There’s PACA, the Perishable Agricultural Commodities Act, a real super-priority. Basically, perishable foods obtain a super priority because, well, they perish and are not recoverable. PACA creates a lien that survives the lifetime of, say, a tomato or grapefruit, and attaches directly to the physical assets, i.e., the furniture, fixtures and equipment, of food distributors.
See:
7 U.S. Code § 499a – Short title and definitions
(a) Short title
This chapter may be cited as the “Perishable Agricultural Commodities Act, 1930”.
(b) Definitions
For purposes of this chapter:
(1) The term “person” includes individuals, partnerships, corporations, and associations.
(2) The term “Secretary” means the Secretary of Agriculture.
(3) The term “interstate or foreign commerce” means commerce between any State or Territory, or the District of Columbia and any place outside thereof; or between points within the same State or Territory, or the District of Columbia but through any place outside thereof; or within the District of Columbia.
(4) The term “perishable agricultural commodity”—
(A) Means any of the following, whether or not frozen or packed in ice: Fresh fruits and fresh vegetables of every kind and character; and
(B) Includes cherries in brine as defined by the Secretary in accordance with trade usages.
(5) The term “commission merchant” means any person engaged in the business of receiving in interstate or foreign commerce any perishable agricultural commodity for sale, on commission, or for or on behalf of another.
(6) The term “dealer” means any person engaged in the business of buying or selling in wholesale or jobbing quantities, as defined by the Secretary, any perishable agricultural commodity in interstate or foreign commerce, except that
(A) no producer shall be considered as a “dealer” in respect to sales of any such commodity of his own raising;
(B) no person buying any such commodity solely for sale at retail shall be considered as a “dealer” until the invoice cost of his purchases of perishable agricultural commodities in any calendar year are in excess of $230,000; and
(C) no person buying any commodity other than potatoes for canning and/or processing within the State where grown shall be considered a “dealer” whether or not the canned or processed product is to be shipped in interstate or foreign commerce, unless such product is frozen or packed in ice, or consists of cherries in brine, within the meaning of paragraph (4) of this section. Any person not considered as a “dealer” under clauses (A), (B), and (C) may elect to secure a license under the provisions of section 499c of this title, and in such case and while the license is in effect such person shall be considered as a “dealer”.
(7) The term “broker” means any person engaged in the business of negotiating sales and purchases of any perishable agricultural commodity in interstate or foreign commerce for or on behalf of the vendor or the purchaser, respectively, except that no person shall be deemed to be a “broker” if such person is an independent agent negotiating sales for and on behalf of the vendor and if the only sales of such commodities negotiated by such person are sales of frozen fruits and vegetables having an invoice value not in excess of $230,000 in any calendar year.
(8) A transaction in respect of any perishable agricultural commodity shall be considered in interstate or foreign commerce if such commodity is part of that current of commerce usual in the trade in that commodity whereby such commodity and/or the products of such commodity are sent from one State with the expectation that they will end their transit, after purchase, in another, including, in addition to cases within the above general description, all cases where sale is either for shipment to another State, or for processing within the State and the shipment outside the State of the products resulting from such processing. Commodities normally in such current of commerce shall not be considered out of such commerce through resort being had to any means or device intended to remove transactions in respect thereto from the provisions of this chapter.
(9) The term “responsibly connected” means affiliated or connected with a commission merchant, dealer, or broker as
(A) partner in a partnership, or
(B) officer, director, or holder of more than 10 per centum of the outstanding stock of a corporation or association. A person shall not be deemed to be responsibly connected if the person demonstrates by a preponderance of the evidence that the person was not actively involved in the activities resulting in a violation of this chapter and that the person either was only nominally a partner, officer, director, or shareholder of a violating licensee or entity subject to license or was not an owner of a violating licensee or entity subject to license which was the alter ego of its owners.
(10) The terms “employ” and “employment” mean any affiliation of any person with the business operations of a licensee, with or without compensation, including ownership or self-employment.
