Near the end of 2020, the “Consolidated Appropriations Act” became law. As suggested by the title to the Act, it included a potpourri of legislative actions, many of which were designed to provide COVID-19 relief. One of the measures adopted as part of the Act amended the Packers and Stockyards Act of 1921 (the “PSA”) to create a new dealer trust to protect persons selling livestock to dealers (the “Dealer Trust”). The existing PSA included various protections for persons dealing with packers who fail to pay for the purchase. By adopting the Dealer Trust provisions, the scope of the PSA was expanded to protect those who sell livestock to a dealer engaged in the buying and selling of livestock. Davenport Evans lawyer Keith Gauer explains.
Under the new Dealer Trust, if a cash seller of livestock to a dealer is not paid for the purchase, the livestock sold to the dealer, and the cash proceeds thereof, are to be held in trust for the benefit of the seller. Any seller seeking to take advantage of the Dealer Trust must provide written notice to the dealer of the seller’s claim and file the notice with the United States Department of Agriculture, within thirty (30) days of the transaction or within fifteen (15) days of receiving notice that the dealer’s check for the purchase price was dishonored. Failure to provide the notice is fatal to the trust claim. If timely notice is provided, the dealer is obligated to provide notice to all creditors holding a recorded security interest in the livestock or proceeds held in the trust.
Assuming notice is properly given, the rights of the unpaid seller to the livestock and cash proceeds held by the dealer in the Dealer Trust will presumably defeat the claims of a bank holding a perfected security interest in the livestock assets of the dealer. Further, the assets held in a Dealer Trust will not be part of the bankruptcy estate in the event a dealer files for bankruptcy and will, instead, be preserved for the benefit of the unpaid sellers. Livestock re-sold by the dealer to a buyer in ordinary course will be conveyed free of the Dealer Trust, but the proceeds of the transaction will remain in the trust.
Banks that finance livestock producers and other sellers of livestock (a sale barn, for example), will want to educate their customers on the benefits of protecting their rights in the event they are not promptly paid following a sale of livestock to a dealer. Given the short timelines and paperwork necessary to claim a Dealer Trust, prompt action should be taken to preserve the seller’s rights. Banks that finance dealers, however, will need to be aware that livestock, and the proceeds of livestock sales in the dealer customer’s possession, could be subject to the claims of unpaid sellers under the Dealer Trust amendments to the PSA. In the event of a dealer insolvency, the bank will want to carefully scrutinize any Dealer Trust claims to be certain that the required notices were timely given to preserve the trust claim.
From our perspective, we question whether the new Dealer Trust statutes will have a significant impact on livestock transactions and lending in South Dakota. In an agricultural world where handshakes and promises are still quite common, we doubt many sellers will timely file the paperwork to preserve the Dealer Trust, particularly when they have been working with a dealer for years. If sellers have become accustomed to waiting a few days or more for the payment of the purchase price and considers the dealer a friend, they may wait too long to enforce the Dealer Trust when the dealer’s promises are unfulfilled.
Further, the Dealer Trust statutes are likely not applicable to the garden variety feedlot fraud cases. In these cases, a feedlot operator buys cattle or groups of cattle and then “sells” the same cattle to more than one buyer, with the buyers agreeing to pay the feedlot owner to feed the cattle for a few months prior to sale to a packer. The feedlot operator uses a shell game, showing the owner buyers the same groups of cattle. In most of these cases, the initial seller of cattle to the feedlot was paid, but the purported “owners” of the cattle are the ones that end up holding the loss months later. As such, the Dealer Trust won’t protect the owners months later when there are not enough cattle on hand at the feedlot when the fraud is discovered.
Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.