WILLIAM A. HILL, U.S. BANKRUPTCY COURT JUDGE.
Debtors Martin A. and Cynthia A. Lesmeister ("Debtors") filed their voluntary Epetition for relief under Chapter 7 of the United States Bankruptcy Code ("Code"), 11 U.S.C. § 101 et seq., on February 10, 1999. They are presently in default on obligations to Ag Acceptance Corporation ("AAC"). Now before the Court is AAC's Motion to Lift Automatic Stay, filed on May 13, 1999.
I.
The Debtors are presently obligated to AAC pursuant to a Master Promissory Note in the original principal amount of $155,000. 00, with interest, and with a maturity date of January 15, 1999. The note was executed on December 11, 1997, between Ag Services of America, Inc. ("Ag Services") and the Debtors, along with two Agricultural Security Agreements ("Security Agreement"). The first Security Agreement secures the note with:
a security interest in the following described property, wherever located[:] . . . all crops, annual or perennial, next maturing after the delivery of this security agreement, and all products and proceeds of crops, supplementary price payments and payments made in lieu of crop proceeds, including crop insurance payments, but specially excluding diversion payments or third party payments made to producers which are not directly related to crop production or proceeds.
("First 1997 Security Agreement.") The second secures the note, in the same manner, with:
all of Debtor's [sic] now owned or hereafter acquired feed, seed, chemicals, fertilizer and other supplies; all now owned or hereafter acquired warehouse receipts or other documents (negotiable or nonnegotiable) issued for the storage of crops;
all now owned or hereafter acquired accounts, chattel paper, documents, instruments,
harvested farm products, entitlements and payments (whether in cash or in kind) arising under any governmental agricultural or farming programs, and goods (especially excluding any such items or parts of said items which are "crops" as defined by NDCC § 35-0504 [sic])[.]
("Second 1997 Security Agreement") (emphasis added.) In this respect, the Second 1997 Security Agreement is identical to one previously executed by the Debtors on December 19, 1996 ("1996 Security Agreement"). As pertains to the language of both security agreements, a reading of the last restrictive clause, referencing a now-repealed statute, appears only to limit the category "goods."
To perfect its security interests in the Debtors' personal property, Ag Services relied upon a Uniform Commercial Code Financing Statement which had been previously filed with the Office of the North Dakota Secretary of State on April 1, 1997 ("April 1, 1997 Financing Statement"), and amendments thereto filed on May 6, 1997 and April 6, 1998, respectively. In particular, the Financing Statement describes its security interest with language identical to that used in both the First and Second Security Agreements, and that contained in the 1996 Security Agreement, as well.
The purpose of the amendments was to list the legal description of additional real property upon which the Debtors' crops were to be grown.
On August 8, 1997, Ag Services assigned all of its right, title, and interest with respect to the loan memorialized by the Master Promissory Note, and the security held therefor, to AAC. Separately, and on July 20, 1998, AAC filed an Agricultural Supplier's Lien with the Secretaiy of State's Office. AAC's Statement of Lien provides, as follows:
On July 16, 1998[,] Supplier made a credit sale to [the Debtors] of the following agricultural supplies: Seed, Fertilizer, Herbicide/Chemicals[,] in the amount of $178,250.00, which is the amount owing on the purchase of the supplies for which a lien is claimed under North Dakota Century Code, Chapter 35-31[,] upon the following and their proceeds:
Crops Products Wheat Fertilizer Pinto Beans Herbicide/Chemicals Sunflowers Canola
Subsequently, the Debtors defaulted on their obligation to AAC by failing to pay the Master Promissory Note as of its maturity date. The Debtors' current indebtedness to AAC approximates $82,000.00.
On May 13, 1999, AAC moved to lift the automatic stay in the Debtors' case in order to repossess and litigate all of the Debtors' property which AAC alleges is subject to its security interest, to wit: crops, including 1998 crops; farm products; government agricultural program payments; inventory; accounts; supplies; and proceeds. In this connection, AAC alleges that its security interest became perfected with the filing of the April 1, 1997 Financing Statement and amendments thereto.
