Agricultural Lending in a Troubled Economy
| Publication year | 1987 |
| Pages | 1773 |
1987, October, Pg. 1773. Agricultural Lending in a Troubled Economy
The agricultural crisis which has swept across the country has prompted the federal government, as well as many state governments, to enact "remedial" legislation designed to assist farmers and ranchers. Most of this remedial legislation has drastically and unilaterally altered the relationship between the agricultural lender and its borrower. For example, new homestead exemptions have been created for farmers and ranchers, the right to reclaim and sell machinery and equipment has been significantly altered, and a new Chapter 12 bankruptcy chapter was recently created.(fn1) At the time this remedial legislation was being enacted, critical amendments were made to the state and federal statutes governing the creation, perfection and enforcement of security interests in farm and ranch products.
All agricultural lenders and their counsel should be aware of these new rules since failure to comply can result in a secured lender becoming unperfected and unsecured. In addition, existing legislation is frequently ignored or improperly complied with, resulting in devastating losses for lenders. This article intends to assist counsel in dealing with the ever-changing maze of state and federal legislation affecting agricultural lending.
The Food Security Act of 1985 ("FSA") was signed into law by President Reagan on December 23, 1985, and became effective one year later on December 24, 1986.(fn2) This new legislation contains certain federally mandated filing requirements which drastically alter the "farm products exception" of the Colorado Uniform Commercial Code ("UCC").(fn3) The bill preempts all state statutes pertaining to the perfection or creation of a lien in farm products.(fn4) Accordingly, it is mandatory that the federal statute be complied with; mere reliance on the Colorado UCC will be insufficient.
It has long been the statutory rule in the state of Colorado that a buyer in the ordinary course of business generally takes free and clear of all security interests created in the goods by its seller unless the goods in question are "farm products." A buyer of farm products generally was subject to the security interest, and the lender could enforce its security interest against the purchasers of those products.(fn5)
Exceptions were made for lenders who waived the lien and authorized the sale either through direct waiver or implied waiver, such as "course dealing" or "usage and trade."(fn6) The FSA removes this farm product exception from the UCC and allows a buyer in the ordinary course of business to take free and clear of all lenders' security interests. The only way that a lender can assure that its security interests will be effective against the purchasers of the farm products is to comply with the FSA provisions.
The FSA mandates that each Secretary of State throughout the country will be responsible for the creation and administration of a "certified central filing system" covering all farm products.(fn7) Each lender will be required to file a separate UCC financing statement in this system. The central filing system is intended to give sellers, purchasers and lenders immediate access to borrower information. It should accomplish the following tasks:
1) Organize financing statements according to farm products;
2) For each category of farm products, maintain an alphabetical listing by debtor's last name;
3) Maintain a numerical index according to the social security number of each debtor;
4) Maintain UCC filings geographically by county;
5) Maintain UCC filings by crop year;
6) Maintain a cross-index of all buyers of farm products, including agents and commissioned brokers; and
7) Regularly distribute to each buyer, agent or commissioned broker a copy of the master list of all UCC filings for the farm product or commodity in which that broker deals.(fn8)
If there is a central filing system in existence and the lender has not made a central filing in that system, the lender has no valid lien that can be enforced against the purchaser. To the extent that a central filing system is not in operation as of the effective date of the statute, December 24, 1986, the only option the secured party has is to give direct prenotification to each and every potential purchaser of the farm products annually. Prenotification requires notifying the potential buyer or broker of: (1) the name and address of secured party; (2) name and address of the debtor; (3) social security number of the debtor; and (4) a description of the farm product, location of collateral, and crop year, if applicable.
At this time, the Colorado Secretary of State does not have a central filing system as mandated by the FSA. In fact, because of the complex nature of the filing system, many states have not implemented a certified central filing system. In Colorado, lack of funding and inadequate computer capability appear to be the problem. Thus, the only option that secured lenders in Colorado now have is to directly notify each and every potential purchaser of farm products as to the existence of the lender's lien in those products. Unless the secured party has directly notified each potential purchaser of the products, it has no lien in those products which can be enforced against the ultimate purchaser.
It should be noted that the FSA does not alter the enforceability of a security agreement by a lender directly against a borrower. Improper sale of collateral by a debtor still provides a basis for a breach of contract or conversion claim by the lender. The federal statute only alters the lender's right to pursue the ultimate buyer of the farm products. Lenders should revise present loan documents to strengthen their rights against the borrower by including the following new clauses and covenants:
1. The borrower is required to list, and regularly update, all purchasers of the farm products of the borrower.
Revised UCC-1 financing statements should be utilized so that when the central filing system is created, the lender can comply immediately (suggested forms have been developed by the Colorado Banker's Association). As a matter of business operations, the lender should compile a list of all purchasers of farm products in its area. This may include grain elevators and livestock auction houses in other states, since farm products can easily be transported for sale across state lines. Direct prenotification to all known purchasers or brokers of farm products should be a first priority in the administration of agricultural loans2. The borrower expressly allows the lender to notify directly any and all purchasers of farm products as to the lender's claim of a security interest in those products.
The changes made by the FSA should not be looked upon lightly. The lender frequently is able to recover on an agricultural loan simply because there was a "deep pocket" in the form of a grain elevator or livestock auction house against whom the security interest could be enforced. The lender will not have this ability unless compliance with the FSA has been accomplished.
The enactment of Colorado House Bill ("H.B.") 1284, which was signed into law by former Governor Lamm on April 18, 1986, has been one of the most controversial pieces of state legislation in the agricultural community in quite some time. In fact, substantial revisions and amendments were recently adopted and set forth in Senate Bill ("S.B.") 123, which was signed into law by Governor Romer on July 1, 1987.(fn9) S.B. 123 repeals some, but not all of the provisions of H.B. 1284. Moreover, H.B. 1284 still applies to those real estate foreclosures, UCC court actions, and Forcible Entry and Detainer ("FED") court actions initiated prior to July 1, 1987.(fn10) Accordingly, a working knowledge of H.B. 1284 is still important.(fn11) A basic review and update follows.
As presently structured, H.B. 1284 (as well as S.B. 123) amends Article 9 of the Colorado UCC, the Colorado Real Property Foreclosure and Redemption statutes, and the Colorado FED statute.(fn12) H.B. 1284 has a sunset date of January 31, 1990.
Section 2 of H.B. 1284 amends CRS § 4-9-503, which deals with a secured party's right to take possession of farm and ranch collateral after default. Prior to this amendment, a secured party, unless otherwise agreed to by the parties, had the right upon default to take possession of the collateral without judicial process if no breach of the peace would result from such action. H.B. 1284 changes this rule with respect to collateral which is farm or ranch machinery or equipment, livestock, or feed or inventory held for livestock and used by a debtor farmer or rancher ("Protected Property"). The bill provides the general rule that a secured party may only take possession of Protected Property pursuant to a court order.(fn13) There are three exceptions to this new rule:
1. If there exists clear and convincing evidence that the debtor has vacated or abandoned the Protected Property, a court order is not required.
2. If the debtor voluntarily surrenders the Protected Property to the secured property and waives the provisions of CRS § 4-9-504(6) and (7) (dealing with notice requirements and requirements of sale or contractual...
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