Grape Grower's Liens and the Revised UCC
Author: Matthew J. Lewis
January 01, 2002
In an uncertain wine market, growers (and their creditors) are increasingly concerned that they get paid for their grapes. Recent changes in the Uniform Commercial Code in California (UCC) raise the question whether the statutory producer's lien usually relied upon by growers for this purpose is now subject to the UCC (and therefore, to the UCC's public filing requirements). We believe that it is not (although this is a matter of interpretation and there are as yet no definitive answers). We also believe, however, that with these recent changes to the UCC, growers can better protect their right to be paid by using the UCC to supplement their existing statutory lien rights and will find it easier to do so.
The Statutory Producer's Lien
Sections 55634 of the California Food and Agricultural Code grants to a grape grower (the "producer") selling grapes ("farm products") to a winery (the "processor") a lien in grapes sold by the grower to the winery under contract and the wine produced from the grapes, as well as bulk wines of the same varietals (in the language of the statute, in: "every farm product and any processed form of the farm product which is in possession of the processor without segregation of the product") to secure payment of the purchase price of the grapes. This "grower's lien," as it is often referred to, is automatic and requires no formal documentation or public filing to become effective. The grower's lien has priority over most other liens or security interests in the grapes or wine (except for certain laborer's and warehouseman's liens). The advantages to the grower of this automatic, first priority lien are obvious; less obvious are the limitations. As interpreted in the sparse case law, the lien does not extend to the cash proceeds of any sale by the processor of the grapes or wine or to wine sold to distributors, negotiants or retailers, and it is unclear whether the lien follows the grapes or wine sold to another processor. The grower has no right of repossession, and available administrative proceedings afford limited enforcement remedies; ultimately, the grower must go to court to foreclose on the lien.
The UCC
The UCC sets forth comprehensive rules for the creation, priority and enforcement of liens ("security interests") in personal property collateral such as grapes (whether on or off the vine), bulk wine and bottled wine. At the UCC's heart is a system of public filings. The UCC determines the relative priority of competing interests using a "first-to-file" rule: the lien claimant ("secured party") that first causes a "financing statement" (often referred to as a "UCC-1") giving notice of the lien to be filed in the public records generally has priority over secured parties who file later. Where the financing statement must be filed is determined by the location of the owner of the collateral (the "debtor"). For California corporations, limited liability companies and limited partnerships, and for general partnerships, trusts, and sole proprietorships with a chief executive office in California, that place is the office of the California Secretary of State, and, where the collateral consists of fixtures, growing timber, oil and minerals, in the local real estate records as well.
Unlike the case with the producer's lien, obtaining priority under the UCC requires making a timely, complying filing in the appropriate filing office. Mistake or inattention, such a failure to file or renew or filing in the wrong place, can result in loss of priority or, if the debtor becomes bankrupt, loss of the security interest altogether. To compensate for this added complexity, a UCC secured party has potentially greater rights than the holder of a statutory producer's lien. For example, in many cases, a security interest continues in both collateral that has been sold or transferred and in the proceeds of that sale or transfer. Furthermore, in addition to judicial foreclosure, a secured party also has the right to peacefully repossess and quickly resell the collateral without resort to the courts.
The UCC and "Agricultural Liens"
UCC security interests most often are created by the agreement of the debtor, but the trend has been to bring many liens created under other statutes within the UCC and its public filing system as well. Effective July 1, 2001, as part of a comprehensive revision, the UCC was extended to apply to all "agricultural liens". If the producer's lien is an "agricultural lien", then starting July 1, 2001, growers will need to make UCC-1 filings to preserve the grower's priority against a winery's other creditors, but the grower could then take advantage of both the expanded scope and remedies of the UCC.
Whether the grower's lien is an "agricultural lien" subject to the UCC is a matter of statutory interpretation. At first glance, the producer's lien, which, after all, is found in the Food and Agriculture Code and is a lien on "farm products", would seem to be an obvious example of an "agricultural lien." We believe otherwise. To see why, it is necessary to look closely at the very technical definitions used in the UCC.
UCC section 9-102(a)(5) defines "agricultural lien" as a statutory, non-consensual, non-possessory lien in "farm products" to secure payment and performance for goods, services or real property under lease "to a debtor in connection with a debtor's farming operation." The producer's lien is statutory and non-possessory, but it is not for goods and services advanced in connection with the grower's farming operations. As defined, the producer's lien would constitute a UCC agricultural lien only if it was a lien against farm products (grapes) for goods (grapes again) advanced in connection with the producer's farming operations. The UCC definition of "farm products" is "crops grown, growing or to be grown." "Farming operation," means "raising, cultivating, propagating, fattening, grazing or any other farming, livestock or aquacultural operation." From the UCC's Official Comments, the drafters appear to have intended to draw a distinction between crops which are in the ground or recently harvested, which constitute "farm products" that are part of a "farming operation" and crops that have been harvested and subjected to some "manufacturing operation", a term which is undefined. A winery is not "raising" or "cultivating" the grapes it purchases, but is instead crushing the grapes and turning them into wine, which, at least arguably, seems to be more like a "manufacturing operation" than a "farming operation" resulting in something other than "farm products." Therefore, the goods (grapes) were not furnished to the processor in connection with the processor's "farming operations;" the grower's lien is not an "agricultural lien" and is not subject to the UCC and its filing requirements.
Why the UCC is Good for Growers
Even if the recent revisions did not bring the statutory producer's lien within the UCC, the UCC remains a useful tool for growers. First, as we saw above, the application of the UCC to the producer's lien is a matter of interpretation and has not been authoritatively determined. While we think that the better interpretation is that the producer's lien is not the kind of statutory lien that was intended to be brought within the scope of the UCC, the matter remains open. Remember, if the UCC does apply, a grower that fails to file a UCC-1 financing statement loses its lien priority. To avoid this drastic result, a grower should consider obtaining the processor's authorization to file a financing statement giving notice of the lien just in case a court decides to read the UCC as including producer's liens. A grower filing a financing statement naming a winery as the debtor without the winery's authorization risks $500 in statutory damages and exposure to actual damages for unauthorized filing.
A second advantage to the grower of obtaining a UCC security interest is that it unambiguously affords the grower the expanded scope and remedies of the UCC, including rights of self-help repossession and non-judicial sale. The parties are also able to tailor their agreement to fit their own circumstances, rather than work within the "one-size-fits-all" framework of the Food and Agricultural Code.
The final advantage of using the UCC is that the law now makes it so easy to do. A financing statement is typically on a computer-generated or preprinted form and identifies the debtor, the secured party and (by very brief description) the collateral. Whereas formerly, the debtor needed to sign both a security agreement and the financing statement, after July 1, 2001, no separate debtor signature is needed on the UCC financing statement so long as the debtor has entered into a security agreement, and the addition of a very basic grant of security interest in the grape purchase agreement form is enough to turn the grape purchase agreement into a security agreement. These changes eliminate a significant source of debtor resistance to entering into consensual security arrangements, and allow the grower to take full advantage of the protections available under both the Food and Agriculture Code and the UCC to ensure that he gets paid.
For more information on agricultural liens, the UCC, or how to best protect your right to payment for your grapes, please contact Farella Braun + Martel partner:
Matt Lewis - 415.954.4461 - mlewis@fbm.com
This law update is published as a service to our clients and friends. It should be viewed only as an overview of the law, not as a substitute for legal consultation.