DOCUMENTING AND COLLECTING AGRICULTURAL LOANS By Tom Flynn Brick Gentry, P.C Westown Parkway, Suite 100 West Des Moines, IA Phone:

Transcription

1 DOCUMENTING AND COLLECTING AGRICULTURAL LOANS By Tom Flynn Brick Gentry, P.C Westown Parkway, Suite 100 West Des Moines, IA Phone: Prepared for Iowa Bankers Agricultural Conference March 17,

2 I. Documenting the Loan A. Types of Borrowers 1. Individuals: Individuals often have variations in their names which begs the question of which name should be used on the UCC Financing Statement (full legal name, nick name, etc.) Much litigation has been generated concerning this issue. In Iowa, as of July 1, 2013, if borrower has an unexpired driver s license use the exact same name as appears on the driver s license. Thus, you need a copy of the borrower s current Driver s License for your file. What if borrower does not have an unexpired driver s license? Answer: the Financing Statement must indicate either (1) the individual name of the debtor or (2) the surname and first personal name of the debtor. What about UCCs for individuals filed prior to July 1, 2013? What if borrower has a driver s license issued by another state? What if the driver s license shows nicknames, misspellings or suffixes? What if the driver s license expires post loan-closing? What if the borrower s name changes on the license? (e.g. women gets remarried or takes maiden name). Does the name of the promissory note need to read exactly as the name on the driver s license/ucc? 2. Corporations: need file-stamped copy of Articles of Incorporation, executed copy of Bylaws and Resolution authorizing borrowing (or guaranty), pledge of assets and who can sign loan documents. 3. Limited Partnerships and Limited Liability Partnerships: need file-stamped copy of Partnership Agreement and Resolution authorizing borrowing (or guaranty), pledge of assets and who can sign loan documents. 4. General Partnership: need executed copy of Partnership Agreement and Resolution authorizing borrowing (or guaranty), pledge of assets and who can sign loan documents. 5. Limited Liability Companies: need file-stamped copy of Articles of Organization, Operating Agreement and Resolution authorizing borrowing (or guaranty), pledge of assets and who can sign loan documents. CAVEAT: If Bank is taking a security interest in the borrower or guarantor s shares or membership units you will probably need the written consent of the entity and other shareholders/members for such pledge. 6. Trusts and Estates: need executed copy of Trust Agreement and Resolution authorizing borrowing (or guaranty), pledge of assets and who can sign loan 2

3 documents. B. Credit Agreements IA Code contains a special statute of frauds applicable to credit agreements, which is intended to protect lenders against claims that there were oral agreements which modified the written loan documents. Credit Agreement is defined to mean any contract made or acquired by a lender to loan money, finance any transaction, or otherwise extend credit for any purpose, and includes all of the terms of the contract, but does not mean a contract to extend credit pursuant to a credit card or pursuant to open-end credit, or pursuant to a home equity line of credit, whether the loan, financing, or credit is for consumer or business purposes, or a consumer rental purchase agreement. i. A credit agreement is not enforceable in contract law by way of action or defense by any party unless a writing exists which contains all of the materials terms of the agreement and is signed by the party against whom enforcement is sought. ii. Unless otherwise expressly agreed in writing, a modification of a credit agreement which occurs after the person asserting the modification has been notified in writing that oral or implied modifications to the credit agreement are unenforceable and should not be relied upon, is not enforceable in contract law by way of action or defense by any party unless a writing exists containing the material terms of the modification and is signed by the party against whom enforcement is sought. This notification can be included among the terms of a credit agreement, can be included on a separate form or together with other disclosures that are provided when the agreement is made, or can be given wholly apart from the agreement and at any time after the agreement has been made. To be effective, the notification and its language must be conspicuous. A person who gives a notification is bound by it to the same extent as the person notified. A notification with respect to any credit agreement is effective with respect to all other credit agreements then in effect between the parties if the notification conspicuously so provides. When a modification is required by this section to be in writing and signed, such requirement cannot be modified except by clear and explicit language in a writing signed by the person against whom the modification is to be enforced. iii. A notification referred to in subsection 2 in the following form in boldface, ten-point type, complies with the requirements of this section: IMPORTANT: READ BEFORE SIGNING. THE TERMS OF THIS AGREEMENT SHOULD BE READ CAREFULLY BECAUSE ONLY THOSE TERMS IN WRITING ARE ENFORCEABLE. NO OTHER TERMS OR ORAL PROMISES NOT CONTAINED IN THIS WRITTEN CONTRACT MAY BE LEGALLY ENFORCED. YOU MAY CHANGE THE TERMS OF THIS AGREEMENT ONLY BY ANOTHER WRITTEN AGREEMENT. 3

