In re Schley

Gary and Julie Schley (debtors) owned a pair of pig-farming sites. They filed an adversary proceeding within their bankruptcy to settle the question of priority between three creditors as to $209,412.24 in receipts from the sale of the Schleys’ livestock. Cooperative Credit Company (CCC) (creditor) obtained a perfected security interest first. In 2004, it entered a security agreement with the Schleys that granted it a security interest in collateral including livestock. CCC promptly filed a financing statement covering the same collateral and filed a timely continuation statement, keeping its interest in full effect. In 2008 and 2009, Peoples Bank (creditor) made $1.36 million in loans to the Schleys and also took a security interest in their livestock and proceeds, which Peoples Bank perfected by filing a financing statement. The Schleys purchased feed for their pigs in February and March 2010 from two suppliers, one of which was Watonwan Farm Service (WFS) (creditor). WFS had a security agreement granting it an interest in inventory and proceeds, also perfected by filing of a financing statement. Peoples Bank paid certain amounts to WFS in 2010 on the Schleys’ accounts. In June 2010, the Schleys sold some of their pigs for $209,412.24 in total, which was promptly deposited by the Schleys into an escrow account. The Schleys filed bankruptcy in December 2010. CCC and Peoples Bank sought a determination of priority over WFS. WFS argued that it had an agricultural lien under Iowa statute. The Iowa law provided that an agricultural supply dealer has an agricultural lien as to livestock consuming the feed it has supplied, except that the lien does not apply to livestock of a farmer who paid all amounts due for the feed. Factually, it was unclear whether the pigs sold had indeed consumed the WFS feed. It was also unclear whether, and to what extent, Peoples Bank’s payments had covered the feed bill for the pigs that were sold. Bank and CCC argued that the agricultural lien should not apply, because another statute, that which regarded proceeds as a continuation of a security interest, provided that a security interest (but not expressly including an agricultural lien) applied to identifiable proceeds of collateral.