March 26, 1987 

Honorable Robert M. Saunders 

Chairman 

Committee on Agriculture and 

Livestock 

Texas Rouse of Representatives 

P. 0. Box 2910 

Austin, Texas 78769 

Opinion No. JM-657 

Re: Effect of the federal Food 

Security Act of 1985 on provisions of state law relating 

to security interests in agricultural products 

Dear Representative Saunders: 

In 1985 the United States Congress enacted legislation that 

provides protection for purchasers of farm products from secured 

creditors of the seller. 7 U.S.C. 61631 (Supp. III 1985). You ask 

vhether that federal legislation preempted sections 9.307(a) and (d) 

and 9.401 (a) and (f) of the Texas Business and Comerce Code and 

section 32.33(f) of the Texas Penal Code. 

The explicit purpose of the federal legislation was to preempt 

certain state laws. Subsections (a) and (b) of section 1631 provide: 

Congress finds that -- 

(1) certain State laws permit a secured lender 

to enforce liens against a purchaser of farm 

products even if.the purchaser does not know 

that the sale of the products violates the 

lender’s security interest in the products, 

lacks any practical method for discovering the 

existence of the security interest, and has no 

reasonable means to ensure that the seller uses 

the sales proceeds to repay the lender: 

(2) these laws subject the purchaser of farm 

products to double payment for the products, 

once at the time of purchase, and again when 

the seller fails to repay the lender; 

(3) the exposure of purchasers of farm 

products to double payment inhibits free 

competition in the market for farm products: 

and 

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Honorable Robert M. Saunders - Page 2 (JM-657) 

(4) this exposure constitutes a burden on and 

an obstruction to interstate commerce in farm 

products. 

The purpose of this section is to remove such 

burden on and obstruction to interstate commerce 

in farm products. 

7 U.S.C. 51631(a), (b) (Supp. III 1985). A house report on section 

1631 statms: 

The bill is intended to preempt state lav 

(specifically the so-called ‘farm products excaption' of Uniform Commercial Code section 9-307) to 

the extent ‘necessary to achieve the goals of this 

legislation. Thus, this Act would preempt state 

laws that set as conditions for buyer protection 

of the type provided by the bill requirements that 

the buyer check public records, obtain no-lien 

certificates from the farm products sellers, or 

otherwise seek out the lender and account to that 

lender for the sale proceeds. By contrast, the 

bill vould not preempt basic state-law rules on 

the creation, perfection, or priority of security 

interests. 

H.R. Rep. No. 99-271, 99th Cong., reprinted in 1985 U.S. Code Cong. 6 

Admin. News 1103, 1214. 

The federal legislation contains the following provision: 

Except as provided in subsection (e) of this 

section and notwithstanding any other provision of 

Federal, State, or local law. a buyer who in the 

ordinary course of business buys a farm product . 

from a -seller engaged in farming operations shall 

take free of a security interest created by the 

seller, even though the security interest is 

perfected; and the buyer knows of the existence of 

such interest, (Emphasis added). 

7 U.S.C. 51631(d). Subsection (e) of section 1631. which contains 

exceptions to the provision above, provides that a buyer of farm 

products takes subject to a security interest if the buyer received 

notice of the security interest before buying the farm products and if 

the notice meets certain other requirements. 7 U.S.C 51631(e)(l). In 

addition, subsection (e) provides that a buyer of farm products takes 

subject to a security interest if the products were produced in a 

state that has a central filing system as defined in section 1631 and 

if the buyer had constructive notice of the security interest as 

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Honorable Robert M. Saunders - Page 3 (~~-657) 

, 

provided for in section 1631(e)(2) or (3). The secretary of agriculture must certify that a particular state’s filing system qualifies 

as a central filing system for purposes of section 1631. 7 U.S.C. 

5 1631(c) (2). 

Your first question is whether the federal statute preempts 

section 9.307, subsections (a) and (d), of the Texas Business and 

Commerce Code. Saction 9.307(a) thereof provides: 

Except as provided by Subsection (d) of this 

section. a buver in ordinary course of business 

(Subdivision (9) of Section- 1.201) other than a 

Person buying farm products from a person engaged 

in farming operations takes free of a security 

interest created bv his seller even though the 

security interest is perfected and even though the 

buyer knows of its existence. (Emphasis added). 

