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Victory for Hemp

Victory for Hemp

Hemp Ban Overturned

Hemp is completely legal to grow in Illinois with the proper state license.

Illinois Hemp Ban Overturned in Rural Oakland

The City of Oakland tried to ban hemp farming inside its city limits by claiming authority under the Illinois Municipal Code section regarding Urban Agricultural Areas. Collateral Base represented the prejudiced farmer and had the municipal ordinance tossed by an Illinois Court. Because the City of Oakland is not a home rule community Dillion’s Rule in Illinois barred the City from banning hemp due to its lack of authority. 

Let’s touch on what is a “home rule” or “non-home rule” municipality in Illinois. 39 States follow “Dillion’s Rule” – including Illinois – and it allows municipalities to allow themselves to govern their community with greater detail than the state law applies, but first they must become a “home rule” unit of government.

Q: What is “home rule,” why would a community want to become a home rule unit, and how?

A: In Illinois, home rule is the State constitutional authority of local governments to override the state and self-govern provided the General Assembly did not explicitly limit that power or maintain the exclusive exercise of authority in a specific area, for example the CRTA limited home rule communities from banning home grow cannabis for medical marijuana patients.

Home rule municipalities explicitly have police powers.  Article 7 of the Illinois Constitution regarding home rule provides that they “may exercise any power and perform any function pertaining to its government and affairs including, but not limited to, the power to regulate for the protection of the public health, safety, morals and welfare; to license; to tax; and to incur debt” without specific statutory authority.

 

Hemp Questions?

How home rule is different than non-home rule

Non-home rule basically bows to the state laws, unless the municipality has a statute or enumerated constitutional powers that enable it to create new ordinances. However, a home rule municipality can go beyond state regulations unless expressly pre-empted by statute and can rely on its police powers.  Here we will examine the differences between the language from the Illinois Constitution on home rule units. 

The City of Oakland went beyond its non-home rule powers when making its hemp farming ban.

Ill. Const. Art. 7, § 7 for Non-home Rule Municipalities

  1. to make local improvements by special assessment and to exercise this power jointly with other counties and municipalities, and other classes of units of local government having that power on the effective date of this Constitution unless that power is subsequently denied by law to any such other units of local government;
  2.  by referendum, to adopt, alter or repeal their forms of government provided by law;
  3.  in the case of municipalities, to provide by referendum for their officers, manner of selection and terms of office;
  4.  in the case of counties, to provide for their officers, manner of selection and terms of office as provided in Section 4 of this Article;
  5.  to incur debt except as limited by law and except that debt payable from ad valorem property tax receipts shall mature within 40 years from the time it is incurred; and
  6. to levy or impose additional taxes upon areas within their boundaries in the manner provided by law for the provision of special services to those areas and for the payment of debt incurred in order to provide those special services.

These are the only powers a non-home rule municipality in Illinois may have – so the City of Oakland had to try and find another statute that enabled them to ban hemp farming throughout its city limits.  We will get to that soon, but we note that the City of Oakland then argued that the statutory authority did not matter because they could ban hemp under its police powers – but non-home rule municipalities do NOT have police powers.  As you can see from the powers of the Home Rule Units under Section 6 of  Article 7 of the Illinois Constitution below.

SECTION 6. POWERS OF HOME RULE UNITS

(a) A County which has a chief executive officer elected by the electors of the county and any municipality which has a population of more than 25,000 are home rule units. Other municipalities may elect by referendum to become home rule units. Except as limited by this Section, a home rule unit may exercise any power and perform any function pertaining to its government and affairs including, but not limited to, the power to regulate for the protection of the public health, safety, morals and welfare; to license; to tax; and to incur debt.

We put the police powers in bold.

What are Police Powers in Illinois?

They are: the power to regulate for the protection of the public health, safety, morals and welfare; to license; to tax; and to incur debt.

Urban Agricultural Areas in Illinois

The City of Oakland went to the Illinois Municipal Code and found a restriction against urban agricultural areas that a city can regulate if it bears a direct relationship with the public health, safety or welfare.

The only problem was – this law did not exist until 2019 and Oakland had no urban agricultural area. The City of Oakland tried to find any method they could to ban the hemp farming inside its city limits.  The City argued that its zoning laws from 1968 qualified as an urban agricultural area.  This is not how law works, as statutes do not operate retroactively.

Division 15.4 of the Illinois Municipal Code, titled Municipal Urban Agricultural Areas

The cited statute, 65 ILCS 5/11.4-30(a,) provides in full:

(a) A municipality may not exercise any of its powers to enact ordinances within an urban agricultural area in a manner that would unreasonably restrict or regulate farming practices in contravention of the purposes of this Act unless the restrictions or regulations bear a direct relationship to public health or safety. (Emphasis Added).

