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agricultural security interests

The Basics: How and Where to File a Financing Statements

As a general rule, in all secured transactions involving a security agreement executed by the debtor, the debtor authorizes the secured party to file a financing statement describing the collateral. See 810 ILCS 5/9-509(a)(1). In addition, Article 9 provides that a person holding an agricultural lien that arises by operation of law and requires no written agreement may file a financing statement without consent provided the financing statement covers “only collateral in which the person holds an agricultural lien.” 810 ILCS 5/9-509(a)(2).

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Second, the financing statement does not need to include the legal description of leased real estate as a condition of perfection. Article 9 only requires this description only for “as-extracted collateral or timber to be cut.” 810 ILCS 5/9-502(b). “As-extracted collateral” means oil, gas, or other minerals that are subject to a security interest that is created by a debtor having an interest in the minerals before extraction and attaches to the minerals as extracted. 810 ILCS 5/9-102(a)(6). However, a legal description may be appropriate as an indication of “the collateral covered by the financing statement.” 810 ILCS 5/9-502(a)(3). One example is the landlord’s lien on crops growing on specific acreage. When the debtor is a tenant farmer that does not have a record interest in the real estate, counsel also must provide the name of the record owner. 810 ILCS 5/9-502(b)(4).

With a few exceptions, all financing statements are required to be filed in the office of the Secretary of State. 810 ILCS 5/9-501(a). The law governing perfection of priority of security interests is generally determined by the location of the debtor. 810 ILCS 5/9-301. For agricultural liens, the law governing priority is the local law of the jurisdiction where the farm products are located. 810 ILCS 5/9-302.

The debtor’s location depends on how the debtor is conducting the farm business. When a debtor is an individual, he or she is located at the individual’s principal residence. When the debtor is a non-registered organization, such as a general partnership, it is located at its place of business or its chief executive office if it has more than one place of business. 810 ILCS 5/9-307(b). However, when the debtor is an organization that is organized under state law, like a corporation or a limited liability company, it is located in the state where it is registered. 810 ILCS 5/9-307(e). The failure to file in the proper jurisdiction or to otherwise fail to satisfy the specific requirements for completing and filing the financing statement can be fatal. See, e.g., Duesterhaus Fertilizer, Inc. v. Capital Crossing Bank (In re Duesterhaus Fertilizer, Inc.), 347 B.R. 646 (Bankr. C.D.Ill. 2006).

Priorities: Which Lien Wins?

In a conflict between security interests and agricultural liens in the same collateral, priority generally dates from the earlier of the time the filing covering the collateral is first made or the security interest or agricultural lien is first perfected. See 810 ILCS 5/9-322, 5/9-338.

A perfected security interest in growing crops has a priority over a conflicting interest of the owner or the mortgagee of the real property on which such crops are grown. 810 ILCS 5/9-334(i)(1)(A). The same priority applies between an assignee of a beneficial interest in an Illinois land trust and the holder of a perfected security interest in crops. See 810 ILCS 5/9-334(i)(1)(B). Lenders financing farm real estate that also want to maintain priority in crops must comply with Article 9 of the Uniform Commercial Code.

 

Purchase-Money Security Interests in Agricultural Products

The 2001 amendment of Article 9 of the Uniform Commercial Code eliminated the special priority for a purchase-money security interest (PMSI) in crops. See former UCC §9-312(2), 810 ILCS 5/9-312(2) (2000).

Article 9 provides that a perfected PMSI in livestock that are farm products has priority over a conflicting security interest in the same livestock. 810 ILCS 5/9-324(d). This provision requires:

1. The PMSI must be perfected when the debtor receives possession of the livestock.

2. The PMSI secured party sends notification to the holder of the conflicting security interest.

3. The holder of the conflicting security interest receives notification within six months before the debtor receives possession of the livestock.

4. The notification states that the person sending it has or expects to acquire a PMSI in livestock and describes the livestock.

The effective date of a PMSI lien depends on the date the secured party with the prior filed lien receives the notification from the PMSI lender and the date the debtor receives possession of the livestock. Since PMSI lenders rarely send PMSI notices months in advance of the delivery of possession of livestock, it is very important to document the date that the priority lender actually receives the required notice. In the event a bankruptcy is filed or a conflict arises with the holder of the blanket security interest in livestock, these dates will determine the priority of the PMSI lien.

In re Leading Edge Pork, LLC

The content of the PMSI notice and the timing of its receipt were at issue in In re Leading Edge Pork, LLC, Bankruptcy No. 09-82789, 2010 WL 2926155 (Bankr. C.D.Ill. July 26, 2010). Leading Edge Pork, LLC, was a swine producer that purchased piglets from third-party sources and paid other third-party growers to raise them to market weight. The debtor retained ownership of the swine while in possession of the third-party growers.

Lone Hollow LLC sold the debtor weaner pigs in 2009 on credit and took a PMSI in the pigs it sold. Lone Hollow perfected its security interest in the weaner pigs it sold by filing a UCC-1 Financing Statement on June 9, 2009. At issue in the case was whether the security interest was perfected as to the sale of pigs to the debtor on June 10th and 12th. At 6:34 p.m. on June 9th, Lone Hollow sent an e-mail to the bank via its website directed to an officer of the bank that stated in its entirety,

Scott — Wayne Peugh gave me your contact information with regard to Purchase Money Security Interest for pigs delivered from Lone Hollow. 2010 WL 2926155 at *2.

This e-mail was forwarded to the banker at 8:13 a.m. on June 10, 2009.

The second communication sent by Lone Hollow was mailed from Carthage, Illinois, on Friday, June 12, 2009, bearing the heading “NOTICE OF PURCHASE MONEY SECURITY INTEREST.” Id. The record contained no direct evidence as to the date or time the mail notice was delivered to the bank or when the debtor actually received the pigs sold on June 10th or 12th.

On cross-motions for summary judgment, the bankruptcy court found that the e-mail notice was insufficient to satisfy the requirements of UCC §9-324(d)(4). It failed to identify Leading Edge Pork, LLC, as the bank’s borrower, nor did it state that Lone Hollow had or expected to acquire a PMSI. On the other hand, the court found that the letter dated June 12, 2009, did satisfy the content requirements of UCC §9-324(d)(4). Because there were genuine issues of material fact as to the timing of the receipt of the notification of the second letter by the bank and the receipt by the debtor of the pigs, the motions for summary judgment were denied. In order to prevail, Lone Hollow had to establish that the bank received the notification before the debtor received the pigs.

Traditionally, PMSI suppliers sent their notices by certified or registered mail and retained the receipt or return card as evidence of the receipt of the notice in the event a conflict would subsequently arise. This remains the best practice. However, because this is the 21st century, some PMSI suppliers send their notices by e-mail. This can be acceptable provided the e-mail contain all of the information required by UCC §9-324(d)(4). By using e-mail or some other form of electronic communication, the PMSI lender should obtain confirmation from all lenders with the prior blanket security interests in livestock that the notice was received. The PMSI lender must retain these electronic records.

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