Challenging economic times bring about an array of legal issues. The exact situations that arise are very different, but the legal issues are often the same and, unfortunately, the outcomes are not predictable.
As an attorney representing pork producers and other agricultural clients, one of the more troubling calls I receive is from the producer who says he has sold pigs under a contract that’s been in place for several years, but now the buyer has failed to pay for one or more of the deliveries. The seller then learns that the buyer is not financially able to make payment and the questions that typically surface are: “Aren’t those pigs still mine?” or “Don’t I have a lien on those pigs since I haven’t been paid?”
An equally troubling call is when a producer pays for an input before delivery. Often this prepayment is to get a price break or to guarantee the input’s availability or delivery. he buyer then learns that the seller is not financially viable and cannot deliver the purchased input. The question then is: “Don’t I get what I paid for or get my money back?”
Contrary to what many believe — or want to believe — unless steps such as the ones outlined in this article are taken in advance, chances of avoiding a financial dilemma such as the one facing the pig seller are slim to none. In the case of prepaying buyers, even if the steps outlined in this article are followed, the buyer’s chances of being made whole are questionable.
While this may not seem right, courts have routinely ruled against unpaid sellers as well as prepaying buyers. The courts’ ruling is that the secured lender of the other party in the deal has superior legal rights, and that the unpaid seller or prepaying buyer should have retained a security interest before entering into the deal. Of course, in both of these situations, the person coming up short can forward legal action against the other party for breach of contract, but that’s typically of little value if the other party is not financially viable.
To best understand the options available, let’s look at each situation separately.
Unpaid Livestock Sellers
To protect their rights involving the animals, and thus to payment, sellers have several options under the Uniform Commercial Code, which has been enacted in all 50 states, with some variations from state to state. Because of these variations, producers should always consult legal counsel familiar with the applicable state law.
First, the seller may include a clause in the sales contract that the buyer grants a first-priority security interest in the livestock and providing that any prior perfected interests be subordinated to the seller’s security interest. The seller should file a financing statement (a form called a UCC-1) in the state in which the buyer is located, claiming a security interest or lien in the livestock being sold to the buyer. The seller should then conduct a lien search and identify any UCC-1s filed against the buyer that are listed before the seller’s. The seller should then work with the buyer to obtain subordination agreements from these banks or other financers. These steps should be taken before livestock are sold under the contract.
Another more feasible option may be to obtain what’s called a “purchase-money security interest” in the livestock being sold. This option does not require a subordination agreement from the buyer’s bank. The legal basis for this method is UCC section 9-324. Again, make sure your state has adopted this section of the UCC. If this provision is in place in your state, follow these steps:
Obtain a security interest and authorization to file a UCC-1 from the buyer for the purchased livestock, either in a separate written agreement or by a clause in the sales contract.
File a UCC-1 in the state where the buyer is located, adequately describing the collateral (the livestock sold under the contract with the buyer). The UCC-1 must be filed before the buyer actually takes possession of the purchased livestock.
If a UCC lien search identifies parties who claim a security interest in the livestock, then a written notice must be provided to these parties informing them that the seller has or expects to acquire a purchase-money security interest in the livestock that the buyer is purchasing. The written notice must describe the livestock and must be received by the secured parties within six months before the buyer takes possession of the livestock.
To protect their rights to purchased product or money paid in advance of product delivery, prepaying buyers generally have the same options under the UCC that are available to unpaid livestock sellers. However, prepaying buyers should evaluate the reason for prepaying and decide if the economic advantages are worth the risk. There is considerable risk for prepaying buyers because even if UCC options are followed, the buyer’s legal claim is to the product purchased and there’s generally no right to a refund of money paid. If the seller does not have the product in inventory or has not contracted for the product and taken steps to protect his right to receive the product, the UCC protections are of little help.
All of these alternatives require advance planning and attention to detail, and often producers tend to conclude that none of them are workable in their situations. However, if these options are properly followed, producers are in a better legal position either in court or in negotiations outside of court.
Finally, as with all legal matters, a producer should always consult with his legal counsel for advice specific to each individual situation. But this is at least a reference point from which to start.
Eldon McAfee, is an attorney at Beving, Swanson & Forrest, P.C., Des Moines, Iowa, where he practices primarily in agricultural law.