The Idaho Supreme Court recently has been called upon to decide two cases that could have important implications for agricultural lenders. The first is already decided; the second has been briefed and will likely be decided this summer.
Cows Gobble Up Commodity Lien
In Farmer’s National Bank v. Green River Dairy, LLC, 2014 WL 268643 (Jan. 24, 2014), the Court held that an agricultural commodity lien on diary feed did not extend to the livestock that eventually consumed the feed.
In Green River, Farmer’s National Bank (“Bank”) held a properly attached and perfected security interest in the dairy cows of Green River Dairy (“Dairy”). Certain commodity sellers (“Feed Providers”) sold hay and wheat products to Dairy for use as feed. Dairy defaulted on its payments to Bank. Bank foreclosed on the cows and sold them at auction. Bank and the Feed Providers each claimed a priority interest in the proceeds of the sale.
Bank claimed priority pursuant to general U.C.C. Article 9 principles. See Idaho Code § 28-9-101, et. seq. According to such principles, conflicting security interests and liens generally rank “according to priority in time of filing or perfection,” and a prior perfected security interest has priority over a conflicting unperfected interest. See Idaho Code § 28-9-322.
The Feed Providers, on the other hand, relied on a special statutory lien enacted to protect “agricultural product” producers and dealers. See Idaho Code § 45-1802. Pursuant to that section, one who sells or delivers agricultural product holds a first priority lien in the agricultural product and the proceeds of its sale. The statute provides that “the lien created in this chapter may attach regardless of whether the purchaser uses the agricultural product purchased to increase the value of his livestock or whether he uses the agricultural product purchased to maintain the value, health or status of his livestock without actually increasing the value of his agricultural product.” Id. The district court construed this sentence to mean that the commodity lien continued in the agricultural product after it was consumed, and attached to the livestock that consumed the product.
The Supreme Court disagreed. It noted that, pursuant to the statute, the lien only applies to “agricultural products” or the proceeds of the sale of such products. Dairy cows are not included within the statutory definition of agricultural products, and are not proceeds of such products. Thus, the Supreme Court held that the Feed Providers’ lien could not attach to the livestock. Their lien was extinguished when the feed was consumed. Accordingly, Bank had priority in the proceeds of the sale of the cows.
Agisters Lien Takes Priority Over Prior Perfected Security Interest
In a related case arising from the same troubled Dairy, the Idaho Supreme Court is considering whether a statutory “agisters’ lien” takes priority over a prior perfected security interest. See J&M Cattle Co., LLC v. Farmers Nat’l Bank, Case No. CV-2012-3020 (Idaho). As described above, Bank claims first priority in the proceeds of the sale of the dairy cows, pursuant to Idaho Code § 28-9-322, which generally grants first priority to a perfected security interest, subject to exceptions.
Bank faces a competing claim from J&M Cattle Company, LLC (“J&M”), a third party dairy servicer that cared for, boarded and fed Dairy’s cattle. Companies that provide such services are often referred to as “agisters”. J&M asserts a possessory agister’s lien that, it claims, trumps Bank’s prior perfected security interest. J&M and Dairy agreed that the proceeds from the cow sale would be held in escrow while they sought a determination from the Supreme Court concerning their relative priority.
Idaho law provides a first priority lien for agisters. That lien is derived from two sections of the Idaho Code. First, Idaho Code § 28-9-333 provides that “a possessory lien on goods has priority over a security interest in the goods unless the lien is created by a statute that expressly provides otherwise.” Thus, an agister’s lien may take priority over a prior security interest if it is (1) a possessory lien in goods, and (2) the statute creating the agister’s lien does not expressly provide otherwise.
The parties in J&M Cattle appear to concede that J&M’s lien is a possessory interest in goods, satisfying the first prong. They dispute, however, whether the agister’s lien statute “expressly provides” that an agister’s lien does not have priority over a competing security interest. That is, unless the agister’s lien statute expressly provides otherwise, the agister’s lien takes priority over Bank’s perfected secured security interest.
The Court’s decision will therefore turn on its construction of the agisters’ lien statute, Idaho Code § 45-805. It consists of three subjections. Generally speaking, subsection (a) describes how one who services personal property of another, may provide prior notice to security interest holders, and if the service provider is not paid, he may sell the property and take first priority in the proceeds. Subsection (b) grants a similar right specifically to agisters – those who feed, board, or care for livestock. Unlike subsection (a), however, subsection (b) is silent regarding the priority of such a lien. Finally, subsection (c) provides, in relevant part, as follows:
The proceeds of the sale must be applied to the discharge of any prior perfected security interest, the lien created by this section and costs; the remainder, if any, must be paid over to the owner.
Subsection (c) is the key disputed provision. In short, Bank will likely prevail – and perfected security interests will trump agister’s liens under Idaho law – if the Supreme Court concludes that this clause “expressly provides” that agister’s liens do not have priority over prior security interests.
The parties, of course, disagree about the meaning of subsection (c). Bank claims it is an express subordination of agister’s liens to prior security interests, because the drafters of subsection (c) must have intended to list liens in order of priority, and prior perfected security interests are listed first. J&M argues that subsection (c) does not “expressly provide” for subordination of the agister’s lien. Instead, Bank’s interpretation relies on an inference that the liens are listed in order of priority. Thus, according to J&M, an agister’s possessory lien takes priority by default pursuant to § 28-9-333.
Secured lenders can take some comfort, based on the Green River decision, that a prior perfected security interest in dairy cows will not be impaired by another party’s provision of feed or other agricultural products to the dairy. That same security interest, however, may come under attack from an agister who cares for the dairy’s cows, depending on the outcome of the J&M Cattle case. Accordingly, secured lenders should be aware of a borrower’s practices with respect to the use of agisters, and may wish to contractually limit or prohibit such use until the law is settled.