(11) The term “retailer” means a person that is a dealer engaged in the business of selling any perishable agricultural commodity at retail.
(12) The term “grocery wholesaler” means a person that is a dealer primarily engaged in the full-line wholesale distribution and resale of grocery and related nonfood items (such as perishable agricultural commodities, dry groceries, general merchandise, meat, poultry, and seafood, and health and beauty care items) to retailers. However, such term does not include a person described in the preceding sentence if the person is primarily engaged in the wholesale distribution and resale of perishable agricultural commodities rather than other grocery and related nonfood items.
(13) The term “collateral fees and expenses” means any promotional allowances, rebates, service or materials fees paid or provided, directly or indirectly, in connection with the distribution or marketing of any perishable agricultural commodity.
And there are Equine Liens:
Stakes are high when it comes to horse racing. Part of the lure of the track is testing one’s luck; you can win big or lose it all. When it comes to the business side of the Thoroughbred industry, however, risk is not nearly as appealing.
Breeding and raising a Thoroughbred racehorse is an expensive process. The life cycle of a typical racehorse requires the involvement of a multitude of people outside of the owners, including stud farms, vets, trainers, consignors and sales companies. Each of these expends time and money in getting the racehorse from foal to finish line.
All too often (and much more so following the financial crisis) these individuals go unpaid for their services. When the horse finally brings in money through winnings or sales, which of these providers gets to collect their debt first? Answering this question requires creditors to have a basic understanding of how liens and security interests are created and perfected.
Although there are several categories of equine liens, the most prevalent (and most litigated) are (i) those arising under the Uniform Commercial Code (Article 9 security interests and agricultural liens) and (ii) statutory liens. The distinction between these equine liens and the applicable priority rules under Kentucky’s Uniform Commercial Code (“UCC”) determines a creditor’s rights.
Article 9 Security Interests & Agricultural Liens
Article 9 of the UCC[1] applies to any (1) “transaction, regardless of its form, that creates a security interest in personal property or fixtures by contract,” and (2) “an agricultural lien.” In its most basic form, an Article 9 security interest is created when a creditor uses an interest in a horse to secure payment or performance of an obligation.
Agricultural liens are of a different breed. KRS §355.9-102(e) defines an agricultural lien, in relevant part, as an interest (other than a security interest) in farm products:
(1) Which secures payment or performance of an obligation for:
(a) Goods or services furnished in connection with a debtor’s farming operation…
2. Which is created by statute in favor of a person that:
(a) In the ordinary course of its business furnished goods or services to a debtor in connection with a debtor’s farming operation…
3. Whose effectiveness does not depend on the person’s possession of the personal property.
Kentucky’s UCC contains a special provision that expands the definition of “farm products” to specifically include horses and equine interests without regard to whether the debtor is engaged in farming. KRS §355.9-102(ah)(5). Under Kentucky’s UCC, an agricultural lien is a non-possessory lien.
Kentucky’s Statutory Liens
Most states, including Kentucky, have statutory liens in favor of those who commonly provide services to horses. Kentucky recognizes three such liens, two of which will be elaborated on in this article:
(1) The Agister’s Lien;[2]
(2) The Veterinarian’s Lien;[3] and,
(3) The Stallion Service Lien.[4]
An Agister’s Lien arises in favor of anyone that provides the “caring for, feeding and grazing” of a horse in exchange for compensation. The lien attaches regardless of whether the horse is permanently or temporarily boarded with the caregiver and lasts for one year after removal of the horse. The definition therefore affords protection not only to farms, but to consignors who temporarily board horses in connection with an auction.
On its face, the Agister’s Lien statute permits, without regard to the existence of other liens, use of the “self-help” provision in KRS 376.400(2), provided that the creditor has possession of the horse and the board bill is at least forty-five days past due. Under this provision, an agister can, ostensibly, cause a sale of the horse and take possession of the proceeds. As discussed below, however, the propriety of this provision is doubtful when other liens and security interests exist.
