Eminent Domain and “Seriously Misleading” Financing Statements

Overview

Farmers and ranchers encounter numerous legal issues, some more often than others.  Some involve relationships with people that have gone awry, while others are a function of the economic situation surrounding the operation.  Still others involve technical contract issues involving the sale or transfer of agricultural commodities.  Many involve farmland in one fashion or another. 

In today’s article, I examine a couple of recent cases illustrating two legal issues that farmers and ranchers encounter – eminent domain and financing arrangements.  These are the topic of today’s post.

Eminent Domain

The power to “take” private property for public use (or for a public purpose) without the owner's consent is an inherent power of the federal and state government. However, the United States Constitution limits the government's eminent domain power by requiring federal and state governments to pay for what is “taken.” The “takings” clause of the Fifth Amendment has been held to apply to the states since 1897. Chicago, Burlington and Quincy Railroad Co., v. Chicago, 166 U.S. 226 (1897). 

The issue of what constitutes “just compensation” is often the thorny issue when a “taking” has occurred.  Often, the government will “low-ball” a landowner upon the exercise of its eminent domain power.  But, just compensation is to be tied to fair market value of the property taken.  The trick is how fair market value is to be determined.  That precise issue came up in a recent Nebraska case.

Recent case. In Russell v. Franklin County, 27 Neb. Ct. App. 684, 934 N.W.2d 517 (2019), the plaintiffs were landowners whose property consisted of 164 acres that was primarily cropland and pastureland. The property has been in the plaintiffs’ family for many years and includes cropland and pastureland. There was no residence on the property, and the plaintiffs used it for birdwatching, camping, hunting for game and mushrooms, and other recreational purposes. The plaintiffs gave the defendant county permission to cut down trees on the plaintiffs’ property in order to improve visibility for drivers on an adjacent county road. However, the defendant’s employees proceeded to cut down trees from an area not authorized for removal. In total, the defendant cut down 67 trees, affecting 1.67 acres of the plaintiffs’ land.

The plaintiffs filed an inverse condemnation action under Neb. Rev. Stat. §76-705, et seq. against the defendant, alleging an unlawful taking of their property for public use without just compensation. The plaintiffs claimed that the damages should be calculated by determining the replacement cost of the trees and soil from uprooted trees.  In other words, the “just compensation” should be what it would cost to put the property back to its status before the trees outside the permitted area were removed.  To that end, the plaintiffs relied upon an arborist, a salesperson from a nursery and garden center, and a representative from an excavating company to quantify their damages. Together, the experts calculated the cost to return the property to its prior condition to be $150,716.  Conversely, the defendant argued that the damages should be calculated by determining the difference in fair market value of the plaintiffs’ property before and after the trees had been cut down, which its expert said was $200.

The trial court agreed with the defendant and held that the appropriate measure of damages was the difference in the fair market value of the land. The trial court noted that the plaintiffs had argued their case under the state’s eminent domain statutes but were seeking damages based on a tort cause of action. On appeal, the plaintiffs’ argued the trial court applied the wrong measure of damages. The plaintiffs maintained their argument that the proper method for determining damages was to calculate the cost of restoring the property to its preexisting condition. The appellate court held that the correct measure for damages was in fact the difference in the fair market value of the land before and after the trees were cut down. The appellate court noted that Nebraska courts have consistently held that damages in eminent domain cases are measured based on market value of the property. Further, the appellate court pointed out that the state Supreme Court had previously held that vegetation is not valued separately and should only be considered in how its presence affects the fair market value of the land. Finally, the appellate court noted that the plaintiffs’ argument for calculating damages rested on cases that stemmed from tort actions. Because the plaintiffs had argued their case as one under the eminent domain statutes, they could not seek damages under an unlawful destruction of trees or negligence action. 

On further review, the Nebraska Supreme Court affirmed.  Russell v. Franklin County, 306 Neb. 546, 946 N.W.2d 648 (2020). 

Financing Statement and Debtor’s Name

Occasionally, a lender loans money on an unsecured basis with the lender's security based solely on the borrower's reputation and promise to repay.  More likely, however, a lender will require collateral to make sure the borrower repays the loan. Usually, the lender requires the borrower to sign a written agreement (security agreement) giving the lender legal rights to the collateral (such as the borrower's crops, livestock or equipment) if the borrower fails to repay the loan. The situation where personal property or fixtures are used to secure payment of a debt or the performance of an obligation is called a secured transaction.  In this transaction, the lender receives a security interest in the debtor’s collateral.  If the debtor fails to repay the obligation, the creditor can have the collateral sold to repay the loan. 

