LIENS AND SECURITY INTERESTS IN FARM PRODUCTS
One of the challenges for those engaged in agricultural lending is decoding myriad overlapping filing and notice requirements under a variety of applicable laws. These laws include Uniform Commercial Code (UCC) Article 9, state agricultural lien laws, and the federal Food Security Act. Too often, lenders and legal professionals conflate these requirements under the single concept of “farm filings.” Yet, each of the records filed under applicable laws have a distinct purpose and legal effect.LEARN MORE
GET STARTED WITH CSC
Join CSC Associate General Counsel Paul Hodnefield for this hour-long webinar that will help demystify some of the misconceptions and explain the unique role that each of these records plays in farm-related secured transactions.
Disclaimer: Please be advised that this recorded webinar has been edited from its original format, which may have included a product demo. To set up a live demo or to request more information, please complete the form to the right. Or if you are currently not on CSC Global, there is a link to the website in the description of this video. Thank you.
Christy: Hello, everyone, and welcome to today's webinar, "Liens and Security Interests in Farm Products." My name is Christy DeMaio Ziegler, and I will be your moderator.
Joining us today is Paul Hodnefield. Paul is an associate general counsel for CSC, where he is responsible for advising the company regarding real estate recording, notary, Uniform Commercial Code, and other public record transactions.
And with that, let's welcome Paul.
Paul: Thank you, Christy. Good morning, everybody. As Christy mentioned, I am associate general counsel at CSC, and in that capacity it's my responsibility to be the subject matter resource for all things related to UCC and related records. And as part of that, I monitor case law. I monitor legislation on a daily basis. I'm involved in the industry through IACA, the filing officers organization. I coach our taskforce for the ABA on filing office operations and search logic. And I spend a lot of time on the phone with filing offices doing troubleshooting and other issues related to the UCC services that we provide.
So needless to say I get a lot of information from a lot of different sources, and I thoroughly enjoy every time that I can share that information. And today what I'm going to talk about is liens and security interests in farm products.
There are several reasons why secured transactions involving farm products can be especially challenging for both lenders and legal professionals. For one, there are a lot of acronyms to remember. There's UCC, FSA, EFS, CNS, PACA, and others. In addition, the business of farming has historically been subject to special regulations and protections, and with the result that there really is a maze of overlapping state and federal legislation applicable to lending when it involves farm products.
Even the language commonly used by lenders and legal professionals to describe the records involved adds to the confusion. The records relevant to farm lending are often lumped together under the umbrella terms, such as farm filings or ag liens or agricultural liens, when in fact these terms refer to specific types of records that each have their distinct purposes, requirements, and legal effect.
My goal today is to explain the basics of those laws that are applicable to security interests in farm products and what the filing and search of public records as part of a transaction involving farm products involves. This will include which laws apply, the purposes of each, and what records may need to be filed or searched during due diligence and other general compliance requirements for each record.
Now specifically what I'm going to do today is I'll start with a brief introduction of the different types of records involved. Then I'll move on and talk about some essential definitions to understand, and then I'll address specific areas, like security interests, ag liens, the Food Security Act, and the Perishable Agricultural Commodities Act at the end.
Let's start with a brief introduction as to what all is involved here. As I said, there's a lot of acronyms, and some or all may apply to any particular transaction involving farm products.
Of course, we're all familiar with the Uniform Commercial Code Article 9 and how that applies. But there are also state agricultural liens. There's the federal Food Security Act that can involve the filing of what are called effective financing statements, which are not UCC records even though they say financing statement. And finally and less important to our discussion today, but I did want to at least mention it because questions do come up, and that's PACA or the Perishable Agricultural Commodities Act.
So this is what we're going to take a look at today. One or more or sometimes all of these may apply as to a particular transaction involving farm products.
Now the starting point for our presentation today will certainly include a definition of farm products. That's the starting point, the building blocks of our presentation.
So I want to explain what farm products are. It is a defined term in Article 9, and what it means is goods, other than standing timber, with respect to which the debtor is engaged in a farming operation and which are: crops. They can be traditional crops grown on the land or aquaculture, that can be grown in the water. Of course livestock, including aquatic livestock, such as fish. Supplies used or produced in a farming operation, or products of crops or livestock in their unmanufactured states. For example, an example of the latter there, milk is a product of livestock, and just raw milk coming out is in its unmanufactured state. We'll talk a little bit more about that in a moment.
