Resolving distressed agricultural loans in Missouri
Vol. 78, No. 3 / May - June 2022
Michael D. Fielding
Michael D. Fielding is a partner in the Food & Agribusiness unit of Husch Blackwell LLP in Kansas City who focuses his practice on helping clients successfully resolve distressed agricultural and commercial loans. Listed in the 2021 and 2022 editions of Best Lawyers in America, he has been named multiple times as a “Best of the Bar” honoree by the Kansas City Business Journal. He is licensed in Missouri, Kansas, Iowa, and Utah and is board certified in business bankruptcy by the American Board of Certification. Michael currently serves as president of the Ag Law Section of the Kansas Bar Association.
Agriculture is a key component of Missouri’s economy.2 According to the Missouri Department of Agriculture, Missouri has 95,000 farms (second in the nation), with an average of 291 acres.3 Nearly 28 million acres in the state are devoted to farmland, and agriculture employs approximately 460,000 people throughout the state.4
Nationwide, Missouri is in the top 10 states for production of hay, rice, soybeans, cotton, corn, beef cows, goats, turkeys, hogs, broiler chickens, horses, and ponies.5 Clearly, agriculture is critically important to Missouri.
Despite its seemingly idyllic nature, farming is not an easy profession. Constantly fluctuating market prices and weather conditions coupled with increasing input costs and extremely thin margins in the ever increasingly competitive global marketplace put Missouri producers under constant financial stress. Given the inflationary pressures facing the U.S. economy and expected interest rate hikes, it is likely that the coming years will see an uptick in distressed farm loans. Unfortunately, it would take a lengthy book to adequately address in sufficient detail the myriad of legal challenges that arise when producers suffer financial setbacks. Rather, this article is intended to identify high-level, key issues that practitioners should have in mind when seeking to resolve a distressed agricultural loan. By understanding how the individual building blocks work, lawyers will be more empowered to craft resolutions that are likely to succeed based on the unique circumstances of their individual clients.
Loan workouts present an opportunity for both the lender and borrower to resolve past mistakes and create a more sustainable path for full loan performance. The first step in this process is a review of the loan file — i.e., determining whether the underlying loan documents are free of any drafting errors and if they were properly signed. What are lenders considering when they do this? Lenders want to verify that deeds of trust and Uniform Commercial Code financing statements were properly filed to perfect their liens. Lenders may obtain real estate title reports; search UCC filings; and look for state and federal tax liens and judgment liens to determine the priority of their liens vis-à-vis other creditors. Lenders will want to verify that federal government payments have been properly assigned to them and that they are named as the loss payee on crop insurance policies. Lenders will also want to verify that any Notices of Security Interest under the Food Security Act have been properly and timely issued. If a lender determines that a possible substantive error exists with the underlying loan documents, then the lender may use the workout negotiations to correct the deficiency.
The underlying collateral will play a major role in how a lender approaches a distressed loan workout. The major classes of agricultural-related collateral include agricultural products (i.e., crops and livestock); agricultural inputs (e.g., seed, fertilizer, weed killer, animal feed, animal health products, etc.); non-titled farm equipment; titled vehicles and trailers; real estate (including mineral and water rights associated with the land); and general intangibles (e.g., rights to government payments, rights to crop insurance payments, etc.). The lender will want to know the estimated value, quality, and current condition of each of these different classes. Lenders will gather information about the collateral in multiple ways including appraisals, onsite visits, requesting business records from the borrower, and obtaining updated personal financial statements. Because the vast majority of farm collateral is both fungible and moveable, lenders will be keenly interested in confirming that appropriate safeguards are in place to prevent the concealment of assets or sale without remittance of the funds to the lender. Lenders are most likely to take aggressive action where the collateral is at risk of disappearance or significant depreciation (e.g., a herd or crop that is not being properly maintained by the producer).
As a practical matter — and provided that no major loan defaults have occurred and the trust level with the borrower is still good — many lenders prefer some sort of consensual workout rather than forced liquidation of collateral or the initiation of legal proceedings. But borrowers should not think that a lender’s initial inclination toward a workout means the borrower will get a free pass. It is a relatively rare event that a well-performing producer is hit so hard by life’s unfortunate circumstances that he or she is forced into a loan workout. Rather, the much more common scenario is one where the producer has some underlying problems (e.g., poor record management, inefficient production methods, poor cost control, etc.) which puts them on shaky financial ground when hit with a life storm. Producers such as that should realize that a loan workout will of necessity require that they make core, substantive changes to improve their operations. The table below identifies different options for both borrowers and lenders in a distressed agricultural loan situation.
Table: Distressed Loan Workout Options
|Additional collateral pledge||Amend or extend loan documents|
|Additional guaranties||Forbearance agreement|
|Liquidation or turnover of collateral||Non-judicial foreclosure of real and personal property|
|Refinance||Initiate legal action|
|Bankruptcy (Chapter 7, 11, or 12)||Seek the appointment of a receiver|
Government payments, crop insurance, and other federal liens
Given their pervasiveness and critical role in farming, it is essential that practitioners understand the mechanics of lien rights in governmental payments and crop insurance. Under the Uniform Commercial Code governmental payments are general intangibles which are perfected under state law through the traditional means of a security agreement and a UCC-1 financing statement filing with the Missouri Secretary of State. But standing alone, this practice is insufficient to fully protect the lender’s lien rights as the federal government does not review those state filings. To protect its interest, the lender must comply with the Assignment of Claim Act.6 This means the producer must fill out paperwork at the local Farm Service Agency, assigning the government payments to the lender. If the documentation is not completed, then the federal government will simply remit the payment to the producer.
