Iowa Supreme Court Interprets Feed Dealer Lien
Agricultural supply dealer liens—intended to encourage suppliers to provide necessary feed and supplies to agricultural producers—can be difficult to enforce. An opinion issued by the Iowa Supreme Court today illustrates some of the complexity of this remedy. Quality Plus Feeds, Inc. v. Compeer Financial, FLCA, 984 N.W.2d 437 (Iowa 2023).
Agricultural Supply Dealer Lien Background
Iowa Code § 570A.3 grants an “agricultural lien” to an “agricultural supply dealer” who provides an agricultural supply to a farmer. This statute was enacted during the 1980s farm crisis to help debt-laden farmers buy livestock feed or crop inputs, such as seed, on credit so that they could continue operations. The lien is for the amount owed to the agricultural supply dealer for the retail cost of the supply, including labor. To perfect an agricultural supply dealer lien, the dealer must file a financing statement with the Iowa Secretary of State within 31 days after the date of purchase. The Iowa Supreme Court has held that the financing statement applies only to the product or service provided within the 31-day period prior to the filing. The filing does not cover subsequent deliveries. This means that a feed dealer making regular deliveries to the debtor must file the UCC-1 every 31 days to maintain perfection of the lien.
A perfected agricultural feed dealer lien in livestock is special under Iowa law. It has “superpriority” over an earlier perfected lien or security interest to the extent of the difference between the acquisition price of the livestock and the fair market value price of the livestock at the time the lien attaches or the sale price of the livestock, whichever is greater. Iowa Code § 570A.5(3). Feed dealers are not required to follow the certified request procedures that other agricultural supply dealers must follow to obtain their superpriority status. Furthermore, this superpriority lien extends to the proceeds of the collateral. This includes the proceeds from milk and livestock sales. In other words, a properly perfected feed dealer lien will give the feed dealer priority over the bank with an earlier perfected blanket security interest in the same collateral. The issue will be whether the dealer can prove the requirements of the statute.
Facts of the Case
The facts of the case were typical of a struggling farm operation. Here, a supplier furnished feed to two related dairy farms over the course of six to eight months, filing all necessary financing statements with the Secretary of State. Farm one did not pay the supplier for feed delivered between September of 2017 and March of 2018 and farm two did not pay the supplier for feed delivered between July of 2017 and March of 2018. The two farms (along with a third one to which the supplier did not deliver feed) owed more than $16 million to the bank that had financed their operations. The bank had properly perfected its security interests in all of the farms’ livestock and milk and proceeds. After a failed bankruptcy reorganization attempt, the farms liquidated their herds and milk supplies, yielding $1,027,904 of cattle proceeds and $317,309 of milk proceeds.
Lower Court Proceedings
The supplier sought to recover $348,306 from the proceeds based upon an unpaid balance of $239,438 for feed supplied to farm one and $108,868 for feed supplied to farm two. The bank opposed the supplier’s right of foreclosure, filing a counterclaim for foreclosure of its blanket security interest on the proceeds. The bank alleged that the supplier had failed to trace its lien on the livestock that received the feed in the fall and winter of 2017-2018 to the livestock that were actually sold and generated proceeds in March and April of 2019. The bank also argued that the supplier had failed to prove its acquisition price for the livestock. The district court entered summary judgment in favor of the supplier, reasoning that Iowa Code section 570A.3 “does not require a meticulous showing of the path from feed to a specific cow.” Rather, “a party asserting a lien must show a reasonable link between the feed provided by the supplier and the livestock.”
The Iowa Court of Appeals reversed the summary judgment in favor of the supplier, ruling that there were too many unanswered questions to permit summary judgment. Specifically, the court of appeals stated that “to the extent [the supplier] asserts a lien in the proceeds, the proceeds would need to be identifiable and traced to subsequent assets.” While stating that it would not require “burdensome and intensive recordkeeping documenting a separate lien on each animal for the amount of feed consumed,” the court of appeals explained the set of facts that would need to be established:
Identifying the proceeds here requires answers to questions about such things as whether cattle that consumed [the supplier’s] feed were sold, whether replacement cattle were purchased, or whether the cattle ended up in the [debtor’s] herd. An additional unsettled question is what the purchase price was, if any, for the cattle sold by [the farms] that generated the sale proceeds fought over here. This is important because [the supplier] could only get priority over [the bank’s] prior, perfected security interest ‘to the extent of the difference between the acquisition price of the livestock and the fair market value of the livestock at the time the lien attaches or the sale price of the livestock, whichever is greater.’ While some of the cattle sold may have been born into the herd, thus giving them an acquisition price of zero, it has not been conclusively established whether all or just some of the cattle sold were born into the herd. Whether any cattle in the herd were purchased and, if so, what the acquisition price was are additional fact questions for which no answer is definitively provided. These unanswered questions contribute to the need to deny summary judgment.
