Opinion
Case No. 118,061
09-20-2019
BANK OF KREMLIN, Plaintiff/Appellee, v. ARA, L.P., Defendant/Appellant, Mary Milacek, as Personal Representative of the Estate of Keith David Milacek; James Liebhart; Mary Milacek; David Milacek; 21st Mortgage Corp.; Kimberly Savage ; Shelly E. Smith; Board of County Commissioners for Garfield County, Oklahoma; and Kevin Postier, County Treasurer, Garfield County, Oklahoma, Defendants.
David M. Collins, EZZELL & SHEPHERD, P.L.L.C., Enid, Oklahoma, for Plaintiff/Appellee, Matthew L. Winton, Craig W. Thompson, THOMPSON & WINTON, P.L.L.C., Edmond, Oklahoma, for Defendant/Appellant ARA, L.P.
David M. Collins, EZZELL & SHEPHERD, P.L.L.C., Enid, Oklahoma, for Plaintiff/Appellee,
Matthew L. Winton, Craig W. Thompson, THOMPSON & WINTON, P.L.L.C., Edmond, Oklahoma, for Defendant/Appellant ARA, L.P.
Opinion by Kenneth L. Buettner, Judge: ¶1 Defendant/Appellant ARA, LP (ARALP) appeals from a grant of summary judgment in favor of Plaintiff/Appellee Bank of Kremlin (Bank). The trial court held that ARALP wrongfully converted proceeds from the sale of crops harvested from land it leased to a third party because the Bank had a superior interest in the crops. ARALP appeals. Because ARALP did not have an enforceable interest in the crops and Bank had a perfected security interest in the crops, we affirm.
¶2 ARALP entered into a written agreement with decedent Keith D. Milacek (Tenant) July 1, 2010, for the lease of farmland owned by ARALP. Tenant thereafter entered into several financial agreements with Bank and granted Bank a security interest in crops grown upon the leased land. The parties do not dispute that Bank held a security interest in Tenant's crops or that Bank's interest was perfected.
¶3 Tenant defaulted on his lease, owing ARALP $62,972.72 plus interest in delinquent rent due December 1, 2016. Tenant failed to cure. Tenant passed away January 18, 2017, and a personal representative was appointed for his estate (the Estate). As allowed by the lease agreement, ARALP took possession of the land February 6, 2017. ARALP sent notice to Bank of Tenant's default and ARALP's possession of the land. ARALP cultivated the existing crops, harvested them, and sold them at market.
¶4 Bank filed this action against the Estate, ARALP, and related defendants November 17, 2017, foreclosing on several defaulted promissory notes executed by Tenant. In all, Bank alleged the Estate owed it $269,619.60 plus interest. Bank moved for summary judgment against all parties December 17, 2018. In its motion, Bank argued that its interest in the crops had priority over ARALP's interest, and that ARALP had wrongfully converted the crops by harvesting and selling them. Bank sought a judgment against ARALP for $70,106.40. ARALP opposed Bank's motion and filed a counter motion for summary judgment. The trial court granted summary judgment in favor of Bank May 14, 2019, ordering ARALP pay Bank $48,200.32 plus interest for its wrongful conversion of the crops. ARALP appeals.
The trial court came to this number by giving "credit for fertilizer and harvesting costs."
¶5 The singular question on appeal is whether Bank's interest in the crops had priority over ARALP's interest. A trial court should grant summary judgment where there is no dispute as to a material fact and the moving party is entitled to judgment as a matter of law. Wood v. Mercedes-Benz of Okla. City, 2014 OK 68, ¶ 4, 336 P.3d 457. We review de novo the issue of which security interest has priority. Morton v. Watson , 2016 OK CIV APP 71, ¶ 3, 394 P.3d 275 (citing Broadway Clinic v. Liberty Mut. Ins. Co., 2006 OK 29, ¶6, 139 P.3d 873 ).
¶6 Agricultural liens are governed by Article 9 of the Uniform Commercial Code (UCC). 12A O.S. 2011 § 1-9-109(a)(2). "Agricultural lien" is defined as "an interest in farm products ... which secures payment or performance of an obligation for: (i) goods or services furnished in connection with a debtor's farming operation; or (ii) rent on real property leased by a debtor in connection with its farming operation ... [and] which is created by statute ...." Id. § 1-9-102(a)(5). "Farm products" are goods "with respect to which the debtor is engaged in a farm operation," and include "crops grown, growing, or to be grown ...." Id. § 1-9-102(a)(34).
