Summary of a Recent
Judicial Development in
Bankruptcy

State Ag Department's Lien Junior
to Other Creditors' Liens

Harrison M. Pittman
Staff Attorney

The Bankruptcy Appellate Panel for the Sixth Circuit has ruled that a lien held by the Tennessee Department of Agriculture ("TDOA") in an insolvent farmer's cotton crop was junior to the liens held by two other creditors in the same crop. In re Hollingshead, 286 B.R. 622, 624-26 (B.A.P. 6th Cir. 2002). The panel ruled that the TDOA forfeited its right to obtain payment ahead of other prior secured parties when it failed to exercise the options available to it under Tennessee law. See id. at 626.

James Hollingshead was a Tennessee farmer who filed a Chapter 11 bankruptcy petition on August 21, 2001. See id. at 624. On March 28, 2000, he obtained a loan from Planter's Bank ("Planter's"). See id. Planter's perfected its security interest in Hollingshead's 2000 cotton crop on April 7, 2000. See id. On February 2, 2000, Deere Credit Services ("Deere Services") provided financing to Hollingshead for his farming operation. See id. Deere Services perfected its security interest in Hollingshead's 2000 cotton crop on February 9, 2002. See id.

Planter's filed a proof of claim for $16,872.00 on October 20, 2001. See id. On November 8, 2001, Deere filed a proof of claim for $52,767.74. See id. On November 23, 2001, the TDOA filed a proof of claim for $8,219.50, claiming that it had a statutory lien that superceded the liens held by Planter's and Deere Services. See id. The TDOA asserted that Hollingshead owed $8,219.50 for payments incurred pursuant to the Tennessee Boll Weevil Eradication Program. See id.

Hollingshead received payments of $8,949.59 for the sale of his 2000 cotton crop. See id. Deere Services filed a motion with the bankruptcy court to require Hollingshead to disburse the payments on April 11, 2002. See id. The TDOA objected to this motion the following month. See id. On June 12, 2002, the bankruptcy court ruled that the TDOA had a lien under Tenn. Code Ann. § 43-6-426(d), but that the security interests held by Deere Services and Planter's were superior to that lien. See id. The TDOA appealed the bankruptcy court's decision to the Bankruptcy Appellate Panel for the Sixth Circuit. See id.

TDOA's claim was based on expenditures incurred pursuant to the Tennessee Boll Weevil Eradication Program. See id. Under the Boll Weevil Eradication Program, an annual assessment is made on all farmland that produces cotton. See id. A cotton farmer is required to make a payment to the TDOA based on this assessment. See id. A farmer who fails to make this payment shall, upon reasonable notice, "'be subject to a per acre penalty . . . in addition to the assessment.'" Id. (quoting Tenn. Code Ann. § 43-6-426 (a)). A farmer who does not pay the assessments, including any penalties owed, "'within (30) thirty days of notice of penalty, shall destroy any cotton plants growing on such cotton grower's acreage which is subject to the assessment.'" Id. (quoting § 43-6-426(b)). The farmer is responsible for all costs associated with destroying the cotton crop. See id. (citing § 43-6-426(b)).

If a farmer does not pay the assessments, penalties, and costs associated with destroying the cotton crop, the commissioner of the TDOA "'may recover the amount due from the buyer of the grower's crop, equal to but not exceeding the amount the buyer paid for the crop.'" Id. (quoting § 43-6-426(c)). Under certain circumstances the buyer is required to make payment to the commissioner of the TDOA before making payment to the farmer. See id. (citing § 43-6-426(c)). A buyer that has not received written notice of the commissioner's claim by the date the farmer is paid for the crop takes the cotton free of the commissioner's claim. See id. (citing § 43-6-426(c)). Section 43-6-426(d) states as follows:

If the grower's cotton crop fails or is not sufficient to pay the commissioner's claim as provided for in subsection (c), the commissioner shall have a lien of equal dignity with other liens for moneys owed to the state against all real and personal property owned or subsequently acquired by the grower in accordance with the provisions of § [67-1-1403].

Id. at *3. (quoting § 43-6-4256(d)).

The TDOA argued that it had a statutory lien that superseded the liens held by Planter's and Deere Services because it had the ability to destroy Hollingshead's cotton crop if he failed to pay the assessment pursuant to § 43-6-426(b) and the ability to collect the assessment from the buyer pursuant to § 43-6-426(c). See id. The TDOA also argued that § 43-426(d) "only comes into play to provide TDOA with an additional lien on all real and personal property of the grower if funds received from the sale of the crop are insufficient to pay the assessment." Id. (emphasis supplied).

Deere Services and Planter's responded that the TDOA could exercise only two options with respect to Hollinghead's 2000 cotton crop. See id. First, it could destroy the cotton crop pursuant to § 43-6-426(b) when the assessment was not paid on time. See id. Second, the TDOA could notify the buyer that it was required to provide payment for the cotton crop to the TDOA instead of to Hollingshead, pursuant to § 43-6-426(c). See id. Deere Services and Planter's argued that because the TDOA did not exercise either of these options, "it lost its priority position over the proceeds from the sale of the cotton crop." Id. The BAP rejected the TDOA's arguments and ruled in favor of Deere Services and Planter's. See id.

The BAP explained that when interpreting a statute, there are only four limited instances in which a court may look beyond the text of the statute: "(1) where the text is ambiguous; (2) where a literal reading is inconsistent with other statutory provisions; (3) where a plain-language reading is inconsistent with congressional intent; [and] (4) where the plain statutory meaning leads to absurd results." Id. (citing Cline v. General Dynamics Land Sys., Inc., 296 F.3d 466, 473 (6th Cir. 2002)). The panel stated that none of these limited instances existed in this case. See id.

The BAP agreed with Planter's and Deere Services that § 43-6-426(b) and (c) provided the TDOA with two options for receiving payment of the assessment ahead of all other prior secured parties. See id. Because the TDOA failed to exercise either of these options, the BAP determined that the TDOA "failed to protect itself by taking action under either subsection." Id. Thus, the TDOA was precluded from holding a lien in the 2000 cotton crop under § 43-6-426(b) or (c). See id. The BAP noted, however, that if the TDOA could show that it gave proper notice to the buyer, then it may be able to entertain a state law cause of action against the buyer. See id.

The BAP determined that the TDOA had a statutory lien "in all real and personal property of Hollingshead" under § 43-6-426(d) because "the proceeds of the cotton crop were not sufficient to pay TDOA's claim after paying the secured claims." Id. It reiterated that § 43-6-426(d) allowed the commissioner of the TDOA to "'have a lien of equal dignity with other liens for moneys owed to the state against all real and personal property owned or subsequently acquired by the grower in accordance with the provisions of § 67-1-1403.'" Id. (quoting § 67-6-426(d)). Section 67-1-1403 states, in relevant part, that "'[n]othing in this section shall be interpreted to give the state priority over any deed of trust or any security interest perfected under the Uniform Commercial Code which is filed prior to the filing of the notice of the state tax lien[.]" Id. (quoting § 67-1-1403(e)). Based on these statutory provisions, the BAP concluded that the TDOA's "lien [was] junior to the prior perfected security interests of Deere Credit Services and Planter's Bank, as the bankruptcy court held." Id.

The case was decided on December 20, 2002; this summary was posted June, 2003