Hidden Liens Report, a project of the Commercial Transactions Committee of the Business Law Section of The State Bar of California
II. List and Discussion of Hidden Liens
D. Agricultural Liens

1. Trust under Perishable Agricultural Commodities Act, 7 U.S.C. Sections 499 et seq.33

Statutory Framework:

Section 499e(c)(2) of the Perishable Agricultural Commodities Act of 1930 ("PACA") provides as follows:

Perishable agricultural commodities received by a commission merchant, dealer, or broker in all transactions, and all inventories of food or other products derived from perishable agricultural commodities, and any receivables or proceeds from the sale of such commodities or products, shall be held by such commission merchant, dealer, or broker in trust for the benefit of all unpaid suppliers or sellers of such commodities or agents involved in the transaction, until full payment of the sums owing in connection with such transactions has been received by such unpaid suppliers, sellers, or agents.

How the Lien Arises/Attaches:

PACA permits a non-segregated floating trust that permits commingling of the trust assets. See PACA § 499e(c)(2); Endico Potatoes, Inc. v. CIT Group/Factoring, Inc., 67 F.3d 1063, 1067 (2d Cir. 1995) (stating that Section 499e(c)(2) "imposes a 'non-segregated floating trust' on the commodities and their derivatives, and permits the commingling of trust assets"). For the trust to result:

  1. the buyer must be a "commission merchant," "dealer" or "broker" as defined by PACA (a "PACA Buyer");
  2. the buyer must have received perishable agricultural commodities ("PACA Commodities");
  3. the PACA Commodities must have been shipped through interstate or foreign commerce;
  4. the supplier, seller or agent of the PACA Commodities (a "PACA Seller") must be unpaid; and
  5. the PACA Seller must have preserved its trust rights by giving written notice to the PACA Buyer within the specified time period.

Perfection of the Lien:

To protect its trust rights, a PACA Seller need only provide notice of the trust to the PACA Buyer within thirty days of a payment default. 7 U.S.C. § 499e(c)(3) (2003) and 7 C.F.R. § 46.46(f) (2003). The PACA Seller may provide the notice one of two ways: (1) by a separate mailing of the trust notice to the PACA Buyer, or (2) by including a specific notice of the trust rights on its invoice. There is no federal database or registry to search for PACA notices.

Priority of the Lien:

The trust created by PACA takes priority over the interests of all other creditors, including secured creditors.

Obligations Secured by the Lien:

The PACA Trust is for the benefit of any PACA Seller.

The Collateral Subject to the Lien:

The trust assets include the PACA Commodities as well as products derived from the PACA Commodities and the proceeds from the sale of the PACA Commodities. 7 U.S.C. § 499e(c)(2) (2003). For example, proceeds from the sales of meals prepared from PACA Commodities are subject to the PACA Trust because the meals are "products derived from perishable agricultural commodities" and the proceeds of such meals are "receivables or proceeds from the sale" of such products. See Red's Market v. Cape Canaveral Cruise Line, Inc., 181 F. Supp. 2d 1339, 1342 (M.D. Fla. 2002) (finding proceeds of meals prepared by cruise line to be subject to PACA Trust); JC Produce v. Paragon Steakhouse Restaurants, Inc., 70 F. Supp. 2d 1119 (E. D. Cal. 1999) (extending PACA Trust to food purchased by restaurants, made into meals that were sold and the proceeds thereof).

The Classes of Secured Party/Debtor Subject to the Lien:

  1. Secured parties who finance restaurants, food manufacturers or any other business that purchases fruits, vegetables and other PACA Commodities are subject to the PACA Trust.
  2. Debtors who purchase fruits, vegetables and other PACA Commodities are subject to the PACA Trust.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

To mitigate the effects of PACA, a lender may consider: (1) implementing a reserve or requiring a letter of credit for unpaid PACA Commodities based upon the historical amounts owed to PACA Sellers; (2) requiring daily or monthly reporting of amounts owed to PACA Sellers and the identity of the PACA Sellers; (3) including covenants in the loan agreement for the delivery of any PACA notices and an updated list of the borrower's suppliers; and (4) monitoring the borrower's accounts payable to PACA Sellers on an ongoing basis by inquiring of the borrower's suppliers. Conversely, any lender contemplating a loan to a PACA Seller should ensure that the PACA Seller is preserving its PACA Trust benefits by timely sending notice of its trust rights or noting those rights on its invoices in the prescribed form.

