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February 1, 2002

Texas farmers seeking credit from their bank or supplier should be aware that the legal documents they are asked to sign will probably include new provisions that reflect a change in Article 9 of the Texas Business and Commerce Code.

Effective July 1, 2001, the type of property that can be used as collateral for a non-consumer transaction was expanded to include deposit accounts (checking, savings and similar accounts and certain certificates of deposit) that are held at banks and other financial institutions.

A creditor's ability to take a deposit account as original collateral in non-consumer transactions means that, in case of a default, a farmer's creditor can seek payment from sources that in the past were partially protected from creditors.

For example, if a creditor has incorporated the new revisions in the law into its security agreement, a farmer purchasing a new tractor on credit may be asked to sign a security agreement that includes as collateral both the tractor and the farmer's savings account. Upon default, the creditor may first attempt to take the funds in the savings account before going through the somewhat difficult process of taking possession of the tractor and reselling it in order to apply the proceeds towards satisfaction of the debt.

While there are certain legal requirements that must be met before a creditor can get a lien on and control over deposit accounts, if properly followed, a farmer may be subject to numerous restrictions on when or if he will have the use of his accounts under the terms of the security and control agreements.

Regardless of what provisions are included in these agreements, farmers should be extremely careful to understand the documents they sign. The provisions of security and control agreements could result in being unable to access checking and savings accounts without a creditor's prior written consent, causing bank fee charges, credit rating concerns, and perhaps even greater problems.

NOTE: Legal Briefs is provided by its author and the publisher of this newspaper for general informational purposes only, and is not intended to constitute legal advice or to substitute for the advice of an attorney. If you require legal or other expert advice, you should seek the services of a competent attorney or other professional.