¶7 Here, ARALP asserts that its interest in the crops is superior to Bank's because Tenant could have only granted an interest as great as or less than Tenant's interest in the land. ARALP argues that when Tenant defaulted on his lease and ARALP canceled Tenant's lease and took possession of the land that any interest in the land Tenant had granted to third parties similarly extinguished. This would be true insofar as any interest Tenant granted to third parties in the land itself . A property interest in crops, however, is not an interest in real property. Instead, as cited above, crops are goods encompassed by the UCC. As such, the priority of the Bank and ARALP's interests are controlled by Article 9.
¶8 Ordinarily, the priority of security interests and agricultural liens encompassed by Article 9 would be determined according to 12A O.S. 2011 § 1-9-322(a)(2), which states that "[a] perfected security interest or agricultural lien has priority over a conflicting unperfected security interest or agricultural lien ...." However, Article 9 provides particular rules for the priority of interests pertaining to crops. Section 334(i) of Article 9 provides, "A perfected security interest in crops growing on real property has priority over a conflicting interest of an encumbrancer or owner of the real property if the debtor has an interest of record in or is in possession of the real property." Id. § 1-9-334(i).
¶9 The interest in the crops claimed by ARALP is a "landlord's lien"—i.e. , a lien arising by operation of statute that attaches to property in satisfaction of unpaid rent. Indeed, Oklahoma law provides: "Any rent due for farming land shall be a lien on the crop growing or made on the premises." 41 O.S. 2011 § 23. ARALP argues that its security interest in the crops has priority because a statutory landlord's lien is not subject to the UCC, meaning that the priority provisions of the UCC would not apply. Id. § 1-9-109(d). In support of its argument, ARALP cites to Titles 41 and 42 of the Oklahoma Statutes, which address the landlord-tenant relationship and liens, respectively.
¶10 The inclusion of agricultural liens within the purview of Article 9 of the Revised UCC has given rise to difficulties in determining the rights of creditors and property owners with regard to farm-related financial transactions. See Susan A. Schnieder, Statutory Agricultural Liens Under Revised Article 9 of the Uniform Commercial Code , The National Agricultural Law Center (March 2002). In recognizing the potential for conflict between § 334(i) and existing statutes regarding priority of security interests in crops, the Official UCC Comment provides that "[s]tates whose real-property law provides [a different manner of determining priority] should either amend that law directly or override it by enacting subsection (j)." U.C.C. § 9-334, cmt. 12 (Am. Law Inst. & Unif. Law Comm'n 1998). The Oklahoma Legislature chose the latter, enacting subsection (j), which states: "Subsection (i) of this section prevails over any inconsistent provisions of other statutes of this state." Id. § 1-9-334(j). The Oklahoma Legislature's adoption of the Revised UCC and its provisions regarding the priority of security interests in crops therefore supplanted all other previously enacted, conflicting statutes.
Additionally, in arguing that a landlord's lien on crops is not subject to Article 9, ARALP disregards the very text of the UCC, which states that Article 9 shall not apply to a landlord's lien, "other than an agricultural lien. " Id. § 1-9-109(d)(1). As such, landlord's liens that are agricultural liens are included within the purview of Article 9.
--------
¶11 Because there is a dirth of Oklahoma Supreme Court case law regarding the priority of agricultural liens under the UCC, we look to the case law of our sister states for guidance. In Farmland Serv. Coop., Inc. v. S. Hills Ranch, Inc ., 266 Neb. 382, 665 N.W.2d 641 (2003), the Supreme Court of Nebraska considered a case with facts nearly identical to those here. Id. at 644. There, in exchange for a loan, a tenant-debtor granted a bank security interest in the crops grown on leased farmlands, which the bank perfected. Id. at 642. When the bank foreclosed upon the loan, however, it discovered that the crops had been harvested by the landlord-owner in satisfaction of unpaid rent. Id. at 643. The landlord relied upon a provision in the lease granting the landlord a security interest in the crops, which the landlord did not perfect. Id. Citing to the previous version of the UCC, the Nebraska Supreme Court held that Nebraska law gave priority to a perfected security interest over an unperfected contractual landlord's lien. Id. at 648.