But it is important to remember that the debtor must be engaged in farming operations in order for the goods to be farm products. And a farming operation is also a defined term in Article 9, and it means raising, cultivating, propagating, fattening, grazing, or any other farming, livestock, or aquacultural operation. So it's a pretty broad definition of what it means to be involved in raising the livestock, crops, or other related things.
Now I mentioned there that the goods must be in their unmanufactured state. Well, what exactly does that mean? Well, this term isn't defined in Article 9. So when I used as an example there milk, milk typically undergoes some sort of processing after it's been harvested from the cow. And Article 9, as I said, doesn't define what manufacturing involves or what it means to be in an unmanufactured state.
It does provide some guidance in the official comments. For example, there are some limited processes that are common in producing these goods for market that do not constitute manufacturing. And one example is pasteurization of milk, or in the case of like collecting maple syrup, boiling the sap that's collected down into syrup. These are essentials and traditional steps of the process.
But more extensive processing may result in it in what's called a manufactured state, such as converting grains into alcohol or something like that. That may very well amount to processing or manufacturing. And when that happens, when there is a sufficient level of processing to say it's no longer in an unmanufactured state, then generally the goods become inventory. They're either inventory of the debtor, or more commonly they become inventory of a buyer from the debtor.
I mentioned the different types of farm products. Farm products is a broad definition. Just about anything that you could raise in a farming operation or the products of those falls into farm products. And to give you an example, this is a list of farm products that the Louisiana Secretary of State maintains for the Food Security Act purpose. And this is not an exclusive list, but it'll give you an idea of some of the things that fall within the definition of farm products.
Of course, you have your traditional farm products, like cattle, livestock, chickens, soybeans, corn, and so forth. But you may find some things here that you wouldn't ordinarily associate with farming operations or farm products. For example, minnows. People raise minnows for use as bait or other purposes or for food for feeding fish. In Louisiana, alligator eggs are a farm product. In fact, even squirrels, I don't know how many squirrel ranches there are out there, but squirrels can be a farm product. It all depends on whether or not they are being raised or can be raised on a farm one way or the other.
So it's important to get the understanding that the definition of farm products is very broad. And now we'll move on and talk about the different interests that can arise in these under the various state and federal laws.
Oh, before I do that though, I do want to point out that when it comes to farm products, there are cases where it may not be easy to tell. A horse, for example, isn't always a farm product. It could be something else beyond a farm product. And the same with other types of goods that might be found on a farm.
So how do the courts look at determining it? Generally they look at what the primary use of the good is or of a horse or whatever other farm product it might be. So, for example, a horse could be a farm product if the farm raises horses. But let's say it's a farm that is using primitive methods for producing. Is the horse that pulls the plow a farm product? I think that's a real gray area there. But what about a horse carriage that's used to transport people around sightseeing and things like that? There that horse might be equipment. And what if somebody buys a horse to keep on their acreage because they like to ride? In that case, the horse could be consumer goods.
In fact, the courts have addressed this type thing, and they've applied that test. There's a case from, this is an older case, 1983, and a court found that in that particular case that horses were, racehorses actually were defined as equipment because they didn't meet the definition of farm product and were not consumer goods in this context. So a bank's security interest in equipment was perfected by filing a financing statement and covered the racehorses.
All right. Now let's talk about the different rules applicable under all these different state and federal laws. First of all, we'll talk about security interests in farm products under the Uniform Commercial Code.
Article 9 does have some special rules for farm products here and there, but for the most part filing perfection and priority are generally the same as the general rule for everything else. When it comes to perfection, a security interest in farm products, the general perfection rules apply. You file a financing statement that covers goods or farm products or specific farm products.
Just like any other UCC financing statement, the law of the jurisdiction where the debtor is located governs perfection and priority in farm products of a security interest in farm products I should say. So you can have a debtor that has farming operations in Minnesota and Iowa right along the border there, and the place to perfect a security interest on those farm products, even though they're being grown in Iowa, would be the Minnesota Secretary of State because that's the central filing office of the state where the debtor is located.
