Agricultural loan pitfalls for urban lawyers

OK, so you are a sophisticated loan attorney at Metropolis who is comfortable with everything from airplane financing to syndicated loans guaranteed by Macau casinos. Still, you feel a twinge of uncertainty when a business loan needs to be secured by an inventory of wine made from grapes grown in both California and Washington. You know intuitively that any time there are farmers, ranchers or food processors in the mix, whether as a borrower or a provider of the borrower, the underwriting and documentation issues are not uniform. ‘state to state and are made worse by layering. federal laws to protect producers of perishable crops and suppliers of livestock. To check the reality, you’ll sometimes secretly call your law classmate who has strangely returned to Smallville and now represents his only bank.

Your concerns are justified, but can be mitigated by including a handful of specific laws that should spark discussion about the risks associated with documentation and collection. First and foremost, all 50 states have unique privilege statuses designed to protect those who provide goods, services, land, and labor to farmers, ranchers, and food processors. Dealing with competing liens and quantifying risk is nothing new to lenders, but the problem with agricultural liens is that they are often not searchable (no public deposit is required), but they often have the priority of privilege over the Conventional Uniform Commercial Code (UCC) security interests. As a result, the number and size of these liens is unknown, except based on the borrower’s own books and records, which hopefully are up to date and accurate.

To illustrate this risk, let’s go back to the cellar loan that made you uncomfortable. California law grants a producer lien (Cal. Food & Agric. Code 55631-55653) to unpaid grape growers in an unlimited amount without requiring public or searchable filing. The priority of a producer lien is higher than all UCC collateral and other claims except UCC warehouse liens and worker wage claims. Cal. Food & Agric. Code 55633; Frazier Nuts v American AgCredit, 141 Cal. App. 4e 1263 (2006). The Producers Lien not only attaches itself to the wine in the borrower’s inventory, but also to the accounts generated by the sale of wine. Frazier nuts, supra, at p. 1270. Thus, the lender’s $ 10 million revolving line of credit, apparently well secured by wine stocks and accounts valued at $ 20 million, presents a much different risk profile if the borrower does not fully disclose the amount of unpaid producer claims, an amount that varies over the business cycle of the winery. The full amount of these producer privileges will trigger the lender’s unpaid loan if collection remedies are required. Cal. Food & Agric. Code 55634.

Faced with this risk, a reasonable lender could attempt to identify likely holders of producer privileges and obtain a waiver or subordination of statutory privileges. This solution is possible but not infallible; waivers of producer lien laws were struck down on grounds showing that they were not given knowingly and intentionally. See, for example., Silva Farms vs. Wells Fargo Bank (In Re GVF Cannery, 202 BR 140 (ND Cal. 1996).

Before you throw in the towel, however, keep in mind that some legal farming privileges may be searchable due to public filing requirements and are also governed by the “first come” priority rules of the. CDU. See, for example, California’s Dairy Cattle Supply Link, Food & Agric. Code 57401-57414; Link on Agricultural Chemicals & Seeds, Food & Agric. Code 57551-57595; and Poultry and Fish Supply Lien, Food & Agric. Code 57501-57545. These ranking and priority rules are the result of efforts by the UCC Standing Editorial Board to introduce statutory privileges into the UCC, but with partial success. Thus, the lawyer’s analysis includes not only the detection of the potential statutory lien, but also the knowledge of when its risk is manageable or mitigated by the search possibility and UCC type collection priority of the specific lien.

Beyond state lien laws, which in themselves are powerful tools in a priority dispute with a conventional UCC lender, federal laws sometimes provide an even more powerful tool. Producers of perishable fruits and vegetables, as well as suppliers of livestock and poultry, enjoy federal protections under the Perishable Agricultural Products Act (PACA), 7 USC 499, and the Packers and Yards Act. livestock (PASA), 7 USC 181. PACA and PASA does not simply create a lien that competes with a UCC security interest; they can in fact impose a trust on agricultural products, the inventory created from those products and all the receivables and other products generated by those perishables and livestock. 7 USC 499e (c) (2). By placing these proceeds and the proceeds in a trust, any purported security interest in the same assets is limited to the residual value after the beneficiaries of the trust – the unpaid vendors – have been paid. And when assets are subject to a PACA or PASA trust, some people are faced with the legal obligations of a trustee to pay those unpaid beneficiaries, which is a strong incentive for the PACA or PASA trustee to do so to avoid personal liability. See, for example Coosemans v. Gargiulo specialties, 485 F. 3d 701 (2d Cir. 2007).

To quantify the risks posed by these federal statutory trusts, it is necessary to understand the limits of these laws and the defenses common to them. For example, the most common questions for the application and scope of the PACA Trust include: (1) is the product a perishable agricultural product under 7 USC 499a (b) (4); (2) was the recipient of the product authorized or otherwise subject to PACA under 7 USC 499a (b) (6); and (3) has the PACA applicant complied with or waived PACA protections? A common defense to a PACA claim is that payment terms exceeded 30 days. 7 CFR 46.46 (e) (2). There are many other more technical disqualifying terms or loopholes. But once the lender is aware of the possibility of a federal trust being imposed on the collateral in question, the lender cannot rely on the prospect of the trust beneficiary’s mistakes to assess their own collateral when taking. subscription decisions.

In short, a UCC collateral-backed farm loan must be underwritten, sized, and then monitored for the risks posed by both these federal trust laws and a host of non-uniform state farm liens. A study of the agricultural privileges of the State, PACA and PASA are the subject of entire treaties and are beyond the scope of this overview. (Excellent scholarly articles and 50 state inquiries are available from the National Agricultural Law Center, https://nationalaglawcenter.orgThe key for the prudent transactional lawyer is to identify the risks and ask the right questions. Since these legal privileges and federal trusts reflect strong public policies, most of these legal privileges and fiduciary rights cannot be easily removed or avoided, but they can be understood and the associated risks managed. In few commercial areas, this exercise is more difficult than agricultural loans to farmers, ranchers and food processors of all types.

Copyright © 2021, Sheppard Mullin Richter & Hampton LLP.National Law Review, Volume XI, Number 76

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