The City of Oakland skipped over all the regulatory hurdles to get to its objective of banning hemp.  Illinois amended the Illinois Municipal Code in 2019 to provide for urban agriculture and provided protections and procedures for farmers to establish an “urban agricultural area.” We must review Article 11, Division 15.4 of the Code regarding Municipal Urban Agricultural Areas. The City looked straight past the controlling provisions of the Code in search of its desired ends – banning hemp farming in its City limits. The City skipped right over numerous Sections of the Code that requires prior to adopting an ordinance designating an urban agricultural area, the municipality must:

  1.  receive an application for establishing an urban agricultural area [65 ILCS 5/11-15.4-15(a)]; 
  2. establish an urban agricultural area committee after receiving an application to so establish one [65 ILCS 5/11-15.4-10(a); 
  3. elect a chair for that committee [65 ILCS 5/11-15.4-10(b)]; 
  4. fix a time and place for a public hearing and notify each taxing unit of local government [65 ILCS 5/11-15.4-20]; 
  5. publish notice of this hearing in a newspaper of general circulation for days before such hearing [65 ILCS 5/11-15.4-20]; and 
  6. hold the public hearing; allow any interested person – like the Plaintiffs in this case – to appear and voice objections and comments with respect to the hearing [65 ILCS 5/11-15.4-20].
  7. Only after such public hearing, and in compliance with the procedures as provided in the Code, may the municipality adopt an ordinance establishing and designating an urban agricultural area [65 ILCS 5/11-15.4-20].

The City of Oakland did none of these things in banning hemp farming from its City limits. Instead, it just said that it did, which the court pointed out that it clearly did not and had no ‘urban agricultural area’ to regulate. Therefore, the City’s ban on hemp failed under judicial review.  The City of Oakland may try to appeal the decision, but that won’t fix the problems with its hemp ban. 

Illinois hemp bans may not be possible in home rule municipalities either because of the State’s comprehensive hemp licensing program, but that issue remains for another day.  

Thomas Howard

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Cannabis Lawyer

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Agriculture Bankruptcy & Marshalling of Assets

Agriculture Bankruptcy & Marshalling of Assets

marshaling equitable doctrine

General marshaling principles.

The equitable doctrine of marshaling rests upon the principle that a creditor having two funds to satisfy his debt should not be permitted to arbitrarily prejudice a junior creditor who may resort to only one of the funds. Meyer v. U.S., 375 U.S. 233, 236, 84 S.Ct. 318, 11 L.Ed.2d 293 (1963)

Bankruptcy and Ag Financing Issues

The greatest challenge to any secured transaction arises when a borrower files a proceeding under the Bankruptcy Code. Originally enacted in 1986, Chapter 12 of the Bankruptcy Code provides a procedure by which family farmers, as defined by the Code (see 11 U.S.C. §101(18)), can restructure debt. A permanent extension of Chapter 12 was enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub.L. No. 109-8, 119 Stat. 23. See Terrell Lee Sharp and Bentley J. Bender, Ch. 7, Chapter 12 Bankruptcy Tips and Procedures, CONSUMER BANKRUPTCY PRACTICE (IICLE®, 2011, Supp. 2013).  In 2019, the Family Farmer Relief Act (H.R. 2336) raised the debt limits on Chapter 12 to dramatically expand its application for farmers with debts totally $10 million, up from the previous $4.4 million.

      Whenever a dispute arises in a bankruptcy case as to the lien rights of a lender, an adversary proceeding will be filed to determine the validity, priority, or extent of a lien under Rule 7001(2) of the Federal Rules of Bankruptcy Procedure. Regardless of whether the adversary proceeding is brought by the lender, the debtor, or the trustee, the adversary proceeding provides the vehicle by which all legal and equitable theories may be tested. See, e.g., Illini Bank v. Clark (In re Snyder), 436 B.R. 81 (Bankr. C.D.Ill. 2010).

Problem Ag Loan

the equitable doctrine of marshaling

At issue in Illini Bank was whether the equitable doctrine of marshaling should be applied to the benefit of Tri Ag, Inc., the holder of a junior lien against certain crop proceeds held by the Chapter 12 trustee. Illini Bank, as the assignee of the senior lienholder, wanted the funds for itself and opposed marshaling. In the debtors’ Chapter 12 petition and schedules, Mr. Snyder listed himself as a farmer and Mrs. Snyder listed herself as retired. However, the schedules for real property and personal property listed them as jointly owned.

