FIRST STATE BANK OF ATHENS, MABANK BRANCH, APPELLANT v. PURINA AG CAPITOL CORPORATION, AND PURINA MILLS, INC. D/B/A PURINA CATTLE MANAGEMENT AND VAN ZANDT LIVESTOCK, INC., APPELLEES NO. 12-99-00062-CV COURT OF APPEALS OF TEXAS, TWELFTH DISTRICT, TYLER 40 U.C.C. Rep. Serv. 2d (Callaghan) 161 October 28, 1999, Opinion Delivered PRIOR HISTORY: Appeal from the 86th Judicial District Court of Kaufman County, Texas. ( Tr.Ct.No. 54489). DISPOSITION: Reversed and Remanded. COUNSEL: For APPELLANT: Mr. M. Keith Dollahite, Tyler, TX. For APPELLEE Purina: Mr. Steven C. Haley, Brenham, TX. For APPELLEE Van Zandt Livestock: Mr. Mark J. Calabria, Kauffman, TX. JUDGES: Panel consisted of Ramey, Jr., C.J., Hadden, J., and Worthen, J. OPINIONBY: ROBY HADDEN OPINION: This case involves a dispute between two competing lien creditors over proceeds from the sale of 818 head of cattle. One of the competing creditors, Purina Ag Capital Corp. and Purina Mills, Inc. d/b/a Purina Cattle Management Services (collectively "Purina"), filed a motion for summary judgment on the entire dispute between it and the other creditor, First State Bank of Athens, Mabank Branch ("Bank"), which the trial court granted. In five issues presented, the Bank appeals the trial court's ruling. We will reverse and remand. I. PROCEDURAL AND FACTUAL BACKGROUND On December 11, 1996, the Bank made a secured loan to James and Kelly Grisham d/b/a J & K Cattle ("Grishams"), who signed a promissory note to the Bank for $ 720,322.00. To secure this note, the Grishams granted the Bank a security interest in certain collateral, including "all cattle now owned [by the Grishams] or hereafter acquired, any increase, or the products or proceeds thereof, including but not limited to: 1565 cows, 1000 calves and 42 bulls." In the loan documents, the Grishams agreed to refrain from selling the cattle unless they received written permission to do so from the Bank. The loan documents also contained a provision stating that: It is agreed and understood that any and all proceeds from the sale of any and all livestock and increases thereof pledged as collateral will be promptly forwarded to [the Bank], to be applied to [the Grishams'] indebtedness.The Bank filed financing statements to perfect its security interests in the cattle. On December 20, 1997, Appellee Van Zandt Livestock, Inc. ("Van Zandt") executed a promissory note to Purina in the amount of $ 552,000.00. Van Zandt is a Texas corporation that owns and operates a livestock commission sales barn. James and Kelly Grisham are its president, vice-president and sole shareholders. Van Zandt also executed a Credit Agreement granting a security interest to Purina in certain cattle to be purchased, fed and conditioned by Van Zandt with the loan proceeds. The cattle were to be placed in a cattle ownership program administered by Purina. Purina filed a financing statement to perfect its security interest in these cattle. Between December 30, 1997 and March 7, 1998, Purina advanced the aggregate principal amount of $ 272, 537.40 to Van Zandt to purchase 818 head of cattle. According to Purina, among these 818 head were 125 of the Grishams own cattle which they sold to Van Zandt for $ 29,571.28 on December 20, 1997. Van Zandt issued a check dated December 20, 1997 for this amount to "J & K # 1." On December 22, 1997, the Grishams endorsed this check to the Bank as a payment on the Grishams' note with the Bank. The Bank issued a receipt to the Grishams. On the receipt, there was a notation stating "cattle sale to interest per James." With respect to the remaining 693 head (818 minus the 125 allegedly purchased from the Grishams), Purina asserts that Van Zandt purchased all but four head from sellers other than the Grishams at public auction sales. Thereafter, the Grishams defaulted on their notes with the Bank and with Purina. On April 3, 1998, the Bank obtained a final judgment against the Grishams for $ 785,097.50 and for foreclosure of the Bank's security interests in the Grishams' cattle. To prevent the Bank from seizing and selling the 818 head discussed above, [n1] Purina filed suit against the Bank and obtained a temporary injunction preventing the Bank from foreclosing on its security interests in these cattle. Subsequently, the trial court ordered that the 818 head be sold by an independent third party and that the proceeds be placed in the registry of the court. On June 1-2, 1998, the cattle were sold and $ 332,187.76 was deposited by the court into interest-bearing accounts pending final distribution. - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n1 Although the record before us is somewhat unclear, it appears that the Bank was able to successfully seize and sell some of the of the Grisham cattle in partial satisfaction of the Bank's judgment. As Purina points out, these cattle were not collateral securing Purina's note and were never made a part of this case. - - - - - - - - - - - - - - - - -End Footnotes- - - - - - - - - - - - - - - - - After the proceeds had been deposited, Purina filed its Second Amended Petition and Application for Temporary Injunction [n2] adding Van Zandt as a defendant and seeking a declaration from the trial court that its interest in all of the deposited funds was superior to the Bank's and VanZandt's interest. In its answer to Purina's petition, the Bank brought a third-party action against the Grishams and a cross-claim against Van Zandt alleging, essentially, that the Grishams and Van Zandt were "one in the same" and that the Grishams used Van Zandt to perpetuate a fraud upon the Bank when they transferred secured property to Van Zandt. Based on these allegations, the Bank sought a declaration that its rights in the deposited funds were superior to the rights of Van Zandt and the Grishams. The Bank also brought a counterclaim against Purina contending, in essence, that the Bank's interest in the funds was superior to Purina's because the Grishams acted fraudulently by transferring secured property to a wholly owned corporation. By way of its counterclaim against Purina, the Bank sought a declaration that its rights in the deposited funds were superior to those of Purina. - - - - - - - - - - - - - - - - - -Footnotes- - - - - - - - - - - - - - - - - - n2 This application for temporary injunction sought to enjoin the Bank and/or Van Zandt from disposing of the deposited
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