We have several questions about completing a “Notice to Buyer of Security Interest in Farm Products” form. Should we use a social security number or EIN as the taxpayer identification number, and should we enter most of that number as Xs? When describing the property, can we enter “all crops” or “all property”? Can the amount of the covered products be listed as “unlimited”? Should we refile this document annually?

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 for this notice.

Both federal and Illinois law requires lenders to provide a statutory notice to buyers of farm products in order to preserve their liens on the farm products being sold. Among other information, the notice must identify the debtor, the farm products and the lien amount. The notice must be provided “within 1 year before the sale of the farm products.”

When identifying the debtor, the notice should provide a social security number for an individual debtor and an EIN issued by the IRS for a “debtor doing business other than as an individual.” We do not recommend redacting this number, as the law requires that the numbers be provided without providing for redaction.

The description of the covered farm products must include “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” and a “reasonable description of the property.” In one case, the Illinois Supreme Court invalidated a bank’s security interest in crops because its notice failed to include the county where the crops were produced or located; the court held that a statement in the notice that it covered “the described farm products wherever located and is not limited to those located on the above property.” Consequently, simply stating “all crops” or “all property” would not suffice, and we do not recommend describing them as “unlimited.” Your bank should strictly follow the law’s requirements to fully describe the crops, including their amounts, years, and location by county.

Also, we recommend providing this notice at least annually. The notice must be provided within one year of a sale in order to protect your bank’s security interest, and we are aware of at least one Illinois case holding that this notice lapses after one year.

Both the Illinois and federal laws are included in our resources below, and we recommend reviewing them carefully. 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:

Food Security Act, 7 USC 1631(d) (“Except as provided in subsection (e) and notwithstanding any other provision of Federal, State, or local law, 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.”)

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.

State Bank of Cherry v. CGB Enterprises, Inc., 368 Ill.Dec. 503, 522 (2013) (“The notices in question contained a section devoted to a description of the property and county or parish where the farm products may be located, but the space under that section was left blank. A box was checked next to a line saying ‘the security interest also covers the described farm products wherever located and is not limited to those located on the above property.’ That is insufficient, however, to strictly comply with the Act. The Act specifically requires the secured party to state the county or parish where the secured property is located.”)

State Bank of Cherry v. CGB Enterprises, Inc., 368 Ill.Dec. 503, 522 (2013) (“We agree with defendant that, if such a general notice can provide the property description and name of county as required by the Act, this would have the effect of writing the requirement of such description and county reference out of the statute. There would be no reason to require a description of property, including county, if a notice could simply say that all farm products wherever located are covered. Plaintiff's notices have failed to strictly comply with the Act.”)

In re Printz, 478 B.R. 876, 883 (Bankr. C.D.Ill. 2012) (“The FSA provides a manner for holders of state law liens to protect their interests in farm products, but the undisputed facts demonstrate that CNH failed to avail itself of this protection. Specifically, CNH's notices to Trainor all failed to include Debtors’ social security numbers and a proper description of the crops subject to CNH’s security interest. See 7 U.S.C. § 1631(e)(1). The weight of authority is that anything less than complete and precise compliance with the notice provisions of § 1631(e)(1) is insufficient.”)

First Midwest Bank, N.A. v. IBP, Inc., 314 Ill.App.3d 255, 260 (“ . . . we hold that valid notice of a security interest in farm products lapses after one year. . . . To require a purchaser of farm products to abide by one notice forever is an unrealistic, unreasonable burden given the history behind this provision.”)