      Tri Ag’s debt of $123,342 was the oldest. In February 2006, only Mr. Snyder signed a security agreement covering all crops grown on real estate farmers in bankruptcylocated in Logan and Mason Counties. To perfect that security interest, a UCC financing statement naming him as the sole debtor was filed on April 7, 2006.

      Unfortunately for Tri Ag, AG-LAND loaned money to the debtors and, on February 27, 2006, filed a UCC financing statement naming both as debtors. AG-LAND was owed $130,897.05. Thus, AG-LAND had the prior security interest in all growing and harvested crops. In 2007, both debtors borrowed money from Illini Bank and granted it a security interest in crops, machinery, and equipment, among other property. After the bankruptcy case was filed, Illini Bank purchased AG-LAND’s position and thereby leapfrogged from third to first priority on the crop lien. Tri Ag and Illini Bank filed cross-motions for summary judgment on the issue of marshaling an application of the total crop proceeds of $100,520.88.

      The first issue the court decided was that the direct and circumstantial evidence supported the conclusion that Mrs. Snyder owned half of the crop proceeds. Consequently, because she failed to sign the Tri Ag security agreement, Tri Ag acquired and held a lien on only one half of the proceeds.

      Next, the court rejected Illini Bank’s argument that the doctrine of marshaling should fail. Instead, the court held that marshaling could be applied to protect the one-half interest held by Tri Ag. The court noted that if AG-LAND had not sold its claim to the bank, AG-LAND, because it held a first priority lien on crop proceeds and on machinery equipment, would have been substantially oversecured. As a result, Illini Bank took the assigned claims subject to the marshaling rights of Tri-Ag.

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
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Filing Financing Statements and Determining Priority

Filing Financing Statements and Determining Priority

Determining Priority

Determining Priority in Perfected Security Interests

Who’s on first? This question decides what creditor gets paid, and what becomes an unsecured creditor whose best option is to recover pennies on the dollar for the money loaned to a business that purportedly had collateral. Priority to collateral needs determination to see who can seize it in satisfaction of its indebtedness to the business. 

How and Where to File UCC Financing Statements

 

As a general rule, in all secured transactions involving a security agreement executed by the debtor, the debtor authorizes the secured party to file a financing statement describing the collateral. See 810 ILCS 5/9-509(a)(1).  A financing statement perfects the lien in the collateral securing the transaction, often a loan to a business.

The financing statement is filed with the Secretary of State’s office in which the collateral is located, or the lien arose because some collateral is mobile. In addition, Article 9 provides that a person holding an agricultural lien that arises by operation of law and requires no written agreement may file a financing statement without consent provided the financing statement covers “only collateral in which the person holds an agricultural lien.” 810 ILCS 5/9-509(a)(2).

UCC Financing Statement Filing

Problem Ag Loan

UCC Financing Statement Illinois Example

UCC Financing Statement Illinois

A UCC 1 in Illinois is common knowledge for commercial bankers and you can find a copy of the fillable PDF form LINKED HERE.

Description of Collateral for Perfection of UCC Lien

The financing statement does not need to include the legal description of leased real estate as a condition of perfection. Article 9 only requires this description only for “as-extracted collateral or timber to be cut.” 810 ILCS 5/9-502(b). “As-extracted collateral” means oil, gas, or other minerals that are subject to a security interest that is created by a debtor having an interest in the minerals before extraction and attaches to the minerals as extracted. 810 ILCS 5/9-102(a)(6). However, a legal description may be appropriate as an indication of “the collateral covered by the financing statement.” 810 ILCS 5/9-502(a)(3). One example is the landlord’s lien on crops growing on specific acreage. When the debtor is a tenant farmer that does not have a record interest in the real estate, counsel also must provide the name of the record owner. 810 ILCS 5/9-502(b)(4).

With a few exceptions, all financing statements are required to be filed in the office of the Secretary of State. 810 ILCS 5/9-501(a). The law governing perfection of priority of security interests is generally determined by the location of the debtor. 810 ILCS 5/9-301. For agricultural liens, the law governing priority is the local law of the jurisdiction where the farm products are located. 810 ILCS 5/9-302.

The debtor’s location depends on how the debtor is conducting the farm business. When a debtor is an individual, he or she is located at the individual’s principal residence. When the debtor is a non-registered organization, such as a general partnership, it is located at its place of business or its chief executive office if it has more than one place of business. 810 ILCS 5/9-307(b). However, when the debtor is an organization that is organized under state law, like a corporation or a limited liability company, it is located in the state where it is registered. 810 ILCS 5/9-307(e). The failure to file in the proper jurisdiction or to otherwise fail to satisfy the specific requirements for completing and filing the financing statement can be fatal. See, e.g., Duesterhaus Fertilizer, Inc. v. Capital Crossing Bank (In re Duesterhaus Fertilizer, Inc.), 347 B.R. 646 (Bankr. C.D.Ill. 2006).

