Opinion #6535

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The following opinion is presented on-line for informational use only and does not replace the official version. (Mich Dept of Attorney General Web Site - www.ag.state.mi.us)

STATE OF MICHIGAN

FRANK J. KELLEY, ATTORNEY GENERAL

Opinion No. 6535

August 17, 1988

COMMERCIAL CODE: Security interest in farm products

CONSTITUTIONAL LAW: US Const, art VI, cl 2--preemption of statute protecting security interest in farm products

The farm products exception provisions of the Uniform Commercial Code, MCL 440.9307; MSA 19.9307, which subject a buyer of farm products in receipt of timely written notice of the security interest created by the seller in the farm products to the security interest, have not been preempted by the Federal Food Security Act of 1985, 7 USC 1631.

Honorable Nick Smith

State Senator

The Capitol

Lansing, Michigan 48913

You have requested my opinion on whether the Federal Food Security Act of 1985, 7 USC 1631, has preempted the Uniform Commercial Code, Sec. 9307, as amended by 1985 PA 199, MCL 440.9307; MSA 19.9307, or whether it comes within the exception provided in 7 USC 1631(e)(1).

Congress enacted the Federal Food Security Act of 1985, 7 USC 1631, to protect the purchasers of farm products from becoming sureties for the farmer debts to lenders holding a security interest in the products. US v Progressive Farmers Marketing Agency, 788 F2d 1327, 1330 (CA 8, 1986).

7 USC 1631(a), (d), and (e) bear directly upon your question. They provide:

"(a) Congress finds that--

"(1) certain State laws permit a secured lender to enforce liens against a purchaser of farm products even if the purchaser does not know that the sale of the products violates the lender's security interest in the products, lacks any practical method for discovering the existence of the security interest, and has no reasonable means to ensure that the seller uses the sales proceeds to repay the lender;

"(2) these laws subject the purchaser of farm products to double payment for the products, once at the time of purchase, and again when the seller fails to repay the lender;

"....

"(d) Except as provided in subsection (e) of this section and notwithstanding any other provision of Federal, State, or local law, a buyer who in the ordinary course of business buys a farm product from a seller engaged in farming operations shall take free of a security interest created by the seller, even though the security interest is perfected; and the buyer knows of the existence of such interest.

"(e) A buyer of farm products takes subject to a security interest created by the seller if--

"(1)(A) within 1 year before the sale of the farm products, the buyer has received from the secured party or the seller written notice of the security interest organized according to farm products that--

(i) is an original or reproduced copy thereof;

(ii) contains,

(I) the name and address of the secured party;

(II) the name and address of the person indebted to the secured party;

(III) the social security number of the debtor or, in the case of a debtor doing business other than as an individual, the Internal Revenue Service taxpayer identification number of such debtor;

(IV) a description of the farm products subject to the security interest created by the debtor, including the amount of such products where applicable, crop year, county or parish, and a reasonable description of the property and

(iii) must be amended in writing, within 3 months, similarly signed and transmitted, to reflect material changes;

(iv) will lapse on either the expiration period of the statement or the transmission of a notice signed by the secured party that the statement has lapsed, whichever occurs first; and

(v) any payment obligations imposed on the buyer by the secured party as conditions for waiver or release of the security interest; and

(B) the buyer has failed to perform the payment obligations, or

"(2) in the case of a farm product produced in a State that has established a central filing system--

(A) the buyer has failed to register with the Secretary of State of such State prior to the purchase of farm products; and

(B) the secured party has filed an effective financing statement or notice that covers the farm products being sold; or

"(3) in the case of a farm product produced in a State that has established a central filing system, the buyer--

(A) receives from the Secretary of State of such State written notice as provided in subparagraph (c)(2)(E) or (c)(2)(F) that specifies both the seller and the farm product being sold by such seller as being subject to an effective financing statement or notice; and

(B) does not secure a waiver or release of the security interest specified in such effective financing statement or notice from the secured party by performing any payment obligation or otherwise; and"

7 USC 1631(d) ennunciates the policy that notwithstanding any other provision of state or local law, a buyer of farm products from a seller engaged in farming operations shall take free of a security interest created by the seller, even though it is perfected, despite the fact that the buyer knows of the existence of the security interest, except as provided in subsection (e).

Congress has provided in subsection (e) two basic exceptions from its stated purpose to permit the buyers of farm products from farm operators to purchase the products free from any secured interest in the products.

The second exception stated in 7 USC 1631(e)(2) deals with a state central filing system for secured interests in farm products. It is inapplicable in Michigan because MCL 440.9307; MSA 19.9307, makes no provision for a central filing system for secured interests in farm products.

Subsection (1) of 7 USC 1631(e), however, states the first exception which is implicated in your question by virtue of MCL 440.9307; MSA 19.9307, as amended by 1985 PA 199, and analysis of this portion of the federal statute is appropriate. It provides that a buyer of farm products takes subject to the security interest if the buyer has received from the secured party or the seller within the previous year an original or reproduced copy of the security interest in said farm products.

