Thursday, February 6, 2020
Farmers, ranchers and agribusinesses engage in various transactions and arrangements on a daily basis, perhaps often without much thought given to the legal consequences if the arrangement or transaction goes awry. In those situations, when the unexpected happens, it’s useful to know what legal recourse might be available. Better yet, it’s good to know what the rules are in advance of something happening.
In today’s post, I look at two recent cases that illustrate common situations in agriculture that present interesting legal entanglements.
One type of ag lien, and getting the debtor’s name precisely correct on a lending document – these are the topics of today’s post.
Application of a Harvester’s Lien
States have lien statutes that can apply in various situations. Often they can come into play when one party that supplies services or goods doesn’t get paid and a state lien statute allows the aggrieved party to apply a lien to particular property or income of the non-paying party to secure repayment. But, each type of lien is unique and the particular requirements of the applicable lien statute must be followed closely. One such lien was at the heart of an Iowa case recently.
In Kohn v. Muhr, No. 18-2059, 2019 Iowa App. LEXIS 1064 (Iowa Ct. App. Nov. 27, 2019), a father farmed with his son – a common occurrence in agriculture. 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 2,000 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. The father then 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 granted partial summary judgment in favor of the harvester as to the properness of the lien filing.
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.
The Importance of Getting A Debtor’s Name Precisely Correct
Ag business sometimes finance purchases of their inventory by farmers and ranchers. Other times, such purchases are financed by a lender such as a bank. In all situations, to “perfect” it’s interest in the debtor’s collateral, it is imperative that the debtor’s name be spelled correctly. The states set forth various rules for determining the parameters of what a correct spelling means. This is an important point, because claiming an interest in collateral involves filing a document informing the public of the creditor’s interest in the debtor’s collateral. So, if the debtor’s name isn’t correct, another potential creditor checking the public record may not find the first lender’s interest and lend the debtor additional funds that otherwise wouldn’t have been loaned.
A recent Kansas case illustrates how important it is to get a debtor’s name correct on a publicly filed lending instrument. In In re Preston, No. 18-41253, 2019 Bankr. LEXIS 3864 (Bankr. D. Kan. Dec. 20, 2019), 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) on the basis that 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 with the debtor, 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 were material. 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. The result was that the creditor’s security interests in the combine and header were unperfected, and the bankruptcy court sustained the debtor’s objection to the creditor’s proof of claim. A space and a period proved to be a very costly mistake – a several hundred-thousand-dollar mistake.
The two cases discussed today illustrate rather common scenarios in agriculture. But, they have rather serious ramifications. One slip-up on the law can really cause substantial problems for a farming or ranching operation, or even an agribusiness.