Priorities: Which Agricultural Lien Wins?

In a conflict between security interests and agricultural liens in the same collateral, priority generally dates from the earlier of the time the filing covering the collateral is first made or the security interest or agricultural lien is first perfected. See 810 ILCS 5/9-322, 5/9-338.

A perfected security interest in growing crops has a priority over a conflicting interest of the owner or the mortgagee of the real property on which such crops are grown. 810 ILCS 5/9-334(i)(1)(A). The same priority applies between an assignee of a beneficial interest in an Illinois land trust and the holder of a perfected security interest in crops. See 810 ILCS 5/9-334(i)(1)(B). Lenders financing farm real estate that also want to maintain priority in crops must comply with Article 9 of the Uniform Commercial Code.

Problem Ag Loan

Thomas Howard

Thomas Howard

Real Estate Lawyer

Whether this is your first land use issue or most recent, our office has helped people and businesses alike.

Thomas Howard was on the ball and got things done. Easy to work with, communicates very well, and I would recommend him anytime.
R. Martindale

LLC Operating Agreements

LLC Operating Agreements

What to Put Your Illinois Company's Operating Agreement An Operating Agreement is the contract of your Illinois company’s life – which it really does not have. However, your company is a legal fiction of a person that has a beginning, called articles of organization...

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What is an Agricultural Lien under the UCC?

What is an Agricultural Lien under the UCC?

agricultural lien

What is a UCC Agricultural Lien

As we detailed in our introductory article on security interests, a security agreement gives a creditor some form of legal right over the property of a creditor. While this definition is fairly straightforward, there are all kinds of quirks which are unique to agricultural liens. Under the 2001 amendment of Article 9 of the Uniform Commercial Code (UCC), agricultural liens are a special kind of interest for lenders.

810 ILCS 5/9-102(a)(5) defines an “agricultural lien” to mean an interest, other than a security interest, in farm products:

  • (A) which secures payment or performance of an obligation for goods or services furnished in connection with a debtor’s farming operation;
  • (B) which is created by statute in favor of a person that in the ordinary course of its business furnished goods or services to a debtor in connection with a debtor’s farming operation; and
  • (C) whose effectiveness does not depend on the person’s possession of the personal property.

There are at least three types of statutory liens in Illinois that involve agriculture:

  1. agister’s lien;
  2. thresherman’s lien; and
  3. landlord’s crop lien.

Problem Ag Loan

What is an Agister’s Lien?

An “agister” cares for livestock. They have a special statutory lien set forth in §50 of the Innkeepers Lien Act, 770 ILCS 40/0.01, et seq.:

Agisters and persons keeping, yarding, feeding or pasturing domestic animals, shall have a lien upon the animals agistered, kept, yarded or fed, for the proper charges due for agisting, keeping, yarding or feeding thereof. 770 ILCS 40/50.

The agister’s lien is a possessory lien which extends animals in the care and possession of the farmer or rancher. Therefore, it does not fit the UCC definition of “agricultural lien,” and compliance with the filing requirements of Article 9 is not required.

What is a Thresherman’s Lien?

The next kind of lien, a a thresherman’s lien, is defined at §50a of the Innkeepers Lien Act:

Every person who, as owner or lessee of any threshing machine, clover huller, corn sheller or hay baler, threshes grain or seed, hulls clover, shells corn or presses hay or straw at the request of the owner, reputed owner, authorized agent of the owner or lawful possessor of such crops shall have a lien upon such crops, beginning at the date of the commencement of such threshing, hulling, shelling or baling, for the agreed contract price of the job, or, in the absence of a contract price, for the reasonable value of the services or labor furnished. Such lien shall run for a period of eight (8) months after the completion of such services or labor notwithstanding the fact that the possession of the crops has been surrendered to its owner or lawful possessor, provided that such lien shall not be valid and enforceable against a purchaser of said crops from the owner or lawful possessor thereof unless the lien holder shall, previous to or at the time of making final settlement for such crops by such purchaser, serve upon such purchaser a notice in writing of the existence of such lien. 770 ILCS 40/50a.

Unlike the agister’s lien, the thresherman’s lien continues after possession of the crops has been surrendered and therefore it fits the UCC definition of “agricultural lien.” Consequently, the rules for perfection, priority, and enforcement of this lien are provided by Article 9. Perfection is achieved by filing with the Secretary of State, and the priority rules of first to file apply. See 810 ILCS 5/9-310(a), 5/9-322.

What is a Landlord’s Crop Lien?