Because crop insurance is governed by the Federal Crop Insurance Act,7 a standard security agreement and UCC filing also will be insufficient to fully protect the lender’s interest in the crop insurance proceeds, even though they too constitute general intangibles under state law. Federal law takes priority if a lender tries to get proceeds of crop insurance from the Federal Crop Insurance Corporation or one of its agents.8 But this preemptive effect ends once the producer receives the proceeds and state law again becomes controlling.9 Similar to governmental payments, a lender’s lien in crop insurance proceeds is obtained by having the borrower/producer complete an assignment of insurance proceeds form from the crop insurer. But even if a lender fails to obtain that assignment, the lender can still become perfected in the proceeds once they are deposited into the borrower’s account, provided that the lender has a security agreement covering the deposit account.10 Borrowers may attempt to avoid this result by depositing the funds at another financial institution. But they do so at their own peril as such actions are viewed very negatively by lenders who, in turn, will take appropriate steps to protect their interests.
Another federal statute impacting distressed farm loans is the Perishable Agricultural Commodities Act,11 which protects the sellers of unprocessed produce. PACA imposes a floating trust on the assets of the produce buyer which will trump even a lender’s lien. Parties that are paid with PACA trust funds (including lenders who receive payment on secured debt obligations) can be required to disgorge the funds they received. Similar to PACA, the Packers and Stockyards Act12 impacts buyers of livestock. The PSA protects sellers of livestock, livestock products, and poultry. The PSA also imposes a floating trust on the assets of buyers which trumps interest of other creditors (including secured lenders).
In resolving distressed agricultural loans, one must determine whether there are any priority federal tax liens.13 To take priority over a lender, the IRS must file a Notice of Federal Tax Lien. A lender’s lien can trump a tax lien in two situations. Under the 45-day Disbursement Rule, three elements must be met: (1) the lender must fully perfect before the issuance of the NFTL; (2) any disbursement made within 45 days after the NFTL is filed must be done without notice of the NFTL’s existence; and (3) the lender’s lien will only attach to the borrower’s property owned when the NFTL is filed.14 The second situation (45-day commercial transaction financing) has four components: (1) the taxpayer must acquire the property within 45 days of the NFTL filing; (2) the lender must not have notice of the NFTL; (3) the loan was made as part of the borrower’s ordinary course of business; and (4) the collateral must fall within certain specified categories (e.g., raw materials, inventory, accounts receivable, etc.).15 Conversely, if the lender knows of the NFTL or if the borrower acquires the property more than 45 days after the NFTL is filed, then the IRS will take priority.
Farm personal property
General UCC provisions
The law regarding liens in personal property used in farming operations is no different than that which applies to non-farming commercial personal property. A security interest will attach to the farm-related personal property when (1) value is given; (2) the borrower has rights in the collateral; and (3) the security agreement describes the collateral.16 A “description of personal or real property is sufficient, whether or not it is specific, if it reasonably identifies what is described.”17 “[A] description of collateral reasonably identifies the collateral if it identifies the collateral by: … (2) category … [or] … any other method, if the identity of the collateral is objectively determinable.”18 Generally a lien in personal property is perfected by the filing of a financing statement19 but perfection in titled vehicles is accomplished through a filing with the Missouri Department of Revenue.20 Perfection in proceeds of collateral is governed by § 400.9-315, RSMo. Generally speaking, the entity that is either first to file its financing statement or first to perfect its lien will be in a senior position.21 But a financier who obtains a purchase money security interest will trump a pre-existing lender with a blanket lien.22 Some types of collateral require control for priority purposes (the most noteworthy being deposit accounts).23
Agricultural liens vs. traditional personal property liens
A question that arises in distressed debt settings is whether an entity with an agricultural lien takes priority over a lender with a traditional lien in the borrower’s assets. An “agricultural lien” is a lien that arises by operation of law (and is not contingent on the lienholder’s possession of personal property) for either goods or services provided in connection with a debtor’s farming operation or leasing real property in connection with a farming operation.24 Examples of agricultural liens include25 those for trespassing livestock,26 liens by governmental entities for control of weeds and pests,27 agisters liens,28 and landlord’s liens on crops for rent.29 To be safe and avoid possibly contentious litigation, entities claiming an agricultural lien in a debtor’s assets should comply with the requirements outlined in UCC Article 9 regarding perfection, priority, and enforcement of their liens.30
The UCC’s farm products exception
Practitioners dealing with distressed agricultural loans need to have a solid understanding regarding the interrelationship of state and federal law on liens in farm products due to the conflicting treatment that is given to them under the federal Food Security Act31 and the UCC. As a threshold matter, the “FSA is not meant to preempt or interfere with other provisions of the U.C.C. regarding the creation, perfection, and priority of security interests.”32 However, the FSA does preempt the “farm products” exception found in the UCC.33
Both the FSA and UCC define the term “farm products” in a similar manner. Specifically, the UCC definition is “goods … with respect to which the debtor is engaged in a farming operation and which are [c]rops grown, growing, or to be grown … livestock, born or unborn … supplies used or produced in a farming operation; or products of crops or livestock in their unmanufactured states.”34 Similarly, the FSA’s definition of that term includes “an agricultural commodity such as wheat, corn, soybeans, or a species of livestock such as cattle, hogs, sheep, horses, or poultry used or produced in farming operations, or a product of such crop or livestock in its unmanufactured state (such as ginned cotton, wool-clip, maple syrup, milk, and eggs), that is in the possession of a person engaged in farming operations.”35
