Ag Supply Dealer Liens – Important Tool in Tough Financial Times

Overview

The present economic conditions in agriculture are reminiscent of the 1980s.  For those of you that attended the agribusiness symposium last September put on by Washburn University School of Law and Kansas State University, you saw the close parallels.  One of the legislative attempts to assist farm producers during that time involved the creation of an agricultural supply dealer’s lien in those states that were experiencing an extraordinarily high number of agricultural bankruptcies. 

For those farmers and ranchers, it was likely that all of their property was claimed subject to perfected security interests under Article 9 of the Uniform Commercial Code, leaving the supply dealer as an unsecured creditor with large unpaid bills.  Thus, the theory behind an ag supply dealer lien is that parties who supply necessary inputs such as seed, feed, fertilizer, chemicals and petroleum products should have a method whereby they are assured of payment for the inputs supplied to agricultural producers. 

Various Statutory Approaches; Various Issues

Agricultural supply dealer lien statutes are rather complex, but most follow a common procedure.  One common type gives an ag commodity dealer that sells an ag product a lien on the ag product or its sale proceeds.  But what if the input subject to the lien is feed that is consumed by livestock that are collateral for another lender’s security interest?  The Idaho statute, for example, specifies that the lien only extends to an “agricultural product” or the “proceeds of the sale of the agricultural product.”  As a result, one court has held that the lien was extinguished when it was consumed as feed by the livestock because “livestock” were not included in the statutory definition of “agricultural products.”  Farmers National Bank v. Green River Dairy, LLC, 318 P.3d 622, 155 Idaho 853 (2014).  But, another court, construing a different state statute has held that the ag supply dealer lien applied to the full amount of feed supplied and fully attached to the animals consuming it.  In re Schley, No. 10-03252, 2017 Bankr. LEXIS 115 (Bankr. N.D. Iowa Jan. 13, 2017).

For crop input suppliers, when a farmer or rancher attempts to purchase supplies on credit or on open account, the supplier can obtain a lien on the crops produced with those inputs.  But, there is typically a process the supplier must go through.  For instance, under the Iowa statute (a statute that has been litigated frequently), the supplier must discover what other parties, if any, have a security interest in the purchaser's crops or livestock.  Iowa Code §570A.  The supplier is required to contact these creditors and inquire about the purchaser's financial abilities.  This puts the creditors on notice that the supplier may be attempting to take a statutory lien.  The creditors can either agree to finance the purchase or send the supply dealer the buyer's financial records.  If the creditors refuse to extend credit, the supply dealer can make the sale and obtain a lien by filing in the appropriate office, usually the Secretary of State's office.  The lien is effective at the time of the purchase and is “perfected” by the filing of a financing statement 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.”  Courts have determined that the lien is perfected for the amount of supplies that the debtor buys from the supplier within 31 days before the supplier files the financing statement.  See, e.g., In re Shulista, 451 B.R. 867 (Bankr. N.D. Iowa 2011); In re Big Sky Farms, Inc., No. 12-01711, 2014 Bankr. LEXIS 1725 (Bankr. N.D. Iowa Apr. 18, 2014).    The lien also extends to the proceeds of the input(s) supplied.  In re Schley, 509 B.R. 901 (Bankr. N.D. Iowa 2014).  The perfected lien does not continue nor does it cover future advances.  If additional supplies are sold to a debtor after the initial 31-day period, another financing statement must be filed within 31 days of sale to perfect the lien for those additional supplies that are provided. 

The Iowa ag supply dealer’s lien has been held to beat out a bank’s prior perfected security interest in hogs even though the supply dealer had not provided the statutory certified notice to the creditor (bank) before selling feed to the debtor on credit. In Oyens Feed Supply, Inc. v. Primebank, 808 N.W.2d 186 (Iowa 2011), the court reasoned that the state ag supply dealer lien statute did not provide for the certified notice affirmative defense in the context of a lien in livestock feed dealers.  The court was persuaded by the feed dealer’s argument that requiring a feed dealer to comply with the certification requirement would result in a “windfall” for the prior perfected lender who would benefit from the increase in the collateral value (livestock) provided for by the feed supplier.  Such “superpriority” status, however, only applies to the extent the acquisition value of the livestock is exceeded by the livestock’s value at the time the lien attaches or its ultimate sale price.  The secured lender still has priority up to the livestock’s acquisition price. 

