A Review of Agricultural Law: Hard Times and Hard Choices
| Jurisdiction | Colorado,United States |
| Citation | Vol. 15 No. 4 Pg. 629 |
| Pages | 629 |
| Publication year | 1986 |
1986, April, Pg. 629. A Review of Agricultural Law: Hard Times and Hard Choices
The economic plight of the American farmer and rancher is one of this nation's most pressing concerns. A recent survey indicates that approximately 33.3 percent of United States farmers are in serious financial trouble. Western farmers are not much better off than the national average, with approximately 26.5 percent in financial trouble.(fn1) The Farmers Home Administration ("FmHA"), the lender of last resort, presently has ninety-six foreclosed properties up for sale in Colorado(fn2) and more are added to the sale ledgers every day. The short-term bailout of the Farm Credit System and the recent price support legislation signed into law by President Reagan on December 23, 1985, may be too little, too late for many of Colorado's farmers and ranchers.
As a result of the agricultural crisis, the nation's court and legislative systems have been faced with an epidemic of agricultural problems which they have been incapable of addressing in a swift and meaningful way. The track record in Colorado, at least until this legislative session, has been as bad or worse. This article focuses on recent developments in agricultural law or, more accurately, on a multitude of different areas of the law which affect agriculture. The authors intend to bring out relevant concerns which affect farmers, ranchers, bankers, suppliers, implement dealers and others in the agricultural industry in the state of Colorado. The practitioner's first involvement in agricultural legal problems may involve the attempt to restructure or rewrite existing troubled loans.
The typical agricultural loan problem is fraught with misunderstanding and mistrust between lender and farmer. The first task in attempting a loan workout is to obtain a full picture of the problem.
The debts of the farmer fall into two categories, secured and unsecured. The unsecured creditors are generally the suppliers of fertilizer, seed, gas and oil, and miscellaneous small items. As a group, they usually have a small percentage of the total debt and are not a major factor in agricultural workouts. After the secured debts are restructured, the unsecured creditors are paid in full or in part over time.
The major focus of the workout is the secured debt. The farmland, machinery, crops and proceeds are typically pledged to the lenders. When loans are seriously in default, the lenders and farmers often distrust each other. The workout process must begin with an attempt to have the parties discuss the problems intelligently and look for practical solutions.
Counsel first should obtain copies of all the loan documentation and determine the existence and amounts of defaults, as well as the nature and extent of the collateral. From this information, counsel can work up an accurate balance sheet and cash flow projections based on prior years. The key to any workout is the ability of the farmer to operate profitably in the future. If the operation cannot produce sufficient funds to pay for the planting, cultivating and harvesting of the crop with the assurance of excess funds to service debt, a successful workout is impossible. Secured creditors first look to the ability of the farmer to operate successfully. The lender must have confidence in the farmer's cash flow projections and prior track record. It is important for the cash flow projections to detail all operations of the farm since many farms have other businesses which relate to the overall enterprise.
Armed with this information, both sides can see if the operation is viable. The farmer must be realistic and understand that the loan defaults have to be cured from future cash flow and that the future operation must pay for itself. The lender must realize that if an arrangement cannot be reached, the alternative is foreclosure in a presently declining market. Foreclosure would have the mutually distasteful result of the farmer being dislocated and the lender running the risk of realizing far less than the fair market value of the property. Further, if a workout is not reached, there is the potential of protracted and costly litigation in the district and bankruptcy courts in Colorado.
With this understood, the parties can attempt to restructure the debt. Several possible means of achieving this goal include:
1) Partial or whole interest payment;
2) Partial or whole principal payment;
3) Defer interest and/or principal for a period of time;
4) Declare a moratorium on loan payments for a period of time;
5) Extend the loan period;
6) Add presently due interest and/or principal to the end of the loan;
7) Reduce the interest rate on the loan for some or all of the duration of the loan;
8) Increase collateral for the loan;
9) Sell part or all of the operation in an orderly manner, perhaps divesting the farm of unnecessary or unproductive operations;
10) Alter farming technique or crops grown to be more cost effective;
11) Set specific goals to be achieved within time frames with planned contingencies if the goals are not achieved (i.e., farmer must sell certain crops and/or assets within some time frame or consider conveying or transferring that property to the lender); and
12) Do everything possible to avoid litigation.
The goal in any workout is to assure future viability of the farming operation. All parties must realize that the next crop must be planted, protected and harvested to generate the cash flow to support the workout. When the lender is reluctant to make further concessions, the farmer, as a result, may feel that the lender is abandoning the farm. If the farm operation can project an adequate cash flow, the parties would be much better off working out the problem than taking any other course. Such workouts require the creativity and understanding of both parties.
When a problem loan cannot be restructured or otherwise worked out between the lender and the agricultural borrower, the usual result is the initiation of a foreclosure proceeding. The farm and ranch machinery and equipment which constitutes collateral for the troubled loan is then repossessed.
The lender should evaluate the practical consequences of foreclosure and repossession. It should try to be as flexible and innovative as possible before resorting to foreclosure. Unfortunately, in many instances, government regulations and the edicts of bank examiners leave no alternative but to foreclose and repossess.
The foreclosure and repossession of agricultural property and collateral is an expensive process. It includes the marketing and holding costs of attempting to dispose of foreclosed-upon property and repossessed collateral. This frequently increases rather than lessens the financial drain upon the assets of the lending institution. Moreover, the depressed market for agricultural property in the state of Colorado makes it almost impossible to sell repossessed farmland quickly at anything approximating its fair market value. Typically, title to the property will transfer to the lending institution, which will be forced to pay taxes, make lease payments and advance money for all other costs associated with the ownership of real property. This "cash drain" may not last just a few months; in many cases, it can continue for several years until the property is sold.
Where foreclosure is inevitable, the lender may wish to consider simply leasing the foreclosed-upon property back to the farmer or rancher during the time that the property is being marketed. Such a relationship benefits the farmer/rancher as well as the agricultural lender by creating cash flow and generating some income from property which would otherwise lay idle, benefiting no one.
There is an increasing number of large farm operations covering more than one county or state being forced into foreclosure. These multi-county properties can pose special problems. For example, in Wellman v. Travelers Insurance Co.,(fn3) the Colorado Court of Appeals voided a public trustee foreclosure and sale of a multi-county farm. The 1400-acre ranch property was located in both Gunnison and Saguache Counties. The holder of the deed of trust initiated two public trustee foreclosure actions, one in each county. Each public trustee scheduled and held a separate sale for the portions of the farm property located within their respective jurisdictions. The foreclosing lender bid the full amount of its loan at both sales.
The Court of Appeals ruled that the lender's bid of its full indebtedness at the first sale extinguished the promissory note. Therefore, the subsequent public trustee sale in the adjoining county was null and void. The case is presently on a writ of certiorari before the Colorado Supreme Court.
Because of the possibility that a public trustee foreclosure will be held to be improper, it is recommended that only judicial foreclosure proceedings be used when foreclosing upon multi-county or multistate properties. Counsel should ask the...
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