Lenders are already aware of the many economic risks facing the agricultural economy. Less well known are the legal risks that many lenders face if they have to try to enforce their rights against collateral. Lenders may be surprised to find out that their “priority” liens on a farmer’s operation are not superior to liens from other creditors, especially input suppliers.
The case of Oyens Feed & Supply Co. v. Primebank is a cautionary tale for lenders whose borrowers may be indebted to feed suppliers. The case began after a farmer who operated a farrow-to-finish hog facility declared bankruptcy. The farmer’s primary lender asserted priority liens over all of the farmer’s assets, including his livestock. The farmer’s feed supplier asserted that it had a priority lien up to the value of the feed that the farmer purchased to maintain his livestock.
The case went to the Iowa Supreme Court twice. The parties’ first trip, covered by this blog in 2012, resolved whether the feed supplier’s lien was superior to the bank’s lien. The Iowa Supreme Court concluded that the feed supplier lien had priority to the extent of the value added to the livestock by the feed supplier’s feed. After issuing its decision the Iowa Supreme Court sent the case back to bankruptcy court so the parties could apportion the farmer’s remaining cash between the bank and feed supplier.
The parties, however, were unable to agree how to divide approximately $340,000. The bank asserted that the feed supplier had failed to perfect its lien. The bank claimed that in order for a feed supplier to obtain a priority lien, Iowa Code § 570A.4(2) required feed suppliers to file a financing statement within 31 days after the farmer purchased the feed. The feed supplier had only filed two financing statements. The feed supplier asserted that these two financing statements were sufficient to cover the entire value of the feed sold to the farmer over the course of at least a year.
The Iowa Supreme Court disagreed with the feed supplier. The Iowa Supreme Court ruled that under Iowa law a feed supplier lien only has priority over a bank’s lien for feed sold within 31 days of each financing statement that the feed supplier files. As a result, since the feed supplier only filed two financing statements the feed supplier only had priority over the bank for feed sold to the farmer in the 31 days preceding the filing of each of the financing statements.
The second issue the Iowa Supreme Court decided dealt with the amount of the feed supplier’s lien. Iowa law only gives the feed supplier a lien to the extent of value added by the feed. However, in this case the farmer’s farrow-to-finish operation meant that hogs were born on the farm and raised until they could be sold.
The bank argued that the feed supplier’s lien should not cover the entire value of the hogs. According to the bank there are certain fixed costs that are involved in the “acquisition” of each new hog. For example, the farm had to have buildings for the hogs to live in, so the cost of the buildings, per hog, should be deducted from the value of the feed supplier’s lien.