Secured Transactions Annotations (Agricultural Law and Tax)

Posted April 24, 2023

Security Agreement Need Not Include Future Advances Clause. The defendant entered into a security agreement with Farmers Tobacco Warehouse for the financing of his 2012 tobacco crop. The security agreement with Farmers did not include a clause for future advances, but Farmers periodically made advances to the defendant after the security agreement was executed. The advances were evidenced by the defendant executing promissory notes to Farmers that referred to the security agreement. Farmers perfected its security interest by filing with the Secretary of State. The defendant entered into a second security agreement with Farmers in 2013. In July of 2013, the defendant then obtained a loan from the plaintiff and listed his collateral as his 2013 tobacco crops. The plaintiff filed a security interest with the Secretary of State in 2013 after the Farmers’ security interests. The defendant defaulted on his loan with the plaintiff, and the plaintiff sued to collect on the balance of the promissory note. During discovery, the plaintiff learned that Farmers had received the profits from the 2013 tobacco crops that the plaintiff was also promised. The plaintiff claimed it was entitled to those profits because the security agreement between the defendant and Farmers did not include a future advances clause and that, as a result, Farmers’ interest was unsecured. The trial court determined that the definition of “agreement” under the UCC included whatever bargain the parties had entered into which includes not only the contract language used, but also the parties’ course of performance. Accordingly, the trial court determined that Farmers’ interest was had priority over the crop proceeds. The appellate court affirmed. On further review the state Supreme Court noted that a future advance clause need not be explicitly included in a written security agreement based on the state’s version of the UCC. The parties’ course of performance and course of dealing supplemented the security agreement and demonstrated that the future advances were to be secured by the 2013 tobacco crop. Versailles Farm Home & Garden, LLC v. Haynes, 647 S.W.3d 205 (Ky. 2022).

Posted April 17, 2023

Liens Do Not Extend to Post-Petition Product Without Express Language in Security Agreement. The debtor obtained a loan secured by 58,700 quarts of his bi-weekly milk quota. The loan agreement and security interest were properly filed. The debtor defaulted and the creditor asserted its rights to the milk quota and accounts receivable generated by the debtor’s milk sales (i.e., the cash collateral under 11 U.S.C. §363(a)). The debtor claimed that the creditor had rights only in accounts receivable in existence as of the bankruptcy petition date and no security interest in the debtor’s cows. The debtor pointed out that under 11 U.S.C. §552(a) property acquired by a bankruptcy estate post-petition is generally not subject to a lien created by a pre-petition security agreement, and that the exception in 11 U.S.C. §552(b) would allow the lien to extend only to certain types of products specifically listed in the security agreement. The court found the lien was only for the milk quota and did not extend to the proceeds, products or profits thereof. The collateral did not include the milk-producing cows and was set at 58,700 quarts of the bi-weekly milk quota. The bankruptcy court held the milk was not a product or proceeds of the milk quota, because the milk quota was an intangible good. Further, the security agreement did not list the property or profits associated with the milk quota. In addition, the court held that the creditor’s pre-petition perfected security interest in the debtor’s accounts receivable did not extend to post-petition accounts receivable because they became ineffective by virtue of 11 U.S.C. §522(a). The court noted that the purpose of 11 U.S.C. §552(b) is to prohibit creditors from creating a floating lien or continuing lien. As a result, the court denied the creditor’s motion for prohibition to use cash collateral resulting from the post-petition sale of milk. In re Las Martas, Inc., No. 22-02380 (ESL), 2023 Bankr. LEXIS 419 (Bankr. D. P.R. Feb. 15, 2023).

Posted August 29, 2021

Security Interest Limited to Crops. The defendant borrowed money from the plaintiff for its farming business. A security agreement was signed for each loan, which gave the lender an interest in crops that the defendant either had or would have an interest in. The defendant did not own any land. The lender perfected its security interest in the crops by filing financing statements with the Secretary of State, as well as security interests in some of the real property owned personally by the defendant’s owners. Upon default, the lender sought to foreclose on the crops and property from the family’s security agreements. The trial court granted the plaintiff the security interest in crops grown on land previously farmed by the family. The plaintiff appealed on the basis that it had a 100 percent interest in the crops grown and harvested, not only on land previously farmed by the family, but to any crops in which the defendant had an interest. By limiting the plaintiff’s security interest only to those crops grown on land previously owned, the court attempted to rewrite the agreements despite there being no such limitation set forth in the agreements. The appellate court found the lower court’s decision to be erroneous on the basis that the security interest was tied to the crops themselves and not to any specific parcel of land. CHS Capital LLC v. Lena Farms Partnership LLC, No. A19-1662, 2020 Minn. App. Unpub. LEXIS 570 (Minn. Ct. App. Jul. 6, 2020).

Posted June 20, 2021

Creditor Loses Priority Due to Financing Statement Deemed Seriously Misleading. The debtor executed a loan security agreement payable to the creditor for the purchase and financing of a tractor. The creditor filed a financing statement to perfect its interest, listing the debtor’s middle name as his first name, and his first name as his middle initial. Six months later, the debtor executed a note payable to an ag lender, along with an accompanying security interest in the tractor. The ag lender subsequently filed a financing statement to perfect its interest, which listed the debtor’s name correctly. One year later, the creditor amended its filing statement to correct the debtor’s name. When the debtor later filed for Chapter 12 protection, which was approved by the bankruptcy court, the ag lender objected to the plan’s confirmation and claimed the creditor did not have priority over its own lien. The bankruptcy court determined that under state law, the creditor’s initial financing statement was seriously misleading. The bankruptcy court noted that because a standard search would not have disclosed the creditor’s initial financing statement, the creditor had not perfected its interest until it amended the financing statement 18 months later. The bankruptcy court held that the ag lender’s lien was perfected before the creditor’s, therefore the ag lender’s lien had priority. The creditor argued that because the ag lender had notice of the creditor’s loan on the tractor, the ag lender should not be entitled to priority. The bankruptcy court noted that under state law, actual notice does not affect the priority of liens. The bankruptcy court held that the first to perfect rule governed, thus the ag lender had priority over the creditor’s lien. Finally, the creditor argued that the ag lender should be precluded from bringing its priority claim because it could have been resolved before confirmation of the debtor’s Chapter 12 plan. The bankruptcy court disagreed and held that the priority of the liens had not previously been litigated, therefore the general preclusive effect of plan confirmation did not apply to the ag lender’s claim. In re Wynn, 2021 Bankr. LEXIS 883 (Bankr. M.D. Ga. Apr. 2, 2021).

Posted December 13, 2020

Adequate Protection Denied Due to Unperfected Security Interest. The debtor is a coal company that voluntarily filed for Chapter 11. The debtor operates 32 properties and holds more than 500 mining permits around the country. At the time of filing, the debtor owed six million dollars to its 1,700 workers in Wyoming and Central Appalachia, $32 million to an international investment firm, and over $17 million in ad valorem taxes (the country version of severance taxes that contribute to local services and state education). In total, at the time of filing, the debtor owed approximately $245 million to various creditors and had $138,000 in a bank account. The debtor and creditor entered into a loan and security agreement in connection with a note and other financial accommodations. The creditor filed a financing statement, indicating collateral that included debtor accounts, receivables and inventory. After amending the original loan and security agreement, the creditor filed a new financing statement that no longer referred to the debtor accounts, receivables and inventory. The new financing statement indicated a security interest in the debtor’s bank accounts, accounts receivable, and liens. The debtor and creditor then entered into a joinder agreement, where another business joined the original debtor as a co-borrower under the loan and security agreement. As a result, the creditor filed a new financing statement with respect to the new debtor again indicating a security interest in the debtors’ bank accounts, accounts receivable, and liens. The debtors subsequently entered into a coal purchase and sale agreement (PSA) with another party. When the debtors filed their Chapter 11 petition, they had failed to pay prepetition wages to employees related to the PSA. The debtors and other party settled, whereby the other party paid the debtors for post-petition accounts receivable pertaining to the PSA. The debtors used the bulk of the settlement to pay employees for unpaid work. The creditor filed a motion for adequate protection, requesting payment of the residual settlement proceeds as a form of adequate protection. The creditor argued that it held a valid security interest in the debtors’ accounts receivable and the proceeds thereof. The debtors argued that the settlement proceeds could not be proceeds of the debtors’ prepetition accounts receivable because at the time of the petition date, there were no accounts receivable owed to the debtors. The creditor argued that it held a prepetition perfected security interest that included the debtors’ PSA and the proceeds thereof. The court held that the creditor had established its security interest in the debtors’ PSA. Specifically, the court held that because the debtors had granted the creditor a security interest in all its receivables under the loan and security agreement, the creditor had a security interest in the contract rights to the PSA. However, the court held that the creditor failed to establish that its security interest in the PSA and its proceeds was perfected. The creditor argued that it perfected its security interest in the PSA by filing a financing statement when the co-borrower joined the original debtor under the loan and security agreement. The court held that the description of the collateral in the financing statement was insufficient as it did not reasonably identify the debtors’ PSA by specific reference or other means as determined under the UCC. The court held that creditor’s financing statement that indicated a security interest in all the debtors’ accounts receivable was insufficient to perfect its security interest under the UCC. The court noted that there is a distinction between a security interest in accounts receivable and a security interest in an underlying contract such as the PSA at issue. Further, the court noted that the creditor’s financing statement did not contain any specific reference to the PSA, while other specific contracts were described. The creditor argued that its financing statement should be read to indicate collateral consisting of agreements related to the payment of accounts receivable. Alternatively, the debtors argued that the creditor had a lien on the debtors’ liens and not an independent lien on the prepetition PSA. The court agreed with the debtors, and held that adopting the creditor’s interpretation would lead to a security interest in all debtors’ agreements and in all debtors’ agreements related to the payment of the debtors’ agreements. Finally, the court held that it would have been inequitable for any liens to attach to the post-petition proceeds in this case as the proceeds arose out of unencumbered inventory to the estate. The court held that allowing the creditor to receive the proceeds would have been inequitable to the unsecured creditors. As a result, the court denied the creditor’s motion for adequate protection due to its unperfected security interest. In re Blackjewel L.L.C.,No. 3:19-bk-30289, 2020 Bankr. LEXIS 3413 (Bankr. S.D. W. Va. Dec. 7, 2020).

