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From Banking and Finance Law Daily, June 1, 2016

Livestock feed seller can’t hog proceeds of collateral sale

By Lisa M. Goolik, J.D.

In response to questions certified by a federal district court, the Supreme Court of Iowa has determined that, in accordance with Iowa law, an agricultural supply dealer’s financing statement only perfects a superpriority lien for feed purchases occurring during the 31 days preceding the filing of the financing statement. Thus, the dealer must file an additional financing statement for quantities of feed sold on credit after the statement is filed. In addition, an agricultural supply dealer with a perfected lien on a farrow-to-finish producer’s herd may assert superpriority lien status to the full extent of the value of feed purchased because the acquisition price of the herd is zero (Oyens Feed & Supply, Inc. v. Primebank, May 27, 2016, Hecht, D.).

Competing claims. The debtor, Crooked Creek Corporation, operated a farrow-to-finish hog operation, raising hogs from birth. Oyens Feed & Supply, Inc., provided the debtor’s sole source of hog feed. The debtor filed for Chapter 12 bankruptcy, and the hogs were sold. The proceeds were deposited in a cash collateral account.

The debtor owes Oyens roughly $342,000 for unpaid feed. Oyens filed financing statements on May 28, 2009, and Aug. 14, 2009, to perfect its lien for the debtor’s feed purchases. The debtor also owed Primebank $1.2 million on two promissory notes, of which approximately $315,000 remains after write-offs and other transactions. Primebank perfected its secured position in 1997 with a standard Article 9 “blanket lien,” which included the debtor’s hogs, and properly renewed its interest in 2002 and 2007.

Oyens asserted that it was entitled to the proceeds of the hogs' sale, contending its lien held superpriority status under Iowa's agricultural supply dealer lien law. The bankruptcy court, however, concluded that to retain superpriority status, Oyens was required to file a financing statement every 31 days in order to maintain perfection of its lien as to feed supplied within the preceding 31 day period. As a result, the court held that Oyens had a superpriority claim for only $156,000—reflecting only the feed delivered in the 31-day periods before its May 28, 2009, and Aug. 14, 2009, financing statements—and an unsecured claim for the remaining $186,000.

On appeal from the bankruptcy court, the district court certified the following question to the Supreme Court of Iowa: “Pursuant to Iowa Code Sec. 570A.4, is an agricultural supply dealer required to file a new financing statement every [31] days in order to maintain perfection of its agricultural supply dealer’s lien as to feed supplied within the preceding [31] day period?” The district court also requested that the court determine whether, under Sec. 570A.5, the “acquisition price” is zero if the livestock are born in the farmer’s facility.

Filing requirements. To perfect an agricultural supply dealer lien, Sec. 570A.4 provides that “the agricultural supply dealer must file a financing statement in the office of the secretary of state as provided in section 554.9308 within thirty-one days after the date that the farmer purchases the agricultural supply.”

Oyens argued that the law does not limit the duration of the lien to 31 days but, instead, limits the retroactive perfection of the lien to 31 days. According to Oyens, by incorporating Section 9-308 of the Iowa Uniform Commercial Code, which provides that agricultural liens are perfected immediately when they become effective, a single financing statement perfects an agricultural supply dealer’s lien for the value of any feed sold after the dealer files a financing statement.

The Supreme Court of Iowa disagreed, stating that, to the extent there is a conflict between chapter 570A and chapter 544, chapter 570A prevails if it requires something more to perfect an agricultural supply dealer’s lien. As a result, the phrase “within thirty-one days after” created a rule that is specific to agricultural supply dealer liens and that modifies the general agricultural lien rule. Thus, the court concluded, an agricultural supply dealer’s financing statement cannot perfect a lien under Sec. 570A.4 for quantities of feed sold on credit after the statement is filed.

Accordingly, Oyens’s filed financing statements could only confer superpriority status for the feed delivered in the 31-day periods before its May 28, 2009, and Aug. 14, 2009, financing statements.

Acquisition price.” Section 570A.5 of Iowa’s agricultural supply dealer lien provisions states that a properly perfected agricultural supply dealer lien in livestock has priority over subsequent liens, as well as priority over an earlier perfected lien or security interest, “to the extent of the difference between the acquisition price of the livestock and the fair market value of the livestock at the time the lien attaches or the sale price of the livestock, whichever is greater.”

Primebank challenged the bankruptcy court’s ruling that the “acquisition price” under Sec. 570A.5 is zero when hogs are born in the facility. Primebank noted that even though the hogs were born at the debtor’s facility, the debtor incurred certain costs associated with ownership of the hogs, such as feed, labor, transportation, facilities depreciation, and utilities.

However, the court agreed with commentators that Sec. 570A.5 allows an agricultural supply dealer with a perfected lien on a farrow-to-finish producer’s herd to assert superpriority to the full extent of the value of feed purchased because animals born and raised in the farmer’s farrow-to-finish operation have no “acquisition price” as that term is used in the section.

The court also noted that Primebank’s interpretation would require detailed and elaborate recordkeeping and accounting of every possible cost, frustrating the “legislature’s intent ‘to encourage a fluid feed market without burdening cooperatives and farmers.’”

The case is No. 15–0806.

Attorneys: Joel D. Vos (Heidman Law Firm, LLP) and Frank Baron (Baron, Sar, Goodwin, Gill & Lohr) for Oyens Feed & Supply, Inc. Scott C. Sandberg (Snell & Wilmer, LLP) and Charles L. Smith (Telpner, Peterson, Smith, Ruesch, Thomas & Simpson, LLP) for Primebank.

Companies: Oyens Feed & Supply, Inc.; Primebank

MainStory: TopStory IowaNews SecuredTransactions StateBankingLaws

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