Source: http://www.lrplaw.net/producers-liens-enforcement-issues/
Timestamp: 2018-05-26 07:42:45
Document Index: 751146605

Matched Legal Cases: ['§ 3', '§ 55631', '§ 545', '§ 55631', '§ 55634', '§ 55638', '§ 55638', '§ 55638', '§ 55638', '§ 55633', '§ 55637', '§ 55650', '§ 55631', '§ 55634', '§ 55631', '§ 55403', '§ 55408', '§ 55632', '§ 55634', '§ 55633', '§ 55647', '§ 55648', '§ 55645']

Producer's Liens: Enforcement Issues - The Fresno California Law Offices of Lang, Richert and Patch
You are here: Home / Business Law / Producer’s Liens: Enforcement Issues
by René Lastreto II1
I. Nature of the Lien
The Producer’s Lien is a California statutory lien. The lien is upon “any farm product” and upon all processed or manufactured forms of such farm product securing the producer’s labor, care and expense in growing and harvesting the product.2 “Farm products” are essentially all agricultural products of the soil and includes honey and beeswax, oil seeds, poultry, poultry product, livestock product and livestock for immediate slaughter.3 Timber, timber products, milk, milk products and aquacultural products are excluded.4
The lien is in favor of every producer of farm products that sells the product grown by the producer
to any processor under either an express or implied contract.5 A “producer” is a person engaged in the business of growing or producing farm products.6 An Illinois Bankruptcy Court construing California law, In re S.N.A. Nut Co. 197 B.R. 642, 652(B.CT.N.D. Illinois, 1996) has held that a California processor could assert a Producer’s Lien as to products it may grow. In SNA Nut Co., supra the Debtor attempted to defeat the California Producer’s Lien by arguing that since the party asserting the lien (in that case Tulare Nut Company) was also a processor, it was precluded from asserting the lien. The Court denied summary judgment on that issue finding an issue of fact as to the extent of product delivered by Tulare Nut Company to the Debtor that was actually grown byTulare Nut Company. Id.
Courts have held that the California Legislature’s intent with the Producer’s Lien statute is that it be
liberally construed to promote and protect the agricultural industry. California Food and Agricultural Code § 3; In re TH Richards Processing Co., 910 F2d. 639643 fn. 3 (9th Cir. 1990); In re Loretto Winery Limited, 898 F2d. 715, 720-21 (9th Cir. 1990). The lien attaches to all delivered product from the date of delivery or any portion of it by a producer to any processor.7 The lien extends to every farm product and any processed form of the farm product which is in the possession of the
processor without segregation.8 Most controversial is the Producer’s Lien is a preferred lien prior in dignity to all other lien claims, or encumbrances except labor claims or personal services rendered to the processor after delivery of the product and Warehousemen’s Liens.9
The lien can be enforced by filing suit and such suit may contain other claims and remedies provided
by law. See California Food and Ag Code § 55631, 55636. A claimant can assert a personal action against the processor and in said action, seek to foreclose the lien.10 If the producer seeks a writ of attachment as part of the lawsuit, he is not required to state in his affidavit that the demand is not secured by a lien.11 Should a judgment be entered against the processor in favor of the producer a judgment does not impair or merge any lien right or claim held by the plaintiff.12 In the event there are more claims than value of processed product held by the processor, Producer’s Lien claims should have equal standing and payment is pro-rated among the claimants.13 The Producer’s Lien is truly a “secret” lien since it does not require the filing of a Financing Statement or other documentation as a lien under Article 9 of the Commercial Code or elsewhere under California Law. Arguments that the lien should be set aside because it is not effective against bona fide purchasers under 11 U.S.C. § 545 (2) have been rejected. See In re SNA Nut Co. supra.
II. Issues Relating to Producer’s Lien Enforcement
A. Extension of the Lien to Proceeds from Processor’s Sales.
California Food and Ag Code § 55631 states the extent of the lien is on farm products and upon all processed and manufactured forms of such farm products. California Food and Ag Code § 55634 defines the extent of the Producer’s Lien as on “every farm product and any processed form of the farm product which is in the possession of the processor without segregation of the product.” The issue is what happens when the farm product is sold by the processor. California Food and Ag Code § 55638 makes unlawful a processor’s removal of the farm product from its ownership or control to which the liens attach except the excess of what is sufficient to satisfy all existing liens or so long as the total proceeds of the sale are used to satisfy obligations to producers secured by the lien.
