                          March 26, 1987




Honorable Robert M. Saunders               Opinion No.   JM-657
Chairman
Committee on Agriculture and               Re: Effect of the federal Food
   Livestock                               Security   Act of 1985 on pro-
Texas Rouse of Representatives             visions   of state    law relating
P. 0. Box 2910                             to security   interests   in agri-
Austin, Texas   78769                      cultural products

Dear Representative   Saunders:

       In 1985 the United States Congress        enacted  legislation    that
provides   protection    for purchasers    of farm products     from secured
creditors   of the seller.      7 U.S.C. 61631 (Supp. III 1985).      You ask
vhether that federal     legislation   preempted sections 9.307(a)    and (d)
and 9.401 (a) and (f) of the Texas Business and Comerce Code and
section 32.33(f)    of the Texas Penal Code.

      The explicit  purpose of the federal   legislation     was to preempt
certain state laws.   Subsections (a) and (b) of section      1631 provide:

              Congress finds   that --

              (1)   certain State laws permit a secured lender
              to enforce liens against a purchaser of farm
              products even if.the     purchaser does not know
              that the sale of the products           violates  the
              lender’s    security interest     in the products,
              lacks any practical   method for discovering      the
              existence of the security     interest,    and has no
              reasonable means to ensure that the seller uses
              the sales proceeds to repay the lender:

              (2)   these laws subject the purchaser of farm
              products   to double payment for the products,
              once at the time of purchase, and again when
              the seller fails to repay the lender;

              (3)   the   exposure  of    purchasers  of farm
              products    to double    payment inhibits  free
              competition   in the market for farm products:
              and




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Honorable   Robert M. Saunders - Page 2 (JM-657)




                (4) this exposure       constitutes       a burden on and
                an obstruction to       interstate       commerce in farm
                products.

               The purpose of this section  is to remove such
            burden on and obstruction  to interstate commerce
            in farm products.

7 U.S.C. 51631(a),      (b)   (Supp.   III    1985).     A   house report   on   section
1631 statms:

                  The bill   is intended      to preempt state       lav
            (specifically     the so-called     ‘farm products excap-
            tion'    of Uniform Commercial Code section 9-307) to
            the extent ‘necessary to achieve the goals of this
            legislation.      Thus, this Act would preempt state
            laws that set as conditions           for buyer protection
            of the type provided by the bill requirements that
            the buyer check public          records,    obtain no-lien
            certificates     from the farm products sellers,          or
            otherwise seek out the lender and account to that
            lender for the sale proceeds.             By contrast,   the
            bill    vould not preempt basic state-law          rules on
            the creation,     perfection,    or priority    of security
            interests.

H.R. Rep. No. 99-271, 99th Cong.,            reprinted    in 1985 U.S. Code Cong. 6
Admin. News 1103, 1214.

       The federal   legislation   contains      the following     provision:

                Except as provided     in subsection    (e) of this
            section and notwithstanding     any other provision of
            Federal, State, or local      law. a buyer who in the
            ordinary course of business buys a farm product                         .
            from a -seller engaged in farming operations shall
            take free of a security      interest   created by the
            seller,    even   though the security      interest  is
            perfected;    and the buyer knows of the existence of
            such interest,     (Emphasis added).

7 U.S.C. 51631(d).       Subsection    (e) of section       1631. which contains
exceptions     to the provision     above, provides      that a buyer of farm
products takes subject to a security          interest    if the buyer received
notice of the security interest       before buying the farm products and if
the notice meets certain other requirements.           7 U.S.C 51631(e)(l).     In
addition,    subsection (e) provides that a buyer of farm products takes
subject    to a security   interest     if the products were produced in a
state that has a central filing        system as defined in section       1631 and
if the buyer had constructive          notice   of the security      interest   as




                                       p. 2994
n’
     Honorable Robert M. Saunders - Page 3           (~~-657)




     provided for in section     1631(e)(2)  or (3).   The secretary  of agri-
     culture must certify  that a particular   state’s filing system qualifies
     as a central   filing  system for purposes of section     1631.  7 U.S.C.
     5 1631(c) (2).

           Your first     question  is whether the federal  statute  preempts
     section   9.307,   subsections   (a) and (d), of the Texas Business and
     Commerce Code.     Saction 9.307(a)  thereof provides:

                      Except   as provided by Subsection (d) of this
                  section.   a buver in ordinary course of business
                  (Subdivision    (9) of Section- 1.201) other than a
                  Person buying farm products from a person engaged
                  in farming operations      takes free of a security
                  interest   created bv his seller     even though the
                  security interest    is perfected and even though the
                  buyer knows of its existence.     (Emphasis added).