With respect to AAC's claimed collateral, the Debtor's Schedules place the value of their remaining 1998 crops at $64,550.00. It also appears that the Debtors are currently entitled to an undisclosed amount of government agricultural program payments.
In their Schedule B, entitled "Personal Property," at item number 28, the Debtors describe this property, and the basis for their valuation, as being: "11,000 bu. of wheat at $3.17 per bu. ($34,870.00); and 212, 000 lbs of pinto beans at $.14 per lbs. ($29,680.00). . . .", for a total of $64,550.00. For its part, however, AAC contends that the value of these crops is approximately $60,000.00.
Although AAC concedes that the value of the government agricultural program payments, which it asserts are subject to its liens, is unknown, it alleges that this unknown value will, nonetheless, place it "in a fully secured, but not an oversecured, position." Thus, it argues that the Debtors lack equity in the property which AAC asserts is subject to its security interest. Additionally, AAC argues that said property is not necessary to an effective reorganization for the reason that the Debtors are currently involved in a Chapter 7 liquidation case.'
The Debtors objected to the Motion on May 26, 1999, as did the Trustee. In his Objection, the Trustee contested AAC's assertions that it has a perfected security interest in the Debtors' 1998 crops and that it has an agricultural supplier's lien. At the time he made his Objection, the Trustee also noticed his intent to commence an adversary proceeding against AAC-an intent upon which he subsequently acted, with Adversary Proceeding Number 99-7046-for purposes of, inter alia, avoiding its claimed security interest in the Debtors' 1998 crops.
A hearing was conducted in this matter before the undersigned on June 8, 1999, at which no testimony or evidence was elicited, and the parties' positions with respect to the Motion were presented on argument.
II.
The Debtor's 1998 crops lie at the heart of this dispute, with AAC claiming right to them via an alleged perfected security interest, based upon the financial documents previously described; and with the Trustee arguing that these documents, viewed in the context of the law in existence at the time that they were executed, permit AAC a security interest extending only to the 1997 crops. As a further preface to this matter, the Court notes that there is a paucity of case law concerning the statutes here at issue, which in turn leaves the Court hard-pressed to divine the intent of the North Dakota Legislature; nevertheless, the Court will endeavor to do so.
1.
In Thompson v. Danner, 507 N.W.2d 550 (N.D. 1993), the North Dakota Supreme Court discussed the general procedures and requirements for creating a perfected security interest under North Dakota state law, as follows:
The creation of a perfected security interest is accomplished by a two-step process: attachment and perfection.
See N.D.C.C. § 41-09-24 [U.C.C. § 9-303]. While "attachment" relates to the creation and enforceability of a security interest between the parties to the transaction, "perfection" is an additional step which makes the security interest effective against third parties.
Citizens Nat. Bank of Evansville v. Wedel,
489 N.E.2d 1203, 1205 (Ind.Ct.App. 1986). When the security interest is intended to cover crops growing or to be grown, attachment occurs once the debtor has signed a security agreement containing a description of the collateral and of the land concerned, value has been given, and the debtor has rights in the collateral. N.D.C.C. § 41-09-16 (1) and (2) [U.C.C. § 9-203].
See also Thet Mah Assoc. v. First Bank of N.D. (NA).
336 N.W.2d 134, 139 (N.D. 1983). A creditor perfects a security interest in crops to be grown by filing an appropriate financing statement. N.D.C.C. § 41-09-23 [U.C.C. § 9-302]. If a creditor completes the required steps for perfection prior to attachment of its security interest, the date of perfection is fixed as of the date the interest attaches. N.D.C.C. § 41-09-24(1)[U.C.C. § 9-303];
Benson County Co-op. Credit Union v. Central Livestock Ass'n. Inc.,
300 N.W.2d 236, 240 (ND. 1980).
Id. at 554-55. Additional requirements are contained in N.D.C.C. §§ 41-09-41 and 35-05-01.
