Chaves v. Modesto Livestock Com. Co. CA5 ( 2021 )

Filed 9/14/21 Chaves v. Modesto Livestock Com. Co. CA5
NOT TO BE PUBLISHED IN THE OFFICIAL REPORTS
California Rules of Court, rule 8.1115(a), prohibits courts and parties from citing or relying on opinions not certified for
publication or ordered published, except as specified by rule 8.1115(b). This opinion has not been certified for publication
or ordered published for purposes of rule 8.1115.
IN THE COURT OF APPEAL OF THE STATE OF CALIFORNIA
FIFTH APPELLATE DISTRICT
DAVID CHAVES,
F080130
Cross-complainant and Respondent,
(Super. Ct. No. 2024694)
v.
MODESTO LIVESTOCK COMMISSION OPINION
COMPANY, INC.,
Cross-defendant and Appellant.
APPEAL from a judgment of the Superior Court of Stanislaus County. John D.
Freeland, Judge.
Mayol & Barringer and Bart Barringer, for Cross-defendant and Appellant.
Law Office of Curtis D. Colaw and Curtis D. Colaw, for Cross-complainant and
Respondent.
-ooOoo-
This matter stems from the January 22, 2016 sale of 400 dairy cattle by cross-
complainant and respondent, David Chaves, to one Sean Hodges, pursuant to a
commercial sales agreement, a purchase money secured promissory note, and a purchase
money security interest agreement. The agreements and promissory note were executed
on January 22, 2016, the date of sale. The cattle were sold for $740,000, which was the
amount reflected in the agreements and promissory note. Chaves perfected his security
interest in the cattle sold to Hodges by filing a Uniform Commercial Code (UCC)
Financing Statement with the California Secretary of State on the date of sale.
Hodges, a third-party debtor for purposes of this matter, defaulted on the secured
promissory note in January 2017. Modesto Livestock Commission Company, Inc.
(MLCC or Modesto Livestock), cross-defendant and appellant, is a “Modesto, California
based livestock auction,” that “acted as a sales broker” in purchasing and selling cattle for
Hodges, after Hodges’s purchase of Chaves’s cattle. Here, Chaves brought a conversion
action in tort against MLCC to enforce the purchase money security interest in the
cattle—and any proceeds arising from the cattle—that Chaves had sold to Hodges.
As mentioned, Hodges would buy and sell cattle through MLCC. He had an
“open account,” essentially an unsecured credit account, with the company. MLCC kept
track of the account balances by means of a ledger. On January 5, 2017, Hodges’s
account with MLCC had an outstanding balance of $18,957.40 related to cattle purchases
made by Hodges.
Thereafter, between January 12, 2017 and February 20, 2017, MLCC sold 49
cattle for Hodges. Although Chaves had a lien against the proceeds of cattle sold by
Hodges, MLCC retained $18,957.40 in proceeds from the sale of Hodges’s cattle to zero
out the outstanding balance in that amount owed on Hodges’s account with MLCC.
Chaves sought to reclaim the cattle sale proceeds retained by MLCC on grounds he had a
prior secured interest in them.
2.
The matter was tried before the superior court in a two-day bench trial. Four
witnesses testified: Chaves, Emanuel Borges Silva, Jr.,1 Lary Gremp of MLCC,2 and
Sean Hodges. Following the trial, the superior court found that “the 49 cows sold at
MLCC were subject to Chaves’[s] Purchase Money Security Agreement for Dairy
Livestock with Hodges,” and that “Chaves’[s] security interest is superior to the claimed
security interest of MLCC.” (Unnecessary capitalization omitted.) The court
consequently determined that “judgment is to be entered in favor of Chaves and against
MLCC in the sum of $18,95[7].40.” (Unnecessary capitalization omitted.) We affirm.
FACTS AND PROCEDURAL BACKGROUND
This appeal arises from a cross-complaint filed by Chaves regarding a sub-dispute
between Chaves and MLCC, in the context of a larger lawsuit involving the California
Department of Food and Agriculture (CDFA) and multiple other parties. The parties to
the present appeal have not addressed or explained the larger context of the instant
matter, and the details of the broader lawsuit are not fully reflected in the limited record
on appeal provided here. Accordingly, we will not further address the larger lawsuit
connected to the instant matter.
The instant dispute arose from Chaves’s sale of 400 dairy cattle to Hodges on
January 22, 2016, pursuant to a sales agreement, a purchase money secured promissory
note, and a purchase money security agreement, all executed on the same date (i.e.,
January 22, 2016).3 The sales price for the cattle was $740,000, extended as a secured
loan from Chaves to Hodges, and the purchase money secured promissory note specified
that Hodges would pay Chaves $22,955.55 monthly, starting on March 5, 2016. Chaves
1 Silva was a friend of Chaves’s and veteran of the dairy industry.
2 Gremp’s position with MLCC is not reflected in the record.
3 The cattle were bought by Hodges, Hodges’s wife (Heidi Hodges), and Hodges’s
mother (Lisa Goulart); all three were cosignatories on documents related to the sale.
However, for purposes of the instant matter, Hodges is the relevant third-party debtor.
3.
filed a UCC financing statement with the California Secretary of State on January 22,
2016, to perfect his security interest as described in the purchase money security interest
agreement. All the relevant documents were admitted into evidence at trial as exhibits.
