Opinion
Bankruptcy No. 99-31487, Chapter 7; Adv. No. 00-7052.
February 15, 2001
Kip Kaler, Attorney for Plaintiff.
Shon Hastings, Attorney for Defendant.
MEMORANDUM OPINION AND ORDER
By complaint filed October 11, 2000, the chapter 7 trustee initiated the instant adversary proceeding, seeking a determination that the security interest claimed by the Farm Service Agency ("FSA") in the debtor's 1999 crops is unperfected and subject to the trustee's avoidance power under 11 U.S.C. § 544(a). FSA contends that it has a perfected security interest in the debtor's 1999 crops and that its interest is therefore beyond the reach of the trustee's section 544(a) avoidance power.
Before the Court are the parties' respective motions for summary judgment. Rule 56 of the Federal Rules of Civil Procedure applies in adversary proceedings. Fed.R.Bankr.P. 7056. Summary judgment is appropriate if, "assuming all reasonable inferences favorable to the nonmoving party. there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law." Tudor Oaks Limited Partnership v. Cochrane (In re Cochrane), 124 F.3d 978. 981-82 (8th Cir. 1997) (citations omitted). Where the unresolved issues are primarily legal rather than factual, summary judgment is particularly appropriate. Id. at 982 (citing Crain v. Board of Police Commissioners, 920 F.2d 1402, 1405-06 (8th Cir. 1990)). Only factual disputes which may affect the outcome of a suit are sufficient to preclude summary judgment. Ries v. Wintz Properties, Inc., (In re Wintz Companies, 230 B.R. 848, 858 (B.A.P. 8th Cir. 1999) (citations omitted). In this case, the parties agree that the facts are undisputed and that the case may be resolved upon their respective motions and supporting materials. Accordingly, summary judgment is appropriate based on the following undisputed facts.
1. Material Facts
The debtor is a farmer who filed a chapter 7 bankruptcy petition on September 7, 1999. The debtor was engaged in a farming operation up through and including the 1999 crop year. A portion of the debtor's 1999 crop was lost due to weather conditions, and the debtor received crop insurance proceeds to cover some of these losses. The crop insurance proceeds, together with the proceeds from the remaining 1999 crops, were paid to Ag Services of America, Inc. in satisfaction of Ag Services' first priority lien. However, there remains in the bankruptcy estate the sum of $14,193.31, which represents proceeds of 1999 crops and crop insurance in excess of Ag Services' first priority lien. It is this sum which is at issue.
Over the past 15 years, FSA made numerous loans to the debtor. On March 12, 1987, FSA filed a financing statement with respect to the debtor's crops. In addition to containing a description of the real estate upon which the debtor's crops would be grown, the collateral description appearing in the March 12, 1987 financing statement appears as follows: "This financing statement covers all crops and other plant products now planted, growing or grown, or which are hereafter planted or become growing crops . . . and the proceeds and products of such crops." (italics added). FSA properly filed continuations of the March 12, 1987 financing statement in 1992 and again in 1997. In addition, FSA filed a second financing statement with an identical collateral description as to the debtor's crops on April 21, 1992. Likewise, FSA filed a continuation of the April 21, 1992 financing statement in 1997. Subsequently, on May 21, 1997, FSA filed an amendment to the April 21, 1992 financing statement for the purpose of providing a new description of the real estate upon which the debtor's crops would be grown.
Although the parties have not submitted a corresponding security agreement from 1987, the Court assumes that such an agreement was in existence.
Although the parties have not submitted a corresponding security agreement from 1992, the Court assumes that such an agreement was in existence.
On March 30, 1999, the debtor executed a security agreement that granted FSA a security interest in "[a]ll crops, annual and perennial, and other plant products now planted, growing or grown, or which are planted after this instrument is signed or otherwise become growing crops or other plant products at any time after this instrument is signed." At the time the debtor's bankruptcy petition was filed, the debtor owed FSA a total of $99,785.16.
