This article was originally published in the Oregon State Bar Debtor Creditor Newsletter in the Fall of 2019.
By Erich Paetsch, Creditors’ Rights & Bankruptcy and Litigation Attorney and Elayna Matthews
As national farm debt and chapter 12 filings increase in 2019, many farmers and related service providers are at risk of nonpayment. For many of these Oregonians, leveraging Oregon’s unique agricultural liens creates the perception of security during challenging economic periods.[1] However, it is estimated that approximately 80% of Oregon’s agricultural products are exported outside of the state of Oregon.[2] Following shipment outside the state of Oregon, several legal questions arise:
- What happens to a non-possessory state agricultural lien in property that is shipped outside of the state of Oregon?
- Does the lien continue to exist and is it enforceable in other states, or even other countries?
- How can farmers better protect their interests instead of relying solely on perceived agricultural lien priority?
- If a debtor files bankruptcy in another state, what rights does a farmer have under Oregon’s agricultural lien statutes to recover the money that is owed to the farmer?
This article explores some of these questions for deeper consideration by readers.
Lien Statutes
Oregon state statutes contain several protective non-possessory liens in favor of farmers, agricultural producers, and others. Unlike many other states incorporating provisions of the draft recommendations from the Uniform Law Commission concerning agricultural liens when adopting the 2000 revisions to Article 9 of the Uniform Commercial Code (“UCC”), Oregon adopted a non-uniform approach.[3] A typical example of an Oregon agricultural lien includes:
Agricultural Produce Lien (ORS 87.700 et seq.). The “agricultural produce lien” creates a non-possessory lien in agricultural products as defined by statute. Bypassing the necessity for a security agreement or UCC-1 financing statement, an agricultural producer receives an automatic lien in agricultural produce that the producer delivers or transfers to a purchaser for consideration. The lien is perfected without any filing or other requirement on the farmer’s part. The lien attaches to the products sold as well as all other inventory of the purchaser, and all proceeds of the sale of any agricultural products sold by the purchaser. This eliminates the need for the agricultural producer to trace its products, which are likely indistinguishable from other similar products. An agricultural produce lien must be foreclosed within 45 days after the date the final payment for the produce is originally due, unless the farmer extends the lien. The lien may be extended by filing a notice of lien claim with the Oregon Secretary of State, in which case the lien is extended to 225 days after the date the final payment for the produce is originally due. (ORS 87.705 et seq.). When the farmer files a notice of lien to extend the lien, the farmer must also notify all persons who have filed a financing statement against the same inventory, proceeds or accounts receivable, notifying secured lenders, probably for the first time, of the farmer’s priority lien claim. An agricultural produce lien obtains priority over all other liens, including prior-in-time consensual lien claims of secure lenders, except for certain tax liens and other limited excepted liens. The lien must then be foreclosed judicially pursuant to ORS Chapter 88 to be enforced before the lien expires.
Which State’s Laws Apply? The Choice of Law Conundrum
Because a majority of Oregon crops are exported, disputes over the application of Oregon’s agricultural liens are likely when priority or payment disputes arise. In situations where a dispute arises, a court must first decide a threshold issue: is there an actual conflict between the substantive law among interested jurisdictions?[4] A conflict exists if the choice of one jurisdictions law over the other will produce a different result. Because Oregon has adopted non-uniform provisions related to agricultural liens, an actual conflict is more likely. In such situations, a court must select and apply the proper choice of law analysis. Assuming a choice of law analysis is required, a judge must decide which state’s choice of law rules apply and the impact this decision has on any choice of law provisions included by contract by the parties.
To enforce Oregon agricultural liens outside Oregon, the choice-of-law question is essential to the analysis – and most likely outcome-determinative. States adopting the recommended agricultural lien provisions under the UCC lack many beneficial provisions of Oregon’s agricultural lien statutes, while those states that have not adopted the agricultural lien provisions of the UCC may lack any agriculture lien protections. The UCC’s treatment of agricultural liens is not as beneficial as under Oregon law. While Oregon law does not require filing a financing statement to perfect an Oregon agricultural lien, the UCC requires filing a financing statement to perfect an agricultural lien claim otherwise created by non-UCC state law. Oregon’s UCC specifically excludes agricultural liens from the definition section in the model UCC Act, so Oregon state agricultural lien law, and not the UCC, governs the priority and perfection of agricultural liens in Oregon.
Importantly, the model UCC Act contains a non-contractually modifiable choice-of-law rule for agricultural lien claims it governs. See UCC § 1-301(c)(8). In § 9-302, the UCC provides, “While farm products are located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or lack of perfection, and the priority of an agricultural lien on the farm products.” Therefore, in cases where a court determines that the choice-of-law analysis supports application of Article 9 choice-of-law provisions, Oregon agricultural lien laws will not apply.[5] Unfortunately, applying general choice-of-law principles, most courts have concluded that in the absence of a contrary agreement of the parties, the forum state’s law prevails.[6] However, there are a few exceptions. Practically, this means disputes involving Oregon agricultural products and farmers outside Oregon will have a significant challenge seeking to enforce an Oregon statutory lien unless general choice-of-law principles support application of Oregon law.