Chaves received, through January 2017, the monthly payments due on the
promissory note, and thereafter the payments stopped. Chaves received the payments
through a milk assignment from the National Farmers Organization that bought the milk
Hodges obtained from the cattle purchased from Chaves. After Chaves received the last
payment, he was still owed approximately $530,000, towards which amount he
eventually obtained $29,000 through various efforts. The outstanding balance remained
unpaid.
The purchase money security agreement executed by Chaves and Hodges provided
that the cattle subject to the agreement would be kept at a specified location in
Livingston, in a clean environment, with adequate food, water, and veterinary care.
However, the cattle were moved to a new location in Hilmar about six or seven months
after Hodges purchased them. Chaves drove by the new location a few times and
“observed a muddy mess.” He testified: “[A] lot of cows that were there appeared not to
be mine.” By the time the payments to Chaves ceased in January 2017, Hodges had cows
at two locations, one in Hilmar and the other in Turlock. At that time, Chaves conducted
additional inspections at both facilities; he conducted approximately four or five such
inspections.
The cattle sold by Chaves to Hodges were branded with a diamond C pattern
(Chaves’s brand). However, Chaves saw that Hodges had commingled cattle of various
brands together at the Hilmar and Turlock facilities. More specifically, the number of
cattle branded with the diamond C appeared to have declined in numbers relative to their
numbers at the time of sale and were commingled with other cattle. Chaves was assisted
by a friend and veteran of the dairy industry, Emanuel Borges Silva, Jr., who testified
most of the cattle on Hodges’s lots were unbranded. Cattle are generally traced either by
4.
means of brands, or, if they are unbranded, by means of ear tags (numbers tattooed in the
ear).
In addition, Chaves testified there was no feed on the lots and the cows were in a
bad state, appearing as “a bunch of skinny cows.” Chaves testified: “[Hodges] didn’t
have any feed. He couldn’t feed – no longer could feed the cows.” Chaves added: “And
the cows were so diseased[,] and the bacteria count was so high[,] that National Farmers
Organization stopped taking [Hodges’s] milk.” Chaves explained that this was the reason
Chaves did not get any more assignment payments. At the same time, Chaves became
aware that Hodges was selling off and liquidating the cattle.
Silva similarly testified that in January 2017, the cattle on Hodges’s lots were in
“horrible shape,” “poorly maintained,” and with “very little feed.” It was clear from the
situation in the milk barn that milk production was no longer viable on account
potentially of “bacteria counts in the line.” There were “[a]bout 300 head” of cattle in
one facility (Hilmar) and about 100 head of cattle in another facility (Turlock); all the
cattle were in the same “poor, poor shape.” When Chaves sold the cows to Hodges in
January 2016, the cows had been in “[e]xcellent condition” and produced milk of high
quality and in good quantities.
At this point, the CDFA got involved to preserve the cattle and proceeds from the
sale thereof, for all legitimate claimants; the CDFA issued a hold order with respect to the
cattle and cattle proceeds. Chaves explained the way the state’s hold order worked: “I
believe that the state puts a hold, and [the seller] cannot sell the cows. They have to go –
they have to stay on the place. Or if they go – if they go to the sales yard … [then the
sale proceeds go] into the state fund.” Various entities and persons, including Chaves,
had filed liens with the California Secretary of State as to the cattle on Hodges’s lots and
related cattle proceeds. Chaves’s lien was second in order. As a result of the state’s hold
order, distribution of the cattle and cattle proceeds was delayed pending further
determination of the rights and interests therein.
5.
Chaves initiated the instant action by filing a cross-complaint against various
cross-defendants (including roe cross-defendants) as part of the larger lawsuit referenced
above. Chaves’s cross-complaint, filed on July 17, 2017, included a cause of action for
conversion. MLCC was identified and added as a specific cross-defendant (in place of a
roe cross-defendant), with respect to the conversion cause of action, on November 2,
2017. Chaves’s cross-complaint pertained to the cattle and cattle proceeds subject to
CDFA’s hold order. Chaves had reached settlements with some cross-defendants who
had competing claims on Hodges’s cattle, while yet other cross-defendants had
defaulted.4 Chaves settled with Martella Livestock Market, Inc., which had the first
priority claim on the cattle and cattle proceeds, for $36,000, and with Henry Tosta, who
also had a claim on the cattle and cattle proceeds, for $20,000. Chaves’s $18,957.40
conversion claim against MLCC did not resolve through settlement or default but rather
proceeded to bench trial. Chaves’s counsel explained at trial that Chaves and the parties
with whom Chaves had reached settlements would receive distributions of the cattle
and/or cattle proceeds held by CDFA once the trial court issued a judgment in the present
case (i.e., on Chaves’s cross-complaint).
Chaves and Silva were able to secure over 300 cows from Hodges’s Hilmar
facility. Eventually 337 of Hodges’s cows were sold under CDFA’s hold order because
they were in “poor shape” or diseased. All proceeds—a total of $116,260—were held by
CDFA. For its efforts, CDFA charged a statutory estray fee of $8,425, leaving
$107,835.81 for distribution pursuant to the trial court’s order in the instant matter.
