[Author: Suzanne Thompson]

On August 24, 2022, the U.S. District Court for the Northern District of Texas held that the plain language of an intercreditor agreement governed the lenders’ priority with respect to a borrower’s collateral. Cattle operator Waggoner Cattle LLC and a group of affiliated entities obtained a senior secured loan from Lone Star State Bank of West Texas, secured by all of Waggoner’s and the affiliates’ cattle. Later, a Waggoner affiliate obtained secondary secured financing from Rabo Agrifinance, LLC for the purchase of certain cattle. As a result, Lone Star and Rabo Agrifinance entered into an intercreditor agreement to determine the priority of the lenders’ security interests in the cattle. After Waggoner Cattle filed for bankruptcy, a lien priority dispute arose, and Lone Star sued Rabo Agrifinance, alleging that Rabo Agrifinace had received proceeds from the sale of cattle that did not qualify as its collateral under the terms of the intercreditor agreement.

Adopting the bankruptcy court’s report and recommendation, the district court ruled for and against both parties, clarifying which cattle belonged to whom. According to the intercreditor agreement, Lone Star’s first-in-time interest in the cattle collateral would be subordinated to Rabo Agrifinance’s interest if the cattle were (1) located on a specific property and (2) “related to, arose from or in connection with Waggoner’s operations on [that specific property].” Lone Star argued that only cattle related to the cattle operation at the time the parties entered into the intercreditor agreement qualified as collateral. The court disagreed, holding that, by its terms, the intercreditor agreement applied to all cattle as long as the cattle were present on the specific property and related to Waggoner’s cattle operations at some point in time. The court agreed with Lone Star, however, that cattle that were owned by Waggoner but never entered the relevant property did not qualify as Rabo Agrifinance’s collateral based on the Intercreditor Agreement’s plain language.

The case is Lone Star State Bank of West Texas v. Rabo Agrifinance, LLC, No. 2:19-CV-098-Z (N.D. Tex. Aug. 24, 2022). Lone Star is represented by Craig, Terrill, Hale & Grantham, LLP, Mullin Hoard and Brown LLP, and Merriott, Lovell Isern & Farabough, LLP. Rabo Agrifinance is represented by Underwood Law Firm, P.C. and Ray Quinney & Nebeker PC. The opinion is available here.