Section 41-09-41 requires that a financing statement contain, inter alia, the names of the debtor and the secured party' the signature of the debtor, the address of the secured party from which information concerning the security interest may be obtained, a mailing address of the debtor, a statement indicating the types or describing the items of collateral. N.D.C.C. § 41-09-41. The provision further requires that, "a financing statement that is to be filed to gain protection under the central notice system . . . include a reasonable description of the property, including the county in which the property is located, and any other additional information required by the Food Security Act of 1985[.]" Id.
Section 35-05-01, entitled "Security agreement on crops prohibited — Exceptions," limits the types of creditors which may take and enforce voluntary crop liens, as follows:
Security interests in growing and unharvested crops are prohibited, and any security agreement purporting to create a security interest therein is void. The provisions of this section do not apply to any security interest or lien in favor of the United States, this state, any county, or any department or agency of any of them, including the Bank of North Dakota, nor to any financial institution as defined by section 6-01-02 or 21-04-01, nor to any agricultural cooperative or agricultural lending agency, nor to any security interest created by contract to secure money advanced or loaned for the purpose of paying government crop insurance premiums or to secure the purchase price or the rental or improvement of the land upon which the crops by the contract are to be grown.
N.D.C.C. § 35-05-01. The supreme court's discussion in Thompson, and the statutes referenced therein, along with the above quoted provisions, frame the backdrop for this Court's analysis, which follows.
2.
At the time that AAC's April 1, 1997 Financing Statement was executed, N.D.C.C. § 35-05-01.1 provided, as follows:
A security interest upon crops attaches only to the crop next maturing after the delivery of the security agreement. The effectiveness of a financing statement covering the crop lapses on the expiration of a period of five years from the date of filing unless terminated. The provisions of this section do not apply to liens by contract given to secure the purchase price or the rental of land upon which the crops covered by the lien are to be grown.
Thus, a security agreement subject to this provision was only permitted to be taken upon crops next maturing after delivery of the security agreement, and none beyond. Effectively, then, the statute prevented secured creditors from taking security interests in any other than a current year's crops. See e.g., Production Credit Assoc. v. Ista, 451 N.W.2d 118, 125 n. 6 (N.D. 1990).
However, effective August 1, 1997, § 35-05-01.1 was amended to permit security interests in future crops, as follows:
A security interest upon crops attaches only to the crop next maturing after the delivery of the security agreement. The financing statement covering a crop cannot be used to enforce a security interest on any crop other than the crop listed in the security agreement.
The provisions of this section do not apply to liens by contract given to secure the purchase price or the rental of land upon which the crops covered by the lien are to be grown or to a security interest upon crops created by a security agreement that contains an after-acquired property clause and the following wording or its equivalent, in boldface print or set forth in some other conspicuous manner, is in the agreement: "This security agreement covers crops now growing. This security agreement also covers future crops to be grown in the current year or any year hereafter. " [sic] The lien on future crops maintains its priority as to crops grown in future years only so long as the lienholder continues to provide operating funds to the borrower. If, in any subsequent year, another entity entitled to a crop security interest under section 35-05-01 advances operating funds to a borrower, the entity has a first priority purchase money security interest in the crops grown by the borrower during the year in which the funds are advanced.
N.D.C.C. § 35-05-01.1 (emphasis added).
Under the instant facts, AAC essentially argues that its April 1, 1997 Financing Statement, which describes its security interest as extending to "all crops . . . next maturing after the delivery of this security agreement," and which was created in the shadow of the pre-amendment § 35-05-01.1, should be prospectively applied in this matter such that its security interest extends to the Debtors' 1998 crops, as well. Yet, the language of the Financing Statement itself dictates a contrary result.
The "crops" to which this document refers were the Debtors' 1997 crops. Further, although that version of § 35-05-01.1 which was in existence and in force when the April 1, 1997 Financing Statement was drafted was subsequently amended, that fact by no means alters AAC's financing statement such that it must now apply to future crops. It simply allows any similarly situated secured creditor to obtain a perfected security interest in future crops through means of statutory compliance.