CDFA also released an additional 89 cows to Chaves, for him to hold on behalf of the
state until judgment was issued in the present matter. These cows were being looked
after and were in fair condition at this point; when Chaves picked them up, they were
4 Sean Hodges was named as a cross-defendant in Chaves’s cross-complaint and
had evidently reached a settlement with Chaves (any settlement between Hodges and
Chaves is not reflected in the record).
6.
“skinny” and “would probably [have gone] for dog food.” About 80 of the 89 cows
remained in Chaves’s possession; the others had either passed away or had to be
liquidated, with the proceeds going to CDFA. The remaining 80 cows were presently
valued at $600 or $800 apiece.
In the meantime, some of the cows from Hodges’s Turlock facility were sent by
Hodges to MLCC to be sold. Previously, Hodges had been purchasing cattle through
MLCC but, in January 2017, MLCC had cut Hodges off from purchasing cattle because
of the accrued balance owed on his open account or credit account with MLCC. Lary
Gremp of MLCC testified he told Hodges that, “If [Hodges] didn’t pay, [MLCC] would
go out and pick up [its] cows.” Gremp was asked whether, beginning in January 2016,
MLCC obtained a security agreement to secure the cattle purchased by, and released to,
Hodges. Gremp responded: “We always had a security agreement. It’s [printed] on the
bottom of our invoice. Until the cattle are paid in full, Modesto Livestock retains title.”
Gremp acknowledged, however, that whenever Hodges purchased cattle through MLCC,
he immediately took possession thereof, despite owing the purchase price. Gremp also
acknowledged that MLCC never filed a UCC financing statement with the California
Secretary of State. Gremp testified that after MLCC cut Hodges off from purchasing
cattle, Hodges started bringing in cattle to sell, in order to defray the outstanding balance
in his account. Gremp testified that the cattle Hodges would sell “were Hodges’s cattle.”
The parties stipulated that “[o]n January 5, 2017, Sean Hodges owed the sum of
$18,957.40 to Modesto Livestock for [previously purchased] cattle[,] as evidenced by
Sean Hodges[’s] account ledger [maintained by Modesto Livestock].” (Unnecessary
capitalization omitted.) The parties further stipulated that “[b]etween January 12, 2017
and February 20, 20[17], Modesto Livestock sold or other[wise] collected proceeds from
49 cattle of Sean Hodges which paid for cattle previously taken by Sean Hodges [through
Modesto Livestock].” (Unnecessary capitalization omitted.) Next, the parties stipulated
that as a result of the proceeds obtained by Modesto Livestock from the sale of the “49
7.
cattle of Sean Hodges,” between January 12, 2017 and February 20, 2017, the
outstanding account balance reflected in MLCC’s ledger records for Hodges’s open
account or credit account was reduced, as of February 20, 2017, to $0.00. Finally, the
parties stipulated that “Modesto Livestock did not file a UCC Financing Statement with
the California Secretary of State’s Office.” (Unnecessary capitalization omitted.)
MLCC called Sean Hodges as a witness. Hodges’s testimony was confusing and
difficult to follow. Hodges acknowledged that he had sold off some of Chaves’s cows
and replaced them with other cows, whereby there was a commingling of cows. When
Hodges ceased his dairy operation in early 2017, he had 350 cows at one facility and 103
cows at another facility, for a total of 453 cattle. Chaves picked up 350 of those cows.
Chaves’s counsel asked Hodges about cows the latter sold through MLCC in
January and February 2017. Hodges responded that the sales had “nothing to do with
Chaves’s cattle,” rather “these were [Hodges’s] own cattle,” as Hodges had not yet
purchased any cattle from Chaves. Chaves’s counsel pointed out that Hodges purchased
cattle from Chaves in January 2016, well before the cattle sales Hodges made through
MLCC in January and February 2017, that were the subject of Chaves’s instant cross-
complaint against MLCC. Hodges then changed tack; he denied that proceeds from the
sale of cattle through MLCC in January and February 2017 were used to pay off any
outstanding balance he owed to MLCC. Hodges insisted he always paid for cattle
purchased from MLCC on the actual day of purchase (this testimony was contradicted by
the testimony of Lary Gremp of MLCC). With regard to the cattle he sold through
MLCC in January and February 2017, Hodges also threw in: “And some of these cows
weren’t even part of the Chaves deal. Some of these cows were Henry Tosta’s.”
Chaves’s counsel pointed out that the account ledger maintained by MLCC for Hodges’s
cattle purchases and sales showed a zero balance on February 20, 2017 (as compared to
the $18,957.40 balance owed on January 5, 2017), thereby suggesting that the cattle at
issue were Hodges’s own cattle as the proceeds accrued to him. Counsel’s point also
8.
undercut Hodges’s testimony that he always paid for cattle purchased on the day of
purchase.
Hodges acknowledged that his wife and business partner, Heidi Hodges, continued
to sell cows through MLCC after the sale of the 49 cows sold between January 12, 2017
and February 20, 2017 that were relevant to Chaves’s cross-complaint; Heidi Hodges
sold cows through MLCC on February 21, 2017 and February 28, 2017. As for the latter
cows, i.e., cows sold after February 20, 2017, Hodges also testified: “But these were the
Tosta cows. These had nothing to do with the Chaves – Chaves deal at all.” Hodges
acknowledged, however, that his business received the proceeds from selling these cows.
