Cir. 2016)

Bayer CropScience (“Bayer”) brought this interpleader action to determine its obligations with regards to a November 2006 settlement reached with Texana Rice Mill and Texana Rice, Inc. (collectively, “Texana”). That settlement came about as a result of lawsuits that arose when Bayer introduced genetically modified rice into the United States commercial long-grain rice supply which allegedly damaged Texana’s rice, plant, and equipment. The parties in this appeal, Stearns Bank National Association (“Stearns”) and Amegy Bank National Association (“Amegy Bank”) were both bank creditors of debtor Texana. Texana settled its commercial tort claim against Bayer, and after disbursement of certain amounts, $933,697.90 remained. Stearns Bank and Amegy Bank claimed priority over those funds. The district court found for Amegy Bank, and Stearns appealed.
Stearns’s loan was made in September 2002 and was secured, in part, by Texana’s equipment and all proceeds from its sale, destruction, loss, or other disposition. Amegy’s loan was made in February 2006 and subsequently secured by its claim against Bayer. Stearns and Amegy’s security interests were perfected.
Stearns argued its security interest had priority because it filed a financing statement covering Texana’s general intangibles before Amegy filed its statement covering the Bayer litigation. It also argued it was entitled to the settlement funds as proceeds from its original collateral, which included the equipment damaged by Bayer’s negligence.
The court concluded Stearns had no interest in the proceeds of the Bayer lawsuit as a general intangible as Article 9 as adopted in Texas imposed heightened identification requirements to encumber commercial tort claims and required that the claim exist at the time of the security agreement. However, some portion of the proceeds was attributable to damage to Texana’s equipment which was subject to Stearns’s security interest. Article 9 as adopted in Texas allowed for this claim as it defined “proceeds,” in part, as arising from claims arising out of the loss, nonconformity, or interference with the use of or damage to the collateral. Furthermore, a security interest in proceeds was perfected if the interest in the original collateral was perfected. Accordingly, Stearns held a security interest in the settlement proceeds as a right of recovery with respect to damage to its original collateral. The court remanded the case to the district court for determination of the amount of this interest.