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Retained ownership & feedlotting - a cautionary item

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Arnold Ziffle

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Here are two postings that I just read and found to be interesting, so I "stole" them from the ranchers.net board. Probably has very little, if any, applicability to most of us , but then again it may apply to some of you and thus prove to be helpful. A little long, but it'll only take a minute or two to read:


South Dakota bankers and cattle producers are perking up their ears to a reality that, on the surface, seems odd.

The person who owns cattle isn't necessarily the one who can claim them as collateral for a loan. A feedlot owner can legitimately take out a loan on cattle he or she is feeding but doesn't possess. And if the loan isn't repaid, the person who owns the cattle might be the one who loses out - not the person who borrowed the money.

That's really nothing new, according to Curt Everson, president of the South Dakota Bankers Association. But it's catching the attention of lenders and livestock people because of a recent decision by the South Dakota Supreme Court.

"Frankly, that ruling confirmed what the lending community has always felt was the law," Everson said.

The case involved Nathan Shaull of Highmore. He used other people's cattle he was feeding under contract as security to refinance a loan with a Huron bank. Shaull's finances failed. The bank filed a lien on the cattle, and proceeds from the cattle went to the bank - not to Feldman Brothers of Prior Lake, Minn., who contracted with Shaull to feed their cattle.

Feldman took the matter to circuit court and lost. The state Supreme Court upheld, on a 4-1 vote, the lower court's decision that Shaull's possession of cattle he didn't own warranted the bank to claim the animals as collateral. Control of livestock rather than ownership determines whether a debtor has collateral rights, according to the ruling.

Aberdeen attorney James Cremer is chairman of the South Dakota Bar Association's Uniform Commercial Code Committee, which deals with such issues. The Supreme Court's decision is a harsh result for Feldman, Cremer said. "And it puts in jeopardy the longstanding practice of owners of livestock to place them out on shares or in feedlots without any need to file anything to protect their ownership interest."

But the court ruling also clears the air, according to Cremer.

"Although the result with respect to Feldman was harsh, and resulted in a windfall for the bank, this case does bring certainty and clarity to the industry because owners of livestock can protect their ownership by filing a financing statement with the South Dakota secretary of state at a cost of $20."

Feldman could have averted disaster if it had filed a financing statement/claim of ownership with the state of South Dakota under the Uniform Commercial Code before they contracted with Shaull.

The Huron bank almost certainly would never have refinanced with Shaull using the cattle as collateral if Feldman had filed an ownership claim, Everson said. UCC is a system that lenders "can, should and mostly do use to check on claims of collateral," he said.

Early this month Secretary of State Chris Nelson began encouraging cattle producers to file ownership claims. Some are, said Shelley Pitlick, state UCC supervisor. "A few new filing documents are coming in," she said. "It will take a while for people to catch on. But considering the results of the (Shaull/Feldman) case, it is definitely something people should look into."

To file, go to http://www.sdos.gov/ucc. Or call the UCC department at (605) 773-4422. Nelson also encourages cattle owners to make sure their lenders are aware of where the cattle are located.

The bankers' association is getting the word out, Everson said. "This case has received a lot of discussion within our membership. We have written about it in our newsletter. We have discussed it at meetings of our ag committee. And it will be discussed at our ag-lending school in August."


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Banks don't have any loopholes that aren't available to anybody else - they just know the procedures and how to properly check and file for security.

We don't file against the brand - we file against the person and the brand is one of the tools used to identify ownership. When we make a loan to a person using cattle as collateral, a filing is made with the state listing the person's name. Anybody who buys cattle from this person is supposed to check with the state and, if there is a filing against them, is supposed to put the bank's name on the check as well. Sale barns do this all the time.

More advice to everybody - if you buy cattle from somebody directly who has been filed on and then they default on their loan - the filer can come to you for funds. You should check with the state before cutting the check. In Nebraska, you can get the information from the Secretary of State - UCC division.
 
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