Why Every Line of the Notice of Security Interest Should Be Completed


[author: Kirk Jenkins]

For many out-of-staters, the first image that comes to mind when they hear "Illinois" is downtown Chicago. Chicago's one of the world's great cities, but the fact is, much of Illinois is rural. The state's 76,000 farms cover more than 28 million acres -- nearly 80% of the total land area of the state. It's estimated that the farming sector of the Illinois economy produces on the order of $9 billion annually. So the Illinois Supreme Court is no stranger to cases impacting the farm community. An important example will be argued this month during the Court's new term: State Bank of Cherry v. CGB Enterprises, Inc.

State Bank starts with an Illinois farmer executing a note in the plaintiff's favor, using certain crops as security. He then sells the crop to the defendant, a grain elevator. The plaintiff sent the defendant a Notice of Security Interest, citing the federal Food Security Act, 7 U.S.C. § 1631(e). The plaintiff sued the defendant ultimately because the defendant paid the farmer, not the plaintiff bank.

The defendant moved to dismiss. The Food Security Act, the defendant pointed out, required that a Notice of Security Interest include "a description of the farm products subject to the security interest created by the debtor, including . . . the name of each county or parish in which the farm products or produced or located." The plaintiff's notice left the location of the crops blank. Citing an Eighth Circuit case, Farm Credit Midsouth, PCA v. Farm Fresh Catfish Co., the defendant argued that strict compliance was mandatory under the Food Security Act, so the plaintiff was out of luck.

The plaintiff had two responses. First, the plaintiff pointed out that the farmer had delivered the crops to the defendant at the defendant's grain elevator, so what difference did it make where they'd come from? Second, the plaintiff argued that the matter was governed by the Illinois Commercial Code, specifically sections 810 ILCS 5/9-320(f) and 9-320.1. Those provisions were pretty much identical to the federal Food Security Act, but under First National Bank v. Effingham-Clay Service Co., substantial compliance with the notice requirements was close enough. The trial court concluded that it was governed by the First National Bank, an Illinois state court decision, and granted the plaintiff's motion for judgment on the pleadings, enforcing the security interest.

A divided panel of the Appellate Court reversed. First, the Court held that the state Commercial Code was preempted by the Food Security Act, making First National Bank irrelevant. The Court noted that it wasn't bound by the Eighth Circuit's decision in Farm Fresh Catfish, but found that the opinion was consistent with other Federal cases on whether substantial compliance was enough under the Food Security Act. The Court noted that although the Act specifically provided that minor errors in Notices given under a central filing system were excused, it contained no such provision for Notices given directly to holders of secured crops. It followed that the Congress intended to require strict compliance.

State Bank of Cherry will be argued during the 9:00 a.m. session of the Illinois Supreme Court on Tuesday, November 20.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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