1.0 Law & Legal CLE Credit A/V Approval # Recording Date - November 13, 2018 Recording Availability November 21, 2018

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1.0 Law & Legal CLE Credit A/V Approval #1087684 Recording Date - November 13, 2018 Recording Availability November 21, 2018 Meeting Location Date Time Topic King County Bar Association 1200 Fifth

1 1.0 Law & Legal CLE Credit A/V Approval # Recording Date - November 13, 2018 Recording Availability November 21, 2018 Meeting Location Date Time Topic King County Bar Association 1200 Fifth Avenue - Suite 700 Seattle, WA Tuesday, November 13, :00 PM to 1:15 PM Farm Foreclosures and Agribusiness Bankruptcy AGENDA 12:00 PM Introduction 12:10 PM Presentation: Farm Foreclosures and Agribusiness Bankruptcy, by Oren B. Haker and Gabrielle Glemann, Stoel Rives LLP An analysis of the unique procedural and substantive issues that arise in the context of farm failures and foreclosures 1:15 PM Adjourn SPEAKER BIOGRAPHY Oren B. Haker, Stoel Rives LLP Oren Haker focuses on the representation of a wide range of parties in business workouts, debt restructurings, receiverships and bankruptcy cases, including corporate debtors, nonprofits, trade and financial creditors, creditors committees, lessors and lessees, and strategic and financial investors acquiring assets of troubled companies. Oren s experience includes prebankruptcy planning, including advising directors and officers on insolvency issues, and exploring out-ofcourt and non-bankruptcy options in the first instance. In bankruptcy cases, Oren s experience includes cash collateral and DIP financing matters, intercreditor disputes, reclamation and section 503(b)(9) issues, bankruptcy sales under section 363, valuation disputes, chapter 11 plan and post-confirmation trust formation issues, fraudulent transfer and preference litigation, and application of safe harbor provisions of the Bankruptcy Code. During the 2008 financial crisis, Oren was a member of the legal team advising President Obama s Auto Task Force in the General Motors, Chrysler, and Delphi Automotive chapter 11 cases. More recently, he has advised state and local leaders on public pension matters and service level municipal distress.

2 Prior to joining Stoel Rives in 2012, Oren practiced corporate finance and restructuring law in New York City for almost nine years, including with the business finance and restructuring departments of Weil, Gotshal & Manges LLP and Cadwalader, Wickersham & Taft LLP. Gabrielle Glemann, Stoel Rives LLP Gabrielle Glemann is Of Counsel at Stoel Rives and has extensive experience in corporate restructuring and distressed debt transactions. She has represented debtors, trustees, examiners, and secured and general creditors in chapter 7 and chapter 11 bankruptcies and related proceedings. Gabrielle also advises corporations across a number of industries regarding a broad array of commercial and regulatory matters, including financing transactions, asset sales and acquisitions, risk assessment and mitigation, corporate governance and regulatory compliance. Her bankruptcy and restructuring recent experience includes representing a regional airline through business restructuring and administration of chapter 11 cases, and representing the Trustee in the liquidation of a broker-dealer, securing recoveries in excess of USD 1 billion for claims arising from complex transfer pricing arrangements. Prior to joining Stoel Rives, Gabrielle was counsel at Hughes Hubbard & Reed LLP ( ) and an associate at Martin Clearwater & Bell LLP ( ). At Hughes Hubbard & Reed LLP, Gabrielle played prominent roles in liquidation of Lehman Brothers Inc. and the liquidation of MF Global, Inc., including leading the prosecution of the brokerage debtors claims against financial counterparties and clearing banks and acted as debtor s counsel in the chapter 11 proceeding of Republic Airways Holdings, Inc.

3 HOW DO I EARN CREDIT FOR SELF-STUDY OR AUDIO/VISUAL (A/V) COURSES? For pre-recorded A/V (self-study) programs, although the sponsor should apply for accreditation, lawyers need to report the credits earned for taking the course. To add an approved course to your roster, follow the procedures below: Go to the "mywsba" website at Log in. Click on the "Access MCLE" link in the "MCLE Info" box on your home profile page. Click on "Add Activity." Search to find the approved course in our system. (See search suggestions on the screen.) Adding a Recorded Course Select Recorded Course from the Add New Activity screen. This will prompt you to search for the activity in case the activity has already been accredited in the MCLE system. You can search by Activity ID or by specific Activity Details. For the Activity Details search, you can use keywords for the title, sponsor name and date. After entering your search criteria and selecting Search at the bottom of the screen, a list of possible activities will be provided. You can select the correct one by clicking the Activity ID. This will take you to the specific activity. Entered the date(s) on which you began and ending viewing this recorded activity. Then claim the correct credits for which you attended this activity in the Credits Claimed fields and click the Submit button at the bottom of the page. You will receive a confirmation message at the top of your screen stating, The activity has been added to your roster.