     Subsection    (d) of section   9.307 provides:~

                      A secured party,       including     a secured party
                  under a securitv        interest     covered bv Stction
                  9.312(b) of this code, may not enforce a security
                  interest   in farm products against a person who has
                  purchased the farm products from a person engaged
                  ia farming operations        -unless the -secured party
                  gives notice of the security interest to the buyer
                  by certified    ‘mail,  return receipt     requested, not
                  later than the 90th day after the date of c
                  chase.    The notice must state the terms of ti;
                  Gity        interest   and the amount claimed to be
                  oved to the secured party.         (Emphasis added).

     Section 9.307(a)   is the Texas version of the provision       that Congress
     intended to preempt.    See H.R. Rep. No. 99-271. m.          Subsection   (d)
     of section 9.307 provi=     some protection    for buyers of farm products.
     Because subsection    (d) allows    a secured creditor      to protect     his
     security interest by giving the buyer notice within 90 days after the
     sale, however. the provisions    of the Texas statute are less favorable
     to buyers than the notice provisions        in the federal   statute,    which
     allow a secured party to protect his security interest         only by prior
     notice.   Because the federal statute was intended to ease the burden
     on purchasers of farm products.     we conclude that the federal statute
     preempted both subsection    (a) and subsection     (d) of section 9.307 of
     the Texas Business and Commerce Code.

           Your second question   is vhether the federal legislation  preempts
     section   9.401, subsections    (a) and (f).  of the Texas Business and
     Commerce Code. Section 9.401(a)     sets out the proper places co file in
 ,   order to perfect a security interest:



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Ronorable     Robert M. Saunders - Page 4 (m-657)




                 The proper place to file in order to perfect              a
              security interest  is as follows:

                 (1) when the collateral       is consumer goods,
              then in the office     of the County Clerk in the
              county of the debtor’s   residence or if the debtor
              is not a resident  of this state then in the office
              of the County Clerk in the county where the goods
              are kept;

                  (2)    when the collateral     is timber to be cut or
              is minerals or the like (including oil and gas) or
              accounts     subject      to Subsection     (e) of Section
              9.103.    or when the financing        statement  Is filed
              as a fixture         filing   (Section     9.313) and the
              collateral      Is goods which are or are’ to become
              fixtures.     then in the office      of the County Clerk
              in the county where a mortgage on the real estate
              would be filed or recorded;

                  (3)  in all other      cases,    in the office    of   the
              Secretary of State.

Section     9.401(f)   deals   with continuation      statements:

                  A continuation      statement filed      to continue a
              security    interest    perfected    before September 1,
              1985, in collateral         that is equipment used in,
              farming operations,       farm products, or accounts or
              general Intangibles        arising   from or relating        to
              the sale of farm products by a farmer must be
              filed in the office      of the Secretary of State, and
              must contain      the information       ,contained    in the
              original   financing     statement, in addition        to the
              information    required for a continuation         statement
              under Section 9.403 of this code.           The priority     of
              such a security      interest     is not affected      by the
              fact that a continuation        statement filed according
              to this subsection       is filed at a different         place
              than the original     financing statement.

       The federal          legislation      provides   for constructive     notice    of
security     interests       in farm products in states that have central filing
systems     certified      by the secretary of agriculture.          As of January 23,
1987, Texas did not have a certified                   central  filing   system.    See.
s,       51 Fed. Reg. 45493 (1986) (North Dakota’s central filing                 system
certified);       see generally,        CIS Federal Register Index (under heading
“Food Security Act”).             The federal statute does not require states to
have central        filing     systems.     Rather, it merely allows for construc-
tive notice of security            interests    in farm products in states that have



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I


    Honorable    Robert M. Saunders - Page 5            (JM-657)




    central    filing      systems.    In states    that do not have central          filing
    systems.     secured parties        can protect    their security      interests      only
    by giving      actual notice       to potential     buyers.      In order to permit
    constructive      notice,    states may wish to change their filing             systems,
    but the federal legislation           does not mandate such a change.         Also. the
    house report cited above states that the federal legislation                  would not
    preempt “basic state laws on the creation.               perfection,   or priority      of
    security    interests.”       Filing is often required for the perfection             of a
    security    interest.       See Tex. Bus. & Comm. Code 59.302.            Also,   filing
    may determine the priority             of security    interests.     See Tex. Bus. 6
    Comm. Code 09.312.           Because the federal       statute doesot         mandate a
    central filing        system and because it was not intended to change state
    procedures regarding perfection            or priority    of security    interests,     we
    conclude that the federal legislation            does not preempt subsections          (a)
    and (f) of section 9.401.

