In 2010 we reported on an unfavorable decision for secured lenders to livestock producers in Iowa issued by the Iowa District Court for Sioux County, Doon Elevator Company v. American State Bank, Case No. LACV022572 (the “Doon Decision”). The Doon Decision allowed 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 to prior secured creditor requirements contained in I.C.A. §570A.2(3). We warned that the Doon reasoning, if eventually accepted by the Iowa Supreme Court, could have serious consequences to lenders who provide secured financing to Iowa livestock producers.
Doon was never appealed, but a series of later cases began to address the same priority issue with mixed results – some favoring lenders and others agricultural suppliers. On December 30, 2011, the Iowa Supreme Court settled the dispute with its decision in Oyens Feed and Supply, Inc. v. Primebank. Unfortunately for the ag lenders, the decision did not favor the secured lender. The Court ruled that the hidden lien of an agricultural supply dealer could prime a pre-existing perfected security interest in a producer’s livestock without the feed supplier providing a certified request to the secured creditor under I.C.A. § 570A.2(3). The only limitation on the agricultural supplier’s priming right was that the value of its lien was limited to the difference between (a) the acquisition price of the livestock and (b) the value of the livestock at the time the supplier’s lien attaches or the sales price of the livestock, whichever is greater. As discussed in greater detail below, this decision has wide ranging effects on ag lenders which finance livestock producers in Iowa.
The Facts in Oyens Feed & Supply
The issue in Oyens Feed & Supply was the competing rights to the proceeds upon the sale of hogs as between Oyens, a feed supplier to the producer, and Primebank, a lender which admittedly held a prior perfected UCC-1 Article 9 security interest in the producer’s livestock. Oyens sold feed on credit and properly perfected an agricultural supply dealer lien under I.C.A. § 570A.1 et. seq., on the producer’s hogs. However, Oyens did not provide the certified request to Primebank, the secured lender, as provided by I.C.A. § 570A.2(1). Accordingly, Primebank argued it had an affirmative defense and superior priority over Oyens’ ag-supply lien under I.C.A. § 570A.2(3). Oyens countered that the certified notice requirement was inapplicable because, notwithstanding the language of I.C.A. § 570A.2(3), because the provisions of I.C.A. § 570A.5(3) controlled and unlike I.C.A. § 570A.5(2) did not require the certified notice for a feed supplier to obtain priority. Therefore, Oyens argued the Iowa legislature intended to provide feed suppliers with priority notwithstanding the affirmative defense provided to lenders against other agricultural supplier under I.C.A. §570A.2(3).
The Supreme Court’s Decision
The Iowa Supreme Court construed the statute and found Oyens’ interpretation more convincing. The Court relied heavily on the express exclusion in I.C.A. § 570A.5(2) of the notice requirement of § 570A.2(3), and the lack of a similar reference in the feed supplier provisions of I.C.A. § 570A.5(3). Based on this discrepancy, The Court, found that reading § 570A.5 to require a § 570A.2(3) notice would make the exception to the notice requirement in § 570A.5(3) “mere surplusage”. The Court concluded that the Iowa legislature did not intend such a result, but intended to give feed suppliers a superior hidden lien with priority over all other security interests and lien claims regardless of notice to prior perfected secured creditors with Article 9 security interests.
The Supreme Court’s Decision In Oyens Feed & Supply Challenges Secured Lenders
Oyens is now the law of the land in Iowa with the impact creating a wide range of risks to secured lenders which finance livestock production operations. Absent express subordination agreements between such lenders and the producer’s feed suppliers, the feed suppliers will generally be entitled to be paid out of the proceeds of the livestock’s sale ahead of the lender. The lender’s priority is limited to what will routinely be the relatively small “acquisition price” of the livestock. This provides limited protection in cases in which the livestock is for example purchased as feeder pigs or weaned heifers and steers for a set sum, but causes real issues in a farrow to finish or cow-calf operation in which there is arguably no “acquisition price” for the hogs and calves and therefore potentially no value available to the prior Article 9 security interest holder ahead of the feed supplier. In such cases, Iowa livestock lenders will need to be careful to confirm the feed provided to their collateral is fully paid for by the producer or other appropriate measures are taken to protect their interests.
One point not addressed in Oyens that bears note is that the priority granted agricultural suppliers is available only to suppliers who properly perfect their liens. To perfect an agricultural supplier must file a financing statement with the Secretary of State “within 31 days after the date the farmer purchases the agricultural supply.” I.C.A. § 570.4(2). The United States Bankruptcy Court for the Northern District of Iowa in In re: Shulista, Bankr. No. 10-00019 has interpreted this to provide protections only for feed purchased 31 days prior to the filing of the financing statement, and to require additional financing statement filings for each additional 31 day period.
For Further Information
If you have questions regarding this Alert or the issues raised by the Iowa Supreme Court’s decision 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. Bothe
James G. Powers
Ronald L. Comes
Douglas E. Quinn
James J. Niemeier
Michael T. Eversden
Jason D. Benson
Robert P. Diederich
Lauren R. Cole