Pub. 15 2020-2021 Issue 2

WWW.NEBANKERS.ORG 20 Court Decisions — When is an EFS Seriously Misleading? EFS filings, like traditional UCC-1 financing statements, must not be “seriously misleading.” See Lisco State Bank v. McCombs Ranches, Inc., 752 F. Supp. 329, 337 (D. Neb. 1990). One court ruled an EFS that contained a borrower’s trade name, instead of the borrower’s legal name, was not seriously misleading where the purchaser of farm products also had actual knowledge of the identity of the borrower. See Peoples Bank v. Bryan Bros. Cattle Co., 504 F.3d 549, 559 (5th Cir. 2007); see also Farmers & Merchants State Bank v. Teveldal, 524 N.W.2d 874 (SD 1994) (EFS, which contained an incorrect EFS code number for the collateral — hogs — did not make the statement seriously mis - leading). According to the Court in Peoples Bank, an EFS will not be “seriouslymisleading” as long as “the financing statement (EFS) contains sufficient information to put any searcher on inquiry.” Peoples Bank, 504 F.3d at 559. Other courts might disagree with the Peoples Bank decision. In re Borden, the Nebraska Bankruptcy Court determined that a lender’s UCC-1 financing statement (not an EFS) was “seri - ously misleading” where it used the debtor’s nickname — “Mike Borden” — instead of the debtor’s full legal name — “Michael Borden.” In re Borden, 353 BR 886, 892 (Bankr. D. Neb. 2006); see also in re TyringhamHoldings, Inc., 354 BR 363 (Bankr. ED Va. 2006) (holding financing statement was seriously mislead - ing where the lender omitted the “Inc.” from the debtor’s legal name). Putting the borrowers’ full legal name on the EFS, and not a trade name, is most likely the better practice. When Farm Products Move Across State Lines — EFS or Direct Notice? Between two systems — direct notice and the central filing — conflicts may arise when products move across state lines. If a lender properly complies with the FSA in a central filing system state by filing an EFS, is their interest still protected if the secured farm products are transported or sold in a state using the direct notice system? The answer is not always clear. A Colorado court addressed this question in a case involving the purchase of cattle fromanOklahoma debtor, Great PlainsNat’l Bank v.Mount, 280P.3d 670 (Colo. Ct. App. 2012). The cattlewere purchased in Missouri (a direct notice state), transported to and inspected in Oklahoma (a central filing state) for one day, and COUNSELOR’SCORNER — continued from page 19 The key issue was where the cattle were “produced.” If they were produced in Missouri, a direct notice state, then the bank would not have complied with the FSA by filing in Oklahoma. If the cattle were found to have been produced in Oklahoma, then the bank would prevail. Baird Holm Tel: 402.344.0500, Fax: 402.344.0588 or for general questions, please email us at info@bairdholm.com. then shipped to the buyer in Colorado (a central filing state). The debtor’s bank filed an EFS in Oklahoma. The key issue was where the cattle were “produced.” If they were produced in Missouri, a direct notice state, then the bank would not have complied with the FSA by filing in Oklahoma. If the cattle were found to have been produced in Oklahoma, then the bank would prevail. The court determined that “produced” meant “the location where farmproducts are furnished or made available for commerce.” The court held that the cattle were produced in Oklahoma because that was where the cattle were furnished for sale. The reason the court gave for this decision was to avoid burdening buyers who might otherwise have to investigate where farm products originated (not an easy task as to livestock) in order to comply with that state’s rules. While this Colorado decision is not binding outside of Colo- rado, it provides insight for lenders. The court’s opinion did not include details about the origin of the cattle, such as where the cattle were born and raised, because the Colorado court interpreted the FSA with a focus on the state in which the sale of farm products occurred. See also Fin-Ag, Inc. v. Pipestone Livestock Auction Market, Inc., 754 N.W.2d 29, 33–37 (SD 2008). This leaves remaining uncertainty about where to file or provide notice if the origins of farm products, like livestock, are unknown. Until further clarification is given, lenders should consider filing or providing direct notice in all states where farm products have been known to be located. Conclusion The FSA was enacted to help to protect both lenders and buyers of farm products. In a central filing state like Nebraska, a lender seeking to preserve its security interests in farm prod - ucts should complete and file an EFS. For products produced in “direct notice” states, a lender should send the required direct notice. Failure to comply with FSA notice requirements may allow a purchaser to buy farm products free and clear of the lender’s security interest, leaving the lender with recourse only against its borrower.  A list of central filing systems states is available at: Clear Title (Cen- tral Filing Systems), UNITED STATES DEPARTMENT OF AGRICULTURE, https://www.gipsa.usda.gov/laws/cleartitle.aspx (last updatedNov. 16, 2015).