Liens and Security Interests in Farm Products
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Join CSC® for a free webinar by Paul Hodnefield, associate general counsel, on the fundamentals of UCC filings regarding agricultural lien laws.
One of the challenges when making secured loans to farming operations is sorting out the perplexing array of overlapping filing and notice requirements under applicable state and federal laws. These include UCC Article 9, state agricultural lien laws, and the federal Food Security Act. Too often, secured lenders lump these laws together under the single concept of “farm filings.” Yet, each of these statutory provisions each have a separate purpose and legal effect.
This free program explains the role of these laws and the related records in farm-related secured transactions. Attendees will take away a better understanding of how the UCC, agricultural liens and the Food Security Act interact and how to comply with the filing requirements for each.
Annie: Hello, everyone, and welcome to today's webinar, "Liens & Security Interests in Farm Products." My name is Annie Triboletti, and I will be your moderator. Joining us today is Paul Hodnefield. Paul Hodnefield is the Associate General Counsel for CSC where he is responsible for advising the company regarding real estate recording, notaries, the Uniform Commercial Code, and other public record transaction services. He is a subject matter expert and frequent speaker on filing, recording, and search issues and has participated as a panelist in numerous continuing legal education program for the ABA, State Bar Association, and several other organizations. With that, let's welcome Paul.
Paul: Thank you, Annie. In my role at CSC, it's my responsibility to be the subject matter resource for all things related to the search and filing process for UCC and related records. In that capacity, it's my job to be involved in the industry. I participate with the filing officers in their organization, IACA. I monitor case law. I monitor legislation on a daily basis. I do a lot of troubleshooting with filing offices, and I also co-chair a task force on filing office operations and search logic for the ABA.
Needless to say, I get a lot of information from a lot of different sources. The favorite part of my job is when I can share that information, and that's what I'm going to do today on a specific topic, and that has to do with liens and security interests in farm products.
I put together this program because the farm filing topic generates a lot of questions both from a filing and from a search perspective. One reason is that there simply is a lot of confusion out there over what public records are involved in the agricultural finance process and how they're used. This partly results from how lenders and legal professionals commonly describe the records involved, imprecise terms such as "farm filing" or "agricultural liens" are frequently bandied about when discussing these transactions involving farm products. However, these terms are all too often misused. They will lump together different types of records that each have distinct purposes, requirements, and legal effect.
It is essential that those involved in the agricultural finance process understand the purpose and the use of each of these different public records that might be filed or searched as part of the transaction. My goal today is to explain the basics of the applicable laws, at least those that might require the filing or searching of a public record as part of a transaction involving farm products. These will include which laws apply, the purpose of each of the laws, what records may need to be searched or filed during the due diligence process, and the general compliance requirements for each record.
Specifically, what I'm going to do today is I'll begin with an introduction of the different records involved, then move on and discuss what exactly are farm products anyway, and then I'll move through and talk about the different types of laws and records involved applicable to security interests, agricultural liens, and the Food Security Act. I'm also going to wrap up with a very brief overview of the Perishable Agricultural Commodities Act or PACA, even though it technically doesn't involve any search or filing.
With that, let's go ahead and get started. As a threshold issue, what exactly are we talking about here when we're talking about farm filings? Well, "farm filings" as that term is often used when I hear people talk about it can mean one of three things. It can mean a UCC financing statement filed in connection with a security interest, an agricultural lien, which may also involve a financing statement, or an effective financing statement, which has nothing to do with the UCC, at least not directly, which would be filed under federal law.
To break this down just a little bit, there are three types of records that could be filed in relation to a farm filing, and they consist of a UCC security interest. It's a consensual lien, a voluntary lien granted by the debtor. It generally will require the filing of a UCC financing statement, and we'll go into more detail on all of these three items a little later.
Then there's also the agricultural lien, which is not a UCC security interest. An agricultural lien is a nonconsensual lien that arises by operation of statute. However, it may also require the filing of a UCC financing statement.
