United States: Sixth Circuit Rules Cows Can Be Leased

According to the Sixth Circuit, the answer is "yes." Dairy cattle leasing is an increasingly popular method for producers to add to their herds while conserving capital for other purposes. Leasing is particularly attractive for thinly capitalized producers who wish to spread their fixed costs across more cows.

The legal and practical issues of cattle leasing were clearly illustrated in a recent decision from the Sixth Circuit, Sunshine Heifers, LLC vs. Citizens First Bank (In re Purdy). Lee Purdy was a Kentucky cattle farmer who owned some of his dairy cows, subject to a security interest held by a local bank called Citizens First Bank. Purdy also leased other cattle from a leasing company called Sunshine Heifers. Purdy intermingled the owned and the leased cattle on his farm, but the Bank's collateral had a white ear tag and Sunshine's leased cattle had a yellow ear tag. In addition, Sunshine required Purdy to brand the leased cattle with Sunshine's proprietary brand. Both the Bank and Sunshine periodically inspected Purdy's farm and counted their cattle, but they never coordinated their inspections.

All went well until Purdy began to experience financial difficulties in 2012. He began to sell off cattle without remitting the proceeds to either the Bank or Sunshine. Purdy eventually filed a Chapter 12 bankruptcy case in late 2012, but it failed almost immediately and a trustee was appointed. When the Bank and Sunshine jointly visited his farm after the bankruptcy was filed, they learned that hundreds of cattle were missing and that there were not nearly enough cattle remaining to pay both of their claims. The bankruptcy trustee eventually sold the remaining cattle, and the Bank and Sunshine litigated their respective rights in the proceeds.

True lease or security agreement?
The key legal issue was whether Sunshine's leases were really disguised security agreements where Purdy actually purchased the cattle from Sunshine and agreed to pay Sunshine for them over time. If the Sunshine leases were really disguised security agreements, the Bank would receive all of the proceeds because its security agreement and financing statement predated Sunshine's documents. On the other hand, if Sunshine did indeed have "true leases," Sunshine would be entitled to the proceeds from the sale of leased cattle, or about 75 percent of the total.

The "true lease" vs. "security agreement" issue is one of the most frequently litigated questions under the Uniform Commercial Code (UCC). See generally 4 J. White and R. Summers, Uniform Commercial Code, § 30-3 at p. 17 (6th Ed.). While the original law on this issue focused on the parties' intent, the statute was amended in the 1980s to focus on a small set of objective factors and the economic substance of the transactions. Id. at p. 21. The revised statute is located at UCC § 1-203, and it establishes a two-part analysis:

(a) Does the transaction fall within the parameters of UCC § 1-203(b) so that the transaction is conclusively a security interest (the "Per Se Test" or "Bright Line Test"); and

(b) If the Per Se Test is not satisfied, do the other facts and circumstances warrant determining that the transaction is a security interest (the "Economic-of-the-Transaction Test").

The Bright Line Test is described in UCC § 1-203(b). This Section provides that all transactions in the form of a lease that are not cancelable by the lessor and that satisfy any of the four criteria listed in UCC § 1-203(b) are conclusively deemed security interests. The Sunshine leases were not cancelable, so the question became whether any of the four statutory criteria were satisfied. The relevant factor in this case was whether "the original term of the lease is equal to or greater than the remaining economic life of the goods." If the economic life of the leased cattle was less than 50 months (the term of the Sunshine leases) then the leases were per se disguised security agreements.

The economic life of a cow
In the Purdy case, the Bankruptcy Court found that the term of the Sunshine leases (50 months) was longer than the "economic life" of a dairy cow, so the Sunshine transactions were actually security agreements. The Bankruptcy Court focused on Purdy's testimony at trial that a dairy herd was culled at the approximate rate of 30 percent per year, meaning that "within three years an entire herd is extremely likely to have been entirely replaced and certainly before the end of 50 months." In short, the Bankruptcy Court analyzed the issue as if Sunshine leased individual dairy cows to Purdy, not a herd of dairy cattle.

The Sixth Circuit disagreed and held that the Bankruptcy Court should have focused on the herd, not the individual cows. The lease documents obligated Purdy to replace any non-producing leased cattle that were culled from the herd. A dairy farmer will frequently replace a culled cow with its calves, but Purdy instead sold the calves and used the proceeds to buy mature, milk-producing cows. Noting that it made little difference to Sunshine whether it received the exact same cows that it leased to Purdy, and that the herd, as replenished over time in the ordinary course of business, had substantial value remaining at the end of the lease term, the Sixth Circuit held that the Sunshine leases "flunk the Bright-Line Test and are not per se security agreements."

The analysis does not stop there, however. The court must also consider the Economics-of-the-Transaction test. The Sixth Circuit noted that the ultimate issue is whether Sunshine "kept a meaningful reversionary interests in the herd." The Sunshine leases contained no purchase option at the end of the lease term, but they did contain a residual guaranty where Purdy guaranteed Sunshine that the cows would be worth at least $300 per head value at the end of the term. The Sixth Circuit was not bothered by the residual guaranty, however, because Sunshine was not obligated to sell the herd to Purdy at the end of the lease term at any price. "Sunshine could have retaken possession of its cows and leased them out to Purdy's competitors under the same terms, and there would have been nothing Purdy could have done under the agreement."

Finally, the Sixth Circuit refused to be influenced by the post-lease conduct of the parties. The Bankruptcy Court was clearly bothered that Purdy did not abide by the strict terms of the lease contracts regarding the culling and replacement of leased cattle. The Sixth Circuit, however, did not think this conduct was important to its analysis, which is consistent with White & Summers' view that post-lease conduct is irrelevant. "When the parties sign the contract and become bound, they have either made a lease or a security agreement... The agreement may prove to be much more beneficial to one than the other, but that does not change its character once the agreement has been signed. Foresight not hindsight controls." 4 White & Summers, § 30-3(3) at p. 33.

This decision represents an unqualified victory for the cattle leasing industry, but the convoluted facts in Purdy illustrate the need for the lessor to be very vigilant, particularly if the dairy farmer has already granted a security interest on his cattle to a lender. Therefore, the lessor should consider running a UCC search before entering into the lease transaction to determine if the dairy farmer has granted any consensual liens to lenders. If there is a preexisting lender with a lien on the farmer's cattle, the lessor and the preexisting lender should work out in advance a method to identify their respective animals and insist that the farmer cooperate.
Just in case, the lessor should consult an attorney who can consider including in the loan documents a clause granting a security interest in the leased cattle to the lessor. The filing of a precautionary financing statement is also a good consideration; it does not prohibit the lessor from later arguing that the transaction is a true lease. The lessor and lessee should agree in advance on how the non-productive cattle will be culled and replaced.

Note: Thompson Coburn  represented Sunshine Heifers in its appeal to the Sixth Circuit.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions