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5th Cir. Rules in Lender’s Favor in Agricultural Lien Priority Dispute

In an agricultural lien contest between three creditors of a bankrupt commercial farm, the U.S. Court of Appeals for the Fifth Circuit recently affirmed the trial court’s award of summary judgment in favor of a bank that provided debtor-in-possession financing, holding that the locale of the farm products determined the applicable lien law and that bank’s lien was superior to the liens of two nurseries that supplied trees and shrubs because the latter were either unperfected or unenforceable.

A copy of the opinion in Fishback Nursery, Inc. v. PNC Bank is available at:  Link to Opinion.

The debtor, “a wholesale grower of trees, shrubs, and other plants, with headquarters in Texas and offices in Michigan, Oregon and Tennessee,” filed bankruptcy in June 2016.

Two creditors were commercial nurseries located in Oregon that supplied trees and shrubs to the debtor in return for security interests in the goods sold. Another creditor, a bank headquartered in Pennsylvania, loaned the debtor money in return for a security interest in most of debtor’s assets. The bank also provided post-petition debtor-in-possession financing so the debtor could stay in business.

The bankruptcy court ordered that the debtor-in-possession financing included the pre-petition loan and that the bank’s lien was subordinate only to valid, perfected pre-petition liens.

The nurseries sued the bank in federal court, seeking a declaratory judgment that their liens were superior to the bank’s lien. The bank filed a counterclaim seeking a declaratory judgment that the nurseries’ liens were unenforceable.

The parties filed cross-motions for summary judgment and the trial court granted the bank’s motion. The nurseries appealed.

On appeal, the Fifth Circuit first approved the trial court’s ruling as to “which choice-of-law analysis should determine the law governing the lien dispute,” reasoning that the trial court correctly declined to choose whether bankruptcy courts “should  apply forum or federal choice-of-law rules” because “both would give the same answer[;]” namely, Texas.

Under Texas law, “agricultural lien perfection and priority are governed by the law of the jurisdiction where ‘farm products are located,” which meant Michigan, Tennessee and Oregon, where the products were delivered to the debtor’s farms.

Turning to the merits, the Fifth Circuit agreed with the trial court that the nurseries’ liens were not perfected and were thus inferior to the bank’s lien “due to defective financing statements.” The defect was that the debtor’s legal name was not exactly reproduced on the financing statements, as required under Michigan and Tennessee law.

Addressing the Oregon products, the Fifth Circuit agreed with the trial court’s conclusion that one nursery “failed to extend its lien under Oregon law.”  Because the nursery’s lien was unenforceable, it could not be senior to the bank’s lien.

The Fifth Circuit therefore affirmed the trial court’s summary judgment ruling in the bank’s favor.

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