Iowa Law Alert: Lender’s Security Interest Held Inferior To Later Perfected Feed Supplier Lien


by Jim Niemeier and Ron Comes

Niemeier, James   Comes, Ronald
jniemeier@mcgrathnorth.com
rcomes@mcgrathnorth.com
(402) 341-3070

Lenders engaged in agricultural lending to Iowa livestock producers need to be aware of a recent unpublished decision of the Iowa District Court for Sioux County, Doon Elevator Company v. American State Bank, Case No. LACV022572 (the “Doon Decision”).  The Doon Decision involved the efforts of an elevator that supplied feed to a hog producer to prime a lender’s prior perfected security interest in the producer’s hogs and their proceeds.  The Iowa District Court ruled in favor of the feed supplier despite the fact that the feed supplier had not complied with the notice requirements in I.C.A. §570A.2(3).  As noted below, although Doon is unpublished, and its reasoning is questionable, it nevertheless has the potential to seriously impact lenders who finance Iowa livestock producers.

The Doon Court’s Reasoning

The issue in Doon was the right to the proceeds of the sale of hogs between the elevator and the lender.  The lender financed the hog producer’s operations and claimed a prior perfected security interest on the hog producer’s livestock and its proceeds.  The elevator claimed an agricultural supply dealer lien under I.C.A. § 570A.1 et. seq., and argued that its later perfected ag-supplier lien primed the lender’s prior perfected security interest, relying upon I.C.A. § 570A.5(3).  This section purports to grant an agricultural supply dealer with a lien in livestock feed, a priority in the livestock and its proceeds, over an earlier perfected lien or security interest.  The lender argued the priority granted under I.C.A. § 570A.5(3) did not apply because the elevator failed to provide the certified request and confidentiality waiver required by I.C.A. § 570A.2(1).  The lender, relying on I.C.A. § 570A.2(3), argued this failure by the elevator provided the lender with “an affirmative defense and complete proof of the superior priority” of its security interest over the elevator’s ag-supply lien.  The Doon Court rejected the lender’s argument in favor of the elevator’s argument that feed supplier’s were exempt from the certified request and waiver requirements of I.C.A. § 570.A.2(3).  The Court relied heavily on the express reference in I.C.A. § 570.A.5(2) to 570A.2(3), and the lack of a similar reference in the feed supplier provisions of I.C.A. § 570.A.5(3).  Based on this discrepancy alone, the Court, without the benefit of any legislative history or other evidence, concluded that the Iowa legislature had intended to give feed suppliers a superior priority secret lien over all other security interests and lien claims.

The Issues With The Doon Decision

In our view, the Doon decision suffers from several deficiencies.  First, the Doon Court cites no authority for its determination of legislative intent.  The Court apparently did not review any of the legislative history that accompanied the study bill that led to the amendments to I.C.A. § 570.A.5, upon which the Doon Court based its decision.  If the court had reviewed this history, it would have found that there is no mention of I.C.A. § 570.A.2(3), much less an intent to alter the protections granted financial institutions by this provision.  Instead, the legislative history evidences an attempt by the legislature to maintain the existing priority scheme among ag-liens (which preferred certain types of ag-liens over others), notwithstanding the enactment of revised Article 9 and its generally applicable “first to file” priority system.  This history supports the conclusion that the purpose of the amendment to 570A.5(3) was not to alter the rights of financial institutions claiming non-ag-lien security interests, but only to maintain the priorities among ag-lien claimants that existed under prior law.  Second, the Doon decision ignores the express language of I.C.A. § 570.A.2(3), which covers all agricultural supply liens.  The Court’s interpretation effectively strikes this section out of the code in the case of feed suppliers, which defies settled rules of statutory construction.  Finally, the Doon decision purports to expressly allow a secret superpriority priming lien to spring in favor of feed suppliers and prime prior filed security interests in contravention of the Uniform Commercial Code’s intent to abolish such secret springing liens in favor of a “first in time” notice based priority system.

Conclusion

While Doon is unpublished, subject to appeal at the time of this writing, and from a lower Iowa Court, its reasoning, no matter how suspect, can be expected to be pressed by feed suppliers claiming liens under the Iowa Agricultural Supply lien statutes.  Until Doon is reversed, or a binding higher court decision holds to the contrary, lenders will need to be mindful of the possibility that their security interest in a debtor’s livestock could be primed without any prior notice by an unpaid feed supplier, and should take appropriate measures to protect their interests.

For Further Information

If you have questions regarding this Alert or the issues in Doon, please contact any of the members of the Financial Services Group at McGrath North at (402) 341-3070, or the attorney at McGrath North with whom you are regularly in contact.

Financial Services Group

 Robert J. Boothe    James G. Powers
 Ronald L. Comes    Douglas E. Quinn
 James J. Niemeier    David H. Roe
 Michael T. Eversden    Jason Benson
 Robert P. Diederich
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