March 26, 1987
Honorable Robert M. Saunders Opinion No. JM-657
Chairman
Committee on Agriculture and Re: Effect of the federal Food
Livestock Security Act of 1985 on pro-
Texas Rouse of Representatives visions of state law relating
P. 0. Box 2910 to security interests in agri-
Austin, Texas 78769 cultural products
Dear Representative Saunders:
In 1985 the United States Congress enacted legislation that
provides protection for purchasers of farm products from secured
creditors of the seller. 7 U.S.C. 61631 (Supp. III 1985). You ask
vhether that federal legislation preempted sections 9.307(a) and (d)
and 9.401 (a) and (f) of the Texas Business and Comerce Code and
section 32.33(f) of the Texas Penal Code.
The explicit purpose of the federal legislation was to preempt
certain state laws. Subsections (a) and (b) of section 1631 provide:
Congress finds that --
(1) certain State laws permit a secured lender
to enforce liens against a purchaser of farm
products even if.the purchaser does not know
that the sale of the products violates the
lender’s security interest in the products,
lacks any practical method for discovering the
existence of the security interest, and has no
reasonable means to ensure that the seller uses
the sales proceeds to repay the lender:
(2) these laws subject the purchaser of farm
products to double payment for the products,
once at the time of purchase, and again when
the seller fails to repay the lender;
(3) the exposure of purchasers of farm
products to double payment inhibits free
competition in the market for farm products:
and
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Honorable Robert M. Saunders - Page 2 (JM-657)
(4) this exposure constitutes a burden on and
an obstruction to interstate commerce in farm
products.
The purpose of this section is to remove such
burden on and obstruction to interstate commerce
in farm products.
7 U.S.C. 51631(a), (b) (Supp. III 1985). A house report on section
1631 statms:
The bill is intended to preempt state lav
(specifically the so-called ‘farm products excap-
tion' of Uniform Commercial Code section 9-307) to
the extent ‘necessary to achieve the goals of this
legislation. Thus, this Act would preempt state
laws that set as conditions for buyer protection
of the type provided by the bill requirements that
the buyer check public records, obtain no-lien
certificates from the farm products sellers, or
otherwise seek out the lender and account to that
lender for the sale proceeds. By contrast, the
bill vould not preempt basic state-law rules on
the creation, perfection, or priority of security
interests.
H.R. Rep. No. 99-271, 99th Cong., reprinted in 1985 U.S. Code Cong. 6
Admin. News 1103, 1214.
The federal legislation contains the following provision:
Except as provided in subsection (e) of this
section and notwithstanding any other provision of
Federal, State, or local law. a buyer who in the
ordinary course of business buys a farm product .
from a -seller engaged in farming operations shall
take free of a security interest created by the
seller, even though the security interest is
perfected; and the buyer knows of the existence of
such interest, (Emphasis added).
7 U.S.C. 51631(d). Subsection (e) of section 1631. which contains
exceptions to the provision above, provides that a buyer of farm
products takes subject to a security interest if the buyer received
notice of the security interest before buying the farm products and if
the notice meets certain other requirements. 7 U.S.C 51631(e)(l). In
addition, subsection (e) provides that a buyer of farm products takes
subject to a security interest if the products were produced in a
state that has a central filing system as defined in section 1631 and
if the buyer had constructive notice of the security interest as
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provided for in section 1631(e)(2) or (3). The secretary of agri-
culture must certify that a particular state’s filing system qualifies
as a central filing system for purposes of section 1631. 7 U.S.C.
5 1631(c) (2).
Your first question is whether the federal statute preempts
section 9.307, subsections (a) and (d), of the Texas Business and
Commerce Code. Saction 9.307(a) thereof provides:
Except as provided by Subsection (d) of this
section. a buver in ordinary course of business
(Subdivision (9) of Section- 1.201) other than a
Person buying farm products from a person engaged
in farming operations takes free of a security
interest created bv his seller even though the
security interest is perfected and even though the
buyer knows of its existence. (Emphasis added).