Section 9307 of the Uniform Commercial Code, 1962 PA 174, MCL 440.9307; MSA 19.9307, was rewritten by the Legislature in 1985 PA 199, in pertinent part, to provide:

"(1) Except as otherwise provided by subsection (10), a buyer in ordinary course of business, as defined in section 1201(9), takes free of a security interest created by his or her seller even though the security interest is perfected and even though the buyer knows of its existence.

"(2) Subsections (3) to (10) shall apply in the case of a person buying farm products from a person engaged in farming operations.

"(3) If requested by the secured party, a debtor engaged in farming operations who gives a security interest in farm products shall provide to the secured party a written list identifying potential buyers and points of delivery of the farm products. Except as otherwise provided by subsection (4), the number of potential buyers for each commodity shall not exceed 5. If a potential buyer has more than 1 point of delivery, each additional point of delivery shall be counted as a potential buyer.

"(4) A debtor engaged in farming operations who provides a written list of potential buyers to a secured party pursuant to subsection (3) shall not sell farm products that secure the debt to a buyer who is not identified on the list without the prior written consent of the secured party. A person who knowingly or intentionally violates this subsection is guilty of a felony, punishable by imprisonment for not more than 3 years or a fine of not more than $10,000.00, or both. If appropriate given the facts and circumstances of the case, the court shall place the person on probation upon the condition that restitution be made to the secured party. Payment of, or application of the proceeds to, the debt upon which the security interest is based shall be an absolute defense to a prosecution under this subsection if the payment or application is made prior to commencement of prosecution.

"(5) A secured party who is provided with a written list of potential buyers pursuant to subsection (3) may notify buyers identified on the list of the security interest as provided in this subsection. A secured party shall not notify a person not identified on the list, except that the secured party may notify a buyer concerning whom the secured party has given prior to written consent pursuant to subsection (4) or to whom the secured party has reasonable cause to believe the debtor is about to sell the farm products. A notice provided pursuant to this subsection shall be in writing, and shall be mailed by certified mail or delivered by another method by which receipt can be verified. The notice may be in a form agreed upon in writing by the buyer and the secured party, but in absence of such an agreement the notice shall be an original financing statement or a carbon, photographic, or other reproduction of an original that is effective under section 9402, or a statement that contains all of the following:

(a) The full name and address of the debtor.

(b) The full name and address of the secured party.

(d) The date and location of the filing of the security interest.

(e) The date and signature of the secured party.

"(6) If the debt that is the basis of the security interest is satisfied, the secured party shall notify in writing each potential buyer to whom the secured party sent notice under subsection (5). The notice may be given within a time period agreed upon in writing by the buyer and the secured party, but in absence of such an agreement the notice shall be given within 11 days after the debt is satisfied.

"(7) A secured party who does any of the following is guilty of a misdemeanor, punishable by imprisonment for not more than 90 days or a fine of not more than $1,000.00 or both:

(a) Knowingly or intentionally gives false or misleading information in a notice provided pursuant to subsection (5).

(b) Sends notice to a potential buyer other than as permitted in subsection (5).

"(8) A buyer of farm products who receives notice pursuant to subsection (5) of a security interest in the farm products shall make payment for the farm products by check or other instrument made payable to the seller and the secured party jointly, except that payment may be made directly to the secured party if authorized in writing by the seller. This subsection shall not apply to any payment or partial payment made before notice under subsection (5) has been received by the buyer. A buyer of farm products who violates this subsection is guilty of a misdemeanor, punishable by imprisonment for not more than 90 days or a fine of not more than $1,000.00, or both. Payment of, or application of the proceeds to, the debt upon which the security interest is based shall be an absolute defense to a prosecution under this subsection if the payment or application is made prior to commencement of prosecution.

In essence, the Uniform Commercial Code, Sec. 9307, provides that a buyer of farm products take free of any security interest in the products unless the buyer has received written notice of the secured interest in the farm products and the buyer has failed to meet the payment obligation to the secured party. It provides a prenotification mechanism under which the seller furnishes the names of potential buyers of the farm products to the secured party who notifies in writing the persons listed of the security interest in the farm products. The form of notice may be a copy of the financing statement. The buyer is obligated to pay for the product in the form of a check or other instrument made payable to the seller and the secured party jointly or to the secured party only if authorized in writing by the seller.

Congress enacted 7 USC 1631, on December 23, 1985, but ordered it to become effective on December 23, 1986. The Uniform Commercial Code, Sec. 9307, as amended by 1985 PA 199, was enacted on December 27, 1985, but it did not become effective until January 1, 1986. It is noted that SB 362 was enrolled by the Senate on December 10, 1985, 1985 Senate Journal 2502, and after approval by the Governor on December 26, 1985 was filed with the Secretary of State on December 27, 1985 as 1985 PA 199. Enacting Sec. 2 of 1985 PA 199 provided that the Act shall take effect on January 1, 1986.