Normally, a security interest in tangible property is perfected by filing a financing statement or by filing the security agreement as a financing statement. Indeed, filing a financing statement usually is the only practical way to perfect when the debtor is a farmer or rancher.

Under UCC § 9-506, a financing statement is effective even if it has minor errors or omissions unless the errors or omissions make the financing statement seriously misleading. A financing statement containing an incorrect debtor’s name is not seriously misleading if a search of the records of the filing office under the debtor’s correct legal name, using the filing office’s standard search logic, if any, discloses the financing statement filed under the incorrect name. However, some states have statutes or regulations defining the search logic to be used and may require that the debtor’s name be listed precisely in accordance with that logic.  A recent Minnesota bankruptcy case illustrates this point.

Recent case.  In a recent bankruptcy case from Minnesota, In re Rancher’s Legacy Meat Co., 616 B.R. 532 (Bankr. D. Minn. 2020), the debtor was a meat packing and processing company that was created by two people (one of which was a creditor) operating under the name of Unger Meat Company (UMC). The creditor leased a building to the debtor that was to be used as a processing plant. The creditor also provided startup funds through two promissory notes. The parties entered into a security agreement that granted the creditor a security interest in all of the debtor’s equipment, inventory, and accounts receivable.

The creditor perfected the security agreement by filing a financing statement with the state. UMC lost money and the creditor entered into an option agreement with a holding company to purchase UMC. Upon finalization of the sale, the holding company subsequently purchased the creditor’s shares in UMC and changed the name of the company to Rancher’s Legacy Meat Company. Fourteen months after the name change, the creditor filed a continuation statement listing the company’s name as UMC. Three years later, the creditor filed an amended continuation statement changing the debtor’s name to Rancher’s Legacy. The creditor began seeking collection on its notes and a few months later the debtor filed for Chapter 11 bankruptcy. The debtor argued that the appropriate procedure to re-perfect the creditor’s security interest was to file a new financing statement upon the debtor’s name change. The creditor claimed that the filings appropriately re-perfected the security interest, entitling the creditor to adequate protection payments. The bankruptcy court looked to local (Minnesota) law, to construe the status of the creditor’s lien. Under Minnesota law, a financing statement becomes seriously misleading and ineffective when it fails to provide the debtor’s correct name. Additionally, when the financing statement is ineffective because of seriously misleading information, an amendment must be made within four months to perfect a security interest.

The bankruptcy court held that the creditor’s security interest lapsed when four months had passed after the creditor’s financing statement became seriously misleading. Further, the bankruptcy court held that the creditor had the ability to re-perfect the security interest by filing a new financing statement. Although the security interest had lapsed, the language of the parties’ security agreement provided the creditor with the opportunity to file a second financing statement. The creditor argued that the multiple filings were sufficient to giver proper notice to any other creditors under the UCC. The bankruptcy court disagreed and held that multiple filings can occasionally give proper notice, but not when the notice had become seriously misleading.

The bankruptcy court held that the validity of the financing statement depended primarily on its ability to give notice of the security interest to other creditors. The purpose of the UCC’s notice system, the bankruptcy court noted, is to provide public notice of a secured interest without requiring parties to piece together several documents. Further, the bankruptcy court noted that the creditor’s argument for multiple filings failed because the original financing statement had lapsed. The creditor’s continuation statements were merely amendments to the original financing statement. However, the original financing statement had lapsed four months after it became seriously misleading. The bankruptcy court held that the continuation statements could not revive the financing statement once it had lapsed. Lastly, the creditor argued that the subsequent filings of the continuation statements should have been enough to re-perfect his security interest.

The bankruptcy court held that even when the creditor’s three filings were read in conjunction, they were ineffective to re-perfect his security interest. The bankruptcy court further pointed out that the UCC specifically provides that continuation statements cannot substitute for financing statements. As a result, the bankruptcy court declared that the creditor became an unsecured creditor at the time the security interests became unperfected. Because the creditor failed to re-perfect the security interest before the debtor filed Chapter 11 bankruptcy, the debtor was not required to provide the creditor with adequate protection payments. 

Conclusion

Eminent domain and getting a debtor’s name correct on a financing statement – two issues that farmers and ranchers frequently encounter.  Also, two issues that illustrate how farmers and ranchers can become entangled in legal matters so easily.