Lecture #31


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Lecture #31

  1. 1. Class #31, Nov. 1, 2002 <ul><li>Chapter 13 - Ag Credit, Finance and Bankruptcy </li></ul><ul><li>Part II Next Class </li></ul><ul><li>Case Recitation </li></ul><ul><li>U.S. v. Ellis --- Scott Priebe&Cale Russler </li></ul><ul><li>First Nat’l --- Donald Shoemaker & Lee Stanish </li></ul><ul><li>Northeast Chick – Eliz. Sturgeon&Mike Veld </li></ul><ul><li>Lisco State Bank – Betsy Willwock & Richard Dobbyn </li></ul>
  2. 2. Case Assignments Monday Nov. 4 <ul><ul><ul><li>Case Student </li></ul></ul></ul><ul><ul><ul><li>Gretna St. Bank -- Andrew Eller& Nathan Fleck </li></ul></ul></ul><ul><ul><ul><li>Exchange Bank -- Chris. Geswein & Luke Harrison </li></ul></ul></ul><ul><ul><ul><li>In Re Welch-- Ryan Holtkamp&Gretchen Humphrey </li></ul></ul></ul><ul><ul><ul><li>In Re Mary Freese–Joshua Johnson& Kyle Kuehnert </li></ul></ul></ul>
  3. 3. Types of Credit <ul><li>Types of Credit </li></ul><ul><li>-- Short-Term Credit </li></ul><ul><ul><li>working capital, term 1-3 years </li></ul></ul><ul><li>-- Intermediate Credit, </li></ul><ul><ul><li>equipment, machinery, farm improvements, term 3-7 years </li></ul></ul><ul><li>-- Long-Term Credit </li></ul><ul><ul><li>land, major building, and land improvements </li></ul></ul>
  4. 4. Ag Institutional lenders <ul><li>-- Commercial banks </li></ul><ul><li>---- Short and intermediate term, a little long term </li></ul><ul><li>-- Insurance Companies </li></ul><ul><li>--- Long term credit </li></ul><ul><li>-- Farm Credit System </li></ul><ul><li>--- began with the Federal Land Bank in 1916 </li></ul><ul><li>---- FLB started with Federal Govn’t capital, but was repaid, and became farmer owned. </li></ul>
  5. 5. Sources of Credit for Ag <ul><li>Financial crisis in ‘80s brought an infusion of fed funds, and reorganization of farm credit agencies </li></ul><ul><li>Farm Credit System Reorganization </li></ul><ul><ul><li>FLBs and Intermediate Credit Banks were merged to form a single Farm Credit Bank </li></ul></ul><ul><li>Now, FCS (Farm Credit Service) exist. </li></ul>
  6. 6. Direct USDA Lending -- Farmer’s Home Administration <ul><li>A USDA Agency providing supervised credit, historically </li></ul><ul><li>--- but, mainly guaranteed loans now </li></ul><ul><li>--- for “worthy” farmers who are unable to get credit elsewhere. </li></ul><ul><li>Note, the losses FHA took in the paper on Indiana Ch. 12 bankruptcy study in the late 80’s. </li></ul>
  7. 7. Direct USDA Lending <ul><li>Farmers are still facing restructured shared appreciation agreements which if and when they are enforced could mean failure to at least a few farmers. </li></ul><ul><ul><li>If the debtor/farmer can’t at least service an extra increment to his or her debt, they may be forced to foreclosure! </li></ul></ul><ul><li>They provides rural housing loans, rural community development loans. </li></ul>
  8. 8. Direct USDA Lending <ul><li>Commodity Credit Corporation (CCC) </li></ul><ul><li>price support loans for farmers since the mid-30s. </li></ul><ul><li>CCC handles storage and disposal of accumulated stocks from non-recourse loans. </li></ul><ul><li>Rural Electrification Administration makes </li></ul><ul><li>100 % loans on up to 35 years for electrical and telephone services. </li></ul>
  9. 9. Non-institutional Lenders <ul><li>Private individuals are a major source of credit </li></ul><ul><li>-- especially within families </li></ul><ul><li>-- often for installment sales of farmland </li></ul><ul><li>Manufacturers, Dealers, and Ag Companies </li></ul><ul><li>-- Machinery, seed, ... </li></ul>
  10. 10. The Loan Agreement <ul><li>Promissory notes, written promise to repay </li></ul><ul><li>--- demand note </li></ul><ul><li>--- installment note </li></ul><ul><li>--- open-ended note for a line of credit </li></ul><ul><li>Aspects of the note </li></ul><ul><li>---- amount, of course </li></ul>
  11. 11. The Loan Agreement <ul><li>More aspects of the note: </li></ul><ul><li>---- interest rate, fixed or variable </li></ul><ul><li>---- other fees: collateral appraisal fees, closing costs, loan service fees, legal fees (examine title) </li></ul><ul><li>---- beware of repayment terms--to avoid default </li></ul><ul><li>---- watch out for the acceleration clause </li></ul>