2. Attachment and Perfection Under the U.C.C.
FSA asserts that it has a perfected security interest in the proceeds of the debtor's 1999 crops and crop insurance. FSA contends that it has complied with all the requirements of chapter 41-09 of the North Dakota Century Code (Article 9 of North Dakota's Uniform Commercial Code) regarding attachment and perfection of a security interest. In In re Lesmeister, 1999 WL 1567729 (Bankr. D.N.D. 1999), the Court summarized the requirements for attachment and perfection under North Dakota's version of U.C.C. Article 9 as follows:
In Thompson v. Danner, 507 N.W.2d 550 (N.D. 1993), the North Dakota Supreme Court discussed the general procedures and requirements for creating a perfected security interest under North Dakota state law, as follows:
The creation of a perfected security interest is accomplished by a two-step process: attachment and perfection. See N.D.C.C. § 41-09-24 [U.C.C. § 9-303]. While "attachment" relates to the creation and enforceability of a security interest between the parties to the transaction, "perfection" is an additional step which makes the security interest effective against third parties. Citizens Nat. Bank of Evansville v. Wedel, 489 N.E.2d 1203, 1205 (Ind.Ct.App. 1986). When the security interest is intended to cover crops growing or to be grown, attachment occurs once the debtor has signed a security agreement containing a description of the collateral and of the land concerned, value has been given, and the debtor has rights in the collateral. N.D.C.C. § 41-09-16(1) and (2) [U.C.C. § 9-203]. See also Thet Mah Assoc. v. First Bank of N.D. (NA), 336 N.W.2d 134, 139 (N.D. 1983). A creditor perfects a security interest in crops to be grown by filing an appropriate financing statement. N.D.C.C. § 41-09-23 [U.C.C. § 9-302). If a creditor completes the required steps for perfection prior to attachment of its security interest, the date of perfection is fixed as of the date the interest attaches. N.D.C.C. § 41-09-24(1) [U.C.C. § 9-303]; Benson County Co-op. Credit Union v. Central Livestock Ass'n, 300 N.W.2d 236, 240 (N.D. 1980).
Id. at 554-55. Additional requirements are contained in N.D.C.C. §§ 41-09-41 and 35-05-01.
Section 41-09-41 requires that a financing statement contain, inter alia, the names of the debtor and the secured party, the signature of the debtor, the address of the secured party from which information concerning the security interest may be obtained, a mailing address of the debtor, a statement indicating the types or describing the items of collateral. N.D.C.C. § 41-09-41. The provision further requires that, "a financing statement that is to be filed to gain protection under the central notice system . . . include a reasonable description of the property, including the county in which the property is located, and any other additional information required by the Food Security Act of 1985[.]" Id.
Lesmeister, 1999 WL 1567729 at *3-*4.
In this case, FSA appears to have satisfied all the requirements for perfection found in North Dakota's U.C.C. Article 9. Nothing in N.D.C.C. chapter 41-09 prevents a creditor from filing an appropriate financing statement in advance of a security agreement. Under those circumstances, perfection occurs at the time of attachment, i.e. when an appropriate security agreement is subsequently executed in accordance with the law. Thus, if N.D.C.C. chapter 41-09 were the controlling body of statutory law, the Court would agree with FSA that their financing statements, originally filed in 1987 and 1992, and properly continued thereafter, perfect the security interest that subsequently arose in favor of FSA by virtue of its March 30, 1999 security agreement with the debtor. However, North Dakota law deviates substantially from U.C.C. Article 9 with respect to creditors who seek to establish a security interest in crops. See N.D.C.C. § 41-09-16(4) ("[a] transaction, although subject to [chapter 41-09], is also subject to chapters 13-03.1, 35-05, 49-09, and 51-13, and in the case of conflict between the provisions of this chapter and any such statute, the provisions of such statute control"). In this case, N.D.C.C. chapter 35-05 applies.
3. The April 21, 1992 Financing Statement
At the time that FSA's April 21, 1992 financing statement was executed, section 35-05-01.1 of the North Dakota Century Code appeared as follows:
A security interest upon crops attaches only to the crop next maturing after the delivery of the security agreement. The financing statement covering a crop cannot be used to enforce a security interest on any crop other than the crop listed in the security agreement. If the court finds a willful violation of this section, the court shall award a producer the reasonable expenses of maintaining an action, including reasonable attorney's fees. The provisions of this section do not apply to liens by contract given to secure the purchase price or the rental of land upon which the crops covered by the lien are to be grown.