Subsection (d) of section 9.307 provides:~ 

A secured party, including a secured party 

under a securitv interest covered bv Stction 

9.312(b) of this code, may not enforce a security 

interest in farm products against a person who has 

purchased the farm products from a person engaged 

ia farming operations -unless the -secured party 

gives notice of the security interest to the buyer 

by certified ‘mail, return receipt requested, not 

later than the 90th day after the date of c 

chase. The notice must state the terms of ti; 

Gity interest and the amount claimed to be 

oved to the secured party. (Emphasis added). 

Section 9.307(a) is the Texas version of the provision that Congress 

intended to preempt. See H.R. Rep. No. 99-271. m. Subsection (d) 

of section 9.307 provi= some protection for buyers of farm products. 

Because subsection (d) allows a secured creditor to protect his 

security interest by giving the buyer notice within 90 days after the 

sale, however. the provisions of the Texas statute are less favorable 

to buyers than the notice provisions in the federal statute, which 

allow a secured party to protect his security interest only by prior 

notice. Because the federal statute was intended to ease the burden 

on purchasers of farm products. we conclude that the federal statute 

preempted both subsection (a) and subsection (d) of section 9.307 of 

the Texas Business and Commerce Code. 

Your second question is vhether the federal legislation preempts 

section 9.401, subsections (a) and (f). of the Texas Business and 

Commerce Code. Section 9.401(a) sets out the proper places co file in 

order to perfect a security interest: 

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The proper place to file in order to perfect a 

security interest is as follows: 

(1) when the collateral is consumer goods, 

then in the office of the County Clerk in the 

county of the debtor’s residence or if the debtor 

is not a resident of this state then in the office 

of the County Clerk in the county where the goods 

are kept; 

(2) when the collateral is timber to be cut or 

is minerals or the like (including oil and gas) or 

accounts subject to Subsection (e) of Section 

9.103. or when the financing statement Is filed 

as a fixture filing (Section 9.313) and the 

collateral Is goods which are or are’ to become 

fixtures. then in the office of the County Clerk 

in the county where a mortgage on the real estate 

would be filed or recorded; 

(3) in all other cases, in the office of the 

Secretary of State. 

Section 9.401(f) deals with continuation statements: 

A continuation statement filed to continue a 

security interest perfected before September 1, 

1985, in collateral that is equipment used in, 

farming operations, farm products, or accounts or 

general Intangibles arising from or relating to 

the sale of farm products by a farmer must be 

filed in the office of the Secretary of State, and 

must contain the information ,contained in the 

original financing statement, in addition to the 

information required for a continuation statement 

under Section 9.403 of this code. The priority of 

such a security interest is not affected by the 

fact that a continuation statement filed according 

to this subsection is filed at a different place 

than the original financing statement. 

The federal legislation provides for constructive notice of 

security interests in farm products in states that have central filing 

systems certified by the secretary of agriculture. As of January 23, 

1987, Texas did not have a certified central filing system. See. 

s, 51 Fed. Reg. 45493 (1986) (North Dakota’s central filing system 

certified); see generally, CIS Federal Register Index (under heading 

“Food Security Act”). The federal statute does not require states to 

have central filing systems. Rather, it merely allows for constructive notice of security interests in farm products in states that have 

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Honorable Robert M. Saunders - Page 5 (JM-657) 

central filing systems. In states that do not have central filing 

systems. secured parties can protect their security interests only 

by giving actual notice to potential buyers. In order to permit 

constructive notice, states may wish to change their filing systems, 

but the federal legislation does not mandate such a change. Also. the 

house report cited above states that the federal legislation would not 

preempt “basic state laws on the creation. perfection, or priority of 

security interests.” Filing is often required for the perfection of a 

security interest. See Tex. Bus. & Comm. Code 59.302. Also, filing 

may determine the priority of security interests. See Tex. Bus. 6 

Comm. Code 09.312. Because the federal statute doesot mandate a 

central filing system and because it was not intended to change state 

procedures regarding perfection or priority of security interests, we 

conclude that the federal legislation does not preempt subsections (a) 

and (f) of section 9.401. 

