BILL ANALYSIS �
SENATE JUDICIARY COMMITTEE
Senator Noreen Evans, Chair
2011-2012 Regular Session
SB 592 (Harman)
As Amended May 2, 2011
Hearing Date: May 10, 2011
Fiscal: No
Urgency: No
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SUBJECT
Dairy Cattle Supply Liens
DESCRIPTION
Under existing law, a person who provides feed or materials to
aid in the raising or maintaining of dairy cattle can place a
lien upon the proceeds of dairy products for unpaid charges.
This bill would update the dairy cattle supply lien laws to
allow a lien also to be placed upon the dairy cattle and
offspring, provide feed or materials lien claimants with a right
to attach during a foreclosure action, provide claim enforcement
following the debtor's payment default, and provide an award of
reasonable attorney's fees and costs to the prevailing party of
a lien enforcement action.
BACKGROUND
California is the nation's leading producer of milk and milk
products. However, the recent financial crisis has taken its
toll on dairy farms because the demand for dairy products has
declined globally. The California Department of Food and
Agriculture reported that California recorded a net loss of 100
dairies in 2009 compared to 2008, and a net loss of 37 dairies
for 2010 compared to 2009, which included dairies that went out
of business, relocated, or merged, and new dairies entering the
dairy business. (Cal. Dept. of Food & Agr., California Dairy
Statistics, 2010 Data �as of Apr. 30,
2011].)
As dairy farms encountered difficult times over the past several
(more)
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years, with many dairy farms ending up in foreclosure or
bankruptcy, lien claimants, especially feed and materials
suppliers, experienced significant challenges collecting payment
on outstanding amounts owed. Feed and material suppliers
provide dairy farms with the ability to nourish and maintain
dairy livestock, which in turn produces dairy products which are
sold by the dairy farmers. Because of this integral
relationship between feed and finished dairy products, in 1987,
the Legislature enacted the dairy cattle supply lien laws, which
provided feed and material suppliers with a right of recovery
against dairy product proceeds. (AB 1133 (Johnston, Ch. 679,
Stats. 1987).)
Since 1987, the dairy cattle supply lien laws have not changed
significantly. However, lien enforcement litigation has borne
out that these laws do not provide adequate clarity in lien
priority and procedure.
This bill, sponsored by the California Grain & Feed Association,
would update the dairy cattle supply lien laws to allow a lien
also to be placed upon the dairy cattle and their offspring,
provide feed or materials lien claimants with a right of
attachment during foreclosure proceedings, provide claim
enforcement following the debtor's payment default, and provide
an award of reasonable attorney's fees and costs to the
prevailing party of an lien enforcement action.
CHANGES TO EXISTING LAW
1. Existing law allows a person who provides feed or materials to
aid the raising or maintaining of dairy cattle to place a lien
upon the proceeds of the milk or milk products produced from
the dairy cattle for the reasonable or agreed charges for the
feed or materials provided and for the costs of enforcing the
lien. However, the amount of charges secured by the lien
cannot exceed an amount equal to the reasonable or agreed
charges for feed or material provided within a 45-day period,
and only two providers of feed or materials can have an
enforceable lien at any time, with lien priority in accordance
with the time the notice of claim of lien is filed. (Food &
Agr. Code Secs. 57402 and 57403.)
Existing law requires a lien claimant to provide written
notice at least 30 days prior to enforcing a lien claim to
secured creditors who have a perfected security interest in
dairy cattle, milk, milk products, or the proceeds thereof as
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of the date the notice of claim of lien is filed with the
Secretary of State. (Food & Agr. Code Sec. 57412.)
This bill would authorize a lien to be placed upon dairy
cattle and offspring therefrom which are raised or maintained
through the use of feed or materials provided by the lien
claimant.
2. Existing law requires the lien claimant, in order to perfect
and give effect to the dairy cattle supply lien, to file a
notice of claim of lien, as specified. The notice of claim of
lien, among other things, must provide the name and address of
the lien debtor, must be signed by the lien claimant or by a
person authorized to sign such documents, and the lien
claimant must provide written notice of the claim of lien to
the lien debtor within 10 days of the date of filing the
notice of lien with the Secretary of State. (Food & Agr. Code
Sec. 57405).
This bill would clarify that a lien shall be perfected by the
filing of a notice of claim of lien with the Secretary of
State.
This bill would clarify that the last known name and address
of the lien debtor must be provided on the notice of claim of
lien.
This bill would delete the redundant provision that the notice
of claim of lien shall be signed by the lien claimant or by a
person authorized to sign such documents on behalf of the
claimant.
This bill would provide for specific claim of lien notice to
debtors which are entities and debtors which are individuals,
as specified.
