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Lecture #31

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  • 1. 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
  • 2. Case Assignments Monday Nov. 4
        • Case Student
        • Gretna St. Bank -- Andrew Eller& Nathan Fleck
        • Exchange Bank -- Chris. Geswein & Luke Harrison
        • In Re Welch-- Ryan Holtkamp&Gretchen Humphrey
        • In Re Mary Freese–Joshua Johnson& Kyle Kuehnert
  • 3. 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
  • 4. 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.
  • 5. 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.
  • 6. 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.
  • 7. 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.
  • 8. 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.
  • 9. 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, ...
  • 10. 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
  • 11. 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
  • 12. 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.
  • 13. 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.
  • 14. 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 .
  • 15. 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 …
  • 16. 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.
  • 17. 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”
  • 18. 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.
  • 19. 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.)
  • 20. 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.
  • 21. 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.