Supreme Court Analysis
On review, the Supreme Court chose a middle path between the district court’s decision and that of the court of appeals. In declining to follow the district court’s “reasonable link” approach, the Court stated that it does not believe that chapter 570A comes with its own relaxed standard of proof. “A lien is a lien; summary judgment is summary judgment. Nothing in chapter 570A indicates that anything other than the customary litigation burdens of proof apply to agricultural lien cases.” Unlike the court of appeals, however, the Court did not believe that numerous fact issues pervaded the proceeding. In fact, the Court stated that it found only one genuine issue of material fact. To get there, the Court reviewed the evidence before it.
- Farm one and farm two operated at two separate locations to which the supplier provided feed.
- The supplier had filed separate foreclosure counts against farm one and farm two.
- The proceeds from the sales of cattle and milk for farm one totaled $864,448.
- The proceeds from the sales of cattle and milk for farm two totaled $367,211.
- The supplier sought to prove a lien of $239,438 for farm one and a lien of $108,868 for farm two.
- To establish a superpriority claim in the proceeds, the supplier was required to prove that at least $239,438 of the $864,448 in farm one’s proceeds derived from cattle that consumed the feed provided by the supplier (netting out the acquisition cost of the cattle from the proceeds). The supplier would also have to prove that at least $108,868 of the $367,211 in farm two’s proceeds derived from cattle that consumed the feed provided by the supplier (netting out the acquisition cost of the cattle from the proceeds).
The Court then framed the issue for summary judgment: Does the record support a reasonable inference that less than $239,438 of the proceeds were derived from cattle that consumed feed supplied to farm one (after netting out acquisition cost) and less than $108,868 were derived from cattle that consumed feed supplied to farm two (after netting out acquisition cost)? If so, the Court stated that there would be a genuine issue of material fact.
After analyzing the evidence, the Court found that the supplier had established a prima facie case that it was entitled to a superpriority lien against the proceeds from the farms in the amount of feed sold for which the supplier was not paid.
The Court then found that the supplier had offered evidence (through a nutritionist consultant’s affidavit) that just over half of the cattle liquidated by farm one had consumed feed provided by the supplier for which it wasn’t paid. The Court found that the supplier had provided evidence supporting an inference that at least the same percentage of cattle liquidated by farm two had consumed feed from the supplier for which it wasn’t paid. The Court also found that the record indicated that all of farm two’s cattle were self-raised and had an acquisition price of zero. Approximately half of farm one’s cattle had an acquisition price of zero because they were self-raised.
Supplier Proved its Superpriority Lien for Farm Two
After evaluating the evidence, the Court found no genuine issue of material fact with respect to the supplier establishing a superpriority lien of $108,868 as to farm two’s cattle and milk proceeds. Because they were all raised, the livestock had an acquisition price of zero. The record showed that at least $83,186 of farm two’s cattle proceeds came from the sale of cows and the $54,072 in milk proceeds were “obviously” also from cows. The Court reasoned that any animal classified as a “cow” had to have been on farm two at least a year before the period during which the supplier provided the feed, and the bank offered no proof to the contrary. As such, the Court found that the supplier had proven that the proceeds were derived from cattle that consumed the feed it supplied, and the Court upheld that portion of the district court’s summary judgment.
Genuine Issue of Material Fact Prevents Summary Judgment for Farm One
The Court then turned to the evidence the supplier proffered to support the foreclosure of the superpriority lien for farm one. The supplier showed that 55 percent (677/1,223) of the cattle liquidated by farm one consumed its feed. The Court stated it could also infer that 55 percent of the milk would have come from those cattle. Although the supplier’s lien of $239,438 was only 28 percent of the $864,448 in farm one proceeds, the Court said that was not sufficient proof. The record was insufficient to establish, as a matter of law, that the price of the 677 cattle exceeded their acquisition price by at least $239,438. While “mathematical precision” is not required, the Court held that evidence would have to be presented, either on a renewed motion for summary judgment or at trial, from which a reasonable fact finder could conclude that the difference between acquisition price and market or sales price exceeds $239,438. As such, the Court reversed the district court’s summary judgment as to the cattle and milk proceeds from farm one.
Supplier Properly Perfected Lien While Automatic Stay Was In Place
In rejecting several affirmative defenses raised by the lender, the Court held that a supplier can perfect an agricultural dealer supply lien after a bankruptcy petition has been filed without violating the automatic stay. The automatic stay does not prohibit a secured creditor from taking steps after the bankruptcy filing to perfect a lien that, under generally applicable law, would be superior to a previously perfected lien.
Although the Court sought to preserve the intent of the legislature by not imposing a tracing requirement necessitating “detailed and elaborate records,” significant proof is still required to foreclose on an agricultural supply dealer lien. Much of the necessary proof—livestock acquisition and sales records—cannot be tracked by the supplier, but is dependent upon the records of the financially distressed producer. Quality Plus Feeds is necessary reading for supply dealers seeking to rely on the statutory lien, as well as lenders seeking to understand the limitations of their blanket security interests. We will watch what happens on remand.
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