Posted October 17, 2020

Debtor’s Name Change Causes Financing Statement to Lapse; No Revival by Continuation Statements. The debtor was a meat packing and processing company that was created by two people (one of which was a creditor) operating under the name of Unger Meat Company (UMC). The creditor leased a building to the debtor that was to be used as a processing plant. The creditor also provided startup funds through two promissory notes. The parties entered into a security agreement that granted the creditor a security interest in all of the debtor’s equipment, inventory, and accounts receivable. The creditor perfected the security agreement by filing a financing statement with the state. UMC lost money and the creditor entered into an option agreement with a holding company to purchase UMC. Upon finalization of the sale, the holding company subsequently purchased the creditor’s shares in UMC and changed the name of the company to Rancher’s Legacy Meat Company. Fourteen months after the name change, the creditor filed a continuation statement listing the company’s name as UMC. Three years later, the creditor filed an amended continuation statement changing the debtor’s name to Rancher’s Legacy. The creditor began seeking collection on its notes and a few months later the debtor filed for Chapter 11 bankruptcy. The debtor argued that the appropriate procedure to re-perfect the creditor’s security interest was to file a new financing statement upon the debtor’s name change. The creditor claimed that the filings appropriately re-perfected the security interest, entitling the creditor to adequate protection payments. The bankruptcy court looked to local (Minnesota) law, to construe the status of the creditor’s lien. Under Minnesota law, a financing statement becomes seriously misleading and ineffective when it fails to provide the debtor’s correct name. Additionally, when the financing statement is ineffective because of seriously misleading information, an amendment must be made within four months to perfect a security interest. The bankruptcy court held that the creditor’s security interest lapsed when four months had passed after the creditor’s financing statement became seriously misleading. Further, the bankruptcy court held that the creditor had the ability to re-perfect the security interest by filing a new financing statement. Although the security interest had lapsed, the language of the parties’ security agreement provided the creditor with the opportunity to file a second financing statement. The creditor argued that the multiple filings were sufficient to giver proper notice to any other creditors under the UCC. The bankruptcy court disagreed and held that multiple filings can occasionally give proper notice, but not when the notice had become seriously misleading. The bankruptcy court held that the validity of the financing statement depended primarily on its ability to give notice of the security interest to other creditors. The purpose of the UCC’s notice system, the bankruptcy court noted, is to provide public notice of a secured interest without requiring parties to piece together several documents. Further, the bankruptcy court noted that the creditor’s argument for multiple filings failed because the original financing statement had lapsed. The creditor’s continuation statements were merely amendments to the original financing statement. However, the original financing statement had lapsed four months after it became seriously misleading. The bankruptcy court held that the continuation statements could not revive the financing statement once it had lapsed. Lastly, the creditor argued that the subsequent filings of the continuation statements should have been enough to re-perfect his security interest. The bankruptcy court held that even when the creditor’s three filings were read in conjunction, they were ineffective to re-perfect his security interest. The bankruptcy court further pointed out that the UCC specifically provides that continuation statements cannot substitute for financing statements. As a result, the bankruptcy court declared that the creditor became an unsecured creditor at the time the security interests became unperfected. Because the creditor failed to re-perfect the security interest before the debtor filed Chapter 11 bankruptcy, the debtor was not required to provide the creditor with adequate protection payments. In re Rancher’s Legacy Meat Co., 616 B.R. 532 (Bankr. D. Minn. 2020).

Posted April 20, 2020

Ag Cooperative Fails To Secure Warehouse Lien; Loses on Conversion Claim. A grain farmer routinely delivered and sold grain to the defendant, an operator of a grain warehouse and handling facility. The contract between the parties contemplated the sale, drying and storage of the grain. The farmer also borrowed money from the plaintiff to finance the farming operation and granted the plaintiff a security interest in the farmer’s grain and sale proceeds. The plaintiff filed a financing statement with the Secretary of State’s office on Feb. 29, 2012 which described the secured collateral as “all farm products” and the “proceeds of any of the property [or] goods.” The financing statement was amended in late 2016 and continued. The underlying security agreement required the farmer to inform the plaintiff as to the location of the collateral and barred the farmer from removing it from its location without the plaintiff’s consent unless done so in the ordinary course of business. It also barred the farmer from subjecting the collateral to any lien without the plaintiff’s prior written consent. However, the security agreement also required the farmer to maintain the collateral in good condition at all time and did not require the plaintiff’s prior written consent to do so. The plaintiff complied with the 1985 farm products rule and the farmer gave the plaintiff a schedule of buyers of the grain which identified the defendant. From 2014 through 2017, the farmer sold grain to the defendant, and the defendant remitted the net proceeds of sale via joint check to the farmer and the plaintiff after deducting the defendant’s costs for drying and storage – a longstanding industry practice. The plaintiff, an ag lender in an ag state, claimed that it had no knowledge of such deductions until 2017 whereupon the plaintiff sued for conversion. The defendant did not properly perfect a warehouse lien and the lien claim was rejected by the trial court, but asserted priority on a theory of unjust enrichment. The trial court rejected the unjust enrichment claim. The state Supreme Court agreed, refusing to apply unjust enrichment principles in the context of Article 9 of the Uniform Commercial Code (UCC). The court did so without any mention of UCC §1-103 (b) which states that, "Unless displaced by the particular provisions of the Uniform Commercial Code, the principles of law and equity” including the law merchant [undefined] and the law relative to capacity to contract; duress; coercion; mistake; principal and agency relationships; estoppel, fraud and misrepresentation; bankruptcy, and other validating or invalidating cause [undefined] supplement its provisions.” This section has been characterized as the "most important single provision in the Code." 1 J. White & R. Summers, Uniform Commercial Code § 5. “As such, the UCC was enacted to displace prior legal principles, not prior equitable principles.” However, the appellate court completely ignored this “most important single provision in the Code.” MidwestOne Bank v. Heartland Co-Op, No. 19-1302, 2020 Iowa Sup. LEXIS 38 (Iowa Sup. Ct. Apr. 17, 2020).

Posted February 15, 2020

Ag Supply Dealer Lien Not Perfected. The debtor is a farming operation. An individual owner of the debtor bought ag products on the debtor’s behalf from an ag supplier. A year after the purchase, the debtor filed Chapter 11 bankruptcy. The supplier filed a proof of claim in the amount of $446,884.36, including interest, indicating that the supplier was a secured creditor under the state ag supply dealer lien statute. However, the debtor claimed that the supplier’s lien was not properly perfected and was otherwise insufficient. Under the state (Iowa) ag supply dealer lien statute, a proper financing statement must be filed with the Secretary of State within 31 days after the debtor purchases the supply. The debtor made various purchases from the supplier from March 8, 2017 to August 1 2017. The suppler filed a financing statement within 31 days of the purchase that occurred on April 21, 2017. No financing statements were filed within 31 days of the debtor’s other purchases, thus the supplier was only possibly secured in the $330,000 purchase occurring on April 21, 2017, according to the debtor. However, the financing statement listed the debtor by the individual owner’s name rather than the registered name of the farming operation that the supplier knew the goods were being bought on behalf of and which was using the purchased goods to produce collateral that the entity owned that served as the basis for the supplier’s lien. The debtor claimed that the supplier was unsecured for the entire $446,884.36. The court agreed, noting that the supplier had only timely filed a financing statement with respect to the April 21, 2017 purchase. The court also determined that the filed financing statement was seriously misleading by virtue of the use of an incorrect name for the debtor. Accordingly, the supplier only had a perfected ag supply dealer lien against the debtor to the extent any value remained in the collateral after payment of any obligations owing to all claimants holding perfected liens in the same collateral. Any resulting balance was unsecured. In re Keast Enterprises, No. 8-00856-als11, 2020 Bankr. LEXIS 302 (S.D. Iowa Feb. 3, 2020).

Posted January 19, 2020

Father Was “Debtor” Against Which Harvester’s Lien Could Apply For Services Rendered on Son’s Land. The father farmed with his son. Each of them owned land separately, but they farmed with the father’s equipment on all of the land. The father farmed between 6,500 and 8100 acres, and the son approximately 7,000 to 7,500 acres of land. The son paid his father $400,000 for equipment and other expenses. The father contacted a custom harvester in the fall of 2016 to harvest 2000 acres of corn. Before the work started, the father provided the custom harvester with crop-insurance maps specifying the fields to be harvested. The maps identified the son as the insured party. The father instructed the custom harvester to deliver the corn to multiple elevators in the father’s name. Stored grain was also delivered in the son’s name to elevators and an ethanol plant. Harvest did not conclude until April 8 or 9, 2017, because of weather. Neither the plaintiff nor son paid the custom harvester for the harvesting within 10 days of completion of the harvesting, and the custom harvester filed a lien against both the father and the son for the non-payment. The father refused payment due to performance issues, and the harvester issued a demand letter. A couple of months later, the father and his bank requested that the harvester remove the father from the lien arguing that the crop was the son’s. The lien was preventing the father from making a margin call. A few days later, the son paid the harvester for the harvesting services and the lien was extinguished. Later, the father sued the harvester for wrongful filing of a financing statement to secure the lien, claiming that his commodity contracts were involuntarily liquidated and that he incurred financial damages when reestablishing his place in the grain trading market after the lien was extinguished. The father requested statutory and punitive damages. The harvester counterclaimed for breach of contract, seeking reimbursement for reasonable expenses and a declaratory judgment that the filing of the financing statement was authorized under state law. Both parties filed for summary judgment. The trial court found that the father was a “debtor” under the Iowa Code §571.1B, and that the harvester had personally contracted for the harvesting services, took possession of the grain at the elevator, and commingled the harvested grain in the on-farm storage. The trial court determined that partial summary judgment in favor of the harvester as to the properness of the lien. The appellate court affirmed. On appeal, the father claimed that he was not a “debtor” that a lien could be filed against, but was merely an agent for his son. The appellate court rejected this argument because it hadn’t been raised at the trial court level. While the harvester worked the son’s property, it was the father that contacted the harvester to arrange for the harvesting and other work. The father was the party responsible for ensuring the property at issue was harvested. The appellate court deemed the situation to be comparable to a contractor/subcontractor arrangement to provide services on the son’s property. As such, the father was “a person for whom the harvester render[ed] such harvesting services” and was a “debtor” under the applicable statute against which the harvester’s lien could apply. Kohn v. Muhr, No. 18-2059, 2019 Iowa App. LEXIS 1064 (Iowa Ct. App. Nov. 27, 2019).

