Uncertainty in the agricultural industry resulting from the global trade war and falling agricultural prices has increased risk to participants in the agricultural economy. Farm bankruptcies continue to increase, and farm debt is at a near-record high. In light of these challenges, creditors of producers and purchasers of farm products should protect their interests through compliance with the federal Food Security Act of 1985, 7 U.S.C. § 1631 (FSA), and awareness of potential statutory lien claims, or they risk avoidable financial loss.
Federal Protection for Buyers of Farm Products
A buyer of inventory in the ordinary course of business generally takes free and clear of security interests created by its seller under the Uniform Commercial Code (UCC), even if the security interest is perfected and the buyer knows of its existence. A buyer of farm products, like corn, soybeans and livestock, does not get the benefit of this general rule under the UCC.
However, the FSA overrides the UCC to protect a buyer of farm products in the ordinary course of business from security interests created by its seller unless the applicable secured party complies with the FSA’s requirements.
Under the FSA, a creditor must provide notice to preserve its security interest in farm products. The form of the notice depends on state law. Sixteen states have enacted what the FSA calls a “central filing system” for some or all farm products. 1 For farm products produced in states covered by the central filing system, secured parties should notify buyers by filing an effective financing statement (EFS). The EFS is different from and in addition to the standard UCC financing statement, which must also be filed to perfect the secured party’s security interest against other creditors.
To obtain the benefit of the FSA for farm products produced in a central filing state, a buyer of farm products should check the EFS records. If an EFS has been filed against its seller, a buyer must comply with the seller’s requirements for release of the secured party’s security interest. Depending on the state’s form, those requirements may be stated on the EFS or may need to be obtained from the secured party.
In direct notice states, a creditor must give actual notice of the security interest to a buyer to protect its security interest in farm products. For this reason, creditors in direct notice states should require farm debtors to provide a list of the buyers to whom they will sell farm products.
The notice provided by a secured creditor in a direct notice state must include the following:
- Name and address of the creditor
- Name and address of the seller
- Social security number or federal taxpayer identification number of the seller
- A description of the farm products subject to the security interest, including the amount, crop year and location of the farm products
- Any payment obligations imposed on the buyer by the secured party as conditions for waiver or release of the security interest
Such notice is effective only for one year, so a new notice must be issued annually. A buyer receiving notice in a direct notice state must comply with the stated payment obligations to take farm products free and clear of the secured creditor’s interest.
In many states, agricultural suppliers, landlords and providers of select services to producers have statutory lien rights. In some states, those liens may even achieve “superpriority” over UCC security interests.
Suppliers and other creditors claiming statutory liens must be particularly mindful of timing. For example, the law of some states permits a supplier’s lien to relate back to the first day that it delivered product to the producer if the lien is timely filed. If the supplier complies with the statutory procedures, its lien may have priority over UCC security interests and possibly over other statutory lienholders. Suppliers who wait to assert a statutory lien until learning of a customer’s insolvency may be too late. Now more than ever, vigilance in credit approval and monitoring is required.
Lenders to producers must also remain attentive to potential statutory lienholders’ claims, particularly if there is a risk that those liens will have priority over the lenders’ security interests. Failure to do so can lead the lenders to overvalue their collateral.
The Need for Internal Lien Procedures and Policies
Creditors and buyers dealing with producers should create internal procedures and policies to protect their interests under the FSA and state statutory lien statutes.
For a secured creditor, compliance with the FSA mitigates the risk that collateral is sold without payment to the creditor. For a buyer of farm products, compliance protects it from double liability for its purchases.
Similarly, awareness of state statutory liens allows agricultural input providers to secure their interests, allows secured lenders to include proper reserves when valuing collateral and may protect buyers from taking property subject to such liens.
Because FSA compliance procedures and statutory agricultural liens vary from state to state, compliance often requires an awareness of multiple states’ laws and systems. We strongly recommend that clients develop procedures for compliance in each state where producers with whom they do business are located. Failure to adopt such procedures may result in avoidable financial loss.
- Another three states (Maine, Vermont and West Virginia) have obtained approval from the U.S. Department of Agriculture for central filing systems but have never implemented those systems.