N.D.C.C. § 35-05-01.1 (1989) (italics added). This statute was amended by the North Dakota legislature in 1989 to include the italicized portion. The dispute in this case, at least with respect to the April 21, 1992 financing statement, revolves around an interpretation of the following provision:
"A security interest upon crops attaches only to the crop next maturing after the delivery of the security agreement. The financing statement covering a crop cannot be used to enforce a security interest on any crop other than the crop listed in the security agreement." N.D.C.C. § 35-05-01.1 (1989). The foregoing provision suggests (1) that one security agreement applies to only one crop; (2) that one financing statement applies to only one crop; and (3) that both of the aforementioned documents apply to the same crop. Therefore, under North Dakota's crop lien statute as it existed in 1992, one financing statement applied to only one security agreement, and both documents necessarily applied to the same crop. Accordingly, to gain a security interest in a subsequent year's crop, lenders were forced to file a new security agreement, and since one financing statement could not cover more than one year's crop, a new financing statement was required as well.
The intent of the North Dakota legislature in enacting the 1989 amendments to the crop lien statute supports the above interpretation. In early 1989, Representatives Watne and Brokaw sponsored HB 1607, which amended the crop lien statute to specifically include the language discussing financing statements. The purpose of the bill was to prevent ranks from using an existing financing statement on file with the Secretary of State's office to enforce nonexistent security interests in farmers' crops. On February 13, 1989, Virginia Anderson, a farmer, testified in favor of HB 1607 before the House Committee on the Judiciary, stating that she gave a bank a security interest in her 1987 crop in exchange for an operating loan in 1987. North Dakota House Standing Committee Minutes, Hearing on HB 1607 Before the House Committee on the Judiciary, Tape No. 1, Side A, Meter No. 1068 (February 13, 1989). Accordingly, she executed a security agreement and financing statement with the bank in the spring of 1987. Id. After harvest in 1987, Anderson used the crop proceeds to repay the bank's operating loan, thus extinguishing the bank's security interest. Id. In 1988, Anderson obtained operating money from another source. Id. However, the 1987 financing statement was still on file. Id. As a result, Anderson's grain check after harvest in 1988 was also made out to her 1987 bank, and even though it had no valid security interest in Anderson's 1988 crop, the bank initially refused to sign over the grain check because of some outstanding equipment loans. Id. This is the situation that HB 1607 was intended to correct. As Senator Stenehjem commented when HB 1607 came before the Senate Committee on the Judiciary, "[t]he amendments the House put on makes it clear that the financing statements on growing crops are only for a year." North Dakota Senate Standing Committee Minutes, Hearing on HB 1607 Before the Senate Committee on the Juidiciary, Tape No 3, Side A, Meter No. 4100-4323 (March 8, 1989).
In light of the Court's interpretation of the plain language of N.D.C.C. § 35-05-01.1 as it existed at the time of FSA's April 21, 1992 financing statement and in light of the legislative intent behind the 1989 amendments to N.D.C.C. § 35-05-01.1, the Court concludes that FSA's 1992 financing statement applied only to the debtor's 1992 crop and, therefore, such financing statement does not operate to perfect FSA's security interest in the debtor's 1999 crop.
