As agricultural financing needs become ever more complex, an increasing number of livestock producers are relying on secured credit to fund their operations. Producers commonly grant lenders blanket liens on substantially all of their business assets to obtain such financing. While lenders search lien records maintained with a secretary of state to determine if these assets have already been pledged to another party, there exist several federal and state statues that allow suppliers and other industry participants to file liens against hogs, sows and other livestock in a non-centralized fashion.
As noted in greater detail in previous articles (see March and November 2011 issues of PORK, or go to http://tinyurl.com/cfn3jht and http://tinyurl.com/d7j2hbh), the interplay among purchase-money security interests, the Federal Food Security Act of 1985, the Uniform Commercial Code, state statutes and common law doctrine determines the priority of interested parties in livestock and varies widely from state to state. While some interests are easily recordable and searchable, others are maintained within separate databases and subject to elaborate recording or re-filing requirements to remain effective.
This article will provide a sample of some filing requirements that establish superpriority liens on hogs, sows and other livestock, and practical recommendations on how to record and preserve such superpriority lien status.
Packers and Stockyards Act Trust
Congress passed the Packers and Stockyards Act of 1921 to, among other things, protect producers from distressed packers. Under the PSA, a packer is defined as someone who: (a) is engaged in buying livestock for slaughter; (b) manufactures meat food products; or (c) in the capacity of a wholesale broker, dealer or distributor, markets meats in an unmanufactured form.
The PSA contains a statutory trust in favor of unpaid cash for producers or other sellers to receive payments from packers that become insolvent. The trust applies to packers whose annual purchases exceed $500,000. The PSA requires that all livestock and related sale proceeds, inventories and receivables be held in trust for the benefit of unpaid cash sellers. Even if payment is delayed, the transaction is still classified as a cash sale unless there is an express financing agreement extending credit from the seller to the buyer. It is worth noting that a producer’s acceptance of late payments is not an express extension of credit by the producer to a packer.
Since the trust assets are segregated from the other packer assets and do not become part of a packer’s bankruptcy estate, unpaid cash sellers have priority in such trust assets. To make a claim against the trust, an unpaid cash seller must give notice to the USDA secretary and the packer within 30 days of the final date for making prompt payment under the PSA or within 15 business days of being notified that a check was dishonored. If a producer does not preserve his or her interest in the trust in a timely manner, the claim may be forfeited.
State Liens in Favor of Industry Participants
In addition to lien priorities contained in federal statues, many states provide specific agricultural liens in favor of landlords, harvesters, forwarding merchants, artisans, veterinarians and feedlots.
One example of the special priority afforded to certain industry participants relates to an agricultural supply dealer’s lien. In many states, including California, Kansas and Texas, dealers of agricultural inputs and chemicals have specific statutory liens that can be superior or have the same priority as secured bank financing, subject to certain defenses. The theory behind this type of lien is that parties who provide agricultural inputs such as seed, fertilizer and chemical products should have a method whereby they are assured of payment.
Although it is generally unnecessary for an agricultural supplier to have possession of the livestock to secure a lien, state statutes sometimes require suppliers to determine the status of third-party interests in a producer’s livestock. To comply, a supplier may need to contact a producer’s creditors of record and inquire about his or her financial abilities. This notification alerts the producer’s creditors that an agricultural supplier may be attempting to take a statutory lien on the livestock. Upon receiving an agricultural supplier’s inquiry, the creditor can either agree to finance or continue to finance the producer.
Some of these liens arise by operation of law and do not require a separate filing to be enforceable. However, as noted by a recent Iowa case, In re Shulista, 451 B.R. 867 (Bankr. N.D. Iowa 2011), some states require very specific steps to obtain and maintain an agricultural supplier’s lien. The court in In re Shulista interpreted the application of an Iowa lien statute that grants priority to a supplier who files a financing statement within 31 days after the producer purchased the agricultural supply. The court held that the feed supplier had priority in the hogs that ate the feed only to the extent of the feed that was provided within 31 days before the supplier’s filing. The filing was not relevant to later sales because the Iowa statute required agricultural suppliers to re-file within a month after every sale, and the supplier did not subsequently re-file its lien in accordance with those requirements.
Another example of a statutory agricultural lien that can have priority over a producer’s lender is a veterinarian’s lien. In most states, the lien becomes effective at the time a licensed veterinarian treats the livestock. In order to have priority over another perfected security interest, states such as Iowa and South Dakota require that a veterinarian make an actual filing with a state or county recording office within a specified number of days. However, in states such as California and Florida, licensed veterinarians do not necessarily need to make any public filings to enforce their lien rights.
A myriad of special liens and trusts exist in both federal and state statutes to protect producers from insolvent packers and to give providers of agricultural goods and services a higher lien priority. While some of these liens are publicly filed, others arise by operation of law and are not readily apparent to a producer’s other creditors.
Given the wide variations in state law, it is highly advisable for producers, agricultural lenders, suppliers, veterinarians, consultants and other members of the industry to familiarize themselves with the various lien priority rules.