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Secured Transactions Annotations (Agricultural Law and Tax)

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 Feburary 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).