Lastly, for a landlord’s crop lien in Illinois, §9-316 of the Code of Civil Procedure, 735 ILCS
5/1-101, et seq., provides in part:

Every landlord shall have a lien upon the crops grown or growing upon the demised premises for the rent thereof, whether the same is payable wholly or in part in money or specific articles of property or products of the premises, or labor, and also for the faithful performance of the terms of the lease. Such lien shall continue for the period of 6 months after the expiration of the term for which the premises are demised, and may be enforced by distraint as provided in Part 3 of Article IX of this Act.

A good faith purchaser shall, however, take such crops free of any landlord’s lien unless, within 6 months prior to the purchase, the landlord provides written notice of his lien to the purchaser by registered or certified mail. Such notice shall contain the names and addresses of the landlord and tenant, and clearly identify the leased property.

A landlord may require that, prior to his tenant’s selling any crops grown on the demised premises, the tenant disclose the name of the person to whom the tenant intends to sell those crops. Where such a requirement has been imposed, the tenant shall not sell the crops to any person other than a person who has been disclosed to the landlord as a potential buyer of the crops. 735 ILCS 5/9-316.

  • Historically, the landlord’s lien was beyond the scope of Article 9. The most common priority dispute was between a UCC lien creditor and a landlord claiming a crop lien. The landlord’s lien usually prevailed. See Dwyer v. Cooksville Grain Co., 117 Ill.App.3d 1001, 454 N.E.2d 357, 73 Ill.Dec. 497 (4th Dist. 1983); Farmers Grain & Supply Co. v. Skinner, 161 Ill.App.3d 201, 514 N.E.2d 216, 112 Ill.Dec. 750 (3d Dist. 1987).
  •  
  • However, with P.A. 91-893, the Illinois General Assembly amended the landlord’s crop lien statute to fit within the Article 9 definition of “agricultural liens.” Furthermore, by P.A. 92-819, in 2002 the legislature added the following provision to the statutory crop lien:

A lien arising under this Section shall have priority over any agricultural lien as defined in, and over any security interest arising under, provisions of Article 9 of the Uniform Commercial Code. 735 ILCS 5/9-316.

As a result of this law, the landlord’s statutory lien for rent against crops grown on leased land continues to be superior to any consensual lien that the tenant may give on the crops, even those created under Article 9. Schweickert v. Ag Services of America, Inc., 355 Ill.App.3d 439, 823 N.E.2d 213, 215, 291 Ill.Dec. 203 (3d Dist. 2005) (“The 2002 amendment restored the original language of the statute as it was before the 2001 amendment.”). Therefore, the statutory lien for landlords requires no financing statement to perfect the lien.

Limitations for Ag Liens Under Bankruptcy

While Illinois created protections for lienholders, those protections are a different story under bankruptcy. The landlord’s statutory lien for unpaid rent may be avoided under the Bankruptcy Code, 11 U.S.C. §101, et seq. 11 U.S.C. §§545(3), 545(4). See Marshall v. Aubuchon (In re Marshall), 239 B.R. 193 (Bankr. S.D.Ill. 1999); Pogge v. Powers (In re Smith), 302 B.R. 865 (Bankr. C.D.Ill. 2003). If a landlord wants to prevail over a trustee in bankruptcy on the crop lien, the landlord needs a consensual security interest and a properly filed UCC financing statement. If a landlord fails to perfect by filing a financing statement, the statutory crop lien once avoided will relegate the landlord to the status of an unsecured creditor.

Thomas Howard

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How Do You Perfect a Security Interest in Agriculture?

How Do You Perfect a Security Interest in Agriculture?

agricultural security interests

A “security agreement” is defined by the Uniform Commercial Code (UCC) as “an agreement that creates or provides for a security interest.” 810 ILCS 5/9-102(a)(74). A security agreement is “effective according to its terms between the parties, against purchasers of the collateral, and against creditors.” 810 ILCS 5/9-201(a). Or, put simply, a security agreement gives a creditor some form of legal right over the property of a creditor. To have an enforceable security agreement, creditors need to meet a series of strict requirements.

Problem Ag Loan

How Do You Perfect A Security Interest in Agriculture?

A “security agreement” is defined by the Uniform Commercial Code (UCC) as “an agreement that creates or provides for a security interest.” 810 ILCS 5/9-102(a)(74). A security agreement is “effective according to its terms between the parties, against purchasers of the collateral, and against creditors.” 810 ILCS 5/9-201(a). Or, put simply, a security agreement gives a creditor some form of legal right over the property of a creditor. To have an enforceable security agreement, creditors need to meet a series of strict requirements.

