When another lender has an existing security interest perfected by a UCC-1 financing statement that covers all of the debtor’s commercial assets, would that apply also to the warehouse receipts from a grain elevator? Or could we, as the second lender, obtain priority by taking possession of the warehouse receipts? The elevator itself is the borrower and owns the grain covered by the warehouse receipts.

If the other lender’s financing statement covers the grain, we do not believe that you can obtain priority over the other lender’s security interest in the warehouse receipts or in the underlying grain. But if there is a defect in the other lender’s financing statement, or if it does not cover the grain, then it may be possible to obtain a priority security interest in the grain by taking possession of the warehouse receipts.

The Uniform Commercial Code (UCC) includes special rules governing the priority of security interests in warehouse receipts, which are referred to as “documents of title.” Under the UCC rules, if a lender has a pre-existing security interest in the borrower’s grain, then a warehouse receipt cannot convey a security interest in the grain to another party.

Whether the other lender has perfected its security interest in the grain depends on whether its financing statement covers the grain, which could be included in a financing statement under a blanket lien for “all assets” and “after-acquired property” (if applicable). If the other lender’s financing statement already has perfected its security interest in the grain, we do not believe that your bank’s security interest, if any, would have priority over the other lender’s security interest. But if you discover that the other lender’s financing statement did not perfect its security interest in the grain, you may be able to establish senior priority in the grain for your bank, by showing that you either: (1) took possession of the negotiable warehouse receipts, or (2) filed a financing statement covering the warehouse receipts before the other lender perfected its security interest in the grain.

In addition, if the elevator were to become bankrupt or be liquidated under the Illinois Grain Code, having possession of the warehouse receipts might provide you with priority to the extent of the grain elevator’s debt to your bank. However, our understanding is that this statutory lien would be effective only in the event of the elevator’s bankruptcy or liquidation, and our guidance is limited by the fact that we are not aware of any Illinois courts interpreting this provision of the Grain Code.

For resources related to our guidance, please see:

UCC, 810 ILCS 5/7-503 (“A document of title confers no right in goods against a person that before issuance of the document had a legal interest or a perfected security interest in the goods . . . .”)

UCC, 810 ILCS 5/9-312 (“While goods are in the possession of a bailee that has issued a negotiable document covering the goods: (1) a security interest in the goods may be perfected by perfecting a security interest in the document; and (2) a security interest perfected in the document has priority over any security interest that becomes perfected in the goods by another method during that time.”)

Grain Code, Article 20, Failure; Liquidation, 240 ILCS 40/20-10 (“A statutory lien shall be imposed on all grain assets and equity assets in favor of and to secure payment of obligations of the licensee to: (1) A person, including, without limitation, a lender: (A) Who possesses warehouse receipts issued from an Illinois warehouse location covering grain owned or stored by a warehouseman; . . .”)