Finally, a filing in the central notification system, which is established under the Food Security Act, the record which would get filed for that purpose is an effective financing statement.
All three of these are different. For example, the security interest is a type of lien. An agricultural lien is a different type of lien, and it is separate and distinct from a security interest. An effective financing statement filed in the central notification system is not a security interest. It is not an agricultural lien. In fact, it is not a lien at all. It is filed for an entirely separate purpose.
We'll go into much more detail on each of these three types of records that may get filed in connection with farm financing. First, though, let's take a look at an important aspect of this. What are we talking about as far as the collateral that would be subject to these records? What is a farm product? Because that's what this is really all about is taking farm products as collateral.
Well, "farm product" is a term as defined in Article 9. In a nutshell, it's what you would expect it to be, although there are some exclusions. For example, standing timber is not a farm product. To the extent the debtor is engaged in farming operations, it would be goods which are crops, livestock, or supplies used in farming operations or the products of the crops or livestock in their unmanufactured state.
The threshold issue here is, first of all, is the debtor engaged in a farming operation? In order to be a farm product, it has to be in respect to which the debtor is engaged in a farming operation. "Farming operation" is also defined under Article 9, and it means again what you would expect – raising, cultivating, propagating, fattening, grazing, and on down the line of crops or livestock.
Also, the products of livestock and crops have to be in their unmanufactured state. What exactly does that mean? Well, "unmanufactured state" is not a term defined by Article 9, but I guess the courts would determine it on a case-by-case basis. Based on the comments to Article 9 and things, there are some ideas of what constitutes processing or manufacturing.
There is some processing allowed. For example, pasteurization or boiling syrup into sap generally would not be considered part of the manufacturing process. However, perhaps taking that syrup and then bottling it or using the pasteurized milk in some other product might bring it into that manufactured state. Once it's in a manufactured state, it loses its characteristics as farm products and turns into inventory. Who happens to hold it at that time?
Taking a look at the definition of farm products, there are a wide variety of things that can be farm products, and I'll give you an example here. This comes out of Louisiana. This is a list of farm products that Louisiana has published for use under their Food Security Act, but this is by no means an exhaustive list. The types of things that could be farm products are the obvious things you would expect, things like cattle and chickens, soybeans, corn, onions, that type of thing.
But there are probably some things in here that might raise an eyebrow. For example, minnows can be a farm product under the definition we just reviewed. Somebody who is raising minnows for sale to be used as fishing bait, for example, it may be a farming operation for the production of those minnows.
Surprisingly, of course, this is Louisiana, so you might have some interesting things on here, and that certainly is the case. For example, alligator eggs can be a farm product. In fact, apparently, they raise enough alligator eggs that they warranted their own code on the list in Louisiana. I would hate to be the farmer that had to go and take those out of the nest, but alligator eggs can be a farm product.
Even squirrels. For some reason, squirrels can be considered a farm product in Louisiana. Somebody must be raising them out there for some purpose. I have no idea what.
Again, this is not an exhaustive list for Louisiana or any other state. Anything that falls within the definition based on farming operations and farm product could be considered a farm product.
But the mere fact that a good is either livestock or some sort of animal or a vegetable of some sort or a fruit, that doesn't automatically make it a farm product. This is especially the case when it comes to certain animals. For example, a horse. Horses can certainly be a farm product, but they can be other types of goods as well. There are cases out there that have addressed this issue, and they go back a ways.
Here's an example, the Kazmaier v. Connelly case, this involved an issue where the question was whether a horse constituted consumer goods or equipment under the UCC. It wasn't even a question of whether it was farm product, and that was because the parties involved were not engaged in manufacturing operations or in farming operations. The horses were being used for other purposes, and the question was, "Was it a consumer good where somebody owned the horse just for pleasure, for riding purposes, or was it used for some other purpose under the UCC?" There the court deferred to a jury to determine what the primary use of that horse was. The courts will typically look to what is the primary use of that good, and if it's something other than a farm product, if it's being used as equipment, it will get classified as equipment.