4 Farm Foreclosures and Agribusiness Bankruptcy Presented by Oren B. Haker and Gabrielle Glemann KCBA Bankruptcy Section November 2018

5 An overview of certain unique procedural and substantive issues that arise in the context of distress in the agribusiness sphere.

6 THE HISTORY OF CHAPTER 12 Chapter 12 of the Bankruptcy Code is a chapter tailored to restructuring the debts of family farmers and family fisherman. Chapter 12 was added to the Bankruptcy Code in 1986 by the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of It went into effect on November 26, The modification of the bankruptcy code was an emergency response to tightening agricultural credit in the early and mid-1980s. The Act was to originally slated to expire on October 1, 1993, but it was extended a number of times without expiring until it was made permanent by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). 3

7 MARKET TRENDS In Q1 2018, there were 116 Chapter 12 bankruptcy filings (down slightly from 118 filings in Q1 2017). Of the 116 filings in the first quarter of 2018, nearly 70 percent of the bankruptcies were in farm country, i.e. dairy, corn, cotton, soybean and wheat producing areas. There were 501 Chapter 12 bankruptcy filings in 2017 the highest level since Since 2013, net farm income has declined by 52 percent, and in 2018 is projected to be at a 12-year low. Chapter 12 bankruptcy filings climbed each year from 2014 to 2017; and since 2014, farm bankruptcies have increased nearly 100 percent. Source: 4

8 MARKET TRENDS CONT The USDA is currently projecting very modest improvements in solvency and liquidity ratios in the farm sector for the upcoming fiscal year. The debt-to-asset ratio is projected to decline to 12.6 percent from 12.7 percent and the debt-to-equity ratio is projected to decline to 14.4 percent from 14.5 percent. The debt service ratio is projected to remain mostly unchanged in 2018 at 27 percent. Notwithstanding projected improvements in these rations, real estate debt is projected at $239 billion in 2018 (increasing at 4.4%), and non-real estate debt is projected at $150 billion (increasing at 2.2%) both record highs. Source: 5

9 WHY CHAPTER 12? Chapter 12 was formulated to address certain key issues that arose for farmers and fisherman seeking relief under the other chapters of the Code: Restructuring alternative to chapter 7. Cheaper and more expedited that chapter 11 and doesn t require creditor approval of a plan. Higher debt limits than chapter 13 (although potentially not high enough). 6

10 CHAPTER 12 OVERVIEW: Who can file? 1. Farmers (including corporations or partnerships if family-owned) with: 1. Debts less than $4.15M; 2. 50% of noncontingent, liquidated claims come from farming operation; and 3. Over 50% of income came from farming in either a) The tax year immediately preceding the filing; or b) Both the second and third tax years preceding the filing. 2. Fishermen (including corporations or partnerships if family-owned) with: 1. Debts less than $1.9M; 2. 80% of aggregate non contingent, liquidated claims arise from commercial fishing operation; and 3. Over 50% of income came from commercial fishing operation in either: a) The tax year immediately preceding the filing; or b) Both the second and third tax years preceding the filing. One of the biggest bars to chapter 12 filing can be the debt limit, and some farmers or fisherman seek to sell assets and reduce their debt before a filing to attain eligibility. 7

11 CHAPTER 12: SOMETHING BORROWED Shared with Chapter 11 & 13 (but not 7): Debtor remains in possession Estate includes after-acquired property. Shared with 13 (but not 11): Co-debtor stay re consumer debts. Only debtor can propose a plan. Payment plan over 3-5 years (or sometimes longer) No disclosure statement (subject to local procedures) No creditor voting (though creditors may object) No absolute priority No 1111(b) election No creditors committee Trustee automatically appointed 8

12 CHAPTER 12: SOMETHING NEW Accelerated Timeline: Plan must be filed within 90 days of filing and then confirmed or denied within 45 days. Trustee can sell farmland, farm equipment, and fishing property free and clear without satisfying 363(f) requirements (but note that only the trustee is authorized to make a sale under 1206) Special Adequate Protection Provision: in the case of use of farmland, adequate protection may be accomplished by payment of reasonable rent customary in the community where the property is located (designed to allow the debtor to sell crops, pay a portion of the secured proceeds to its secured creditor, and retain the remainder of the proceeds to fund new crops). 9