But despite the similar definitions, the two statutory schemes treat liens in farm products very differently. Under the UCC, a lien in farm products will continue in those goods even following an ordinary course sale by the producer.36 Conversely, the FSA’s general rule is that “a buyer who in the ordinary course of business buys a farm product from a seller engaged in farming operations shall take free of a security interest created by the seller, even though the security interest is perfected; and the buyer knows of the existence of such interest.”37 Significantly, however, the FSA has a major exception to this general rule. Specifically, the entity who purchases the farm products will take those goods subject to the lender’s lien if, within one year “before the sale of the farm products, the buyer has received from the secured party or the seller written notice of the security interest organized according to farm products” which contains the secured party’s name and address; debtor’s name and address; the debtor’s social security number or taxpayer identification number; and “a description of the farm products subject to the security interest created by the debtor, including the amount of such products where applicable, crop year, and the name of each county … in which the farm products are produced or located.”38
There are several practical points from these rules. First, if a lender fails to timely re-issue its notice of security interest each year, then the lender will lose its lien in the farm products once they are sold. But if a lender timely issues its notice but the buyer fails to jointly remit the proceeds to the lender and borrower, the lender can pursue a claim against the buyer.39 Because Missouri has not adopted a centralized filing system with respect to the FSA, borrowers have an incentive to travel great distances to find a buyer that has not received a notice of security interest such that the borrower may simply pocket the sales proceeds. While the borrower may benefit from this “out-of-trust” sale in the short-term, it will be an event of default under the applicable loan documents and create grounds for the lender to take more aggressive action against the borrower.40
Liquidation of personal property collateral
Secured creditors can use both nonjudicial and judicial remedies to enforce their security interests.41 Non-judicial remedies include a turnover notification to an account debtor,42 set-off of a deposit account,43 or reposes the collateral or render it unusable.44 In taking these actions, a secured party must take care not to “breach the peace.”45 “After default, a secured party may sell, lease, license, or otherwise dispose of any or all of the collateral in its present condition or following any commercially reasonable preparation or processing.”46 But all parts of the liquidation of the collateral must be “commercially reasonable.”47 The collateral can be sold privately or publicly,48 but there must be timely notice of the sale.49 The secured creditor can also accept the collateral in full or partial satisfaction of the indebtedness owed.50
While judicial foreclosure proceedings are allowed in Missouri, the vast majority of foreclosures are done through non-judicial foreclosure, whereby foreclosure of real estate occurs without a legal proceeding being filed (i.e., foreclosure of a deed-of-trust). Missouri lawyers must act swiftly because non-judicial foreclosures can be accomplished in just a matter of weeks. The workout options in those situations include attempting a resolution before publication notice of the foreclosure begins, attempting to obtain a judicial injunction of the sale (assuming grounds exist to do so), or attempting to judicially challenge the sale once it has been completed.
Lawyers representing distressed agricultural borrowers should remember that the right of redemption is a statutory right allowing landowners and lien creditors to redeem the property for a period of time following foreclosure of the property. Missouri’s right of redemption is straightforward. The borrower must give notice of its intention to redeem at the time of foreclosure auction or within 10 days before the sale. Thereafter it must, within the following year, pay all indebtedness secured by the deed of trust along with taxes, legal fees, and costs.51
Receivers can be appointed for agricultural lenders in both state and federal courts.52 In 2016, Missouri adopted the Missouri Commercial Receivership Act that applies to farm receiverships.53 The appointment of a receiver under the MCRA results in the imposition of a stay akin to the Bankruptcy Code’s automatic stay.54 Indeed, the MCRA is very similar to Chapter 7 of the Bankruptcy Code and lays out a very detailed and broad statutory framework governing the receiver’s rights and authorities including the right to assert claims and pursue actions under the Uniform Fraudulent Transfer Act;55 subpoena documents and conduct examinations under oath;56 use, sell, and lease property (including sales free and clear of liens);57 assume or reject contracts and leases;58 incur additional debt on behalf of the receivership estate;59 and abandon property.60 Critically, however, the MCRA has one key limitation with respect to farm receiverships: a receiver cannot sell real estate used principally in the production of crops or livestock if the owner has not consented to the sale.61
There are two types of receivers. A general receiver is appointed over all of the borrower’s assets and has very broad powers.62 A limited (or special) receiver is appointed over a limited class of assets and whose power will be confined to matters relating to those items.63 The type of receiver that is appointed will depend on the particular facts and circumstances of each case. The grounds to seek the appointment of a receiver may be based on a contract64 or statute. The MCRA identifies 14 different grounds for the appointment of a receiver, including dissolution of an entity, appointment over a revenue producing asset subject to a lien, assistance in collecting a judgment, prevention of waste, impairment or destruction of property, or prevention of irreparable harm.65
Receiverships have both benefits and expenses. Benefits include taking away control of the borrower’s assets and putting them into the hands of a third-party fiduciary, the prevention of wasting or mismanagement of the borrower’s assets, and creating a structure for an orderly liquidation of a borrower’s assets. Receiverships can be costly, though. A receiver’s bond must be posted, creating an additional cost to the loan.66 Receivers frequently engage their own counsel to represent them, resulting in administrative costs of both the receiver and his or her lawyer. Borrowers or other creditors may actively oppose the receiver’s efforts, thereby prolonging the matter and creating substantial costs for the receivership estate which, in turn, adversely impacts the amount of funds that can be distributed to creditors.
