By Lisa M. Goolik, J.D.
A bank, Guaranty Bank & Trust Company, that perfected its security interest in a debtor’s crops in accordance with Article 9 of the Mississippi Uniform Commercial Code was entitled to the proceeds of the debtor’s crops prior to a competing creditor’s exercise of its right to set-off. The U.S. District Court for the Northern District of Mississippi concluded that Guaranty followed all of the steps to attach and perfect a production-money security interest in the debtor’s crops, entitling the bank to “superpriority” status under Section 9-103 of the UCC (Guaranty Bank and Trust Co. v. Agrex, Inc. d/b/a/ FGDI, May 22, 2015, Bigger, N.).
Background. In 2010, a Mississippi farming partnership entered into a series of commodity futures contracts with Agrex Inc., d/b/a FGDI, a subsidiary of Mitsubishi Corp. The contracts required the partnership to deliver defined amounts of corn and soybeans at agreed upon prices within a specific range of months in 2010. The partnership was unable to perform four of their commodity futures contracts with FGDI in 2010 and later dissolved.
In September 2011, a former partner, David Walker, received and signed a letter from FGDI regarding the four unperformed contracts from 2010. In the letter, FGDI acknowledged the partnership’s dissolution and stated its willingness to assign the contracts to Walker and “roll” the contracts into 2012’s shipments. The letter stated that when FGDI received a signed copy of the letter, “[FGDI] will assign the contracts listed above to the entity ‘David Walker’ and [FGDI] will resend the contracts for your signature;” however, the contracts were never assigned or resent for Walker’s signature.
During that time, in April 2012, Guaranty executed a loan for $600,000 for the production of crops in the 2012 growing season on Walker’s behalf. Walker signed a loan agreement with Guaranty, secured by his 2012 soybean and corn crops, and a security agreement, secured by his farm products and equipment. Guaranty filed financing statements with the Mississippi Secretary of State’s central filing system, perfecting its security interest in Walker’s 2012 soybean and corn crops, along with his equipment. Walker drew over $400,000 to fund his 2012 growing operation.
At the end of the 2012 growing season, Walker delivered all of his corn and soybean crops to two grain terminals in Mississippi. FGDI notified the grain terminals of their contracts with Walker, and the grain terminals applied the delivered crops to FGDI’s account, after which FGDI sold the grain to the grain terminals. Walker filled all corn contracts but was unable to fill, in full, the soybean contract. FGDI summed up the amounts due Walker and set-off their estimated damages for the partially filled soybean contract.
Guaranty requested the proceeds of Walker’s crops from FGDI, claiming their recorded financing statement assumed priority over any interest FGDI asserted based on previous contracts with the partnership. In response, FGDI issued a check payable to Walker, Guaranty, and a third party for approximately $57,000, the amount FGDI calculated was in excess of its set-off regarding the unfilled soybean contract.
Assignment. Before addressing the priority dispute, the court began by addressing whether the partnership’s contracts with FGDI, including the unperformed soybean contract, were properly assigned to Walker. Guaranty argued the assignment was not valid, because neither FGDI nor Walker followed through on the assignment letter stating FGDI’s intent to rescind the contracts in the partnership’s name for Walker’s and return the contracts to Walker for signature, implying there was no written agreement to satisfy the Mississippi Statute of Frauds.
The Mississippi Statute of Frauds provides that “a contract for the sale of goods for the price of five hundred dollars ($500) or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought.”
Despite its failure to send the reassignment, FGDI asserted that the partnership’s 2010 contracts were ratified by Walker in 2012, by signing “roll sheets,” which list incremental price changes with related dates and notations, for the previous partnership contract. Viewing the evidence in the light most favorable to FGDI, the court concluded it was “plausible” that Walker ratified the partnership’s contracts by signing the roll sheets.
Priorities. However, the court concluded that Guaranty’s perfected purchase-money security interest assumed priority over FGDI’s claim to the crops' proceeds through set-off. FGDI argued Guaranty’s security interest was subject to the terms of the agreement between FGDI and Walker, which allowed for set-off. FGDI argued Guaranty’s security interest was limited to the proceeds of the crops and was perfected only after Walker assumed the partnership’s agreements.
“Were Guaranty’s interest only in David Walker’s accounts, FGDI’s priority argument would be persuasive; however, Guaranty’s security interest is not solely, nor primarily, in David Walker’s accounts. Guaranty’s paramount interest is in David Walker’s 2012 crops and crop proceeds,” noted the court.
It was undisputed that Guaranty followed the proper procedure and requirements to obtain a production-money security interest in Walker’s 2012 crops and crop proceeds. Guaranty perfected its interest by filing an effective financing statement with the Mississippi Secretary of State, completed all notification requirements, and provided funds to Walker to be used for the production of crops.
Production-money security interests are granted a higher priority over other secured interests because the obligation incurred by the debtor, for the value given, is restricted to the production of crops. In addition, Section 9-103 of the UCC provides that a production-money security interest does not lose its priority status, “even if: (1) The production-money crops also secure an obligation that is not a production-money obligation; [and] (2) Collateral that is not production-money crops also secures the production-money obligation.”
Accordingly, Guaranty’s production-money security interest, attached at filing, was superior to FGDI’s set-off interest, which may have been created when Walker delivered his crops to the terminal. As a result, the court concluded that Guaranty was entitled to the 2012 crop proceeds before FGDI’s set-off in the amount of $360,000.
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