When it comes to priority, the standard priority rules apply, the general rules under Article 9, and that means the first to file or perfect will have priority over later parties that file or perfect.
I'm often asked, "What do we have to do in the collateral field or check on the form otherwise to indicate that this covers farm products?" Well, the answer to that in general is there's no special requirements for collateral or other indications on the financing statement form. So, for example, you can describe the same farm products many different ways. It could be very specific, like corn or hogs or cattle. It could be just farm products. It could be livestock. It could be goods. It could be as simple as all assets if the security interest substantially covers all assets of the debtor. All of these can cover the farm products.
The rules are pretty much the same as for anything else in Article 9, and there is no special indication required on the financing statement to indicate that these are farm products. You'll notice that there's no check box for farm products or to indicate that it's filed in connection with a farming operation or anything like that.
There is a check box on the form to indicate ag lien or agricultural lien. However, a security interest in farm products under Article 9 is not an agricultural lien, which leads us into the very next topic — agricultural liens. These are different than Article 9 security interests, and I want to explain what an agricultural lien is, why there's a significant or why it's different, and what significance that has for those who search or file on farm products.
First of all, agricultural lien is a defined term in Article 9, just like farm product is. It means an interest in farm products that secures performance or payment of an obligation for goods or services that are furnished in connection with the debtor's farming operation. In other words, it secures payment of the price for the goods or services that were furnished to enable the debtor to produce the farm products, and it has to be in connection with the debtor's farming operation.
And the agricultural lien is an interest that is created by law, not by a security interest, which is a consensual interest. But this is a non-consensual interest. It's created by operation of law. If certain conditions specified in the statute are satisfied, then the lien arises in favor of a person that in the ordinary course of business furnishes goods or services or leases property to the debtor in connection with the farming operations.
So it has to secure goods or services that are furnished, and it must arise by operation of law without the consent of the debtor. Also, finally, it has to be a lien in which its effectiveness does not depend on possession of the personal property of the debtor. In other words, it's a non-possessory agricultural lien.
So the key determination here again is whether the debtor is engaged in farming operations. If they're not involved in farming operations, then an agricultural lien isn't available.
Now there are a number of different agricultural liens out there. It all depends on the particular state law. For example, a landlord's lien. This doesn't refer to something that a landlord gets if they lent out or lease out an apartment or a commercial space. This means the landlord of agricultural land who is leasing out that land for a farmer engaged in farming operations to use to grow crops.
An agister's lien, this can go by various different terms depending on state to state, but generally means somebody that's providing an input, either goods or services, to raise crops. A lien for service of a stallion, a jack or a boar. A veterinarian's lien, remember a veterinarian provides services in the ordinary course of business to agricultural operations. Providers of seed can be entitled to a lien. Other agricultural input liens, which are a broader type of ag lien. And labor liens. So farmhands, for example, have some protection under agricultural lien laws. And finally, harvester's liens. It's not unusual for persons engaged in farming operations to hire others to come in and actually pick the crop for them with specialized or more efficient equipment than they might be able to otherwise have.
So there's a variety of these. They vary quite a bit from state to state. You will find that certain states have different interests and different protections built into them depending on who had the influence with the legislature at some time. And, for example, you'll see very specialized agricultural liens, like in Maine there's a potato lien, and various other things like that from state to state.
So when it comes to agricultural liens, a few general concepts that are important to understand about the agricultural lien process. First of all, agricultural liens are not security interests. They are not a security interest. A security interest is a consensual lien. An agricultural lien is a non-consensual lien that arises by operation of statute. These are two very different things. However, agricultural liens fall within the scope of UCC Article 9, and that means when it comes to perfection and priority of agricultural liens, the general Article 9 rules apply, with the exception of certain types of perfection rules related to possession.
This is important to understand. Lenders do not get ag liens. They do not get agricultural liens. Agricultural liens are available for those who provide agricultural inputs, such as seed providers, those who provide veterinary services, those who provide fuel to farming operations to allow harvesting, those who provide the land that's being used. These people are entitled to agricultural liens, but a lender is not entitled to an agricultural lien. I suppose they could buy the rights to enforce a lien from somebody, but that would be extremely rare. Generally lenders do not obtain agricultural liens.
