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Agribusiness Alert: Feed Supplier Liens in Iowa—Why a Lender with Livestock Collateral Fed in Iowa Should Care

January 19, 2012 | Alert

Introduction. Until recently, it was believed that a feed supplier was required to give notice to a lender prior to obtaining a super priority lien in livestock fed in Iowa. A recent decision by the Iowa Supreme Court changed this. On December 30, 2011, the Iowa Supreme Court ruled in Oyens Feed & Supply, Inc v. PrimeBank that a feed supplier is not required to give notification to the secured lender to get the benefit of the super priority lien. This alert discusses the Iowa Supreme Court decision and provides steps a lender can take to help mitigate the risk of a feed supplier filing a super priority lien on livestock fed in Iowa.

Agricultural Input Supplier Liens under Minnesota Law. According to Minnesota law, for an agricultural input supplier (which includes a feed supplier) to assert a super priority lien under Minn. Stat. 514.966 subd. 3 the supplier must mail a lien-notification to the lender. Upon receipt of the lien-notification, the lender has ten days to either: (a) extend additional credit to the producer to allow for the payment of feed; (b) reject the lien-notification; or (c) do nothing. If the lender elects to reject the lien-notification by giving written notice to the feed supplier, the feed supplier is not entitled to a super priority lien. If the lender does nothing, the feed supplier may proceed to supply feed with the protection of the super priority lien. To perfect the super priority lien, the feed supplier is required to file a UCC-1 with the Minnesota Secretary of State. The statute is designed to place the burden on the lender, after receiving the lien-notification, to either extend additional funds to the borrower to buy feed, reject the notice and continue forward without the risk of a super priority lien, or do nothing and allow the priority lien to vest with the feed supplier.1

Agricultural Supply Dealer Liens under Iowa Law. Iowa law generally grants to a provider of agricultural supplies (which includes a feed supplier) a similar lien. Like the Minnesota statute, the Iowa statute references a lien-notification requirement. However, the Iowa Supreme Court ruled that the lien-notification statement is only required for non-livestock feed agricultural supply liens. The Court ruled that, for livestock feed suppliers, the lien-notification is not required. The Court based its decision on the statutory construction of the statue and the reasoning that feed suppliers are providing some additional value to the livestock, and that the feed supplier should be entitled to a priority lien for that added value. The livestock feed supplier, like all other agricultural supply dealers, is still required to perfect its lien by filing a UCC-1 with the Iowa Secretary of State within 31 days of the delivery of the agricultural supply.

Impact. The Oyens Feed decision effectively creates three categories of agricultural supply dealer liens in Iowa:

(1) all agricultural supply dealer liens that are filed before the lender files its UCC-1 will have priority over the lender;

(2) all agricultural supply dealer liens that are filed after the lender files its UCC-1 will have “equal priority” to that of the lender for the full value of the secured property if the agricultural supply dealer gives the lien-notification statement to the lender; and

(3) all agricultural liens for livestock feed that are filed after the lender files its UCC-1 will have super priority to that of the lender for the difference between the acquisition price of the livestock and the fair market value of the livestock.

The focus of this alert is the third category. The Iowa Supreme Court effectively put the burden on a lender to scrutinize all livestock collateral that is located in Iowa to identify the feed supplier and verify that the feed bills are being paid. Failure to account for an unpaid feed supplier may result in the lender’s security interest becoming involuntarily subordinated to the feed supplier without any advance notice to the lender.

Steps to Mitigate Risk. Lenders who extend credit to borrowers with livestock fed in Iowa should consider affirmative steps to mitigate the risks of the super priority feed supplier lien.

New Loans: For new loans, the lender should consider the following loan condition and covenants:

(1) As a Condition to Closing: Require a subordination agreement, or in the alternative, require a lien waiver from existing feed suppliers. The lender may want to require as a condition of a new loan agreement that the existing feed supplier sign a subordination agreement and require that the feed supplier give notice to the lender in the event the borrower stops buying feed from the supplier. In the alternative, require that the feed supplier sign a lien waiver for all feed supplied before the loan closing. A feed supplier is still required to perfect its lien by filing a UCC-1 with the Iowa Secretary of State within 31 days of the product being supplied; however, because of the Oyens Feed decision the lender would not have any ability to verify if there are any outstanding feed bills for feed delivered within 31 days of the loan closing.

(2) Loan Covenant: Require the borrower to identify its feed suppliers. The lender may want to require a covenant in the loan documents that the borrower will identify all feed suppliers and obtain a signed authorization from the borrower permitting the lender to verify with these feed suppliers that all feed bills are being paid.

(3) Loan Covenant: Require monthly feed bills. The lender may want to require a covenant in the loan documents that the borrower will provide the monthly feed bills and/or authorize the feed supplier to send a copy of the feed bills directly to the lender. The lender will then need to review the feed bills in relation to the livestock operation to determine whether the bills are reasonable and, more importantly, whether the livestock producer may be acquiring feed from an alternative supplier.

(4) Loan Covenant: Require a reconciliation of unpaid feed bills and adjust the borrowing base accordingly. The lender may want to require a covenant in the loan documents that the borrower will reconcile any unpaid feed bills on a monthly basis and adjust any borrowing based so as to deduct such unpaid bills from the value of the eligible livestock.

(5) Loan Covenant: Require a subordination agreement or regular lien waivers from new feed suppliers. The lender may want to require a covenant in the loan documents that all future feed suppliers will sign a subordination agreement prior to the delivery of feed and require that the feed supplier give notice to the lender in the event the borrower stops buying feed from the supplier. In the alternative, require that the borrower deliver to the lender regular lien waivers from its feed suppliers.

New and Existing Loans: For new and existing loans, the lender should consider the following:

(1) Heightened Scrutiny. Increase the scrutiny of the livestock operation to determine who is supplying feed and in what amounts. The lender should inquire from the borrower at its regular farm visits and make unannounced visits. Changing feed suppliers, failure to pay for feed, or an increase in the amount of feed purchased on credit may be indicators that the borrower is under financial stress.

(2) Monitor UCC-1 Filings. The lender should regularly monitor UCC-1 filings with the Iowa Secretary of State to determine if a feed supplier is asserting a feed supplier lien. In Iowa the feed supplier must file the lien within 31 days after the feed is supplied. Although the lender may already be subject to the priority lien, by knowing that a UCC has been filed, the lender will be able to control and limit the amount of any super priority lien.

Conclusion. Unfortunately, there is no mechanism to ensure that the security interest of the lender will not be involuntarily subordinated to a feed supplier for livestock fed in Iowa. However, the lender can take affirmative steps to limit its exposure.

Gray Plant Mooty is a full-service law firm with specialized practices in agribusiness and agricultural lending. Contact Phillip Kunkel, Thomas Melloy, or Jeff Peterson if you have any questions regarding this alert.


1 A more detailed discussion of the Minnesota statute can be found at: http://www.gpmlaw.com/resources/newsletters/mn-court-of-appeals-priority-livestock-production-input-lien.aspx

This article is provided for general informational purposes only and should not be construed as legal advice or legal opinion on any specific facts or circumstances. You are urged to consult a lawyer concerning any specific legal questions you may have.

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