The U.C.C. and Perfection Issues Relating to Farm Products

The Uniform Commercial Code (the U.C.C.), first proposed in 1952, is designed to harmonize the various state laws dealing with commercial transactions. To date, the U.C.C. has been adopted in all fifty states. Article 9 of the U.C.C. governs the creation of security interests in personal property that is pledged in exchange for debt. Primarily, Article 9 covers the creation of an enforceable security interest, referred to as attachment, the legal process of notification of a security interest to other creditors, known as perfection, the priority among secured creditors over claims to collateral, and the secured creditor's remedies for failure of the debtor to honor its obligations.

Various state laws govern the creation and enforcement of security interests in farm products, as well as the priority of agricultural liens. The complex interplay of the Uniform Commercial Code as adopted among the states, and federal law relating to the perfection and priority of security interests in agricultural products, has resulted in a variety of unintended consequences. First, the U.C.C.'s Article 9 agricultural lien provisions, primarily the rules defining farm products and agricultural liens, create some confusion when determining the U.C.C.'s applicability to agricultural liens when dealing with secured parties, debtors, and collateral. Second, Article 9's priority rules with respect to agricultural liens are subject to state lien statutes.

These state lien statutes, in turn, contain their own priority rules and opt-out clauses with respect to priority under the U.C.C. In many situations, it is still unclear whether lien statute priority provisions override Article 9's priority rules. Historically, agricultural liens were created by state legislatures to protect specific types of creditors. In general terms, agricultural liens are designed to protect those who supply real estate (e.g., landlords), services (e.g., veterinarians), or goods (e.g., feed sellers) on credit to farmers in furtherance of crop or livestock production. Agricultural liens, similar to security interests, are designed to give creditors the ability to claim farm products in order to recoup payment from a defaulting debtor.

Contrary to the purpose of the U.C.C., the failure to include statutory liens under Article 9 has resulted in a great variance from jurisdiction to jurisdiction when it comes to matters relating to the creation, enforcement, perfection, and priority in agricultural liens. Georgia agricultural lien statutes are often used throughout this Article as examples. This Article recognizes that the process for the perfection and the establishment of priority in security interests in farm products is not always clear, because the current legal regime occasionally results in uncertainty in the perfection and priority process for the related creditors and debtors. The first part of this Article will summarize the U.C.C. and federal law framework for perfecting and enforcing a security interest in agricultural products.

The second part of this Article will analyze the Chapter 12 bankruptcy issues that result from the definition of farm products and farming operations, the analysis for when farm products become inventory for purposes of Article 9, and whether government entitlement payouts to farmer-debtors are reachable by secured creditors. Next, this Article will examine the issues facing secured creditors with respect to establishing the priority between agricultural liens and Article 9 security interests. Finally, this Article will review the current status of recent cases addressing these issues.