Now, as far as filing offices go, when it comes to filing an agricultural lien under the UCC, because it is within the scope of the UCC, all the Part 5 of Article 9 rules applicable to filing offices and filing financing statements, these all apply to the filing of agricultural liens. That means that the same type of rules apply. The lien claimant has to get the debtor name right. They have to file it in the right location and so forth.
Now one thing that is different with an agricultural lien is the governing law. The governing law for an agricultural lien is the law of the state where the farm products are located. That's different from a security interest in farm products, which is the law of the state where the debtor is located.
When it comes to perfection of an agricultural lien, general rules are that under Article 9, an agricultural lien becomes perfected and effective when all the applicable requirements in §9-310 are satisfied, which are really the filing rules. Under §9-310, perfection of an agricultural lien will always require the filing of a financing statement. You cannot perfect an agricultural lien by possession because then, by definition, it's not an agricultural lien under Article 9.
As I mentioned, the law governing perfection of an agricultural lien is the law of the state where the farm products are located, not the law of the jurisdiction where the debtor is located.
There may be additional state perfection requirements in addition to filing under the UCC. The UCC filing is in addition to any other notice or filing requirements that might be required under the applicable state law. For example, an agricultural lien might require a lien statement to be filed at the county, or it may require a notice to be sent to the debtor on an agricultural lien. These have to be done in addition to filing a financing statement.
So if there are additional requirements, it's necessary to comply with both the UCC and the state law requirements to be able to get perfection and priority under Article 9. If just the financing statement is filed, it can limit the lien claimant to the normal priority rules under Article 9 as opposed to any special priority rules that may be available under agricultural lien law. And there are special priority rules available in many states under agricultural lien laws.
The general rule under Article 9 is that agricultural liens have the same priority rules, and that means the earlier time of filing or perfection. But there are exceptions under state agricultural lien laws, and Article 9 recognizes these exceptions.
If the applicable agricultural lien law gives a greater priority to the agricultural lien than the UCC would, then the agricultural lien will prevail when it comes to priority. So that is if the statute that creates the lien also designates the priority. And there are many states that do this. They'll give a super priority to agricultural liens even over prior perfected security interests in the same farm products. And the reason is that really when you take a look at it, an agricultural lien is much like a purchase-money security interest.
The lien claimants of an agricultural lien are typically parties that have provided inputs, such as seed or other agricultural inputs, without which the debtor could not have raised the crop that they have to sell in order to pay for these inputs. So it's just like a purchase-money security interest in that respect. We give super priority to a purchase-money secured party in the collateral that they enabled the debtor to acquire. It's the same thing here. We give the party that provides agricultural inputs a super priority under some state laws because without their input the debtor never would have been able to produce the farm products. So they're entitled to that super priority in some cases. And it's a way of encouraging and protecting those who can provide these essential inputs, these critical inputs necessary for farmers to produce farm products.
Here's an example of how that happened. There was a feed supplier, and the feed supplier was entitled to an agricultural lien. I think this was out in North Dakota. And the agricultural lien was perfected as required by Article 9, and all the requirements were satisfied. And the lien statute actually provided not only for the creation of the lien but also said it took priority over other liens in the same collateral. And as a result, the court said that, yeah, the supplier here had a super-priority agricultural lien over the bank's prior perfected security interest in that same collateral. And again, the rationale here is that without that input, without the supplier's input, the farmer never would have been able to produce the farm products that would be sold to pay for the inputs. So beware of that super priority.
Again, when it comes to agricultural liens, this is more of a concern from a searching perspective for a lender or legal professional that's conducting a search.
So when it comes to just to sum up agricultural liens and what they really mean, filing an agricultural lien, it's not something lenders have to really worry about. It's the lien claimants that have to file a UCC, and it has to be filed in the location of the collateral. So in the example I gave you, where you have a farmer in southern Minnesota, the farmer's residence is in southern Minnesota, but the farmer has operations in both Minnesota and Iowa, a security interest would be perfected by filing with the Minnesota Secretary of State. But an agricultural lien in farm products may have to be filed in Iowa with the Secretary of State and also perhaps in Minnesota, depending on where the particular farm products are located in either state or in both states.