Posted January 13, 2020

Financing Statement “Seriously Misleading” and Creditor Unsecured. The debtor filed Chapter 12 bankruptcy in the fall of 2018 and his proposed reorganization plan treated a creditor’s security interest in the debtor’s non-titled personal property (including a combine and header) as unperfected (and, hence, unsecured) because the creditor’s filed financing statements did not correctly state the debtor’s name. In 2015, the debtor had purchased a combine and header from the creditor on an installment basis. The creditor filed a UCC-1 financing statement to perfect its purchase money lien in the combine and a separate financing statement to protect its lien in the header. Both financing statements listed the debtor’s name as "Preston D.Dennis" (with a period but no space). “Preston” was included in the box for Surname, and "D.Dennis" was in the box for “First Personal Name.” The "Additional name(s)/initial(s)" box was blank. The debtor referred to himself as "D. Dennis Preston" (with a period and a space) and his driver's license displayed his name as "Preston D Dennis" (without a period but with a space). The "Additional name(s)/initial(s)" box was blank. The debtor’s argument that the creditor’s security interest in the combine and header were unsecured was based on the failure to satisfy Kan. Stat. Ann. §84-9-503 (both the collateral and the debtor were located in Kansas). That provision states that, for individual debtors with a Kansas driver’s license or identification card, the name of the debtor is sufficiently stated “only if the financing statement provides the name of the individual which is indicated on the driver’s license or identification card.” Kan. Stat. Ann. §84-9-503(a)(4). While minor errors or omissions on a financing statement will not cause a security interest to fail, a financing statement is deemed to be seriously misleading (and unperfected) if it doesn’t list the debtor’s name exactly as listed on the debtor’s driver’s license or identification card. Kan. Stat. Ann. §84-9-506(b). But, if the financing statement could be found by performing a search using the filing office’s standard search logic, it is not “seriously misleading” even if it fails to comply with Kan. Stat. Ann. §84-9-503(a)(4). The debtor claimed that the creditor’s interests were unsecured for failure to comport with Kansas law and because a search of the debtor’s name as denoted on the financing statements using standard search logic did not reveal the interests. The bankruptcy court agreed, finding that that the debtor’s name as indicated on the financing statements which did not match the debtor’s driver’s license was seriously misleading. The financing statements should have stated Preston as Debtor's surname, D as his first name, and Dennis as his middle name. The lack of a space and the period are material in this situation. The bankruptcy court rejected the creditor’s argument, made without authority, that a driver’s license does not identify the fields as "first," "personal," or "middle," and there is nothing to indicate that periods and spaces change what constitutes a name. Thus, the creditor’s security interests in the combine and header were unperfected, and the court sustained the debtor’s objection to the creditor’s proof of claim. In re Preston, No. 18-41253, 2019 Bankr. LEXIS 3864 (Bankr. D. Kan. Dec. 20, 2019).

Posted January 15, 2019

Default and Non-Response To FSA Payment Options Results in Foreclosure. The defendant farm and farm owners executed two promissory notes and a mortgage with USDA’s Farm Service Agency (FSA). The notes and mortgage were secured with farm products, crops, livestock, farm equipment and farm real-estate. The defendant defaulted and the loan agreements allowed the FSA to declare the entire unpaid amount immediately due and payable and foreclose on the instruments and sell the real property and chattel securing the loans. When the debtors first became delinquent, the FSA provided them with information containing different payment and deferral options, none of which were executed. Ultimately, the FSA served the defendants with a Notice of Acceleration and Demand for Payment of the entire outstanding debt. The FSA collected $6,970.51 under the Treasury Offset Program, but the defendant still made no payments under the acceleration clause. When the FSA foreclosed upon the debtors, other creditors were notified of the foreclosure. One creditor, a seed company, signed a waiver of service and another creditor, a bank, was served with a summons. The defendant did not respond to the FSA’s motion for summary judgment or respond to any of the payment options that they were given. The court deemed all of the FSA’s proposed finding of fact admitted and granted the FSA’s summary judgment motion and motion for default judgment and dismissed the case. As for the other creditors, the court determined that their interests arose after the FSA’s interest. As a result, the FSA was entitled to judgment against these creditors. United States v. Four C Farms LLC, No. 18-cv-212-pp, 2018 U.S. Dist. LEXIS 216454 (E.D. Wis. Dec. 27, 2018).

Posted January 3, 2019

Kentucky Ag Lien On Crops For Applies Only To Services.  Between March 2015 and August 2015, the plaintiff in this case, performed agricultural services on crops owned by John Summer and Jamie Summers Farm. The plaintiff submitted various invoices for its work which listed charges for a variety of different goods and services involved its fertilizing and crop spraying services. In total, the plaintiff alleged that John Summers owed it $223,531.28, and the Jamie Summers Farms owed it $828,071.84. After John Summers and the Jamie Summers Farm failed to timely pay the invoices, the plaintiff filed crop lien statements. The liens were asserted in accordance with KRS §376.135 against the 2015 wheat, rapeseed, corn, and soybean crops owned by John Summers and the Jamie Summers Farm for “seed, fertilizer, chemicals, and custom application for the planting and growing of the subject crops." To recover on its liens, the plaintiff filed two separate actions against John Summers the Jamie Summers Farm respectively. However, the defendant, a creditor of John and Jamie Summers also claimed liens on the same crops under Kentucky’s Uniform Commercial Code (UCC). By law a valid lien under KRS §376.135 is superior to any lien under the UCC. Accordingly, the defendant did not contest that the plaintiff held a superior lien. The defendant did, however, contest the amount of the lien. The defendant claimed that the plaintiff’s liens should be limited to the amounts attributable to its services such as crop spraying, applying liquid nitrogen, and dry fertilizer application, and cannot include the amounts attributable to the products purchased such as seed, fertilizer, and other chemicals. Both parties moved for summary judgment. The trial court concluded that the plaintiff’s liens were limited to the invoice amount for “custom spraying.” Adding these amounts together, the trial court concluded that the plaintiff had a superior crop lien on 2015 crops produced by Jamie Summers for $30,300.26 and a superior crop lien on the 2015 crops produced by John Summers for $9.296.93. The plaintiff appealed. The appellate court began with an analysis of KRS §376.135 which states that, “Any custom operator who performs a service on a farm, including but not limited to filling of silos, hay baling and crop spraying, by contract with, or by the written consent of the owner or manager of the farm, shall have a lien upon the farm crop involved to secure the cost of the service furnished.” The plaintiff argued that the term “service” is not limited to the actual process of applying fertilizers or other chemicals to crops, but also included the inputs. The defendants, however, claimed that the legislature was aware of the difference between goods and services when it wrote the statute and chose to include only services in the statute. The appellate court held that the plain language of the statute granted a lien for services performed by a custom operator but not for goods sold. Moreover, the phrase “the cost of the service furnished” referred only to the cost of the service as the plain language suggested. The court determined that combining goods and services, would require the court to add language to the statute, that would be contrary to the statute’s plain meaning. Thus, the appellate court determined that the legislature made a conscious decision to limit the lien statute to the value of the service. However, the appellate court also determined that the trial court erred when it determined that the plaintiff could only recover for line item entries for “spraying-custom” listed on the invoices. The appellate court held that custom spraying is simply an example of a type of service covered by the statute and that the statute extended beyond the specific types of services listed in its text. In addition, the appellate court found that, based on the invoices, at least two additional items should have been included: “truck 500# under fert,” and “streaming liquid nitrogen.” Accordingly, the appellate court affirmed the trial court’s construction of KRS §376.135, but vacated the trial court’s grants of summary judgment and remanded the case for a determination, of the amount of the plaintiff’s liens. Reliance AG, LLC v. S. States Simpson Coop., Inc., 2018 Ky. App. Unpub. LEXIS 280 (Ky. Ct. App. May 11, 2018).

Posted December 24, 2018

No Implied Course of Dealing Means Creditor Secured. Before death, the decedent made multiple loans to the defendant. Security agreements were made between the parties securing any present and future debts owed to the decedent. The decedent was granted a blanket security interest in all of the defendant’s farm property. Upon the decedent’s death, the plaintiff bank was appointed representative of the decedent’s estate. A few months later, the plaintiff sought replevin of the secured assets. A hearing was held, and the court ordered a writ of replevin on certain assets. In another order the court held that the tractors that the defendant sold to his son were free of the decedent’s security interest because of an an implied course of dealing between the decedent and defendant that allowed the defendant to sell collateral without the decedent’s permission. The court also held that the decedent did not have priority on the tractors as another bank held the loan taken out by the defendant’s son. On appeal, the appellate court reversed. The appellate court determined that the decedent and the defendant had made their course of dealing distinct from their written agreement and that the defendant’s son had not shown that the tractors where sold to him "within that course of dealing." The court noted that the defendant had sold the two tractors to his son for one-fourth of their estimated value and, as such, the “gift” of tractors was not within the scope of the course of dealing. The appellate court also determined that the evidence did not indicate that the decedent allowed the sale of secured assets and that the trial court erred in determining that the plaintiff/decedent did not have perfected security interest in the two tractors. The appellate court then turned to the issue of priority of the secured creditors with respect to the tractors. To purchase the tractors, the defendant’s son took out loans from another bank and listed the tractors as collateral. Because the decedent had a perfected security interest and the sale between the defendants was not within any implied course of dealing, the court held that the decedent’s interest had priority over the bank. Security National Bank of Sioux City v. Welte, No. 17-0907, 2018 Iowa App. LEXIS 1021 (Iowa Ct. App. Nov. 21, 2018)