13 RECENT LEGISLATION In 2012, the Supreme Court decided, Hall v. U.S., 132 S. Ct (2012). The Halls filed for Chapter 12 bankruptcy in Arizona and were forced to sell their family farm for $960,000 to settle their bankruptcy debts. That sale brought about capital gains taxes of $29,000. The Halls argued that the taxes were dischargeable as a debt "incurred by the estate". The IRS objected, claiming that the taxes were not dischargeable and must be paid. The Ninth Circuit agreed, ruling that the Halls had to pay federal income tax on the gain from the sale of their farm during bankruptcy proceedings. In a 5-4 decision, the Supreme Court affirmed. 10

14 RECENT LEGISLATION CONT On October 25, 2017, the Family Farmer Bankruptcy Clarification Act of 2017 was signed into law (as part of a larger bill). Section 1005 of the Act reverses Hall v. U.S, by providing that any unsecured claim of a governmental unit against the debtor or the estate that arises before the filing of the petition, or that arises after the filing of the petition and before the debtor s discharge under section 1228, as a result of the sale, transfer, exchange, or other disposition of any property used in the debtor s farming operation (1) shall be treated as an unsecured claim arising before the date on which the petition is filed; (2) shall not be entitled to priority under section 507; (3) shall be provided for under a plan; and (4) shall be discharged in accordance with section

15 LIENS & SECURITY INTERESTS IN FARM PRODUCTS: State Agricultural Liens: statutory agricultural liens arise by operation of law for the benefit of farm suppliers/creditors that provide goods, services or labor to an agricultural producer or processor. Similar in concept and operation to a mechanics lien, the agricultural statutory lien gives the farm supplier/creditor a lien against the crops, livestock or farm products for which the goods, services or labor were provided. Types of agricultural statutory liens include seed supplier liens, fertilizer supplier liens and livestock care. 12

16 LIENS & SECURITY INTERESTS IN FARM PRODUCTS: RCW 60.13: The Co-op Exception Starting on the date a producer delivers any agricultural product to a processor or conditioner, the producer has a first priority statutory lien, referred to as a "processor lien." A commercial fisher who delivers fish to a processor also has a first priority statutory "processor lien" starting on the date the fisher delivers fish to the processor. This processor lien shall continue until twenty days after payment for the product is due and remains unpaid, without filing any notice of lien, for the contract price, if any, or the fair market value of the products delivered. The processor lien attaches to the agricultural products or fish delivered, to the processor's or conditioner's inventory, and to the processor's or conditioner's accounts receivable. However, no processor lien may attach to agricultural products or fish delivered by a producer or commercial fisher, or on the producer's or fisher's behalf, to a processor which is organized and operated on a cooperative basis and of which the producer or fisher is a member, nor may such lien attach to such processor's inventory or accounts receivable. 13

17 NON CONSENSUAL LIENS ARE ALSO NON- NEGOTIATED In re Te Velde, (Bankr. E.D. Ca. August 22, 2018): Oregon law grants an agricultural service lien, which extends to crops, animals, their proceeds, and, in certain instances, the offspring of those animals. In Te Velde, the service providers argued that the term proceeds, encompassed not only monies generated by the sale of cattle, but milk derived from the cattle and sold. In interpreting the text of the statute (which did not define proceeds) the Court distinguished proceeds, (meaning the total amount realized in consideration) from products (meaning something produced or resulting from), to conclude that proceeds, did not include milk or monies realized on the sale of milk. 14

18 SECURITY INTERESTS & LIENS The Interplay of Article 9 and the Food Security Act: Generally, security interests in farm products (like other goods and inventory) are governed by Article 9 of the UCC. Section of the UCC has a farm products exception that provides that buyers in the ordinary course of business, other than buyers of farm products from a person engaged in farming operations, will take the assets purchased free of a security interest created by the buyer s seller, even if the security interest is perfected and the buyer knows of its existence. The exception in Section means that under state law, a lien created by a farmer in farm products will continue in those assets even after they have been sold to a buyer in the ordinary course of business, even if the buyer knows about the lien (except in California, which never adopted the exception). 15

19 THE FOOD SECURITY ACT: The Food Security Act of 1985 (7 U.S.C. 1631(d)) imposes additional notice and/or registration requirements on farmers lenders who wish to preserve their liens after sale of the farm products and provides that a buyer of farm products from a seller engaged in farming operations takes free of a security interest in the farm products, even if it knows of the security interest so long as it buys in the ordinary course of business, unless: if the applicable state where the farm products are produced does not have a certified system for the registration of such security interests (a Notice State ), the buyer has received notice of the security interest created by the seller within one year prior to the purchase; or if the applicable state where the farm products are produced has a certified system for the registration of such security interests (a Registration or Clear Title State), the buyer has not registered with such system and the secured party has filed an effective financing statement with such system. 16

