IBA Compliance Connection

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We provided a line of credit to a farmer who used the proceeds to plant his crops on rented land. We recently found out that he has not paid his cash rents and the landlord is threatening him with a lawsuit. As the lender, does our bank face any liability for the farmer’s unpaid rent? Also, we have a security interest in the crops on the rented land, for which we filed a UCC financing statement. What if the landlord also filed a financing statement for those crops? Do we have priority over the landlord?

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First, although we cannot provide legal advice, we are not aware of any liability that your bank might face for your borrower’s breach of his rental agreement with his landlord. Under Article 9 of the Uniform Commercial Code, the fact that your bank has a security interest in your borrower’s crops does not subject you to contract or tort liability for the borrower’s conduct (or misconduct) with respect to a third party.

With respect to your security interest in the crops, generally speaking, the first party to perfect its security interest has priority over other security interests. Ordinarily, a security interest in farm products is perfected at the time the UCC financing statement is filed. Consequently, your priority over the landlord’s potential interest in the crops will depend on whether and when the landlord filed a UCC financing statement.

For resources related to our guidance, please see:

  • 810 ILCS 5/9-402 (“The existence of a security interest, agricultural lien, or authority given to a debtor to dispose of or use collateral, without more, does not subject a secured party to liability in contract or tort for the debtor's acts or omissions.”)
  • 810 ILCS 5/9-310 (“Except as otherwise provided in subsection (b) and Section 9-312(b), a financing statement must be filed to perfect all security interests and agricultural liens.”)
  • 810 ILCS 5/9-322(a)(1) (“Conflicting perfected security interests and agricultural liens rank according to priority in time of filing or perfection . . . .”)
  • 810 ILCS 5/9-317 (“A security interest or agricultural lien is subordinate to the rights of: (1) a person entitled to priority under Section 9-322; and (2) except as otherwise provided in subsection (e) or (f), a person that becomes a lien creditor before the earlier of the time: (A) the security interest or agricultural lien is perfected; or (B) one of the conditions specified in Section 9-203(b)(3) is met and a financing statement covering the collateral is filed.”)