Subsection (d) of section 9.307 provides:~
A secured party, including a secured party
under a securitv interest covered bv Stction
9.312(b) of this code, may not enforce a security
interest in farm products against a person who has
purchased the farm products from a person engaged
ia farming operations -unless the -secured party
gives notice of the security interest to the buyer
by certified ‘mail, return receipt requested, not
later than the 90th day after the date of c
chase. The notice must state the terms of ti;
Gity interest and the amount claimed to be
oved to the secured party. (Emphasis added).
Section 9.307(a) is the Texas version of the provision that Congress
intended to preempt. See H.R. Rep. No. 99-271. m. Subsection (d)
of section 9.307 provi= some protection for buyers of farm products.
Because subsection (d) allows a secured creditor to protect his
security interest by giving the buyer notice within 90 days after the
sale, however. the provisions of the Texas statute are less favorable
to buyers than the notice provisions in the federal statute, which
allow a secured party to protect his security interest only by prior
notice. Because the federal statute was intended to ease the burden
on purchasers of farm products. we conclude that the federal statute
preempted both subsection (a) and subsection (d) of section 9.307 of
the Texas Business and Commerce Code.
Your second question is vhether the federal legislation preempts
section 9.401, subsections (a) and (f). of the Texas Business and
Commerce Code. Section 9.401(a) sets out the proper places co file in
, order to perfect a security interest:
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The proper place to file in order to perfect a
security interest is as follows:
(1) when the collateral is consumer goods,
then in the office of the County Clerk in the
county of the debtor’s residence or if the debtor
is not a resident of this state then in the office
of the County Clerk in the county where the goods
are kept;
(2) when the collateral is timber to be cut or
is minerals or the like (including oil and gas) or
accounts subject to Subsection (e) of Section
9.103. or when the financing statement Is filed
as a fixture filing (Section 9.313) and the
collateral Is goods which are or are’ to become
fixtures. then in the office of the County Clerk
in the county where a mortgage on the real estate
would be filed or recorded;
(3) in all other cases, in the office of the
Secretary of State.
Section 9.401(f) deals with continuation statements:
A continuation statement filed to continue a
security interest perfected before September 1,
1985, in collateral that is equipment used in,
farming operations, farm products, or accounts or
general Intangibles arising from or relating to
the sale of farm products by a farmer must be
filed in the office of the Secretary of State, and
must contain the information ,contained in the
original financing statement, in addition to the
information required for a continuation statement
under Section 9.403 of this code. The priority of
such a security interest is not affected by the
fact that a continuation statement filed according
to this subsection is filed at a different place
than the original financing statement.
The federal legislation provides for constructive notice of
security interests in farm products in states that have central filing
systems certified by the secretary of agriculture. As of January 23,
1987, Texas did not have a certified central filing system. See.
s, 51 Fed. Reg. 45493 (1986) (North Dakota’s central filing system
certified); see generally, CIS Federal Register Index (under heading
“Food Security Act”). The federal statute does not require states to
have central filing systems. Rather, it merely allows for construc-
tive notice of security interests in farm products in states that have
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central filing systems. In states that do not have central filing
systems. secured parties can protect their security interests only
by giving actual notice to potential buyers. In order to permit
constructive notice, states may wish to change their filing systems,
but the federal legislation does not mandate such a change. Also. the
house report cited above states that the federal legislation would not
preempt “basic state laws on the creation. perfection, or priority of
security interests.” Filing is often required for the perfection of a
security interest. See Tex. Bus. & Comm. Code 59.302. Also, filing
may determine the priority of security interests. See Tex. Bus. 6
Comm. Code 09.312. Because the federal statute doesot mandate a
central filing system and because it was not intended to change state
procedures regarding perfection or priority of security interests, we
conclude that the federal legislation does not preempt subsections (a)
and (f) of section 9.401.