Posted September 8, 2018

Milk Is Not “Proceeds” Of a Cow — Ag Service Lien Statute Inapplicable. The plaintiff owns three dairies, including one that delivers the milk it produces to a processor, Columbia River Processing. The plaintiff gave each of the three a consensual lien against the milk-delivering dairy’s crops, milk, milk checks, equipment, and other personal property at a time when the aggregate amount due the creditors was about $78 million. Custom Feed Services, LLC; Western Ag Improvements, Inc.; Cold Springs Veterinary Services, Inc.; and Scott Harvesting, LLC (collectively known as ASL Holders) provided goods and/or services to plaintiff’s milk-delivering dairy. The plaintiff then filed Chapter 11. Each of the ASL creditors claimed a non-possessory chattel lien under Oregon Rev. Stat. § 87.226, encumbering the dairy’s crops and livestock, as well as the sale proceeds of the crops and livestock. The amount due ASL Holders on the date of bankruptcy filing was almost $1.1 million. The ASL Holders served notice of their liens on Columbia River. Columbia River owed the dairy approximately $1.2 million for milk delivered to it. Uncertain as to whether the plaintiff, the Consensual Lienholders, or the ASL Holders were entitled to those funds, Columbia River Processing impounded and held the milk proceeds. The plaintiff sued the Consensual Lienholders and the ASL Holders to determine the nature, extent, and validity of the agricultural service liens. Oregon's non-possessory lien statute specifies that persons who provide services, and suppliers who provide materials, have a lien against chattels improved by the services and materials. Agricultural Services Liens extend to crops and animals, their "proceeds," and, in limited instances, to the offspring of those animals. The court determined that the text and context of the statute revealed a legislative intent that the agricultural services lien reaches only crops and animals, the proceeds of crops or animals generated by their sale or similar disposition, and, in limited instances, the products of crops or animals, unborn progeny of animals that are in utero on the date a notice of lien is filed and, in the case of stud or artificial insemination services, offspring. The court also pointed out that in common parlance, milk is a product, not a proceed, and § 87.226 narrowly tailors the circumstances in which agricultural service liens attach to products; i.e., unborn progeny and offspring of stud/artificial insemination services. Because this is not one of those circumstances, the court held that “proceeds” as the term is used in Oregon Rev. Stat. §87.266(1) does not attach to milk, or the monies generated by its sale, produced by a cow encumbered by an Agricultural Service Lien. As such, the milk held by Columbia River was not subject to the lien of ASL lienholders. In re Velde, No. 18-11651-A-11 2018 Bankr. LEXIS 2621 (Bankr. E.D. Cal. Aug. 23, 2018).

Posted September 7, 2018

Lapsed Financing Statement Costs Creditor Priority Position. In early 2011, a trust sold a line of harvesting and hay equipment, 2,000 round alfalfa bales, growing crops and feedlot contract to the debtor. The contract called for a down payment of $100,000 and a promissory note was issued for the balance of the purchase price. In return, the debtor received a bill of sale evidencing title and ownership of the collateral in the debtor. The debtor granted the trust a security interest in the collateral to secure repayment, and the trust filed a financing statement on January 14, 2011, listing the collateral by item, including a “Tro grinder [Model No.] 5100. The financing statement was good for five years (through January 14, 2016), and was not renewed. The debtor filed Chapter 12 bankruptcy on October 10, 2017 and at that time the debtor still owed the trust $211,000. The debtor also owed a bank more than $840,000 secured by security agreement and financing statement that the bank filed on January 7, 2014 which secured the debtor’s farm equipment, crops, government payments, farm products, inventory and accounts. A collateral item, a tub grinder, burned up in a fire near the end of 2016 and an insurance check of $140,000 was issued to the debtor, trust and the bank. The bankruptcy court directed that the check be negotiated and deposited in the court’s registry pending the outcome of the case. The court noted that the trust’s security interest had attached and was properly perfected, but that it had expired before the debtor filed bankruptcy and at the time of the fire. The trust claimed that the contract with the debtor had become null and void and, as a result, title to the grinder had reverted to the trust. However, the court disagreed, noting that the trust had retained a security interest in the collateral irrespective of the contract terms. The court also determined that there no facts supporting the trust’s argument for the existence of a lease back of the goods to the debtor upon default. As a result, the court granted summary judgment to the bank which had senior priority in the collateral (including the grinder) over the trust due to the lapse of the trust’s security interest. In re Novak, No. 17-5152, 2018 Bankr. LEXIS 2586 (Bankr. D. Kan. Aug. 27, 2018).

Posted August 9, 2018

No Attachment in Crops By Security Interest. The plaintiff, a bank, claimed that it held an enforceable security interest in radish and ryegrass seed crops, which were in possession of the defendant, a farmer. The bank loaned money to a seed dealer, Cover Crop Solutions. Cover Crop Solutions was licensed to sell the seed varieties at issue that were owned by Blue Moon Farms. The security agreement between the plaintiff and Cover Crop Solutions was executed when the seed crops were still growing and stated that the seed was to be the property of Cover Crop Solutions. In addition, the license agreement between Blue Moon and Cover Crop Solutions stated that Cover Crop Solutions was assigning to Blue Moon all the “rights under all grower and production contracts.” The defendant was not a party to the license agreement. A separate license agreement with respect to the radish seed crop entered into between Cover Crop Solutions and the defendant specified that title to all stock seed, growing seed crops and seed produced was to remain in Cover Crop Solutions. This agreement was not signed until after harvest. The ryegrass contract between the defendant and Cover Crop Solutions stated that it “warrant[ed] that all seed shall be delivered and sold to Cover Crop Solutions [was] free and clear of all encumbrances.” Cover crop solutions defaulted on their loan with the plaintiff, and the plaintiff claimed that it had an enforceable security interest in the crops produced from the seed. The trial court determined that the bank did not have a security interest in the crops. On appeal, the appellate court affirmed. The appellate court noted that when the security agreement was executed by the parties, the seed crops were still in the ground. In addition, the appellate court concluded that Cover Crop Solutions “never acquired the harvested crop, either directly or through an agent.” Instead, the seed dealer only had a contractual right to the harvested crops rather than ownership that the plaintiff’s security interest could attach. Northwest Bank v. McKee Family Farms, Ltd. Liability. Co., No. 16-35879, 2018 U.S. App. LEXIS 20924 (9th Cir. July 27, 2018).

Posted July 26, 2018

Tank and Sprayer Not Accession To Tractor. The plaintiff financed the purchase of a tractor by pledging the tractor as collateral. The plaintiff defaulted on the loan and the loan holder utilized the defendant as their “asset recovery” provider. The defendant repossesses collateral and sells the collateral, distributing the funds to lienholders. When the defendant took possession of the tractor, a front-mounted tank and sprayer was attached. The tank and sprayer were not in the loan agreement. The plaintiff contacted the defendant to return the tank and sprayer. The defendant did not return the property, and posted photos on social media of the tractor with the tank and sprayer for an upcoming sale. The loan was settled, and all the property was returned. The plaintiff hired another person to spray his crops. The plaintiff sued for common law and statutory conversion, trespass to chattels, and negligence. The defendant moved for summary judgment and it was granted on the basis that the defendant was acting lawfully on behalf of the creditor, with the information provided. On further review, the plaintiff claimed that the sprayer was not an “accession” to the tractor and there was sufficient time for the tank and sprayer to be disconnected from the tractor. The appellate court agreed, and reversed on this issue. As for the conversion claim, the appellate court held that simply acting on behalf of the creditor did not shield the defendant from all liability, but not returning the sprayer was enough to constitute as conversion. Furthermore, the appellate court noted that the defendant had an obligation to split out the property, which could have been easily done without diminishing the value of the tractor. But, the appellate court determined that fact issues remained for jury determination on this issue. Magley v. M & W Inc., No. 340507, 2018 Mich. App. LEXIS 2809 (Mich. Ct. App. Jul. 17, 2018).

Posted July 21, 2018

Crop Proceeds Erroneously Paid Under Inter-Creditor Agreement Can Be Returned If Plaintiff Meets Its Burden. During crop years 2014 and 2015, the plaintiff and the defendant were creditors of Thomas Dickerson (the debtor), who engaged in farming operations in his individual capacity and through W & T Farms, LLC (W&T) and Dickerson Agricultural Partnership (DAP). The parties entered into an Inter-Creditor Agreement with W & T as debtor and Dickerson as guarantor for the 2014 crop year. In addition, the parties entered into Inter-Creditor Agreements with DAP as debtor and Dickerson as guarantor for the 2014 and 2015 crop years. The Agreements provided that the plaintiff would fund the debtors' cash expenses up to a fixed amount and would receive a first lien position on all crops grown during a specified crop year. The Agreements also provided that the defendant would furnish the debtors with chemicals, seed, fertilizer, and services up to a fixed amount and would receive a second lien position on the debtor's crop for a specified crop year. Section 3 of the Agreements provided as follows: “Creditors and Debtor further agree and understand, that all crop proceeds checks shall be made payable jointly to both Creditors and Debtor and that once the line established by [the plaintiff] has been paid in full, [the plaintiff] will relinquish to [the defendant] any and all proceeds, including crop proceeds, government payments, crop insurance proceeds, etc. beyond the full payment of their line until such time that the line with [the defendant] has also been paid in full.” In addition, the agreements further provided that crop buyers were to make all checks payable to the producer-debtor and to the plaintiff and defendant. Pursuant to the Agreements, what normally happened is that upon sale of a debtor's crop, the buyer would issue a check for the sales price to the debtor, the plaintiff, and the defendant. The debtor would deliver the check to the plaintiff. If the debtor owed a balance to the plaintiff related to the crop, the plaintiff would apply the check to the debtor's account with the plaintiff. Once the debtor's obligation to the plaintiff was satisfied, the plaintiff would forward crop proceeds checks to the defendant, and the defendant would apply that amount to the debtor's obligation to the defendant until it was fully paid. However, the claim at issue arose from a situation in which the debtor presented seven checks, totaling $1,102,704.65 to the plaintiff but told the plaintiff they were proceeds from the 2014 crop year. The plaintiff had been paid in full for 2014 crops, so the plaintiff endorsed the check and/or authorized the debtor to turn them over to the defendant. The plaintiff later learned that the checks were allegedly for payment of 2015 crops. The debtor and his farming entities had an outstanding balance for the 2015 crops. Louisiana Civil Code article 2299 provides: "A person who has received a payment or a thing not owed to him is bound to restore it to the person from whom he received it." The plaintiff claimed that its erroneous endorsement and relinquishment of payment to the defendant was subject to the suspensive condition that it be paid in full, as the highest-ranking creditor, under the Inter-Creditor agreements. The plaintiff claimed that regardless of the due date in the separate promissory notes the inter-creditor agreements established the suspensive condition. The court agreed that a suspensive condition was established. The court found that the parties themselves agreed to when a payment would be due and the language created a suspensive condition that the defendant was aware of and agreed to. Thus, the court held that if the plaintiff can prove at trial that the suspensive condition was not met, then the proceeds were not due to the defendant and the plaintiff erroneously caused payments to be made to the defendant, and those payments should be restored if the plaintiff meets its burden. Consequently, the defendant’s motion for summary judgment was denied. Franklin State Bank & Trust Co. v. Crop Prod. Servs., 2018 U.S. Dist. LEXIS 111379 (W.D. La. Jul. 3, 2018).

