Entering the 2019 harvest, farmers and agricultural banks face a desolate economic landscape. The corn price rally that occurred earlier in the summer has come to an abrupt end, and below average yields are anticipated due to pronounced flooding during the planting season. The result is that many operations will fail in fourth quarter of 2019 and in 2020.
This article examines the progression that typical ag credits tend to follows when they fail.
Phase 1: Trouble on the Horizon
- The Borrower starts requesting financial accommodations such as loan extensions, reamortizations, and interest rate reductions.
- The Borrower starts submitting financials that show either losses, substantially reduced profitability, an increase in creditors/debt, or purportedly benign “mistakes.”
- The Borrower starts submitting financials that are unusually positive given the current economic climate.
- The Borrower starts submitting financials where certain numbers stay exactly the same as last year’s numbers, when changes would typically be expected (crop on hand, prepaid inputs, etc.).
- Deposit records show that commodities proceeds are wildly different than what was expected in cash flow projections.
- Equipment that appeared on a previous equipment list is inexplicably omitted from the current list.
- The Borrower starts opening up new bank accounts at different banks.
Phase 2: Default
- The Borrower starts making loan payments late or failing to make payments altogether.
- The Borrower starts making representations that they are seeking refinancing elsewhere so that the Bank does not need to take collection action.
- The Borrower starts making representations that they will be looking to voluntarily liquidate some or all of the assets so that the Bank does not need to take collection action.
- The Borrower starts secretly liquidating commodities in a different state and failing to remit the proceeds to the Bank.
- The Borrower starts liquidating commodities through family members or friends and failing to remit the proceeds to the Bank.
- The Borrower starts liquidating equipment and failing to remit the proceeds to the Bank.
- The Borrower fraudulently transfers assets to family members and then claims that the assets were never theirs to begin with (particularly a problem in cattle operations).
- The Bank receives notice that the Borrower has been sued.
- The Bank receives garnishments from creditors of the Borrower.
- The Borrower misappropriates loan proceeds and uses them to pay off other creditors.
Phase 3: Collection Process
- The Bank assesses liquidation prospects and realizes that it stands to suffer large losses through traditional collection procedures due to: (1) depressed markets for commodities; (2) depressed markets for agricultural land/equipment; (3) improper liquidation of commodities by the Borrower; (4) fraudulent transfers by the Borrower; (5) fraudulently diverted loan proceeds by the Borrower; and (6) improper offsets by agricultural good/service providers.
- The Borrower refuses to voluntarily relinquish or liquidate collateral, or they say they will do so themselves as a stall tactic but never follow through.
- Farmer-Lender mediation becomes a vehicle for delay as no resolution is generally possible at the onset, and the Borrower makes proposals that are not reasonable or appropriate.
- The Borrower declares bankruptcy and may even engage in sequential bankruptcies with their spouse in order to maximize disruption and delay.
- A revolving door of attorneys appear to represent the Borrower and then fade back out. These attorneys tend to employ a mix of aggression and implausible resolution proposals.
- Intense intercreditor disputes errupt as it becomes clear that the only way the Bank can be made whole is to: (1) vigorously defend its priority position against other banks and statutory lien creditors who also claim an interest in the Borrower’s assets; (2) assert claims against creditors who received fraudulently diverted loan proceeds; (3) assert claims against commodities buyers who failed to observe assignments or CNS financing statements; and (4) assert claims against commodities buyers who improperly offset commodities proceeds against past amounts owed to the buyer by the Borrower.
- The Bank is forced to bring fraudulent transfer claims against the Borrower’s family members and friends who were the recipients of fraudulent transfers. These disputes can also involve other banks if the recipient of the fraudulent transfer pledged those assets as collateral for a loan with the other bank.
- Foreclosure proceedings tend to be far more complicated than normal foreclosures given the messy web of lenders, statutory lien creditors, and mechanic’s lien claimants that may claim an interest in the agricultural property.
- Even simple lawsuits can become inexplicably drawn out and difficult given the sympathy judges tend to have for farmers.
- The Bank either needs to walk away from a deficiency judgment against the Borrower or go through a statutorily mandated jury trial, which must occur after the sale of the agricultural property. The Bank might also be forced into this proceeding – even if it would otherwise be willing to walk away from the deficiency – if the loan is an FSA guaranteed loan.
- Given the length of the liquidation process and fluctuations in property values, the bank may realize liquidation proceeds that are markedly different than what was expected at the onset.
- Agricultural property generally sells for less, or even far less, than the forced liquidation value specified in applicable appraisals.
- Traps for the unwary are peppered throughout the collection process, with one particularly noteworthy example being the statutory right of first refusal connected to agricultural property.
While all of the above mentioned issues/events do not occur in all cases, many do occur in most cases. Knowing what will happen does not necessarily make the process easier or less painful, but it does minimize the risk that the Bank (or its attorney) will make a mistake that severely compromises the Bank’s liquidation prospects.
Matthew J. Bialick is a banking and agricultural finance attorney with the M | J | B Law Firm. Matthew can be contacted for questions at 952-239-3095 or firstname.lastname@example.org