The Stallion Service Lien arises in favor of a stallion’s owner to secure payment of the stud fee. This lien does not attach to the mare and is enforceable for one year after the birth of the foal. To enforce the lien, the stallion keeper may file a lawsuit for enforcement or use the same affidavit/warrant process permitted by the Agister’s Lien.
Competing Liens
Securing a lien on a horse is only the first step in recovering debt. While the above liens are sufficient to establish a creditor’s interest, that interest remains unperfected (and thus subordinate) as to other creditors unless and until the creditor goes the extra mile to secure its place in line.
By virtue of Kentucky’s provision classifying “equine interests” as “farm products,” Kentucky’s statutory liens fall within the scope of Article 9’s definition of an agricultural lien. As such, they are subject to the requirements set out in Article 9 relating to perfection and priority.
Pursuant to KRS 355.9-322, conflicting perfected security interests and agricultural liens rank in priority according to the time of filing or perfection. Perfecting an equine lien, whether it be an Article 9 or statutory lien, can be accomplished by filing a financing statement with the Secretary of State. An un-filed, unperfected security interest or agricultural lien will come behind a perfected security interest – regardless of when the underlying obligation arose.
It merits mention that the applicability of the first to file or perfect rule with respect to the Agister’s Lien appears at odds with the literal language of the Agister’s Lien statute. To that end, although KRS 376.400(2) expressly permits recovery of debt through a sale of the horse, in practical effect this could improperly place an otherwise unperfected or subordinate agister in front of prior-perfected liens or security interests. This contradiction remains an unresolved issue in this field, however we are aware of at least one Fayette Circuit Court ruling in which a judge has deemed the first to file or perfect rule controlling.
As between competing statutory liens, the answer to priority disputes is more clearly defined. In that regard, the Stallion Service Lien statute expressly states that it is inferior to an Agister’s Lien. An Agister’s Lien will therefore always prevail over a Stallion Service Lien, regardless of when or if they are filed or perfected in relation to one another. In practice, however, and contrary to the statute, stud farm owners are often first to recover their debt by virtue of their ability to withhold the Stallion Service Certificate. A stud farm owner will generally not release the Stallion Service Certificate if there is an outstanding stud fee.
A Winning Strategy
For a safe bet, always file a financing statement with the Kentucky Secretary of State. Doing so ensures that an interest is placed in line with other competing interests. Moreover, whereas statutory liens only provide a one-year effective period, Article 9 financing statements are effective for five years. A filed financing statement will also resolve the due process concerns that accompany the self-help sale method permitted by the Agister’s Lien.
As you can see, loans and costs incurred on a horse’s behalf are subject to a complex set of rules; it often takes experienced legal counsel to discern who gets paid first when a horse brings in money. This is definitely one arena where the outcome is best not left to chance.
© 2014 by McBrayer, McGinnis, Leslie & Kirkland, PLLC. All rights reserved.
About the Author
W. Chapman Hopkins is an associate in the Lexington, Kentucky office of McBrayer, McGinnis, Leslie & Kirkland, PLLC. He is a member of the firm’s Commercial and Business Litigation practice group, as well as the Equine and Gaming Law, Administrative Law, and Employment Law groups.
Chapman has experience in navigating clients through all facets of their litigation matters. He frequently advocates for clients in complex litigation disputes involving a broad range of business and employment related cases. As a lifelong owner and breeder of Thoroughbred horses, Chapman has a…
Robert E. Maclin, III, Member of McBrayer, McGinnis, Leslie & Kirkland, PLLC has a broad range of legal experience gained through over 25 years of practice throughout the Commonwealth of Kentucky and various states where his clients conduct business. Mr. Maclin’s practice is concentrated in the areas of insurance defense, commercial and banking litigation, and association management representation. He often represents clients in banking proceedings, including lender liability, bankruptcy, insurance bond claims, secured transactions, leasing disputes, and other litigation and…