Summary of a Recent
Judicial Development in
Secured Transactions

Liability of Sublessee

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In McClatchy v. Anthony Farms, 936 So.2d 456 (Miss. App. 2006), the Minnesota Court of Appeals held that a landlord did not forfeit her statutory crop lien merely by failing to attach the immediate lessees as defendants in her counterclaim.

Background

Plaintiff leased 400 acres to her nephew, d/b/a Waltonia Farms. Id. at 457. After the nephew was convicted of criminal charges and filed for bankruptcy, he subleased the property to Anthony Farms. Id. at 458. Plaintiff signed an agreement for the sublease, but did not enter into any contract with Anthony Farms. Id. Anthony paid Waltonia the full amount of the lease, and Waltonia in turn paid Plaintiff, but Plaintiff applied the money to past due rent from previous years. Id. Plaintiff later filed a crop lien against Anthony Farms, alleging that the rent was delinquent and knowing that her nephew was unable to make the payment. Id. Anthony Farms brought suit to cancel the crop lien, and Plaintiff counterclaimed, alleging that Anthony as sublessee was a surety for the outstanding rent due from Waltonia Farms, and that because of the nephew's bankruptcy there were no assets from which to pay unsecured creditors such as herself. Id. The trial court held that Plaintiff's landlord's lien was voided because she had failed to seek the rent from her immediate lessees first, and Plaintiff appealed. Id.

Arguments

Anthony Farms argued that the Plaintiff's statutory landlord's lien was voided because she had failed to seek payment from Waltonia first. Id. at 459.

Plaintiff argued that bringing suit against Waltonia first would have been futile because of their bankruptcy, and also that it was Anthony Farms who initiated the action, not the Plaintiff. Id.

Analysis and Holdings

The court rejected the argument that the mere bringing of a counterclaim against the surety without joining the immediate tenants as defendants acts as an automatic cancellation of the obligations of a surety. Id. at 462. The general rule controlling this issue is that "a creditor cannot increase the secondarily liable entity's risk by actions that release the primarily responsible entity in whole or in part." Id. at 461. The court explained that that the surety is released when "the principal debtor and the creditor make a material change in the contract evidencing the indebtedness," and reasoned that merely getting ahead of yourself, as Plaintiff did, is not necessarily a "material change." Id. at 462. The court therefore reversed and remanded on the issue of whether the agricultural lien had been forfeited, and ordered the trial court to consider whether the surety's rights were impaired sufficiently to justify voiding the lien. Id.

The case was decided on August 15, 2006.