It is critical to note that the MCRA subordinates the claims of the secured lender who seeks the appointment of a receiver to administrative expense claims that occur in the case.67 This structure gives leverage to borrowers, other lienholders, and unsecured creditors. Specifically, the lender who seeks the appointment of a receiver will desire a fast and expeditious receivership proceeding to minimize administrative expense claims and maximize its own recovery. Other creditors can thwart this benefit by filing various motions challenging the receiver’s actions, resulting in higher administrative expense claims. While the opposition posed by these creditors may be legally weak, the lender who moved for the appointment of the receiver will have an incentive to compromise to minimize the costs of administration, thereby providing a potential windfall to other creditors. Furthermore, even though receivers have a fiduciary obligation to act in the best interests of the estate, the structure created by the MCRA creates an incentive for the receiver and its counsel to litigate every motion that is filed because doing so increases the fees of the receiver and its counsel.
Receivers appointed in federal proceedings are to manage the receivership estate according to the state law of the forum where the property is located.68 While the Federal Rules of Civil Procedure apply to the receivership case, the federal rule makes it clear the administration of the estate “must accord with the historical practice in federal courts or with a local rule.”69 The Local Rules for the U.S. District Court for the Western District of Missouri have some additional requirements for receivers,70 while the Local Rules for the Eastern District of Missouri do not have any provision that supplements Rule 66.71 The applicable federal and local procedural rules do not allow litigants or receivers to override express statutory frameworks, because the federal courts’ equitable powers are “subject to express and implied statutory limitations.”72 “Courts of equity can no more disregard statutory and constitutional requirements and provisions than can courts of law.”73 Plainly stated, a court’s equitable powers cannot trump specific statutory provisions.74
Missouri farmers frequently have multiple secured creditors. Oftentimes this includes a bank with a blanket lien on all assets, plus other secured creditors with liens in specific pieces of collateral. As the borrower’s available funds become limited, it is not uncommon to see defaults on various debt obligations which, in turn, leads to enforcement actions. When this occurs, does one lender’s enforcement of its rights (which necessarily may result in financial detriment to another lender) give rise to a cause of action for the harm suffered?
A lender does not typically owe a fiduciary duty to its borrower. Rather, the general rule is that “the relationship between a bank and its depositor involves a contractual relationship between a debtor and a creditor.”75 Furthermore, a breach of contract in and of itself does not create tort liability.76 But what happens when the actions of one lender, in enforcing its rights against a borrower, results in the borrower breaching its contract with a second lender? Does that give the second lender a tortious interference claim against the first lender?
In Missouri “a claim for tortious interference with a contract or business expectancy requires proof of each of the following: ‘(1) a contract or valid business expectancy; (2) defendant’s knowledge of the contract or relationship; (3) a breach induced or caused by defendant’s intentional interference; (4) absence of justification; and (5) damages.’”77 The “justification” element is crucial. A party “is justified in interfering with another's business expectancy for the purpose of protecting his own economic interest as long as [that party] does not employ improper means.” 78 “Justification [for a party’s actions] exists if [that party] has an unqualified legal right to do the action of which the [other] complains.”79 Significantly, Missouri courts do not recognize a cause of action for intentional interference with another’s performance of his or her own contract.80 In short, “[i]is simply not tortious for a commercial lender to lend money, take collateral, or to foreclose on collateral when a debt is not paid.”81
Despite the fact that feuding lenders cannot assert tort claims against one another, that does not mean there will not be a dispute. Competing secured lenders will closely examine one another’s loan documents to verify perfection and scope of liens. Subordinate lenders may attempt to leverage their positions by challenging the senior secured lender through motion practice or other means to extract settlement value from the senior lender so the parties do not get stuck in prolonged litigation which simply results in higher attorney’s fees and greater interest through prolonged delay in repaying indebtedness. Wise lenders will seek to mitigate these potential problems by seeking lien subordination agreements at the outset of the loan.
