Iowa Bankruptcy Court Further Clarifies the Iowa Ag Supply Dealer’s Lien

The United States Bankruptcy Court for the Northern District of Iowa has issued another opinion clarifying the scope of the agricultural supply dealer’s lien under Iowa Code Chapter 570A. This time, the feed supplier prevailed.

The debtor, a farmer conducting a farrow-to-finish operation for swine production, filed for Chapter 12 bankruptcy protection in 2009.  After the bankruptcy petition was filed, the debtor’s hogs were sold pursuant to a court order and the proceeds were placed into a cash collateral account. Two creditors asserted competing liens in the proceeds. A feed supplier claimed a “super priority” agricultural supply dealer’s lien under Iowa Code § 570A.5(3). The debtor’s bank claimed a perfected Article 9 “blanket lien” in the proceeds. The $358,841.10 in proceeds were insufficient to cover both claims.

The bank attacked the ag supply dealer’s lien on several fronts. In 2011, the Iowa Supreme Court answered a certified question in the case ruling that the feed supplier had super priority on increases in the hogs’ value from acquisition price to final sale. Oyens Feed & Supply Co. v. Primebank, 808 N.W.2d 186, 194 (Iowa 2011).  In the trial following the Iowa Supreme Court decision, the bank attempted to lower this amount. Because the debtor ran a farrow-to-finish operation, he did not purchase outside swine. He birthed and raised replacement gilts rather than purchasing them. The bank argued that the debtor’s “acquisition price” in the livestock he raised was the “cost to produce each hog—facility maintenance costs, electricity, vet bills, semen, wages, expenses for the gilt, etc.” The feed supplier argued that the acquisition price as intended by Iowa Code § 570A.5(3) was $0.

The court sided with the feed supplier, stating that “without a purchase price, the 'acquisition price' was zero." The bank’s definition of “acquisition price,” the court found, was “impractical” and "did not fit the statute." The court continued:

Applying this definition would require feed suppliers to track virtually all of the hog facility's expenses—from semen costs to building depreciation—and assign an amount of each to every hog. It would require the feed supplier to attempt to assign long term costs to an unknown, if not unknowable, quantity of hogs that would be produced over the useful life of the long-term costs. Further, this result would significantly blur the line between overhead costs and acquisition price, so much that they seem to merge together. At a minimum, it would present hog suppliers with an accounting burden—in time and costs—that would be prohibitive.

The court concluded by affirming that the definition of “acquisition price” for purposes of the ag supply dealer’s lien where the hogs are born in the facility is $0. The alternative definition, the court stated, “produces an unreasonable, unjust, impractical, or absurd outcome.”

On another issue, the court--without discussion--followed earlier rulings to determine that the feed supplier had only a lien in the amount of feed sold to the debtor within 31 days from the date of its filed financing statement. (This issue was decided by the bankruptcy court in the two recent cases of In re Schley, 2014 Bankr. LEXIS 1724 (Bankr. N.D. Iowa 2014) and In re Big Sky Farms, Inc., 512 B.R. 1725 (Bankr. N.D. Iowa 2014) in agreement with the court in In re Shulista, 451 B.R. 867 (Bankr. N.D. Iowa 2011)).

The bank tried to lower the amount of the feed supplier’s lien, however, by contending that the amount perfected should be limited to the difference between the debt at the beginning of the 31-day period and the debt at the end of the period. The court again rejected the bank’s argument, stating that Iowa law did not support this position.  The court pointed out that the argument assumed that all payments received by the supplier would apply to all feed supplied during that period. Iowa law, the court ruled, allowed creditors to apply payments to first-incurred debt. Thus, the difference between the total amount of debt at the beginning and end of each period was irrelevant. The supplier had filed two financing statements and had delivered feed valued at $45,927.22 from April 27, 2009 to May 28, 2009 (first 31-day period) and feed valued at $110,440.21 from July 14, 2009 to August 14, 2009 (second 31-day period). Therefore, the court found that the supplier had a super priority lien as to $156,367.43 and an unsecured lien for the balance of the debt.

As such, the court declared that the bank was entitled to any escrowed funds in excess of $156,367.43.

For more background information on this issue, read our article, Guidance on the Iowa Ag Supply Dealer’s Lien.