Article

* Jacob A. MANNING is an Associate at Dinsmore & Shohl LLP. This summary was submitted by Mr. MANNING. The facts have been reformatted and rearranged by the IIBLP staff to correspond with the formatting used in this volume but the legal analysis and comment are those of the author.

Topic: Letters of Credit

Note: Crooked Creek Corp. (Debtor), a family farmer that produced swine, filed for bankruptcy protection under Chapter 12 (Family Farmers & Fisherman) petition of the US Bankruptcy Law, seeking adjustment of its debts. Because conflicting liens were held by Primebank (Lender) and Oyens Feed & Supply, Inc. (Supplier), Debtor filed an adversary proceeding to determine the priority. Both Lender and Supplier claimed a security interest in the proceeds of the sale of Debtor's existing livestock.

Debtor was indebted to Lender on two promissory notes, the first in the amount of US$1.1 million and the second in the amount of US$100,000. To secure repayment of the notes, Debtor had executed and delivered numerous security agreements to Lender, pursuant to which Debtor granted Lender a security interest in property including the livestock and Lender had properly perfected its security interest.

Supplier claimed a perfected security interest in the proceeds by virtue of an agricultural supply dealer's lien. Under Iowa law (IOWA CODE § 570A.3 (2009)), an agricultural supply dealer's lien is created when a supply dealer provides agricultural supply to a farmer. The lien is perfected by filing a financing statement with the Iowa Secretary of State. IOWA CODE § 570A.4 (2009).

An agricultural supply dealer's lien may have equal priority as earlier-perfected liens if certain requirements are met. IOWA CODE § 570A.5 (2009). If the agricultural supply dealer sends a certified request to a financial institution that has a security interest in collateral held by the farmer or an outstanding loan to the farmer for an agricultural purpose, the financial institution must respond within four business days with a memorandum that indicates whether the farmer has a sufficient net worth or line of credit to pay the purchase price owed to the agricultural supply dealer. It is a complete defense to an action to enforce an agricultural supply dealer's lien against the financial institution that the financial institution did not receive the certified request. IOWA CODE § 570A.2 (2009).

In this case, no certified request was ever sent. Thus, while Supplier did hold a perfected security interest in the livestock proceeds (because it had filed a financing statement), its security interest was not given equal priority with Lender's. Because Lender had perfected its security interest first, its lien was superior.

While the case itself did not involve letters of credit, it referred to a provision of Iowa law that should be of interest to financial institutions that do business in Iowa. If the financial institution receives and responds to the agricultural supply dealer's certified request that the farmer does have a sufficient net worth or line of credit, the statute provides that financial institution's memorandum constitutes "an irrevocable and unconditional letter of credit to the benefit of the agricultural supply dealer for a period of thirty days following the date on which the final payment is due for the amount of the purchase price which remains unpaid." IOWA CODE § 570A.2 (2009).

While Iowa has adopted Revised UCC Article 5, "letter of credit" is separately defined for the purposes of this section as "an engagement by a financial institution to honor drafts or other demands for payment." IOWA CODE § 570A.1 (2009). The section does not refer to Article 5, and no case appears to have considered the application of Article 5 to a "letter of credit" issued in this manner. If Article 5 were deemed to apply though-and there is little basis by which a court could determine that it would not under the appropriate facts-the independence principle (codified in UCC § 5-103(d) and IOWA CODE § 554.5103(4) (2009)) would also apply.

Of course, this would mean that a financial institution that responds to an agricultural supply dealer by stating that sufficient funds exist issues perhaps unknowingly an independent undertaking to pay the agricultural supply dealer, without any established reimbursement obligation on the farmer's part. Certainly, a financial institution confronted with a certified request should consider its response carefully.

One also wonders if a simple contract of (true) guarantee would rise to the level of an independent undertaking under the statute.

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