What Maryland Farmers Need To Know About Security Interests

This is Part II in a two part series on what Maryland Farmers need to know about security interests. Part I was posted on November 24th.

Photo by Edwin Remsberg

Photo by Edwin Remsberg

Priority of Security Interests

What happens if there is more than one perfected security interest in the same collateral? Perfected security interests, including agricultural liens, rank according to priority in time of filing.[i]  Although some states have adopted laws giving agricultural liens priority over other types of perfected security interests, in Maryland agricultural liens have the same priority status as other types of security interests.  Because priority of security interests is dictated by time of filing, failure to file a financing statement will render a security interest junior to any other creditor that first perfects a security interest in the same collateral.  This is referred to as “first in time, first in right.”

Purchase Money Security Interests

An exception to the “first in time, first in right” rule is for the priority of purchase money security interests (PMSI).  A purchase money security interest occurs when a lender loans a debtor the money necessary to finance the purchase of goods, and the same goods are used as collateral to secure repayment of the loan. In order for a purchase money security interest to attach the new lender must file a financing statement within 20 days from the time the debtor takes possession of the goods. If this is done, the purchase money security interest will be given priority over a conflicting security interest.[ii] A typical example of purchase money financing is the financing provided by farm machinery manufacturers.  Often such financing is offered directly by agricultural equipment dealers.  Special rules apply to lenders who anticipate obtaining a purchase money security interest in livestock. These lenders must not only file a financing statement in order to trump an earlier filed financing statement, but must provide written notice to the other creditors holding conflicting security interests stating that new lender expects to acquire a purchase money security interest in the livestock. The notice must be received by the other creditors within six months before the debtor receives possession of the livestock.[iii]  Another exception for the “first in time, first in right” rule is for a possessory lien other than a security interest or agricultural, such as a mechanic’s lien.[iv]  Further, a perfected security interest in crops growing on property owned by the debtor has priority over a conflicting interest of the mortgage holder or owner of the property.[v]

Validity of Security Interests

In general, once perfected, a security interest will be valid for a period of five years after the date of filling and action must be taken after the five years to keep the interest valid.[vi]  Once the debtor has fully satisfied the obligation that is secured by the collateral, the lender has the obligation to file a termination statement to release the security interest.[vii]  Debtors should ensure that a termination statement is filed with the SDAT as this is a step that is often overlooked. 

Disposition of Secured Collateral

If a debtor is in default of the lending agreement secured by a security interest, the secured party has the right to take possession of the collateral either pursuant to judicial process or without resorting to judicial process if it can be done without a breach of the peace such as a trespass.  After acquiring collateral, a secured party may sell, lease, license or otherwise dispose of the collateral.[viii]  Every aspect of the disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable.[ix] Except when the collateral is consumer goods, a secured party is legally obligated to provide the debtor written notice of the time, date and method in which the collateral will be sold and informing the debtor that he or she has the right to an accounting of the transaction.[x]

[i] Md. Code, Commercial Law Art., §9-322(a)(1)

[ii] Md. Code, Commercial Law Art., §9-324(a)

[iii] Md. Code, Commercial Law Art., §9-324(d)

[iv] Md. Code, Commercial Law Art., §9-333

[v] Md. Code, Commercial Law Art., §9-334(i)

[vi] Md. Code, Commercial Law Art., §9-515

[vii] Md. Code, Commercial Law Art., §9-513(a)

[viii] Md. Code, Commercial Law Art., §9-610(a)

[ix] Md. Code, Commercial Law Art., §9-610(b)

[x] Md. Code, Commercial Law Art., §9-613

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