Ask a Banker | Lien on Me?
A banker explains types of liens in the cattle business and what you should know about them.
By Katrina Huffstutler
Do liens have you concerned? Wondering why (or if) that load of cattle has multiple liens on it? Confused about the different types and their purposes? We asked Texas and Southwestern Cattle Raisers Association (TSCRA) Director John Zacek, who also serves as Prosperity Bank’s area chairman for South Texas, to answer your most burning questions about liens for this month’s edition of “Ask a Banker.”
First, Zacek says, it is important to note that Texas is a modified central filing state, which means it operates under the ‘first to file’ rule. As such, whoever has filed with the secretary of state first is declared the lien holder of record.
“That generally represents the purchase money lender,” Zacek explains. “In other words, whoever is financing the buyer — the bank that represents that cattle buyer — is the person who is going to be in that position most times.”
He says that under the Food and Security Act of 1985, pre-notification is the second step a secured lender takes to properly protect themselves. That’s where the bank obtains a list of prospective purchasers from its customer so it can give proper notice to the buyer or buyers that the seller has his cattle encumbered with them.
“So, ‘first to file’ is generally the law of the land. And you perfect it with pre-notification,” Zacek recaps. “That’s the simple explanation.”
When it gets more complicated
Of course, not all cases are simple, especially when multiple liens exist. Often, this is the result of not cleaning up the old liens.
“The program, the pen of cattle, the lot of cattle… has been closed out and no one’s done a lien release and so there’s an old filing still out there that says, ‘Any and all cattle now owned hereafter acquired.’ It’s typical language that all banks use that they’re trying to take what we refer to as a ‘blanket lien,’” Zacek says.
His advice to prospective buyers? It’s the old adage, buyer beware.
“If you want to make sure you get a free and clear title to the cattle, you need to investigate what lien or liens are on them,” he says.
Another potential issue arises when cattlemen elect to retain ownership on their calves.
Zacek says with a first to file lien, the local bank finances the producers’ ongoing operations at home or on the ranch. But if that producer opts to feed their cattle out in a feedyard, the local bank may not want to be involved in that segment, due to geographical constraints or lack of experience in feedyard financing.
Zacek explains that feedyards offer their own captive finance company, which is a subsidiary whose purpose is to provide financing to customers buying the parent company’s product. In this case, the product is feed. Generally, this would operate off a separate line of credit. They would have their own promissory note and their own security agreement — everything a bank does — and function like a lender.
He says they may only finance the feed bill, or they may finance the feed bill and cattle.
“In a situation where the community bank back at home says, ‘Let them finance that up there,’ what that rancher really needs is his equity back out of those cattle,” Zacek says. “Then, he can bring that check back home and give it to his traditional banker who is financing his local ranching operations. He can pay his line of credit way down so he has more money available for next year.”
In that case, the finance company for the feedyard would want to have the first lien on those cattle.
“At some point in time, that filing could be problematic if it reached beyond the lots the rancher moved up there,” Zacek says. “Now you’ve got 2 filings out there. You have the bank’s filing that’s probably first in order of filing. However, now you also have the feedyard out there with a lien. Producers have to be really careful when they do that, so when they pay that feedlot off, they get those liens released.”
He says a termination filing is easy to do once you’ve paid the feedyard off — and it saves a lot of headaches long term.
“Otherwise, when you perform a lien search on Joe Rancher, you’re going to see our filing there and then you’re also going to see XYZ Feedyard’s filing there. Then let’s say that the following year they go to a different feedyard because they don’t think the first one did a good job. You have another filing from another feedyard and so on and so forth. Just keep your file clean by getting terminations when you cease to do business with a finance company.”
Likewise, Zacek encourages all producers to sit down and go over their lien search with a banker.
“Any old stuff that’s on there, get it cleaned up,” he advises. “It’s just a source of confusion and potentially makes the bankers nervous, not knowing where you’re doing business and where you’re not doing business, and it is just unnecessary filings that don’t need to be out there.”
Whether you’re financing cattle or tractors or anything else, it’s important to show the money trail, he says.
Another barrier to free and clear cattle is the agister’s lien, agriculture’s version of the mechanic’s or materialman’s lien.
“It’s all very similar across industries,” Zacek says. “If you’re building a house and the subcontractor doesn’t get paid, they take out a lien on your house. If a mechanic works on your car and isn’t paid, he takes out a lien on your car. And when the feed bill doesn’t get paid, the feedyard takes out a lien on your cattle.”
He says the agister’s lien trumps ‘first to file’ because it is a possessory lien. That means once possession of the commodity is gone, the lien is, too.
“When a subcontractor signs off and says, ‘I’ve completed my work and I’ve been paid satisfactorily,’ he won’t be protected if he goes back and does more work he hasn’t been paid for. The bank already had him sign off on it,” Zacek explains. “He’s lost his possession. He’s lost all control.” ❚
“Lien on Me?” is excerpted from the June 2017 issue of The Cattleman magazine.