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Lien Trouble Down on the Farm
July 2, 2019
By Samuel R. Henninger
In a priority dispute between a bank and two nurseries, the bank prevailed. The dispute concerned who held the senior lien in over a million dollars’ worth of trees and shrubs in three states. After a bankrupt commercial farm liquidated its assets, the parties fought over who was entitled to the proceeds. Because the nurseries failed to follow the laws in the states where the property was located to either perfect or maintain perfection, the nurseries’ liens were junior. Fishback Nursery, Inc. v. PNC Bank, 920 F.3d 932 (5th Cir. 2019).
Two of the states were Michigan and Tennessee. In both, the name of the debtor on the financing statement must be the same as the name on the public documents creating the debtor. This rule is subject to the following exception: an incorrect name may be sufficient if a search with the incorrect name would still produce the financing statement. Here, the nurseries incorrectly listed the debtor’s name as “BFN Operations, LLC abn Zelenka Farms” instead of “BFN Operations LLC.” Because of the search logic used by the filing systems of Michigan and Tennessee, however, a search for the former would not produce a financing statement of the latter. As the district court noted, the search logic in those filing systems does not provide for inclusivity in the way that Google’s system does. Thus, the nurseries’ financing statements in Michigan and Tennessee were ineffective. The bank’s perfected lien was senior.
The other state was Oregon. Unlike in Michigan and Tennessee, an agricultural producer in Oregon that delivers it produce to a purchaser is not required to file any notice to perfect its lien. But this rule is also subject to an exception—the lien expires unless the producer files an extension shortly (45 days) after final payment is due. Here, one of the nurseries filed an extension, but it was too late. In short, its lien expired under Oregon law. As in Michigan and Tennessee, the bank’s perfected lien in Oregon was senior.
The bank’s lien was senior to the nurseries’ liens because the court determined priority under the law of the respective state where the farm products were located. For example, the priority of liens on farm products located in Tennessee is determined under the law of Tennessee. On appeal, the court noted the issue of whether courts exercising bankruptcy jurisdiction should apply forum or federal choice-of-law rules—an area where the circuits are split. But because either approach would yield the same result, the court declined to take a side. By applying forum (Texas) or federal choice-of-law rules, for example, the priority of liens on trees that the nursery sold to the debtor in Michigan would be determined by Michigan law.
On appeal before the Fifth Circuit, one of the nurseries (Fishback) lost on two additional issues. First, the nursery argued that a choice-of-law clause in an invoice between the nursery and the debtor should apply in the lien dispute between the nursery and the bank. Lacking authority to support its contention, the nursery failed to persuade the court. The rights of a bank in a lien dispute are not controlled by a choice-of-law provision in a contract between other parties. Second, the nursery contended that it should prevail because of its “substantial compliance” with a relevant statute. The nursery relied on a decision of the Oregon Supreme Court, which explained that a party could satisfy the requirements of a statute by complying with its essential matters. One could fail to check all the required boxes under this approach and still prevail. The nursery based its substantial-compliance argument on its UCC statement, but this also failed because a UCC statement would not meet the objectives of the statute. It fails to notify parties such as the bank that a lien had been extended. In sum, the nurseries had plenty of lien trouble down on the farm.