The Basics

For a security interest against collateral to be enforceable against the debtor and third parties, 810 ILCS 5/9-203(b) requires that the following three conditions be met:

1. Value has been given.

2. The debtor has rights in the collateral or the power to transfer rights in the collateral to the secured party.

3. One of the following conditions has been met:

a. The debtor has authenticated (signed or otherwise executed) a security agreement that provides a description of the collateral and, if the security interest covers timber to be cut, a description of the land concerned.

b. The collateral is not a certificated security and is in the possession of the secured party under 810 ILCS 5/9-313 pursuant to the debtor’s security agreement.

c. The collateral is a certificated security in registered form, and the security’s certificate has been delivered to the secured party under 810 ILCS 5/8-301 pursuant to the debtor’s security agreement.

d. The collateral is deposit accounts, electronic chattel paper, investment paper, or letter-of-credit rights, and the secured party has control pursuant to the debtor’s security agreement.

These are the minimum requirements that must be satisfied to enforce a security interest. In re Duckworth, 776 F.3d 453, 462 (7th Cir. 2014).

Common Pitfalls: Mistaken Identification

Lenders must properly identify the debt to be secured, because §9-203 does not provide a mechanism for rescuing a lender from mistakenly identifying the debt to be secured. In Duckworth, the court held that the mistaken identification of the debt cannot be corrected against the bankruptcy trustee by using parol evidence to show the intent of the parties to the original loan. Id.

In Duckworth, the bank brought an action against the bankruptcy trustee and others asking the court to determine that the bank had a first priority security interest in proceeds from the sale of certain farm products, equipment, and crop insurance. After the farmer filed a Chapter 7 petition, the trustee was holding $22,284.27 in post-petition sales of farm equipment and $586,740.38 in crop proceeds.

The debtor obtained a loan from the bank by a promissory note dated December 15, 2008, in the amount of $1.1 million. On page 2 of the 2008 note, in a paragraph labeled “collateral,” it stated that the borrower acknowledged that the note was secured by a security agreement dated December 13, 2008. The debtor did sign an agriculture security agreement dated December 13, 2008, that described the collateral as all inventory, farm products, farm equipment, and crop insurance, among other property. However, in the definition of “note,” the principal amount was left blank and the note was referenced as being dated December 13, 2008; there was no cross-collateralization clause.

The trustee and another creditor argued that the security interest was invalid because the security agreement provided that its security debt was evidenced by a note dated December 13, 2008, even though that note did not exist. The bank provided the declaration of the loan officer who prepared the loan documents and personally closed the loan. The loan officer explained that the discrepancy was a “clerical error.” The bank further maintained that the error was correctible by means of parol evidence, because Illinois adheres to the principle that documents executed as part of a single transaction are interpreted as one contractual agreement. The bankruptcy court agreed. So did the district court on appeal. However, the Seventh Circuit Court of Appeals reversed, declaring that bankruptcy trustees “are entitled to treat an unambiguously security agreement as meaning what it says, even if the original parties have made a mistake in expressing their intentions.” 776 F.3d at 463.

The lesson from Duckworth is that special care must be taken to ensure that the security agreement contain a provision for securing future debts. Future advances or dragnet clauses are expressly permitted by the UCC. 810 ILCS 5/9-204(c). A future advances clause must be set forth in writing as part of the security agreement for the security interest to cover debts not expressly identified therein.

See the sample form of an agricultural security agreement in §7.20 below. In the sample form of security agreement, the term “obligations” broadly encompasses all debts existing at the time of execution of the agreement and arising thereafter.

Defining the Collateral

Most security agreements define the “collateral,” but a mistake in the definition can be costly.  Creditors should always use language covering after-acquired property for collateral. There is no protection for creditors who mistakenly assume some kind of “common sense” inclusion applying to things like inventory.

It is important to understand the meaning of terms defined in the Uniform Commercial Code. Some secured lenders define “accounts,” “inventory,” etc. The UCC defines many of these terms, so there isn’t necessarily a need to define them separately in the security agreement. However, it’s important to keep up-to-date on the UUC definitions. For example, some UCC terms changed dramatically when Article 9 was amended in 2001.  Therefore, a provision that incorporates UCC terms can affect the entire agreement.

810 ILCS 5/9-102(a)(34) defines “farm products” to mean “goods, other than standing timber, with respect to which the debtor is engaged in a farming operation” and that are

(A) crops grown, growing, or to be grown, including:

(i) crops produced on trees, vines, and bushes; and

(ii) aquatic goods produced in aquacultural operations;

(B) livestock, born or unborn, including aquatic goods produced in aquacultural operations;

(C) supplies used or produced in a farming operation; or

(D) products of crops or livestock in their unmanufactured states.