The number of cases exploring conflict-of-law issues and Oregon agricultural liens are limited. The few cases specifically exploring this issue do not establish a favorable precedent for Oregon agricultural lien claimants seeking to enforce liens outside the state of Oregon.
In re Symons Frozen Foods Inc.
In In re Symons Frozen Foods Inc.,[7] the U.S. Bankruptcy Court for the Western District of Washington addressed whether a supplier of Oregon-grown corn who sold the corn to a Washington frozen foods company had a valid lien under Oregon or Washington law after the Washington purchaser received the corn and then filed for chapter 11 bankruptcy. The Symons court held that (1) an actual conflict existed between Oregon and Washington law; (2) federal choice-of-law rules applied; (3) under the federal choice-of-law rules, Washington had the “most significant relationship” to the parties, the agricultural produce, and the lien, so Washington law applied; and (4) alternatively, principles of extraterritoriality prohibited the court from applying Oregon’s agricultural produce lien beyond Oregon’s borders.[8]
In its choice-of-law analysis, the Symons court held that the UCC simply did not apply to the lien at issue.[9] The court reasoned that UCC Article 9’s definition of “agricultural lien” only applied to benefit persons providing goods or services to the producer, not to “processor liens” created in favor of a producer that sells its agricultural product to a processor or conditioner.[10] Thus, the court avoided the impact of the UCC’s mandatory choice-of-law rules entirely. Instead, the general choice-of-law rules applied to this federal diversity action, which dictates the choice-of-law rules of the state where the federal court is located. Accordingly, the court applied Washington choice-of-law rules to this inquiry.
Another interesting component of the Symons court is its discussion of extraterritoriality and comity. The Symons court refused to apply Oregon’s law to products that left the state, citing as an alternative argument the principle of extraterritoriality.[11] Extraterritoriality is the proposition that a state’s laws only have an effect within the state and have no effect outside of the state. However, courts oftentimes recognize the laws and judgments of other states under the complementary doctrine of comity. Comity merely “allows the Court to recognize ‘the law of other states unless doing so would be prejudicial to the interests of the resident state.’”[12]
The Symons court refused to apply the principle of comity to recognize Oregon’s agricultural lien statutes and apply them to Oregon produce that left the state.[13] The court relied on a New York bankruptcy case that similarly refused to apply Ohio lien laws to a property of a New York debtor located in New York.[14] The court cited from the New York case, stating that the “entire priority and distribution scheme of the Bankruptcy Code would be disrupted if this Court granted comity to the Ohio lien.”[15] Further, the Symons court reasoned that applying comity would be unfair to all of the other interested parties who objected to the creditor’s argument for application of an Oregon agricultural lien in the case.[16] The court stated that while those individuals may have had reason to believe a Washington lien may have encumbered property located within the state of Washington, they would have had “little reason to believe that an Oregon statutory lien encumbered the property.”[17] The court refused to “disrupt the priority scheme of the Bankruptcy Code” by recognizing Oregon agricultural lien claims over property located in Washington state and held by a Washington debtor.[18]
Fishback Nursery, Incorporated v. PNC Bank, N.A.
The Fifth Circuit recently tackled another Oregon lien case in Fishback Nursery, Inc. v. PNC Bank, N.A.[19] Ultimately, the Fishback court determined it was unnecessary to apply federal or state choice-of-law rules because the result would be the same. In other words, the dispute did not overcome the threshold issue of a controversy supporting a substantive choice-of-law analysis. In the absence of a controversy, the court held that the choice-of-law rules in the state where the products were located (Texas) controlled.
In Fishback, the creditor nurseries had a contractual agreement with the debtor, a debtor in chapter 11, which stated Oregon lien laws applied to the nurseries’ shipment of nursery stock to the debtor on credit.[20] This is a different factual situation than in Symons, where no contractual choice-of-law provision existed. However, the Fifth Circuit affirmed the district court in rejecting the application of any contractual choice-of-law clauses.[21] The court reasoned that the contract does not apply to the dispute between the nurseries and the secured lender, since the secured lender was not a party to the debtor’s contract.[22] This was true even though the dispute involved the debtor’s assets and priority as to those assets.[23]
The Fishback court affirmed that the federal choice-of-law rules applied, using the choice-of-law rules from the state where the federal court was located – in this case, Texas. Texas has adopted the UCC provisions relating to agricultural liens, and so the mandatory UCC choice-of-law provision applied, and each state where products were shipped to applied to the lien inquiry.[24] The court refused to apply Oregon lien laws to all states and affirmed the lower court’s choice-of-law analysis using the Texas choice-of-law rules. For products shipped within Oregon, the court held that Oregon law applied. However, the nurseries failed to timely extend their liens in strict compliance with the Oregon agricultural lien statutes, and as such, the liens expired.[25] Thus, the court did not have to delve into any further analysis, because there were no liens to be enforced. For the products shipped to all other states, each state’s laws where products were shipped to applied to the lien inquiry.[26] Since none of the other states had agricultural lien laws like Oregon’s, and since the nurseries did not file financing statements in any other state, the court’s inquiry ended there, finding no priming agricultural lien to exist in any other state.