Another important thing to understand is that the UCC record that's filed to perfect an agricultural lien does not have to indicate it's an agricultural lien. It can. There is a check box there. But it generally is not required. Checking the ag lien or not box generally will not have any impact on the enforceability of that UCC.
Now it's possible that some individual states might have a non-uniform provision with regard to that. I haven't seen one, but that doesn't mean there isn't one out there somewhere. So be aware of that. But generally, failure to check the box that it's an agricultural lien doesn't have any effect on the effectiveness of the record.
A filing office, from its perspective, has no distinction between a UCC filed to perfect a security interest in farm products and a UCC filed to perfect an agricultural lien. The same intake rules apply. They're both indexed the same way. They're both searched the same way. There's really no difference. The filing office makes no distinction between them.
And finally, for filing, the normal rejection reasons apply. So the lien claimant must comply with Article 9 and all the filing requirements of Article 9.
Now, from a searching perspective, lenders and legal professionals do have to pay attention to agricultural liens if they are dealing with a debtor that might be subject to an agricultural lien. The search process though is exactly the same as for searching a UCC security interest. You search, of course, the central index of the state where the debtor is located. But in addition to that, you would also typically search the central index of the state where the farm products are located, because a search for example, in the example I've used over and over, a Minnesota farmer with operations in both Minnesota and Iowa, searching the Minnesota Secretary of State will find security interests in farm products. It will also find agricultural liens in farm products that are located in Minnesota. But it may be necessary to also search the Iowa Secretary of State to find agricultural liens in farm products that are located in Iowa. So from a due diligence standpoint, be aware that searches may need to be conducted in more than one jurisdiction if the farming operation takes place in more than one state.
So that's the agricultural lien. Now I want to move on and talk about one of the most misunderstood records that can arise under Article 9, and that's the effective financing statement under the Food Security Act. The Food Security Act is a federal law, and it overlaps the UCC and preempts the UCC in some respects with regard to priority and remedies available to lenders.
In order to understand why the Food Security Act is relevant here it's important to understand what happens upon the disposition of collateral under Article 9. The general rule is that a security interest will continue in collateral unless the secured party authorized the disposition free of the security interest. In other words, if my assets, my company's assets are subject to a security interest and I sell them to somebody else, that security interest is going to follow the goods, and the buyer, if they don't make an effort to deal with that security interest, they may have to pay twice for those goods. They might be subject to an interest for conversion if the original debtor defaults.
Well, there is an exception to that general rule though, and that is that . . . I'm getting ahead of myself a little bit here, but bottom line is if there's a transfer and the secured party did not consent, then the secured party has a range of remedies available. They can go after the buyer or the transferee for replevin, in other words return the goods. Or they can bring a conversion action, make them pay again for them. And that security interest that follows it will also apply to the proceeds of the collateral. So it gives the secured party some pretty good remedies.
But there is an exception to this, and that's for a buyer in ordinary course of business or a BIOCOB. The general rule is that a buyer in ordinary course of business will take free of a security interest created by the seller even if the buyer knows of its existence. Now to be a buyer in ordinary course of business, the buyer must be a buyer from a person engaged in the sale of goods of that kind.
And so where this would apply typically I'll give you an example. Maybe somebody goes into a big-box retail store and they buy a great big, huge television in there for a few thousand dollars. That television is inventory of that seller in that case, and that inventory may be subject to a security interest by a bank. But because the buyer goes in, they're buying in ordinary course of business from a party engaged in selling goods of that kind, they're going to take free of that security interest. And it's a really a policy choice. We don't want the lender to be tracking down all the buyers out there, making them pay twice if the retailer defaults. The lender knows going in that the retailer is going to sell these and that they're not going to have the ability to go after the retail buyers.
But there is an exception to this rule. A buyer in ordinary course, other than a buyer of farm products from a person engaged in farming operations, takes free. So the drafters of Article 9, and this predates revised Article 9, this goes way back to the original Article 9. The drafters carved out persons engaged in farming operations as sellers engaged in selling goods of the kind for a buyer in ordinary course. Perhaps they thought farmers at the time were less sophisticated, or I don't know the exact reasoning behind it.