2. Trust under Packers and Stockyards Act, 7 U.S.C. Sections 181 et seq.34

How the Lien Arises/Attaches:

Under the Packers and Stockyards Act, 7 U.S.C. §§ 181 et seq., all livestock purchased by a packer and poultry purchased by a live poultry dealer in cash sales, and all inventories of, or receivables or proceeds from meat food products or livestock products derived therefrom shall be held by such packer in trust for the benefit of all unpaid cash sellers of such livestock and/or poultry until full payment has been received by such unpaid sellers.35 If a packer or live poultry dealer fails to pay a cash livestock or poultry seller on time, the trust will arise. Unless otherwise agreed, a livestock purchaser must pay the seller by the close of the next business day following the sale an transfer of possession. (7 U.S.C. § 228b(a)). In order for the trust to be preserved, the unpaid cash seller must deliver a written notice to a buyer within thirty days after the final due date for the payment or within fifteen business days after receipt of a dishonored payment instrument. The unpaid cash seller must also file the notice with the Secretary of Agriculture. (7 U.S.C. § 196(b)).

The Packers and Stockyards Act applies to (i) "packers" which means "any person engaged in the business (a) of buying livestock in commerce for purposes of slaughter, or (b) of manufacturing or preparing meats or meat food products for sale or shipment in commerce, or (c) of marketing meats, meat food products, or livestock products in an unmanufactured form acting as a wholesale broker, dealer, or distributor in commerce" (7 U.S.C. § 191), and (ii) "live poultry dealers" which means "any person engaged in the business of obtaining live poultry by purchase or under a poultry growing arrangement for the purpose of either slaughtering it or selling it for slaughter by another, if poultry is obtained by such person in commerce, or if poultry obtained by such person is sold or shipped in commerce, or if poultry products from poultry obtained by such person are sold or shipped in commerce." (7 U.S.C. § 182(10)). It also applies to a "market agency" pursuant to 9 C.F.R. § 202.42. A "market agency" is defined as any person engaged in the business of (1) buying or selling in commerce livestock on a commission basis, or (2) furnishing stockyard services. (7 U.S.C. § 201(c)).

Perfection:

Since this is a trust structure, the concept of perfection is not directly applicable. However, as discussed above an unpaid cash seller must deliver written notice to the packer or poultry dealer and to the Secretary of Agriculture in order to preserve the trust.

Priority of the Enforcement Liens:

The trust in favor of unpaid cash sellers is intended to have priority over all secured creditors including creditors with perfected liens under the Uniform Commercial Code and a bankruptcy trustee. In re Frosty Morn Meats, Inc., 7 B.R. 988 (M.D. Tenn. 1980).

The Obligations Secured by the Lien:

The trust secures amounts due to any unpaid cash seller of livestock and poultry by the debtor.

The Collateral Subject to the Lien:

All livestock purchased by a packer and poultry purchased by a poultry dealer in cash sales, and all inventories of, or receivables or proceeds from meat food products or livestock products derived therefrom shall be held by such packer in trust for the benefit of all unpaid cash sellers of such livestock are subject to the lien until full payment has been received by such unpaid sellers. Note that the trust covers even livestock and poultry that originate from the cash sale and livestock and poultry that do not originate from the cash sale if such assets are commingled with other property unless the packer can identify and segregate any non-trust property.

