Summary of a Recent
Judicial Development in
Bankruptcy

Landlords' Lien Prevails over Perfected
Security Interest in Crops

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Bank of McCrory v. Morrison (In re James), 368 B.R. 800 (Bankr. E.D. Ark. 2006), the United States Bankruptcy Court for the Eastern District of Arkansas held that a landlords' lien (pursuant to Ark. Code Ann. § 18-41-101) will prevail over any other properly perfected security interests in the same crops.

Background

Debtors filed for Chapter 7 bankruptcy on July 13, 2006, and thereafter Bank of McCrory brought suit to determine the extent and priority of its claim of a security interest in crops produced by the Debtors in 2005. Id. at 801. The field where the Debtors' crops were grown, located in Woodruff County, Arkansas, was owned by three brothers. Id. The brothers conducted business as McCaughan Farms, a general partnership consisting of the brothers and JPJ Farms, Inc., in which they also owned a controlling interest. Id. at 802. The Morrisons, doing business as McCaughan Farms, leased the land to the Debtors. Id. The Debtors did not pay rent for 2005, which amounted to $189,963.00. Id. The Trustee was authorized to sell the crops free and clear of all claims, and proceeds from the sale totaled $534,769.26. Id. The Bank had made a crop production loan in the amount of $1,150,000 to the Debtors, and the Debtors in turn had granted the Bank a security interest in certain collateral including all crops grown in Woodruff County. Id. Also, during the harvest season, the Debtors signed and pledged scale tickets for their soybean crop to the Bank, stating the tickets were in connection with their loan and the security agreement they had made. Id. McCaughan had brought suit in May 2006 to foreclose a landlords' lien for the unpaid rent. Id.

Arguments

The Bank argued that because the Morrison family operated as a partnership, the Debtor was actually a subtenant, McCaughan Farms was the primary tenant, and the owners, the Morrisons and JPJ Farms, were the actual landlords; therefore, because Arkansas law prohibits the assignment of the landlords' lien without notice, the Bank's security interest should prevail over the landlords' lien. Id. The Bank also argued that the assignment of the scale tickets meant that its secured interest had priority over the landlords' lien. Id. at 802-803. The Bank argued further that the court should order the Trustee to sue the Morrison family to avoid the landlords' lien under 11 U.S.C. § 545(3). Id. at 803.

The Morrisons argued that the lien was perfected under state law before the Bankruptcy case was filed and that the foreclosure was timely filed with everyone who could own an interest in the real estate named as a plaintiff; therefore, the landlords' lien had priority. Id.

Analysis and Holdings

The court began by noting that they must first determine whether the landlords' lien prevails over a properly perfected security interest in the same crops, and if so, whether the partnership (McCaughan) could be considered a landlord. Id. Finally, if the landlords' lien is valid, it must be determined whether lien could be avoided by the Trustee in bankruptcy. Id. Ark. Code Ann. § 18-41-101 provides:

(a) Every landlord shall have a lien upon the crop grown upon the demised premises in any year for rent that shall accrue for the year.
(b)(1) The lien is perfected and shall have priority over a conflicting security interest in or agricultural lien on the crop regardless of when the conflicting security interest or agricultural lien is perfected.
(2) The lien shall continue for six (6) months after the rent shall become due and payable, and no longer.

The Bank properly perfected its security interest by filing a financing statement with the Circuit Clerk of Woodruff County, Arkansas, but the landlords' lien has priority "regardless of when the conflicting security interest [was] perfected." Id. at 803-804. Also, McCaughan filed a timely claim, within six months of the rent coming due. Id. at 804. Based on those provisions, the court determined that "a landlords' lien has priority over a Bank's perfected security interest in the same crops . . . ." Id. at 803.

As for the partnership issue, the court restated the principle that the names that appear on the deed are irrelevant when determining whether land is a partnership asset; rather, it is determined by the partner's intent. Id. at 804. The court found it was "clear from the facts of the case that the Morrison family intended for McCaughan Farms Partnership to have equitable title to the land and act as the landlord." Id.

Turning then to the issue of whether the trustee could avoid the lien, the court examined 11 U.S.C. § 545(3), which states "[t]he trustee may avoid the fixing of a statutory lien on property of the debtor to the extent that such lien . . . is for rent . . . ." Id. The Trustee told the court that he did not pursue that claim because he did not believe he would prevail. Id. at 805. The court declined to force him to pursue the claim because he has discretion, and should act in the best interest of the estate. Id. For those reasons, the court held that "the landlords' lien of the Morrison family d/b/a McCaughan Farms, a partnership, [had] a first priority over all other claims of liens in crops produced on the Morrison lands." Id.

The case was decided on May 2, 2006.