Your third question is whether the federal legislation preempts 

the following provision in the Texas Penal Code: 

A person who is a debtor under a security 

agreement, and who does not have a right to sell 

or dispose of the secured property or is required 

to account to the secured party for the proceeds 

of a permitted sale or disposition, commits an 

offense if the person sells or otherwise disposes 

of the secured property, or does not account to 

the secured party for the proceeds of a sale or 

other disposition as required, with intent to 

appropriate (as defined in Chapter 31 of this 

code) the proceeds or value of the secured 

property. A person is presumed to have intended 

to appropriate proceeds if the person does not 

deliver the proceeds to the secured party or 

account to the secured party for the proceeds 

before the 11th day after the day that the secured 

party makes a lawful demand for the proceeds or 

account. An offense under this subsection is: 

(1) a Class A misdemeanor if the proceeds 

obtained from the sale or other disposition are 

money or goods having a value of less than 

$10,000; 

(2) a felony of the third degree if the 

proceeds obtained from the sale or other 

disposition are money or goods having a value 

of $10,000 or more. 

Tex. Penal Code 132.33(f). This provision applies to all types of 

secured property, not just farm products. We assume you are asking 

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whether the federal legislation excepts farm products from the 

co&rage of section 32.33(f). We conclude that it does not. Under 

section 32.33(f) it is a crime for a debtor under a security agreement 

to sell or dispose of secured property without accounting to the 

secured party for the proceeds if the security agreement requires the 

debtor to account to the secured party for the proceeds. Not only 

does section 32.33(f) protect secured creditors, but it also protects 

subsequent buyers of secured property. Therefore, it is in harmony 

with the intent of the federal legislation. 

We note that the federal legislation also makes certain conduct a 

criminal offense: 

(1) A security agreement In which a person 

engaged in farming operations creates a security 

interest in a farm product may require the person 

to furnish to the secured party a list of the 

buyers, commission merchants, and selling agents 

to or through whom the person engaged in farming 

operations may sell such farm product. 

(2) If a security agreement contains a 

provision described in paragraph (1) and such 

person engaged in farming operations sells the 

farm product collateral to a buyer or through a 

commission merchant or selling agent not included 

on such list, the person engaged in farming 

operations shall be subject to paragraph (3) 

unless the person -- 

(A) has notified the secured party in 

writing of the identity of the buyer, 

cossaission merchant, or selling agent at 

least 7 days prior to such sale; or 

(B) has accounted to the secured party 

for the proceeds of such sale not later 

than 10 days after such sale. 

(3) A person violating paragraph (2) shall be 

fined $5,000 or 15 per centum of the value or 

benefit received for such farm product described 

in the security agreement, whichever is greater. 

7 U.S.C. 01631(h). Under both the federal statute and the Texas 

statute, failure of a debtor under a security agreement to account for 

proceeds may constitute a crime. We do not think that overlap in 

coverage, however, is indicative of congressional intent to preempt 

state law provisions such as section 32.33(f). The federal legislation was intended to preempt state law only to the extent necessary to 

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achieve the goal of easing the burden on purchasers of farm products. 

Section 32.33(f) helps, rather than hinders, that goal. Further, 

state prosecution and federal prosecution of the same person for 

the same act does not constitute double jeopardy. United States v. 

Wheeler, 435 U.S. 313 (1978). Therefore. we conclude that the federal 

legislation did not remove farm products from the coverage of section 

32.33(f) of the Penal Code. 

SUMMARY 

Federal legislation intended to protect 

purchasers of farm products from secured creditors 

of the seller preempts subsections (a) and (d) of 

section 9.307 of the Texas Business 6 Commerce 

Code. It does not preempt subsections (a) and (f) 

of section 9.401 of the Texas Business and 

Comerce Code or section 32.33(f) of the Texas 

Penal Code. 

Attorney General of Texas 

JACK HIGHTOWRR 

First Assistant Attorney General 

MARY KELLER 

Executive Assistant Attorney General 

RICK GILPIN 

Chairman, Opinion Committee 

Prepared by Sarah Woelk 

Assistant Attorney General 

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