March26, 1987

Honorable Robert M. Saunders Chairman CommitteeonAgriculture and Livestock Texas Rouse of Representatives P. 0. Box2910 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

DearRepresentative Saunders:
In 1985 the United States Congress enacted legislation that provides protection for purchasers of farm products from secured creditors of the seller. 7U.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 theTexasPenal Code.
The explicit purpose of the federal legislation was to preempt certain state laws. Subsections (a) and(b) of section 1631provide:

Congress finds that -- (1) certain State lawspermit asecured 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 anypractical method for discovering the existence of the security interest, andhas no reasonable meansto 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 torepay 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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(4) this exposure constitutes aburden onand
anobstruction to interstate commercein farm products.
Thepurpose of this section is to removesuch burden on and obstruction to interstate commerce in farmproducts.
7U.S.C. 51631(a), (b) (Supp. III 1985). A house report on section 1631statms:
The bill is intended to preempt state lav

(specifically the so-called ‘farm products excaption' ofUniformCommercial Codesection 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 thetype provided bythebill requirements that the buyer check public records, obtain no-lien certificates from the farm products sellers, or otherwise seek out the lender andaccount 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 1985U.S. CodeCong. 6 Admin.News1103, 1214.
Thefederal legislation contains the following provision:

Except as provided in subsection (e) of this section andnotwithstanding anyother provision of Federal, State, or local law. abuyer whoin the ordinary course of business buys a farm product

. froma-seller engaged in farming operations shall take free of a security interest created by the seller, even though the security interest is perfected; andthebuyer knowsof theexistence of suchinterest, (Emphasis added).

7U.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 thefarmproducts andif the notice meetscertain other requirements. 7U.S.C 51631(e)(l). In addition, subsection (e) provides that abuyer of farmproducts takes subject to a security interest if the products were produced in a state that has acentral filing system as defined in section 1631and if the buyer had constructive notice of the security interest as

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, provided for in section 1631(e)(2) or (3). The secretary of agriculture mustcertify that aparticular state’s filing system qualifies
as a central filing system for purposes of section 1631. 7 U.S.C. 51631(c) (2).
Your first question is whether the federal statute preempts section 9.307, subsections (a) and (d), of the Texas Business and CommerceCode. 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 farmproducts from aperson engaged in farming operations takes free of a security interest created bv his seller even though the security interest is perfected andeventhough the buyer knowsof its existence. (Emphasisadded).
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, maynot enforce asecurity interest in farmproducts against aperson whohas purchased the farmproducts fromaperson engaged ia farming operations -unless the -secured party gives notice of the security interest to thebuyer 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. (Emphasisadded).
Section 9.307(a) is the Texas version of the provision that Congress intended topreempt. SeeH.R. Rep. No. 99-271. m. Subsection (d) of section 9.307 provi= someprotection for buyers of farmproducts. Because subsection (d) allows a secured creditor to protect his security interest by giving the buyer notice within 90days 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
onpurchasers of farmproducts. weconclude that the federal statute preempted both subsection (a) and subsection (d) of section 9.307 of the Texas Business andCommerceCode.

Your second question is vhether the federal legislation preempts section 9.401, subsections (a) and (f). of the Texas Business and CommerceCode. Section 9.401(a) sets out the proper places co file in order to perfect asecurity interest:

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Theproper place to file in order to perfect a security interest is asfollows:
(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 aresident of this state thenin the office of the County Clerk in the county where the goods
are kept;

(2) whenthe collateral is timber to be cut or is minerals or the like (including oil andgas) 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 amortgage onthe real estate wouldbe 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, farmproducts, 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 theSecretary 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. Thepriority of such a security interest is not affected by the fact that acontinuation statement filed according to this subsection is filed at adifferent place thanthe original financing statement.
The federal legislation provides for constructive notice of security interests in farmproducts in states that have central filing systems certified by the secretary of agriculture. Asof January 23, 1987, Texas did not have a certified central filing system. See. s, 51Fed. Reg. 45493 (1986) (NorthDakota’s central filing **system** certified); see generally, CISFederal Register Index (under heading

“Food Security Act”). Thefederal statute does not require states to have central filing systems. Rather, it merely allows for constructive notice of security interests infarmproducts in states that have

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central filing systems. In states that do not have central filing systems. secured parties can protect their security interests only bygiving actual notice to potential buyers. In order to permit constructive notice, states maywish to change their filing systems, but the federal legislation does not mandatesuch achange. Also. the house report cited abovestates that the federal legislation wouldnot preempt “basic state laws onthe creation. perfection, or priority of security interests.” Filing is often required for the perfection of a security interest. SeeTex. Bus. &Comm.Code 59.302. **Also,** filing maydetermine the priority of security interests. See Tex. Bus. 6 Comm.Code 09.312. Because the federal statute doesot mandate a central filing system andbecause it wasnot intended to change state procedures regarding perfection or priority of security interests, we conclude that the federal legislation does not preemptsubsections (a) and (f) of section 9.401.

Your third question is whether the federal legislation preempts the following provision in theTexas Penal Code:

A person who is a debtor under a security agreement, andwhodoes 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 11thdayafter the daythat the secured party makesa lawful demandfor the proceeds **or** account. Anoffense under this subsection is: (1) a Class **A** misdemeanor if the proceeds obtained fromthe 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 moneyor goods having avalue of $10,000 ormore.
Tex. Penal Code 132.33(f). This provision applies to all types of secured property, not just farmproducts. Weassumeyou are asking

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whether the federal legislation excepts farm products from the co&rage of section 32.33(f). Weconclude that it does not. Under section 32.33(f) it is acrime for adebtor under asecurity 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.

Wenote that the federal legislation also makescertain conduct a criminal offense:

(1) **A** security agreement In which a person engaged in farming operations creates a security interest in a **farm** product mayrequire the person to furnish to the secured party a list of the buyers, commission merchants, and selling agents to or through whomthe person engaged in farming operations maysell such farmproduct. (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 7days prior tosuch sale; or (B) has accounted to the secured party for the proceeds of such sale not later than 10days 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 adebtor under asecurity agreementto account for proceeds mayconstitute a crime. Wedo not think that overlap in **coverage,** however, is indicative of congressional intent to preempt state law provisions such as section 32.33(f). Thefederal legislation wasintended to preemptstate lawonly to theextent necessary to

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achieve the goal of easing the burden onpurchasers 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. weconclude that the federal legislation did not removefarmproducts from the coverage of section 32.33(f) of the Penal Code.
SUMMARY

Federal legislation intended to protect purchasers of farmproducts fromsecured 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
JACKHIGHTOWRR First Assistant Attorney General
MARY KELLER Executive Assistant Attorney General
RICKGILPIN Chairman, Opinion Committee Prepared bySarahWoelk Assistant Attorney General

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