BILL ANALYSIS �
SB 592
Page 1
Date of Hearing: June 26, 2012
ASSEMBLY COMMITTEE ON JUDICIARY
Mike Feuer, Chair
SB 592 (Harman) - As Amended: May 15, 2012
As Proposed to Be Amended
SENATE VOTE : 38-0
SUBJECT : DAIRY CATTLE SUPPLY LIENS
KEY ISSUE : SHOULD CALIFORNIA'S DAIRY CATTLE SUPPLY LIEN LAW BE
UPDATED AND MODERNIZED TO PROVIDE CLEARER DIRECTION TO
CREDITORS, DAIRY FARMERS, AND THE COURTS IN A MANNER THAT
PROMOTES CONSISTENCY WITH THE UNIFORM COMMERCIAL CODE (UCC)?
FISCAL EFFECT : As currently in print this bill is keyed fiscal.
SYNOPSIS
Existing law currently provides a right for animal feed
providers to dairy animals to obtain a lien upon the proceeds of
a dairy's milk payments. This statute, known as the dairy
supply lien law, has not been significantly updated or revised
since it was first enacted in 1987. According to the author,
the current statute contains a number of ambiguities and
limitations that have left creditors, dairy persons, courts, and
bankruptcy trustees without clear direction with respect to the
foreclosure and lien process when the borrowing dairy person
becomes distressed. This non-controversial bill is sponsored by
the California Grain and Feed Association (CGFA) but represents
the collaborative efforts of a working group of dairymen, feed
and grain producers, bankers, and other stakeholders to revise
and update the state's dairy supply lien law. Among other
things, this bill seeks to: (1) expand provision of the written
notice of the claim of lien; (2) clarify the priority of
conflicting security interests and agricultural liens,
consistent with the UCC; and (3) clarify claim enforcement
options available to creditors following default of payment. As
proposed to be amended, this bill has no known opposition.
SUMMARY : Revises the dairy cattle supply lien law to provide
creditors of dairies clearer direction on obtaining a lien upon
the proceeds of the dairy's milk products. Specifically, this
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bill , among other things:
1)Authorizes the dairy cattle supply lien to attach to milk
proceeds when the feed or materials provided by the lien
claimant aided the raising or maintenance of the dairy cattle
or any offspring therefrom.
2)Provides that 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 60-day period, rather than
the current 45-day period, and that only one dairy supply lien
per dairy producer is available per affiliated business
supplier.
3)Requires the lien claimant to provide written notice of the
claim to the lien debtor, secured parties or lienholders, and
other persons, as specified, within 10 days of filing the
claim with the Secretary of State.
4)Requires the lien claimant, within 20 days after receiving a
demand from a lien debtor, to send the lien debtor a
termination statement if the lien has been terminated, as
specified.
5)Provides that the priority of conflicting security interests,
agricultural liens, and the dairy supply lien established by
this act shall be governed by existing law pursuant to Section
9322 of the Uniform Commercial Code, as specified.
6)Authorizes a lien claimant, after payment default by the lien
debtor, to foreclose on a dairy supply lien in any of the
following ways:
a) Foreclose in an action to recover charges for feed or
materials delivered.
b) Notify any person obligated under the lien to make
payment to the lien claimant, except that such demand for
payment may not be made until 15 calendar days after the
date of the notice and concurrent notice must be provided
to the lien debtor, secured creditors, and others, as
specified.
c) Enforce the obligations of any person subject to the
dairy supply lien, and exercise the rights of the lien
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debtor with respect to the proceeds or any property that
secures the right to proceeds subject to the lien.
7)Clarifies that nothing in this act prohibits a lien claimant
from seeking provisional remedies pursuant to Title 6.5 of
Part 2 of the Code of Civil Procedure, such as the right to
attach order and a writ of attachment, or a temporary
protective order.
8)Allows a dairy obligated under a dairy supply lien, when
presented with a demand notice to make payment from a feed
creditor, to honor a prior assignment of milk proceeds without
liability for failure to comply with such notice.
9)Allows a lien debtor to secure a release of a lien by paying
the amount secured by the lien, or depositing with the
Secretary of State a surety bond, as specified, for the
purpose of guaranteeing payment of the full amount secured by
the lien within 35 days after entry of final judgment.
