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ComplianceFinanceMarch 02, 2021

Bank's perfected security interest in crops prevails over landlord's agricultural lien

By: Michael Weissman, Of Counsel at Levin Ginsburg

Bank of Kremlin v. Ara, L.P., 2020 OK CIV APP 30, 469 P.3d 724 (Div. One, June 17, 2020) was a dispute between the bank, with a security interest in the crops of a borrower, and the landlord who had leased the farmland to the borrower. When the borrower defaulted on his farm lease, the landlord took possession of the property, cultivated the existing crops, and harvested and sold them. That motivated the bank to assert its security interest in the crops and the proceeds of their sale was superior to that of the landlord. The Oklahoma Court of Civil Appeals ruled in favor of the bank.

UCC filings should be made prior to, or contemporaneously with, the funding of the loan, and since the borrower is cultivating crops on leased farmland, the lender should become familiar with how agricultural liens are attached under local law and obtain a landlord’s waiver at the time of funding.  

The case facts

This was the background. Ara LP leased farmland it owned to Keith D. Milacek on July 1, 2010. After that, Milacek was granted loans by Bank of Kremlin; Milacek secured the indebtedness with a perfected security interest in the crops he intended to grow.

Milacek defaulted on his farm lease owing about $70,000 due as of December 1, 2016. He passed away on January 18, 2017. Mary Milacek was appointed to represent his estate. Ara LP took possession of the farm on February 6, 2017, giving notice to Bank of Kremlin. After growing the crops on the property, Ara LP sold them and retained the proceeds of sale. 

On November 17, 2018, the bank filed suit against Ara LP claiming the $70,000 in crop proceeds because, at the time of his death, Keith D. Milcek owed the bank $269,619 and the crop proceeds were subject to the bank’s security interest. The sole issue, said the court, was “whether Bank’s interest in the crops had priority over ARALP’s interest.”

The court observed that “The inclusion of agricultural liens within the purview of Article 9 [of the UCC] has given rise to difficulties in determining the rights of creditors and property owners with regard to farm-related financial transactions.” The UCC proposes to gives priority to the holder of a perfected security in crops over an owner of the leased farmland. But in this case, there was an Oklahoma statute that read as follows: “Any rent due for farming land shall be a lien on the crops growing or made on the premises.”

Recognizing that in many agricultural states there could be conflict such as arose in this case, the UCC unequivocally provides that the priority of a holder of a perfected security interest on crops grown on leased farmland takes precedence over any state law that is not consistent with that rule.

At that point, the court made an interesting comment. It said that when drafting the UCC, the draftsmen distinguished between those provisions that relate to both security interests and agricultural liens, and those that mention only security interests. It went to say that the UCC omits agricultural liens when it addresses the methods for attachment of liens. So the UCC is specific about the methods for attaching security interests but is silent on the methods for attachment of agricultural liens. Thus, said the court, it had to look to Oklahoma’s non-UCC law to resolve the priority issue because it had to decide whether ARALP’s agricultural lien had attached. And Oklahoma’s non-UCC law provides that until an affidavit (sworn statement) for attachment and bond have been filed with the appropriate court, the agricultural lien has not attached.

How did the court rule?

The court said, ”In other words, in Oklahoma, the effort to enforce a landlord’s lien on crops for the payment of unpaid rent of farmland occurs upon the filing of an action… Here, ARALP did not file an action for Tenants’ unpaid rent, but instead took possession of the farmland without a court order and cultivated and sold the crops.” It continued saying that there was no dispute about whether the bank had a perfected security interest which meant that “the Bank’s interest was superior to ARALP’s [unattached] agricultural lien” and that “ARALP’s harvest and sale of the crops constituted conversion of Bank’s property.”

What’s the point?

The takeaway from this case is that landlords’ liens on the agricultural property are within the ambit of the UCC with respect to the rules of priority, i.e., “first in time, first in right.” But insofar as whether, in the first place, the agricultural lien has attached, the UCC leaves that to state law to determine. For lenders, it means first, that UCC filings should be made prior to, or contemporaneously with, the funding of the loan, and, second, since the borrower is cultivating crops on leased farmland, the lender should become familiar with how agricultural liens are attached under local law and obtain a landlord’s waiver at the time of funding.

Lien filing can be complex; partner with an expert

Filing liens can be complex; laws are different in each state and county. Partner with an expert who can assist you in navigating the nuances of local and state jurisdictions. Lien Solutions can help you obtain and maintain perfection so you can secure your assets throughout the loan life cycle. Give one of our experts a call at 1-800-833-5778, option 3, to get started today. 

This piece is authored by Michael Weissman, Of Counsel at Levin Ginsburg

Michael L. Weissman is an attorney in Chicago who has served as Executive Vice President and General Counsel of a banking group, as an adjunct professor at a law school, as a FINRA arbitrator, as an educational trainer in the United States and overseas, as chairman of a leading legal educational organization in Illinois, and as an expert witness in commercial lending cases. Weissman is a winner of the 2018 Addis Hull Award of the Illinois Institute for Continuing Legal Education for speaking, writing, and governance. He serves as a consultant to Wolters Kluwer Lien Solutions and The Risk Management Association.