There are other cases as well. Racehorses have been defined as equipment by the courts. Now, the courts are going to address this always on a case-by-case basis, so it is important to take a look at all the facts and circumstances around it, but the important thing to take away is that the mere fact that the good is an animal or some other type of growing thing, that does not automatically mean it's a farm product. It has to fall within that definition that we discussed, and the debtor has to be engaged in farming operations.
Let's talk about the first of the applicable laws that we need to discuss when discussing agricultural finance or financing farming operations, and that is security interests in farm products, which are, of course, governed by Article 9 of the Uniform Commercial Code. Farm products under Article 9 are a type of good. They are goods, and as goods they are subject to the normal rules for Article 9 for perfection and priority. They're really no different than any other type of good.
Perfection of a security interest in farm products is done by filing a financing statement. The law of the jurisdiction where the debtor is located is going to govern perfection and priority of security interests. So the financing statement will be filed in the jurisdiction where the debtor is located under Section 9-307, and priority will also be determined under the Article 9 priority rules. There are a special priority rules for a security interest in farm products with one exception, and that is the purchase-money security interest. There are special rules that apply to a purchase-money security interest in livestock.
For those of you that have worked with purchase-money security interests, the rules for purchase-money security interests in livestock are actually very similar to a purchase-money security interest in inventory. There is no 20-day window after the debtor receives permission possession of the livestock in which to perfect. The security interest must be perfected before the debtor receives possession of the livestock.
There is a notice required that is very similar to the notice required for a purchase-money security interest in inventory. The difference is that while the notice has to be sent to the holder of a conflicting security interest, it must be received within six months before the debtor receives possession of the livestock. In other words, the notice letter is effective to cover deliveries of livestock for a six-month period. With a purchase-money security interest in inventory, the notice is effective to cover deliveries for a five-year period. So it's a much shorter period when it involves a purchase-money security interest in livestock.
The content requirements of the notice are very similar to the purchase-money in inventory, and just like a purchase-money security interest in inventory, the secured party bears the burden of proof for compliance with all the requirements of obtaining that purchase-money security interest, and they must strictly comply with these requirements. As a result, the best practice for sending the notice is just like for a purchase-money security interest in inventory. It should be sent by certified mail or some other method that will provide proof of delivery.
As I mentioned, purchase-money security interests apply to farm products just like other things with just some special rules for livestock, but for other types of farm product collateral, the purchase-money security interest rules don't always fit. How does a lender enable a debtor to acquire something that's grown on a farm? It may not be altogether clear how the lender could get a purchase-money or that superior priority in those crops.
For that reason there is an optional provision in an appendix to Article 9 called a production-money security interest. The production-money security interest is an optional provision that the states were able to enact if they wanted to, and what it does is it is essentially the equivalent of a purchase-money security interest.
However, only seven states actually enacted the production-money security interest provisions. What these include are special definitions for production-money security interests. There is some general description of what a production-money security interest is and how it works as well as production-money security interest perfection and notice requirements, which again are very similar to the requirements for purchase-money security interests in inventory or a purchase-money security interest in livestock.
In the states where this is available, if the secured party does perfect a production-money security interest, it is substantially the same as a purchase-money security interest, but rather than somebody that provides goods on credit or enables the debtor to purchase goods, this is available to those who provide inputs, the value that enables the debtor to produce the crops. In many senses, this is similar to agricultural liens, which we'll come to in a minute, and I'll explain why when we get to those.
One other thing I want to cover about security interests in farm products is that there is one special rule when it comes to the disposition of collateral. Just like any other type of good, if the debtor disposes of the collateral without the secured party's authorization, the security interest will continue to follow that collateral. But there is an exception, and this applies to most types of goods, and that is . . . Let me back up a second.
