Lending On The Back 40
        Perfection & Priority in Farm Country




This presentation is not intended to serve as leg...
Security Interests, FSA & Ag Liens




                        Food              UCC               State
                 ...
Presentation Outline

                                      • Article 9 & Farm Products
                                  ...
Article 9 & Farm Products
Article 9 Definitions

    • Farm Products - UCC § 9-102(a)(34)
             – Goods, other than standing timber, with res...
Crop Examples


                                  Corn           Apples
                                  Wheat          P...
Livestock Examples

                                     Cows       Ostrich
                                     Hogs     ...
Equine Collateral Discussion

    • Collateral Classification
             – Determines perfection requirements.
         ...
Products of Crops or Livestock


                                         Milk
                                         Eg...
Unmanufactured State

    • Term is Undefined by Article 9
             – See § 9-102 Comment 4(a).
    • Effect of Limite...
Collateral Type Transformation




         Farm Product                    Inventory   Consumer Goods



©2010   by Corpo...
Article 9 Farm Products Rules

            •        Perfection
                   – Normal Article 9 perfection rules appl...
PMSI in Livestock Requirements
            • No 20-Day Window
                   – PMSI must be perfected when debtor take...
Disposition of Collateral
            •        General Rule - § 9-315(a):
                   –       Security interest con...
Food Security Act
Congressional Findings

            • Certain State Laws Permit Enforcement of
              Liens Against a Purchaser of ...
Effect of Food Security Act

            • Preemption of Article 9
                   – § 1631(d) expressly preempts state...
Notice to Buyers
            •     Recipients
                   – FSA permits security agreement to require that debtor f...
Central Filing System (“CFS”)

            • Defined:
                   – System for filing statewide effective financing...
States with CFS Systems

                          Alabama         New Mexico
                          Colorado        No...
Effective Financing Statement
            • Content Requirements:
                   –    Name & address of secured party....
EFS Amendments

            • When Required:
                   – Following material changes to EFS information.
         ...
Other EFS Issues

            • Sufficiency
                   – Minor errors do not affect sufficiency if it substantiall...
CFS Farm Product Lists

            • Secretary of State Farm Product List Duties:
                   –    Organize list b...
FSA Summary

            •     Compliance with FSA
                   – Actual notice is not sufficient. Secured party mus...
Agricultural Liens
Farm Inputs




©2010   by Corporation Service Company
Farm Inputs




©2010   by Corporation Service Company
“Agricultural Lien” UCC § 9-102(a)(5)

    • An interest, other than a security interest, in farm
      products:
        ...
Agricultural Lien Examples

           • Landlord’s Lien
           • Agister’s Lien
           • Lien for Service of Stal...
Agricultural Lien General Concepts

            •        General Rule:
                   – An agricultural lien is not a ...
Security Interests & Ag Liens




                                          UCC         State
                            ...
Article 9 Agricultural Lien Sections

                            §9-102(a)(5) (defined)
                            §9-10...
Agricultural Lien Perfection

            •        General Rule:
                   –       An agricultural lien is perfec...
Agricultural Lien Perfection

            •        UCC Filing Location:
                   –       File in the § 9-501(a)(...
Agricultural Lien Attachment

            •        Article 9 Attachment Rules Do Not Apply!
                   –       Att...
Priority

            •        Agricultural Lien Superpriority
                   – § 9-322(a)(2) (agricultural lien has p...
Agricultural Lien Summary

            •        Filing:
                   – Generally not an issue for lenders.
         ...
Cites & References

            •        Helpful Cases
                   –       Stockman Bank of Montana v. Mon-Kota, 18...
Questions & Answers
                                           Paul Hodnefield
                                        Ass...
About CSC
•       Privately-held, 110+ year old company headquartered in Wilmington, Delaware
•       CSC operates offices...
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Lending On The Back 40

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The secured lending process can be complicated when collateral includes farm products or other property involved in agricultural pursuits. Many states have special liens for a variety of farming transactions. Even federal law plays a role in determining perfection and priority when farming is involved. The interaction of Article 9 with other state and federal law can be perplexing to lenders and legal professionals alike.

