Class #31, Nov. 1, 2002

Chapter 13 - Ag Credit, Finance and Bankruptcy

Part II Next Class Case Recitation U.S. v. Ellis --- Scott Priebe&Cale Russler First Nat’l --- Donald Shoemaker & Lee Stanish Northeast Chick – Eliz. Sturgeon&Mike Veld Lisco State Bank – Betsy Willwock & Richard Dobbyn

Case AssignmentsMonday Nov. 4

Case StudentGretna St. Bank -- Andrew Eller& Nathan FleckExchange Bank -- Chris. Geswein & Luke Harrison In Re Welch-- Ryan Holtkamp&Gretchen Humphrey In Re Mary Freese–Joshua Johnson& Kyle Kuehnert

Types of Credit

Types of Credit -- Short-Term Credit

working capital, term 1-3 years -- Intermediate Credit,

equipment, machinery, farm improvements, term 3-7 years

-- Long-Term Credit land, major building, and land improvements

Ag Institutional lenders

-- Commercial banks ---- Short and intermediate term, a little long term -- Insurance Companies --- Long term credit -- Farm Credit System --- began with the Federal Land Bank in 1916 ---- FLB started with Federal Govn’t capital, but

was repaid, and became farmer owned.

Sources of Credit for Ag

Financial crisis in ‘80s brought an infusion of fed funds, and reorganization of farm credit agencies

Farm Credit System Reorganization FLBs and Intermediate Credit Banks were

merged to form a single Farm Credit Bank Now, FCS (Farm Credit Service) exist.

Direct USDA Lending -- Farmer’s Home Administration

A USDA Agency providing supervised credit, historically

--- but, mainly guaranteed loans now --- for “worthy” farmers who are unable to get

credit elsewhere. Note, the losses FHA took in the paper on Indiana

Ch. 12 bankruptcy study in the late 80’s.

Direct USDA Lending

Farmers are still facing restructured shared appreciation agreements which if and when they are enforced could mean failure to at least a few farmers. If the debtor/farmer can’t at least service an extra

increment to his or her debt, they may be forced to foreclosure!

They provides rural housing loans, rural community development loans.

Direct USDA Lending

Commodity Credit Corporation (CCC) price support loans for farmers since the mid-30s. CCC handles storage and disposal of

accumulated stocks from non-recourse loans. Rural Electrification Administration makes 100 % loans on up to 35 years for electrical and

telephone services.

Non-institutional Lenders

Private individuals are a major source of credit

-- especially within families -- often for installment sales of farmland Manufacturers, Dealers, and Ag Companies -- Machinery, seed, ...

The Loan Agreement

Promissory notes, written promise to repay --- demand note --- installment note --- open-ended note for a line of credit Aspects of the note ---- amount, of course

The Loan Agreement

More aspects of the note: ---- interest rate, fixed or variable ---- other fees: collateral appraisal fees,

closing costs, loan service fees, legal fees (examine title)

---- beware of repayment terms--to avoid default

---- watch out for the acceleration clause

The Loan Agreement

Acceleration Clauses (ACs) are not favored by the courts. An example is, the “quick foreclosure clause” (strict

forfeiture) in an installment contract. Borrower should soften ACs with a grace period. Borrower will want a prepayment option without penalty. If there is an secondary signatory on the note, they are

primarily liable along with the borrower.

Mortgages

A mortgage is a conveyance of an interest in real property by the mortgagor (borrower) to the mortgagee (lender).

-- on the condition that the transfer is void once the debt is repaid.

Actually, the “title status” of the parties varies by state. --- In “title states,” lenders are deemed to have title while

the debt exists. --- In “lien states,” the debtor has title and the lender

has a lien, Indiana being an example.

Mortgages

If permitted by the terms, the borrower may sell the mortgaged property, but subject to the mortgage

Priority of Lenders The first mortgage holder has priority over all other

creditors, including second and subsequent mortgage holders.

A second mortgage is one where the same real estate is security for a debt as the first or primary mortgage.

-- in a foreclosure, the 2nd takes after the 1st.

Mortgages

The document itself is similar to an installment contract, discussed earlier.

Borrower has many responsibilities and a failure could trigger the acceleration

clause. Issues are, taxes, insurance, assessments …

The Mortgage Instrument

Eminent domain or any other sale proceeds are likely to accrue to the lender/mortgagee.

Thus, lender may have to consent to the transaction and/or the amount in order avert an acceleration

E.g., Selling the house and lot off the farm.

“Deeds of trust” are used in place of mortgages in some states. E.g. Missouri.

Foreclosure --- discretionary action by the lender after the payments are

overdue This is a suit or action that is a request for sale of the property

once the court so orders the property is advertised for sale after the statutory time allowance, there is an auction to the

highest bidder proceeds of sale are applied to the debt

Alternatively, there may be a “deed in lieu of foreclosure”

Redemption

This right permits the borrower to redeem--buy back the land.

There is a time period, set by state law to redeem after the foreclosure sale

-- three months in Indiana, but longer in the past, and in other states.

Redemption

Note, it is an “equity of redemption” that may be allowed under an installment contract if it is requested in a court proceeding where a “strict foreclosure” is provided in a contract.

A farmer (debtor) remains in possession during the redemption period.

(See Figure 13.1 on an overhead.)

United States v. Ellis, U.S. Ct of App., 9th Cir., ‘83

Action: for redemption rights Issue: Does Ellis have redemption rights? Facts: Ellis took FmHA loans, in ‘76’’,77, &’78. Mortgages on the farm secured the loans. Mortgage document waived “state redemption

rights.” On 4 -1- 81 FmHA foreclosed--due $150,000+Interest FmHA got a judgement for a sale of property.

United States v. Ellis

Holding: There are now redemption rights in federal law. The court held there was no grant of state

redemption rights that had been explicitly waived. At the time of the action, Washington state law

had a one year redemption right.