If the debtor does dispose of the farm products without the secured party's authorization, then the secured party can bring a replevin or a conversion action against the party that acquired the goods from the debtor. That's following an unauthorized disposition. Likewise, security interests will attach to proceeds of the collateral so that a secured party ordinarily will have a choice – go against the proceeds held by the debtor or go against the transferee for conversion or return of the collateral.
There is a big exception to this, though, and that is if the buyer or the transferee is a buyer in the ordinary course of business, the buyer will ordinarily take free of a security interest created by the seller even if the buyer knows of its existence. However, Article 9 carves out farm products from the buyer in ordinary course. In other words, a buyer in ordinary course of farm products from the farmer, the person engaged in farming operations, will still be subject to that security interest under Article 9, at least in the official text of Article 9.
It was due to this provision that the Food Security Act was enacted on a federal level, and I'll explain when we get to that portion how it applies to this provision. Before we get to that, though, I want to talk about agricultural liens.
Agricultural liens are not UCC security interests. They're very different. There is a definition. It is a defined term in Article 9. It means an interest in farm products that secures payment or performance of certain obligations, and the obligations arise from goods or services furnished in connection with the debtor's farming operation. In other words, somebody provided inputs that enabled the debtor to raise a crop or raise livestock.
It's created in favor of the person who provided those inputs in the ordinary course of business. In other words, they're in the business of providing the types of goods or services, or they're in the business of leasing agricultural property in connection with farming operations.
The effectiveness does not depend on the person's possession of the personal property. There are agricultural liens out there, common-law liens, possessory liens, common-law possessory liens for people that might provide certain services for livestock, for example, but they would not fall within the definition of "agricultural lien" unless it wasn't dependent on possession for perfection.
So again we are looking at a key determination. Is the debtor engaged in farming operations? If they're not engaged in farming operations, an agricultural lien or the definition of "agricultural lien" wouldn't necessarily apply.
Some examples of common agricultural liens out there, and I should point out that each state has its own focus of agricultural lien laws, but there are some that are very common.
A landlord's lien, this is typically where a farmer will rent out a portion of their land to another farmer who raises the crops. An agister's lien, oftentimes this will be a lien for tilling or harvesting, that type of thing. There are various other types of liens – liens for services of stallions and so forth, veterinarians, seed providers, other agricultural inputs such as maybe fertilizer or chemicals. A farmworker might be able to obtain an agricultural labor lien, and there are special liens out there for harvesters.
There's a wide variety. What they tend to have in common is they enable the debtor to produce the crops or livestock. They're inputs that enable the production of this. So in many ways these are like a production-money security interest or a purchase-money security interest because they are enabling the debtor. At least in part they are enabling the debtor to produce the crops or the livestock, the farm products.
Some general things to keep in mind about agricultural liens. One is – again, I can't emphasize this enough – an agricultural lien is not a security interest. A security interest is a consensual lien that arises by contract. An agricultural lien is a nonconsensual lien that arises by operation of law when the statutory requirements are satisfied. But agricultural liens fall within the scope of Article 9. Therefore, to a certain degree, they must satisfy Article 9 requirements.
Lenders, those who are financing farming operations, generally are not going to be entitled to obtain agricultural liens. Agricultural liens generally arise in favor of those who provide the inputs – goods and services that enable the debtor to produce the crops – not necessarily those who just provide money that enables the debtor to acquire the crops or livestock. Lenders don't need to worry too much about filing them, but they do need to worry about searching for them.
The agricultural lien statutes out there, they may have additional requirements for creating the lien, and they may have their own priority rules.
I mentioned that Article 9 applies to agricultural liens, but not every portion of Article 9 necessarily applies to agricultural liens. Only the portions of Article 9 that specifically refer to agricultural liens applied agricultural liens. You may see a requirement that the financing statement must be filed to perfect a security interest or agricultural lien, but the priority rules may state just security interests or just agricultural liens. It's the same with the choice of law provisions.