The Classes of Secured Party/Debtor Subject to the Lien:

A debtor's livestock and/or poultry assets may be subject to this trust if (i) the debtor is a "packer" as defined in the Packers and Stockyards Act, and (ii) the debtor's average annual livestock purchases exceed $500,000 or the debtor's average annual poultry purchases exceed $100,000. The trust will benefit any unpaid cash livestock or poultry seller.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

A secured party will not be able to obtain priority over the unpaid cash seller and circumvent the effects of the Packers and Stockyards Act. Therefore, to mitigate the effects of this lien, a lender should consider (1) requiring other collateral that is not livestock or poultry, but that strategy will only be effective if the other collateral is not purchased with funds subject to the trust, (2) requiring the packer or poultry dealer to pay for the livestock or poultry timely and perhaps even into an escrow that will not be released until the packer or poultry dealer receives sufficient comfort that the seller's downstream payment obligations have been satisfied, (3) performing audits on the payment arrangements of the sellers to the packers or poultry dealers and requiring the packer or poultry dealer to maintain a reserve for the value of all collateral (livestock, poultry receivables or otherwise) that could become subject to the lien, (4) including appropriate reporting requirements in the loan documentation including prompt notice of the receipt by the packer or poultry dealer of any notices under the applicable statute, and (5) requiring one or more personal guaranties from the principals of the packer.

3. Agricultural laborer's lien under Civil Code Section 3061.5.36

How the Lien Attaches:

California Civil Code § 3061.5, subdivision (a) provides that:

Any person who as an employee, shall, by his or her own labor, do or perform any work harvesting or transporting harvested crops or farm products as defined in Section 55403 of the Food and Agricultural Code which are owned and grown or produced by a limited partnership as defined in Section 15501 of the Corporations Code, has a lien upon any and all of the severed crops or severed farm products or proceeds from their sale for the value of the labor done up to a maximum of earnings for two weeks. The liens attach whether the work was done at the instance of the owner who is the grower or producer of severed crops or severed farm products or of any other person acting by or under the owner's authority, directly or indirectly, as contractor or otherwise; and every contractor, subcontractor, or other person having charge of the harvesting or transporting of the severed crops or severed farm products shall be held to be the agent of the owner for the purposes of this section.

California Civil Code § 3061.5, subdivision (b) provides that these liens attach from the date of the commencement of the work or labor. The statute does not require the potential lien claimant to take any action other than perform labor in the work of harvesting or transporting harvested crops or farm products. There is a significant limitation on the applicability of the lien since the statute provides that it only applies to crops or farm products owned and grown or produced by a limited partnership.

Perfection of the Lien:

California Civil Code § 3061.5 does not provide any steps for perfection of the lien but Section 3061.6 of the California Civil Code, subdivision (a) provides that:

The lien created by Section 3061.5 shall continue in force for a period of 45 days from the time the person claiming such lien shall have ceased to do or perform the work for which such lien is claimed, and such lien shall cease at the expiration of the 45 days unless the claimant, his or her assignee or successor in interest, files a claim with the Labor Commissioner or brings suit to foreclose the lien in which case the lien continues in force until the claim filed with the Labor Commissioner or the lien foreclosure suit is finally determined and closed. If a claim is filed with the Labor Commissioner, the Labor Commissioner shall act upon and finally determine such claim within 180 days after filing. In case such proceedings are not prosecuted to trial within two years after the commencement thereof, the court may in its discretion dismiss the same for want of prosecution.

California Civil Code § 3061.6, subdivision (b) provides that:

Upon filing a claim with the Labor Commissioner, the Labor Commissioner, if the owner who is the grower or producer has failed to satisfy the conditions of subdivision (d) of Section 3061.5, shall determine whether or not such owner of the severed crops, severed farm products, or their proceeds is capable financially of satisfying such claim. For purposes of this determination, it shall be proper for the Labor Commissioner after investigation to take into account the potential liability faced by such owner of such severed crops, severed farm products, or their proceeds. If the Labor Commissioner determines that a lien is necessary to protect the interest of claimants, the Labor Commissioner shall file such lien on the crop, the severed farm product, or their proceeds and notify, in writing, the owner and notify, in writing, all persons who have filed financing statements on the crop, the farm product, or their proceeds pursuant to the provisions of the Commercial Code.

