Security Interests in Farm Products

The article provides a broad overview of some issues facing lenders in perfecting and enforcing security interests in farm products.[1]

A. Attachment and Perfection

The statutory framework underlying security interests and liens in agricultural financing is sometimes subject to confusion among lenders/secured parties as it is governed by Article 9 of Uniform Commercial Code (the “UCC”) as adopted by Virginia, other sections of the Virginia Code and federal law. “Farm products” are “goods” under Virginia’s UCC and Virginia Code Section 8.9A-102 defines “farm products,” to include, among other things, crops, livestock, aquatic goods, supplies used or produced in farming operations, and products of crops or livestock in their manufactured state.[2]

As with other UCC security interests, in order for a creditor to obtain and enforce a security interest in farm products, the security interest must go through the same statutory process for attachment and perfection of security interests in other goods.[3] After the security interest has attached, the creditor needs to “perfect” its security interest in farm products, which in most cases is done by: (i) filing a financing statement; or (ii) taking possession of the collateral.[4] As with other collateral, there are some exceptions, but generally once a creditor’s security interest has attached and been perfected, it has priority over subsequently perfected security interests in the same collateral.It is also worth noting that a perfected security interest in crops growing on real property has priority over a conflicting interest of an encumbrancer or owner of the real property if the debtor has an interest of record in or is in possession of the real property.[5]

B. The FSA Notice Requirements

Once the security interest in the farm products is perfected, lenders must be aware of the Food Security Act (the “FSA”) and the statutory rule under the FSA, that “a buyer who in the ordinary course of business buys a farm product from a seller engaged in farming operations shall take free of a security interest created by the seller, even though the security interest is perfected; and the buyer knows of the existence of such interest.”[6] There is a statutory exception to the buyer taking free of the security interest provided that the secured party/lender provides written notice of the security interest to the buyer. This notice needs to contain: (i) the name and address of the secured party; (ii) the name and address of the person indebted to the secured party; (iii) the social security number, or other approved unique identifier, of the debtor or, in the case of a debtor doing business other than as an individual, the Internal Revenue Service taxpayer identification number, or other approved unique identifier, of such debtor; (iv) a description of the farm products subject to the security interest created by the debtor, including the amount of such products where applicable, crop year, and the name of each county or parish in which the farm products are produced or located; and (v) any payment obligations imposed on the buyer by the secured party as conditions for waiver or release of the security interest.[7] Providing this notice is the best way for a secured party to ensure that it receives the proceeds (or protects its ability to receive the proceeds) from the sale of the farm products.[8]

In order to best protect itself, a lender should also require the borrower[9] to identify all potential purchasers of the farm products at the time the loan is made and the security interest is created.The lender can then provide this list of potential purchasers with notice under the FSA of the security interest and payment obligations on the purchaser (such as payment by joint check) prior to the release of the security interest. Accordingly, while the FSA notice provisions are detailed and specific, where exercised properly, they can ensure payment on the loan when the farm products are sold.

C. Conclusion

When Lenders make loans that may be secured by farm products, it is imperative that those persons negotiating and approving the loans recognize that farm products are atypical and subject to exceptions and rules outside of the UCC.To mitigate risks and insure that it actually receives the intended secured interest in the particular farm products and proceeds thereof, lenders should be informed and educated about borrower’s farming operation and the specific farm products which may serve as collateral. Lenders also need to communicate with borrowers to identify potential purchasers of the farm products and take the necessary steps to ensure that all potential purchasers are given FSA compliant notice of the security interest.Once this is done, arrangements may be implemented with the borrower and the purchaser to ensure that the lender is paid when the farm products are sold.

Please note that this article is not an exhaustive review of the UCC, the FSA or the procedures for obtaining and preserving a perfecting a security interest in farm products and it is not intended as advice for any particular situation. Any questions on procedures, agreements or actions related to security interests in farm products or the UCC or the FSA should be reviewed by the lender’s counsel.

[1] This article does not analyze “agricultural liens” as the revised UCC in Virginia eliminated many of the issues surrounding agricultural liens by requiring that agricultural liens be perfected by filing of a financing statement. Lenders should still ask their counsel about agricultural liens to be certain there are no issues regarding them.

[2] Pursuant to Virginia Code §8.9A-102(34) “farm products” means “goods, other than standing timber, with respect to which the debtor is engaged in farming operation and which are: (A) crops grown, growing, or to be grown, including: (i) crops produced on trees, vines, and bushes; and (ii) aquatic goods produced in aquacultural operations; (B) livestock, born or unborn, including aquatic goods produced in aquacultural operations; (C) supplies used or produced in a farming operation; or (D) products of crops or livestock in their unmanufactured states.”

[3] Attachment requires that first, the debtor must authenticate a security agreement describing the collateral. The security agreement must generally show an intent to grant a security interest in the collateral described therein and describe the farm products in a list or using statutorily defined terms. Second, the creditor must “give value” for attachment to occur. Finally, the debtor must have rights in the collateral (even if it only a partial ownership interest). See Virginia Code §8.9A-203. Please note that Virginia Code §8.9A-203 also provides for a number of nuances and exceptions which may be applicable in a given case.

[4] Virginia Code §8.9A-310.

[5] Virginia Code §8.9A-334.

[6] 7 U.S.C. § 1631(d).

[7] 7 U.S.C. § 1631(e).

[8] There are specific requirements, restrictions and time limitations to the FSA notice requirements and therefore a lender or its counsel should specifically review the applicable provisions of the federal code to ensure that notice is compliant.

[9] A borrower who sells or removes farm products subject to a creditors’ lien, may face criminal liability under Virginia Code Section 18.2-115.