Chapter 12 farm bankruptcies
Farmers struggling with high debt loads may look to federal bankruptcy law for protection. But in doing so, they should keep in mind that bankruptcy is not a perfect panacea to their problems and may not always work for them. Chapter 12 of the Bankruptcy Code was specifically enacted for farmers. Critically, however, if the debtor’s total debts exceed $10 million, they will be ineligible for Chapter 12 and the only bankruptcy recourse will be the more costly and time-consuming process of Chapter 11.82
Only “family farmers” with regular annual income can file for Chapter 12.83 A family farmer with regular annual income is someone “whose annual income is sufficiently stable and regular to enable such family farmer to make payments under a plan under chapter 12 of this title.”84 Individuals or companies can qualify as “family farmers.”85 For individuals, at least 50% of the debt must relate to farming operations, and at least 50% of their income must have come from farming.86 To qualify as a “family farmer,” a corporate entity must be at least 50% owned by a family or relatives that conduct the farming operation.87 Additionally, over 80% of its assets must be related to the farming operation, and at least 50% of its debts must stem from the farming operation.88 The term “farming operation” is broadly defined and “includes farming, tillage of the soil, dairy farming, ranching, production or raising of crops, poultry, or livestock, and production of poultry or livestock products in an unmanufactured state.”89
Chapter 12 bankruptcies offer several benefits to debtors, including retention of estate property;90 modification of liens on real or personal property;91 bifurcation of undersecured debts into secured and unsecured claims;92 binding of all creditors to a confirmed plan whether the creditor agreed or disagreed with it;93 no requirement to pay US Trustee fees;94 and no absolute priority rule requirement such as that found in Chapter 11.95 Additionally, a bankruptcy filing immediately triggers an automatic stay, prohibiting further debt collection efforts by creditors.96 It also allows debtors to restructure terms of debt repayment,97 and it allows sales of assets free and clear of liens.98 Chapter 12 plans range from three to five years99 (but payments on long-term secured debt can be extended beyond that time).100 A major benefit of Chapter 12 that is not available in Chapter 11 is the ability of a farmer to sell appreciated farm ground and discharge the large tax claims attributable to the sale.101
But bankruptcy is not without its risks. As a practical matter, if a farmer cannot cash-flow their operations while in bankruptcy, it is highly unlikely that either (a) the farmer’s plan of reorganization will be successful or (b) the farmer will be able to complete the plan payments and obtain a bankruptcy discharge. Furthermore, the debtor must seek court approval for non-ordinary course transactions.102 The bankruptcy filing will not stop lease payment obligations.103 A debtor’s bankruptcy filing does not absolve a guarantor of liability and instead will sharpen the lender’s focus on the guarantor as a source of debt repayment. Bankruptcy can also be very expensive — particularly the longer the case drags on. Debtors are obligated to pay the attorney’s fees and costs of their oversecured creditors.104
As one contemplates bankruptcy, consider findings from academic research which has revealed three key factors that are predictive whether a debtor will seek bankruptcy protection: (1) debtor’s debt level, (2) availability of cash in the short-term, and (3) whether the debtor can coordinate with its various creditors.105 Consequently, a lender’s actions — whether intentional or unintentional — can increase or decrease the likelihood of a bankruptcy filing depending on how they impact these three factors.106
To increase the odds of a successful outcome in bankruptcy, wise debtors will make critical preparations prior to filing to minimize the time and cost of bankruptcy while maximizing the probability of a successful outcome. A key factor for any large bankruptcy is the debtor’s ability to get debtor-in-possession financing,107 because debtors with DIP financing are more likely to successfully emerge from the bankruptcy.108 Debtors with DIP financing also tend to have shorter bankruptcies.109 Consequently, if the debtor can propose a plan of reorganization which remains unchanged but which sheds unsecured debt, a lender may be willing to proceed with DIP financing so the debtor will emerge stronger and better able to fulfill commitments to secured creditors.
To confirm a plan, a “[d]ebtor must establish all six elements contained in section 1225 of the Bankruptcy Code in order to have a plan confirmed.”110 “If the debtor fails to establish any one of the six elements in § 1225, then the court must deny confirmation of the plan.”111 Section 1225(a)(1) requires that a proposed plan comply with all provisions of Chapter 12112 that, in turn, requires that the debtor satisfy the requirements of 11 U.S.C. § 1222 which identifies the required plan contents. Section 1225(a)(2) requires the debtor be able to pay all administrative expense and propriety claims.113 If the debtor cannot cashflow in Chapter 12 (and thus cannot satisfy these priority claims), then its plan cannot be confirmed.
A Chapter 12 debtor must propose its plan in good faith,114 determined on the unique facts of each case.115 Good faith “turns on an examination of the totality of the circumstances surrounding the plan and the bankruptcy filing.”116 “The court must focus on factors such as whether the debtor has stated debts and expenses accurately; whether the debtor has made any fraudulent misrepresentation to mislead the bankruptcy court; or whether the debtor has unfairly manipulated the Bankruptcy Code.”117 “The filing of a bankruptcy petition without the intent or ability to properly reorganize is an abuse of the Bankruptcy Code[,]” which may require dismissal of the case because good faith is lacking.118
Under the best interests of creditors test, the debtor must show that its creditors will get more under the Chapter 12 plan than they would if the case were liquidated under Chapter 7.119 This test is considered as of the plan’s anticipated effective date.120
Chapter 12 allows secured claims to be treated in three different ways for purposes of plan confirmation.121 First, the lienholder can simply accept the plan and the proposed treatment.122 Second, the secured creditor may retain its lien with the payment of its secured claim over some specified period of time.123 Finally, the debtor can surrender the collateral to the creditor.124