But bottom line is they carved this out. And what this does is it creates a situation where somebody could buy goods from a farmer if they're farm products and be subject to paying twice for them if the debtor did not pay their share to the secured party. And this created a problem with some large buyers of farm products, some industrial level buyers of farm products. And they went to Congress and said, "We don't want to have to risk having to pay twice." And Congress listened to them and said, "All right, we'll take a look at this."
And so Congress took a look, and what they decided is that the Article 9 exclusion for buyers in ordinary course, it permits enforcement of the liens against the purchaser of farm products, which subjects these purchasers to the risk of double payment. And because there's that risk of double payment, it inhibits competition and the free flow of or the free market in farm products.
And so what Congress did is they drafted the federal Food Security Act, which is codified at 7 U.S. Code Section 1631. And the purpose of this act is to remove obstruction to interstate commerce in farm products by eliminating the risk of double payment for buyers, but at the same time continuing to provide additional protections to lenders to farming operations.
So what the federal Food Security Act does is first of all it preempts Article 9. It specifically says that it preempts conflicting state and local law. Article 9 is a local or a state law, and as a result the federal law will preempt it under the supremacy clause.
And what the Food Security Act does is it says that a buyer of farm products in ordinary course from a seller engaged in farming operations takes free of the security interest created by the seller. But there are exceptions to this. If the buyer has received a notice from the lender prior to buying the farm products, they could be subject to conversion and replevin actions. Or if the state has a central notification or central filing system, that's been certified by the Secretary of Agriculture, and the buyer of the farm products failed to register with this system so that they could receive notices of security interests in farm products, then again they will take subject to the security interest and be subject to replevin and conversion action.
So what it all boils down to is the Food Security Act deals with the remedies available to secured parties and limits those remedies unless a secured party takes action under the federal Food Security Act to protect themselves. And as I said, there's two ways. There's either a direct notice to buyers, or if a state has put in place a notification system certified by the Secretary of Agriculture, then registration with the notification system is required.
So when it comes to direct notice to buyers, a security agreement, so a lender can require the debtor to furnish a list of possible buyers, and that list will be provided to the secured party. The secured party can then send notices to all of the buyers. The debtor may still sell to non-listed buyers, but there are special requirements involved when that happens to protect the secured party. A buyer after receiving a notice will take subject to the security interest if it receives a notice from the secured party within one year before the sale. In other words, the secured party has to keep sending these every year to ensure that the buyers have current notices out there.
The notice, it's not a public record. It's merely a letter or equivalent that states the name and address of the parties, the Social Security number or unique identifying number. It has to describe the farm products that are subject to the security interest, describe the payment obligations of the buyer for the release of the security interest, and has to be signed or authenticated by the secured party.
If the contents of the notice that was sent to a buyer or to a prospective buyer change, then if it's a material change, the secured party will have to send an updated notice within three months after the material change.
The majority of states have direct notice requirements under the Food Security Act. They do not have a public record filing. But there are states that have gone out and received certification of a central notice system from the Department of Agriculture, from the Secretary of Agriculture. And those that have done so, then buyers in those states will have to register with that central notification system.
Now a central filing system, a CFS, or a central notification system, a CNS, these are the same thing. And what it is, is it's a system for the filing of statewide effective financing statements. That is a Food Security Act term. And it has to be certified by the Secretary of Agriculture. It's essentially the equivalent of a UCC filing system.
Now to be certified, the system must permit the filing of effective financing statements under the Food Security Act. The secretary of state will then compile the records into master lists, and then it will maintain lists of registered buyers, commission merchants, and selling agents who might be involved in the purchase of farm products, and they have to register to receive the master list. The master lists have to be regularly distributed to the registered parties. And finally, they have to provide searches for non-registered parties. So anybody can go in the EFS system and do a search under the debtor name.
Now there are 19 states that have obtained certification for a central filing system. Three of these states never implemented it after it was certified. But there are 16 states that do have central filing systems, and therefore buyers of farm products must register in order to be able to take as a buyer in ordinary course free of a security interest.
Now what gets filed in these systems is an effective financing statement. An effective financing statement is similar to a UCC financing statement, but they are different and have different content requirements.
