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Idaho court decision limits payment rights of feed suppliers

Ryan Miltner Published on 31 March 2014

As an attorney living in Ohio and working largely in the area of federal law and regulation, I have not read very many court decisions from Idaho.

Although I am certain that I have read some, I cannot specifically recall any of them. But in late January, the Idaho Supreme Court rendered an opinion in a case involving dairy farming that caught my interest.

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To have a decent understanding of the case, a short summary of the factual background is necessary. Dairy farmers had obtained a series of loans from their bank to finance their dairy operation.

Over time, the farmers obtained 10 such loans. As would be expected, the bank took a security interest in the dairy cows of the farm operation. The bank filed the necessary UCC form to perfect its security interest in the cows.

Four feed suppliers provided feed to the dairy on credit. Also, as would be expected, the dairy fed the feed to the cows. (What else would they do with it?) Under Idaho law, the feed suppliers had a priority lien on the feed and the cattle that were fed the feed – at least they thought they did.

Unfortunately, the dairy defaulted on its bank obligations. The bank auctioned off the cows, and the proceeds from sale were insufficient to pay both the bank and the feed suppliers.

A lawsuit followed, and the feed suppliers claimed they were entitled to the proceeds of sale by virtue of their feed suppliers’ lien. A trial court agreed with the feed suppliers. An appeal to the Idaho Supreme Court followed.

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In its opinion, the court examined the law creating the feed sellers’ lien, which reads:

An agricultural commodity producer or an agricultural commodity dealer who sells, or delivers under contract or bailment, an agricultural product has a lien on the agricultural product or the proceeds of the sale of the agricultural product as provided in section 45-1804, Idaho Code. The lien created in this chapter may attach regardless of whether the purchaser uses the agricultural product purchased to increase the value of his livestock or whether he uses the agricultural product purchased to maintain the value, health or status of his livestock without actually increasing the value of his agricultural product.
Idaho Code § 45-1802

The court focused on the phrase “has a lien on the agricultural product or the proceeds of sale of the agricultural product.” Because the term “agricultural product” does not include livestock, the court determined that the feed suppliers’ lien did not extend to the cows that ate the feed. The sellers were out of luck.

What does this mean for dairy farmers? Bob Naerebout, the executive director of the Idaho Dairymen’s Association, stated to the Magic Valley Times-News that the decision will help dairy farmers by giving bank lenders assurance that their security interests hold priority over other liens.

Mr. Naerebout’s point is correct. Given the historical volatility of dairy farm incomes, providing lenders with stability and predictability is important to maintaining a pool of qualified and willing dairy lenders.

But there is also a second side to the argument. Livestock operations have often purchased feed on credit, and dairy farms are no exception. This decision clarifies that Idaho feed suppliers lose their lien once feed is consumed.

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While the court decision provides such sellers greater certainty regarding the existence of their liens, one might expect that feed suppliers will be more reluctant to sell feed on credit, especially to dairies experiencing financial difficulty.

As a practical matter, this decision might result in more formal agreements between lenders with security interests in cattle and livestock and feed suppliers to ensure livestock collateral is preserved and feed suppliers have some guarantee of payment.

It is also important to note that this particular decision involves Idaho law exclusively. The court opinion and laws involved are particular to Idaho. Each state will have its own laws regarding liens and their respective priority.

While a survey of the law from more than a few states would be far beyond the scope of this article, it is worth noting that California has a statutory Dairy Cattle Supply Lien which affords, in essence, a right to a milk check garnishment to satisfy unpaid feed bills. In Ohio, there is no exact analog to the Idaho provisions.

Given this new clarity on these Idaho provisions, it will be interesting to see how other courts might look to resolving such disputes, should they arise – although I certainly hope that such situations remain few and far between. PD

ryan miltner

Ryan Miltner
Attorney
The Miltner Law Firm LLC

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