Pub. 15 2020-2021 Issue 2

WWW.NEBANKERS.ORG 18 I N TIMESOF ECONOMICSTRESS, FARMERS SOMETIMES SELL THEIR crops or livestock without paying their lenders. One of the tools lenders have for protecting their security interest in farm products is to comply with the Food Security Act of 1985 (the FSA) and, in a central filing state such as Nebraska, to file an effective financing statement (EFS) with the Secretary of State. This article will discuss the FSA’s impact on Nebraska lenders’ security interests in farm products, the filing require - ments of an EFS, and select cases. Security Interests in Farm Products The Uniform Commercial Code (UCC) provides that when a buyer purchases farm products from a farmer, the buyer buys them subject to the security interest of the farmer’s lender. See UCC § 9-320. In other words, the farm products are not pur - chased “free and clear” of the lender’s security interest. Buyers of farm products have objected to this system because, among other things, it was sometimes difficult to ascertain from a UCC search the identity of the lenders who claimed a security interest in particular crops or livestock. Buyers were sometimes subjected to double-payment liability if, for example, they bought farm products from the farmer, but failed to include the lender’s name on the check to the farmer. To address this concern, the FSA was enacted. It pre-empts the UCC, in part, by providing that a buyer, who in the ordinary course of business buys farmproducts froma farmer, does so free of the lender’s security interest unless: (1) within one year before the sale the buyer has received from the secured party written notice of the lender’s security interest in the farm products (a direct notice); or (2) for products produced in a state with a central filing system, the secured lender has filed an EFS identify - ing the farm products. Nebraska adopted a central filing system requiring a lender to file an EFS, with the Secretary of State. Neb. Rev. Stat. § 52-1301, et seq. It is important to understand that filing an EFS or providing direct notice, is not a substitute for the filing of a UCC financing statement. A UCC-1 financing statement still provides the lender with critical protections as to its borrower and others. Not all lenders choose to file an EFS. Lenders may prefer not to file because doing so requires additional training of its employees and resulting expense. Some lenders may not have realized the serious losses that can result when their borrower becomes insolvent, and therefore feel that the filings are not necessary. However, when a borrower nears insolvency, having an EFS on file, or providing notice in a direct notice state may give the lender important protection. Lenders, from time to time, make mistakes in their EFS filings, which can result in losing the FSA’s protections. EFS Requirements Nineteen states — including Nebraska — have a central filing system. All other states are, therefore, direct notice states. For central filing states, a lender must provide the following infor - mation in its EFS, and then file it with the Secretary of State: 1. The name and address of the secured lender; 2. The name and address of the secured lender’s borrower; Randy Wright, Nick Buda, Partners at Baird Holm LLP, and Sapphire Andersen, Law Student and Summer Associate, Baird Holm LLP Protection For Lenders — The Effective Financing Statement And Key Court Decisions COUNSELOR’S CORNER