Posted July 18, 2018

Family Farm Liable For Payment on Defaulted Farm Loans. The defendant, a family farming operation, defaulted on numerous operating loans when the outstanding loan balance was a total amount of $427,290. The total face amount of the loans was $800,000. The defendant’s property, crops, livestock, and equipment was put up as collateral for each of the loans. There was also a pending federal criminal case against a family member and a pending federal civil fraud case against the defendant. The plaintiff sued to foreclose the loans and the defendant filed answers to the initial complaint. The court entered a scheduling order. On the day before all dispositive motions were to be filed, the plaintiff filed a motion for summary judgment, the defendants did not file an answer. Since there were no disputed facts, the court applied the stipulated facts to state (North Carolina) elements of breach of contract. Those elements include the existence of a valid contract and a breach of the stipulated terms. These elements were present for all six loans. Thus, the court granted the motion for summary judgment, and awarded the plaintiff the damages. Damages included the value owed on the loans plus post judgment interest. Those amounts were to be paid from the proceeds of the sale of the collateral. United States v. Giddens, No. 7:16-CV-7-FL, 2018 U.S. Dist. LEXIS 113070 (E.D.N.C. Jul. 9, 2018).

Posted July 4, 2018

Dragnet Clause in Security Agreement Removes Need For Notice Of Additional Liabilities. The plaintiff owned an entity that bought real estate in Echols County, Georgia from the defendant. The $1.675 million purchase was financed through two notes: the defendant extended a $900,000 unsecured loan to the plaintiff and AgGeorgia Farm Credit (AgGeorgia) extended a $605,770 loan to the entity which the plaintiff guaranteed. The loan from AgGeorgia was secured by various conveyances of collateral. In addition, to facilitate the financing of the transaction, the defendant granted a security interest in two tracts of property in Lowndes County, Georgia. The defendant memorialized his grant of a security interest in two documents. First, he executed a deed to secure debt. In addition to securing the funds financing the transaction, the deed to secure debt contained an open-ended clause. That clause extended his security interest to “all additional loans and advances that may subsequently be made to [the plaintiff]”. Second, the defendant signed a hypothecation agreement. Like the deed to secure debt the hypothecation agreement contained an open-ended clause. That clause provided “[the defendant] agrees with the Lender that, to secure payment of the Liabilities, the Lender shall have a lien upon, security title to, and a security interest in [property owned by the defendant].” The agreement defined “Liabilities” as “all obligations of [the plaintiff] to Lender, however incurred or evidenced…now or hereinafter existing, or due or to become due.” Further, the agreement stated that the defendant “waives notice of the existence or creation of all or any of the Liabilities.” Over the next three years, the plaintiff obtained additional loans from AgGeorgia, including a $1 million loan from AgGeorgia. The defendant did not consent to the loan nor is there any evidence that he was even aware of the loan. Nevertheless, AgGeorgia claimed that the security interest extended to the 2016 note by operation of the open-ended clauses in both the deed to secure debt and the hypothecation agreement. Both parties moved for summary judgement. The court determined that because there was no ambiguity in either of the documents, Georgia law required the court to interpret the rights between the parties according to the language in the contract. However, the defendant also argued that the open-ended clauses contravened O.C.G.A. § 44-14-1(b) and, as such, the court should not enforce the provision without his consent. Georgia courts have interpreted O.C.G.A. § 44-14-1(b) to require, under certain circumstances, the consent of the original parties to the security instrument to extend the operation of the open-ended clause. However, the court also reviewed several Georgia cases that found that if there is no ambiguity, the contract language superseded O.C.G.A. 44-14-1(b)’s default rule. Therefore, the court determined that because the contract language clearly extends the security interest to the plaintiff’s later incurred debt, even without the defendant’s consent, this case fell into the exception created by those cases. As such, because there was no ambiguity, no factual issues remained and the court granted the plaintiff’s motion for summary judgment. In re Carter, No. 17-70277-JTL, 2018 Bankr. LEXIS 1661 (Bankr. M.D. Ga. Jun. 5, 2018).

Posted April 7, 2018

Lien Invalidated For Untimely Filing. The plaintiff leased farm land from the defendant, but claimed that on January 1, 2015, he was deprived of possession and the value of the hay crop that the had previously seeded. The hay crop was later partially cultivated by a subsequent tenant. The plaintiff filed a lien statement with the county clerk on March 10, 2016 and filed an amendment on March 22, 2016. On the amended lien, the plaintiff stated that he seeded the property in 2014 in preparation for his crop and then was denied access to the crop. The lien was for $37,000, plus filing fees and legal costs. The defendant moved for summary judgment on the basis that the lien was not timely filed. The court granted the defendant’s motion noting that the applicable lien statute, Kentucky Rev. Stat. §376.010(1) and §360.040. The court also noted that KRS §376.080 requires that the lien be perfected by filing with the county clerk within six months after the date the claimant ceases to labor or furnish materials. Because the plaintiff did not file the lien within the six-month timeframe, the lien was unenforceable, and the work done by the subsequent tenant did not count towards the work done by the plaintiff because it was not provided for in the statute. Lattanzio v Brunacini, No. 5: 16-171-DCR, 2018 U.S. Dist. LEXIS 35944 (E.D. Ky. Mar. 6, 2018).

Posted February 8, 2018

Imprecise Debtor’s Name on Financing Statement Makes Creditor Unsecured. A bank financed a debtor’s purchase of a manure spreader. The bank properly filed a financing statement listing the debtor’s name as “Kenneth Pierce.” At the time of the filing, the debtor’s driver’s license identified him as “Kenneth Ray Pierce, but the debtor would always sign his licenses as either “Kenneth Pierce” or as “Kenneth Ray Pierce.” Approximately two years after the bank filed, the debtor filed Chapter 12 bankruptcy. The bank filed a proof of claim in the amount of $14,459.81 and attached the financing statement. The debtor filed an objection claiming that because the bank failed to correctly identify him as “Kenneth Ray Pierce” on the financing statement, the bank’s security interest was unsecured along with its claim. After determining that the debtor had standing to use the trustee’s avoidance powers under and bring an action under 11 U.S.C. §544, the court found the bank’s interest to be unsecured. The court noted that Georgia Code §11-9-503(a)(1)-(4) required an individual debtor’s name on a financing statement to match the debtor’s name on the debtor’s driver’s license. The court noted that such imprecise match was seriously misleading and that Georgia law required that debtor’s name on the financing statement match the typed name on the debtor’s driver’s license. The court also pointed out that had the bank followed the Georgia UCC-1 Financing Statement Form which instructs the use of the debtor’s exact full name, the debtor would have been identified the same as the typed name on the debtor’s driver’s license. In re Pierce, No. 17060154, 2018 Bankr. LEXIS 287 (Bankr. S.D. Ga. Feb. 1, 2018).

Posted December 25, 2017

Accidentally-Filed Termination Statement Eliminates Creditor’s Security Interest. The debtor farmed 2,500 acres and had various loans for equipment and land. The debtor also had crop input financing for which the creditors had security interests in the debtor’s crops and other farming-related collateral. On July 9, 2005, the debtor granted a creditor a lien against “all crops growing or to be grown in fields or produce thereof.” The creditor protected its interest by filing a UCC-1 financing statement with the Kentucky Secretary of State. The creditor filed a timely continuation statement on May 7, 2015. The debtor filed Chapter 7 bankruptcy on June 15, 2015. The creditor filed a termination statement on July 10, 2015, but approximately 10 minutes later, the creditor filed an amendment in an attempt to add itself as a secured party. On March 20, 2016, the debtor received a crop insurance check for $102, 411. On April 18, 2016, the creditor filed a UCC-5 Correction Statement asserting that the termination statement was accidentally filed. On April 27, 2016, the creditor filed a new UCC-1 which was identical to the UCC-1 that it had filed on July 19, 2005. Throughout all of this, the debtor continued to make payments on the debt to the creditor. On November 16, 2016, the creditor filed a secured claim for $146,793.11 based on its allegedly secured status via the UCC-1 that listed collateral as crops growing or to be grown. The creditor also attached additional financing statements listing livestock and crops insurance proceeds as collateral. A different creditor moved for summary judgment seeking to avoid the other creditor’s lien on the debtor’s collateral and recover payments that the debtor made to that other creditor. The court granted the motion, noting that the creditor’s interest was effectively terminated upon the filing of the termination statement, and that the creditor remained unsecured between July 10, 2015 until April 18, 2016. The termination statement was filed by the creditor’s loan processor who was authorized to file financing statements and related documents. The subsequently filed amendment had no impact on the effectiveness of the termination statement. Consequently, the creditor moving for summary judgment moved to first priority position when the other creditor terminated its 2005 financing statement. In re Wheeler, No. 16-50392, 2017 Bankr. LEXIS 4373 (Bankr. W.D. Ky. Dec. 22, 2017).

Posted September 8, 2017

‘Timber’ Is Not Considered ‘Crops’ Under Deed Of Trust Act. The plaintiff operated a logging and scrap metal operation on his property. The defendant loaned the plaintiff money in June 2007 and secured the loan by a deed of trust on the parcel he purchased from his parents. A deed of trust is a deed where legal title is transferred to a trustee which holds it as security for a loan between the borrower and lender, with equitable title remaining in the borrower. The plaintiff defaulted on the loan and then tried to contest the deed of trust on the basis that the parcel was agricultural land and, as a result, state law barred a nonjudicial foreclosure. Subsequently, a new deed of trust was issued in 2009 and a new loan was renegotiated to cure the default. In this new document, the parties stipulated that the land was not used for agriculture. The plaintiff again defaulted and the matter was set for nonjudicial foreclosure. The plaintiff again claimed that nonjudicial foreclosure was not an option. The trial court dismissed the action finding that the plaintiff could not contest the nature of the property given the stipulation in the 2009 deed of trust. The Washington Supreme Court reversed, finding that the requirements of the deed of trust act (Act) could not be waived by the parties. The case was remanded with the requirement that the trial court hold a hearing to determine whether the property was primarily agricultural at relevant times. The trial court distinguished between crop and timber and ruled that the land was primarily used for non-agricultural timber operations. The plaintiff appealed that ruling. The appellate court pointed out that the Uniform Commercial Code (UCC) definition of “crop” does not include timber. In addition, the appellate court found that an executive summary prepared by the working group that drafted the 1998 Amendments to the Act provide evidence that the legislature expected that the UCC would apply to the Act. Consequently, the appellate court determined that the trial court did not err in considering the current UCC definition of crops when construing the meaning of that term in the Act. As a result, the judgment of the trial court was affirmed. Schroeder v. Haberthur, No. 33336-1-III, 2017 Wash. App. LEXIS 1942 (Wash. Ct. App. Aug. 15, 2017).

