Issues in Enforcing California Dairy Cattle Supply Liens

by René Lastreto II1

I. Introduction

The Dairy Cattle Supply Lien law in California provides for a statutory lien know as a “Dairy Cattle Supply Lien” in favor of those who provide feed or material (a defined term) to aid in the raising or maintaining dairy cattle.2 The Dairy Cattle Supply Lien was added to the Food and Agricultural Code in 1987. Other than very minor amendments to conform with certain provisions the Commercial Code, the law remains as originally drafted. While there are no reported cases construing the law, certain issues have arisen in various bankruptcy cases dealing with enforcement of the lien law. Generally, two of the primary financing constituencies in a dairy bankruptcy case are a traditional lender and grain suppliers. In addition to the substantial defaults facing the traditional lender, grain suppliers often have large balances owed at the time of the petition is filed. Most grain suppliers are sophisticated enough to have filed Dairy Cattle Supply Liens with the Secretary of State.

However, even if the lien is filed with the Secretary of State, certain issues for the enforcement of the lien should be considered. Some of those issues are the subject of this article.

II. Frequent Issues Arising in Enforcing Dairy Cattle Supply Liens

A. Property Charged with the Lien
The Dairy Cattle Supply Lien is only upon the proceeds of the milk or milk products produced from the dairy cattle that have benefitted from the provision of “feed or materials” aiding in the raising or maintenance of the cattle.3 “Proceeds” is defined in the law as funds derived from the sale of milk or milk products which are payable to the lien debtor by the possessor of the funds.4 Interestingly, the lien does not extend to the milk itself or milk products produced from the dairy cattle.

The definition of “proceeds” under the law presumes certain deductions which are normally taken by dairy product processors.5 Those deductions include taxes, fees and assessments, court ordered deductions, deductions for hauling if the processor has provided hauling services as well as deductions for sums due a processor for the testing of milk. Most processor’s when having received a notice of an assignment of the rights to payment of proceeds respond with a standard disclaimer that certain costs and deductions will be taken from the assigned proceeds before disbursement accordance with the assignment. The Dairy Cattle Supply Lien law contemplates deductions in favor of the processor also.

B. What the Lien will Secure.
The Dairy Cattle Supply Lien is to secure the reasonable or agreed charges for the feed or the materials provided and for the costs of enforcing the lien.6 “Feed or materials” is defined as “commercial feed, grain, forage, feed ingredients, mineral feed, drugs, animal health products, customer formula feed, any mixture or preparation for feeding animals, any of the constituent nutrients of an animal ration, or any other food which is used for the feeding of dairy cattle.”7 Thus virtually anything used for the feeding of the animals can form the basis for the charges secured by the lien.

Curiously, the amount secured by the Dairy Cattle Supply Lien is affected by the time the “feed or materials” are furnished. The lien can not secure charges in excess of the amount equal to the reasonable or agreed charges for feed or material provided with in a 45 day period. The statute does not specify which 45 day period may be used.

In addition, the number of providers of feed or materials that can exercise lien rights is limited. The lien law permits only two providers of feed or material to have an enforceable lien at any time, according to statutory priority.8 Under the terms of the statute, the number of providers with “an enforceable lien” is limited. However, the statute does not by its terms limit the number of notices of lien that can be filed. Thus under the terms of the statute, it would be possible for more than two providers to file liens. However, at any one time only two could have an enforceable lien. As long as two of the providers either continue to supply the dairy with “feed or material” or remains unpaid, that supplier may have an enforceable lien.9

C. Determining Priority.
The Dairy Cattle Supply Lien does not have a “super priority.” Under the statute, the lien has priority in accordance with the time the notice of claim of lien is filed.10 The statute provides that just as a party with a security interest must perfect a lien by filing a Financing Statement, so does a Dairy Cattle Supply Lien claimant.11 Division 9 of the Commercial Code is specifically incorporated into the Dairy Cattle Supply Lien law. California Food and Ag Code § 57407.

The usual scenario is the traditional lender has liens on not only the milk and milk products but also the dairy cattle and other personal property. Negotiation occurs between the Dairy Cattle Supply claimants and the traditional lenders to try to foster reorganization when that is possible. If it is not possible, there usually are not priority fights between the traditional lender and the Dairy Cattle Supply Lien claimant although that can occur at times.

D. Length of the Effectiveness of the Lien.
When considering a Dairy Cattle Supply Lien claimant and the rights that claimant might have, some consideration must be given to whether the lien is in fact effective. The Dairy Cattle Supply Lien law states that the claim of lien remains in effect as long as the person providing the feed or materials either (1) remains unpaid for amounts secured by the lien, or (2) continues to provide feed or materials on a regular basis to the lien debtor.12 The statute provides if more than thirty (30) days elapses between supplier deliveries, that supplier is not making deliveries on a regular basis.13 Thus if there is an issue as to enforceability or priority of a Dairy Cattle Supply, some inquiry must be made as to frequency of delivery.

E. Enforcement of the Lien.
Initially, the lien itself must be examined to determine if it complies with what must be included in the claim of the lien. Generally, the same information that is required on a UCC Financing Statement must be included on a claim of lien. However, issues have arisen relating to the sufficiency of the lien because not all of the information has been included by the lien claimant. For example, a lien must contain the name and address of the lien claimant and the location of the diary to which the feed and materials were provided.14 The name and address of the lien debtor must also be provided. Accordingly, care must be taken as to whether the name and the address of the lien debtor and the location of the dairy to which the feed is delivered are the same. If not, both locations must be specified as appropriate in the notice of claim of lien.

