Summary of a Recent
Judicial Development in
Secured Transactions

Food Security Act Does Not Protect Buyer Who
Was Aware of Secured Creditor's Interest

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Fin Ag, Inc. v. Hufnagle, Inc., 700 N.W.2d 510 (Minn. App. 2005), the Minnesota Court of Appeals held that a purchaser of farm products was not entitled to protection under the Food Security Act because it was aware of an existing security interest in the products, and ordered the buyer to pay restitution to the secured creditor.

Background

Larry Buck obtained operating loans from Fin Ag, using his crops and farm products as collateral. Id. at 514. Buck sold corn to Meschke Poultry Farms on several occasions. Id. Buck defaulted on his loans and Fin Ag sued Meschke, seeking to enforce its security interest in the crops. Id. The trial court entered judgment in favor of Fin Ag and Meschke appealed. Id.

Arguments

Meschke argued that, as a South Dakota corporation transacting business in Minnesota, Fin Ag could not maintain an action without a certificate of authority, and also that Meschke was entitled to take the corn free of Fin Ag's interest under the Food Security Act. Id.

Fin Ag conceded that it had not obtained a certificate of authority to do business in Minnesota, but argued that Meschke lacked standing to challenge its claim on that basis because it did not assert that defense in its pleadings, and also argued that Meschke had not shown that the extent of Fin Ag's activities in Minnesota required it to obtain a certificate of authority. Id. at 515.

Analysis and Holdings

The court agreed with Fin Ag that Meschke could not assert lack of capacity on appeal because it had not done so in its original pleadings, and also that Meschke had failed to present adequate evidence to support its claim that Fin Ag did not fall within an exception for foreign corporations that participate in limited or particular types of transactions in Minnesota. Id. at 515-16. The court then addressed the issue of whether the Food Security Act allowed Meschke to take the corn free of Fin Ag's interest. Id. at 516. At the time of the transactions in dispute, the UCC "buyer in the ordinary course of business" doctrine included an exception for farm products-a buyer of farm products still took subject to the secured interest. Id. However, this exception led to many situations in which a buyer of farm products would be forced to pay twice, once to the seller and again to his creditors, so Congress passed the Food Security Act to prevent such problems. Id. The Act preempts state farm-product rules and allows the buyer of farm products to take free and clear of a secured creditor's interest, regardless of whether the interest was perfected or whether the buyer knew of the interest, subject to certain exceptions. Id. at 516-17. The court concluded that Meschke was a buyer in the ordinary course of business; however, an exception to the Act (subsection (e)(3)) applied because Meschke was aware of Fin Ag's interest in the crops, and therefore Meschke's purchase of the corn was subject to Fin Ag's security interest. Id. at 517-19. Finally, the court held that Fin Ag had a valid perfected security interest although it had filed its financing statements in the wrong county, because it had acted in good faith and Meschke was already aware of its interest in Buck's crops. Id. at 520. The court therefore affirmed the trial court's holding and awarded judgment in favor of Fin Ag. Id. at 520-21.

The case was decided on July 19, 2005.