Posted September 5, 2017

Marshalling of Assets Not Allowed. The debtors filed Chapter 12 in 2010. At the time of filing, they owed $300,000 to a bank that had a mortgage on the debtor’s real estate, a first priority lien on farming equipment, and a first priority lien on 2009 crop proceeds. The debtors also owed $176,000 to another creditor which was secured by a second priority lien on the equipment and crop proceeds. The equipment was sold post-petition for $170,000. The post-petition sale of the crops generated $68,000 and the debtors’ post-petition sale of personal property generated $238,000. The asset sales created over $210,000 of federal and state tax liability for the debtors. When the bank sought a distribution of proceeds the other creditor sought to have the bank look first to the real estate mortgage to satisfy its debt under the doctrine of marshalling of assets. The bankruptcy court denied the request and awarded $238,000 to the bank because the debtors’ plan to retain the real estate would prejudice the bank. The debtors then converted the Chapter 12 case to Chapter 7 and the non-bank creditor again motioned for a marshalling of assets since the real estate was going to be sold. The debtors objected along with the bankruptcy trustee on the basis that marshalling would be inequitable in that it would decrease the amount available to pay unsecured creditors and because there were not two funds belonging to the debtor. The real estate was sold for $411,000. The bank was paid the balance of its claim and $261,000 remained in the estate for distribution. The bankruptcy court granted the motion for marshalling and the debtors and bankruptcy trustee appealed. The district court instructed the bankruptcy court to resolve the case without marshalling and an appeal to the Seventh Circuit was dismissed for lack of jurisdiction. On remand, the district court remained unpersuaded by the non-bank creditor’s arguments and the matter was resolved without marshaling. In re Ferguson, No. 17-1029, 2017 U.S. Dist. LEXIS 140567 (C.D. Ill. Aug. 31, 2017).

Posted August 31, 2017

Marshalling of Assets Inapplicable When Doing So Would Impact Exempt Asset. The debtors, a married couple, operated a farming business and filed Chapter 7 bankruptcy. They owned machinery and equipment worth over $50,000 and an exempt homestead worth almost $300,000. The defendant held a security interest in the debtors’ machinery and equipment and proceeds thereof. The defendant also held a mortgage on the defendants’ homestead property, and exempt asset. Another creditor had a junior security interest in the farm equipment and machinery and the proceeds thereof. The debtors’ owed the defendant approximately $135,000 less than the combined collateral value, and owed the other creditor about $40,000. Thus, the collateral value exceeded the amount of the claims against the assets. The other creditor claimed that the doctrine of “marshaling of assets” should apply to allow it to satisfy its claim after the defendant’s claims were satisfied. The court noted that the conditions for marshaling were satisfied - two creditors with a common debtor; two funds belonging to a common debtor, and; one creditor is legally entitled to satisfy its claim from either fund and the other creditor can only legally satisfy its claim from one fund. However, the court refused to apply marshaling because it would not have been equitable to all of the parties involved. In particular, the court noted that applying marshaling would have reduced the value of the debtor’s exempt homestead contrary to state (IA) law. Thus, the other debtor could not collect on its claim. In re Schantz, No. 16-0400, 2017 Bankr. LEXIS 2207 (Bankr. N.D. Iowa Aug. 7, 2017).

Posted June 7, 2017

Ag Supply Dealer’s Lien Is Superior if Filed Timely and Debtor Named Correctly. A bank brought an adversary proceeding against the debtor seeking a determination that its liens against livestock sale proceeds were senior to a cooperative’s claim made pursuant to the state (ND) ag supply dealer’s lien (N.D.C.C. §35-31-02). The debtor was obligated to the bank on a note in excess of $1.2 million, with the debtor’s farm products and livestock serving as the collateral and the proceeds thereof. The bank properly perfected its lien. The debtor, via its operating entity, established credit accounts with suppliers including the cooperative, from which it regularly obtained supplies. Upon failing to pay for certain supplies from the cooperative, the cooperative filed an ag supply dealer’s lien prior to the date the debtor filed bankruptcy. Before filing bankruptcy, the debtor sold some livestock and the cooperative claimed that its ag supply dealer lien was superior to the bank’s lien in the sale proceeds. Also, before filing bankruptcy, the debtor leased approximately 1,000 acres from a landowner, but failed to pay the required rent in full. The landowner filed an ag supply dealer’s lien for the unpaid rent. To perfect an ag supply dealer lien for supplies other than petroleum to maintain livestock, the filing must occur within 120 days after supplies are furnished or services are performed. The court determined that the cooperative timely filed its lien in a proper manner and that the debtor was the party that owned the livestock (as opposed to the debtor’s entity). As a result, the cooperative’s interest was superior to the bank’s interest to the extent of the unpaid products and supplies. The cooperative, however, was not superior to the bank for supplies sold after the debtor filed Chapter 12 because the debtor’s entity was the party that bought the supplies and was not listed on the lien as filed. As for the pasture lien, the court held that the lien was not timely filed (within 120 days from the beginning date of the lease). Thus, the bank held a prior perfected security interest in the livestock proceeds. In re McDougall, No. 16-30542, 2017 Bankr. LEXIS 1465 (Bankr. D. N.D. May 31, 2017).

Posted April 17, 2017

Mechanic’s Lien Upheld Under Industry Custom. The plaintiff operates a farm drainage and excavation business and entered into an oral agreement with a farm tenant to install pattern tiling on 47 acres that the tenant was farming for the landlord. The project began in May of 2011 and was completed in June. The plaintiff billed the tenant for the work on June 24 in the amount of $64,638 for the feet of tile installed, river rock and cuts into concrete pipe. On July 18, the tenant paid $30,550 and in August, the plaintiff sought the balance of the amount due. The tenant told the plaintiff that the tenant would talk with his bank. The tenant’s lawyer then sent a letter to the plaintiff stating that the tenant considered the amount billed to be excessive and that the parties had agreed to a payment rate of $650 per acre for 47 acres for a total of $30,550. The letter acknowledged that the parties had agreed to move the laterals closer together and a check was included in the amount of $7,637.50 as full payment. The plaintiff returned the check and filed a mechanic’s lien on the tiled acres, seeking a balance due of $34,088. The tenant acknowledged the tiling contract but disputed the amount due and filed a counterclaim alleging that the tiling work was not done in a timely manner. The tenant also sought losses due to the delay in the tiling being completed which required the planting of less profitable soybeans. The plaintiff sued to enforce the lien and the trial court ruled for the plaintiff. The trial court noted that 2011 had been a wet spring and tiling couldn’t reasonably have been completed any earlier than it was. The trial court also noted that the tenant didn’t complain about the bill until contacting his lawyer and that structuring payment on a per acre basis rather than on a per-foot basis was not reasonable as being outside of industry custom. The court determined that industry custom accounted for the plaintiff not keeping track of hours spent on the job. The trial court also dismissed the tenant’s counterclaim, noting that the project was timely completed and that the tenant had admitted that there was no agreed contract concerning timely performance. The trial court also awarded the plaintiff attorney fees of $39,874.47. On appeal, the appellate court affirmed on all points. Hjelmeland v. Collins, et al., No. 15-1901, 2017 Iowa App. LEXIS 217 (Iowa Ct. App. Mar. 8, 2017).

Posted March 28, 2017

Bank’s Security Interest Avoidable and Promissory Note Not Perfected. The debtor received commissions for selling insurance and other financial products. The debtor earned commissions when customers renewed their policies. A bank loaned money to the debtor’s LLC with the debtor personally guaranteeing the loan and executing an agreement stating that the loan was “made and accepted as collateral security for the repayment of any indebtedness of the [Debtor] to [the Bank] existing or hereafter incurred.” The bank did not file a financing statement to perfect its interest. The debtor filed bankruptcy and the trustee claimed that the renewal commissions were “accounts” under UCC Article 9 that the bank failed to perfect. The bank claimed that it did not need to file a financing statement because the agreement was excepted from the UCC as an assignment of a single account in satisfaction of a preexisting debt. The court held that the agreement bore the hallmarks of a security agreement rather than an assignment because its purpose was to provide “collateral security” for the repayment of any of the debtor’s existing or future debts to the bank. Also, the court noted that the debtor continued to receive the renewal commissions, and the bank’s interest in them would terminate if the debtor paid off the loan. Thus, the bank’s security interest in the commissions was avoidable by the Trustee as a lien creditor. In a separate transaction, the debtor executed a commercial security agreement granting the bank a security interest in a promissory note payable to the debtor in his individual name for $104,000. The bank filed a financing statement, but put the debtor’s name in the wrong box on the financing statement and used the debtor’s individual name as an organizational name. The bank claimed that the debtor was adequately specified and the financing statement was not seriously misleading. The court noted that state (WI) law required a correct designation of the debtor as either an individual or an entity because that will determine the appropriate database to search and the applicable search logic for that office. As such, the court determined that an ordinary course search of the debtor’s name would not reveal the financing statement and the financing statement was not effective to perfect the bank’s security interest in the note. In re Voboril, No. 16-23237, 2017 Bankr. LEXIS 715 (Bankr., E.D. Wisc. Mar. 17, 2017).