20 THE FSA: PREEMPTION/PROTECTION Food Services of America v. Royal Heights, 123 Wash.2d. 779 (August 14, 1994): Fruit producer sold to two parties that acted as both seller and lender. The second buyer/lender argued that because of the Food Security Act, which provided that, as buyer, it was not subject to the first lender s lien, it was also not subject to that lien as a lender. The WA court disagreed and held that its priority as a lender (as opposed to a purchaser) was dictated by state law, and the provisions of the FSA could not be applied to preempt those provisions. 17

21 OTHER: PACA TRUST Perishable Agricultural Commodities Act ((PACA) 7 U.S.C. 499, et seq.): Proceeds from the sale of any perishable agricultural commodity, as well as intermediate products and proceeds from their sale, are held in trust for the benefit of an unpaid supplier. Perishable agricultural commodities are defined as "fresh fruits and vegetables of every kind and character, whether or not frozen or packed in ice..." PACA's trust provisions only apply to transactions involving unprocessed or minimally processed fruits and vegetables. 18

22 PACA CLAIMS IN BANKRUPTCY Courts disagree on whether assets encumbered by PACA are property of the estate: [W]hat is excluded from the estate is the PACA claimant's equitable interest in the thing that is included in the bankruptcy estate. In re Cherry Growers, Inc., 576 B.R. 569 (Bankr. W.D. Mich. 2017). Because the buyer holds produce in trust for the seller until repayment is complete, when the buyer files for bankruptcy the produce or its proceeds do not become property of the estate. In re Symons Frozen Foods Inc., 425 B.R. 589 (Bankr. W.D. Wash. 2010) (citing Sysco Food Servs. of Seattle, Inc. v. Country Harvest Buffet Rests., Inc. (In re Country Harvest Buffet Rests., Inc.), 245 B.R. 650, 653 (9th Cir. BAP 2000). Priority of PACA Claims: Essentially, like a secured claim. Property interests determined to be held in trust will not be available to pay the claims of other creditors until the PACA claim is satisfied. (There may also be an overlap with 503(b)(9)). 19

23 PACA PITFALLS Rights must be preserved (must mark your invoices, must mark your product, must not extend payment terms, must send notice). Failure to be licensed doesn t defeat PACA, but may subject party to penalties. Make sure the product is eligible as a perishable agricultural commodity. Beware of claims including ancillary costs. 20

24 RECENT DECISIONS: PACA S&H Packing & Sales Co. v. Tanimura Distrib., 883 F.3d 797 (9th Cir. 2018) (en banc): Produce growers sold their PACs to distributor Tanimura, who then sold the products to third parties. Tanimura sold its account receivable to AgriCap Financial through a factoring agreement. The growers claimed that the receivables were property of the PACA Trust and the factoring agreement was an impermissible secured financing. On February 22, 2018, the 9th Circuit issued a decision which affirmed precedent requiring the court to conclude whether the transaction was an impermissible grant of a security interest or a permitted true sale, but slightly modified the factors the Court will consider in making this determination. The Court rejected an approach based solely on whether a transaction was commercially reasonable, and instead remanded to the lower court with instructions to determine whether risk of collection actually transferred to the buyer (rendering it a true sale, and the receivables would be free of the PACA trust) or if risk of collection does not transfer (rendering it a disguised security interest and the secured creditor s interest junior to the PACA trust beneficiaries). 21

PANELISTS Oren Haker is a partner in the Corporate Department of Stoel Rives, LLP, based out of Stoel s Portland office.

including corporate debtors, trade and financial creditors, creditors committees, lessors, and strategic and financial investors acquiring assets

Gabrielle s practice focuses on advising corporations across a number of industries regarding a broad array of commercial and regulatory matters,

25 PANELISTS Oren Haker is a partner in the Corporate Department of Stoel Rives, LLP, based out of Stoel s Portland office. Oren s practice focuses on the representation of a wide range of parties in workouts, debt restructurings, receiverships and bankruptcy cases, including corporate debtors, trade and financial creditors, creditors committees, lessors, and strategic and financial investors acquiring assets of troubled companies. Gabrielle Glemann is of counsel in the Corporate Department of Stoel Rives, LLP, based out of Stoel s Seattle office. Gabrielle s practice focuses on advising corporations across a number of industries regarding a broad array of commercial and regulatory matters, including financing transactions, asset sales and acquisitions, risk assessment and mitigation, corporate governance and regulatory compliance, both in and out of the distressed context. 22

1.0 Law & Legal CLE Credit A/V Approval # Recording Date October 19, 2017 Recording Availability October 12, 2018

1.0 Law & Legal CLE Credit A/V Approval #1082780 Recording Date October 19, 2017 Recording Availability October 12, 2018 Meeting Location Date Time Topic King County Bar Association 1200 Fifth Avenue -