¶12 Conversely, in In re James , the United States Bankruptcy Court for the Eastern District of Arkansas considered whether a landlord's lien had priority over a perfected security interest in crops. In re James, 368 B.R. 800, 802 (Bankr. E.D. Ark. 2006). There, the landlord filed a complaint to foreclose upon a landlord's lien on the crops for past due rent. Id. at 802. Prior to the landlord's filing, however, the tenant had granted a security interest in the crops to a bank, which the bank had perfected. Id. The Arkansas landlord's lien statute—which was amended after Arkansas's adoption of the Revised UCC—stated that a landlord's lien "shall have priority over a conflicting security interest in or agricultural lien on the crop regardless of when the conflicting security interest or agricultural lien is perfected." Id. at 803 (citing Ark. Code Ann. § 18-41-101 (Michie 2003)). Relying on the statute, the court in In re James determined that the landlord's lien had priority. Id. at 805.
¶13 The law applicable in this case is different from that in either Farmland or In re James . In Farmland, the court applied the previously effective UCC, which did not include a provision specifically addressing the priority of agricultural liens on crops. Farmland , 266 Neb. 382, 665 N.W.2d 641, 648 (2003). In In re James , the Arkansas Legislature chose the opposite approach as Oklahoma, choosing to amend previously enacted, conflicting statutes rather than enacting § 334(j), which gives § 334(i) precedence over its older statutes regarding security interests in crops. In re James , 368 B.R. 800, 803 (Bankr. E.D. Ark. 2006) ; see also Ark. Code Ann. § 4-9-334 (West 2001).
¶14 With those distinctions acknowledged, we note one additional distinction, present in both of those cases but absent here: The landlords' interests in the crops attached prior to the banks' attempts to foreclose. In Farmland , the lease explicitly granted the landlord a security interest in the crops. In In re James , the landlord's lien attached upon filing the action foreclosing on the lease, in accordance with state statute. Neither instance is present here.
¶15 Oklahoma's adoption of the Revised UCC's Article 9 superceded previous statutes regarding agricultural liens insofar as the previous statutes were in conflict with the new Article 9, City of Sand Springs v. Dep't of Pub. Welfare , 1980 OK 36, ¶ 28, 608 P.2d 1139 ("Where statutes conflict in part, the one last passed, which is the later declaration of the Legislature, should prevail, superseding and modifying the former statute only to the extent of such conflict."); Bank of Beaver City v. Barretts' Livestock, Inc. , 2012 OK 89, ¶ 6 n. 2, 295 P.3d 1088 (applying Revised Article 9 to an agricultural lien on cattle). Drafters of the UCC were careful, however, to distinguish between agricultural liens and security interests. The UCC defines a security interest as "an interest in personal property or fixtures which secures payment or performance of an obligation." 12A O.S. 2011 § 1-201(35). An agricultural lien, on the other hand, is "an interest in farm products ... which is created by statute ...." Id. § 1-9-102(a)(5). Throughout Article 9, the UCC drafters include both terms where a provision applies to both security interests and agricultural liens, but omits one or the other when referring to only one type of interest. Regarding attachment, § 1-9-203 states that "a security interest attaches to collateral when it becomes enforceable against the debtor," thereafter describing the instances in which security interests may become enforceable. Notably, § 9-203 does not mention "agricultural liens," meaning that existing statutes regarding the enforcement of agricultural liens remain intact.
¶16 As such, we look to 41 O.S. 2011 § 28, which provides:
In an action to enforce a lien on crops for rent of farming lands, the affidavit for attachment shall state that there is due from the defendant to the plaintiff a certain sum, naming it, for rent of farming lands, describing the same, and that the plaintiff claims a lien on the crop made on such land. Upon making and filing such affidavit and executing an undertaking as prescribed in the preceding section, an order of attachment shall issue as in other cases, and shall be levied on such crop, or so much thereof as may be necessary; and all other proceedings in such attachment shall be the same as in other actions.
In other words, in Oklahoma, the effort to enforce a landlord's lien on crops for the payment of unpaid rent of farmlands occurs upon the filing of an action pursuant to 41 O.S. 2011 § 27. Here, ARALP did not file an action for Tenant's unpaid rent, but instead took possession of the farmland without court order and cultivated and sold the crops.
¶17 In accordance with § 1-9-334 (i), a perfected security interest in crops has priority over the conflicting interest of the landowner, including an agricultural lien created by 41 O.S. 2011 § 23. The parties do not dispute that Bank maintained a perfected security interest in the crops, which means Bank's interest was superior to ARALP's agricultural lien. As a result, ARALP's harvest and sale of the crops constituted conversion of Bank's property. We affirm the holding of the trial court.
¶18 AFFIRMED.
GOREE, C.J., and JOPLIN, P.J., concur