Finally, to confirm a plan, the debtor must show that it “will be able to make all payments under the plan and to comply with the plan.”125 This feasibility test is a fact question.126 “The feasibility standard requires the Court to determine whether the plan offers a reasonable prospect of success and is workable.”127 The feasibility test “‘injects pragmatism into the confirmation process by prohibiting confirmation of overly optimistic reorganization plans clearly destined to fail and by not belaboring the inevitable demise of a hopelessly insolvent debtor.’”128
The debtor has the burden of proof on feasibility.129 “Sincerity, honesty and willingness are not sufficient to make the plan feasible, and neither are any visionary promises.”130 Rather, “feasibility must be based on objective facts, not mere wishful thinking or pipe dreams.”131 The debtor’s income and expense projections are considered in conjunction with their actual past performance.132 “Debtors’ historical yields constitute the best evidence of the reliability of their plans’ projection of production.”133 Feasibility will not be established if the debtor’s cash flow projection is unsupported by past performance.134 “In short, the court must be persuaded that it is probable that a plan will be able to cash flow, not merely technically possible for it to do so.”135
If unsecured creditors object to a proposed Chapter 12 plan, then, in order to confirm it, the debtor must “contribute for the benefit of unsecured creditors, at a minimum, all ‘disposable income.’”136 “[T]he disposable income requirement does not require that there be a specific sum for unsecured claims; rather, the debtor’s plan must commit disposable income to plan payments for the period of the plan, based on projections made at the time of confirmation.”137 “Thus, at the confirmation stage, the plan must promise payment of all projected disposable income, and in so doing, provide a projection of disposable income.”138
It is critical to recognize that “disposable income” has a flexible definition. It is defined as “income which is received by the debtor and which is not reasonably necessary to be expended (A) for the maintenance or support of the debtor or a dependent of the debtor; or (B) for the payment of expenditures necessary for the continuation, preservation, and operation of the debtor’s business.”139 “The determination of what constitutes disposable income is a fact-intensive inquiry into whether debtor has ‘income which is in excess of that reasonably required for maintenance and continuation of [its] farming operation from one year to the next.’”140 Disposable income cannot be substantiated based on a back-of-the-envelope, rough estimation calculation. Indeed, “[u]ndocumented numbers or mere estimates of past years’ income and expenses will not be accepted. Projections of income and expenses offered to show the funds needed to continue the operation (such as seed and fertilizer for the coming crop year) must be grounded on historical figures.”141
Debtors who complete their required plan payments will obtain their bankruptcy discharges, which discharges the debtor “from all debts provided for by the plan,” but is subject to the same exceptions as a Chapter 7 discharge.142 For example, domestic support obligations will not be discharged.143 But the debt discharge does not automatically extend to all debts. Creditors must file adversary proceedings in the bankruptcy proceeding seeking denial of certain types of debts.144 The most common classes for seeking denial of discharge for specific debts are: (1) money or property obtained by false pretenses where the consideration was obtained by use of a writing that was materially false;145 (2) “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;”146 or (3) “for willful and malicious injury by the debtor to another entity or to the property of another entity.”147 This last category includes claims for “out-of-trust” sales if the debtor did so willfully and maliciously.148 Consequently, a borrower who, prior to bankruptcy, engaged in out-of-trust sales may face a claim in bankruptcy seeking to deny from discharge the debt associated with those sales. The better and safer course of action is to simply remit to secured lenders the funds to which they are entitled.
Farming in today’s challenging times is not for the faint of heart. Producers face constantly changing prices driven by global factors, increasing challenges from extreme weather conditions, the ever-present threat of disease to crops and livestock, growing pressures to employ environmentally friendly farming practices, and increasing pressure on profit margins. Complicating these business concerns are the overlaying patchwork of different state and federal laws and regulations. Lawyers who advise farmers in financially difficult situations need to have a solid grasp on the underlying law and options available. Consensual resolutions should always be a top priority as they are typically the least expensive for the producer and optimize the probability of a successful workout.
1 Michael D. Fielding is a partner in the Food & Agribusiness unit of Husch Blackwell LLP in Kansas City who focuses his practice on helping clients successfully resolve distressed agricultural and commercial loans. Listed in the 2021 and 2022 editions of Best Lawyers in America, he has been named multiple times as a “Best of the Bar” honoree by the Kansas City Business Journal. He is licensed in Missouri, Kansas, Iowa, and Utah and is board certified in business bankruptcy by the American Board of Certification. Michael currently serves as president of the Ag Law Section of the Kansas Bar Association.
2 See Missouri Department of Agriculture, Missouri Agriculture at a glance (last visited January 31, 2022), https://agriculture.mo.gov/abd/intmkt/pdf/missouriag.pdf.
6 31 U.S.C. § 3727; 41 U.S.C. § 15.
7 7 U.S.C. § 1501 et seq.
8 In re Cook, 169 F.3d 271, 276 (5th Cir. 1999).
10 “Control” takes priority over proceeds of collateral under Mo. Rev. Stat. § 400.9-327.
11 7 U.S.C.§ 499a et seq.
12 7 U.S.C.§ 181 et seq.
13 See 26 U.S.C. § 6323.
14 26 U.S.C. § 6323(d).
15 26 U.S.C. § 6323(c).
16 Section 400.9-203, RSMo (2016).
17 Section 400.9-108(a), RSMo (2016).
18 Section 400.9-108(b), RSMo (2016).
19 See Sections 400.9-310, 400.9-312, 400.9-502, and 400.9-503, RSMo (2016).
20 Section 400.9-311(a)(2), RSMo (2016); see also Sections 8-135 and 58-4204, RSMo (2016).
21 Section 400.9-322, RSMo (2016).
22 Sections 400.9-103 and 400.9-324, RSMo (2016).
23 Section 400.9-327, RSMo (2016).
24 Section 9-102(5), RSMo (2016).
25 The National Agricultural Law Center has compiled a helpful quick reference of Missouri statutory liens, which can be found at: http://nationalaglawcenter.org/wp-content/uploads/assets/agliens/missouri.pdf (last visited March 1, 2022).
26 Sections 272.010-272.270, RSMo (2016).
27 Sections 263.080, 263.200, and 263.456, RSMo (2016).
28 Sections 430.030-430.060; 430.150-430.165; and 430.170-430.220, RSMo (2016).
29 Sections 441.280 and 441.300, RSMo (2016).
30 Section 400.9-109(a)(2), RSMo (2016).
31 7 U.S.C. § 1631.