4. The March 12, 1987 Financing Statement
At the time that FSA's March 12, 1987 financing statement was executed, section 35-05-01.1 of the North Dakota Century Code provided as follows: "A security interest upon crops attaches only to the crop next maturing after the delivery of the security agreement. The provisions of this section do not apply to liens by contract given to secure the purchase price or the rental of land upon which the crops covered by the lien are to be grown." N.D.C.C. § 35-05-01.1 (1985). Significantly, this early version of the crop lien statute is silent with respect to financing statements. Moreover, it is almost identical to the pre-1972 version of U.C.C. § 9-204(4)(a), which provided that "no security interest in crops attaches under an after-acquired property clause to crops which become such more than one year after the security agreement is executed[.]" The foregoing provision, and others, were eliminated from former section 9-204 of the U.C.C. in 1972. The commentators offered the following explanation for the change:
The obvious purpose of [former U.C.C. § 9-204(4)(a)] was to protect a necessitous farmer from encumbering his crops for many years in the future. The provision did not work because there was no corresponding limit on the scope of a financing statement covering crops, and under the [Uniform Commercial] Code's notice-filing rules the priority position of a security arrangement covering successive crops would be as effectively protected by the filing of a first financing statement whether the granting clause as to successive crops was in one security agreement with an after-acquired property clause or in a succession of security agreements. On the other hand the clause did require an annual security agreement for crops even when the encumbrance on crops was agreed to as part of a long-term financing covering farm machinery and other assets. The provision thus appeared to be meaningless in operation except to cause unnecessary paperwork[.]
U.C.C. § 9-204 (1972) (Official Statement of Reasons for 1972 Changes in Official Text); See also United States v. Gleaners Farmers Co., Elevator Co., 481 U.2d 104, 107-108 (7th Cir. 1973). The same reasoning applies to North Dakota's crop lien statute as it existed when the March 12, 1987 financing statement was executed. The lack of any guidance as to financing statements obliges the Court to apply the relevant provisions of North Dakota's U.C.C. as they existed on March 12, 1987. According to those provisions, a financing statement was effective for five years and could be continued every five years thereafter. N.D.C.C. § 41-09-42(2), (3) (1987) [U.C.C. § 9-403(2), (3)]. A financing statement could be filed before a security agreement was made or a security interest otherwise attached. N.D.C.C. § 41-09-41(1) (1987);Benson County Coop. Credit Union v. Central Livestock Ass'n, Inc., 300 N.W.2d 236, 240-41 (N.D. 1980). Moreover, a single financing statement was sufficient to perfect multiple security agreements executed in subsequent years so long as that financing statement was still in effect. See, e.g., Gleaners Farmers Coop. Elevator Co., 481 F.2d at 105-06 (financing statement on the debtor's crops dated April 13, 1967 was sufficient to perfect not only a security agreement executed on April 10, 1967 regarding the debtor's crops but also a subsequently arising security agreement executed on March 28, 1968 with respect to crops);James Talcott, Inc. v. Franklin National Bank of Minneapolis, 194 N.W.2d 775, 783 (Minn. 1972) (financing statement filed February 21, 1968 perfected the security agreements executed on February 20, 1968 and January 30, 1969). Furthermore, prior to 1997, the lender had no duty to terminate a filed financing statement after the underlying loan had been repaid unless the debtor made a written demand on the creditor to do so. N.D.C.C. § 41-09-43(1) (1987) [U.C.C. § 9-404(1)].
In this case, FSA properly filed a financing statement signed by the debtor which described the debtor's crops as collateral on March 12, 1987. FSA properly filed continuation statements in 1992 and 1997. As a result, the effectiveness of the original March 12, 1987 financing statement has been extended to the year 2002. See N.D.C.C. § 41-09-42(3) (1999) [U.C.C. § 9-403(3)]. Therefore, the March 12, 1987 financing statement was sufficient to perfect the security interest that arose in favor of FSA upon execution of the March 30, 1999 security agreement between USA and the debtor with respect to the debtor's 1999 crop. Accordingly, the trustee may not use 11 U.S.C. § 544(a) to avoid FSA's perfected security interest in the debtor's 1999 crop.
5. Conclusion
Based on the foregoing, the motion for summary judgment filed by the chapter 7 trustee on January 16, 2001 is hereby DENIED, and the motion for summary judgment filed by FSA on January 18, 2001 is hereby GRANTED. As FSA holds a perfected security interest in the debtor's 1999 crop, judgment shall be entered in favor of FSA and against the chapter 7 trustee in the amount of $14,193.31, that amount reflecting the remaining proceeds of the debtor's 1999 crop and crop insurance.
JUDGMENT MAY BE ENTERED ACCORDINGLY.
SO ORDERED.