The United States Bankruptcy Court for the Eastern District of California held an US Bank N.A. v. Deseret Farms (In Re Sargent Walnut Ranches), 219 B.R. 880 (B.Ct.E.D. California, 1998) that a growers Producer’s Lien did not encumber the proceeds from the sale of walnuts when the processor had no available inventory. The Court noted that the Producer’s Lien was extinguished when the last of the walnut inventory was sold to third parties. Accordingly, in a priority dispute between a lender secured by inventory and inventory proceeds and the Producer’s Lien claimants, the lender with the inventory lien had higher priority.
The California Court of Appeal for the 5 District has th held otherwise and is the controlling authority in California on this issue. Frazier Nuts, Inc. v. American Ag Credit, 141 Cal.App. 4th 1263 (2006). In Frazier Nuts, a secured lender extended a $4,000,000 revolving line of credit to a processor. The line of credit was renewed a few times. The collateral securing the line of credit included the processor’s inventory, accounts receivable and equipment at the processor’s facility. When the processor could not pay off the line of credit after its last renewal, it filed a Chapter 11 bankruptcy petition. It was later converted to Chapter 7. Between the last renewal of the line of credit and its filing for bankruptcy, the processor made nearly $400,000 of payments to the lender. The growers delivered almonds to the processor and in return received a promise of payment. The growers filed a complaint against the lender claiming that the secured lender wrongfully diverted proceeds of the sale of their almonds. The trial court granted secured lender’s motion for summary judgment
holding in part that the grower’s statutory lien did not extend to the accounts receivable or sale proceeds arising out of the crop delivered by the almond growers. The secured lender’s primary argument was the growers legal theory failed because they had no lien or other right at any time in the processor’s almond sale proceeds. Frazier Nuts, supra 141 Cal. App. 4th at 1270.
The Court of Appeals looked at the legislative history of Food and Ag Code § 55638 which makes the processor removing any farm product from its control without payment of the lien unlawful unless the total proceeds of a sale is used to satisfy the liens. The Court noted that prior to the 1979 amendments to that section, the lien’s duration was limited to 60 days. Frazier Nuts, supra 141 Cal. App. 4th at 1272. The Court of Appeal focused on the provision of California Food and Ag Code § 55638 which provides that the sale of raw or processed farm product is not prohibited “so long as the total proceeds of the sale are used to satisfy obligations to producers.” Id. at page 1274. The Court of Appeal disagreed with the holding Sargent, supra and held that the provisions of California Food and Ag Code § 55638 that the total proceeds of the sale to be used to satisfy producer’s obligations imposed the duty upon processors and/or a right in favor of producers.
The next question is whether that right constituted a lien on the proceeds with priority over the secured lender. The Court of Appeal reasoned that the legal right of grower’s to be paid by the processor from the sale proceeds can be characterized as a lien. The Court continued its logic by stating that grower’s right to be paid from the proceeds (or its correlative, processor’s legal obligation to pay) before the debt processor owes growers is satisfied is an interest sufficient to be a lien. Frazier Nuts, supra 141 Cal. App 4th at 1277 (The Court extended the priority of the lien under California Food and Ag Code § 55633 to the proceeds as “promot[ing] the general purposes of the Producer’s Lien statute as well as the 1979 amendment’s specific purpose of seeing the producers would be paid for their product.”) Id. at page 1278.
Thus under current California Law, the Producers Lien statute’s penalty provisions provide the platform for producer’s assertion of liens with higher priority than general security interests in proceeds from a processor’s sale of encumbered product.
B. Can the Protections of the Producer’s Lien Statute be Waived?
In In re GVF Cannery, Inc. 202 BR 140 (N.D. California, 1996) The District Court for the Northern District California reviewed an appeal from the Bankruptcy Court which found that a subordination agreement that a processor’s lender required to be signed by a producer was a waiver of the statutory right which was ineffective due to the producer’s lack of information about the rights the producer was waiving. The District Court affirmed the Bankruptcy Court’s reasoning that a waiver analysis should be applied to the subordination agreement at issue but reversed and remanded for findings as to whether a valid waiver was obtained. In GVF Cannery, supra a tomato grower executed a subordination agreement which had the effect of waiving his first priority Producer’s Lien rights under the California Food and Ag Code. There were issues concerning whether the processors’ agent mislead the producer. After the Bankruptcy Court ruled in favor of the producer, the lender appealed the decision. The lender argued that the Bankruptcy Court should have analyzed the subordination agreement as an enforceable contract not as a waiver of the statutory right. The lender argued that the producer did not unequivocally relinquish any rights as a creditor by subordinating the lien but “suppressed” its rights until the obligation to the lender was satisfied. The District Court disagreed holding that the producer did give up a right forever by subordinating the Producer’s Lien the right to be first creditor in line. In re GVF Cannery, Inc. supra 202 BR at 144.