         Your   third question is whether the federal              legislation     preempts
    the following    provision in the Texas Penal Code:

                     A person     who is a debtor under a security
                 agreement, and who does not have a right to sell
                 or dispose    of the secured property or is required
                 to account to the secured party for the proceeds
                 of   a permitted sale or disposition,         commits an
                 offense if the person sells or otherwise disposes
                 of the secured property,        or does not account   to
                 the secured party for the proceeds of a sale or
                 other disposition      as required,     with intent   to
                 appropriate     (as defined    in Chapter 31 of this
                 code)    the proceeds     or value     of   the secured
                 property.     A person is presumed to have intended
                 to appropriate     proceeds   if the person does not
                 deliver    the proceeds     to the secured party      or
                 account to the secured party for the proceeds
                 before the 11th day after the day that the secured
                 party makes a lawful demand for the proceeds or
                 account.    An offense under this subsection is:

                        (1) a Class A misdemeanor if the proceeds
                    obtained from the sale or other disposition are
                    money   or goods having a value of less than
                    $10,000;

                         (2) a felony of the third degree if the
                     proceeds    obtained from the sale     or other
                     disposition   are money or goods having a value
                     of $10,000 or more.

    Tex. Penal Code 132.33(f).            This provision     applies  to all types of
    secured property, not just          farm products.       We assume you are asking




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Honorable Robert M. Saunders - Page 6            (m-657)




whether the federal        legislation       excepts   farm products     from the
co&rage    of section   32.33(f).       We conclude that it does not.         Under
section 32.33(f)    it is a crime for a debtor under a security agreement
to sell   or dispose     of secured property without accounting             to the
secured party for the proceeds if the security agreement requires               the
debtor to account to the secured party for the proceeds.                  Not  only
does section 32.33(f)     protect secured creditors,         but it also protects
subsequent buyers of secured property.              Therefore,   it is in harmony
with the intent of the federal        legislation.

      We note that the federal     legislation     also makes certain    conduct   a
criminal offense:

                (1)  A security  agreement In which a person
            engaged in farming operations  creates a security
            interest  in a farm product may require the person
            to furnish   to the secured party a list    of the
            buyers, commission merchants, and selling    agents
            to or through whom the person engaged in farming
            operations may sell such farm product.

                 (2)   If    a security     agreement     contains   a
            provision     described   in paragraph     (1) and such
            person engaged in farming operations            sells  the
            farm product collateral       to a buyer or through a
            commission merchant or selling        agent not included
            on such list,         the person    engaged in farming
            operations     shall    be subject    to paragraph     (3)
            unless the person --

                     (A)   has notified   the secured party in
                     writing    of the identity  of   the buyer,
                     cossaission merchant, or selling    agent at
                     least 7 days prior to such sale; or

                     (B) has accounted   to the secured party
                     for the proceeds of such sale not later
                     than 10 days after such sale.

                (3) A person violating   paragraph (2) shall be
            fined $5,000 or 15 per centum of the value or
            benefit  received   for such farm product described
            in the security   agreement, whichever is greater.

7 U.S.C.    01631(h).  Under both the federal      statute   and the Texas
statute,  failure of a debtor under a security agreement to account for
proceeds may constitute    a crime.    We do not think that overlap         in
coverage,   however, is indicative   of congressional    intent to preempt
state law provisions   such as section 32.33(f).      The federal  legisla-
tion was intended to preempt state law only to the extent necessary to




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Honorable Robert M. Saunders - Page 7         (JM-657)




achieve    the goal of easing the burden on purchasers of farm products.
Section     32.33(f)  helps,  rather   than hinders,   that goal.   Further,
state    prosecution   and federal   prosecution   of the same person for
the same act does not constitute        double jeopardy.    United States v.
Wheeler, 435 U.S. 313 (1978).       Therefore. we conclude that the federal
legislation     did not remove farm products from the coverage of section
32.33(f)    of the Penal Code.

                                  SUMMARY

                  Federal    legislation     intended     to   protect
           purchasers of farm products from secured creditors
           of the seller preempts subsections         (a) and (d) of
           section     9.307 of the Texas Business 6 Commerce
           Code. It does not preempt subsections           (a) and (f)
           of    section    9.401    of  the   Texas    Business    and
           Comerce Code or section          32.33(f)    of the Texas
           Penal Code.




                                             Attorney    General of Texas

JACK HIGHTOWRR
First Assistant Attorney    General

MARYKELLER
Executive Assistant    Attorney   General

RICK GILPIN
Chairman, Opinion Committee

Prepared by Sarah Woelk
Assistant Attorney General




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