10)Clarifies that these provisions shall apply only
prospectively to all contracts entered into after January 1,
2013.
EXISTING LAW :
1)Authorizes 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.
(Food & Agricultural Code Section 57402. All further
references are to this code unless otherwise stated.)
2)Limits the amount of charges secured by the lien to an amount
less than or 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. (Section 57402.)
3)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 of the date the notice of
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claim of lien is filed with the Secretary of State. (Section
57412.)
4)Requires the lien claimant, in order to perfect the lien, to
file a notice of claim of lien with the Secretary of State
that, among other things, must provide the name and address of
the lien debtor and be signed by the lien claimant or another
authorized person, and also requires the lien claimant to
provide written notice of the claim to the lien debtor within
10 days of the date of filing the notice of lien. (Section
57405.)
5)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 was filed. (Section 57406.)
6)Allows a lien claimant to foreclose on a dairy cattle supply
lien only through an action to recover the reasonable or
agreed charges for feed and materials delivered. (Section
57413.)
COMMENTS : Existing law currently provides a right for animal
feed providers to dairy animals to obtain a lien upon the
proceeds of milk payments. This statute, known as the dairy
supply lien law, has not been significantly updated or revised
since it was first enacted in 1987, despite what the author
views as inherent ambiguities and deficiencies as evidenced by
recent litigation to enforce such liens. According to the
author:
The California dairy industry has lost $2 billion in
equity since the collapse of the market in the fall of
2008. Many feed suppliers maintained service to dairies
for as long as viable but also had significant capital
losses during this time. As some dairies became
"distressed assets" or even filed for bankruptcies, this
little known dairy lien law started to be recognized -
with various applications. CGFA undertook a significant
process of analyzing and reviewing the law, deficiencies,
as well as industry business practices to better
understand what went wrong and what could be adjusted.
This bill seeks to update the dairy lien law and remove
limitations and ambiguities that have left creditors,
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dairy persons, judges and bankruptcy trustees without
clear direction. This measure attempts to more closely
mirror the Commercial Code where appropriate and provide a
method to perfect the lien upon default consistent with
that Code.
Expansion of lien authority to include feed or materials used to
raise offspring of dairy cattle . Existing law establishes that
any person who provides feed or materials to aid the raising or
maintaining of dairy cattle has a lien upon the proceeds of the
milk or milk products produced from the dairy cattle. (Section
57402.) This bill would expand that provision by allowing the
lien to attach to the milk proceeds when the feed or materials
provided by the lien claimant aided the raising of the dairy
cattle or offspring therefrom (emphasis added). This modest
change simply makes the lien on milk proceeds available to the
feed provider whether the feed was consumed by the dairy cow or
by its offspring-in either case the feed was provided, consumed,
and should be ultimately paid for by the dairy person.
As proposed to be amended, this bill expands provision of the
written notice of the claim of lien to those who may have a
security interest in the dairy proceeds. The author has
proposed to amend the bill to require the lien claimant to
provide written notice of the claim of lien to not only the lien
debtor, but other lienholders or parties who may have a security
interest in the milk proceeds, as specified. According to the
author and sponsor, this amendment requires notice to the same
parties that are entitled to notice of a strict foreclosure
under Section 9621 of the Uniform Commercial Code. As a result,
the bill now requires all senior and secured lien holders to
receive notice of the dairy supply lien, and serves to put dairy
operators on notice of their liability in the event they fail to
satisfy amounts owed to the animal feed supplier. Written
notice to the dairy operator that they are subject to the dairy
supply lien presumably will alert them to the statutory changes
proposed by this bill and help them consider their debts
accordingly.
As proposed to be amended, this bill clarifies that the priority
of conflicting security interests and agricultural liens shall
be consistent with the UCC. With respect to lien priority,
existing law provides only that the dairy cattle supply lien
"shall have the same priority as a security interest perfected
by the filing of a financing statement as of the date the notice
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of claim of lien was filed." (Section 57406.) Supporters
contend that this rule is not sufficient to clearly resolve
situations where there are valid conflicting security interests
and other liens. Therefore, the author proposes to amend the
bill to clarify that the priority of the dairy cattle supply
lien with respect to conflicting security interests and other
agricultural liens shall be governed by the priority provisions
of Section 9322 of the Uniform Commercial Code-a familiar set of
rules already used in a variety of contexts to determine lien
priority for secured transactions. Generally speaking, Section
9322 provides that conflicting perfected security interests and
agricultural liens rank according to priority in time of filing
or perfection. According to the author, most conflicts are
likely to be resolved with the same result, but incorporation of
the UCC rules by reference will also result in less ambiguity in
close cases.