The District Court did disagree with the Bankruptcy Court’s ruling that a waiver needed to include a statement regarding the processor’s existing debt to the lender and the relation of the debt to the processor’s existing assets. Instead, the District Court held that the producer be informed that: (1) he had a statutory first priority lien in his tomatoes; (2) by subordinating his Producer’s Lien he was giving up his right to first priority; (3) this waiver would place him behind the lender as a creditor and (4) if the processor went bankrupt and the processor’s assets were not sufficient to cover the debts to the lender, the producer would not receive any further payments for his tomatoes.
Thus a waiver or subordination could be found effective provided the elements of a waiver are established by the parties claiming a waiver. Those elements are the party executing the waiver must be fully informed of (1) the existence of the right being waived; (2) the meaning of the waiver; (3) The effect of the waiver; and (4) a full understanding of the explanation of the waiver. Hittle v. Santa Barbara County Employees 39 Cal. 3rd 374, 389 (1985). The Producer’s Lien statute does provide when a release of the Producer’s Lien will occur by operation of law (e.g., a surety bond or cash deposit or payment or arrangements being made for such payments satisfactory to the producers, California Food and Ag Code § 55637; the processor either pays the value of the farm product, deposits with the director surety bond, deposit of cash sum or delivering the director a receipt;
provision of evidence to a Court that the processor has security or monies on deposit with the director if an action is filed, California Food and Ag Code § 55650).
C. Does Co-Mingling of the Producer’s Product Mean the producer has a Lien on the Entire Inventory?
Some tension exists between the provisions of California Food and Ag Code § 55631 which provides in part:
Every producer of any farm products that sells any product which is grown by him
to any processor under contract … has a lien upon such product and upon all processed or manufactured forms of such farm products for his labor, care and expense in growing and harvesting such product
This provision limits the extent of the Producer’s Lien to the product grown by the producer and held by the processor.
This lien however is extended by California Food and Ag Code § 55634:
Every lien which is provided for in this article is on every farm product and any processed form of a farm product which is in the possession of the processor without segregation of the product.
Thus the lien extends beyond that product which is produced by the farmer to product in the possession of the processor which is produced by other farmers “without segregation.” The United States Bankruptcy Court for the Eastern District of California in In re California Pacific Rice Mill, Ltd., 265 BR 237, 240 (B.Ct.E.D., California 2001) reasoned that which is not segregated is commingled. Id.at 240. The phrase “without segregation” is properly interpreted to mean “with commingling” or “that is commingled.” Id.
In California Pacific Rice Mill, supra the facts were that the rice processor segregated all the rights held by the processor by variety and crop year. Accordingly, the Bankruptcy Court denied the producer’s requests for a preliminary injunction prohibiting the debtor processor from disposing of, or relinquishing control of any of its rights to inventory regardless of variety or crop year. The Bankruptcy Court held that the extension of the scope of the Producer’s Lien would be only to the extent those farm products are commingled. Because of the facts in California Pacific Rice Mill, the Producer’s Lien was limited. Accordingly, in an appropriate case when crops are segregated, the extent of the Producer’s Lien may not be so vast.14
The Producer’s Lien provides a substantial remedy for producers who are unpaid. The scope of the lien can be the subject of some debate but California aw at present extends that coverage of the lien to proceeds. The coverage of the lien may be waived. The extent of the lien will be limited if the processor segregates crops
Rene Lastreto, II is an owner shareholder at Lang, Richert & Patch, Attorneys at Law, a
Professional Corporation. He has 30 years of experience in representing all contingencies in the
loan enforcement process including lenders, bankruptcy trustees, borrowers, equipment lessors
and others. His practice is in all Courts including the Bankruptcy Courts, Federal Courts and
California Superior Courts. He is certified in the area of Creditors Rights Law by the American
Board of Certification. ↩
California Food and Ag Code § 55631. ↩
California Food and Ag Code § 55403. ↩
California Food and Ag Code § 55408. ↩
California Food and Ag Code § 55632. ↩
California Food and Ag Code § 55634. ↩
California Food and Ag Code § 55633. ↩
California Food and Ag Code § 55647. ↩
California Food and Ag Code § 55648. ↩
California Food and Ag Code § 55645. ↩
Two excellent articles should be consulted for further analysis of the extent of the Producer’s Lien; Walter et al, “California Producer’s Liens: A Primer,” 19 San Joaquin Agric.L.Rev.25 (2009); Walter & Morrison, “Lender Beware: California’s Secret and Not So Secret Statutory Agricultural Liens” 31 Cal.Bankr. J. 505(2010). ↩