Priority of the Lien:

California Civil Code § 3061.5, subdivision (b) provides that these liens "are preferred liens, prior in dignity to all other liens, claims, or encumbrances."

Obligations Secured by the Lien:

California Civil Code § 3061.5, subdivision (a) provides that the lien created thereunder secures the obligations of a limited partnership to pay the value of labor done by an employee doing his or her own labor performing work harvesting or transporting harvested crops or farm products up to a maximum of earnings for two weeks.

California Civil Code § 3061.5, subdivision (b) provides that:

Except as provided in California Civil Code § 3061.5 subdivisions (a) and (c) they shall not be limited as to amount by any contract price agreed upon between the owner who is the grower or producer of the severed crops or severed farm products and any contractor, but the several liens shall not in any case exceed in amount the reasonable value of the labor done, nor the price agreed upon for the labor between the claimant and his or her employer. In no event, where the claimant was employed by a contractor, or subcontractor, shall the lien extend to any labor not contemplated by, covered by, or reasonably necessary to the execution of, the original contract between the contractor and the owner who is the grower or producer of severed crops or severed farm products and of which contract, or modification thereof, the claimant had actual notice before the performance of the labor.

California Civil Code § 3061.5, subdivision (c) provides that:

The maximum liability of severed crops, severed farm products or the proceeds from their sale subject to liens under this section is limited to the lesser of actual proved claims or 25 percent of the fair market value of the severed crops, severed farm products, or 25 percent of the proceeds after their sale.

Collateral Subject to the Lien:

The lien created under California Civil Code § 3061.5 is applicable to "any and all of the severed crops or severed farm products or proceeds from their sale." California Civil Code § 3061.5, subdivision (c), however, limits the collateral to the lesser of actual proved claims or 25 percent of the fair market value of the severed crops, severed farm products or proceeds of sale.

Classes of Secured Parties/Debtor Subject to the Lien:

Secured parties who take crops or farm products as defined in Section 55403 of the Food and Agricultural Code as collateral from a limited partnership are subject to the hidden lien arising under California Civil Code § 3061.5 which is a preferred lien and has priority over all other liens, claims or encumbrances.

How a Secured Party Can Maintain Its Priority or Protect Its Security Interest Against the Hidden Lien, Including Recommended Due Diligence:

California Civil Code § 3061.5, subdivision (b) expressly provides that the liens created under California Civil Code § 3061.5, subdivision (a) are created when a limited partnership hires laborers and the laborers perform harvesting or crops or transportation services with respect to harvested crops. These liens are preferred liens with priority over all other liens, claims and encumbrances and therefore the secured party does not have any way to protect its priority in the crops or farm products or proceeds thereof. Secured parties who make loans to limited partnerships in the business of harvesting or transporting harvested crops should require the borrowers to promptly pay all laborers and the secured parties should take steps to monitor the borrower's compliance with these covenants. Although the liens will arise automatically when the laborers perform their services, once the laborers are paid for their services, the liens for those services will be extinguished.

Furthermore, California Civil Code § 3061.5, subdivision (d) provides that:

No person has a lien if the owner who is the grower or producer of the severed crops, severed farm products, or their proceeds, who otherwise would be subject to a lien pursuant to subdivision (a), either gives directly, or requires a person or entity hired or used to furnish labor in connection with harvesting or transporting the severed crops, to give to the Labor Commissioner prior to the harvest and for 45 days after its completion, a bond executed by an admitted surety insurer in an amount and form acceptable to the Labor Commissioner, which is conditioned upon the payment of all wages found to be due and unpaid in connection with such operations under any provision of this code.

