Lender Priority In Collateral May Be Impacted By Amendments To The Packers And Stockyards Act


by Jim Niemeier & Matt Criswell

The Packers and Stockyards Act of 1921 (the “PSA”) has been protecting livestock producers for roughly a century. It was enacted in response to perceived overreach by packers to try to assure fair competition among those engaged in the business of marketing livestock, meat, and poultry in interstate or foreign commerce (e.g., packers, swine contractors, stockyard owners, market agencies, dealers, and live poultry dealers). Conversely, the PSA does not apply to persons marketing their own livestock or buying livestock for their own stocking or feeding purposes.

One of the focuses of the PSA is the protection of sellers of livestock in transactions with packers, live poultry dealers, sale barns, and similar regulated entities. The PSA requires these covered entities to maintain a custodial trust account from which livestock sellers are paid. If a livestock seller is not paid promptly, the seller may make a claim against this trust.

The enactment of the Consolidated Appropriations Act (the “CAA”), signed in December 2020 and effective February 17, 2021, extended the PSA’s trust protections. The CAA created a Dealer Statutory Trust in favor of livestock sellers who sell to livestock dealers. The trust is a floating trust on livestock and the proceeds in the possession of a livestock dealer. The Dealer Statutory Trust gives unpaid cash sellers a first priority lien on livestock sold to a livestock dealer (and proceeds). As a result, lenders to livestock dealers are at risk of losing priority in their collateral.

A livestock “dealer” is defined as “any person, not a market agency, engaged in the business of buying or selling in commerce livestock, either on his own account or as the employee or agent of the vendor or purchaser.” 7 U.S.C §201(d). “Livestock” includes cattle, sheep, swine, horses, mules, or goats, whether live or dead. Livestock dealers who purchase livestock must provide prompt payment to the livestock seller for the full amount of the purchase price. Payment is “prompt” when made by the close of business the day after transfer of possession. Prompt payment rules do not apply in credit transactions which are discussed below.

For the Dealer Statutory Trust to apply, the livestock must have been purchased in a cash (not credit) sale, and the livestock dealer must purchase $100,000 or more of livestock per year. An unpaid seller waives its rights to the trust’s protections if it extends credit to the defaulting dealer. A cash sale is a sale “in which the seller does not expressly extend credit to the buyer.” The Fifth Circuit has held in In re Gotham Provision Co., “that unless the parties clearly agree in writing to a credit arrangement, the transaction is a cash sale.” To preserve its rights in the assets of the Dealer Statutory Trust, an unpaid seller must give notice within 30 days of the final date for making prompt payment in accordance with the PSA if a payment instrument has not been received or within 15 days of receiving notice that the dealer is in default.

The full scope of the Dealer Statutory Trust will no doubt be subject to litigation that will further define its boundaries. However, lenders should be aware that the Dealer Statutory Trust may impact their priority in collateral for loans made to livestock dealers.

If you have any questions regarding the effects of the Dealer Statutory Trust, please contact one of the members of the Financial Services Group at McGrath North listed below:

 

Jason Benson
jbenson@mcgrathnorth.com
(402) 633-6864

Bob Bothe
rbothe@mcgrathnorth.com
(402) 341-3070

Matt Criswell
mcriswell@mcgrathnorth.com
(402) 633-1490

Rob Diederich
rdiederich@mcgrathnorth.com
(402) 633-9561

Jim Niemeier
jniemeier@mcgrathnorth.com
(402) 341-3070

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