I. DEBTOR'S FAILURE TO SIGN EFS - PAPER FILINGS ONLY
A. U.S. District Court (Nebraska) Case
A Nebraska U.S. District Court decision underscores the importance of properly filing both a “Financing Statement” and an EFS in order to retain maximum protection for the holder of a security interest in farm products. In Lisco State Bank v. McCombs Ranches, Inc., 752 F. Supp. 329 (1990), the defendant purchased 30 head of cattle from the debtor for $45,000 by joint check made payable to the debtor and the bank. The bank maintained that the fair market value of the cattle sold was at least $92,000, claimed that the purchaser paid substantially less for the cattle than fair market value and sued for the balance. In moving for summary judgment, the defendant maintained that the bank failed to comply with notice requirements of the Food Security Act (FSA) and applicable Nebraska law (EFS central filing system) and that the farm products were purchased free of the bank’s security interest.
Evidence established that the bank had not filed an EFS, because the debtor failed and refused to sign such a statement. The bank alleged that the defendant had actual knowledge of the bank’s security interest in the cattle at the time of its purchase and that the defendant failed to act in “good faith”, because it purchased the cattle at a price far below their fair market value, knowing that the bank was not receiving full value for its collateral
In ruling against the bank, the Court found that notwithstanding the defendant’s prior knowledge of the bank’s security interest, the cattle were purchased free and clear of the bank’s security interest. The Court noted that there is no “good faith” buyer requirement under the FSA, citing 7 U.S.C. § 1631(d) that provides in part:
. . . a buyer who in the ordinary course of business buys a farm product from a seller engaged in farming operations shall take free of a security interest created by the seller, even though the security interest is perfected; and the buyer knows of the existence of such interest. (Emphasis supplied)
An exception to the rule allows a security interest in farm products to survive a sale if the holder of the security interest has properly filed an EFS within Nebraska’s central filing system.
Addressing the bank’s contention of its inability to file an EFS due to the debtor’s refusal to sign, the Court determined that while the FSA seemingly requires an EFS to be “signed by the debtor” [7 U.S.C. § 1631(4)(C)], implementing regulations do not contain such a requirement. Regulatory provisions (9 C.F.R. § 205.103) regarding “minimum requirements” of an EFS state:
1. The Minimum Information Necessary on an EFS is as Follows:
2. A Requirement of Additional Information on an EFS is Discretionary with the State
The Court noted that notwithstanding the absence of the debtor’s signature, the bank made no effort to comply with the FSA pursuant to Nebraska’s central filing system. Citing Neb.Rev.Stat. § 52-1307 that defines an EFS to mean a statement that “substantially complies with the requirements of this section even though it contains minor errors that are not seriously misleading”, the Court suggested that the absence of a debtor’s signature on an EFS could be considered to be a “minor error” that is not “substantially misleading.” In light of the principal intent of the FSA to act as a notice statute to protect buyers of farm products from the threat of double payments, the Court indicated that the bank could have filed an unsigned EFS in conjunction with its filed Financing Statement that contained the debtor’s signature. In this fashion, the Court opined that the bank could then argue that it had acted in a commercially reasonable manner, by doing all it was able to do under the circumstances, thereby shifting the burden to the defendant to have registered as a buyer with the Secretary of State in order to take free and clear of the bank’s security interest.
B. Conclusion
This case involved a situation where the bank’s security interest had arisen prior to the effective date of the FSA. By the time the EFS requirements became law, an adverse relationship had developed between the bank and its debtor, with the debtor refusing to execute the EFS. While many years have passed since the enactment of Nebraska’s central filing system, should your bank have existing situations where a debtor has refused to sign an EFS, it may be wise to consider the Court’s recommendations to “act in a commercially reasonable manner by doing all that you are able to do under the circumstances” by either: (1) filing an unsigned EFS in conjunction with a Financing Statement to at least place buyers of farm products on notice of the existence of your security interest or (2) electronically filing the EFS to eliminate the need to obtain the debtors’ signature.
II. NO DEBTOR’S SIGNATURE REQUIREMENT – EFS ELECTRONIC FILINGS ONLY
Neb.Rev.Stat. § 52-1307(3) provides that the debtors’ signature requirement for an original EFS only applies in cases where the EFS is “paper filed.” As a result, any original EFS electronically filed is not required to contain the debtors’ signature. If a bank should encounter a situation where a debtor refuses to sign an original EFS after the UCC Financing Statement has been filed, the bank may electronically file its EFS to remove the problems that would otherwise be associated with the failure to obtain the debtors’ signature.
The EFS Forms can be found at http://www.sos.ne.gov/business/ucc/efs_menu.html, or by going to the Secretary of State's website, clicking on "Forms" from the "Quick Links" and clicking on the "Effective Financing Statement Forms" link.
N O T I C E (READ CAREFULLY)
Federal and State law requires the debtor to sign a Nebraska Effective Financing Statement (EFS) and any continuation of the same. This form serves as a grant to the Lender of authority to affix the debtor’s name to any continuation of an EFS. Read this document carefully because it authorizes a representative of the Lender (Secured Party) to continue an EFS by placing your signature upon any EFS continuation statement. Your signature on this form grants that authority and acknowledges that you have read this Notice and consent to the grant of authority made to the Lender. Your signature also affirms that this authority was granted at the time of the extension of credit to you by the Lender or at the time of a renewal of existing indebtedness by that Lender to you.
GRANT OF AUTHORITY
TO THE COUNTY CLERK OF __________________COUNTY AND TO THE SECRETARY OF STATE OF THE STATE OF NEBRASKA:
You and each of you are hereby notified that the undersigned hereby consents that a representative of the Lender, (insert name of bank) , shall be and hereby is authorized, on my behalf, to execute any continuation of a Nebraska Effective Financing Statement (EFS) previously signed by me and upon presentation of such executed continuation of the EFS for filing, the same shall be of full force and effect as if I had personally signed said continuation statement. This grant of authority shall continue in effect for so long as there is a security interest in any farm products granted by me to the above named Lender, by security agreement or otherwise and this grant of authority shall be irrevocable during such period. This grant of authority further acknowledges that its execution was at the time of the extension of credit or at the time of a renewal of any indebtedness owed by me to the Lender.
DATED: ____________________________, 20____
Debtor
Witness