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Bench & Bar of Minnesota is the official publication of the Minnesota State Bar Association.

A Storm on the Farm

What every creditors’ remedies attorney needs to know about the coming agricultural crisis

A crisis is currently brewing in Minnesota’s agricultural sector. Years of low commodities prices brought on by a global supply glut have been taking their toll. Over the past several years, many farmers experienced losses due to the low prices, but those losses have been kept somewhat under control due to record production yields. 

But in 2018, the already low prices of one key commodity—soybeans—went from bad to cataclysmic due to the trade war with China. In the span of two months, prices dropped from almost $10.50 per bushel to just over $8.00 per bushel. While the Federal Market Facilitation Program (known colloquially as the Emergency Aid Program) will offset these losses to some degree, the program limits aid payments to $125,000 per farmer, paid out over two years, and thus very likely will not compensate farmers fully for their losses.

Additionally, and even more significantly, Minnesota farmers are likely to experience production yields in 2018 that are far less favorable than yields of the recent, record-setting years, due largely to excessive moisture during the planting and harvest seasons.

As a result of all this, many agricultural economists are forecasting that the average Minnesota farmer will experience heavy losses in 2018. Economist Thomas Walker, Jr. of Praexis Business Labs has forecasted that based on current prices, government payments, and likely yields, the average Minnesota farm can expect to lose between $200,000 and $600,000+ (depending on size and several other factors) in 2018. This level of loss would bring working capital down to zero for many farmers.

Such large losses, paired with a commodities market that does not show any signs of improving in the near future, will also force many banks into a position in which they will have no option but to non-renew loans set to mature over the next few months and also to forego lending additional funds for 2019 crop and livestock inputs. This action could trigger a large-scale market correction in 2019 that produces a wave of foreclosures and other creditors’ remedies actions by agricultural goods and service providers.

An increase in creditor’s remedies activity means an increase in associated legal work. This creates an opportunity for Minnesota lawyers but also a number of major traps for the unwary. Collecting on an agricultural debt is very different from collecting on general commercial debt. This is true regardless of whether the debtor is a farmer or an agricultural goods or service provider that has been forced into insolvency due to out-of-control receivables from its farmer customers.

While not a remotely exhaustive list, here are several things every creditors’ remedies attorney should know about agricultural collections.

Minnesota Farmer-Lender Mediation Act

First and foremost, every creditors’ remedies attorney dealing with an agricultural debt needs to be aware of the Farmer-Lender Mediation Act. This law prescribes that before any creditor (not just lenders, as the name might imply) takes most meaningful collection action on a debt owed by a farmer in excess of $15,000, they have to offer the farmer the right to participate in a three-month mediation process involving all secured creditors. During this process, the creditor is barred from taking any further collection action. Failure to offer the debtor farmer-lender mediation could render all subsequent collection action invalid.

Statutory liens

Next, creditors’ remedies attorneys need to understand that when dealing with agricultural commodity collateral, there exists a world of secret statutory liens. Under Minnesota law, most agricultural goods and service providers are granted super-priority liens on the commodities produced in connection with their goods and services that, if perfected, can trump a bank’s prior perfected security interest. Perfection generally occurs (among other things) through filing a UCC Financing Statement within strict, statutorily mandated timelines. Many goods and service providers never file the financing statements and some do not even realize that a lien exists.

If proper perfection is not made, then the statutory lien does not trump a prior perfected security interest, but it is still a lien. As such, creditors’ remedies attorneys must ensure that all statutory lien creditors are named as parties to any enforcement action that seeks a determination of lien priority, and that they are provided notice of liquidation of the commodity collateral before it is sold.

A final note on statutory liens: Attorneys need to remember to perfect and assert these liens if they are collecting on behalf of an agricultural goods or service provider. Since many goods and service providers do not ever perfect their statutory liens, and since there are often very tight perfection deadlines at play, the very first thing an attorney should do after receiving a new collection file is to assess whether any statutory liens exist and then take immediate steps to perfect the liens that do exist.

CNS Financing Statements

All creditors’ remedies attorneys dealing with a debt secured by a lien on agricultural commodities need to be aware of the existence of CNS Financing Statements (also called Effective Financing Statements). CNS Financing Statements are documents filed with the Minnesota Secretary of State that give notice to commodities buyers that a creditor has a lien on a certain farmer’s agricultural commodities. By filing a CNS Financing Statement, a creditor’s lien on agricultural commodities follows the commodities, notwithstanding their sale in the ordinary course of business. As a result, if the buyer does not make payment out to both the farmer and the creditor, and the proceeds are not remitted to the creditor by the debtor, the creditor can actually take steps to assert lien rights against the buyer.

This presents another potential source of recovery upon non-payment and presents another trap for the unwary if the attorney represents a commodities buyer that does not realize the legal implications of buying commodities and fails to satisfy all associated liens.

FSA guaranteed loans

When dealing with liquidation of agricultural debts for banks, it is not uncommon to run into loans that have been guaranteed in part by the United States Farm Services Agency (FSA). Attorneys need to be aware that whenever they are liquidating an FSA-guaranteed loan, an incredibly specific set of requirements come into play as to timing, documentation, and due diligence. The failure to follow these guidelines can result in the reduction, or even the total invalidation, of the FSA guarantee.

While a complete discussion of all applicable requirements is beyond the scope of this article, one special point is worth mentioning. Under FSA guidelines, before a bank can liquidate an FSA-guaranteed loan, it must make a determination as to whether a borrower is eligible for the Interest Assistance Program. This is a federal program from which struggling borrowers can receive a government-subsidized reduction in the applicable interest rate. Even though this program has not been funded since 2011, banks are required by federal law to assess the program’s applicability and submit a form to the FSA indicating whether the bank believes the program is appropriate for the borrower. Failure to do so could render all subsequent liquidation action invalid.

Statutory right of first refusal

One final trap for the unwary exists in the statutory right of first refusal applicable to agricultural land. An agricultural creditor may not lease or sell agricultural land it obtained from a debtor (through means such as foreclosure, deed in lieu, etc.) without first offering the debtor a right of first refusal on the land. Failure to offer a right of first refusal can affect the marketability of the title and can subject the creditor to liability.

Conclusion

Given the current economic climate in agriculture, it appears that a large-scale market correction is likely in either 2019 or 2020. Any legal work resulting from such a correction carries with it a host of pitfalls and challenges. Creditors’ remedies attorneys who intend to practice in this space should make sure they are fully up to date on all legal and regulatory requirements and are comfortable dealing with agricultural collateral and the associated statutory liens.

 

MATTHEW BIALICK is a banking, agricultural finance, and creditors’ remedies attorney with the law firm of Johnson | Bialick. Matthew can be contacted for questions at 952-239-3095.  More information and educational resources can be found at www.jblawmn.com. 

 

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