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Financial Distress Issues for Family Farmers and

Their Creditors

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Congratulations!!!You just won the lottery!!!

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What are you going to do now?

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Trending Problems Irrigated and Non-Irrigated Cropland, Average Value

per Acre: 2012-2016

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State 2012 2013 2014 2015 2016 Change 2015-2016

(dollars) (dollars) (dollars) (dollars) (dollars) (percent)

MissouriAll Cropland

IrrigatedNon-irrigated

3,1203,6403,080

3,5004,1403,450

3,8104,7503,730

3,8105,1303,700

3,7705,1003,660

-1.0-0.6-1.1

KansasAll Cropland

IrrigatedNon-irrigated

1,6502,2501,590

1,9302,7601,840

2,2603,2802,150

2,2103,2702,090

2,0503,0001,940

-7.2-8.3-7.2

*Land Values 2016 Summary (August 2016), USDA, National Agricultural Statistics Service

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Trending Problems

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*USDA Long-term Projections to 2026, February 2017, USDA

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Trending Problems

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*USDA Long-term Projections to 2026, February 2017, USDA

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Trending Problems

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*USDA Long-term Projections to 2026, February 2017, USDA

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Storm Clouds on the Horizon:What should

you do?

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Take Stock of your Loan Situation

Any defects in loan documents?

Scope of perfection in collateral?

Value of collateral?

Competing priorities in collateral?

Status of guarantors?

Any lender liability claims?

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Work with your Borrower

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Proactively Discuss Strategies –Maintain Open Dialogue

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Share your Borrower Horror Stories

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“In local news, old Macdonald no longer has a farm.”

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Execute Forbearance Agreements with Release of Claims

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Offer an Orderly Liquidation

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Offer to Waive the Personal Guaranty if Key Milestones are Met

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Don’t Set Yourself up for a Fall

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Debtor

Payee/Transferee

Debtor transfers property interest without getting

reasonably equivalent value in exchange

Constructively Fraudulent Transaction

Payee/Transferee

Debtor

Before the Transfer After the Transfer

The Transfer

“More” of the Debtor for Creditors

“Less” of the Debtor for Creditors

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Transfer ofInterestin property

Some value or other contractual relationship

Some value the debtor indirectly receives because of the transfer

What Happens on Paper

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In reality, the debtor gives value to the lender without receiving any reasonably equivalent value in return.

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Before the Storm: Vendors, Landlords and Lessors

Get current financial statements and cash

flow projections

Require cash-in-

advance?

Don’t let defaulted contracts

linger

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Why did Congress create Chapter 12?

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Who can file Chapter 12?

Family Farmer or company owned by family engaged in farming

No more than $4,153,150 in debt

Regular annual income

50% or more of income from farming operations

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Benefits of Chapter 12

Faster

Cheaper

Easier

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Limits of Chapter 12

Debt Limit

CapitalGains

Control

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What frequently happens with

bankruptcy filings?

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The Debtor Takes the Leap of Faith with High Hopes

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…..but many cases fail

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Lurking Danger: Capital Gains Taxes

Hall v. United States

Capital gain taxes from sale of property in Chapter 12 cannot be paid pro rata with other unsecured creditors

Family farmer must pay the tax

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Actions for All Creditors

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File a Proof of Claim

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Closely Check Exemptions –Is the Debtor Being Greedy?

Kansas Exemptions

Missouri Exemptions

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Did the Debtor misbehave?

Then object to discharge of his debt.

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Secured Creditors

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Secured creditor Use of Cash Collateral

Adequate Protection

– Property insured?

– Loss of value?

Collateral Must be Paid in Full

Actions against guarantors

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Dealing with “Sneaky” Debtors

– Assets titled in wholly owned company

– Assets transferred for no consideration to debtor

– Debtor immediately files for bankruptcy

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Homestead Exemption Objections

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Lookout for low collateral valuations

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Cram Down

Debtor can strip off

unsecured liens

Debtor can change

loan terms

Debtor can change

payment terms

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The Big Question:

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Is the Plan Feasible?

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Unsecured Creditors 44

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Land & Equipment Leases

Stay relief to terminate?

Adequate protection—Post-petition Payments?

60-day requirement Cure costs?

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Reclamation—A Silver Bullet?

Reclamation “reclaims” goods that were provided just before bankruptcy [show picture of someone taking something back such as a gift]

Reclamation notice must be issued very shortly after bankruptcy filed

Reclamation doesn’t work if a secured lender has a lien on the goods

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Michael D. Fielding

michael.fielding@huschblackwell.com

816.983.8353

Q&A

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