Here's a list of the Article 9 provisions that relate directly to agricultural liens. Except for what specifically applies to an agricultural lien under Article 9, any questions will be resolved from the agricultural lien statute itself.
When it comes to perfection of an agricultural lien, the first thing to be concerned about is what's the filing location, which would also be the search location. A different law may apply to an agricultural lien than applies to a UCC security interest. The general rule for agricultural lien choice of law . . . oh, I'm sorry. I'm getting ahead of myself.
First of all, when it comes to perfection of an agricultural lien, when does it become perfected? Well, it's perfected if it becomes effective under the applicable statute and complies with the requirements of Section 9-310, and 9-310 requires the filing of a financing statement in virtually all cases. Only a security interest can be perfected by possession. As I said, there may be a common-law lien that enables the perfection of a lien in farm products by possession but not an Article 9 agricultural lien.
As far as the state lien perfection requirements by statute, sometimes the statutory lien requirements will require . . . in addition to compliance with Article 9, they'll require perhaps the filing of a lien statement at a local or state level. They may also require notice to be sent to the debtor. It varies widely from state to state. You may have a lien statement. You may have a notice requirement, and it is necessary to comply with both the state lien law and the UCC in order to get access to any special priority that would arise under the agricultural lien statute. That's because the agricultural lien statute may specify a different priority, and Article 9 will defer to that.
Getting back to where I was on the filing location, that's going to be dependent on the governing law. The governing law in the case of farm products is the law of the jurisdiction where the farm products are located, not the location of the debtor if they are different.
For example, my family used to have a farm right on the Minnesota/Iowa border. There were some farming operations that actually farmed on both sides of the border. It may be necessary, for example, to search and file for agricultural liens both in the jurisdiction where the debtor is located, which may be Iowa, and where farm products are located, which may be Minnesota, in order to pick up agricultural liens.
So they're not filed necessarily where the debtor is located. They may coincidentally be filed there, but the governing law is the law of the jurisdiction where the farm products are located, so an agricultural lien or I should say a financing statement filed to perfect an agricultural lien would be filed in the central filing office of the state where the farm products are located. If a lien statement is required to be filed, that's going to require taking a look at the applicable agricultural lien statute and where it designates. It may be at the county level. It may be at the state level. It may be in a different filing office than other types of documents would be filed. You have to check the applicable statute if you're searching for the lien statement.
When filed in the central filing office, the lien statement potentially could be effective as a financing statement if it satisfies all the requirements for a financing statement in Section 9-502(a), which means the correct name of the debtor, the name of the secured party, and an indication of the collateral.
I don't recall if this is anything mentioned in Article 9 or in the official comments, but there is some case law out there that mentions that a lien statement could be effective, although it wasn't dicta, so this isn't a hard-and-fast rule. The content requirements of a lien statement if one is required are set by statute, so you would have to look at the applicable statute.
When it comes to attachment of agricultural liens, the attachment rules of Article 9 don't mention agricultural liens, so it's necessary to look to the applicable agricultural lien law to determine the scope of the attachment of the agricultural lien. Generally, they remain attached to the farm products following disposition, so the claimant can maintain an action both against the debtor and perhaps against the transferee of collateral. Generally, under Article 9, agricultural liens don't attach to proceeds, but they may under the applicable agricultural lien law.
When it comes to the priority of agricultural liens, there are special rules that apply. In general, under Article 9, if there is no special priority rule in the applicable lien statute, then the normal Article 9 rules would apply to agricultural liens. However, if the state lien law provides for a different priority for agricultural liens, the agricultural lien will get that state law priority if that priority is created by the same statute that creates the lien and the lien is perfected.
For example, there was a case not too long ago where a feed supplier's agricultural lien had a superpriority over the bank's prior perfected security interest, and that's because that agricultural lien statute gave the feed supplier that priority. It makes sense because the feed supplier enabled the production of the farm products that were subject to that lien. Therefore, the bank probably came out ahead. In this case, the bank wanted to come out even more ahead, but the court correctly held that the feed supplier's lien did have the superpriority because the statute gave it a superpriority. Article 9 steps back and defers to that lien law when there's a conflict with the Article 9 priority rules.
