27 Apr Considerations for the Kansas grain industry following a ruling by the Iowa Supreme Court on grain warehouse deductions for drying and storage charges
The state Supreme Court of Iowa recently published a ruling on MidwestOne Bank v. Heartland Co-op, where a bank (MidwestOne) maintained a prior perfected security interest in a financially distressed farmer’s grain that was stored at the grain elevator (Heartland Co-op). Upon the sale of the grain, the elevator withheld part of the proceeds for its drying and storage services. Neither the elevator nor the farmer notified the bank of the deductions. The bank then sued the elevator on a conversion action for the amount of the withheld deductions, arguing that the elevator’s withholding of the proceeds violated the bank’s superior security interest. In finding for the bank, the Court ruled that the bank’s security interest had priority over the grain elevator’s expenses, and ordered the grain elevator to pay the bank for the cost of the deductions.
Withholding sale proceeds for drying and storage charges on stored grain is a common industry practice, and prohibiting an elevator from recovering such fees would place our industry in an untenable position. Industry stakeholders in Iowa are now seeking to amend Iowa state law to create a superior statutory priority for a grain elevator’s lien on stored grain.
In Kansas, however, both state statute and case law already provide for astatutory (warehouseman) lien for grain warehouses on stored grain. Kansas law gives this statutory lien priority over any prior perfected security interest by a lender. In fact, a United States Bankruptcy Court referred to this grain warehouse lien as having a “super priority.” That Court identified the public policy for this super priority as protecting the statutory liener who has worked to preserve the value of the (grain) collateral.
For those states that have not yet adopted a statutory priority for warehouse liens over conflicting security interests, the NGFA recommends the following proactive defenses for elevators to consider when buying grain:
- Require a cash sale at the time of delivery if the lienholder will not consent to deductions for drying or storage services;
- Obtain prepayment for drying and storage services;
- If the lien notice is received after grain is already in storage, refrain from purchasing the grain unless the lienholder consents to payment for services; and
- Issue warehouse receipts
For answers to questions regarding this or any industry legal issue, please contact your KGFA in-house legal staff, Randy Stookey at 785-234-2461 or randy@kansasag.org.
This communication is meant for Kansas Grain and Feed Association members only. No portion of this communication may be copied or reproduced without prior express written permission.