Summary of a Recent
Judicial Development in
Secured Transactions

Landlord's Lien and Competing Security Interests

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Stokes v. Farmers Grain Terminal, Inc., No. CA 05-763, 2006 WL 2879451 (Ark. App. Oct. 11, 2006), the Arkansas Court of Appeals held that a landlord could be entitled to partial proceeds from the sale of the lessee's crops even though another creditor held a valid security interest in the crops, and remanded the case for determination of factual issues.

Background

Roberts leased farmland from Stokes and agreed to pay Stokes a share of the crops he produced. Id. at *1. They agreed to a handwritten planting plan which provided for growing certain crops, but there was no mention of growing wheat. Id. Roberts obtained financing from two cooperatives, Southern and Statesman, and granted them an interest in his crops and farm equipment. Id. Southern also obtained a guaranty of the crop loan from Stokes. Id. Roberts then planted wheat on the leased property. Id. After Roberts defaulted on his obligations, Southern notified him that he had 15 days to make his payments or it would sue. Id. Stokes subsequently harvested and delivered wheat from the leased farm to Farmers Grain Terminal, Inc. Id. Southern asserted entitlement to the proceeds and made demand upon Stokes pursuant to the guaranty. Id. Stokes did not make payment on the guaranty, and Southern filed suit against him. Id. Farmers Grain issued a check for a portion of the wheat made payable to Stokes, Roberts, and Southern, and Stokes protested the refusal to make payment to him alone. Id. Stokes filed suit against Farmers Grain, asserting breach of contract, unjust enrichment, and conversion, and also sought a determination of the priority of the parties' interests. Id. The trial court held that Southern had a valid security interest in the crops and awarded it proceeds from the sale, and dismissed Stokes's claim against Farmers Grain, and Stokes appealed. Id. at *2.

Arguments

Stokes argued that the trial court erred in determining that Southern's interest in the wheat was superior to his, and that his landlord's lien should have been given priority. Id. at *3, 4.

Analysis and Holdings

The court found that there was an issue of fact as to whether the security agreement between Stokes and Roberts contemplated the growing of wheat, and remanded the issue for trial. Id. at *3. Also, the court held that "even if the trial court determines that Southern has a valid security interest, Southern would not necessarily be entitled to all of the proceeds from the wheat crop." Id. at *4. Because the agreement called for the rent to be one-fourth of any wheat crop along with certain maintenance expenses, and Stokes had not provided proof of the other expenses, the court remanded for a determination of the amount to which Stokes was entitled to attach his lien. Id.

The case was decided on October 11, 2006.