An effective financing statement must provide the name and address of the secured party, name and address of the debtor, the debtor's Social Security number or other unique identification number. It has to describe the farm products, including the amount, and the name of the county or parish where they're located. Finally it has to be signed or otherwise authenticated by the debtor.
Once it's filed, an effective financing statement is effective for five years just like a UCC. It can be continued for additional five-year periods, just like a UCC financing statement can be continued, and the rules are nearly the same.
If the information in an effective financing statement changes, the secured party must file an amendment following material changes. The amendment does require the signature or authentication by the debtor in many cases. There is a time limit. It has to be done within three months of a material change.
And like a UCC financing statement, the effectiveness of an effective financing statement can be terminated. It's done by filing what's called a notice of lapse. It's the equivalent of a termination, and it causes the record to lapse upon filing.
Some other things, the sufficiency of an effective financing statement depends on essentially substantial compliance. Minor errors are not going to affect the sufficiency as long as it substantially complies with the statutory requirements. But seriously misleading errors will make the record ineffective. What constitutes seriously misleading errors would be, of course, determined by the courts, and there's not a lot out there on it yet.
Forms are generally state specific. They may be modeled on the UCC form, but they're not UCC records. Many states do use an entirely different form of some sort, and they're called by different names. It might be a UCC1F, even though it's not a UCC record. It could be a CFS record or an EFS. There's all sorts of different terminology used for these forms. It varies from state to state. There is no national form like there is with a UCC record.
The product lists likewise vary from state to state. It depends on what the secretary of state determines should be on the different lists of farm product codes. They do organize their lists by farm products, and they're sorted by farm products and by debtor and by location. So the secretary of state does provide those lists based upon these different identifiers.
The secretary of state's farm product list is distributed to those who subscribe. It's distributed regularly on a regular schedule as prescribed by the state. It can be in paper or electronic form, although there is a move towards more electronic in that area. And they can be searched individually. Many states commingle the EFS records with the UCC. Some require a separate search.
So, in summary, when it comes to the Food Security Act and effective financing statements filed under the Act, bear in mind that an effective financing statement filed under the Food Security Act does not perfect a security interest. It just prevents the buyer of farm products from being a buyer in ordinary course. It limits the remedies to a secured party. A secured party can go after the proceeds in the hands of the debtor, but it cannot go after the farm products or maintain a conversion action against the buyer. So it doesn't alter the UCC rules for perfection and priority of security interests. It only impacts the remedies.
So filing an effective financing statement does benefit the secured party because it maintains their priority over a buyer in ordinary course and it allows them to sue for replevin or repossession of the goods or for conversion.
And failure to file an effective financing statement or send the notice in direct notice states does not mean the security interest is unperfected. It remains perfected. As long as the secured party has complied with Article 9, they have a perfected security interest. What it does is it just limits the ability of the secured party to enforce the security interest to the proceeds in the hands of the debtor.
Well, to wrap up today, I do want to touch on PACA or the Perishable Agricultural Commodities Act. You will hear about this, and I sometimes get questions about how do we search this.
PACA is designed to protect sellers of perishable agricultural commodities against the risk of non-payment or slow payment or bankruptcy and other potential unfair business practices of the buyer of the farm products. Really what it does is it creates constructive trust to prevent against a buyer's bankruptcy or other non-payment.
There is no public record under PACA. It doesn't require the filing of a financing statement or equivalent lien record, and as a result they cannot be searched.
So in summary, of everything I've covered today, there are four types of records or four types of interests that people need to be aware of in farm products. Of course there's the UCC security interest, which is a consensual lien and requires the filing of a financing statement or possession to perfect the security interest.
Then there's the agricultural lien, which is a non-consensual statutory lien that arises in favor of those who provide agricultural inputs, not lenders. And it arises by operation of law, but it also falls within the scope of the UCC and requires the filing of a financing statement in addition to other statutory requirements.
There's the Food Security Act, which doesn't perfect a security interest, but it does preserve remedies for the seller or I should say for the secured party against the buyers of farm products. It is not a lien in and of itself. It just preserves certain remedies for the secured party against the buyer.
And finally, there's the Perishable Agricultural Commodities Act, which really doesn't have much of an impact on lenders because there isn't a public record that can be searched as part of due diligence and no filing is required.