When it comes to agricultural liens, just a few things to bear in mind. When it comes to filing, lenders don't usually have to worry about that. That's going to be the issue for the suppliers of goods and services to those engaged in farming operations. The claimant is going to have to file a UCC financing statement in the location of the collateral, in the state where the collateral is located. Typically, that's going to be in the central filing office of the state where the collateral is located, and, if it's required by law, they may have to file a lien statement as well or provide notice of intent to claim a lien to the debtor.
When it comes to searches, bear in mind it's important to conduct a UCC search in the location of the farm products if it is different than the state in which the debtor is located. Again, it may be required to conduct UCC searches in multiple states in order to pick up all the security interests and applicable agricultural liens. If somebody is looking for the lien statements as well, it's necessary look at the lien statute and see whether it was filed in the appropriate office that's designated by the lien statute.
That's an agricultural lien. Now I want to move on and talk about the federal Food Security Act with the time we have left. The Food Security Act is not a lien. It's very different. It is a federal law that was enacted in response to the limitations of Section 9-320(a), which is the provision that exempts farm products from the buyer in ordinary course provision. In other words, a buyer in ordinary course of business from a seller engaged in selling goods of that kind is going to take subject to a security interest in farm products under Article 9.
There were some concerns about this by large buyers of agricultural products. They did not want to be subject to having to pay twice for the goods. They wanted some sort of protection, and they went to Congress for this. Back in the 1980s, these buyers of farm products went to Congress and expressed concerns, and Congress held some hearings and made the findings. Specifically, the Article 9 carveout of the farm products from buyer in ordinary course protection permits enforcement of liens against a buyer in ordinary course of farm products. This situation places those purchasers at risk for double payment, and that leads to preventing free competition in the market for farm products.
Therefore, Congress came up with the Food Security Act, which is codified at 7 United States Code Section 1631. What the purpose of this is is to remove any obstructions to interstate commerce in farm products by providing protection for buyers in ordinary course. The way it does this is by preempting Article 9 with respect to the buyer in ordinary course of farm products. It expressly preempts the Article 9 provisions to the contrary. That narrows it down to section 9-320(a).
What it does is the Food Security Act provides that a buyer of farm products in ordinary course of business from a seller engaged in farming operations is going to take free of the security interest created by the seller. This is no different than if a company goes into an equipment dealer and buys a tractor. They're going to take that tractor free of a security interest created by the equipment dealer even though the buyer may be aware that the inventory of that equipment dealer is subject to the security interest. Here, Congress went ahead and made that same rule applicable to buyers in ordinary course of farm products.
However, there are some additional protections for a secured party to a person who holds a security interest in those farm products. If the secured party sends a notice to the buyer as provided by the Food Security Act and notifies the buyer of the security interest or if the state has certified a central filing system under the Food Security Act and the secured party files what's called an effective financing statement, then, if the buyer has failed to register or search that index, then they can't be a buyer in ordinary course. If either of these exceptions apply, the buyer would not be a buyer in ordinary course and would take subject to the security interest created by the farmer.
There are two different ways to accomplish this goal. One is the notice to the buyer. The Food Security Act provides that the secured party can send this notice to the buyer. The Food Security Act requires the debtor upon request of the lender to furnish a list of the prospective buyers of farm products, and then the secured party can then send the notice to all those prospective buyers.
That does not limit entirely the parties to whom the debtor can sell the farm products. There are special protections if the debtor sells to other buyers. So they can sell to non-listed buyers, but there are special duties that the debtor has to abide by in order to protect that secured party. Basically, it creates a constructive trust if I recall correctly.