Join us to learn more about the issues of perfection and priority when the collateral includes crops, livestock or other property used in farming operations. The topics include Article 9 rules for agricultural collateral, the Food Security Act and statutory agricultural liens. Along the way this presentation will offer best practice suggestions for UCC filing, searches and compliance with federal law when the transaction involves farm-related collateral.

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Lending On The Back 40

  1. 1. Lending On The Back 40 Perfection & Priority in Farm Country This presentation is not intended to serve as legal advice. You should not act or rely on any information contained in this presentation without first seeking the advice of an attorney.
  2. 2. Security Interests, FSA & Ag Liens Food UCC State Security Article 9 Ag Liens Act Buyer in Ordinary Course Perfection & Priority ©2010 by Corporation Service Company
  3. 3. Presentation Outline • Article 9 & Farm Products – Security Interests in Farm Products – Buyer in the Ordinary Course • Food Security Act – Purpose & Effect – Notice Requirements – Central Filing System • Agricultural Liens – General Concepts – Perfection – Priority • Conclusion – Q&A ©2010 by Corporation Service Company ©2010 by Corporation Service Company
  4. 4. Article 9 & Farm Products
  5. 5. Article 9 Definitions • Farm Products - UCC § 9-102(a)(34) – Goods, other than standing timber, with respect to which the debtor is engaged in a farming operation and which are: • crops, grown, growing or to be grown; • livestock, born or unborn; • supplies used or produced in a farming operation; or: • products of these items in their unmanufactured state. • Farming Operations - UCC § 9-102(a)(35). – Raising, cultivating, grazing or other farming, livestock or aquaculture operation. ©2010 by Corporation Service Company
  6. 6. Crop Examples Corn Apples Wheat Pears Oats Grapes Barley Peanuts Soybeans Tomatoes Peas Potatoes String Beans Mushrooms Rice Kelp Avocados Algae Nuts Hemp ©2010 by Corporation Service Company
  7. 7. Livestock Examples Cows Ostrich Hogs Reindeer Chickens Yak Turkeys Llama Geese Oysters Ducks Salmon Sheep Catfish Goats Tilapia Bison Shrimp Elk Rabbits Deer Horses ©2010 by Corporation Service Company
  8. 8. Equine Collateral Discussion • Collateral Classification – Determines perfection requirements. – Determines availability of PMSI. • Racehorse - Debtor’s Interests – Fractional Shares • Courts have generally held fractional shares are goods. – Breeding Rights • Severed breeding rights are likely general intangibles. • Un-severed breeding rights may be goods. • Farm Products? – Unlikely if owner is not engaged in farming. – Other possible classifications? ©2010 by Corporation Service Company
  9. 9. Products of Crops or Livestock Milk Eggs Cream Maple Syrup Sheared Wool Ginned Cotton Pearls Manure Scent ©2010 by Corporation Service Company
  10. 10. Unmanufactured State • Term is Undefined by Article 9 – See § 9-102 Comment 4(a). • Effect of Limited Processing: – Some processes do not constitute manufacturing. – Pasteurization or boiling sap into syrup, for example. • Effect of Manufacturing: – Manufacturing normally turns farm products into inventory. ©2010 by Corporation Service Company
  11. 11. Collateral Type Transformation Farm Product Inventory Consumer Goods ©2010 by Corporation Service Company
  12. 12. Article 9 Farm Products Rules • Perfection – Normal Article 9 perfection rules apply. – Law of debtor’s location governs security interest perfection & priority. • Priority – Article 9 contains no special priority rules for a security interest in farm products. • Purchase-Money Security Interest – Special rules apply to PMSI in livestock only. ©2010 by Corporation Service Company
  13. 13. PMSI in Livestock Requirements • No 20-Day Window – PMSI must be perfected when debtor takes possession of the livestock. – Authenticated notice must be sent to holders of conflicting security interests. • Notice Required by § 9-324(d) – Secured party must send an authenticated notification to the holder of a conflicting security interest. – Recipient must RECEIVE the notice within 6 months before the debtor receives possession of the livestock. • Best practice is to use Certified Mail, FedEx or other delivery service that provides satisfactory proof of delivery. – Notification must state the sender has or expects to acquire a PMSI in livestock of the debtor. • Must also include a description of the livestock. ©2010 by Corporation Service Company
