Many agricultural producers borrow money to successfully run their operations. Typically, the lender requires the borrower to give a security interest in property such as land, equipment or commodities before supplying the funds. This type of transaction is considered a secured transaction, which is primarily governed by Article 9 of the Uniform Commercial Code (“UCC”). In general, a secured transaction is one that creates a security interest for the creditor. Thus, the producer who borrows money from the creditor will provide a security interest in their agricultural property to the creditor. Previous articles in this series discuss the rules governing these types of transactions.
Creditors take security interests in a debtor’s property to provide themselves with the ability to enforce their interest in the collateralized property. In most cases, debtors repay their debts by the maturity date. However, if a debtor does not perform their obligations under a security agreement, a creditor must enforce their interest to satisfy the debt owed to them.
In these instances, Article 9 includes a process that allows creditors to enforce their interest against a debtor. The first step in that process is, of course, that the debtor must have defaulted on their loan. As a result, creditors must know what constitutes a default under an agreement to determine precisely when they may enforce their interest.
When Default Occurs
Before a creditor can enforce its security interest under Article 9, there must be a default. Unfortunately, there is no distinct definition of “default” because the term is not defined under the UCC. As a result, the specific requirements are left for the parties to decide.
In most cases, a definition of default is contained in the security agreement or loan agreement signed by both the creditor and debtor. Parties can agree upon a definition of default after executing the security agreement, but this is rare. It is crucial for parties to define default because the creditor’s enforcement rights do not become effective until the debtor defaults. Without a definition, the creditor cannot possibly know when it is appropriate to enforce their interest. If the creditor tries to enforce its interest without a definition of default, they risk noncompliance with Article 9.
In general, what must happen before an agreement is defaulted is only limited by the parties’ ability to agree. The most common event included in the definition is the debtor’s failure to make payments on time. However, parties generally do not limit the definition of default to one specific event. For example, parties often agree to several different events which constitute default, such as:
- Selling the collateral;
- Commencing a bankruptcy proceeding;
- Judgments against the debtor;
- Misrepresentations by the debtor; and
- Defaults under other agreements.
Typically, if any defaulting event under an agreement occurs, the creditor has the right to enforce its security interest against the debtor. As a result, the parties must pay special attention to the conditions which constitute default under an agreement to ensure they do not violate the terms of their loan agreement.
“Default” Under Agricultural Liens
While the UCC leaves it to the parties to define default under their agreement, it takes a different approach with agricultural liens. This is because agricultural liens are structured differently than Article 9 security interests, mainly because these liens are created by a state statute. States enact agricultural lien statutes to ensure individuals and businesses who provide agricultural goods, services, labor, or lease land on credit are repaid. In general, when the specific requirements of the statute creating the agricultural lien are met, a party can claim an interest in certain property owned by a debtor to secure repayment for the goods and services provided to a debtor. A chart of statutory agricultural liens by state is available here.
While agricultural liens are created by statute, there are certain situations where some agricultural liens are subject to the same UCC rules that apply to Article 9 security interests. However, some provisions under Article 9 provide different rules for agricultural liens. For instance, parties to an agricultural lien do not have the ability to define what constitutes default under the lien. Rather, § 9-606 of the UCC provides that default is defined by the statute creating the agricultural lien. Thus, creditors claiming an agricultural lien must review the lien statute to determine what constitutes default and when they can enforce their interest against the debtor.
For example, assume Lucas contracts with Emma for the care of his cattle. Under the agreement, Emma promises to feed and pasture Lucas’ cattle on her property from July 1 until October 1. The contract states Lucas must pay for her services on October 1. The state where the parties live has enacted a statute that provides a lien to “any person who feeds, herds, pastures, or keeps livestock for another person.” Also, the statute explains that “if the owner of livestock fails to pay for the contracted services, the lienholder in possession of the livestock may enforce their lien by filing a lawsuit 10 days after payment became due.”
Starting on July 1, Emma takes possession of Lucas’ cattle, and she satisfies the requirements needed to claim the lien. On October 1, Lucas attempts to retrieve his cattle from Emma, but does not have payment in hand. Emma informs Lucas that she is not releasing possession of the cattle until she has been paid the full amount due under the contract. By October 11, Emma still had not received payment, so she goes to the county courthouse and files a lawsuit against Lucas to enforce her interest in receiving payment for her services.
In this example, Emma correctly enforced her lien interest against Lucas after a default. Emma properly claimed the agricultural lien because she 1) provided the type of services covered under the lien on credit and 2) retained possession of the cattle. Because Emma’s interest arises under an agricultural lien, the statute defines what constitutes default. Under the statute, default occurs 10 days after payment was due under the contract. In this scenario, the default date was October 11th. As a result, Emma was correct to wait until October 11th, 10 days after payment was due to file an enforcement action against Lucas.
In general, Article 9 requires creditors to identify when their interest may be enforced. In other words, creditors must know when a default occurs. For Article 9 security interests, this means that the parties must agree on the definition of default under their security agreement. For agricultural liens, the state statutes define the situation in which default occurs. In either case, once a debtor has defaulted under a security agreement or agricultural lien statute, the creditor has the right to enforce their security interest. The next article in this blog series will cover the process creditors take to repossess collateralized property in order to enforce their security interest.
To read the other articles of this series, click here.
To view the agricultural liens enacted by each state, click here.
For more National Agricultural Law Center resources on finance and credit, click here.
For more National Agricultural Law Center resources on secured transactions, click here.