Hodges further acknowledged that on March 1, 2017 or March 2, 2017, he requested
MLCC to liquidate an additional 103 cows; MLCC went out to Hodges’s facility and
took the cows away in trailers. As to these cows, Hodges also testified: “[Those] were
owned by Henry Tosta. They had nothing to do with [the Chaves] deal.” Ultimately,
CDFA stopped this sale of 103 cows; the sale subsequently went forward under CDFA’s
hold order.5 Chaves’s counsel showed Hodges the state’s hold order, which evidently
indicated that 75 cows subject to the hold order had Chaves’s brand on them and 56 cows
had Tosta’s brand.6
Hodges testified that the cattle he obtained from Henry Tosta were leased cattle.
Hodges said there was no written lease agreement; rather it was an oral agreement.
Chaves’s counsel showed Hodges a written agreement between Hodges and Tosta, signed
by both parties; it was an agreement regarding a lease with an option to buy and was
admitted into evidence. (See Chaves’s Ex. 8.) Hodges denied that the signature on the
document was his. Hodges acknowledged that he picked up 400 cattle from Tosta on
October 10, 2016, which was also the date listed at the top of the agreement. As to the
5 MLCC’s Lary Gremp testified to this effect.
6 CFDA’s hold order does not appear to be included in the record on appeal.
9.
fate of these cows, Hodges testified: “Cows were sold … [¶] … They went to different
auctions. I had feed bills to pay.” Hodges received payment for the cattle that were sold,
in the form of checks.
Towards the end of his testimony, Hodges again addressed the 49 cattle he sold
through MLCC between January 12, 2017 and February 20, 2017. While he previously
testified that “some” of these cattle belonged to Henry Tosta, at the end of his testimony
he said all these cattle belonged to Tosta. However, none of the sales invoices for the
relevant transactions referred to Tosta. Hodges further acknowledged that the sales
documentation for the cows sold in the relevant time period showed that the cows were
unbranded; they did not have Tosta’s brand on them. Hodges also acknowledged that he
was aware, at the times of these sales, that Chaves had a blanket security interest in cows
owned by Hodges, yet Hodges took no affirmative steps to prove that the cows he was
selling belonged to Tosta. Rather, Hodges claimed at trial that not every cow that
belonged to Tosta had Tosta’s brand on it. Hodges noted the cows had ear tags, and said
he believed the ear tags on the 49 cows sold between January 12, 2017 and February 20,
2017, identified them as Tosta’s cows. Hodges, however, acknowledged that the cows
sold during the relevant period had a range of different types of ear tags, as reflected on
the sales invoices. As to one cow, with an ear tag of K35, Hodges acknowledged that the
cow was not Tosta’s cow. As to two other cows, Hodges acknowledged they did not
have ear tags at all.
Hodges said he kept cows at two facilities, one in Hilmar and one in Turlock.
Tosta’s cows were mixed in with other cows at both facilities. Some of the cows at both
facilities did not have ear tags. Hodges did not record ear tags for Tosta’s cows in order
to track them. Hodges also could not recall when he last sent Tosta a check for any of the
cows that were sold in the relevant period.
Following the trial, the superior court found that “the 49 cows sold at MLCC
[between January 12, 2017 and February 20, 2017] were subject to Chaves’[s] Purchase
10.
Money Security Agreement for Dairy Livestock with Hodges,” and that “Chaves’[s]
security interest is superior to the claimed security interest of MLCC.” (Unnecessary
capitalization omitted.) The court consequently determined that “judgment is to be
entered in favor of Chaves and against MLCC in the sum of $18,95[7].40.”
(Unnecessary capitalization omitted.) The court set forth its decision, and explained it, in
a final statement of decision (prior to the final statement of decision, the trial court had
issued a tentative decision and a proposed statement of decision).
DISCUSSION
I. Chaves had a Security Interest in the 49 Cattle Sold by MLCC for Hodges
MLCC challenges the court’s decision in this matter, to the extent the court found
that “the 49 cows sold at MLCC were subject Chaves’[s] Purchase Money Security
Agreement for Dairy Livestock with Hodges.” MLCC contends: “Hodges did not have
an ownership interest in the [49] cattle sold by MLCC between January [12], 2017 and
February 20, 2017,” as “those cattle were owned by Tosta and all of [the] evidence
offered at trial supports that proposition.” MLCC argues that Chaves, in turn, did not
have a security interest, on account of his purchase money security agreement with
Hodges, in the 49 cattle sold by Hodges through MLCC between January 12, 2017 and
February 20, 2017, and, therefore, cannot claim the $18, 957.40, in proceeds from the
sale of those cows.7 Based on the foregoing contentions, MLCC seeks reversal of the
judgment entered in the trial court. We disagree with MLCC’s contentions and affirm the
trial court’s rulings that Chaves had (1) a security interest in the 49 cows sold by MLCC
for Hodges in early 2017, and (2) a superior claim on the $18,957.40 in proceeds from
the sale thereof.8
7 MLCC’s brief refers to $18,952.40; however, the record reflects the relevant
amount was $18,957.40.
8 The trial court’s statement of decision also refers to $18,952.40 in damages
awarded to Chaves; however, the record reflects the relevant amount is $18,957.40.
11.
