Archive notice
This article was originally published on February 11, 2025. It is reproduced as a historical publication and has not been presented as a current legal update. References to growing conditions and legal developments reflect the original publication. Consult counsel about current law and the documents governing a particular credit.
The article
Many Minnesota farms either have received, or shortly will receive, crop insurance indemnity payments given the poor growing conditions in 2024. Most banks assume that they have a perfected security interest in indemnity payments made under a crop insurance policy, even in the absence of an executed assignment of indemnity, by virtue of an all assets UCC filing. But do they really? The answer is not as straightforward as it may appear.
The first question in the analysis under the UCC as enacted in Minnesota is whether the bank can perfect a security interest in crop insurance indemnity payments by virtue of a UCC filing. The answer is yes, but only if the bank has a security interest in the crop itself, as opposed to having only a security interest in accounts or payment intangibles. The reason is that insurance payments directly connected to a bank’s other collateral (such as crops or machinery) is considered a “proceed” that is covered by Article 9, whereas insurance payments unconnected to a bank’s other collateral (such as life insurance) are not covered by Article 9. That said, this is not much of a limitation, because it is unlikely that a bank will feel entitled to a crop insurance indemnity payment if it does not also have a lien on the crops themselves.
The second question is much stickier—is the entire UCC preempted by the Federal Crop Insurance Act? There are two applicable federal provisions that come into play in answering this question:
7 USC Sec. 1509, which provides that “claims for indemnities under this subchapter shall not be liable to attachment, levy, garnishment, or any other legal process before payment to the insured;” and 7 CFR 400.352, which provides that states may not “Impose or enforce liens, garnishments, or other similar actions against proceeds obtained, or payments issued in accordance with the Federal Crop Insurance Act,”
Taken together, one might assume that the UCC is completely supplanted in the area, and that the only way a bank can obtain a valid perfected security interest in an indemnity payment is through an assignment of indemnity. However, Courts that have addressed this issue have been hesitant to reach this conclusion despite the applicable language. The most common view—including the view hinted at in a Minnesota bankruptcy case—is to regard this language as only prohibiting a creditor from taking action to intercept crop insurance proceeds “before” they are made. In other words, the bank (in the absence of an assignment of indemnity) cannot send a demand for payment to the insurer directly or name the insurance as a party to a lawsuit, but the bank can go after the proceeds after they have been paid to the farmer. Courts view the broader language in 7 CFR 400.352 as either overstepping the bound of rulemaking authority slightly, or needing to be read in harmony with the more narrow 7 USC Sec. 1509 which only discusses actions “before payment to the insured.” However, this result is a bit strange, because it essentially means that indemnity proceeds are unperfected until the moment they are paid to farmers, at which time the perfection immediately and automatically snaps into place. This result is practically challenging as well, because if the borrower has committed fraud, the defrauding borrower will almost certainly gain uncontrolled access to indemnity payments, leaving the bank to chase money after it has been received by the fraudster (which is very challenging).
The second approach adopted by a minority of courts, including a bankruptcy court in the 8th Circuit, is to strictly construe both 7 USC Sec. 1509 and 7 CFR 400.352 and find that the only means of obtaining a perfected security interest in indemnity payments—either before or after payment to the farmer—is to file an assignment of indemnity. If embraced, this means that every bank with a UCC filing, but no assignment of indemnity, has no special rights to recover indemnity payments either before or after payment to the farmer. This is draconian, but fully consistent with federal law.
The final approach, which I have not yet seen adopted by a Court, but which is fully reasonable, is to find that 7 USC Sec. 1509 only applies to attempts by parties who do not have a perfected security interest in the farmer’s crop to obtain an interest through a judicial remedy like attachment or garnishment, and then further find that 7 CFR 400.352 either exceeds valid rulemaking authority, or else does not operate to completely preempt the UCC. This could be because the phrase “liens” applies only to things like statutory agricultural liens, rather than UCC security interests, or other statutory reasons. This interpretation is probably the most strained, but it avoids the odd result of a security interest essentially snapping into perfection upon payment to a farmer and it avoids the practical harms that could befall banks by making indemnity payments directly to farmers who could be inclined to defraud their banks.
Ultimately, we simply cannot say for certain how a court in Minnesota (probably a federal court given the issues at play) would rule on the questions of: (1) whether a bank can seek claim and delivery of crop insurance indemnity payments after they have been made to a farmer; and (2) whether a bank can permissibly seek claim and delivery of crop insurance indemnity payments from an insurance company, if the bank also names the farmer as a party to the litigation. In light of this uncertainty, one thing is clear (and disturbing), the only way to guarantee that your bank has a perfected security interest in crop insurance indemnity payments is to take an assignment of indemnity. Anything less is taking a large risk.
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.