Therefore, secured parties who make loans to limited partnerships in the business of harvesting or transporting harvested crops should also require the borrowers to give the Labor Commissioner prior to the harvest and for 45 days after its completion, a bond executed by an admitted surety insurer in an amount and form acceptable to the Labor Commissioner. This bond will serve as additional assurance that the limited partnership will pay all wages to its laborers.

Civil Code § 3061.5, subdivision (e) provides that a buyer in the ordinary course of business, as defined in subdivision 9 of Section 1201 of the Commercial Code, takes free of the agricultural laborer's lien created by this section, notwithstanding the fact that the lien is perfected and the buyer knows of its existence.

4. Lien for pest abatement under Food & Agric. Code Section 5431.

[TO BE ADDED IN SUBSEQUENT DRAFT]

5. Lien on land for removal of plants and crops which are nuisances under Food & Agric. Code Section 5632.

[TO BE ADDED IN SUBSEQUENT DRAFT]

6. Lien for camelthorn abatement under Food & Agric. Code Section 7305.

[TO BE ADDED IN SUBSEQUENT DRAFT]

7. Lien for expenses of treating cattle or sheep under Food & Agric. Code Section 9331.

[TO BE ADDED IN SUBSEQUENT DRAFT]

8. Lien for expenses for confinement of cattle under Food & Agric. Code Section 10152.

[TO BE ADDED IN SUBSEQUENT DRAFT]

9. Lien for expenses of vaccinating calves under Food & Agric. Code Section 10355.

[TO BE ADDED IN SUBSEQUENT DRAFT]

10. Lien for expenses of testing cattle in brucellosis control area under Food & Agric. Code Section 10385.

[TO BE ADDED IN SUBSEQUENT DRAFT]

11. Lien for expenses incurred in caring for property under Food & Agric. Code Section 16526.

[TO BE ADDED IN SUBSEQUENT DRAFT]

12. Lien of railroad for expenses associated with transportation of animals, Food & Agric. Code Section 16907.

[TO BE ADDED IN SUBSEQUENT DRAFT]

13. Lien for care of stray animals under Food & Agric. Code Section 17041.

[TO BE ADDED IN SUBSEQUENT DRAFT]

14. Agricultural producer's lien under Food & Agric. Code Section 5563.

[TO BE ADDED IN SUBSEQUENT DRAFT]

15. Livestock seller's lien under Food & Agric. Code Section 55702.

[TO BE ADDED IN SUBSEQUENT DRAFT]

16. Dairy cattle supply lien under Food & Agric. Code Section 57402.

[TO BE ADDED IN SUBSEQUENT DRAFT]

17. Poultry and fish supply lien under Food & Agric. Code Section 57510.

[TO BE ADDED IN SUBSEQUENT DRAFT]

18. Agricultural chemical and seed lien under Food & Agric. Code Section 57561.

[TO BE ADDED IN SUBSEQUENT DRAFT]

19. Lien for service of stallion, jack or bull under Civil Code Section 3062.

[TO BE ADDED IN SUBSEQUENT DRAFT]

20. Livestock servicer's lien under Civil Code Section 3080.01.

[TO BE ADDED IN SUBSEQUENT DRAFT]

21. Lien on crops of a disabled veteran for operation of farm by Department of Veterans' Affairs under Mil. & Vet. Code Section 987.9.

[TO BE ADDED IN SUBSEQUENT DRAFT]

Endnotes

33 This analysis last updated on 12/1/2010. Back

34 This analysis last updated on 12/1/2010. Back

35 7 U.S.C. § 196 applies to livestock packers and 7 U.S.C. § 197 applies to poultry dealers. Packers whose average annual purchases are less than $500,000 are exempt from this provision. Poultry dealers whose average annual purchases are less than $100,000 are exempt from this provision. Back

36 This analysis last updated on 12/1/2010. Back

II-E. Tax and Other Governmental Liens / Table of Contents