proceeds (7 U.S.C. § 1509). However, this may be too late, given the borrower’s circumstances. Accordingly, to effectively take a superior collateral position in crop insurance, in addition to identifying proceeds in an Article 9 financing statement, the lender will want to execute an “Assignment of Indemnity,” have the borrower execute the assignment, and then have it approved by the borrower’s crop insurance provider. Failure to do so will leave a lender vulnerable to other creditors and potentially the whims or diversions of the borrower. PACA/PSA If a lender’s borrower is an entity that routinely deals with producers of agricultural or livestock-related products (e.g., a grocery store or a restaurant), the lender should be cognizant of the implications of the Perishable Agricultural Commodities Act (7 U.S.C. §§ 499a et seq.) (PACA) and the Packers and Stockyards Act (7 U.S.C. §§ 181 et seq.) (PSA). PACA provides protection to producers and growers of perishable goods who transfer those perishables to brokers, dealers, and merchants, who in turn sell such goods to purchasers, by mandating the creation of a statutory trust for the benefit of such producers. PSA requires packers and poultry dealers to do the same for unpaid sellers and poultry growers. As beneficiaries of these trusts, producers are entitled to a priority lien position over secured creditors of the seller/broker, provided that certain statutory notice requirements are met by the producer. As a practical tip, the lender should monitor its borrower’s accounts payables, particularly in the context of a struggling and potentially insolvent supermarket, restaurant, or produce wholesaler. If the lender sees payables to entities that may be entitled to priority pursuant to PACA or PSA, it could signal a potential erosion of collateral position or make the lender subject to a potential clawback for payments received. Silent Liens and Priorities Under various states’ laws, creditors are given liens (and, in some cases, priority liens) in crops, livestock, and/or commodities. For example, in Illinois, a landlord will have a priority lien (of limited duration) on crops over an Article 9 lien without making any official filing. Similarly, in several states, suppliers of goods and services (chemical, fertilizers, feed, fuel, and custom planting/ harvesting costs) may have a lien on crops or livestock, provided they comply with any applicable notice and filing requirements. When making a farm loan, the lender will want to understand which state law applies and whether any specific liens apply. Conclusion Successfully navigating these potential collateral pitfalls requires a lender to know its borrower’s business and financials. It also requires that the lender understand what laws may be at issue at the state and federal levels. Failure to do so will result in potential collateral erosion and frustration if the lender is ultimately required to enforce its security interests. ■ Under the FSA, for a secured lender to remain perfected in farm products, it must provide notification of its security interest to the potential purchaser of such farm products. How notice is provided depends on whether the respective state is a direct notification state or has adopted a central filing office. October 2022 | 9
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