This bill would provide that failure to provide written notice
of the claim of lien to the lien debtor shall not affect the
validity or priority of the lien.
3. Existing law provides that the dairy cattle supply lien
shall have priority in accordance with the time the notice of
claim of lien is filed and the same priority as a security
interest perfected by the filing of a financing statement as
of the date the notice of claim of lien was filed. (Food &
Agr. Code Sec. 57406.)
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This bill would clarify that the dairy cattle supply lien only
has the same priority as a security interest perfected by the
filing of a financing statement as of the date the notice of
claim of lien was filed.
4. Existing law provides that a lien claimant can foreclose on a
lien created by the dairy cattle supply lien law only in an
action to recover the reasonable or agreed charges for feed
and materials delivered. (Food & Agr. Code Sec. 57413.)
This bill also would authorize a lien claimant, during an
action to recover charges, to apply for a right to attach
order and a writ of attachment. Further, this bill would
authorize the lien claimant, after payment default by the lien
debtor, to:
notify anyone obligated on any proceeds subject to
the lien created under the dairy cattle supply lien law
to make payment or otherwise render performance to or for
the benefit of the lien claimant; and/or
enforce the obligations of anyone obligated on any
proceeds subject to the lien created under the dairy
cattle supply lien law and exercise the rights of the
lien debtor with respect to those proceeds or property
that secures the right to those proceeds subject to the
lien.
This bill also would provide that anyone obligated on any
proceeds subject to the lien makes a payment to anyone other
than the lien claimant after receipt of the notice of payment
obligation, that payment will not constitute a defense or
basis for reduction of his or her liability to the lien
claimant.
5. This bill would authorize an award of attorney's fees, as
fixed by the court, and costs to the prevailing party in a
dairy cattle supply lien enforcement action.
COMMENT
1. Stated need for the bill
The author writes:
The Dairy Feed Lien law has not been amended since it was
placed in statute 22 years ago and needs to be updated and
reviewed. While this is a superior lien to other unsecured
creditors, it has limitations and ambiguities in drafting that
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have left creditors, dairy persons, judges and bankruptcy
trustees without clear direction. Some of the limits and
ambiguities come from the priority of the lien while other
limitations are based in the requirements to perfect the lien
including the number who qualify, time periods and
notification.
SB 592 would clarify ambiguities and remove some impediments
of the perfection process. The bill will be attempting to
address the issues of �n]otice, number of lien positions
available, suppliers length of the lien, process to perfect
the lien, and adding dairy livestock to the lien.
California Grain & Feed Association (CGFA), the sponsor of this
bill, writes:
The California dairy industry has experienced extreme price
fluctuations, increasing input costs and challenging economic
times since the collapse of the financial markets. While the
dairy industry has experienced significant volatility in the
past, this recent challenge has been more extreme and lasted
longer than past periods of economic challenge. Following
the recent stabilization, the dairy feed and supply industry
embarked on a project to identify ways to improve this 22
year old law. We have been meeting with other suppliers,
bankers and dairy operators exploring methods to improve this
law and update provisions to provide clear and transparent
guidance on how best �to] clarify certain sections of the
lien law. SB 592 is the culmination of those efforts.
2. Expansion of lien authority to dairy cattle and offspring
This bill would provide for a dairy cattle supply lien to attach
to the dairy cattle and offspring therefrom that are raised or
maintained through the use of feed or materials provided by the
lien claimant. Existing law provides for a lien to attach to
the proceeds derived from the sale of dairy products. (Food &
Agr. Code Secs. 57402 and 57406.)
CGFA argues that the dairy cattle supply lien law should be more
similar to the provisions of the Texas animal feed lien law.
The Texas animal feed lien law applies to "beef cattle, dairy
cattle, sheep, goats, hogs, horses, poultry, and ratites."
(Tex. Agr. Code Sec. 188.001.) An animal feed lien can be
placed on proceeds received by a lien debtor from the sale of
livestock for which the animal feed was used, products derived
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from the livestock, including dairy products, and issue born to
that livestock. (Tex. Agr. Code Sec. 188.002.)
Texas law also requires the animal feed supplier to provide
pre-purchase notice of the provisions of the animal feed lien
law by either providing a general notice to purchasers of animal
feed as part of the lien claimant's normal business practices or
specifically to the lien debtor. (Tex. Agr. Code Sec. 188.006.)
This practice puts dairy operators on notice of their liability
in the event they fail to satisfy amounts owed to the animal
feed supplier and presumably helps the dairy operators consider
their debts accordingly. Notifying feed consumers that their
dairy cattle and offspring therefrom and dairy products are
subject to lien would also make dairy operators aware of the
dairy cattle supply lien authority changes under this bill.
