§ 9.5 - Crop Secured Transactions

• Jurisdiction: Washington

§9.5 CROP SECURED TRANSACTIONS

Secured transactions involving crops may occur in relation to transfers of interests in the land or transfers of interest in the crops only, as discussed below.

(1) Consensual security interests in real property

The effects of consensual real property security interests, including mortgages, deeds of trust, and real estate contracts, are discussed below.

(a) Mortgages and deeds of trust

A real property mortgage gives a lien on everything that would be conveyed by a deed to the land, including the growing crops. 21A AM. JUR. 2D Crops §18 (2008). Crops belong to mortgagors who remain in possession of the mortgaged premises and grow and harvest the crops before foreclosure. Id. Until mortgagors lose possession, they may harvest and pass good title to the crops even though they have in the real property mortgage pledged the crops, rents, issues, and profits. Id.

The problem of priorities to unsevered crops as between a real property mortgage and a later crop mortgage, lien, or security agreement creating a security interest in crops does not appear to be fully resolved. See §9.5(2)(b) below.

The general rule is that a purchaser at a foreclosure sale under a real property mortgage acquires the growing crop with the mortgaged land. 21A AM. JUR. 2D Crops §19 (2008). The rights of subsequent third parties claiming through the mortgagor are cut off. Id. This usually is true as to tenants of the mortgagor and purchasers of the land from the mortgagor, who take subject to the mortgage. 21A AM. JUR. 2D Crops §§19, 22 (2 If the real property mortgagor or a tenant remains in possession after the sale, either by permission of the foreclosure sale purchaser or through a statutory right of possession during redemption, the purchaser's rights in the crop may be lost. 21A AM. JUR. 2D Crops §21 (2008).

In Washington, by statute, the mortgagor is entitled to retain possession of farm land during the 12-month period of redemption. RCW 6.23.110. The statute has been held to entitle the mortgagor, compared with the purchaser at a foreclosure sale, to the unharvested crops that remain on the mortgaged premises but mature during the redemption period. McNulty v. Dean, 154 Wash. 110, 281 P. 9 (1929).

After their rights to the land are terminated, real property mortgagors may still take their personal property, including harvested crops. Ray A. Brown, THE LAW OF PERSONAL PROPERTY §17.2 (3d ed. 1975).

Growing crops sold or mortgaged by mortgagors in possession have in some states been treated as constructively severed and awarded to the purchasers or crop mortgagees against the purchasers of the land who claim under earlier real property mortgages. In other states, it is held to the contrary on the ground that mortgagors could give no greater rights than they possessed. 21A AM. JUR. 2D Crops §23 (2008).

(b) Real estate contracts

The general rule that title to unsevered crops passes with the land also applies to sales on real estate contracts. Miller v. Smith, 119 Wash. 163, 205 P. 386 (1922); 21A AM. JUR. 2D Crops §14 (2008). A purchaser, however, has no right to crops that mature and are harvested before the purchaser is entitled to possession under the contract. 21A AM. JUR. 2D Crops §14 (2008). However, the purchaser is entitled to crops harvested while the seller wrongfully withholds possession. Miller, 119 Wash. 163.

Until an option to purchase is exercised, the owner in possession has the right to crops growing on the land. In re Estate of Niehenke, 117 Wn.2d 631, 645, 818 P.2d 1324 (1991); 21A AM. JUR. 2D Crops §14 (2008).

Purchasers in possession, as occupiers of the land, are entitled to all crops harvested while they retain possession. Loudon v. Cooper, 3 Wn.2d 229, 100 P.2d 42 (1940); Lynch v. Sprague Roller Mills, 51 Wash. 535, 99 P. 578 (1909). The right of purchasers in possession to growing crops has been held subject to attachment as real property. State ex rel. Oatey Orchard Co. v. Superior Court, 154 Wash. 10, 280 P. 350 (1929).

After a purchaser takes possession, the seller ordinarily has no interest in crops grown on the land and cannot maintain an action for conversion against a buyer of the crop from the purchaser. Loudon, 3 Wn.2d 229. This is so even when payments under the contract are to be made from the proceeds of crops grown on the land. Lynch, 51 Wash. 535.

Forfeiture of real estate contracts does not necessarily divest the land purchaser of the right to growing crops. Purchasers in possession are entitled to crops that they harvest on the theory that title to the crops follows possession, not merely the right to possession. Churchill v. Ackerman, 22 Wash. 227, 60 P. 406 (1900); 21A AM. JUR. 2D Crops §15 (2008). But if a seller recovers possession before the crop is harvested, the purchaser and those claiming under the purchaser may lose their rights to the crop. Union Farm Land Co. v. Isaacs, 106 Wash. 168, 174, 179 P. 84 (1919); 21A AM. JUR. 2D Crops §15 (2008).

