Notice to Buyers of Farm Products

The Food Security Act & Notice to Farm Product Buyers

Federal and state law conflict under the Food Security Act of 1985 that preempted the UCC farm products rule that permitted a secured party to follow its lien into the hands of the buyer. Therefore providing the proper notice to the grain buyer is quite crucial and every ag lenders forms for Notice to Grain buyer needs to comply with the requirements to be effective if something goes wrong and the collateral goes missing. 

The notice to buyers of farm products serves to protect the creditors from a buyer from paying the seller for the grain or livestock without including the creditor’s name on the check.

How to enforce your security interest against buyers of farm products

In order to have your security interest be effective against a buyer of farm products, it must comply with the Food Security Act’s requirements.  They are: 

  1. The Name And Address Of The Secured Party;

  2.  The Name And Address Of The Person Indebted To The Secured Party;

  3.  The Social Security Number Or Other Approved Unique Identifier, Of The Debtor Or, In The Case Of A Debtor Doing Business Other Than As An Individual, The Internal Revenue Service Taxpayer Identification Number, Or Other Approved Unique Identifier, Of The Debtor; And

  4.  A Description Of The Farm Products Subject To The Security Interest Created By The Debtor, Including The Amount Of Such Products Where Applicable, Crop Year, And The Name Of Each County Or Parish In Which The Farm Products Are Produced Or Located. 7 U.S.C. §1631(E)(1)(A)(Ii).

Problem Ag Loan

The law also provides for fines and criminal penalties for selling to parties other than as disclosed to a secured party. 810 ILCS 5/9-315.02. Similarly, the FSA provides for penalties if the debtor violates the restriction on sale without paying the secured party. 7 U.S.C. §1631(h).

Compliance with Food Security Act to Enforce Security Interest Farm Products

      Strict compliance with the notice provisions of §1631(e) is required for a secured party to obtain the protection provided by the FSA. State Bank of Cherry v. CGB Enterprises, Inc., 2013 IL 113836, 984 N.E.2d 449, 368 Ill.Dec. 503. In State Bank of Cherry, the bank claimed that CGB Enterprises, Inc., failed to protect the bank’s security interest in crops that CGB purchased from a farmer. CGB filed a motion to dismiss the bank’s complaint on the grounds the bank’s notices of security interest failed to strictly comply with §1631(e). On cross-motions for summary judgment, the circuit court entered judgment granting the bank’s motion for summary judgment and denying CGB’s motion.

Illinois Law Regarrding Security Interests in Farm Products

      The farmer had executed a note in the bank’s favor using his crops as security. The farmer sold these crops to CGB. The bank alleged that it gave notice of the security interest in the crops to CGB pursuant to the FSA and that CGB failed to protect the bank’s security interest by making payment on the crops directly to the farmer without naming the bank on the check. CGB relied on Farm Credit Midsouth, PCA v. Farm Fresh Catfish Co., 371 F.3d 450 (8th Cir. 2004), which held that strict compliance with the §1631(e) notice provision is required for a party to recover for failing to protect a security interest in crops. The Eighth Circuit held that “the Act[ ] . . . does not contain language indicating the required contents of the written notice are merely permissive or can be satisfied through substantial compliance.” Farm Fresh Catfish, supra, 371 F.3d at 453. In State Bank of Cherry, supra, neither of the notices served on CGB included information regarding the names of the county where the farm products were produced or located.

      The appellate court adopted the construction of Farm Fresh Catfish that Congress intended strict compliance with the FSA, and the Supreme Court affirmed. As a result, CGB took free of the bank’s security interest even though CGB knew of its existence. 2013 IL 113836 at ¶67.

Security Interests in Proceeds of Crops and Farm Producgs

      However, the FSA protections for a grain buyer of corn and soybeans do not extend to the proceeds of those crops. CNH Capital America LLC v. Trainor Grain & Supply Co. (In re Printz), 478 B.R. 876 (Bankr. C.D.Ill. 2012). Therefore, the grain buyer cannot use the proceeds, in which the lender obtained a first priority security interest, to set off against the debts owed to it by the farmer.

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