We are extending a matured line of credit secured by equipment and farmland. The borrower has agreed to provide additional collateral for the loan by assigning grain contracts the borrower has executed with a buyer. We plan to prepare and execute a pledge agreement specifying each grain contract in which we are taking a security interest. The existing security agreement and financing statement describe the collateral as “All Equipment,” and a separate mortgage perfects our lien on the farmland. Do we need the borrower to sign a new security agreement or financing statement reflecting the additional collateral? What documents do we need from the buyer of the grain so that the grain sale proceeds will be payable to our bank?

We recommend amending the security agreement and financing statement to reflect the additional collateral. Currently, your security agreement and financing statement describe the collateral as “equipment,” and this term does not encompass crops or grain.

The security agreement should be amended to expand its collateral description to include the borrower’s grain and any proceeds from the sale of the grain. For purposes of the security agreement, the collateral description does not need to individually identify each grain contract, but it should identify the grain and the sale proceeds by category or type of collateral.

The financing statement also should be amended to expand its collateral description. For purposes of the financing statement, the collateral description can be as broad as “all assets,” or it can use the same collateral description as the security agreement, identifying the grain and sale proceeds by category or type of collateral.

To ensure that the grain sale proceeds are made payable to your bank, you should follow the disclosure procedures in the Food Security Act and the Illinois UCC. Both laws require lenders to provide certain disclosures to buyers of farm products in order to preserve their liens on the farm products being sold. Among many other items of information, the notice must include “any payment obligations imposed on the buyer by the secured party as conditions for waiver or release of the security interest” — such as your bank’s requirement that the sale proceeds are made payable to your bank.

Both the Illinois and federal laws are included in our resources below, and we recommend reviewing them carefully; their requirements are similar, but not identical. For example, the federal law references a state “central filing system” for financing statements, which has not been established in Illinois. Consequently, for purposes of an Illinois transaction, you may disregard the federal law’s references to a central filing system.

We also recommend consulting with local counsel to ensure that your security agreement, financing statement and notice to the buyer follow applicable local rules and practices.

For resources related to our guidance, please see:

Illinois UCC, 810 ILCS 5/9-102(33) (“‘Equipment’ means goods other than inventory, farm products, or consumer goods.”)

Illinois UCC, 810 ILCS 5/9-102(34) (“‘Farm products’ means goods, other than standing timber, with respect to which the debtor is engaged in a farming operation and which are: (A) crops grown, growing, or to be grown . . . .”)

Illinois UCC, 810 ILCS 5/9-102(64) (“‘Proceeds’ . . . means the following property: (A) whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral; . . .”)

Illinois UCC, 810 ILCS 5/9-108 (A “description of collateral [in a security agreement] reasonably identifies the collateral if it identifies the collateral by: (1) specific listing; (2) category; (3) except as otherwise specified in subsection (e), a type of collateral defined in the Uniform Commercial Code; . . .”)

Illinois UCC, 810 ILCS 5/9-509(b) (“By authenticating or becoming bound as debtor by a security agreement, a debtor or new debtor authorizes the filing of an initial financing statement, and an amendment, covering: (1) the collateral described in the security agreement; and (2) property that becomes collateral under Section 9-315(a)(1), whether or not the security agreement expressly covers proceed.”)

Illinois UCC, 810 ILCS 5/9-504 (“A financing statement sufficiently indicates the collateral that it covers if the financing statement provides: (1) a description of the collateral pursuant to Section 9-108; or (2) an indication that the financing statement covers all assets or all personal property.”)

UCC Comments, § 9-504, Comment 2 (“ . . . Note that a broad statement of this kind (e.g., ‘all debtor’s personal property’) would not be a sufficient ‘description’ for purposes of a security agreement. See Sections 9-203(b)(3)(A), 9-108. It follows that a somewhat narrower description than ‘all assets,’ e.g., ‘all assets other than automobiles,’ is sufficient for purposes of this section, even if it does not suffice for purposes of a security agreement.”)

Food Security Act, 7 USC 1631(e):

(e) Purchases subject to security interest. A buyer of farm products takes subject to a security interest created by the seller if—

(1)(A) within 1 year before the sale of the farm products, the buyer has received from the secured party or the seller written notice of the security interest organized according to farm products that

(i) is an original or reproduced copy thereof;

(ii) contains, (I) the name and address of the secured party; (II) the name and address of the person indebted to the secured party; (III) the social security number, or other approved unique identifier, of the debtor or, in the case of a debtor doing business other than as an individual, the Internal Revenue Service taxpayer identification number, or other approved unique identifier, of such debtor; and (IV) a description of the farm products subject to the security interest created by the debtor, including the amount of such products where applicable, crop year, and the name of each county or parish in which the farm products are produced or located;

(iii) must be amended in writing, within 3 months, similarly signed, authorized, or otherwise authenticated and transmitted, to reflect material changes;

(iv) will lapse on either the expiration period of the statement or the transmission of a notice signed, authorized, or otherwise authenticated by the secured party that the statement has lapsed, whichever occurs first; and

(v) contains any payment obligations imposed on the buyer by the secured party as conditions for waiver or release of the security interest; and

(B) the buyer has failed to perform the payment obligations, or

(2) in the case of a farm product produced in a State that has established a central filing system—

(A) the buyer has failed to register with the Secretary of State of such State prior to the purchase of farm products; and

(B) the secured party has filed an effective financing statement or notice that covers the farm products being sold; or

(3) in the case of a farm product produced in a State that has established a central filing system, the buyer—

(A) receives from the Secretary of State of such State written notice as provided in subsection (c)(2)(E) or (c)(2)(F) that specifies both the seller and the farm product being sold by such seller as being subject to an effective financing statement or notice; and

(B) does not secure a waiver or release of the security interest specified in such effective financing statement or notice from the secured party by performing any payment obligation or otherwise.

Illinois UCC, 810 ILCS 5/9-320(f):

(1) A buyer of farm products takes subject to a security interest created by the seller if:

(A) within one year before the sale of the farm products, the buyer has received from the secured party or the seller written notice of the security interest organized according to farm products that:

(i) is an original or reproduced copy thereof;

(ii) contains: (a) the name and address of the secured party; (b) the name and address of the person indebted to the secured party; (c) the social security number of the debtor or, in the case of a debtor doing business other than as an individual, the Internal Revenue Service taxpayer identification number of such debtor; (d) a description of the farm products subject to the security interest created by the debtor, including the amount of such products where applicable, crop year, county, and a reasonable description of the property;

(iii) must be amended in writing, within 3 months, similarly signed and transmitted, to reflect material changes;

(iv) will lapse on either the expiration period of the statement or the transmission of a notice signed by the secured party that the statement has lapsed, whichever occurs first; and

(v) sets forth any payment obligations imposed on the buyer by the secured party as conditions for waiver or release of the security interest; and

(B) the buyer has failed to perform the payment obligations.

(2) For the purposes of this subsection (f), a buyer of farm products has received notice from the secured party or seller when written notice of the security interest is sent to the buyer by registered or certified mail.