Your third question is whether the federal legislation preempts
the following provision in the Texas Penal Code:
A person who is a debtor under a security
agreement, and who does not have a right to sell
or dispose of the secured property or is required
to account to the secured party for the proceeds
of a permitted sale or disposition, commits an
offense if the person sells or otherwise disposes
of the secured property, or does not account to
the secured party for the proceeds of a sale or
other disposition as required, with intent to
appropriate (as defined in Chapter 31 of this
code) the proceeds or value of the secured
property. A person is presumed to have intended
to appropriate proceeds if the person does not
deliver the proceeds to the secured party or
account to the secured party for the proceeds
before the 11th day after the day that the secured
party makes a lawful demand for the proceeds or
account. An offense under this subsection is:
(1) a Class A misdemeanor if the proceeds
obtained from the sale or other disposition are
money or goods having a value of less than
$10,000;
(2) a felony of the third degree if the
proceeds obtained from the sale or other
disposition are money or goods having a value
of $10,000 or more.
Tex. Penal Code 132.33(f). This provision applies to all types of
secured property, not just farm products. We assume you are asking
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whether the federal legislation excepts farm products from the
co&rage of section 32.33(f). We conclude that it does not. Under
section 32.33(f) it is a crime for a debtor under a security agreement
to sell or dispose of secured property without accounting to the
secured party for the proceeds if the security agreement requires the
debtor to account to the secured party for the proceeds. Not only
does section 32.33(f) protect secured creditors, but it also protects
subsequent buyers of secured property. Therefore, it is in harmony
with the intent of the federal legislation.
We note that the federal legislation also makes certain conduct a
criminal offense:
(1) A security agreement In which a person
engaged in farming operations creates a security
interest in a farm product may require the person
to furnish to the secured party a list of the
buyers, commission merchants, and selling agents
to or through whom the person engaged in farming
operations may sell such farm product.
(2) If a security agreement contains a
provision described in paragraph (1) and such
person engaged in farming operations sells the
farm product collateral to a buyer or through a
commission merchant or selling agent not included
on such list, the person engaged in farming
operations shall be subject to paragraph (3)
unless the person --
(A) has notified the secured party in
writing of the identity of the buyer,
cossaission merchant, or selling agent at
least 7 days prior to such sale; or
(B) has accounted to the secured party
for the proceeds of such sale not later
than 10 days after such sale.
(3) A person violating paragraph (2) shall be
fined $5,000 or 15 per centum of the value or
benefit received for such farm product described
in the security agreement, whichever is greater.
7 U.S.C. 01631(h). Under both the federal statute and the Texas
statute, failure of a debtor under a security agreement to account for
proceeds may constitute a crime. We do not think that overlap in
coverage, however, is indicative of congressional intent to preempt
state law provisions such as section 32.33(f). The federal legisla-
tion was intended to preempt state law only to the extent necessary to
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achieve the goal of easing the burden on purchasers of farm products.
Section 32.33(f) helps, rather than hinders, that goal. Further,
state prosecution and federal prosecution of the same person for
the same act does not constitute double jeopardy. United States v.
Wheeler, 435 U.S. 313 (1978). Therefore. we conclude that the federal
legislation did not remove farm products from the coverage of section
32.33(f) of the Penal Code.
SUMMARY
Federal legislation intended to protect
purchasers of farm products from secured creditors
of the seller preempts subsections (a) and (d) of
section 9.307 of the Texas Business 6 Commerce
Code. It does not preempt subsections (a) and (f)
of section 9.401 of the Texas Business and
Comerce Code or section 32.33(f) of the Texas
Penal Code.
Attorney General of Texas
JACK HIGHTOWRR
First Assistant Attorney General
MARYKELLER
Executive Assistant Attorney General
RICK GILPIN
Chairman, Opinion Committee
Prepared by Sarah Woelk
Assistant Attorney General
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