  14. 14. Disposition of Collateral • General Rule - § 9-315(a): – Security interest continues in collateral unless secured party authorized disposition free of the security interest. – Secured party’s recourse following unauthorized disposition: • Repossess collateral from transferee. • Maintain an action for conversion. – Security interest attaches to any identifiable proceeds of collateral. • Buyer in Ordinary Course - General Rule: – A buyer in the ordinary course of business takes free of a security interest created by the seller, even if the buyer has knowledge of the security interest. • See § 9-320(a). • Buyers in Ordinary Course - Farm Products: – A buyer of farm products from a person engaged in farming operations does not take free of the security interest. ©2010 by Corporation Service Company
  15. 15. Food Security Act
  16. 16. Congressional Findings • Certain State Laws Permit Enforcement of Liens Against a Purchaser of Farm Products – Refers to Article 9 exclusion of farm products from BIOCOB protection. • Purchasers are at Risk of Double Payment – Inhibits free competition in the market for farm products. • Purpose of 7 USCS § 1631: – Remove obstruction to interstate commerce in farm products. ©2010 by Corporation Service Company
  17. 17. Effect of Food Security Act • Preemption of Article 9 – § 1631(d) expressly preempts state & local law, including Article 9. • Buyers in Ordinary Course Protected – A buyer of farm products in the ordinary course of business from a seller engaged in farming operations takes free of a security interest created by the seller. • Exceptions: – Notice to buyers. – Central filing. ©2010 by Corporation Service Company
  18. 18. Notice to Buyers • Recipients – FSA permits security agreement to require that debtor furnish list of prospective buyers. – Debtor may sell to non-listed buyers, but law imposes special requirements to protect secured party. • Timing – Buyer takes subject to security interest if it receives notice from secured party within 1 year before the sale. • Notice Contents – Name & address of debtor & secured party. – Social Security Number (or other unique ID number). – Description of the farm products subject to security interest. – Payment obligations of buyer for or release of security interest. – Secured party signature or other authentication. • Material Changes – Amended notice must be sent within 3 months. ©2010 by Corporation Service Company
  19. 19. Central Filing System (“CFS”) • Defined: – System for filing statewide effective financing statements or notices thereof and is certified by the Secretary of Agriculture. • System Certification Requirements: – Permits filing of an effective financing statement (“EFS”). – Secretary of State compiles all records into a master list. – Maintains list of registered buyers, commission merchants and selling agents. – Regularly distributes master list to each registered buyer, commission merchant and selling agent that covers their registered farm product interests. – Provide EFS searches for non-registered parties. ©2010 by Corporation Service Company
  20. 20. States with CFS Systems Alabama New Mexico Colorado North Dakota Idaho Oklahoma Louisiana Oregon Maine* South Dakota Minnesota Utah Mississippi Vermont* Montana West Virginia* Nebraska Wyoming New Hampshire ©2010 by Corporation Service Company
  21. 21. Effective Financing Statement • Content Requirements: – Name & address of secured party. – Name & address of debtor. – Social Security Number (or other unique ID number). – Description of the farm products subject to security interest, including: • Amount of farm products, if applicable, and • Name of each county or parish where the farm products are produced or located. – Signature or authentication of the debtor. • Not applicable for electronic filing. • Effectiveness: – An EFS is effective for 5 years from the date of filing. – Effectiveness can be continued by filing a continuation statement within 6 months before expiration of the 5-year period. ©2010 by Corporation Service Company
  22. 22. EFS Amendments • When Required: – Following material changes to EFS information. • Content Requirements: – Similar to UCC amendments. – Requires signature or authentication by debtor. • Time Limit: – Amendment must be filed within 3 months of material change to EFS. • Notice of Lapse: – Equivalent to a UCC Termination. – EFS lapses upon filing of notice. – Requires secured party’s signature or authentication. ©2010 by Corporation Service Company
