The Chapter 12 “Cramdown”: Leveling the Lender's Playing Field.

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                This past week Congress was actually able to agree on something and the Family Farmer Relief Act of 2019 was passed.  The Act serves to raise the current debt limit for Chapter 12 from 4.2 million to 10 million.  Some have bemoaned this as only helping “big farms’, whatever that is, but in an era where a combine can approach a half million dollars, many smaller or medium sized farms found themselves up against the previous debt limit.   Without the ability to utilize Chapter 12, instead of restructuring, the famer is generally liquidating.
            In helping many farm clients over the past year who have been experiencing financial difficulties, I am simply amazed at the inability of some lending institutions to work with the farmer who is experiencing financial difficulties.  Don’t get me wrong, some lenders have been very good to work with and are open to forbearance agreements, debt reconstruction, and other measures that keep the farmer able to continue on.  On the flip side, some lenders appear to simply want the loan gone and offer very little in the way of cooperation.
            What is even more frustrating is the nature of the contracts that we enter into with lenders.  Simply stated, I think a person would be hard pressed to find more one sided documents than what lenders use.  Sadly, especially in today’s financial environment, the farmer has virtually no ability to negotiate the terms of the arrangement.  You either sign the loan documents as they are, or you don not get the loan.  For example, here is list of standard terms in mortgages that kick in when a farmer becomes delinquent on a loan:
·         The bank can charge a much higher default interest rate.
·         The bank can accelerate the note and make the entire amount due.
·         The bank can charge a penalty.
·         The bank can use money in a checking or savings account, without your permission, and apply it to the loan as a “set off”.
·         If the bank has to foreclose or hire legal counsel to collect, you pay their attorney fees.
I view the above as nothing short of “piling on” by banks.  If a farmer has defaulted on a loan, safe to say his/her financial situation has reached a dire point.  Is it really necessary for the lender to increase interest, charge fees, and so forth?  Or, more so, should the bank profit when a farmer defaults?  I could go on and on with present day examples of  “banks gone wild”, but they say brevity is the sole of wit.  So, we will shift gears and talk about what happens in these situations when the lender just will not be reasonable, paints the farmer in a corner and seeks to pile on. 
Often times, the farmer has no choice, because of the actions of the lender, than to seek Chapter 12 protection.   Fortunately, Chapter 12 has the ultimate nuclear option, which is referred to as the “Cram down” ability that can level the playing field.   Hey, if banks can have provisions that kick in at a default that a farmer would never initially sign up for, then the farmer should have the ability to push back on these unwanted terms.
            The power of the “cram down” is quite impressive.   Any secured debt, including mortgages (residential and other), chattel mortgages, equipment loans, etc. can be reset to allow the debtor to pay only the value of the collateral, at market rate interest, and over a longer term. For instance, let’s say the farmer owns a tractor that he owes $100,000 on, but it is only worth $80,000, on a five year note.   The “cram down” resets the amount owed from $100,000, down to the value of $80,000.  The interest rate can be reduced and the payment term extended.   And, the Court can dismiss the penalties, fees, and so forth sought by the lender.  The term “cram down” does not appear anywhere in the bankruptcy code.  I’ve viewed it as having a certain size suitcase, representing the value of the assets, and you try to “cram” or “pack into” the suitcase more clothes (debt) than the suitcase would generally hold.  So, you take out some clothes, jump up and down on the suitcase, and eventually you reach a point where the suitcase will close.  Essentially, the term has come to mean any situation in which a creditor is forced to accept a change to the financial arrangement that the lender was resistive to.   If the bank can utilize a totally one-sided lending contract, then it seems fair that the farmer can seek to have the contract balanced out.
            If payments are missed and a lender accelerates the loan, issues a higher default interest rate, socks the farmer with penalties, takes money out of accounts as a set off, etc, etc, it makes it almost impossible for a farmer to be in a position to transfer to another lender.  The “piling on” buries the farmer so deep and limits the options the farmer has that often times the only thing that can save the farm is a Chapter 12 restructure.  I tend to think that but-for the piling on, many financial situations could be salvaged without the need of Chapter 12.
            In closing, it should be remembered that none of us control the weather, the price of grain, and pretty much everything else with farming.  And, we surely cannot control what a lender does when payments are behind.  However, you can control how much you allow a lender to pile on.  The “cram down” ability of Chapter 12 is the tool that provides such control.  It really does serve as the ability to level the playing field, which in today’s farming, seems to be needed more on many different fronts.  The fact that more farms will now be able to achieve a level playing field with their lender hopefully will keep more farmers on the farm.

John J. Schwarz, II, is a lifelong farmer and has been an agricultural law attorney for 14 years. He can be reached at 574-643-9999, john@schwarzlawoffice.com, or visit him at www.thefarmlawyer.com.
John would like to thank Douglas R. Adelsperger, of the firm of Adelsperger & Kleven, LLP in Fort Wayne and LaGrange County, In,  for the utilization of his nearly 30 years of practicing bankruptcy law in contributing to this article.    
  These articles are for general informational purposes only and do not constitute an attorney-client relationship.    If you have a specific legal issue, you should contact an attorney. 

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