Class 34

Chap. 13 -- Bankruptcy wrap-upLandlord/tenant Chap. 15 pp. 436-446• Recitation• Case StudentIn Re Welch -- action, issue, facts; Micaela Shipe

holding, rule/law; Daniel ShonkwilerIn Re Mary Freese – action, issue, facts; Neal Wolheter

holding, rule/law; Heather Lawyer

Quiz 11

1. An interest in property to secure a debt

• a. Mortgage• b. Security interest• c. Lien• d. all the above.

• 2. A security interest in “crops and farm inventories” is an interest in:

• a. Land• b. Personal property

• 3. Generally, a lender must “file” (a financing statement) to have a perfected security interest in goods (crops, equipment, inventory …).

• 4. A “central filing system” for liens is with the County Recorder.

• 5. Private, installment contracts for land may preclude a “right to redemption.” T or F.

Bankruptcy• Chapter 13 - consumer bankruptcy reorganization

repayment plan.• Debt limits are substantial, but only for individuals/sole

proprietors—not corporations or partnerships.• -- Generally, for consumers who have income, to have

supervision invoked in their financial lives,• -- to get extended terms so they may be able to “cash

flow.”• New Bankruptcy Law -- effective on October 17, 2005: The

major intent of bankruptcy reform is to require people, who can afford to make some payments towards their debt, to make these payments, while, perhaps, having the the right to have the rest of their debt erased. These people MUST file Chapter 13 rather than be able to file a “Chap. 7 liquidation” bankruptcy.

Bankruptcy• Chapter 11 - Business Reorganization• -- a plan is sought, that creditors will approve• -- else the business may end up in a Ch. 7

liquidation.• Farmers in Ch. 11 often find it impossible to get a

plan approved because of the requirement to satisfy certain creditors under Ch.11 rules.

• Chapter 12 Family Farm Bankruptcy Act became law in 1986 with requirements so that a “typical” farm could get a reorganization plan approved.

• Chapter 12 offers a farmer (and now fishermen) the opportunity to reorganize with a plan for the creditors that offers at least as much as they would get if the debtor were in a liquidation bankruptcy.

Chapter 12 Farm Bankruptcyunder revised permanent law

• Eligibility requirements• 1.-- Individual, or individual and spouse in a farming

operation whose aggregate debts does not exceed $3.237 million (indexed, CPI) with

• 2.-- 50% of this debt excluding principal residence arising out of the farming operation owned or operated by the debtor, and

• 3.-- with 50% of the gross income in the year prior to filing from farming or 2 and 3 years prior to filing (an extension of time under the 2005 Act to allow for the reality that farmers in financial stress make adjustments before filing).

Chapter 12 Plan• Rules:

-- The debtor must file a plan “within 90 days” of a petition in bankruptcy.

• -- The plan must have a portion of future earnings for the trustee

to dispense in deferred installments to all priority claims, e.g., secured creditors and those who obtain a super-priority.

• --- All claims in the same class must get the same treatment.

Chapter 12 Plan

• Note: There are three types of debt: • Secured Debts: those for which the creditor has the

right to pursue specific pledged property upon default. • Priority Debts: those granted special status by the

bankruptcy law, such as most taxes and the costs of the bankruptcy proceeding and new lenders who get a super priority —for example, a supplier who makes it possible for a farmer to plant a crop.

• Unsecured Debts: generally are characterized as those debts for which credit was extended based solely on the creditor’s assessment of the debtor’s future ability to pay.

Chapter 12 Plan• -- A key to Chapter 12 relief at least in the past is that

mortgaged land is re-valued in a plan at the “current value.” This was huge in the mid to late ‘80’s when land values dropped substantially from 1981 to 1987! What now in 2005?

• --- That is, marked down with the difference between secured amount and current value being essentially “written-off,” and the lower value amortized in a Chap. 12 plan.

• -- The farmer must be able to show a regular income sufficient to service the “restructured” debt in the plan.

• --- In many cases, the income is fortified by off-farm income.

Chapter 12 Farm Bankruptcy

• Chapter 12 Plan

• --Upon completion of a 3 or 5 year plan, the debtor is/maybe discharged from unsecured debts.

• --Long term financing arrangements continue –

• During a plan, there may be “extra” income to pay toward claims that are not otherwise allowed in a plan –”Disposable income”– but the bankrupt may use this money to maintain the farm operations rather than make it available to unsecured debt owed under “the plan” after a 10% trustee fee.

In re Welch U. S. Dist. Ct. S.D. Ohio ‘87

• Action? • To dismiss from Ch. 12 Bankruptcy.• Issue?• Are the bankrupts as a married couple eligible for

Chapter 12?• Facts: In Dec. ‘86 James, and in Jan. ‘87, Betty

Welch filed for bankruptcy independently, and then filed a joint plan under Chap.12

• -- Major creditors, FCS and FLB both filed motions to dismiss.

In re Welch

Holding: Creditors’ motions to dismiss are denied.• -- The court analyzed the creditors’ attempt to

show that the components of James Welch’s income were not from farming in 1986.

• -- 1986 is the “income test” year -- the year before the Chapter 12 filing which was in 1987.

