Banking and Finance Law Daily Wrap Up, SECURED TRANSACTIONS—Idaho Sup. Ct.: Agricultural commodity lien did not extend to livestock, (Jan 27, 2014)

By Lisa M. Goolik, J.D.

In accordance with the plain language of Idaho’s agricultural commodity dealer lien law, agricultural commodity dealers that supplied feed for the maintenance of a debtor’s dairy cows did not have a security interest in the debtor’s cows that consumed the encumbered feed because the dealers’ liens did not extend to livestock, the Idaho Supreme Court has held. As a result, a bank with a perfected security interest in the debtor’s cows was entitled to the proceeds from the sale of its collateral (Farmers National Bank v. Green River Dairy, LLC, Jan. 24, 2014, Horton, Justice).

Background. The bank, Farmers National Bank, made 10 loans to the debtor, Green River Dairy, LLC, to support the debtor’s dairy operations. The debtor granted the bank a security interest in its dairy cows, and the bank filed a UCC-1F, farm products financing statement, with the Idaho Secretary of State.

Four dealers sold hay and wheat product to the debtor on credit, as feed for the debtor’s cows. Each dealer filed lien notices with the Idaho Secretary of State pursuant to Idaho’s agricultural commodity dealer lien law.

After the debtor defaulted on its loans with the bank, the bank took possession of its collateral and sold the dairy cows at an auction for $211,957.58. Despite the bank’s perfected security interest, the commodities dealers also claimed an interest the proceeds of the auction because the dairy cows had consumed agricultural products sold by the dealers.

The bank filed an action seeking a declaration: (1) of the respective priority rights in the proceeds of sale; (2) that the bank’s security interest in the collateral was properly perfected and had first priority in the debtor’s dairy cows; and (3) that liens created pursuant to Idaho’s agricultural commodity dealer lien law in commodity sales do not extend to the dairy cows that consume the agricultural products subject to the lien.

Agricultural products. Section 45-1802 of Idaho’s agricultural commodity dealer lien law provides that an agricultural commodity producer or dealer who sells an agricultural product has a lien on the agricultural product or the proceeds of the sale of the agricultural product. According to the second sentence of the section, the lien attaches “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.” The dealers argued that this second sentence unambiguously extends an agricultural lien in an agricultural product to livestock that consume the agricultural product.

The Idaho Supreme Court disagreed, concluding that the statute was not ambiguous, and the lien does not extend to the livestock that consume encumbered agricultural products. The plain language of the statute extends the lien to agricultural products and proceeds from the sale of agricultural products. The term “agricultural product,” as defined by sec. 45-1801 of the law, does not include livestock. Thus, the plain language of the law did not provide any basis for a commodity producer or dealer to maintain a lien in livestock because the lien rights extend only to agricultural products and the proceeds of the sale of agricultural products.

Moreover, the second sentence of the section did not expand the scope of the agricultural lien but, rather, clarifies that the lien will attach regardless of whether the purchaser uses the agricultural product to increase the value of his livestock or simply maintain their value, the court noted.

Accordingly, the court concluded that the dealers’ liens did not extend to the debtor’s dairy cows, and the bank was entitled to the proceeds of its sale.

The case number is No. 40101.

Attorneys: John Stephen Ritchie (Coleman, Ritchie &Cluff) for Farmers National Bank. Andrew Benjamin Wright (Wright Brothers Law Office, PLLC) for Ernest Daniel Carter and Jack McCall. Gery Edson (Gery W. Edson, P.A.) for Hull Farms, Inc. Andrew Benjamin Wright (Wright Brothers Law Office, PLLC) for Ernest Daniel Carter and Jack McCall.

Companies: Farmers National Bank; Green River Dairy, LLC; Hull Farms, Inc.

LitigationEnforcement: IdahoNews SecuredTransactions