When it comes to sending the notice, the buyer is going to take subject to the security interest if it gets the notice within one year of the sale. What that means is that once the secured party sends that notice, the notice is effective against that buyer for one year from the day the buyer receives it. Of course, the secured party can send new notices whenever they want to.
The notice to the buyer is the typical notice, the contents of which are spelled out in the Food Security Act. It has to have the name and address of the debtor and secured party. It must provide the Social Security number of the farmer. It was amended about 10 years ago to provide for other unique identifier numbers due to privacy concerns over Social Security numbers. It has to describe the farm products that are subject to the security interest as well as the payment obligations of the buyer to release the security interest, and the secured party has to sign or otherwise authenticate that notice.
If there are material changes to the contents of that notice, then the secured party is under an obligation to send an amended notice to the buyer within three months after the notice has been . . . or after the change. I'm sorry.
That's one way to deal with it. Another approach is what's called the central filing system. The Food Security Act provides that the secured party or, I'm sorry, that a state may apply to the secretary of agriculture for certification of a central filing system into which a record called an effective financing statement, not to be confused with a UCC financing statement, but into which an effective financing statement can be filed.
A central filing system is a statewide system for effective financing statements filed under the Food Security Act, and it has to be certified by the Secretary of Agriculture. There are some states that refer to this as a central notification system rather than a central filing system. Central filing system is what the Food Security Act . . . that's the term used there, but they're really interchangeable, CFS or CNS.
In any event, to get certification, the system has to permit the filing of effective filing statements and allow the Secretary of State to compile those into a master list. The Secretary of State is responsible for maintaining the list of registered buyers who receive the list. This includes commission merchants and selling agents. Then the Secretary of State would have to regularly generate and distribute this list to each of the registered buyers, commission merchants, and selling agents. Finally, Secretary of State also has to provide one-off searches of these effective financing statement records for nonregistered parties.
Because of the certification requirements, not every state decided to go ahead and take this route. In fact, only a minority of states have central filing systems. Those that do are listed here. You will notice that there are three that are asterisked. Maine, Vermont, and West Virginia obtained certification of their central filing systems back in the 1980s but never implemented the process. They have certification, but they never approved forms for this use or anything like that. So in effect, they're not using the CFS system.
What gets filed in these systems? It's called an effective financing statement. As I said, it's not to be confused with a UCC financing statement. They are different. They have different purposes and different legal effect.
For an effective financing statement, the content requirements are a little different. They do require the name and address of the debtor and secured party. They require the Social Security number or other unique identifier for the debtor, and they have to have a description of the farm products subject to the security interest that is much more detailed than what would be necessary in a UCC record. It includes the amount of the farm products if that's applicable and then also the name of the county or, in the case of Louisiana, the parish where the farm products are located.
Finally, it has to have the signature or other authentication of the debtor, although there is an exception in that the signature or authentication are not required on an EFS record in states that permit or allow electronic filing of the records. It would have to be on a paper record recorded in the state, but it's not required on a record filed electronically in the same state.
Once it's filed, an effective financing statement is effective for five years from the date of filing. Unlike the direct notice requirement of the Food Security Act, the EFS record is effective for five years, and just like a UCC financing statement, it can be continued for additional five-year periods by filing a continuation statement within six months before expiration of that five-year period.
Effective financing statements can be amended. Just like a UCC financing statement, the Food Security Act requires amendment following material changes to the contents.
As far as the contents of amendments, it's really very similar to filing UCC amendments. They do require the signature or authentication by the debtor in some cases, but as I said, if the record is filed electronically in those states that allow it, it doesn't require that.
Amendments must be filed within three months of a material change to the effective financing statement, and this is different than for UCC financing statements, of course, which might have different time periods for required amendments following post-closing changes or post-filing changes.
When it comes to the lapse of an EFS record, there is a record that can be filed that terminates the EFS record. Otherwise, it lapses upon the filing of such notice. It's called a Notice of Lapse. It really isn't a lapse. It's the same thing as a termination statement. That requires the secured party's signature or authentication. Again, there might be an exception for electronically filed records.
