Secretary of State - Uniform Commercial Code
As background, farm products are treated differently under the Uniform Commercial Code (UCC) than most other products. For most other products, a buyer of inventory in the ordinary course of business generally takes possession free and clear of security interests created by its seller under the UCC, even if the security interest is perfected and the buyer knows of its existence. Unfortunately, a buyer of farm products does not receive the benefit of this general rule under the UCC.
However, the Food Security Act of 1985 overrides the UCC to protect a buyer of farm products in the ordinary course of business from security interests created by its seller unless the applicable secured party complies with the Food Security Act’s requirements. This protection was created because Congress did not want buyers of farm products in the ordinary course of business to have to pay twice for farm products – once to the seller and again to the secured party with a security interest in the farm product - if the buyer was unaware of the security interest in the farm product.
However, if buyers of farm products are notified of the secured party’s security interest, they become liable if they do not honor the protections provided by the security interest.
Through the Food Security Act of 1985, Congress created two different ways for secured parties to notify buyers of security interests. First, secured parties may directly notify buyers of farm products of the security interest (direct notice) or if the state has a certified central filing system, the secured party may file an effective financing statement with the state and the onus and liability falls on the buyer to determine if security interests exist at the time of purchase.
Under central filing systems, grain buyers bare the risk of successfully identifying the security interests of their producer customers in the central filing system and administrative burden increases for not only grain buyers, but also producers due to the increase in two or more party checks that are needed for regulatory compliance.
Currently, 31 states utilize direct notice and 19 states (including Nebraska) have central filing systems certified by the U.S. Department of Agriculture. Almost all central filing systems were created shortly after the Food Security Act of 1985 was implemented.