Lenders providing financing secured by farm products must be acquainted with the strictures of the Food Security Act of 1985 (“FSA”). See 7 U.S.C. § 1631. Failure to do say may result in a buyer taking free of the lender’s security interest in farm products.
The FSA protects lenders with a security interest in farm products when their debtors sell the farm products to buyers in ordinary course, by allowing the secured lender to preserve its security interest, notwithstanding the farm products’ sale, in one of two ways. Which of these two methods applies depends on the state in which the farm products are produced.
States may adopt either a direct notice or central filing system to allow secured lenders to provide notice to potential buyers of farm products—produced in the state—regarding their security interest in the farm products. A direct notice system requires the secured party to provide notice to potential buyers of its security interest in the farm products for sale. Failure to do so allows the buyer to take free of the security interest. A central filing system, on the other hand, requires secured parties and buyers to register with the secretary of state, who then compiles a listing of farm products for sale and the respective security interests attached. So long as the seller has filed an Effective Financing Statement (“EFS”) with the secretary of state, providing notice of its interest in the farm products, a subsequent buyer takes subject to the security interest.
The import of a farm product’s location becomes paramount where some states are direct notice states, i.e. Washington, and others are central filing states, i.e. Idaho and Oregon. A secured party and buyer have different obligations in each. Further, although the FSA does not supplant the perfection process of security interests under Article 9 of the UCC, some states, like Idaho, have a special UCC-1 form for farm products, called a UCC-1F. In Idaho a UCC-1F doubles as the requisite filing under Article 9 and Idaho’s central filing system implementing the FSA. Problems may arise however where a UCC-1F is filed based on the location of the debtor (as required under Article 9), but not where the farm products are produced in another jurisdiction. In such a circumstance the FSA may operate to allow a buyer of the farm products to take free of the security interest. Therefore, it is essential to understand where farm products are produced to ensure all measures are taken to fully protect one’s security interest therein.
Published opinions interpreting the FSA are rare. However, the Colorado Court of Appeals has provided insight on how to determine where a farm product is produced for purposes of the FSA. See Great Plains National Bank v. Mount, 280 P.3d 670 (Colo. Ct. App. 2012). There, a Colorado Buyer agreed to purchase 206 cows from an Oklahoma Debtor. The Debtor’s Bank had previously filed a UCC-1 and EFS in Oklahoma, a central filing state. However, the cattle were essentially raised in Missouri, a direct notice state, spending only 24 hours in Oklahoma before being shipped to the Buyer in Colorado. The Bank sought to enforce its security interest in the cows purchased by the Buyer. If the cows were produced in Oklahoma, the Bank had properly complied with the FSA and preserved its security interest. However, if the cows were produced in Missouri, the Bank had not properly complied with the FSA, because it did not send notice of its security interest to the Buyer.
The Colorado Court concluded that “produced” as used in the FSA was intended by Congress to mean “the location where farm products are furnished or made available for commerce,” in other words, “the state in which a sale of farm products takes place.” Because the cows were furnished for sale in Oklahoma, that is where they were produced, and the Bank prevailed. The Court based its reasoning on the premise that to hold otherwise would put a huge burden on buyers of farm products to investigate the state in which farm products originated instead of simply relying on the state in which the farm products were being sold. Such a burden would be inconsistent with the policy of the FSA.
While a Colorado state court’s interpretation of a federal statute is not binding on other jurisdictions, the Mount Court’s opinion is one of few interpreting the FSA, and provides helpful guidance to a secured party trying to best protect its interest in farm products. It stands for the proposition that a secured party should comply with the FSA pursuant to the state’s system in which the farm products are being offered for sale. However, until the statute is clarified, a secured party might consider complying with the FSA in all of the states the farm products have been located.
For more information contact our Banking group or call 208.344.6000