A. Background
The purchase money security agreement that was executed by Chaves and Hodges
in conjunction with the sale of Chaves’s cows to Hodges, provided that Chaves would
have an ongoing security interest in the 400 cattle sold, and in additional collateral,
including all dairy cattle owned at the time, or thereafter acquired, by Hodges, as well as
in the products and proceeds thereof. (See Chaves’s Ex. 2.) Specifically, the purchase
money security agreement provided that the “Debtor shall provide Creditor with a
purchase money security interest in dairy livestock hereinafter referred to as the
‘Collateral,’ ” and more particularly described as follows:
“ ‘All dairy livestock including cows, dry cows, springers, heifers, calves,
and bulls, including, but not limited to Four hundred (400) purchase money
Holstein lactating and dry cows, and all products and proceeds thereof,
including natural increases (progeny), and subsequent purchases by bill of
sale, draft or otherwise, which includes all dairy livestock now owned or
hereafter acquired without limitation, and all products and proceeds
thereof, including government and cooperative entitlements, whether now
owned or hereafter acquired, and all milk, milk products, milk proceeds,
accounts, accounts receivable, herd retirement or retention proceeds,
production base and contract rights, patronage dividends, owners equity,
quality control payments, and retainages, including retain accounts and
cash proceeds thereof, whether now owned or hereafter acquired’ ” (Italics
added.)
The parties stipulated that Chaves perfected his security interest in the agreed-
upon collateral for the sale of his herd to Hodges, by filing a UCC financing statement on
the date of sale, January 22, 2016. The parties further stipulated: (1) between January
12, 2017 and February 20, 2017, MLCC sold “49 cattle of Sean Hodges”; (2) “Sean
Hodges owed the sum of $18,957.40 to Modesto Livestock for cattle as evidenced by
Sean Hodges[’s] account ledger [maintained by Modesto Livestock]”; (3) the proceeds
from the sale of “49 cattle of Sean Hodges … paid for cattle previously taken [from
MLCC] by Sean Hodges”; (4) Hodges’s account with MLCC was therefore “reduced to
$[0.00] as of February 20, 2017”; and (5) “Modesto Livestock did not file a UCC
12.
Financing Statement with the California Secretary of State’s Office.” (Unnecessary
capitalization omitted.)
After the trial, the trial court ruled, as reflected in its final statement of decision, as
follows:
“Chaves takes the position that the collateral agreed to as security for
the sale extended beyond the cows that were the subject of the sale by
Chaves. MLCC contends that because the cows were not related to those
which were the subject of the sale between Chaves and Hodges, they were
not part of the collateral for Chaves’[s] security interest and therefore the
value attributed to such cows is not owed to Chaves as a priority creditor
under the security agreement.
“These matters are governed by the Commercial Code. A
description of personal or real property as collateral is sufficient if it
reasonably identifies what is described. (Cal. Com. Code §9108(a).) The
description reasonably identifies the collateral if it identifies it by either
specific listing, category, type, quantity, formula or procedure, if the
identity of the collateral is objectively determinable. (Com. Code
§9108(b).) However, a description such as ‘all the debtor’s assets’ or ‘all
the debtor’s personal property’ is insufficient to reasonably identify the
collateral. (Com. Code §9108(c).) Moreover, the Commercial Code
specifically recognizes that a security agreement may create or provide a
security interest in after-acquired collateral. (Com. Code §9204(a).) Such
an interest is not merely equitable, and no further action is required for the
interest to attach to such collateral. (Com. Code §9204, Uniform
Commercial Code Comment 2.) [¶] … [¶]
“Based on [Bank of Cal. v. McCoy (1937) 23 Cal.App.2d 192 and
Merced Production Credit Assn. v. Bayer (1963) 222 Cal.App.2d 793], the
law recognizes later acquired livestock—not involved in the sales
transaction between Chaves and Hodges—as part of the intended collateral
described in the security agreement. The inquiry then turns on a question
of contract interpretation, i.e., was the livestock described as collateral in
the security agreement limited to those which were the subject of the
transaction between Chaves and Hodges or does the language extend to
cover later-acquired livestock from other sources?
“The security agreement and UCC financing statement describe the
collateral as: ‘All dairy livestock including cows, dry cows, springers,
heifers, calves, and bulls, including but not limited to Four Hundred (400)
13.
purchase money Holstein lactating and dry cows, and all products and
proceeds thereof, including natural increases (progeny), and subsequent
purchases by bill of sale, draft or otherwise, which includes all dairy
livestock now owned or hereafter acquired without limitation, and all
products and proceeds thereof….’ [¶] [Citation.]
“The description is clear. Chaves has a continuing security interest
arising out of his Purchase Money Security Agreement for Dairy Livestock
(Exhibit ‘2’) in all the dairy livestock, including cows, dry cows, springers,
heifers, calves and bulls. This includes the four hundred purchase money
Holstein lactating and dry cows, and all the products and proceeds
stemming from Hodges[’s] purchase of the 400 cows. This includes … all
dairy livestock now owned or hereinafter acquired [and all products and
proceeds thereof,] accounts, accounts receivable, cash proceeds, now or
hereinafter acquired, including all rights to payments of Hodges.
“The Court finds that the debt owed by Hodges to Chaves was not
satisfied, and Chaves’[s] security interest continued following turnover of
the 426 cows [i.e., 337 plus 89] by Hodges to Chaves. Chaves’[s] lien
thereafter continued in the security as described in the Purchase Money
Security Agreement for Dairy Livestock (Exhibit ‘2’).