In addition, the lien must contain the statement that the lien claimant “has a dairy cattle supply lien pursuant section 57402.”15

The statute also requires that the notice of claim of lien “should be signed by the lien claimant.”16 The Commercial Code since 2001 has not required a physical signature by a lien claimant. A lien claimant need only “authenticate” the record.17 There is no controlling authority dealing with this supposed “tension”. However, in an unpublished decision one Court has addressed the issue and has found that the type written signature of the lien claimant was sufficient.18

Also, the Dairy Cattle Supply Lien law requires the lien claimant to provide written notice of the claim of lien to the lien debtor within 10 days of the date of the filing of the lien with the office of the Secretary of State.19 There is no provision in the current law which says that failure to provide that notice does not effect the validity of the lien. That is likely the intent of the law or certainly would be a consistent construction of the law in light of the Commercial Code. However, there is nothing currently dealing with that issue addressed in the law.

Finally, the enforcement of the lien is covered by the statute. First, the only the way the lien is “foreclosed” is by an action to recover the reasonable or agreed charges for feed and material delivered.20 Once a judgment is entered, it can be enforced in accordance with the California Code of Civil Procedure.21 However, as a prerequisite, the statute requires the lien claimant provide written notice to secured creditors at least 30 days prior to enforcing the claim of lien.22 Curiously, other than the notice to the lien debtor within 10 days of the date of filing the lien, no further notice needs to be given the debtor before the lien can be enforced. However, secured creditors must receive notice.23 The creditors that receive notice are not necessarily the creditors who have liens as defined by the statute on the date the action is going to be filed. Rather, the 30 day notice needs to be given to those secured creditors having liens on file when the lien claimant files the notice of lien. Also, not all “secured creditors” need to be notified. Only those having a perfected security interest in the specified collateral need to be notified.

III. Proposed Legislation

In the 2011 legislative session, SB 592 has been introduced which proposes certain changes to the California Dairy Supply Lien law. Currently, the bill is “inactive” although it has passed the senate judiciary committee in May 2011.24 The proposed changes are relatively extensive. First, the proposed change would allow the lien to be placed upon the dairy cattle and offspring. That is not the case under the current law. Second, the 10 day notice required under California Food and Ag Code § 57405 is still required but the proposed law identifies the party to receive the notice depending upon the type of entity the dairy may be. Third, the law as amended would provide that failure to give the written notice would not affect the priority of the lien or the validity of the lien. Fourth, if an enforcement action is filed, the lien holder can apply to the Court for a right to attach order and writ of attachment. Finally, the proposed law would permit a supplier to notify “any person obligated on any proceeds subject to the lien” to pay the claimant.

Whether these provisions will be enacted remains to be seen.25

Conclusion

The Dairy Cattle Supply Lien law provides a valuable remedy for grain suppliers to financially troubled dairies. However, as a statutory lien there are numerous issues that surround lien enforcement that must be considered. Certain clarifying and other changes are proposed but are not yet enacted. Until then the lien law must be carefully consulted by analyzing the enforcement of the lien and its affect on other creditors.


  1. Rene Lastreto II is an owner shareholder at Lang, Richert & Patch, Attorneys at Law, a Professional Corporation. He has 30 years of experience in representing all contingencies in the loan enforcement process including lender, bankruptcy trustee, borrowers, equipment lessors and others. His practice is in all Courts including the Bankruptcy Courts, Federal Courts and California Superior Courts. He is certified in the area of Creditors Rights Law by the American Board of Certification.
  2. California Food and Ag Code § 57402.
  3. California Food and Ag Code § 57402.
  4. California Food and Ag Code § 57401 (c).
  5. California Food and Ag Code § 57401 (c) (1-5).
  6. California Food and Ag Code § 57402.
  7. California Food and Ag Code § 57401 (b).
  8. California Food and Ag Code § 57402.
  9. See California Food and Ag Code § 57403 (b).
  10. California Food and Ag Code § 57406(a).
  11. California Food and Ag Code § 57406(b).
  12. California Food and Ag Code § 57403(b).
  13. Id.
  14. California Food and Ag Code § 57405(b).
  15. Id.
  16. See California Food and Ag Code § 57405(c).
  17. See California Commercial Code § 9102(a)(7)(A), (B). Under the general definitions provided in section 1201 of the Commercial Code “signed” is defined expansively “ to include using any symbol executed or adopted with a present intention to adopt or accept a writing.” California Commercial Code § 1201 (38).
  18. In re Mendonca, 63 U.C.C. Rep. Serv. 2nd (Callaghan) 276 (B. Ct. E.D. California, 2007) (J. Bardwill).
  19. See California Food and Ag Code § 57404(f).
  20. See California Food and Ag Code § 57413.
  21. Id.
  22. See California Food and Ag Code § 57412.
  23. The statute defines “secured creditors” as those creditors having a perfected security interest in dairy cattle, milk, milk products, or the proceeds thereof, as the date the notice of claim of lien is filed with the Secretary of State.
  24. 2011 CA S.B.592
  25. See State Net, Lexis Nexis, 2011 CA S.B. 592.