Most operations need access to capital to make their operations work and banks generally provide that access. In order to get access to those funds, the banks generally require the operator to give a security interest in the results of the operation (the products), land, and /or equipment, or commodities. This is called giving a security interest or a secured transaction. Simply saying you can take my stuff if I don’t pay isn’t enough. Steps and procedures have to be followed. The first step is connecting the pledged property to the promise to pay via a pledge or attachment. After that, the lender perfects its interest in the attached property by filing with the recorder’s office or Secretary of State or wherever the rules say they should file for the type of property they are attaching to. Usually, this is done with a financing statement, but with title vehicles it means placing a lien on the title and with real estate it means putting a mortgage on the property.
The reason lenders follow these steps is to make sure they are the right place or priority as to who gets paid when the pledged item is sold. The Talladega Nights motto of “if you are not first you are last” isn’t quite right as sometimes, the difference between being second or third priority is the difference between being paid and being left holding an empty promise. Generally, the first to file wins the priority race, with some exceptions.
The two that impact ag the most are purchase money security Interest (PMSI) and Ag Liens.
PMSI changes the first to file wins concept. A PMSI lets the lender jump the line to “super-priority” over other parties claiming an interest in the same collateral covered by the PMSI. Super-priority means the creditor with a PMSI will have first priority over third parties, even when these third parties perfected their interests before the creditor gained the PMSI. In order to be a PMSI, the lender has to give the money to purchase the item and follow the steps to perfect that interest in that item. Example, the local banker lends the operation money to put in the crop and receives a pledge of all farm products and equipment. The operation buys a new tractor mid-year and finances it through the dealership. The dealership’s lending will be first over the local bank as to the tractor it lent money for if it follows the rules to secure the PMSI financing. The PMSI rules require filing within 20 days of the operation taking possession (when it is physically received)
PMSI in livestock is another critter altogether. It requires additional steps, to include actual notice to the local lender who might otherwise be in front of the PMSI lender. The PMSI has to be filed BEFORE the delivery of the livestock. If an operation has a choice on equipment or livestock PMSI financing, the lender is probably doing less to secure its position with equipment PMSI lending.
Ag liens are state rules that trump the normal pecking order of payment. Vet liens, custom harvest and feeding liens and even repair shops that hold onto repaired equipment each have different rules on how to prefect their lien.
As a potential buyer of equipment at a private sale, the operation should do a lien search on the name of the seller (which needs to be searched exactly how the driver’s license appears) and a release should be obtained from any lender that has filed a financing statement. If the operation sees a financing statement that is valid and still wants to purchase the equipment, it should talk to the lender about what it will take to release the specific item being purchased. Oral statement that “my banker doesn’t care” and “I am good for it” are sure ways to line the pockets of your lawyer when the bank comes to take the property that you already paid the seller for once.