  23. 23. Other EFS Issues • Sufficiency – Minor errors do not affect sufficiency if it substantially complies with statutory requirements. – Seriously misleading errors will make record ineffective. • Forms – Generally state-specific. • Some states base EFS forms on the UCC statutory forms, but many states use different formats. – Terminology: • UCC1F, CFS-1 or EFS-1. • UCC3F, CFS-3 or EFS-3. • Trap for Unwary UCC Searcher? – Potential for EFS to also satisfy the requirements for a sufficient financing statement in § 9-502(a). ©2010 by Corporation Service Company
  24. 24. CFS Farm Product Lists • Secretary of State Farm Product List Duties: – Organize list by farm product. – Sort debtor names within each product alphabetically. – Sort names by debtor’s SSN or unique identifier. – Arrange listings by county or parish. – Arrange listing by crop year. – Allow for amendments to reflect material changes. • List Distribution: – Buyers of farm products should subscribe to list. – Distributed regularly as prescribed by the state. – Can be provided on paper or in electronic form. • Single EFS Index Search: – May be commingled with UCC or searchable separately. ©2010 by Corporation Service Company
  25. 25. FSA Summary • Compliance with FSA – Actual notice is not sufficient. Secured party must strictly comply with FSA notice or EFS requirements. • Financing Statement Perfects Security Interest – FSA does not alter UCC rules for perfection and priority of security interests. – Perfection occurs solely under the UCC. • EFS Filing Maintains Priority over a BIOCOB – Ensures the buyer cannot take free of security interest. – Preserves ability to repossess or bring action for conversion. • Effect of Failure to File EFS or Send Notice – Secured party remains perfected. – Secured party has no recourse against buyer. – Secured party may only go after proceeds collected by the debtor/seller. ©2010 by Corporation Service Company
  26. 26. Agricultural Liens
  27. 27. Farm Inputs ©2010 by Corporation Service Company
  28. 28. Farm Inputs ©2010 by Corporation Service Company
  29. 29. “Agricultural Lien” UCC § 9-102(a)(5) • An interest, other than a security interest, in farm products: – which secures payment or performance of an obligation for: • goods or services furnished in connections with a debtor’s farming operation; or • rent on real property leased by a debtor in connection with its farming operation; – which is created by statute in favor of a person that: • in the ordinary course of business furnished goods or services to a debtor in connection with a debtor’s farming operation; or • leased real property to a debtor in connection with the debtor’s farming operation; and – whose effectiveness does not depend on the person’s possession of the personal property. • Key Determination: – Whether debtor is engaged in a farming operation. ©2010 by Corporation Service Company
  30. 30. Agricultural Lien Examples • Landlord’s Lien • Agister’s Lien • Lien for Service of Stallion, Jack or Boar • Veterinarian’s Lien • Seed Lien • Agricultural Input Lien • Agricultural Labor Lien • Harvester’s Lien ©2010 by Corporation Service Company
  31. 31. Agricultural Lien General Concepts • General Rule: – An agricultural lien is not a security interest! • Agricultural Lien Statutes: – Perfection requirements and priority rules vary by jurisdiction and lien type. • Article 9 Application to Agricultural Liens: – Only parts of Article 9 that expressly refer to “agricultural liens” apply to agricultural liens. ©2010 by Corporation Service Company
  32. 32. Security Interests & Ag Liens UCC State Article 9 Ag Liens ©2010 by Corporation Service Company
  33. 33. Article 9 Agricultural Lien Sections §9-102(a)(5) (defined) §9-109(a) (scope of Article 9) §9-302 (governing law) §9-308(b) & (c) (perfection) §9-310(a) & (c) (filing & assignment) §9-315(a)(1) (effect of disposition) §9-317(a) & (b) (priority & BIOCOB) §9-322(a) & (g) (priority rules) §9-338(a) (priority due to incorrect information) §9-501(a) (filing office) §9-509 (person entitle to file a record) §9-601 (rights after default) §9-606 (time of default for agricultural lien) §9-608(a) (application of proceeds - collection) §9-615 (application of proceeds - disposition) ©2010 by Corporation Service Company