When it comes to the sufficiency of an EFS record, the Food Security Act says that minor errors do not affect sufficiency if it substantially complies with those requirements. Only seriously misleading errors will make a record ineffective. It's very similar to Article 9 with one big exception in that it doesn't have special rules for errors in the debtor name. In UCC financing statements, of course, under Section 9-506(b), virtually any error in the debtor name will render the financing statement seriously misleading. There's not a counterpart to that for effective financing statements.
As far as the forms, those states that have central filing systems have all generated their own forms. These can be a little confusing because many of them based them on the UCC statutory forms. They look just like a UCC record. They might be slightly different, but they will look a lot like a UCC record. They may even be called a UCC1F or something similar, but these are not UCC records. They're not intended to be UCC records. They use that similar terminology. They may look alike in many of the states, although several states have records that are very clearly not the same as UCC.
There is the potential, however, in some states, even though they're not UCC records, if they do satisfy the requirements for a sufficient financing statement, it is arguable that they could be effective as a UCC financing statement in addition to satisfying the requirements for an effective financing statement. For that to happen, the state would have to file them in the same index as the UCC records, and there are states that do that. So it is possible that just because it says EFS, it could still be effective as a financing statement for UCC purposes. For that reason, it is necessary to conduct further inquiry if a search were to disclose an EFS record in the UCC records.
Farm products lists, the Secretary of State is responsible for organizing those lists and sending those out to subscribers, arranging them by the debtor's Social Security or unique identifier. The Food Security Act now does allow the Secretary of State to encrypt that information to a certain degree, but it must still allow searches by that information. Then the Secretary of State has to go ahead and disperse the list to those who have subscribed to it. It can be either in paper or electronic form. Again, the index in which these records are filed has to be searched or it has to have the ability to be searched. For that reason, some states do commingle it with UCC, but there are some that permit separate searches.
In summary, compliance with the Food Security Act is essential for the secured party in order to ensure that a buyer of the farm products is not a buyer in ordinary course.
A financing statement is generally still necessary to be filed to perfect the security interest. The UCC financing statement perfects a security interest. The EFS record, the effective financing statement, prevents a buyer from being a buyer in ordinary course.
If the secured party fails to either file its effective financing statement where that's required or fails to send its direct notice in other states, then it's going to not have that buyer in ordinary course protection. That does not mean it's unperfected. All it means is that its remedies are limited to going against the proceeds in the hands of the debtor. It can't go against that buyer in ordinary course to try and reclaim the goods or maintain a conversion action.
To wrap up I want to mention the Perishable Agricultural Commodities Act or PACA, because I'm frequently asked if we can do PACA searches. PACA is designed to protect the suppliers of fresh fruit and vegetables, things that are perishable, and it does this by creating a constructive trust. Those who receive these perishable commodities are holding them in trust for the unpaid suppliers and sellers.
As a trust and especially as a constructive trust, there is no public record necessarily made of that that can be searched. Therefore, there really are no searches for PACA interests, but be aware there is this thing out there called PACA, and it does apply to certain obligations that a debtor may have, but no public record and not the same as a security interest or a buyer in ordinary course protection afforded by the Food Security Act.
Again, the important thing to remember is you've got three different types of records applicable here. You've got UCC security interests, which have to be perfected under the UCC rules. You have agricultural liens, which are within the scope of Article 9 and require the filing of a financing statement but also might require compliance with other law, the law that created the agricultural lien. Finally, the Food Security Act, which is not a lien at all, but it prevents a buyer from being a buyer in ordinary course and preserves additional protections or additional remedies for the secured party that files.
Remember that these are three distinct, different documents and that they should not be confused. Unfortunately, they are all too commonly confused even by filing offices. You'll see filing offices referring to effective financing statements as agricultural liens, which can be really confusing for people that are looking at the administrative rules or a filing office's website.