The Food Security Act of 1995 is part of a matryoshka of statutes. In the center is the general rule of 9-320(a) of the UCC, that a buyer in the ordinary course of business takes free of a security interest created by its seller. The next doll is the Farm Products Exception, which I wrote about here: except, most notably, in California, the buyer in the ordinary course rule does not apply to a buyer of farm products. The next doll is the Food Security Act itself: if you fail to comply with its terms, then the Farm Products Exception does not apply. Finally, if you do comply, then the Farm Products Exception does apply.
If that’s not entirely clear, don’t blame the messenger.
An interesting case out of the U.S. Bankruptcy Court for the Central District of Illinois asked this question: does the Food Security Act apply to proceeds? Here are the basic facts of CNH Capital America LLC v. Trainor Grain & Supply Co.: Both CNH and Trainor had financed crops for farmers named Printz, who are now in bankruptcy. CNH had the earlier filed financing statement. Trainor was also the grain elevator which bought the crops. CNH did not comply with the notice provisions of the Food Security Act. Trainor had therefore, there was no dispute, purchased the crops free and clear of CNH’s lien. But what about the proceeds? Trainor simply offset them against its debt and paid nothing to the Printzes. Would it be able to walk away without paying, despite CNH’s earlier filed financing statement?
Your ordinary buyer, when it pays for the crops, is concerned about double payment, which is why it will check the Food Security Act filings or notices of its seller. In essence, Trainor wasn’t making any payment at all; no cash was changing hands. If it was wrong, it still had its debt. That probably isn’t worth much without collateral and with the farmers in bankruptcy, but also, as a secured party, it was clearly in second position behind another creditor.
And that, in essence, is what the court held. The Food Security Act protects a buyer. If a secured creditor does not comply with its notice provisions (which, in some states like Idaho and Oregon, are essentially the same as for filing a financing statement, while in others, like Washington and, presumably, Illinois, involve actually sending notice to known prospective buyers of the farm products), then the buyer gets full title to the goods. But what it does not get is priority in proceeds as well.
Think of it this way: if there were no Farm Products Exception–the rule that applies to purchasers of every kind of goods except farm products–would a buyer who also had a second security interest be able to take the goods by setting off its debt against the interests of a first priority secured creditor? I think not, and that is what the court ruled here.
What if Trainor had paid the farmers and the farmers had turned around and paid Trainor in cash? Under 9-332 of the UCC, unless Trainor and the farmers had been in collusion, Trainor would, outside of bankruptcy, have taken good title to the funds. Of course, in bankruptcy, this was likely to be a preference and thus recoverable just as the setoff in the actual case was.