Perfecting Security Interests in Agricultural Assets

November 21, 2017 | dehs

Agricultural Livestock 0

By Robert E. Hayes

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Personal property used to secure loans to farmers generally falls into one of three categories:  equipment, livestock, or crops. The means for perfecting a security interest in each of these types of collateral can vary.

Security interests in all three types of collateral are generally perfected by a filing with the office of the Secretary of State. If the residence of the borrower is a state other than South Dakota, that filing must be made in the office of the Secretary of State where the borrower resides, even if the property is located in South Dakota.

Perfection of a security interest in equipment can be accomplished by execution of a security agreement and filing of a UCC-1 financing statement with the general description “equipment”. If, however, the machinery in question is titled, as would be the case with a truck for example, perfection must be made by a notation of the security interest on the title to the vehicle in question. Priorities are established based on the time of filing of the UCC-1 or notation of the title to the vehicle.

Perfection of a security interest in crops occurs in the same manner. While there are some priority issues arising from statutes granting priority over previously-filed security interests (thresher’s liens, seed liens), generally priority is established by the time of filing. Although it is a much-debated issue, in South Dakota there is no priority given to the purchase money lender who lends for inputs such as fertilizer, herbicide and pesticide.

As with crops, creation of a security interest in livestock occurs with the execution of a security agreement and the filing of a financing statement, both describing “livestock” as part of the collateral being obtained. Unlike crops, however, it is possible to obtain a security interest with priority over an earlier-perfected security interest in livestock if the loan to be secured is a purchase money loan, and certain steps are taken. These steps are:

  • the purchase money security interest must be perfected on or before the date when the borrower receives possession of the livestock;
  • the purchase money lender must have sent an “authenticated” notification to the holder of the pre-existing security interest or interests;
  • the holder of the previously-filed security interest must receive the notification within six months before the borrower receives possession of the livestock; and
  • the notification must state that the purchase money lender “has or expects to acquire” a purchase money security interest in the livestock.

Of course, one of the critical points is that the borrower must have actually used the loan funds to acquire his or her interest in the livestock.

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.