Additionally, existing law does not provide procedures to govern
instances where the debtor disputes the lien claim. Texas law,
on the other hand, provides that a notice of claim of lien may
not be filed if a settlement of dispute between the claimant and
the debtor has been submitted to the Texas Department of
Agriculture for review. (Tex. Agr. Code Sec. 188.009.)
Further, the commissioner of agriculture is required to
establish procedures for settling disputes between a claimant
supplying animal feed and a debtor, as specified. (Tex. Agr.
Code Sec. 188.012.) Accordingly, should this bill move out of
committee, the author may wish to consider amending this bill to
require pre-purchase notice of the dairy cattle supply lien law
and claim dispute settlement procedures.
Staff notes that, although Food and Agricultural Code Section
57402 would be amended under this bill to provide for a lien
over dairy cattle and offspring, Food and Agricultural Code
Section 57403 still only would provide for a lien on dairy
product proceeds. In order to conform the intentions of this
bill for a lien to attach to dairy cattle and offspring
therefrom, the author has agreed to add and amend Section 57403
to provide that the lien created pursuant to the dairy cattle
lien law attaches also to dairy cattle and offspring therefrom.
Suggested amendment :
On page 3, line 15, after "SEC. 2." insert "Section 57403 of
the Food and Agricultural Code is amended to read:
57403. (a) The lien created pursuant to this chapter
attaches to dairy cattle and offspring therefrom and dairy
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products proceeds.
(b) Except as otherwise provided in this chapter, the
notice of claim of lien shall remain in effect, and no new
notice of claim of lien shall be required in order to maintain
the lien, as long as the person who provides feed or materials
either (1) remains unpaid for amounts secured by the lien, or
(2) continues to provide feed or
materials on a regular basis to the lien debtor. For purposes
of this section,
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providing feed or materials shall not be deemed to be made on
a regular basis if a period of more than 30 days elapses
between deliveries.
SEC. 3."
3. Super lien priority for feed and materials suppliers
Existing law provides a super lien priority for feed and
materials suppliers over dairy products proceeds. (Food & Agr.
Code Sec. 57402.) However, "the amount of charges secured by
the lien cannot exceed an amount equal to the reasonable or
agreed charges for feed or material provided within a 45-day
period, and only two providers of feed or materials shall have
an enforceable lien at any time according to priority in
accordance with the time the notice of claim of lien is filed."
(Id.)
California has numerous agricultural supplier lien laws to
protect suppliers when providing materials and services to
farmers. Farmers may encumber their property, including the
livestock, as security for bank loans, and these loans would
normally take first priority when the property is sold or
foreclosed. However, the Legislature has long recognized the
feed and materials suppliers who provide sustenance to maintain
the bank's security interest - without food, the livestock would
die. Accordingly, the Legislature provided a super lien for
feed and materials suppliers to dairy cattle, fowl, poultry, and
fish. (See Food & Agr. Code Secs. 57401 et seq., 57501, et
seq., and 57510 et seq.)
The Legislature also enacted the livestock service lien law,
which provides a general lien over livestock cared for and in
the possession of the lien claimant. (Civ. Code Sec. 3080 et
seq.) Yet, there is no exception under the dairy cattle supply
super lien priority for labor claims for wages and salaries for
personal services provided by an employee to a lien debtor or
claims for charges for the care of the livestock. Accordingly,
the author has agreed to amend this bill to provide for an
exception to this super lien priority for labor claims
associated with the care of the livestock and offspring and
production of animal products derived from the livestock.
Suggested amendment :
On page 5, line 2, after "57406." insert "Notwithstanding the
provisions under Section 3080 of the Civil Code,"
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4. Lien claim enforcement after payment default
This bill would provide a mechanism under which the lien
creditor, after payment default by the debtor, could take monies
owed to the lien debtor. Existing law provides secured parties
with claim enforcement abilities after payment default by the
lien debtor. (Cal. U. Comm. Code Sec. 9607.) This bill would
authorize, after the debtor fails to make a payment for feed or
materials, a lien claimant to (1) notify any person holding the
debtor's proceeds to make payment or otherwise render
performance to the lien claimant and (2) exercise the debtor's
rights to proceeds or property securing the rights to those
proceeds.
The sponsor states that these provisions were copied from the
Commercial Code, which authorizes secured creditors to accept
proceeds due to debtors. The sponsor argues that, upon payment
default, the feed supplier is unable to demand the return of the
product sold to the dairy operator because the product already
has been used to feed the dairy livestock. At that point, the
lien claimant's product essentially has been converted into
dairy products which are sold to creameries. The existing lien
law provides for a lien over dairy product proceeds, which
expires as soon as the lien debtor receives the proceeds and
deposits the money into his or her bank account. The sponsor
argues that because the lien creditor is unable to demand return
of the product, which has been converted into another product
for which the debtor is able to receive proceeds, and the lien
expires upon the debtor's receipt of the proceeds, the lien
claimant should be able to step into the debtor's shoes to
receive the proceeds.