32 Battle Creek State Bank v. Preusker, 571 N.W.2d 294, 300 (Neb. 1997).
33 First Nat. Bank and Trust v. Miami County Co-op Ass’n, 897 P.2d 144, 147 (Kan. 1995).
34 Section 400.9-102(34), RSMo (2016).
35 7 U.S.C. § 1631(c)(5).
36 Section 400.9-320(a), RSMo (2016). Once crops are harvested, they are no longer “crops” but rather “farm products” while they remain in the producer’s hands. In re Temple Stephens Co., Inc., 156 B.R. 38, 40 (Bankr. W.D. Mo. 1993).
37 7 U.S.C. § 1631(d).
38 7 U.S.C. § 1631(e).
39 Id; 7 U.S.C. § 1631(g).
40 Parties that participate with borrowers in out-of-trust sales may not be immune from risk. One Missouri court noted that an auctioneer will be liable for conversion if it sells cattle and remits the proceeds to the debtor rather than turning over the proceeds to the secured lender. Ensminger v. Burton, 805 S.W.2d 207 (Mo. App. W.D. 1991).
41 Section 400.9-601, RSMo (2016).
42 Section 400.9-607, RSMo (2016).
43 Section 400.9-607(a)(4), RSMo (2016).
44 Section 400.9-609, RSMo (2016).
46 Section 400.9-610(a), RSMo (2016).
47 Section 400.9-610(b), RSMo (2016).
48 Section 400.9-610(c), RSMo (2016).
49 Section 400.9-611, RSMo (2016).
50 Section 400.9-620, RSMo (2016).
51 Section 443.410, RSMo (2016).
52 See 28 U.S.C §§ 958–959; Fed. R. Civ. P. 66; Section 515.500, RSMo (2016).
53 Sections 515.500-515.665, RSMo (2016).
54 Section 515.575, RSMo (2016).
55 Sections 515.545.1(5)-(6), RSMo (2016).
56 Section 515.545.1(9), RSMo (2016).
57 Sections 515.545.1(10) and 515.645, RSMo (2016).
58 Section 515.585, RSMo (2016).
59 Section 515.590, RSMo (2016).
60 Section 515.640, RSMo (2016).
61 Section 515.645.2(1), RSMo (2016).
62 Section 515.515, RSMo (2016).
64 This occurs, for example, when a breach of contract has occurred and a contractual remedy for the breach is the appointment of a receiver. These types of provisions are extremely common in loan documents.
65 Section 515.510.1, RSMo (2016).
66 Section 515.530, RSMo (2016).
67 Section 515.625.1(2), RSMo (2016).
68 28 U.S.C. § 959(b) (A “receiver … appointed in any cause pending in any court of the United States … shall manage and operate the property in his possession as such trustee, receiver or manager according to the requirements of the valid laws of the State in which such property is situated …”).
69 Fed. R. Civ. P. 66.
70 See W.D. Mo. Local Rule 66.1.
71 See E.D. Mo. Local Rules.
72 Armstrong v. Exceptional Child Ctr., Inc., 575 U.S. 320, 1385 (2015).
73 Id. (quoting I.N.S. v. Pangilinan, 486 U.S. 875, 883 (1988)).
74 Law v. Siegel, 571 U.S. 415, 421 (2014) (holding court could not use its equitable powers under 11 U.S.C. § 105(a) to contravene specific provisions of Bankruptcy Code).
75Wood & Huston Bank v. Malan, 815 S.W.2d 454, 458 (Mo. App. W.D. 1991).
76 Sakabu v. Regency Const. Co., Inc., 392 S.W.3d 494, 499 (Mo. App. E.D. 2012); Ryann Spencer Group, Inc. v. Assurance Co. of America, 275 S.W.3d 284, 290 (Mo. App. E.D. 2008); Chrysler Financial Co.L.L.C. v. Flynn, 88 S.W.3d 142, 151 (Mo. App. S.D. 2002).
77 Rail Switching Services., Inc. v. Marquis-Missouri Terminal, LLC, 533 S.W.3d 245, 257 (Mo. App. E.D. 2017) (citing Bishop & Assocs., LLC v. Ameren Corp., 520 S.W.3d 463, 472 (Mo. banc 2017)).
78 Chandler v. Allen, 108 S.W.3d 756, 760 (Mo. App. W.D. 2003).
80 Rail Switching Services., Inc. v. Marquis-Missouri Terminal, LLC, 533 S.W.3d 245, 259 n. 10 (Mo. App. E.D. 2017).
81 Sierra-Bay Fed. Land Bank Assn v. Superior Court, 227 Cal. App.3d 318, 334 (1991).
82 11 U.S.C. §§ 101(18) and 109(f).
83 11 U.S.C § 109(f).
84 11 U.S.C. § 101(19).
85 11 U.S.C. § 101(18).
86 11 U.S.C. § 101(18)(A). Note that debt calculation “exclude[s] a debt for the principal residence of such individual or such individual and spouse unless such debt arises out of a farming operation.” Id.
87 11 U.S.C. § 101(18)(B).
89 11 U.S.C. § 101(21).
90 11 U.S.C. §§ 1207(b) and 1227(b).
91 11 U.S.C. § 1222(b)(2).
92 11 U.S.C. §§ 506(a) and 1222(b)(2).
93 11 U.S.C. § 1227.
94 28 U.S.C. § 1930.
95 11 U.S.C. § 1129(b)(2)(B)(ii).
96 11 U.S.C. § 362.
97 11 U.S.C. § 1222(b)(2).
98 11 U.S.C. § 363(f).
99 11 U.S.C. § 1222(c).