As AAC does not make claim to the Debtors' property pursuant to the first prong of § 35-05-01. 1's exception, to wit, by means of a lien "by contract given to secure the purchase price or the rental of land upon which the crops covered by the lien are to be grown," then its compliance must be met under the second prong requiring that its security agreement contain an after-acquired property clause and the following or equivalent language in bold print or set forth in other conspicuous manner: " This security agreement covers crops now growing. This security agreement also covers future crops to be grown in the current year or any year hereafter." No document presently before the Court satisfies this requirement, and thus, AAC's claim under § 35-05-01.1 fails.
3.
In the alternative, AAC contends that "even if [it] does not have a properly perfected lien in the Debtors' 1998 crops, its security interest in farm products is perfected and is not subject to avoidance by the [T]rustee." By this, AAC references the 1996 Security Agreement and the Second 1997 Security Agreement, both of which list as collateral, "all of Debtor's [sic] now owned or hereafter acquired . . . harvested farm products." AAC argues that severance of the 1998 "crops" transformed them into "harvested farm products."
AAC's argument is well-taken. The North Dakota Supreme Court recognizes that "crops" change from realty to personalty when harvested. See First State Bank v. Moen Enters., 529 N.W.2d 887, 891 (N.D. 1995). Indeed, as the Moen Court observed, "Harvested crops are fungible goods no longer attached to a particular parcel of land. They are indistinguishable from stored crops which a farmer may have acquired from another source." Id. (citation and internal quotation marks omitted). In turn, this position is consistent with the North Dakota Century Code, which generally includes harvested grains within the meaning of the term "farm products." See. e.g., N.D.C.C. §§ 4-14-0 1 (2) (""Farm Products' means butter, milk, cream, butterfat, cheese, and other dairy products, honey, eggs, poultry, and grain.") 41-09-09 (3) ("Goods are . . . "Farm Products' . . . if they are products of crops. . . in their unmanufactured states (such as ginned cotton, wool-clip, maple syrup, milk, and eggs), and if they are in possession of a debtor engaged in . . . farming operations.").
"Crops" and grains, although most obviously related, are neither coextensive as objects nor terms; rather, crops become grains, and thus, farm products, upon harvest and the removal of their connections to the soil. An analogous relationship, for purposes of example only, would be that of trees and lumber. In both the 1996 Security Agreement and the Second 1997 Security Agreement, the Debtors pledged all of their then-owned or thereafter acquired harvested farm products. AAC perfected its security interest in the same through its April 1, 1997 Financing Statement.
4.
The Court next turns to the merits of AAC's Motion to Lift Automatic Stay. The automatic stay is effective upon a debtor's filing of their petition in bankruptcy, and operates to prohibit, inter alia, "any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate." 11 U.S.C. § 362(a)(3). Pursuant to § 362(d)(2)(B):
the court shall grant relief from the stay provided under subsection (a) . . . such as by terminating . . . such stay . . . with respect to a stay of an act against property under subsection (a). . . if —{A) the debtor does not have an equity in such property; and (B) such property is not necessary to an effective reorganization[.]
11 U.S.C. § 362(d)(2)(B).
It is undisputed that the Debtors do not have equity in the property here contested. Further, as the Debtors' case is one under Chapter 7, this property is not necessary for an effective reorganization. See, e.g. In re Kingsley, 161 B.R. 995, 997 (Bankr. W.D. Mo. 1994); Ford Motor Credit Co. v. Sherwood Ford. Inc. (In re Sherwood Ford. Inc.), 125 B.R. 957, 963 (Bankr. D. Md. 1991). Therefore, AAC's Motion will be granted.
III.
Accordingly, and having concluded that Ag Acceptance Corporation has a perfected security interest in Debtors Martin A. and Cynthia A. Lesmeisters' remaining harvested farm products, including all farm products remaining from the Debtors' 1998 crops, IT IS HEREBY ORDERED THAT Ag Acceptance Corporation is granted relief from the automatic stay in the Debtors' Chapter 7 bankruptcy case in order to pursue its remedies under state law.
SO ORDERED.