Agricultural loan creates dispute as to what constitutes a crop

As the speed and volume of transactions in the agriculture space increases, manual processes can’t always keep up. To stay competitive and compliant, lenders must be able to run a lean, effective operation that controls costs and mitigates risk. The following (In re Ollis 2019 Bankr. LEXIS 1068) is an interesting look at what happens when collateral is defined in a way that can be ambiguous.

The debtor, James Ollis, was engaged in farming operations including buying and raising cattle to be sold as well as growing hay to feed the cattle. He entered into a credit agreement with Rabo Compton Bank (Rabo) in the amount of $1,500,00.00.

The note is secured by a Security Agreement between Ollis and Rabo, granting Rabo a security interest in Ollis’ personal property now owned or hereafter acquired, including:

all accounts . . . (b) all inventory; (c) all equipment . . . (e) all farm products, including crops grown, growing or to be grown, livestock born or unborn, supplies used or produced in Grantor’s farming operation, and products of crops and livestock in their unmanufactured state . . . (j) substitutes or replacements for any Collateral, all proceeds, products, rents and profits of any Collateral . . .

Rabo filed a UCC financing statement with the South Carolina Secretary of State, listing Ollis as the debtor and providing a description of the collateral identical to the security agreement.

Ollis filed for Chapter 12 relief. Rabo filed a secured claim in the amount of $1,606,622 based on the security agreement and financing statement.

Rabo’s claim asserts its interest is fully secured but did not fill in the blank on the official form for the “value of property” on its proof of claim.

In addition to cattle, Rabo asserts its security interest includes all hay on the farm and all equipment.
Ollis makes three arguments:

  1. He asserts that the hay is not a crop subject to Rabo’s security interest.
  2. Rabo’s security interest in the equipment is not perfected because the financing statement does not specifically describe the equipment, including listing serial numbers.
  3. Rabo’s claim failed to include a value for the property in which it claims a security interest and, therefore, should be treated as unsecured.

The court noted that Ollis provided no basis for the argument that hay is not a crop or any alternative as to what type of good the hay constitutes. The term “crops” is not identified by the UCC, but, elsewhere, the court noted, means “products that are grown, raised, and harvested.” (citing Black’s Law Dictionary) Therefore, the hay appears to be a crop.

Nevertheless, the court continued, the hay is still subject to Rabo’s lien as a “farm product” when used to feed Ollis’ cattle because, per 9-102(34), it is “supplies used or produced in a farming operation.”

As to Ollis’ second argument, the court referenced several sections of the UCC:

For a security interest to be effective against third parties, it must have attached to the collateral and be perfected. A security interest in farm products and equipment attaches when: (1) the debtor signs a security agreement; (2) the security agreement contains a description of the collateral; (3) value is given; and (4) the debtor has rights in the collateral. S.C. Code Ann. § 36-9-203. A description of the collateral in the security agreement “is sufficient, whether or not it is specific, if it reasonably identifies what is described.” S.C. Code Ann. § 36-9-108(a). A description reasonably identifies the collateral if it identifies it by, among other things, category, which the court found it did. See S.C. Code Ann. § 36-9-108(b). However, “a description of collateral as ‘all the debtor’s assets’ or ‘all the debtor’s personal property’ or using words of similar import does not reasonably identify the collateral” on a security agreement. S.C. Code Ann. § 36-9-108(c).

However, the court pointed out, Perfection of a security interest in farm products and equipment occurs when the secured party files a financing statement with the Secretary of State’s office. S.C. Code § 36-9-310(a). The financing statement is sufficient if it contains the name of the debtor, the name of the secured party, and indicates the collateral covered. S.C. Code Ann. § 36-9-502. Unlike a security agreement, a financing statement adequately indicates the collateral if it provides that it covers all the debtor’s assets or personal property. S.C. Code Ann. § 36-9-504. [My emphasis added].

The court found that, despite the financing statement not referencing the equipment serial numbers, the financing statement met the above criteria, and the description in the security agreement and UCC financing statement are sufficient to attach and perfect Rabo’s lien on the equipment.

Finally, the court addressed Ollis’ objection to Rabo’s proof of claim.

A proof of claim is the creditor’s statement as to the amount and character of the claim. Fed. R. Bankr. P. 3001(a)). The Federal Rules of Bankruptcy Procedure specify the form, content, and filing requirements for a proof of claim. The court cited bankruptcy rules, “A proof of claim shall conform substantially to the appropriate Official Form.” Fed. R. Bankr. P. 3001(a)… “A proof of claim executed and filed in accordance with these rules shall constitute prima facie evidence of the validity and amount of the claim.” Fed. R. Bankr. P. 3001(f).

The court continued, “The burden then shifts to the debtor to object to the claim” 11 U.S.C. § 502(b) . . . “The debtor must introduce evidence to rebut the claim’s presumptive validity” Fed. R. Bankr. P. 9017; Fed. R. Evid. 301; 4 Collier at ¶ 501.02[3][d]. “If the debtor carries its burden, the creditor has the ultimate burden of proving the amount and validity of the claim by a preponderance of the evidence.” 502.02[3][f].

Ollis objects to Rabo’s Claim, asserting the amount of the secured claim should be $0.00 because it failed to include the value of the property that secured its interest on the official form. Although Rabo failed to include this amount, it otherwise complied with the applicable Bankruptcy Rules and conformed substantially to the official form to render its secured claim prima facie valid in the amount of $1,606,622.61.

The court found that Rabo’s omission of stating an actual amount, given other evidentiary factors, was a “technicality” that does not render Rabo’s interest unsecured. The court ruled in favor of secured party Rabo.

In this case, Rabo was fortunate that they were able to access the collateral in this situation. However, it illustrates what a complicated situation proper filing (or lack thereof) can become. It is important to remember that performing due diligence searches and UCC filing activities in-house, directly with the secretary of state or at the county level, makes it harder to maintain protection of assets and have a clear picture of overall lien portfolio health. In fact, unperfected liens can range from as low as 3% to as high as 30% of a portfolio without lenders even knowing.

Check out our trusted risk management solutions for agricultural lenders and lienholders. We can help you navigate the complexities of the modern ag lending landscape and perfect your interests.