Trade wars and wet conditions as farmers attempt to plant their 2019 crop have generated a great deal of uncertainty in the agricultural industry. As the uncertainty surrounding trade and weather grows, it is important to conduct file reviews and ensure best practices are being utilized to secure a lender’s collateral position in government farm program payments and crop insurance proceeds.
FARM PROGRAM PAYMENTS
Courts across the country are divided when a security interest attaches to a government farm program payment, and even if they can attach at all. Due to these uncertainties, best practices dictate using all methods available to a lender in securing collateral.
First, execute a security agreement and file a UCC Financing Statement with the Secretary of State. Once again, courts are divided on which description of collateral is appropriate for farm program payments. In order to avoid any questions whether farm program payments are included in a collateral description on a security agreement, ensure that it includes both farm product and their proceeds, and general intangibles. A blanket financing statement should then be filed with the Secretary of State.
Second, execute an instrument assigning payments from the borrower to the lender. The USDA regulations govern the method in which payments made by the Farm Service Agency (FSA) and Commodity Credit Corporation (CCC) must be assigned. Form CCC-36 is used for payments made by a county FSA committee including: the Emergency Conservation Program (ECP), Emergency Forest Restoration Program (EFRP), Commodity Incentive Payment Program, the Dairy Margin Protection Program, and the Agriculture Conservation Easement Program (ACEP). All other assignments must be made on forms CCC-251 and CCC-252. These payments would include the Environmental Quality Incentive Program (EQUIP), Price Loss Coverage/Agricultural Risk Coverage (PLC/ARC), Cotton Transition Assistance Program (CTAP), and Noninsured Crop Disaster Assistance Program. Conservation Reserve Program (CRP) payments may fall under either form, so it is important to understand whether the payment was approved by a county FSA committee, or directly contracted with the federal government.
In order for these assignments to be effective:
On May 23, 2019 the USDA announced a second round of trade aid for the agriculture industry in an effort to soften the blow of the trade war with China. The trade aid payments were authorized under the statutory authority of the Commodity Credit Corporation (CCC) Charter Act. Due to the fact that the payments come from the CCC, the regulations appear to provide authority for assignment in the same manner as other government payments. In light of the upcoming trade aid payments, it would be wise for lenders to obtain an assignment from borrowers who may receive payments from the program. Although there is no legal precedent concerning perfection in trade aid payments, best practices dictate filing both a UCC Financing Statement and obtaining an assignment of payments prior to the time the payment is made.
CROP INSURANCE PROCEEDS
In 2012, an Illinois Bankruptcy Court ruled that the Federal Crop Insurance Act (FCIA) pre-empts security interests in crop insurance proceeds. In this case, the Court determined that the bank’s Article 9 security interest was ineffective because the FCIA provided the exclusive method for obtaining an interest in the crop insurance proceeds. Although this issue has not been addressed by the Iowa Supreme Court, best practices would once again dictate a two-step perfection process. First, file a UCC Financing Statement with the Secretary of State; and second, obtain an assignment of payments from the borrower.
Due to the unique political and weather conditions of 2019, there will be a substantial amount of non-traditional income sources for agricultural producers, including, government program payments and crop insurance proceeds. It is more important than ever that lenders ensure they have the ability to access those income sources in the event of troubled loan files. The typical method of creating a security interest may not be sufficient when it comes to government payments and crop insurance, so best practices dictate obtaining assignments from the borrower in addition to obtaining a standard security interest.
Lenders should consider having loan files reviewed by knowledgeable counsel to ensure that they have properly secured and perfected security interests in government payments, and other types of collateral.