“The court finds that the 49 cows sold at MLCC were subject to
Chaves’s Purchase Money Security Agreement for Dairy Livestock with
Hodges. Chaves’[s] security interest is superior to the claimed security
interest of MLCC. Com. Code §9201 provides that a security agreement is
effective according to its terms between the parties, against the purchasers
of the collateral, and against creditors. [(]See, e.g., Guild Wineries &
Distilleries v. Land Dynamics (1980) 103 Cal.App.3d 966, 973 – perfected
security interest binds all subsequent holders of the collateral.)
“Com. Code §9315 governs the secured party’s rights to recover the
collateral or its proceeds. This section indicates that a security interest
continues in the collateral notwithstanding sale, lease, license, exchange, or
other disposition thereof unless the disposition was authorized by the
secured party. Moreover, the security interest attaches to any identifiable
proceeds of the collateral, even if commingled with other properties, if the
identity of the collateral can be traced by a legally permissible method.
(Com. Code §9315(a),(b).) A secured party seeking to collect its collateral
in agricultural goods has a right to bring a conversion action against the
party retaining the collateral. [(]American National Bank v. Cloud (1988)
201 Cal.App.3d 766.[)] The commingled nature of the collateral or
proceeds is not an issue here, as the parties acknowledge that the proceeds
14.
or value of the subject cows obtained from Hodges by MLCC was
$18,952.40. [¶] … [¶]
“MLCC’s claim to title in the 49 cows is nothing more than a
claimed security interest under the Commercial Code because possession of
the cows was turned over by MLCC to Hodges. (See Com. Code §2401.)
Further, Article 9 of the Commercial Code dealing with secured
transactions in personal property also recognizes the limited scope of
Article 2 and other title retention claims. Article 9 priorities apply
regardless of retention of title claims. A seller or other creditor in goods
sold may retain a secured interest through title, but only until such time as
the debtor is given possession of the collateral. (See Com. Code §2202.)
“MLCC did not comply with statutory requirements to perfect its
claimed retention of title interest, and it no longer had a title interest once it
turned over possession to the debtor. Further, MLCC’s contention that
Chaves cannot collect secured proceeds because Chaves must have received
cattle it sold to Hodges does not defeat [Chaves’s] security interest in the
proceeds. (Knox v. Phoenix Leasing, Inc. (1994) 29 Cal.App.4th 1357,
1366-1367.)
“For these reasons[,] judgment is to be entered in favor of Chaves
and against MLCC in the sum of $18,952.40.” (Unnecessary capitalization
omitted.)
The trial court also resolved issues relevant to the distribution of cattle and cattle
sale proceeds held pursuant to CDFA’s hold order. The court ruled: “The Court finds
that approximately 337 cattle were liquidated and the funds deposited with the [CDFA],
which are subject to disposition by this Court. The CDFA holds at least $116,260.81 in
cattle proceeds. From these proceeds the CDFA is owed estray fees of at least $8,425.00,
leaving a balance of at least $107,835.81.” The court determined that Martella Livestock
Market, Inc. had “a first priority lien claim in the cattle proceeds subject to this case held
by the CDFA, after statutory estray fees,” whereby “the amount of $36,000 … shall be
paid [to Martella Livestock Market, Inc.] as a first-priority from the cattle proceed funds
held by the CDFA.”
The court further found that Chaves had “a second-priority lien claim in all the
remaining cattle proceeds subject to this case in the estimated sum of at least $71,835.81
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… arising out of [his] Purchase Money Security Agreement for Dairy Livestock with
Sean Hodges executed on January 22, 2016, which was perfected by the filing of a UCC
Financing Statement with the California Secretary of State’s Office on January 22, 2106.”
The court determined: “All of the remaining cattle proceeds shall be paid as a second
priority lien to Chaves.” The court also ordered that the first $20,000 of the proceeds to
be paid to Chaves would be directed to Henry Tosta, pursuant to Chaves’s request (in
light of Chaves’s settlement with Tosta), while the remaining amount of at least
$51,835.81 would be paid to Chaves himself. Finally, as to the 89 cattle of which Chaves
took possession “subject to this case and the statutory hold orders of the CDFA,” the
court ordered that “Chaves shall have all the right, title and ownership interest in the 89
cattle, including the remaining 80 cattle, and any proceeds [therefrom],” on account of his
“Purchase Money Security Agreement for Dairy Livestock with Hodges executed on
January 22, 2016, and perfected by the filing of a UCC Financing Statement with the
California Secretary of State’s Office on January 22, 2016.”
B. Analysis
California Uniform Commercial Code section 9203, subdivision (b) provides, in
relevant part, that “a security interest is enforceable against the debtor and third parties
with respect to the collateral” when the following conditions are satisfied: “(1) Value has
been given”; “(2) The debtor has rights in the collateral or the power to transfer rights in
the collateral to a secured party”; “(3) … The debtor has authenticated a security
agreement that provides a description of the collateral.” Furthermore, section 9204,
subdivision (a) provides that “a security agreement may create or provide for a security
interest in after-acquired collateral,” and section 9315, subdivision (a)(2) clarifies that
“[a] security interest attaches to any identifiable proceeds of collateral.” Finally, an
unsecured creditor cannot offset its advances to a debtor by crediting its accounts with
sale proceeds to the detriment of a prior secured creditor with a claim to those proceeds,
and a secured creditor seeking to collect its collateral or the proceeds thereof has a right
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to bring a conversion action against a party retaining the collateral. (Imperial NH3 v.
