Summary of a Recent
Judicial
Development in
Bankruptcy
Article 9 Security Interest Has
Priority Over Landlord's Privilege
E. John Edwards IIINational AgLaw Center Graduate Assistant
In a dispute between a bank that had a perfected security interest in a farmer's crops and a landlord who claimed that it had a superior interest in the same crops because it held a statutory lessor's "privilege" under Louisiana law, the United States District Court for the Western District of Tennessee has upheld the bankruptcy court's ruling in favor of the bank. In re Parks Planting Co., Nos. Civ. 01-1298, 00-12467-GHB, 01-5048, 2002 WL 1397250, (W.D. Tenn. June 5, 2002). The decision is unreported.
The dispute in this case involved competing claims in a bankruptcy adversary proceeding filed by South Delta Properties, LLC ("South Delta") against First State Bank (the "Bank") and the debtor, Parks Planting Company, for the remaining proceeds from the sale of certain crops harvested by the debtor. See id. at *1. The debtor was a farmer who leased 1401 acres of land in Madison Parish, Louisiana from South Delta for the primary purpose of growing corn, rice and soybeans. See id. The lease was effective from December 15, 1997, "'until terminated by the landlord.'" Id.
On July 5, 2000, South Delta filed a financing statement covering the corn, rice, and soybean crops the debtor had planted in 2000. See id. The financing statement listed the amount owed to South Delta as $1,300,000.00. See id. No separate security agreement, however, was entered into between the debtor and South Delta covering any of the debtor's crops or proceeds. See id. South Delta claimed unpaid rent under the lease "in the amount of $134,763.00 for 1999, and $173,000.00 for 2000." Id.
The Bank provided financing to the debtor for its farming operations in 1998, 1999, and 2000. See id. The debtor executed four promissory notes that totaled $1,600,000.00. See id. This debt was "expressly secured by the crops and farm products from the leased acreage in Louisiana." Id. On February 25, 1998, July 30, 1999, and July 6, 2000, the Bank filed financing statements covering the debtor's crops and proceeds. See id.
On July 14, 2000, the debtor filed a Chapter 11 bankruptcy petition in the United States Bankruptcy Court for the Western District of Tennessee that was subsequently converted to a Chapter 7 proceeding. See id. In October, 2000, the bankruptcy court ordered the Bank to pay South Delta the full amount of its claim for the year 2000 rent. See id. As a result, "the only issue before the Bankruptcy Court [in the adversary proceeding filed by South Delta in February 2001], . . . [wa]s whether South Delta ha[d] a prior claim in the debtor's 2000 crop proceeds for the unpaid 1999 rent." Id.
According to the bankruptcy court, the financing statement filed by South Delta on July 5, 2000, could not standing alone be considered a valid security agreement. See id. Because the bankruptcy court also determined that there were no other documents evidencing a security agreement, it granted summary judgment in the Bank's favor. See id. South Delta appealed this ruling to the district court, which affirmed. See id. at *1, 4.
South Delta first argued that its claim was entitled to priority over the Bank's claim because the "lessor's privilege granted under Louisiana law . . . is superior even to mortgages and other perfected security interests." Id. at *2. According to the court, "Louisiana law provides that "'[p]rivilege is a right, which the nature of a debt gives to a creditor, and which entitles him to be preferred before other creditors, even those who have mortgages.'" Id. (quoting La. Civ. Code Ann. art. § 3186). The court explained that the lessor's privilege provides that "'[t]he lessor has, for the payment of his rent, and other obligations of the lease, a right of pledge on the movable effects of the lessee, which are found on the property leased.'" Id. (quoting La. Civ. Code Ann. art. § 2705). The court also explained how Louisiana law provides for enforcement of the privilege:
In the exercise of this right [of pledge], the lessor may seize the objects subject to his privilege before the lessee removes them from the leased premises, or within fifteen days after they have been removed by the lessee without the consent of the lessor, if they continue to be the property of the lessee, and can be identified.
Id. (citing La. Civ. Code Ann. art. § 2709A).
The court stated that "[c]rops grown by the lessee are considered movable effects, and are subject to the privilege held by the lessor of the land on which they are grown." Id. (citing La. Civ. Code Ann. art. § 3217(3)). The court framed the issue as whether "there exists a right of privilege separate and apart from the right of pledge, or whether the lessor must exercise the right of pledge in a timely fashion in order to validly claim the privilege." Id. After examining several Louisiana state court decisions, the court "conclude[d] that the weight of Louisiana authority compels the holding that a lessor loses its right of privilege by failing to exercise the right of pledge in accordance with [La. Civ. Code Ann.] art. 2709A." Id. Thus, since South Delta had failed to exercise its right of pledge, it was not entitled to claim the lessor's privilege. See id.
Alternatively, the court stated that even if it concluded to the contrary and determined "that a separate right of privilege exists, the result would be the same." Id. at *3. The court reasoned that although South Delta was claiming a lessor's privilege in the 2000 crops for the 1999 rent, South Delta failed to cite any authority "clearly supporting its position, arguing only that the various relevant Code provisions do not expressly state that the lessor's privilege existing in crops for a particular year cannot also cover unpaid rent for a prior crop year." Id.
The court noted that the primary authority relied on by South Delta, O'Kelley v. Ferguson, 22 So. 783 (La. 1897), actually contradicted its argument because that case stated that '"[w]e agree with plaintiffs' counsel that the lessor's privilege as a substantive right does not extend beyond the crop of the year for which the rent was due."' Id. (citing O'Kelley, 22 So. at 789). Thus, the court rejected South Delta's argument. See id.
The court next considered whether South Delta would be entitled to priority under La.Rev.Stat. § 9:4521 which, for interests which have been "properly filed and maintained in accordance with the central registry provisions of R.S. 3:3651 et seq.[,]" accords priority to lessor's privileges over Article 9 perfected security interests. Id. (quoting La.Rev.Stat. § 9:4521).
The court concluded that "if South Delta's financing statement is construed as a filing of the lessor's privilege in compliance with La.Rev.Stat. § 9:4521, it secured only the payment of rent for the year 2000." Id. The court based its conclusion on the facts that South Delta's financing statement "expressly covered only the 2000 crops[,]" and that "the lessor's privilege does not extend beyond the crop of the year for which the rent is due." Id.
Having ruled against South Delta on its lessor's privilege argument, the court next considered whether South Delta had "a properly perfected security interest in the year 2000 crop proceeds by virtue of the UCC-1F filed on July 5, 2000, one day prior to the Bank's financing statement." Id. The court stated that, "[w]hile a standard form UCC-1F financing statement generally cannot, by itself, be considered a valid security agreement, it may be read in conjunction with other documents in order to determine whether a security interest has been granted." Id. at *4.
The court determined that the relevant documents in this case were the financing statement filed on July 5, 2000, and the lease dated December 15, 1997. See id. The court's review of those "documents reveal[ed] no language indicating an intent to create a security agreement." Id. The court further explained that the "UCC-1F contains only the standard information called for on the form. There is no additional language indicating that a security interest in the crops is being granted. The 1997 lease agreement also contains no language purporting to grant a security interest in the debtor's crops, or in anything else; it is merely a lease, and that is all." Id.
The court concluded that "South Delta [did] not have a valid, perfected security interest in the debtor's crops, and [was] not entitled to priority over the claim of the Bank in the year 2000 crop proceeds." Id.
The case was decided on June 5, 2002; this summary was posted April, 2003