The pre-litigation collection authority provided under this bill
would authorize the lien claimant to collect proceeds ahead of
the debtor, who may need the proceeds to keep the dairy
operations running, and ahead of secured creditors, such as the
banks loaning money to the dairy operators. The banks enter
into contracts with the dairy operators which typically require
the dairy operator to agree that certain property of the dairy
operator will secure the debt. Conversely, the feed supplier
does not require the dairy operator to put up collateral to
secure payment. Rather, the feed supplier becomes a secured
creditor after payment default and after filing a notice of
claim of lien with the Secretary of State. This provision would
place lien claimants, who become secured creditors after the
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banks, in the debtor's shoes, as well as in the shoes of the
banks and lending institutions which provide financing to the
dairy farmers to keep their businesses running.
Existing law provides a complex scheme for priority of
conflicting security interests, including agricultural liens, in
personal and real property, proceeds, and debtor accounts. (See
Cal. U. Comm. Code Sec. 9101 et seq.) The Legislature has
already provided the feed and materials suppliers with a super
lien priority above secured creditors. But authorizing these
lien claimants to step in front of the debtor or secured
creditor to receive direct payment of money owed to the debtor
would contradict the complex priority scheme already established
under the Commercial Code. Further, as discussed in Comment 2,
no dispute settlement procedure exists for the lien debtor to
dispute the lien prior to an enforcement action by the lien
claimant. Under the provisions of this bill, the lien claimant
could take proceeds ahead of the debtor, which the debtor in
good faith believes are not owed to the lien claimant. On the
other hand, the lien claimant currently can enforce the lien
through litigation procedures, which are overseen by the court
and provides necessary protection to the lien debtor.
The author reports that stakeholders are working toward an
agreement regarding pre-litigation lien enforcement. In the
meantime, the author has agreed to strike the provisions
providing for lien enforcement following payment default and to
work with committee staff to find mutually agreeable language
that addresses these concerns.
Suggested amendment :
On page 5, strike lines 24-39
5. Award of attorney's fees and costs
This bill would authorize an award of attorney's fees and costs
to the prevailing party in a lien enforcement action. Existing
law provides that a feed or materials supplier can place a lien
on milk products for the reasonable or agreed charges for the
feed or materials provided and also for the costs for enforcing
the lien. (Food & Agr. Code Sec. 57402.)
Generally, in the United States, the "American rule" is that
parties must bear their own costs of civil litigation. In
commercial transactions, parties may freely negotiate attorney's
fees and costs provisions as part of the contract terms. The
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parties affected by this bill are contracting in the same manner
as other commercial parties and may write in attorney's fees
provisions into their contracts. The sponsor argues that
existing law already provides for an award for costs of
enforcing a lien. However, existing law does not specifically
provide for an award of attorney's fees and costs, which are
arguably different than lien claim filing fees, postage for
mailing the notice of claim of lien, or other administrative
costs associated with enforcing the lien claim. (See Food &
Agr. Code Sec. 57402.) Accordingly, the author has agreed to
amend this bill to strike the attorney's fees provisions under
Section 5.
Suggested amendment :
On page 6, strike lines 1-7
6. Lien creditor's right to attach
This bill would provide, during an enforcement action, a lien
creditor's right of attachment to the debtor's property and
accounts receivable as permitted by law. Existing law
authorizes the lien claimant to foreclose on a lien through a
recovery action (Food & Agr. Code Sec. 57413), but does not
provide any protection of the creditor's potential claim over
the debtor's use of proceeds or sale of property during the
enforcement proceeding. Existing law provides a right of
attachment under the Code of Civil Procedure, which authorizes
the creditor to attach property, farm products, and accounts
receivables, as specified, unless otherwise exempt. (Code Civ.
Proc. Sec. 487.010.)
The sponsor reports that, following the recent financial crisis,
more dairy farms are being foreclosed upon. During this
process, feed and materials providers who file lien claims are
finding it difficult to recover monies awarded through an
enforcement proceeding because they do not have a right to
attach the milk product proceeds. Further, because the current
dairy cattle lien law is sparse, courts are unsure how to
enforce these liens during bankruptcy proceedings. This bill
would allow the courts to preserve the debtor's property and
accounts receivable, as specified, in order to protect the
creditor's potential award through enforcement proceedings.
Support : None Known
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Opposition : Western United Dairymen
HISTORY
Source : California Grain & Feed Association
Related Pending Legislation : None Known
Prior Legislation : See Background.
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