Archive notice
This article was originally published on September 19, 2018. Its original analysis is reproduced below; the author’s contact information has been updated separately. Laws and lien requirements may have changed. This historical article is not a current legal update or a determination of priority in a particular transaction.
The article
During the harvest season, it is important for banks to be on the lookout for improper offsets from agricultural goods and service providers such as grain elevators and co-ops. An improper offset occur when a service provider offsets amounts they are owed from the farmer from the proceeds of commodities sales. In such a case, the service provider is legitimately owed money from the farmer, but if the farmer’s bank has a prior, perfected security interest in the applicable commodity, the service provider may be converting the bank’s collateral by offsetting, rather than simply remitting full payment to bank and farmer and then invoicing the farmer later.
That said, such an offset may be permissible if the service provider has a properly perfected statutory lien on the applicable commodity. See Minnesota Statutes Sections 514.963-514.966. While the analysis of whether proper perfection has occurred can be a tricky one, two main questions control the analysis: (1) did the service provider file a UCC financing statement within applicable timelines; and (2) in the case of crop or livestock inputs (e.g. feed, seed, fertilizer, etc.) was a lien notification statement provided to the bank? If the answer to either of these questions is no, then the service provider does not have a super priority lien and any offsets would be improper.
As a final consideration, even if the service provider did properly perfect an agricultural lien, there must be matching between the invoice that forms the basis of the offset and the applicable commodity (i.e. the invoice must relate specifically to the commodity being sold). Offsets based on unrelated invoices are improper even if the service provider properly perfected its agricultural lien. However, given that invoices may relate to multiple different commodities from potentially multiple years and there may be multiple different agricultural liens at play (e.g. a harvester lien and a crop production input lien) the analysis can get a bit murky.
If you have reason to believe that an improper offset has occurred, your bank does have potential recourse and should consult its legal counsel on recovery strategies.
About the author
Matthew Bialick represents financial institutions in banking, agricultural finance, workouts and related litigation. Contact Matthew at 952-239-3095 or matthew@mjblawmn.com.