4266 Tuller Road
Dublin, OH 43017
Securing Loans with Collateral
Robert Moore
The vast majority of farmers use loans to help with cash flow and purchase assets. Along with this financing inevitably come UCC filings, mortgages and various other forms of security agreements. These documents are extremely important as they provide the lender with collateral for their loans without which the lender would likely not lend money. However, these documents also greatly affect the rights that the farmer has in his own assets and should be well understood before being signed.
A lender will almost always require some kind of security for its loan. This allows the lender to become “secured” meaning that it will get paid before general creditors. For example, Bank loans money to Farmer and takes a mortgage on his land. If Farmer liquidates or goes bankrupt, Bank will receive all the proceeds from the sale of the land until it has been paid in full. Only after Bank is paid do the unsecured creditors receive any money, if any. Unsecured creditors are often credit cards companies and input vendors such as fertilizer and feed dealers. If a farm liquidates or goes bankrupt, general creditors rarely get paid in full and often get nothing because there are typically multiple secured creditors ahead of the general creditors.
Mortgages are probably the most common or at least well known form of security. The lender gives the bank a mortgage that allows the bank to foreclose on the property should the debtor default on the loan. All sale expenses are paid first, the lender is paid second, and any remaining proceeds must go to the lender. Mortgages should be recorded in the county in which the land is located. Upon full payment of the loan, the mortgage is released and the lender no longer has any rights of foreclosure.
UCC filings are used to secure collateral that are not titled. Most commonly these assets are machinery, livestock, and grain. The lender will complete a UCC form on which it declares the assets on which it has a security interest or lien. Often the UCC filing will say “all machinery, livestock, grain, farm products, and the proceeds thereof”. The UCC filing provides security in the form of lien so that if the borrower defaults on the loan, the lender can repossess the asset and then sell the asset and collect the proceeds. UCC filings are rather simple to complete but must be done accurately. The wrong name on the UCC filing will cause the security to be invalid and the lender will be completely unsecured. All UCC filings can be viewed on the Ohio Secretary of State’s web site. A farmer should periodically review the UCC filings to be sure that any and all UCC filings filed with him as debtor are correct and accurate. Initial UCC filings must be authorized by the debtor either by singing the filing or a security agreement authorizing the filing. The filings are good for five year and then must be renewed. The renewal does not require the authorization of the debtor.
In most cases, the mortgage or lien follows the asset. That is, if the asset is transferred before the loan is paid in full, the lender can still enforce its rights against the new owner. For example, Farmer sells a tractor to Neighbor but does not tell Neighbor that Bank has a lien on the tractor. Farmer then defaults on his loan to Bank. Bank has a UCC filing on the tractor and repossesses it from Neighbor and sells the tractor taking all proceeds. Bank would be within its right to repossess the tractor even though Neighbor owned the tractor. Neighbor should have checked the UCC filings to be sure that the tractor was free and clear of any liens before purchase. The lien followed the tractor and so did Bank’s rights of repossession.
In Ohio, a lender cannot repossess collateral in violation of a “breach of the peace”. There is a breach of the peace when repossession is made over the debtor’s protest or when repossession involves constructive force or implied threats. A lender who takes possession in violation of a breach of the peace is often liable for punitive damages. In the event of a protest by the debtor, the lender must initiate legal action and receive a court order allowing the repossession to occur. Only with a court order may a lender repossess collateral over protests of the debtor.