“Farming operation” is defined to mean “raising, cultivating, propagating, fattening, grazing, or any other farming, livestock, or aquacultural operation.” 810 ILCS 5/9-102(a)(35).

The term “proceeds” is broadly defined to include whatever property or goods are received upon the sale, exchange, collection, or disposition of the collateral. 810 ILCS 5/9-102(a)(64). A security interest attaches to any identifiable proceeds of collateral. 810 ILCS 5/9-315(a)(2). Determining readily identifiable cash proceeds is a difficult endeavor. See C.O. Funk & Sons, Inc. v. Sullivan Equipment, Inc., 89 Ill.2d 27, 431 N.E.2d 370, 59 Ill.Dec. 85 (1982). The secured party has the burden of identifying its proceeds. Assumptions and speculation are insufficient to meet this burden. See Van Diest Supply Co. v. Shelby County State Bank, 425 F.3d 437 (7th Cir. 2005).

The Grant

According to Article 9 of the UCC, the grant must describe the property and what it secures. 810 ILCS 5/9-203(b)(3). This is a mandatory requirement; the failure to have a document explicitly granting a security interest is fatal. Covey v. Morton Community Bank (In re Sabol), 337 B.R. 195 (Bankr. C.D.Ill. 2006). There are no specific “magic words” required to be included in the security agreement to create a security interest, however no security interest will be recognized without a description of the collateral in a signed or authenticated document or in a separate document incorporated by reference into a signed or authenticated document. 377 B.R. at 202.

Due Diligence and Proper Searches

Before making a loan, a lender must make the following searches to determine whether it has priority:

1. the debtor’s form of organization;

2. the debtor’s principal place of business;

3. the debtor’s predecessors;

4. all names utilized by the debtor; and

5. all locations used for goods.

After the lender relies representations regarding these issues, it still must perform its own due diligence to verify the representations. This includes reviewing an entity’s articles of incorporation, articles of organization, or other organizational agreement and any other reports available to the lender to verify the locations of the collateral.

The lender can confirm whether the borrower is a corporation or a limited liability company and in good standing at the website of the Illinois Secretary of State’s Department of Business Services at www.cyberdriveillinois.com/departments/business_services.

The lender also must conduct a UCC lien search using the precise name of the entity or person. Failure to use the correct name can be fatal. See, e.g., Corona Fruits & Veggies, Inc. v. Frozsun Foods, Inc., 143 Cal.App.4th 319, 48 Cal.Rptr.3d 868, 870 (2006) (financing statement that listed debtor’s name as “Armando Munoz” instead of his correct name of “Armando Munoz Juarez” was seriously misleading and thus invalid). For perfection by filing a financial statement for an individual, the use of a name on a driver’s license and social security card is sufficient. In re Miller, No. 12-CV-02052, 2012 WL 3589426 (C.D.Ill. Aug. 17, 2012); see also 810 ILCS 5/9-503(a)(4).

 

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Thomas Howard

Real Estate Lawyer

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Illinois Cannabis Zoning Laws

Illinois Cannabis Zoning Laws

Illinois Cannabis Zoning Laws

Illinois Cannabis Zoning Laws

Illinois Cannabis Zoning Laws Illinois Cannabis Zoning Laws depend greatly on the local governments that are placing “reasonable” restrictions on their community’s cannabis businesses that may operated in their jurisdictional limits. Many communities require a “special use permit” for having cannabis business operations.  Then, there are certain set-backs to that limit the distance a cannabis company may be from certain sensitive businesses or schools, churches, and other things in the city that they want to keep the cannabis business away from by using their zoning authority.  Here’s a lot more on the Illinois Cannabis Zoning Laws. 

Can Your City Ban Cannabis?

At the beginning of this year, Illinois’ cannabis legalization bill, formally known as the “Cannabis Regulation and Tax Act” (the “Cannabis Act”), went into effect. The Cannabis Act creates a comprehensive licensure scheme for the cannabis industry, and allows for adult, recreational use of cannabis. Governor Pritzker kicked off the Cannabis Act by pardoning over 11,000 people convicted of marijuana crimes.

Still, plenty of local communities are approaching legalization with much more caution, and sometimes fear. Lake County, the third-most populous county after Cook and DuPage, intends to impose a one-year moratorium on cannabis in the unincorporated parts of the County. In a lengthy Report of the Recreational Cannabis Task Force, Lake County freely states that

“local government attorneys have differing interpretations of the Act on whether communities can enact separate licensing requirements. It is essential that every community consult with their own counsel prior to enacting a licensing mechanism.”