Adoption of the Uniform Commercial Code in Washington may, in some cases, preclude loss of the purchaser's interest in the crop. In Hecomovich v. Nielsen, 10 Wn.App. 563, 518 P.2d 1081, review denied, 83 Wn.2d 1012 (1974), the drafters of a real estate contract failed to reserve title to personal property. Consequently, the personal property vested in the purchaser when the purchaser went into possession under the real estate contract. Unless otherwise explicitly agreed by the parties, RCW 62A.2-401(2) causes title to personal property to vest in the purchaser at the time and place at which performance is completed by the seller. In this case, title to the personalty vested in the purchaser at the time the goods were physically delivered. Consequently, after forfeiture, title to the personal property was confirmed in the purchaser. If the alleged personal property is growing crops, it is not clear that the rule of Hecomovich will control.

Practice Tip: Some commonly used real estate contract forms make no provision for crops in case of forfeiture. When handling transactions involving crops, be sure to describe any presently growing crops and make sure that title to them is explicitly reserved if that is intended. Security interests in crops (both present and future) also can be created in the real estate contract. Further, review the contract to determine whether disposition of the crop on forfeiture is adequately covered.

Sellers who have forfeited real estate contracts but are unable to regain possession may protect their rights to the growing crops by seeking and obtaining appropriate injunctive relief. See, e.g., Short v. Short, 180 Wash. 514, 40 P.2d 752 (1935) (seller was held entitled to the crop regardless of delays encountered in the recovery of actual possession of the land until after harvest).

Practice Tip: In the event of forfeiture, if recovery of possession is delayed, it may be advisable, regardless of the contract language to obtain injunctive relief to protect the seller's interest in the growing crop.

(2) Consensual security interests in crops—U.C.C. Article 9

Article 9 of the Washington Uniform Commercial Code, Chapter 62A.9A RCW, governs the creation of security interests in goods. See RCW 62A.9A-109. "Goods" include growing crops. RCW 62A.9A-102 (44). The term "crops" is not specifically defined in the U.C.C. However, the distinction between natural and industrial crops has been abolished. 13 Neil E. Harl, AGRICULTURAL LAW §118.02[2] (Dec. 1998).

(a) Attachment

Under the original version of RCW 62A.9-203 (repealed 2000), adopted in 1965, the debtor created an enforceable security interest in crops by signing a security agreement describing both the crops and land on which they were growing or to be grown. Former RCW 62A.9-203(1)(b) (repealed 2000). "[A] security interest cannot attach until there is agreement...that it attach and value is given and the debtor has rights in the collateral." Presently, for a security interest to attach, the security agreement must only be "authenticated" instead of executed; however, all other conditions of attachment remain unchanged. RCW 62A.9A-203. Attachment occurs only when crops are planted or otherwise became growing crops, as this is when the debtor is deemed to have rights in the collateral. RCW 62A.9A-203(b)(2).

In 1981 the statute was amended, Laws of 1981, ch. 41, §12 (eff. June 30, 1982), to eliminate the requirement that the security agreement contain a description of the land on which the crops were grown. RCW 62A.9-203(1)(a) (repealed 2000). Although this statute was amended again in 1985 and 2000, the current version of the code still does not require that a security agreement contain a description of the land on which the crops are grown. RCW 62A.9A-203.

(b) Perfection

Priority of competing security interests in crops is governed by RCW 60.11.050 and RCW 62A.9A-322. If all interests are unperfected, then the order of attachment of the security interests generally determines priority. RCW 62A.9A-322(a)(3).

As a general rule, a security interest is perfected by filing a financing statement with the appropriate governmental agency. RCW 62A.9A-310. RCW 62A.9A-501(a)provides that the creditor must file a financing statement centrally with the Department of Licensing to perfect a security interest in all cases (including crops) except timber to be cut, minerals, or certain accounts, or when the financing statement is intended as a fixture filing.

Under RCW 62A.9A-502, a financing statement covering crops need not contain a description of the land. The Washington Comments to the U.C.C. indicate that, because central filing with the Department of Licensing is required to perfect a security interest in crops growing or to be grown, such a filing will be effective against all crops of the debtor located in the state. Therefore, there is...