Stockman Bank of Montana
In contrast to the opinions above but interpreting Montana agricultural lien law, a court arrived at a different – and more encouraging – conclusion.[27] In Stockman, a supplier that sold fertilizer and pesticides to a sugar beet farm did not have to perfect a lien under the laws of North Dakota despite the fact that the farm was a North Dakota corporation and under applicable law, a lien would be filed in North Dakota. Applying a conflict-of-law analysis and in contrast to other opinions, the court held that the beets at issue were located in Montana when the lien was created, and the supplier complied with Montana law by filing its agricultural lien with the Montana Secretary of State.[28]
Contract Solutions?
Because most courts will apply standard choice-of-law analysis, a partial solution might exist in ensuring adequate contractual provisions are included preserving application of Oregon law. For example, some courts have upheld agreements where parties have designated by agreement which state’s choice-of-law rules might apply to the perfection of security interests.[29] However, contracting for certain outcomes is limited to the parties to the contract. As applied to other parties, the parties’ contractual agreement may have limited benefit, as the Fifth Circuit noted in Fishback (it cannot enforce choice-of-law provisions against non-contractual parties and the UCC does not permit a party to contract around the choice-of-law rules stated in UCC § 9-302). While unclear, it appears that attempting to contract around the choice-of-law restrictions limiting the application of Oregon agricultural liens outside Oregon has limited benefit.
Conclusion
Oregon agricultural liens provide a unique set of statutory protections unlike any other state and in sharp contrast to the agricultural lien provisions incorporated into Article 9 of the Uniform Commercial Code. Oregon courts have and commonly uphold the protections those liens provide, even when confronted with a conflict-of-laws analysis, because most conflict-of-laws analyses result in the forum state’s choice of laws applying.
Where, however, a court outside Oregon is confronted with a conflict between Oregon’s agricultural lien laws and those of another state, the Oregon agricultural lien fails to follow the crop from Oregon to the forum state. In other words, the Oregon liens disappear when they cross the border. While the parties to any contractual agreement can agree to apply choice-of-law provisions that would attempt to increase the likelihood that an Oregon agricultural lien might survive outside the state, it will be difficult to enforce the contractual provisions against nonparties. A prudent agricultural farmer and their lawyer should consider what alternatives exist to both improve the likelihood for the enforcement of Oregon agricultural liens outside the state of Oregon together with what actions can be taken to ensure the adequate protection and assurance of payment during increasingly turbulent economic times for the agricultural sector.
[1] Compare UCC Sec. 9-109(a)(2) to ORS 79.0102(e).
[2] See Oregon AgLink Oregon Facts & Figures at https://oregonfresh.net/education/ag-facts-figures/oregon-facts-figures/#targetText=Some%2080%25%20of%20Oregon’s%20agricultural,amount%20exported%20to%20foreign%20countries.
[3] ORS 79.102(e).
[4] See 39 A.L.R. 7th Art. 3 Choice of State Law Governing Perfection of Security Interest or Agricultural Lien Under Revised Article 9 of the Uniform Commercial Code by Gard D. Spivey at Sec. 2 pg. 4.
[5] However, Article 9 does not direct a court to apply the choice-of-law rules of a particular jurisdiction so a court should look to general choice-of-law principles. Official UCC Commentary § 9-301, cmt. 3.
[6] 39 A.L.R. 7th, Art 3 at § 7, pg. 17.
[7] 432 B.R. 290 (2010).
[8] Id. at 296–302.
[9] Id. at 295.
[10] Id.
[11] Id. at 301.
[12] Id. at 302.
[13] Id.
[14] Id. at 301–02 (citing In re R.F. Cunningham & Co., 355 B.R. 408 (Bankr. E.D.N.Y. 2006)).
[15] Id. at 302 (citing Cunningham, 355 B.R. at 418).
[16] Id.
[17] Id.
[18] Id.
[19] 920 F.3d 932 (5th Cir. 2019).
[20] Id. at 937–938.
[21] Id.
[22] Id.
[23] Id.
[24] Id.
[25] Id. at 940.
[26] Id.
[27] Stockman Bank of Montana v. Mon-Kota, Inc., 2008 MT 74, 342 Mont. 115, 180 P.3d 1125 (2008).
[28] Id.
[29] See, for example, In re GEM Refrigerator Co., 512 B.R. 194 (Bankr. E.D. Pa. 2014).
Erich Paetsch is a partner in the Litigation and Creditors’ Rights & Bankruptcy practice groups and the Financial Services Industry Group. The information in this article is not intended to provide legal advice. For professional consultation, please contact Erich Paetsch at Saalfeld Griggs PC. 503.399.1070. epaestch@sglaw.com © 2019 Saalfeld Griggs PC