Most state statutes provide that an agricultural supply dealer lien is superior to subsequently filed Article 9 security interests, and of equal priority to Article 9 interests already in existence.  However, Minn. Stat. § 514.952 (1994) provides that upon a supplier providing a lender a lien notification statement and the lender refuses in writing within 10 days to issue a letter of commitment, the rights of the lender and supplier are unaffected.  The statute was at issue in Underwood Grain Co. v. Harthun, 563 N.W.2d 278 (Minn. Ct. App. 1997), where a lender with a prior perfected interest in cattle was determined to have priority over an agricultural production input lien upon refusal to issue a letter of commitment.  Also, it’s important to understand whether a state ag lien statute applies to crops “produced” with the supplier's inputs.  There might be a time limit specified in the statute.  See, e.g, In re Schlote, 177 B.R. 315 (Bankr. D. Neb. 1995).

A question can arise concerning the total amount of inputs a supply dealer's lien secures.  For instance, in Tracy State Bank v. Tracy-Garvin Cooperative, 573 N.W.2d 393 (Minn. Ct. App. 1998), a farmer borrowed money from a bank and granted the bank a security interest in the farmer's property.  The bank perfected the interest.  The farmer obtained feed on credit from a supplier and the supplier filed with the bank a notification of agricultural input lien, listing the lien amount at $65,000.  The bank received the notification, but did not respond to it, thus giving the supplier a priority lien for $65,000 under Minnesota law.  The supplier, however, actually provided the farmer with $73,748 in feed during the dates listed and the farmer paid on the account during that period such that the debt stood at $44,682 when the farmer liquidated the farm.  The supplier argued that the lien protected a revolving line of credit of up to $65,000 regardless of the payments made by the farmer so that the entire $44,682 was covered by the lien.  The bank argued that only $65,000 of the total amount supplied on credit, less the amounts paid by the farmer, was subject to the lien.  The court held that, under Minnesota law, the notification stated the retail cost of the anticipated production inputs to be provided.  Therefore, the notification statement's listing of $65,000 established the total limit on the inputs covered by the lien.  The court also noted that if a supplier provides more than the notification amount, Minnesota law allows the notification to be amended to provide for priority for the additional amount. Because the plaintiff did not file an amended notification, the lien covered only $65,000 of the feed less the amounts the farmer actually paid on the debt.

“Super Priority”

Because statutory liens grant “super priority” status only to the extent that they are perfected, it is important that a party seeking to gain super priority status understand the particulars of the statutory lien and follow the requirements to perfect the lien as intended.  It is also important to clearly understand the type of lien obtained because nuances exist amongst state statutory liens.  For example, in First National Bank v. Profit Pork, LLC, et al., 820 N.W.2d 592 (Minn. Ct. App. 2012), a feed supplier was found to have a production-input lien rather than a superior feeder’s lien under a different statutory provision because the supplier also provided nutritional advice, feed and labor to produce custom-made feed for the debtor.  As previously noted, the Iowa ag supply dealer’s lien statute is perfected only for the amount of supplies that are purchased from the supplier within 31 days before the supplier files the financing statement.  The perfected lien does not continue, nor does it cover future advances.  Thus, if additional supplies are sold to a debtor after the initial 31-day period, another financing statement must be filed within 31 days of the sale to perfect the lien for those additional supplies that are provided. In re Shulista, 451 B.R. 867 (Bankr. N.D. Iowa 2011).   But, there is no limit on the amount that is purchased from the supplier, even if it is for future periods.

Unanswered Questions

There remain some unanswered questions about ag supply dealer liens.  For example, where must an ag supply dealer’s lien be filed?  Is it to be filed in the state where feed is supplied, or in the state of incorporation of the owner of the livestock, if that is different?  Clearly, the safest course of action would be to file in both states as it is relatively inexpensive to do so and avoids the necessity of litigation to determine whether the lien was properly filed.  Also, what about a feedlot owner that provides feed to cattle in the feedlot?  Can the feedlot owner file an ag supply dealer’s lien to secure the value of the feed supplied to the cattle?  Some feedlot owners have filed these liens seeking to assert a lien prior to the lien of the bank.  Will that work?

Conclusion

This is just one of the topics that will be discussed at next weeks’ farm financial distress seminar at Washburn law school.  If you can’t attend in person, the seminar will be simulcast live over the web.  If you work with farm/ranch clients that are dealing with a difficult economic situation, this seminar and the accompanying materials is what you need.  Here’s registration information:  http://washburnlaw.edu/employers/cle/farmersandranchers.html