While these two pieces of legislation were considered at approximately the same time, 7 USC 1631 in its final formulation was not adopted until after the enrollment of 1985 SB 362.

Addressing your question whether 7 USC 1631 entirely preempts Sec. 9307 of the Uniform Commercial Code, the controlling rules for determining whether Congress has preempted state law under the Supremacy Clause of US Const, art VI, cl 2, are summarized in Louisiana Public Service Comm v FCC, 476 US 355, 368; 106 SCt 1890; 90 LEd2d 369 (1986):

1. Congress has expressed a clear intent to pre-empt state law. Jones v Rath Packing Co, 430 US 519; 97 SCt 1305; 51 LEd2d 604 (1977).

2. There is an outright or actual conflict between federal and state law. Free v Bland, 369 US 663; 82 SCt 1089; 8 LEd2d 180 (1962).

3. It is impossible to comply with both the federal and state laws. Florida Lime & Avocado Growers, Inc v Paul, 373 US 132; 83 SCt 1210; 10 LEd2d 248 (1963).

4. There is implicit in the federal law a barrier to state regulation. Shaw v Delta Air Lines, Inc, 463 US 85; 103 SCt 2890; 77 LEd2d 490 (1983).

5. Congress has occupied the entire field of regulation, leaving no room for the states to supplement federal law. Rice v Sante Fe Elevator Corp, 331 US 218; 67 SCt 1146; 91 LEd 1447 (1947).

6. The state law is an obstacle to the accomplishment and execution of the full objectives of Congress. Hines v Davidowitz, 312 US 52; 61 SCt 399; 85 LEd 581 (1941).

The two explicit exceptions delineated in subsections (e)(1) and (2) to the otherwise clear expression of Congress in 7 USC 1631(d) that buyers of farm products take free any security interest "notwithstanding any other provision of ... State, ... law" manifest an intent on the part of the Congress to preempt "all other law relating to security interest in farm products." Comment, Section 1324 of the Food Security Act of 1985: Congress Preempts the Farm Products Exception of Section 9-307(1) of the Uniform Commercial Code, 55 U of Mo Kan City LR 454, 464 (1987), hereafter Comment, Section 1324 of the Food Security Act of 1985, citing HR Rep No 271, 99th Cong, 1st Sess 110 (1985). 1985 US Cong & Adm News 1214. Thus, Congress has neither explicitly nor implicitly occupied the field of regulation and has left room for the state to regulate the manner of actual or constructive notice to buyers of farm products which would subject them to the security interest of the lender. State regulation in this area would not present an obstacle to the accomplishment of the objective of Congress in the enactment of 7 USC 1631(d) unless state regulation outright or actually conflicted with the provisions of 7 USC 1631(e)(1) or (2), making it impossible for a buyer to comply with both the federal and state law.

While a number of states have enacted legislation providing for a central registry system of security interests in farm products as a form of constructive notice to farm products buyers, Comment, Section 1324 of the Food Security Act of 1985, at 463, n 67, Michigan has chosen to adopt a system which permits the lender to provide the buyer with prenotification of the security interest in the farm products. Several states have adopted a similar buyer notification system. Comment, Section 1324 of the Food Security Act of 1985, at 462, n 61.

A comparison of the farm products exception provisions of MCL 440.9307; MSA 19.9307, with the provisions of 7 USC 1631(e)(1) is appropriate in order to ascertain whether the provisions are in outright or actual conflict with each other which would make compliance with both federal and state law impossible. Such a comparison does not reveal any outright or actual conflict between the provisions of the state and federal statutes. MCL 440.9307; MSA 19.9307, furthers, rather than obstructs, the basic objective of Congress in enacting 7 USC 1631(e)(1).

Although MCL 440.9307(8); MSA 19.9307(8), is unclear as to period of time that a written notice of a security interest received by a potential buyer is binding upon that buyer, it may be given a constitutional construction that it is binding for one year from the time of sale of such farm products consonant with 7 USC 163(e)(2)(A) in order to effect the purpose of MCL 440.9307; MSA 19.9307, consonant with the Supremacy Clause of US Const, art VI, cl 2.

Similarly, MCL 440.9307(5); MSA 19.9307(5), does not contain a requirement in the form of the notice to the potential buyer of the social security number or an Internal Revenue Service taxpayer number of the debtor, research reveals no decision of a federal court holding that the validity of the notice of security interest in the farm products is dependent upon inclusion of such number. The Legislature may wish to amend the statute to conform it to the federal statute.

It is my opinion, therefore, that the farm products exception provisions of the Uniform Commercial Code, MCL 440.9307; MSA 19.9307, which subject a buyer of farm products in receipt of timely written notice of the security interest created by the seller in the farm products to the security interest, have not been preempted by the Federal Food Security Act of 1985, 7 USC 1631.

Frank J. Kelley

Attorney General

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