Central Valley Feed Yards, Inc. (1977) 70 Cal.App.3d 513, 520; American National Bank
v. Cloud (1988) 201 Cal.App.3d 766.)
Here, the trial court’s decision is correct under the applicable legal framework as
set forth above, and the factual findings necessary to support the trial court’s
determination are supported by substantial evidence.
Hodges bought 400 dairy cattle from Chaves for $740,000, by means of a loan
extended by Chaves. Hodges and Chaves executed a purchase money security agreement
to secure the loan amount. As noted in the purchase money security agreement, Chaves
gave “new value” in the form of the $740,000 loan to Hodges to enable the latter to
“purchase, take possession [of], and profit from the purchased dairy livestock,” and in
exchange for which value, Hodges provided Chaves with a security interest in the
collateral and its proceeds, as described in the purchase money security agreement.
Subsequently, Hodges stopped making payments to Chaves on the $740,000 loan and
started selling off his herd of dairy cattle in part because, as he testified, he had “feed
bills to pay.” MLCC, which had an open account for Hodges for the purpose of buying
and selling cattle, sold 49 cows for Hodges between January 12, 2017 and February 20,
2017, at a time when there was an outstanding balance of $18,957.40 in Hodges’s
account. The parties stipulated that the 49 cattle that were sold were Hodges’s cattle (the
court noted this stipulated fact in the summation of the evidence presented included in its
final statement of decision). MLCC retained $18,957.40 from the proceeds obtained
from the sale of the cattle; Hodges’s account with MLCC was therefore zeroed out on
February 20, 2017. Unlike Chaves, MLCC was not a secured creditor of Hodges; indeed,
Chaves was a prior secured creditor in relation to MLCC.
In light of the applicable law and the foregoing facts, the trial court properly
determined that “the 49 cows sold at MLCC were subject to Chaves’s Purchase Money
Security Agreement for Dairy Livestock with Hodges,” and that “Chaves’s security
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interest is superior to the claimed security interest of MLCC.” Accordingly, the trial
court correctly entered judgment in favor of Chaves in his conversion action against
MLCC and awarded damages of $18,957.40 to Chaves and against MLCC.
MLCC attacks the trial court’s ruling by pointing to certain findings in the court’s
initial, tentative decision that MLCC alleges are incompatible with the court’s ultimate
ruling, as reflected in its final statement of decision. Specifically, MLCC argues that the
court’s ultimate ruling does not make sense in light of the court’s tentative decision,
which noted, “Hodges’s uncontradicted testimony was that all of the cattle Hodges sold
between January 12, 2017 and February 20, 2017 were cattle that Hodges obtained from
Tosta, and were not cattle in which Chaves had a security interest.” Relying on the above
statement in the court’s tentative decision, MLCC contends: “The Court found that the
cattle in question were cattle that Hodges leased from Tosta and thus, Tosta’s cattle could
not be considered ‘after acquired livestock’ of Hodges.” However, the record is clear that
the court completely jettisoned its tentative decision and ultimately reached a conclusion
opposite to that reflected in its tentative decision. (See Cal. Rules of Court, rule
3.1590(b) [tentative decision is not binding on the court].) MLCC’s reliance on the
court’s tentative decision is therefore unavailing.
In its final ruling, the court impliedly rejected Hodges’s self-serving testimony that
all of the 49 cattle he sold through MLCC in early 2017 were cattle that he had leased
from Tosta. Not only was Hodges’s testimony at odds with the parties’ stipulation that
the 49 cattle Hodges sold through MLCC in early 2017 were Hodges’s cattle, but Lary
Gremp of MLCC also testified that the cattle sold by Hodges were Hodges’s cattle. None
of the sales invoices for the transactions at issue referred to Tosta. Hodges also
acknowledged that the sales documentation for the cows sold in the relevant time period
showed the cows were unbranded; they did not have Tosta’s brand on them. Hodges
further acknowledged that he was aware, when these sales occurred, that Chaves had a
blanket security interest in cows owned by Hodges, yet Hodges took no affirmative steps
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to prove that the cows he was selling belonged to Tosta. Instead, Hodges merely claimed
at trial that not every cow that belonged to Tosta was identified by Tosta’s brand.
Hodges suggested the cows had ear tags, and he believed the ear tags on the cows
sold between January 12, 2017 and February 20, 2017, identified them as Tosta’s cows.
However, the cows sold during the period had a range of different types of ear tags, as
reflected on the sales invoices. As to one cow, with an ear tag of K35, Hodges
acknowledged that the cow was not Tosta’s cow. As to two other cows, Hodges
acknowledged they did not have ear tags at all. Moreover, Hodges acknowledged he did
not record ear tags for Tosta’s cows in order to track them. Hodges also could not recall
when he last sent Tosta a check for any of the cows that were sold. Rather, Hodges
testified he sold the cows because he had feed bills to pay, and the evidence supported an
inference that Hodges sold the cows to pay off the outstanding balance on his account
with MLCC because MLCC had cut him off from making any further purchases in light
of his unpaid balance. Given this record, the court’s implied rejection of Hodges’s
testimony that all the 49 cows he sold through MLCC in early 2017 were Tosta’s cows,
was entirely reasonable.