  34. 34. Agricultural Lien Perfection • General Rule: – An agricultural lien is perfected if it has become effective and all of the applicable requirements of § 9-310 are satisfied. • Requirements of § 9-310: – Perfection of agricultural lien requires filing a financing statement. – Only a security interest may be perfected by possession. • State Lien Law Perfection Requirements: – Lien statement. – Financing statement in compliance with UCC. • Compliance with State Lien Law and UCC: – Necessary for agricultural lien to avoid general priority rules of UCC 9-322(a)(1). ©2010 by Corporation Service Company
  35. 35. Agricultural Lien Perfection • UCC Filing Location: – File in the § 9-501(a)(2) filing office of the jurisdiction where the farm products are located. See § 9-302. • Location of the debtor only applies to UCC filings that perfect a security interest. • Lien Statement Filing Location: – Location specified by lien statute. • County office. • Secretary of State. • Other. – Separate lien statement may not be required under state lien law. • Lien Statement vs. Financing Statement: – Lien statement can be effective as a financing statement. – Must meet all the requirements of § 9-502(a). ©2010 by Corporation Service Company
  36. 36. Agricultural Lien Attachment • Article 9 Attachment Rules Do Not Apply! – Attachment is determined by state lien law. • Ag Lien Remains Attached to Farm Products – Lien remains against collateral following disposition. – Permits lien creditor to repossess collateral following disposition or to maintain an action for conversion. See § 9-315(a)(1). • Ag Liens Do Not Attach to Proceeds – § 9-315(a)(2) specifically states that security interests attach to identifiable proceeds, but omits any mention of agricultural liens. ©2010 by Corporation Service Company
  37. 37. Priority • Agricultural Lien Superpriority – § 9-322(a)(2) (agricultural lien has priority over conflicting security interest if the statute creating the lien so provides). – Other priority as established by statute. • Other Statutory Priority – Agricultural lien priority rules may differ based on: • Jurisdiction. • Type of lien. ©2010 by Corporation Service Company
  38. 38. Agricultural Lien Summary • Filing: – Generally not an issue for lenders. – Lien claimants must file a UCC in the location of the collateral and, if required by law, – File lien statement with appropriate state or local filing office. • Searches: – Conduct UCC search in the location of the farm products. – Conduct lien search, if necessary under state law, in the appropriate state or county filing office. ©2010 by Corporation Service Company
  39. 39. Cites & References • Helpful Cases – Stockman Bank of Montana v. Mon-Kota, 180 P.3d 1125 (Mont. 2008)(interaction of Article 9 and agricultural lien statutes with respect to perfection and priority). – Bank of Dawson v. Worth Gin Company, 295 Ga. App. 256 (2008)(buyer takes free of a security interest or agricultural lien if the buyer gives value and receives delivery of the collateral without knowledge and before it is perfected). • Food Security Act – 7 USCS § 1631. • Articles – Scott J. Burnham, Agricultural Liens Under Revised Article 9, 63 Mont. L. Rev. 91 (2002)(impact of Revised Article 9 on Montana agricultural liens). – Katherine Simpson Allen, A Horse is a Horse (of Course), Bus. Law Today, Sept./Oct. 2008 (thoroughbred racehorses as collateral). ©2010 by Corporation Service Company
  40. 40. Questions & Answers Paul Hodnefield Associate General Counsel Corporation Service Company 380 Jackson Street, Suite 700 St. Paul, MN 55101 800-423-7398 phodnefi@cscinfo.com Cell: 952-649-1555 Q&A To ask a question, please type your inquiry into the Q&A panel www.CSCGlobal.com ©2010 by Corporation Service Company © Corporation Service Company 2009
  41. 41. About CSC • Privately-held, 110+ year old company headquartered in Wilmington, Delaware • CSC operates offices in the US, Canada, Germany, France and the UK and employs over 1,000 people worldwide • CSC is dedicated reducing risks and costs for our clients by providing: – Corporate Governance & Compliance Services – Corporate Identity Protection Services – Litigation & Matter Management Services – Deal & Transaction Support Services. • CSC Tracking Solutions include: – Debtor Tracker: Alerts the secured party of new UCC filings on the debtor, including unauthorized amendments – Corporate Tracker: Notifies the secured party of changes in debtor name and/or entity status – Bankruptcy Tracker: Provides an alert within 24 to 48 hours if the debtor files a bankruptcy petition – FileWatch & CSCFinancialOnline: UCC portfolio management and lapse date monitoring system For more information please contact WebSeminars@CSCInfo.com ©2010 by Corporation Service Company

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