100 11 U.S.C. § 1222(b)(9).
101 11 U.S.C. § 1232.
102 11 U.S.C. § 363(b).
103 11 U.S.C. § 365(d)(3).
104 11 U.S.C. § 506(b).
105 Sris Chatterjee, Upinder S. Dhillon, and Gabriel G. Ramirez, Coercive tender andeExchange offers in distressed high-yield debt restructurings: An empirical analysis, 38 J. Fin. Econ., 333–360 (1995).
106 For an in-depth academic analysis considering the intersection of distressed agricultural debt and implicit biases in decision making, see Michael D. Fielding, Combining the Academic with the Practical: A Meaningful Framework for More Effectively Resolving Distressed Agricultural Loans, 26 Drake J. Ag. L., 1-61 (2021).
107 Sandeep Dahiya, Kose John, Manju Puri, and Gabriel Ramirez, 2003, Debtor-in-possession financing and bankruptcy resolution: Empirical evidence, 69 J. Fin. Econ., 261; see also Maria Carapeto, Maria, Does Debtor-in-Possession Financing Add Value? IFA Working Paper No. 294–1999, Cass Business School (1999).
108 Sandeep Dahiya, Kose John, Manju Puri, and Gabriel Ramirez, 2003, Debtor-in-possession financing and bankruptcy resolution: Empirical evidence, 69 J. Fin. Econ.259–280 (2003).
110 In re Michels, 305 B.R. 868, 872 (8th Cir. B.A.P. 2004).
111 In re Rice, 357 B.R. 514, 518 (8th Cir. B.A.P. 2006).
112 11 U.S.C. § 1225(a)(1).
113 11 U.S.C. § 1225(a)(2); see also 11 U.S.C. §§ 503 and 507.
114 11 U.S.C. § 1225(a)(3).
115 In re Barger, 233 B.R. 80, 83 (8th Cir. B.A.P. 1999).
116 Id. at 83.
118 In re Euerle Farms, Inc., 861 F.2d 1089, 1092 (8th Cir. 1988).
119 11 U.S.C. § 1225(a)(4).
120 In re Bremer, 104 B.R. 999, 1006 (Bankr. W.D. Mo. 1989).
121 11 U.S.C. § 1225(a)(5).
122 11 U.S.C. § 1225(a)(5)(A).
123 11 U.S.C. § 1225(a)(5)(B).
124 11 U.S.C. § 1225(a)(5)(C).
125 11 U.S.C. § 1225(a)(6).
126 In re Lockard, 234 B.R. 484, 492 (Bankr. W.D. Mo. 1999).
127 In re Richards, 2004 WL 764526 (Bankr. N.D. Iowa 2004).
128 In re Foertsch, 167 B.R. 555, 565 (Bankr. D.N.D. 1994) (citation omitted).
129 In re Lockard, 234 B.R. 484, 492 (Bankr. W.D. Mo. 1999).
130 Id. (quoting In re Clarkson, 767 F.2d 417, 420 (8th Cir. 1985)); see also In re Clark, 288 B.R. 237, 248 (Bankr. D. Kan. 2003) (“A plan’s ‘income projections must be based on concrete evidence and must not be speculative or conjectural’” (internal citations omitted)).
131 Id.; In re Tofsrud, 230 B.R. 862, 872 (Bankr. D.N.D. 1999).
132 In re Weber, 297 B.R. 567, 571 (Bankr. N.D. Iowa 2003); In re Lockard, 234 B.R. 484, 492 (Bankr. W.D. Mo. 1999); see also In re Foertsch, 167 B.R. 555, 565 (Bankr. D.N.D. 1994).
133 In re Stallings, 290 B.R. 777, 791 (Bankr. D. Idaho 2003).
134 In re Foertsch, 167 B.R. 555, 566 (Bankr. D.N.D. 1994).
136 Agribank, FCB v. Honey, 167 B.R. 540 (W.D. Mo. 1994) (citing 11 U.S.C. § 1225(b)(1)); see also Rowley v. Yarnall, 22 F.3d 190, 191 (8th Cir. 1994).
137 Matter of Schwarz, 85 B.R. 829, 832 (Bankr. S.D. Iowa 1988); see also Rowley v. Yarnall, 22 F.3d 190, 193 (8th Cir. 1994).
138 In re Meyer, 173 B.R. 419, 424 (Bankr. D. Kan. 1994).
139 11 U.S.C. § 1225(b)(2).
140 In re Broken Bow Ranch, Inc., 33 F.3d 1005, 1008 (8th Cir. 1994) (citing In re Coffman, 90 B.R. 878, 885 (Bankr. W.D. Tenn. 1988)).
141 In re Kuhlman, 118 B.R. 731, 739 (Bankr. D.S.D. 1990).
142 11 U.S.C. §§ 1228-1228(a)(2), incorporating the 11 U.S.C. § 523(a) discharge exceptions.
143 11 U.S.C. § 523(a)(5).
144 11 U.S.C. § 523(c). The deadline for filing a denial of discharge complaint for claims under 11 U.S.C § 523(c) is “60 days after the first date set for the meeting of creditors under [11 U.S.C.] § 341(a).” Fed. R. Bankr. P. 4007(c).
145 11 U.S.C. § 523(a)(2).
146 11 U.S.C. § 523(a)(4).
147 11 U.S.C. § 523(a)(6).
148 See generally In re Tinkler, 311 B.R. 869, 882 and n.1 (Bankr. D. Colo. 2004).