Posted February 27, 2017

Reclaiming Seller Did Not Have Priority Over Secured Creditors. A cattle company had longstanding dealings with a cattle buyer/seller as a bonded commission dealer who also bought cattle for his own account which he placed with the cattle company. The cattle buyer/seller entered into a contract with another cattle company to buy up to 400 head of cattle with $10,000 down and over $800,000 paid at delivery. Four of the five checks were dishonored, and only one check of slightly over $40,000 cleared the bank. The cattle buyer/seller had a $2.5 million line of credit with the cattle company which was secured by, among other things, after-acquired cattle. The arrangement was that the buyer would transfer possession to the cattle company and the company would finance the purchase and the feed and care of the cattle, with a deduction in the nature of a down payment. Then the cattle company would continue to feed and care for the cattle and would ultimately market and sell the cattle. The sale proceeds would first be used to repay the cattle company, including feed and care, with the balance going to the cattle buyer. When the purchased cattle were in the cattle company’s lot after the purchase, the seller discovered that most of the purchase checks had been dishonored, and filed a replevin action to recover the cattle. The trial court entered an order of replevin ordering that the seller was entitled to reclaim the cattle for which he had not received payment. The cattle were ultimately sold for almost $900,000. Out of that amount, the cattle company was paid about $215,000 for feeding and caring for the animals, with the balance held in escrow. The cattle buyer filed bankruptcy and the cattle company, its financier and the seller battled over the proceeds. The court determined that the holder of a valid security interest takes priority over a secured creditor that is reclaiming the collateral under UCC §2-507. As such, the cattle company and its financier has a superior interest in the proceeds to that of the reclaiming seller. Title to the cattle had transferred to the debtor which meant that the cattle company’s after-acquired lien did not attach to the cattle. But, the seller did not have priority on the policy basis that Article 2 of the UCC was to facilitate the free flow of commerce. That meant, the court reasoned, that lenders need not ascertain that their borrowers had ownership and possession of collateral before funds were loaned. In re Leonard, No. 16-6029, 2017 Bankr. LEXIS 521 (B.A.P. 8th Cir. Feb. 24, 2017).

Posted February 7, 2017

Security Agreement Failed to Attach. The defendant signed three security agreements in late 2006 and early 2007 as security for two promissory notes executed for the plaintiff. The first note secured a loan on $60,000 and specified that certain of a third party’s farm equipment would serve as collateral along with crops grown on the third party’s farm. The second note secured a loan of $20,000 for the same collateral and some additional farm equipment and noted that the other farm equipment had been sold. The plaintiff perfected its security interest by filing two financing statements. However, the other party that owned the land where the crops were grown didn’t sign any promissory note, security agreement or financing statements. The defendant defaulted on the notes and the plaintiff chose to accelerate the debt and seek turnover of the collateral and filed a motion for summary judgment. The third party responded to the plaintiff’s motion by claiming that he didn’t give the defendant any permission to use the third party’s equipment as collateral for the loans. The court denied the motion on the basis that the security interests failed to attach because the defendant had no ownership interest in or had rights in the collateral. The court could not find as a matter of law that the third party expressly allowed the defendant to pledge his equipment to secure the loans. United States v. Myers, No. 4:15-cv-04024-BHH, 2017 U.S. Dist. LEXIS 14094 (D. S.C. Jan. 31, 2017).

Posted January 18, 2017

Ag Supply Dealer Lien Applies to Full Amount of Feed Supplied and Fully Attached to Animals Consuming It. The debtors operated a feeder-to-finish hog operation. A bank held a properly perfected security interest in the debtor’s livestock and proceeds thereof. After the bank filed and perfected its interest, the debtors purchased hogs and the hogs ate feed that a local cooperative supplied to the debtor from Feb. 9, 2010 to Mar. 11, 2010, in the amount of $43,314.54. On Mar. 11, 2010, the cooperative filed a financing statement the established an ag supply dealer lien in the feed supplied and the animals that ate the feed. In May of 2010, the debtor sold slightly over one-half of the hogs, and then sold the balance in June of 2010. Both the bank and the cooperative claimed a perfected security interest in the proceeds of the sale of the hogs. The debtors filed an action in the fall of 2010 to determine the priority of the lienholders in the proceeds of the June 2010 hog sale. The parties agreed that the cooperative had superpriority in at least $21,224,14, but disagreed as to the balance of $22,094.06. The cooperative claimed it had super priority position as to the entire amount of the feed sold to the debtor. The bank claimed that because the proceeds at issue came from 49 percent of the hogs that consumed the feed, the cooperative’s lien was limited to 49 percent of the proceeds and that amount has already been paid out and the bank was entitled to the balance of the sale proceeds. The parties stipulated that each hog ate the same amount of feed. Both the bank and the cooperative moved for summary judgment. The bank claimed that Iowa Code §570.3 limited the cooperative’s lien to the cost of the feed that was consumed by the hogs that were sold, and that only slightly less than half of the hogs sold generated the proceeds at issue. Because those hogs did not consume all of the feed supplied, the cooperative’s lien is limited to the percentage of the feed that the hogs that generated the proceeds at issue actually consumed. That amount was $21,224.14 of the sale proceeds. The court disagreed, noting that the statutory language ties the amount of the lien to the amount owed to the supply dealer for the retail cost of the supplies, and that the statutory phrase, “livestock consuming the feed,” did not limit the amount of the lien, but only denoted the items to which the lien attaches – the livestock that produced the proceeds at issue. The amount covered by the lien is the amount of feed sold during the 31-day period before the supplier files its financing statement. The court determined that a ruling supporting the bank’s rationale would discourage suppliers from supplying feed to leveraged farmers because the supplier would have to document a separate lien on each animal for the amount of the feed that the animal consumed. The court determined that such a holding would frustrate the legislative intent of the statute of providing a fluid feed market. Thus, the cooperative had priority to the extent of the difference between the sales price of the livestock and the acquisition price, or the difference between the livestock’s fair market value at the time the lien attaches and the livestock’s acquisition price, whichever is greater. The lien applied in full to the hogs that were sold to cover the retail cost of the feed supplied. In re Schley, No. 10-03252, 2017 Bankr. LEXIS 115 (Bankr. N.D. Iowa Jan. 13, 2017).

Posted November 27, 2016

Grain Producer Lien Has Priority Over Security Interest. An Oregon farming operation entered into a contract with a PA company to plant, harvest, clean and store radishes that the PA company would supply. The PA company was to pay based on the poundage of seed as well as for the cleaning and testing of the seed, with payments due in mid-February of 2015 and mid-October of 2015. The farming operation has stored the seeds since August 20 of 2014. In July of 2014, the plaintiff (bank) made a loan to the PA corporation of $7,000,000, secured by an interest in all of PA company’s assets, including the seeds in question. The interest was perfected through a financing statement filed in Pennsylvania. Another financing statement was filed in Oregon on August 17, 2015. The farming operation claimed a possessory lien in the seeds. To realize the seeds' value, the farming operation would need to proceed to a foreclosure sale – either judicial or public. The plaintiff argued that the farming operation waived its right to a possessory lien through its contract with the PA company. In the alternative, the plaintiff argues that even if the farming operation has a lien, summary judgment is not appropriate until the lien is foreclosed. If the farming operation proceeds with a public sale state (OR) law requires the farming operation to provide notice to any security interest holder by March 17, 2015, which was 30 days after the cleaning of the seeds had been completed. Without providing such notice and if they pursue a public sale, the farming operation would be liable to the plaintiff for the fair market value of the seeds. In contrast, if the farming operation pursues a judicial foreclosure, the notice provision would not apply. This uncertainty as to liability after a sale, according to the Plaintiff, precludes the court from determining which interest has precedence before a sale. The court disagreed. The court reasoned that even if the farming operation proceeded with a public sale and the plaintiff was ultimately owed the fair market value of the seeds, the farming operation’s possessory lien could still have precedence over the plaintiff’s secured interest. The public sale and failure to notice would simply mean that the bank may be entitled to compensation after the sale. A declaratory judgment that the farming operation has a valid possessory lien would not change that outcome. Northwest Bank v. McKee Family Farms, Inc., No. 3:15-cv-01576-MO, 2016 U.S. Dist. LEXIS 63302 (D. Ore. May 12, 2016).

Posted July 31, 2016

Feedlot Has Superior Rights to Cattle Sale Proceeds. A cattle feedlot financed the debtor’s purchase of cattle from a third party (cattle seller) through a lender. The debtor placed the cattle in the feedlot where the cattle would be feed and care for the cattle until selling them. The sale proceeds would then be first used to repay the feedlot for the amount financed, with the balance going to the debtor. After checking public records, the feedlot confirmed that the cattle were free and clear of liens and encumbrances and no records showed that the seller had any interest in the cattle. The feedlot loaned the debtor almost $600,000 for finance the purchase of the cattle. The promissory notes and security agreements that the parties executed were assigned to the lender, and the lender wired the funds directly to the debtor. Unfortunately, several of the debtor’s checks for the purchase of the cattle were not honored, resulting in the seller receiving only partial payment for the cattle. The debtor filed Chapter 11 bankruptcy, and the feedlot, cattle seller and lender battled over priority rights in the proceeds of the sale of the cattle. In a prior proceeding, the court found that the cattle seller had reclaimed the cattle for which he had not been paid via a replevin action that was unaffected by the debtor’s bankruptcy. The remaining cattle were eventually sold for a gross proceeds amount of $883,073.25. $215,119.87 of that amount was paid to the feedlot for its care and feeding of the cattle. The balance was placed in escrow pending the outcome of the litigation. The feedlot claimed that it had superior rights to the proceeds of the cattle sale because the seller gave up possession to the feedlot and the feedlot was a purchaser in good faith in that title had been transferred to the buyer who then transferred it to the feedlot. The seller claimed it had prior rights because title to the cattle didn’t transfer to the feedlot, and because the feedlot’s interest in the cattle didn’t attach due to the feedlot not being a good faith purchaser because the feedlot should have first determined that it had a valid bill of sale showing that the debtor owned the cattle. The court agreed with the feedlot based on U.C.C. §2-401 which deals with title transfer and does not provide for a revesting of title in the seller when the buyer fails to pay for the goods. The court noted that the seller could have protected himself rather than simply relying on the buyer’s word. Accordingly, the feedlot was a good faith purchaser of the cattle that relied on the legal documents of ownership that were presented with the cattle. The court noted that cattlemen generally consider the bill of sale and brand inspection report (which the feedlot relied on) to be valid documentation of ownership. In re Leonard, No. BK15-82016, 2016 Bankr. LEXIS 2681 (Bankr. D. Neb. Jul. 22, 2016).