  1. WHAT DOES THE CANNABIS ACT SAY?

The Cannabis Regulation and Tax Act can be found at 410 ILCS 705/1-5 et seq. Certain parts of the Cannabis Act directly and explicitly preempt any state and local government from regulating cannabis. Section 55-90 of the Act reads:

Except as otherwise provided in this Act, the regulation and licensing of the activities described in this Act are exclusive powers and functions of the State. Except as otherwise provided in this Act, a unit of local government, including a home rule unit, may not regulate or license the activities described in this Act. This Section is a denial and limitation of home rule powers and functions under subsection (h) of Section 6 of Article VII of the Illinois Constitution.

That is, local governments are prohibited from regulating in the area of cannabis except when the Cannabis Act specifically allows it.

Illinois Cannabis Zoning Restrictions on Municipalities 

Note the reference to “home rule powers and functions” in the Illinois Constitution. Article VII, Section 6 of the Illinois Constitution sets forth the definition and rules governing home rule units. Basically, any County which elects a chief executive officer, or any municipality with over 25,000 people constitutes a “home rule” unit. Home rule units are given a great degree of authority to govern their internal affairs. If you’re reading this in Chicago or in the Chicago suburbs, you probably live in a home rule county and probably a home rule city or village as well. And as sub-section (m) of this part of the Illinois Constitution provides, “[p]owers and functions of home rule units shall be construed liberally.”

Conversely, Article VII, Section 7 of the Illinois Constitution covers non-home rule units of government. These units are essentially limited to a few fiscal powers in the Constitution, and then anything else granted to them by other laws. See, e.g., Hawthorne v. Village of Olympia Fields, 790 N.E.2d 832 (Ill. 2003) (striking down a zoning ordinance that had the effect of prohibiting an otherwise lawful home daycare center) If you are reading this from a rural, agricultural community, there is a good chance you live in a non-home rule municipality.

Need Help With Cannabis Zoning

David Silvers

David Silvers

Chicago Business Lawyer

David Silvers practices cannabis and corporate law with litigation experience and first-hand knowledge of start up operations.

Zoning Ordinances For Cannabis In Illinois

So what is the status of zoning restrictions and moratoriums, like those out of Lake County? Section 55-25 discusses local ordinances. While Section 55-25 allows local governments to enact restrictions on the time, place, and manner of legal cannabis, they may not use zoning ordinances as a cover to effectively ban cannabis. Specifically, subsection (1) provides:

A unit of local government, including a home rule unit or any non-home rule county within the unincorporated territory of the county, may enact reasonable zoning ordinances or resolutions, not in conflict with this Act or rules adopted pursuant to this Act, regulating cannabis business establishments. No unit of local government, including a home rule unit or any non-home rule county within the unincorporated territory of the county, may prohibit home cultivation or unreasonably prohibit use of cannabis authorized by this Act.

Local governments like Lake County may be limiting cannabis under the guise of protecting the “health, safety, and welfare” of the community, or some similar phrase. Such justifications should be treated with skepticism, no matter what the issue is. But with respect to bans like Lake County’s, it’s difficult to see how they could possibly be within the bounds of the Cannabis Act.

Illinois Cities May “Reasonably” Restrict Cannabis Businesses with Zoning.

Section 55-25 limits zoning ordinances to those which don’t “unreasonably” prohibit legal uses of cannabis, and there’s nothing more unreasonable than a blanket prohibition or moratorium. For rural, non-home rule municipalities, they might totally lack the authority to enact such zoning ordinances with or without the authority granted by the Cannabis Act. See Hawthorne, supra. Municipalities that get in the way of the overwhelming public support and public demand for legal cannabis are putting themselves at a huge risk for litigation that they stand a strong chance of losing. In Lake County alone, there are roughly 700,000 residents (including your humble author), and many of them won’t be happy when they find out that the County Board is curbing their hard-won rights under the Cannabis Act.

Key Takeaways of Cannabis Zoning in Illinois

  • Illinois Zoning Changes Depending on What City Are Located
  • To find your cities zoning ordinance, Google: “(Your City) Cannabis Ordinance”
  • Illinois Cannabis Laws allow ‘reasonable’ zoning restrictions
  • Cities in Illinois cannot ban cannabis or home grow for medical cannabis patients.

How To Get Help With Your Cannabis Zoning Issues

Feel free to call our law firm with all your questions regarding cannabis zoning, there are many levels of interactions with local governments and we are experienced with assisting business clients in their real estate matters, whether related to cannabis, or not. 

Need A Business Lawyer?

Call our law offices with your legal questions for help on:

  1. real estate contracts
  2. business contract disputes
  3. Shareholder litigation
  4. cannabis business
  5. fraud actions
  6. mechanic's liens

 

REACH US BY EMAIL