• -- Court said the, share of “milk check,” government payments, as well as what appeared to be cash rent all should count!

• Students- “Keep your eye” on cash rent!

Chapter 12 Eligibility Dilemma

• Note, like the Welch case, the problem presented in financial stress situations, is the farmer in financial stress often cuts back his farming activity in an effort improve financially,

• -- takes an off-farm job• -- rents out his land, and sells his livestock and

equipment.• Thus, when bankruptcy is a necessary option, to keep

the land, Ch.12 may not be available because “debtor” has abandoned an active “farmer” status and fail the 50% gross income test in the prior year. 2005 Act may help with this dilemma since 2nd and 3rd prior years may be considered for the 50% test.

• “Rule:” Plan carefully when in financial stress!

Mary Freese Farms, Inc.U.S. Bankruptcy Ct. N.D. Iowa ‘87

Action? • To bar or dismiss Freese Corp. from Ch. 12 • Issue?• Is Freese eligible for Chap. 12• Facts: Baxter and Mary Freese, and children

own the stock in a farm corporation.

Mary Freese Farms, Inc.

• They meet the % tests of Chapter 12

• but, their two mortgaged farms are cash rented.

• No member of the family had farmed any of the land for several years.

• They own no equip., mach. or livestock,

• and there was no evidence they planned to change their involvement.

Mary Freese Farms, Inc.

• Holding: Farming operation is defined in 11 U.S.C. 101(20) to include “farming, tillage of soil, dairy farming, ranching, production or raising of crops, …”-- for lack of rulings on this point, they look to other cases

that point to “risk-taking” as being a factor in “farming.”

• Rule: A crop-share lease would constitute risk- taking behavior.

Shared Appreciation Mortgage*

• The interest rate is reduced depending on how much of the property's appreciation you bargain away. For example:

• Standard 30 Year Fixed Rate Mortgage: 8.00%SAM w/20% Appreciation given to investor: 7.50%SAM w/30% Appreciation given to investor: 7.00%SAM w/40% Appreciation given to investor: 6.50%SAM w/50% Appreciation given to investor: 6.00%

• *In fact, by the end of the 80’s the farm credit lenders were essentially compelled to “restructure” farmers with bankruptcy potential and provide essentially a mark down in debt to repay like a Chap. 12 but save the expense and stigma of a Chap. 12, but SAMs were part of the deal.

• At the expiration of these SAM agreements the farmer debtor often could not show the he or she could finance the amount added to the debt from the SAM agreement, and may have been forced to cease business.

Shared Appreciation Agreements-- Restructured Loans --

• An SAA is a contract between FmHA/FSA and the borrower in which the borrower promises to pay a certain amount of money in the future if the property securing the agreement increases in value, allowing FmHA/FSA to "recapture" all or a portion of the write-down amount.

• See: http://www.flaginc.org/saa/saa.htm• At that site you can find lots of info on SAAs.

Shared Appreciation Agreements-- Restructure Agreeements --

• As of late 1988, whenever a farm loan borrower receives a write-down of debt owed to the Farmers Home Administration (FmHA) - now the Farm Service Agency (FSA) - the borrower must sign a Shared Appreciation Agreement (SAA). At the same time, the borrower usually also signs a mortgage or other security agreement securing the SAA.

• E.g., 10 years after the initial SAAs agreement, the borrowers were required to add a part of the appreciation to their debt—add it to the principle, or pay over the amount– agreed share.

Shared Appreciation Agreements-- Restructure Agreeements --

• FSA regulations list a number of "trigger" events that require payment under the SAA:

• 1. Transfer of security property (other than to spouse upon death of the borrower).

• 2. You stop farming and stop receiving farm income, including lease income.

• 3. You pay the debt in full. • 4. Acceleration of the written-down debt. [This trigger

was added on March 10, 1998.] • If none of these trigger events occur within ten years

after the write-down, the SAA will "expire" on the ten-year date. (Beginning August 18, 2000, the maximum term for all new SAAs is five years.)

Indiana Farmland Lease Law—Chapter 15--Overview

• A lease or rental arrangement is a contract.• Oral leases for Indiana farming are “valid!”

– Written leases are a good business practice, and common place for most acreages.

• Indiana has a “three month” “notice to quit” statute.• Term leases are for a set (stated) time period.• Term leases require no notice to quit!• Landowner (landlord) involvement in the farm

operation matters for federal income, estate, and social security tax purposes.

• A UCC type (consensual) lien may be a good idea.

Farm Tenancy• At least 50% of the farm cropland is not owner-

operated.• Alternative landowner operator/worker

relationships:• -- Employer-employee• -- Independent contractor (custom operator)• -- A partnership!!• -- A tenancy (landlord-tenant)• -- A lease or rental arrangement or ….

The document is critical.• --- But, actions may overcome words!

Indiana Farmland Leases

• Writing requirement?• -- Oral leases are valid as an exception to the

statute of frauds.• Notice to Quit (lease termination)• without other provisions, 3 months advance

before the end of the “lease year”• none needed for a “term” leases!• At least one Indiana trial court has held a term

lease may be oral.