Power Hour: Watch Out for Liens

January 22, 2013 08:30 AM
Power Hour: Watch Out for Liens

Agricultural supplier’s liens can put farmers in a tough situation

Matt Leavitt rented a coulter from an agricultural services company in Max, N.D., in the spring of 2011, agreeing to pay $10 per acre tilled. Field conditions allowed Leavitt to till only a portion of his 10,000 acres in nearby Renville County. "It was so wet, 90% of the ground in our county didn’t get planted," he says. When he finished what he could, Leavitt called the equipment supplier to pick up the coulter.

The coulter had a counter that recorded revolutions to count acres, and that number (1,700 acres) was turned in to the supplier. A few weeks later, Leavitt got a bill for use on 4,200 acres—more than twice the actual number. Leavitt sent a payment of $17,000, but the agricultural services firm kept pushing for another $25,000.

"Then the company filed a crop lien against me, which cost $15 to file and no requirement of proof that I owe money," Leavitt says.

Lien Law. The lien that Leavitt refers to is called an agricultural supplier’s lien. "These are very powerful liens, and they’ve been in North Dakota for 20 years," says John Foster, a partner with Zimney Foster in Grand Forks, N.D., and a law professor at the University of North Dakota. "The lien has a super priority. The only person who can get a higher priority is an agricultural processor. Just about every farm state has a similar lien, but North Dakota’s is one of the strongest."

The North Dakota Century Code states: "Any person who furnishes supplies used in the production of crops, agricultural products, or livestock is entitled to a lien upon the crops, products produced by the use of the supplies, and livestock and their products including milk."

According to North Dakota code, the lien must be filed within 120 days of the first day the service is provided. Some states require a hearing prior to a lien being filed, and some states also require that a notice of lien be filed, which lets other businesses know there is a lien on the property.

Once a lien is filed, the lien holder is the first to get paid. In Leavitt’s case, because the lien was in dispute, the elevator held back Leavitt’s crop payments totaling $650,000. The cost for Leavitt to stand firm was therefore far higher than the $25,000 in dispute. He had to take out an operating loan that had interest payments of $12,000, and he eventually paid $10,000 of the disputed sum to get the lien released. "We just cut our losses," Leavitt says.

If opportunity costs are factored in, Leavitt estimates, his losses soar to more than $300,000. The cost of fertilizer alone jumped $200,000 from the time Leavitt would have purchased his fertilizer needs, had he received payment for his crops in time.

To prevent having crop revenue tied up for months, producers in similar situations basically have  three choices, Foster says. First, they can pay the money in dispute to get the lien lifted. Second, they can try to prove the lien is unfounded. And third, they can hire an attorney and have the disputed sum placed into an escrow account with the court. The court then holds the money until the dispute is settled. "If you win, the money is yours. If the lien holder wins, the money is his," Foster adds. But crop revenues won’t be held back.

Leavitt either tried or considered trying all of the things Foster recommends, but says fighting the lien was costly and time-consuming due to delays with general trial procedure and court scheduling.

The North Dakota law has never been challenged at the state Supreme Court level. The U.S. Supreme Court, however, ruled in Connecticut v. Doehr that a lien cannot be placed on real estate without prior notice and opportunity for a hearing. That case does not apply to a lien placed on crop proceeds.

"While liens have their place, they are easily abused and can violate anyone’s rights to due process," says Ashley Gulke, Leavitt’s wife and an attorney with Gulke Group, Chicago. "These laws need to be amended."

For state-by-state lien laws, see http://nationalaglawcenter.org/assets/agliens/index.html

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