This is Part I in a two part series on what Maryland Farmers need to know about security interests. Part II will be posted on December 2nd.
What is a Security Interest?
When a farmer enters into a credit transaction, for example the purchase of a piece of farm equipment, and secures the transaction by granting the lender a right in the farmer’s crops or livestock a security interest is created. A security interest is defined as the limited right in specific property or collateral of the debtor that allows the creditor to take the property should the debtor fail to fulfill his credit obligation. In Maryland, security interests and transactions involving security interests referred to as secured transactions are governed by the Article 9 of the Uniform Commercial Code (UCC) as amended and adopted by the Maryland Code, Commercial Law Article, Title 9.
Since the extensive revisions to the UCC in 2000, agricultural liens have been defined as non-possessory liens created by statute in favor of persons providing land, goods, or services in connection with a debtor’s farming operations.[i] While the creation and general enforceability of such liens remains governed by other parts of State law, the UCC, as adopted by Maryland in Title 9 of the Commercial Law Article of the Maryland Code, governs the perfection and priority of security interests as explained in detail below. Some Maryland statutory liens involving agriculture are possessory as opposed to non-possessory liens and are therefore not affected by Title 9 of the Commercial Law Article of the Maryland Code. An example of a possessory lien is the lien which occurs in favor of a caretaker of livestock such as a stable owner and allows the stable owner to retain the livestock if stable fees are unpaid similar to a mechanic’s lien.[ii] This blog has a previous post specifically on this type of stable lien
Creation of a Security Interest
In general, in order for a creditor to become a secured party with the legal right to take possession of collateral the security interest must be properly created through the statutory process of attachment or, in the case of an agricultural lien, the security interest must become effective. To attach or become effective a debtor must pledge an interest in collateral to a creditor and authenticate a security agreement describing the collateral. A security agreement must contain a clear statement that the debtor is granting the creditor a security interest in specified goods. The agreement need not take any specific form but the collateral must be specifically described by quantity or other descriptive means such as make, model and serial number. A description of collateral such as “all of debtor’s assets” or “all of debtor’s personal property” does not reasonably identify the collateral and will not be sufficient.[iii] Collateral, other than consumer goods, can include collateral acquired after the execution of the security agreement by using terms such as “all my present and future farm equipment.”[iv] One thing for a secured party to consider in a secured transaction is the debtor’s rights in the collateral. If a debtor owns the collateral outright this is not an issue but for example, if debtor pledges his farm equipment to secure a transaction with Lender B but he still owes Lender A for the initial purchase of the equipment, debtor can pledge his interest but he can only pledge his partial interest. In short, the debtor can only pledge his actual interest in the collateral, not the entire interest if he does not own the collateral in whole.
Perfection of a Security Interest
In order to ensure that no other party will be able to claim a greater interest in the same collateral a secured party must perfect his or her security interest. To perfect a security interest a creditor must file a financing statement describing the secured transaction. In Maryland a financing statement is an easy to use fill-in-the-blank document that can be found on the State Department of Assessments and Taxation (SDAT) website and filed with SDAT.[v] It is important to note that financing statements are indexed under the debtor’s name so the proper, legal name of the debtor should be used. A secured party should perfect an interest in farm products by filing a financing statement in the office of the secretary of state in the state in which the debtor is located.[vi] The only exception to general rule for the filing a financing statement with SDAT is for security interests in collateral that are timber, minerals or fixtures.[vii] A fixture is something that has become so connected to real property that it has become a part of the real property itself. An example of a fixture would be built in irrigation equipment that installed into the property. In the case of timber, minerals or a fixture, the financing statement should be filed in the county Land Records Office in which the timber, minerals or fixture is located. Although perfecting a security interest is not required to validate the interest, if a security interest remains unperfected and a debtor defaults, a creditor will have a lessor priority status compared to the holder of a perfected security interest in the same collateral even if the unperfected creditor had an interest first.
[i] Md. Code, Commercial Law Art., §9-102(a)(5)
[ii] Md. Code, Commercial Law Art., §16-401
[iii] Md. Code, Commercial Law Art., §9-108(c)
[iv]Md. Code, Commercial Law Art., §9-204
[v] Md. Code, Commercial Law Art., §9-501(a)(2)
[vi] Md. Code, Commercial Law Art., §9-302
[vii] Md. Code, Commercial Law Art., §9-501(a)(1)