Posted June 13, 2016

Lender Properly Perfected In Proceeds of Debtor’s Crops and Gets Superpriority Lien. A farm partnership entered into numerous commodity futures contracts with the defendant that required the farming operation to deliver specified quantities of corn and soybeans at set prices during a specific range of time. The farming operation failed to perform on four of the contracts with the defendant and then dissolved. The following year, a former partner of the farming partnership signed a letter from the defendant acknowledging the partnership’s dissolution and said the defendant was willing to assign the contracts to the former partner and “roll” them into the next year’s shipments. While the letter said that when the defendant received the signed copy of the letter that it would assign the contracts to the former partner and then resend them for his signature, the contracts were not assigned or resent for the former partner’s signature. During this time, the plaintiff loaned the former partner $600,000 for spring crop production expenses with the plaintiff securing the loan with the resulting crops and a security agreement in the former partner’s farm products and equipment. The plaintiff properly perfected its security interest in the former partners crops and equipment. The former partner drew out over $400,000 to fund his spring crop input costs. Upon the resulting harvest, the former partner delivered all of the resulting yield to two grain terminals, which the defendant notified of their interest in the crops. The terminals applied the crop proceeds to the defendant’s account and the defendant sold the grain to the terminals. The former partner performed on all of the corn contracts, but could not fully perform on a soybean contract. Thus, the defendant determined the amounts due the former partner and set-off its estimated damages as to the soybean contract. The plaintiff then sought the proceeds of the former partner’s crops from the defendant on the grounds that their perfected security interest had priority over the defendant’s interest. The defendant then issued a check to the former partner and a third party for approximately $57,000 – the estimated amount of the excess of the set-off on the unfilled soybean contract. The court first concluded that it was “plausible” that the former partner had ratified the partnership’s contracts with the defendant by signing the roll sheets, even though there was no signed reassignment between the parties. On the priority issue, the court determined that the plaintiff’s perfected purchase money security interest (PMSI) had priority over the defendant’s claim to crop proceeds through the set-off. The court noted that the plaintiff’s interest was in the former partner’s crops and crop proceeds and not only in the former partner’s accounts. The court also noted that the plaintiff had properly perfected and had provided funds for the production of crops, which gave them a higher priority over other secured interests, and that the defendant had not registered its interest with the Secretary of State. Thus, the plaintiff’s interest attached at filing and beat out the defendant’s interest which was created at the time the former partner delivered crops to the terminals. Thus, the plaintiff was entitled to the entire value of the crop “proceeds” – the full value of the agricultural products of $417,033 without having any of that amount set-off for undelivered crops. Guaranty Bank & Trust Co. v. Agrex Incorporated, No. 15-60445, 2016 U.S. App. LEXIS 7731 (5th Cir. Apr. 28, 2016), aff’g., 2015 U.S. Dist. LEXIS 67110 (N.D. Miss. May 22, 2015).

Posted May 31, 2016

Iowa Ag Supply Dealer Lien Construed. The Iowa ag supply dealer lien requires an ag supply dealer to send the lender with whom the farmer has a security interest a “certified request” as to the farmer’s financial abilities and sets out a priority scheme based upon when the ag supply dealer “attached” or perfects their lien. An examination of the statutory language of pertinent sections of Ch. 570A and the steps an ag supply dealer must take in filing a properly perfected Ag Supply Dealer’s Lien is essential to understanding the disputes that are developing around the state regarding this statute. The lender is to issue, within four business days, a memorandum which states whether or not the farmer has a sufficient net worth or line of credit to assure payment of the purchase price on the terms of the sale. If the lender issues a memorandum stating that the farmer has sufficient net worth, the memo constitutes “an irrevocable and unconditional letter of credit” to the dealer for a certain time. If, on the other hand, the lender issues a memorandum stating that the farmer does not have sufficient net worth to assure payment, the memorandum constitutes a “negative assessment” on behalf of the farmer, and the lender is required to hand over the farmer’s “relevant” financial history to the dealer, so the dealer can independently make a decision on whether or not to sell the ag supplies to the farmer. If, within four business days, the lender fails to issue a memo or the memo is incomplete or a negative assessment is made, then the ag supply dealer may make the sale and secure the purchase price with the Ag Supply Dealer’s lien. The lien is “effective” at the time of the credit purchase, and is “perfected” by the filing of a financing statement (UCC-1) with the Iowa Secretary of State within 31 days of the purchase. The lien applies to crops related to the purchased supply or livestock consuming the feed sold to the farmer by the dealer. The amount of the lien is the amount owed to the dealer for the “retail cost of the agricultural supply, including labor.” The debtor is a farrow-to-finish hog operation that raised replacement gilts and did not purchase any swine from others. An input supplier supplied the hog feed and management services. A bank was the debtor’s major creditor. At the time of bankruptcy filing, the debtors owed the supplier $342,371.78 for unpaid feed, $45,927.22 for feed delivered from Apr. 27, 2009 to May 28, 2009 and $110,440.21 for feed delivered from Jul. 14, 2009 to Aug. 14, 2009. The debtor also owed the supplied a sum for yardage and veterinary services. The debtor also owed the bank $1.2 million and the debtor’s owners owed the bank over $2 million personally. After refinancing, significant amounts remained owed to the bank. Both creditors perfected their respective liens in the livestock proceeds – the bank in 1997 with a blanket lien which it had properly renewed over the years, and the supplier by filing financing statements on May 28, 2009 and Aug. 14, 2009. The issue before the court was how to dispose of the $358.841.10, the remaining amount the debtor owed for feed that was placed in an escrow account. The debtor claimed super priority to the entire amount, but the bank claimed that the supplier couldn’t show the "difference between the acquisition price of the livestock and the farm market value at the time the lien attaches or the sale price of the livestock" as statute required. As a result, the bank claimed that the supplied could not achieve super priority. However, the supplier argued that the “acquisition price” of the hogs was zero because the debtor raised the hogs. The bank, conversely, argued that the “acquisition price” was the debtor’s total cost of production. The court determined that “acquisition price” meant “purchase price” and that amount was zero because none of the hogs at issue were purchased hogs. The court reached that conclusion on the basis that the court believed it would be impractical for the feed supplier to track all of the hog facility’s expenses and separate out overhead costs, and accounting burden that the court believed to be prohibitive. As such the supplier’s lien was limited to amounts supplied with the two 31-day periods in which its interest was perfected. While the bank claimed that amount was to be measured by the difference between the debt at the beginning of each 31-day period and the debt remaining at the end of each period, the court disagreed on the basis that the bank’s argument assumed that all payments received would apply to all feed supplied during each 21-day period. Thus, based on the value of feed delivered during the two 31-day periods, the supplier had super priority as to $156,367.43, and was unsecured in the amount of $186,004.35. On appeal from the bankruptcy court, the feed supplier claimed that its lien was not limited in duration to the value of feed supplied in the 31-day period before filing, but that the 31-day period only limited the retroactive perfection of the lien. Thus, the supplier claimed, a single financing statement could be filed to perfect the lien as to future deliveries as well as feed delivered up to 31 days before filing. The bank claimed that the bankruptcy court erred in its determination of “acquisition price” for purposes of the lien. The bank asserted that the debtor clearly incurred costs associated with possessing and owning the hogs and that, therefore, the “acquisition price” could not be zero. Neither of these statutory issues had been addressed by the Iowa Supreme Court, so the court certified the two questions to the Iowa Supreme Court based on an evaluation of the factors for and against certification. On the answers to the certified questions, the Court followed Shulista and held that the suppler must file a financing statement every 31 days to stay perfected with respect to the value of feed supplied within the prior 31 days. While it is possible to perfect a typical lien before it becomes effective (e.g., before value is given), the Court determined that the “every 31-day requirement” applicable to the ag supply dealer lien was a rule unique to the ag supply dealer lien and required repeated filings to perfect value given within the prior 31 days. The Court also determined that the “acquisition price” of the raised hogs was zero. The Court believed that the undefined phrase was different than “acquisition cost” which, the Court stated, the bank meant. Thus, for raised livestock, the supplier would have super priority for the full value of the purchased feed bought within the prior 31 days of the filed financing statement. The Court apparently believed that Iowa livestock producers do not keep adequate records of their production costs to provide suppliers with sufficient information to determine the extent of their priority. The Court’s opinion also spells trouble for the financing of Iowa farrow-to-finish or cow-calf operations where there is no “acquisition price” for the hogs and calves. In those situations, based on the Court’s opinion, there is potentially no value available to the prior perfected U.C.C. Article 9 secured creditor ahead of the feed supplier. Thus, lenders to such operations can be expected to require that the debtor fully pays for feed provided to the lender’s collateral or they can be expected to take other steps to protect their interests. In re Crooked Creek Corp., No. 09-02352S, 2014 Bankr. LEXIS 4456 (Bankr. Iowa Oct. 21, 2014); appeal from the bankruptcy court at, Oyens Feed and Supply, Inc. v. Primebank, No. C14-4114-DEO, 2014 U.S. Dist. LEXIS 58482 (N.D. Iowa May 5, 2015); answers to certified questions at, Oyens Feed and Supply, Inc. v. Primebank, No. 15-0806, 2016 Iowa Sup. LEXIS 63 (Iowa Sup. Ct. May 27, 2016).

Posted April 1, 2016

Creditor’s Disposition of Collateral Did Not Violate UCC. In 2008, the defendant transferred farm machinery and equipment worth approximately $1.2 million to the debtor, retaining a security interest. The debtor defaulted in 2010 and the defendant sued to recover the property. In 2011, the parties agreed that the debtor would return the property if the debtor could not obtain financing. In early 2012, the plaintiff loaned approximately $180,000 to the debtor and retained a security interest in specific equipment and personal property of the debtor. The plaintiff recorded a security interest and financing statement in a timely manner. Later in 2012, the property transferred to the debtor in 2008 was transferred back to the defendant in exchange for cancellation of the debtor’s debt owed to the defendant. The debtor defaulted on his obligations to the plaintiff, and the plaintiff obtained a judgment against the debtor in 2014 for slightly over $200,000 and the right to possess the collateral subject to prior perfected security interests. The plaintiff claimed that the defendant violated the UCC when it disposed of collateral without notifying the plaintiff. The defendant moved for summary judgment on the basis that the plaintiff was a junior lienholder and that the 2012 foreclosure extinguished the plaintiff’s right to collateral. The plaintiff claimed it was entitled to discovery to determine whether other collateral was sold and whether the defendant’s failure to notify of the foreclosure damaged the plaintiff. The defendant asserted that even if it had notified the plaintiff, the plaintiff would not have recovered any value from the property. The trial court granted the defendant’s motion for summary judgment, and the decision was affirmed on appeal. Based on the evidence there were no fact issues remaining and the trial court judgement was correct. Agri-Science Techs. v. Greiner’s Green Acres, No. 325182, 2016 Mich. App. LEXIS 561 (Mich. Ct. App. Mar. 17, 2016).