As proposed to be amended, this bill expands claim enforcement
options available to creditors following payment default by
dairy companies. According to the author and sponsor, an
increasing number of dairy farms are being foreclosed upon
because of the recent economic downturn, but feed 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 proceeds. Furthermore, they
report that courts are unsure how to enforce these liens during
bankruptcy proceedings under the relatively sparse provisions of
the current dairy lien law.
Existing law allows a lien claimant to bring an action in court
to recover the reasonable or agreed charges for feed or
materials delivered. As proposed to be amended, this bill would
also authorize certain non-judicial foreclosure procedures that
largely mirror provisions from the UCC (Commercial Code Section
9670). Specifically, the bill would authorize the lien
claimant, after payment default by the lien debtor, to foreclose
on a dairy supply lien by (a) notifying any person obligated
under the lien to make payment to the lien claimant, except that
such demand for payment may not be made until 15 calendar days
after the date of the notice; or (b) enforcing the obligations
of any person subject to the dairy supply lien, and exercising
the rights of the lien debtor with respect to the proceeds or
any property that secures the right to proceeds subject to the
lien. The guaranteed 15-day period between the notice and the
date that payment may be demanded differs from Section 9670 of
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the UCC to the benefit of providing more time to the debtor
dairy. As proposed to be amended, the bill also requires the
lien claimant to provide concurrent notice of lien enforcement
efforts to secured creditors and other parties, and, after
receiving any proceeds, to provide an accounting and pay any
surplus to the lien debtor.
Existing law provides a right of attachment under Title 6.5 of
Part 2 of the Code of Civil Procedure, which authorizes the
creditor to attach property, farm products, and accounts
receivables, as specified, unless otherwise exempt. As proposed
to be amended, the bill clarifies that nothing in the dairy lien
law shall prohibit the lien claimant from exercising this
existing authority under Title 6.5 to seek from the court other
provisional remedies, such as a writ of attachment or a
temporary protective order.
Author's proposed amendment clarifying liability of milk
handlers. Creameries perform an important function in the
supply chain from the dairy to the supermarket shelf. Typically
referred to as "handlers" in the Food and Agriculture Code,
these business persons essentially receive unprocessed milk in
bulk form from dairy producers for the purpose of manufacture,
processing, and/or sale. Handlers are among those who could be
served with a notice to pay pursuant to lien enforcement
proceedings under this bill. According to the author, some milk
producers and handlers engage in the practice of assigning their
milk proceeds to lenders, who then may take the amount owed to
them and pay any remaining balance into the borrower's account.
The author proposes to amend the bill to provide a safe harbor
from liability for handlers that will allow them to honor a
prior assignment of milk proceeds when presented with a notice
demanding payment from a feed provider seeking to enforce a
dairy supply lien.
Author's proposed amendment to eliminate cash guarantees
deposited with the Secretary of State. As currently in print,
the bill authorizes a lien debtor to secure the release of the
diary supply lien by depositing an adequate cash sum with the
Secretary of State for the purpose of guaranteeing full payment
of the amount secured by the lien. According to the author,
however, the Secretary of State has notified the author that it
no longer accepts cash sums, making this provision problematic.
The author proposes to amend the bill to eliminate this
provision regarding cash deposits. In any case, the bill still
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allows a lien debtor the option of depositing a surety bond with
the Secretary of State in the appropriate amount in order to
secure release of the lien.
Author's proposed amendment requiring prospective application .
As proposed to be amended, the bill clarifies that these
provisions shall apply to all contracts entered into on or after
January 1, 2013, so as not to potentially impair existing
contracts. This would allow dairies to know precisely what lien
remedies are available to its suppliers when it enters into a
contract to purchase feed on credit after the date this bill
would become operative if signed into law.
REGISTERED SUPPORT / OPPOSITION :
Support
California Grain and Feed Association (sponsor)
Opposition
None on file
Analysis Prepared by : Anthony Lew / JUD. / (916) 319-2334