  12. 12. The Loan Agreement <ul><li>Acceleration Clauses (ACs) are not favored by the courts. </li></ul><ul><li>An example is, the “quick foreclosure clause” (strict forfeiture) in an installment contract. </li></ul><ul><li>Borrower should soften ACs with a grace period. </li></ul><ul><li>Borrower will want a prepayment option without penalty. </li></ul><ul><li>If there is an secondary signatory on the note, they are primarily liable along with the borrower. </li></ul>
  13. 13. Mortgages <ul><li>A mortgage is a conveyance of an interest in real property by the mortgagor (borrower) to the mortgagee (lender). </li></ul><ul><li>-- on the condition that the transfer is void once the debt is repaid. </li></ul><ul><li>Actually, the “title status” of the parties varies by state. </li></ul><ul><li>--- In “title states,” lenders are deemed to have title while the debt exists. </li></ul><ul><li>--- In “lien states,” the debtor has title and the lender has a lien, Indiana being an example. </li></ul>
  14. 14. Mortgages <ul><li>If permitted by the terms, the borrower may sell the mortgaged property, but subject to the mortgage </li></ul><ul><li>Priority of Lenders </li></ul><ul><li>The first mortgage holder has priority over all other creditors, including second and subsequent mortgage holders. </li></ul><ul><li>A second mortgage is one where the same real estate is security for a debt as the first or primary mortgage. </li></ul><ul><li>-- in a foreclosure, the 2nd takes after the 1st . </li></ul>
  15. 15. Mortgages <ul><li>The document itself is similar to an installment contract, discussed earlier. </li></ul><ul><li>Borrower has many responsibilities </li></ul><ul><li>and a failure could trigger the acceleration clause. </li></ul><ul><li>Issues are, taxes, insurance, assessments … </li></ul><ul><li> </li></ul>
  16. 16. The Mortgage Instrument <ul><li>Eminent domain or any other sale proceeds are likely to accrue to the lender/mortgagee. </li></ul><ul><li>Thus, lender may have to consent to the transaction and/or the amount in order avert an acceleration </li></ul><ul><li>E.g., Selling the house and lot off the farm. </li></ul><ul><li>“ Deeds of trust” are used in place of mortgages in some states. E.g. Missouri. </li></ul>
  17. 17. Foreclosure <ul><li>--- discretionary action by the lender after the payments are overdue </li></ul><ul><li>This is a suit or action that is a request for sale of the property </li></ul><ul><ul><li>once the court so orders </li></ul></ul><ul><ul><li>the property is advertised for sale </li></ul></ul><ul><ul><li>after the statutory time allowance, there is an auction to the highest bidder </li></ul></ul><ul><ul><li>proceeds of sale are applied to the debt </li></ul></ul><ul><li>Alternatively, there may be a “deed in lieu of foreclosure” </li></ul>
  18. 18. Redemption <ul><li>This right permits the borrower to redeem--buy back the land. </li></ul><ul><li>There is a time period, set by state law to redeem after the foreclosure sale </li></ul><ul><li>-- three months in Indiana, but longer in the past, and in other states. </li></ul>
  19. 19. Redemption <ul><li>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. </li></ul><ul><li>A farmer (debtor) remains in possession during the redemption period. </li></ul><ul><li>(See Figure 13.1 on an overhead.) </li></ul>
  20. 20. United States v. Ellis, U.S. Ct of App., 9th Cir., ‘83 <ul><li>Action: for redemption rights </li></ul><ul><li>Issue: </li></ul><ul><li>Does Ellis have redemption rights? </li></ul><ul><li>Facts: Ellis took FmHA loans, in ‘76’’,77, &’78. </li></ul><ul><li>Mortgages on the farm secured the loans. </li></ul><ul><li>Mortgage document waived “state redemption rights .” </li></ul><ul><li>On 4 -1- 81 FmHA foreclosed--due $150,000+Interest </li></ul><ul><li>FmHA got a judgement for a sale of property. </li></ul>
  21. 21. United States v. Ellis <ul><li>Holding: </li></ul><ul><li>There are now redemption rights in federal law. </li></ul><ul><li>The court held there was no grant of state redemption rights that had been explicitly waived. </li></ul><ul><li>At the time of the action, Washington state law had a one year redemption right. </li></ul>
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