As noted above, the trial court’s determinations were supported by substantial
evidence, including in light of the parties’ stipulation that the 49 cattle at issue were the
cattle of Sean Hodges. Furthermore, to the extent the trial court made an implied finding
that Hodges had commingled cows from various sources at both his Hilmar and Turlock
facilities, whereby the 49 cows he sold through MLCC in early 2017 represented
commingled goods, such a finding was also supported by substantial evidence. (See
Briggs v. Eden Council for Hope & Opportunity (1999) 19 Cal.4th 1106, 1115-1116, fn.
6 [we presume the “trial court impliedly found every fact necessary to support its order”];
Finney v. Gomez (2003) 111 Cal.App.4th 527, 545 [“If the trial court has made no
findings, the reviewing court will infer all findings necessary to support the judgment and
then examine the record to see if the findings are based on substantial evidence.”].)
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Chavez and Silva testified that the cows at Hodges’s facilities were of various
brands and mostly unbranded. Hodges testified that he had obtained cows from various
sources and they were commingled in his two facilities. Hodges also testified that he did
not record any ear tags present on the cows. Finally, CDFA’s hold order reflected that
Hodges had cows with various brands as well as unbranded cows.
Moreover, to the extent the court made an implied finding that the 49 cows were
commingled in the sense of not necessarily being identifiable as originating from specific
sources, Chaves would have a security interest therein pursuant to section 9336 of the
California Uniform Commercial Code. California Uniform Commercial Code section
9336, subdivision (a) defines “ ‘commingled goods’ ” as “goods that are physically
united with other goods in such a manner that their identity is lost in a product or mass.”
Section 9336, subdivision (c) provides that “[i]f collateral becomes commingled goods, a
security interest attaches to the product or mass,” and section 9336, subdivision (d)
clarifies that “[i]f a security interest in collateral is perfected before the collateral
becomes commingled goods, the security interest that attaches to the product or mass
under subdivision (c) is perfected.” Official Comment 2 to California Uniform
Commercial Code section 9336 explains: “Subsection (a) defines ‘commingled goods.’
It is meant to include goods whose identity is lost through manufacturing or production
(e.g., flour that has become part of baked goods) but also goods whose identity is lost by
commingling with other goods from which they cannot be distinguished (e.g., ball
bearings).”
In sum, we detect no error in the trial court’s ruling that Chaves had a security
interest in the 49 cows sold by Hodges through MLCC in early 2017 and that Chaves’s
prior security interest was superior to any claimed security interest on the part of MLCC.
II. Court Properly Entered Judgment Against MLCC in the Sum of $18,957.40
MLCC contends that the damages in the sum of $18,957.40 awarded to Chaves are
not supported by substantial evidence because the debt owed to Chaves was satisfied
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when the third-party debtor, Hodges, turned over 426 cattle [i.e., 337 plus 89] to Chaves
and CDFA. We disagree.
The trial court found that “the debt owed by Hodges to Chaves was not satisfied,
and Chaves’[s] security interest continued following turnover of the 426 cows by Hodges
to Chaves. Chaves’[s] lien thereafter continued in the security as described in the
Purchase Money Security Agreement for Dairy Livestock (Exhibit ‘2’).” (Unnecessary
capitalization omitted.) Furthermore, upon finding that Chaves’s lien extended to the 49
cows sold by Hodges through MLCC in early 2017, the court ordered that “judgment is to
be entered in favor of Chaves and against MLCC in the sum of $18, 95[7].40.”
(Unnecessary capitalization omitted.) We detect no error in the court’s determinations
and affirm the judgment.
The evidence presented at trial showed that CDFA liquidated 337 cows taken from
Hodges by Chaves; CDFA held on to proceeds of this sale for distribution upon
determination of the rights of various creditors of Hodges. The evidence further showed
that Chaves was holding an additional 89 cows on behalf CDFA pending resolution of the
instant matter. The trial court’s post-trial order credited $71,835.81 from the proceeds
held by CDFA to Chaves; the court’s order further credited the 89 cows conditionally
possessed by Chaves to Chaves. Taking into consideration these and all prior payments
to Chaves, Hodges still owed $365,970.67 to Chaves (the calculations underlying this
figure are reflected in Chaves’s brief and are not disputed by MLCC).
In the instant matter, Chaves sought $18,957.40 from MLCC. The parties
stipulated that “[b]etween January 12, 2017 and February 20, 201[7], Modesto Livestock
sold or other[wise] collected proceeds from 49 cattle of Sean Hodges[,] which paid for
cattle previously taken by Sean Hodges.” (Unnecessary capitalization omitted.) The
record further showed that MLCC retained $18,957.40 from the proceeds generated by
the sale of the 49 cattle at issue to defray the outstanding balance in Hodges’s account
with MLCC. However, as the trial court properly determined, Chaves had a superior
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security interest relative to MLCC’s claimed security interest in the 49 cattle sold by
MLCC on behalf of Hodges (see above). On this record, the award of $18,957.40 in
damages to Chaves and against MLCC was supported by substantial evidence and was
entirely proper.
DISPOSITION
The judgment is affirmed. Chaves to recover his costs on appeal.
SMITH, J.
WE CONCUR:
DETJEN, Acting P.J.
MEEHAN, J.
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