What Can a Landlord Do to Protect Against the Bankruptcy of a Farm Tenant?

In Illinois, landlords typically expect to collect unpaid rent from an insolvent agricultural tenant through the proceeds from the sale of the crops at the end of the season. This method usually works because Illinois law automatically grants to landlords a statutory lien in crops grown on their premises. 735 ILCS 5/9-316. This lien has priority over virtually all other security interests, and it arises automatically without the need to file a notice with the Secretary of State.¹

A problem arises in bankruptcy, however. The U.S. Congress has decided that states should not be able to tinker with the order by which a debtor’s assets are distributed in bankruptcy, and it has thus passed a law providing that any statutory liens (including a landlord’s lien for unpaid rent) are not effective in a bankruptcy proceeding against a tenant. 11 U.S.C. § 545(3). This means that if the tenant declares bankruptcy, the landlord will not be able to collect the unpaid rent from the proceeds of a sale of the crops. Instead, the landlord will have to get in line with all other creditors of the tenant, and will likely collect only pennies on the dollar.

What can landlords do to avoid this unfortunate outcome? One possible solution is that landlords can secure an explicit contractual lien to which the tenant agrees in a lease, in addition to the statutory lien. By agreeing to such an explicit contractual lien, the tenant agrees that the landlord has a security interest in the crops that is enforceable in bankruptcy. Such a provision should explicitly acknowledge that the contractual lien is in addition to, and not in place of, the statutory lien.

For this solution to work, the landlord must file a notice of the contractual lien in the Illinois Secretary of State’s office.² This should be done each year as soon after the crops are planted as possible. An extra benefit of the contractual lien is that, if desired, the landlord can obtain a security interest in other personal property (such as farm equipment) that the tenant may have on the property. This provides even greater protection and assurance that the rent will be paid.

The above considerations are becoming increasingly important as farm bankruptcies are on the rise. As The Wall Street Journal reported on February 6, 2019, “Throughout much of the Midwest, U.S. farmers are filing for chapter 12 bankruptcy protection at levels not seen for at least a decade, a Wall Street Journal review of federal data shows. Bankruptcies in three regions covering major farm states last year rose to the highest level in at least 10 years. The Seventh Circuit Court of Appeals, which includes Illinois, Indiana and Wisconsin, had double the bankruptcies in 2018 compared with 2008.” (Newman, Jesse, and Jacob Bunge. “’This One Here Is Gonna Kick My Butt’–Farm Belt Bankruptcies Are Soaring.” (https://www.wsj.com/articles/this-one-here-is-gonna-kick-mybuttfarm-belt-bankruptcies-are-soaring-11549468759?mod=hp_lead_pos1) The Wall Street Journal, 6 Feb. 2019, www.wsj.com/articles/this-one-here-is-gonna-kick-my-buttfarm-belt-bankruptcies-are-soaring-11549468759?mod=hp_lead_pos1

² Although note that for maximum protection from the statutory lien, it is advisable to send a notice of the landlord’s statutory lien in the crops by registered or certified mail to any grain elevator or other purchaser to whom the tenant may sell the crops within six months prior to the sale. 735 ILCS 5/9-316. This ensures that the purchaser is aware of the lien, and the landlord would then be able to collect any unpaid rent from the purchaser after a sale.

¹ Forms for this filing are available here:
https://www.cyberdriveillinois.com/publications/pdf_publications/ucc1.pdf