4 iv. Notwithstanding subsections 1 and 2, a credit agreement or modification of a credit agreement which is not in writing, but which is valid in other respects, is enforceable if the party against whom enforcement is sought admits in court that the agreement or modification was made, but no agreement or modification is enforceable under this subsection beyond the terms admitted. C. Real Estate Loans i. Mortgages and Deeds of Trust. Mortgages and deeds of trust are provided for in IA Code Chapter 654. They are considered equivalent in substance, with similar rights and remedies, including foreclosure. IA Code Purchase money mortgages have certain priority rights over other liens (e.g. priority over preexisting judgments against the purchaser). Purchase Money Mortgage is mortgage loan that enables purchaser to acquire real estate (or to refinance existing purchase money mortgages by same lender to same purchaser). IA Code B. All real estate documents to be recorded must be properly acknowledged to be effective against third parties. ii. Homesteads. a. Waiver on Mortgage. A mortgage against an agricultural homestead of 40 acres or more must contain the boldface homestead exemption waiver signed and dated by the borrower as provided in Iowa Code Section Failure to include the required disclosure invalidates an agricultural mortgage. b. Spousal Signatures. Regardless of whose name the property is titled, both spouses must sign a mortgage on homestead property, or the mortgage is invalid, unless (i) the nonsigning spouse s interest is terminated by a decree of dissolution of marriage or other order of the court; (ii) the nonsigning spouse s right of recovery is barred by section 614.5; (iii) the encumbrance is a purchase money mortgage as defined in section B; and (iv) a court sitting in equity enters a decree holding that invalidating the conveyance or encumbrance or a contract to convey or encumber the homestead would, directly or indirectly, unjustly enrich the nonsigning spouse. c. Order of Collection. A lender that holds as collateral a debtor's homestead with other non-homestead property (whether real or personal) must collect its debt from the non-homestead property first. d. Truth in Lending Act-Notice of Right to Rescind. A lender that is taking a security interest in the debtor's principal dwelling must give the debtor written notice of his right to rescind the transaction within three days of signing the mortgage documents. If the notice is not given, the debtor may rescind the mortgage at any time within three years. If in 4

5 bankruptcy, a Kansas Bankruptcy court has opined that this means that the debtor can rescind the mortgage, leaving the lender with an unsecured obligation that is discharged in bankruptcy, and the debtor with an unencumbered homestead that is exempt. e. Parceling on Sale. If the homestead is agricultural, the debtor is allowed to parcel the homestead, up to forty acres, and redeem that ground, at fair market value, separate and apart from the remaining land in the tract. f. Pre-Acquisition Debt. A homestead is not exempt as to debts contracted prior to its acquisition. Because a debtor can tack homesteads, preacquisition debt as a practical matter is generally limited to debt incurred before the debtor acquired his first homestead. iii. Real Estate Contracts. Under Iowa law, a seller s interest in a real estate contract constitutes personal property and a lender taking such interest as collateral must perfect by filing a financing statement in accordance with Article 9 of the Uniform Commercial Code. However, because such contract could subsequently be forfeited, thus returning the entire fee simple interest to the seller, a prudent lender should also file a mortgage encumbering the seller s interest in the county where the land is located. The buyer s interest in a real estate contract constitutes real property and a lender taking such interest as collateral must perfect by filing a mortgage in the county where the land is located. Real estate contracts can be forfeited upon thirty (30) days notice of default from the seller to the buyer. IA Code A buyer s mortgagee is also entitled to receive such default notice and thus have an opportunity to cure the default. IA Code iv. Assignments of Leases and Rents An assignment of leases and rents may be contained in the mortgage or deed of trust or by separate instrument and is perfected by filing in the county where the land is located. v. Environmental Laws and Regulations Iowa has fairly extensive statutory and regulatory provisions relating to environmental matters. The majority of the statutory provisions are found in IA Code Chapters 455A-I, Chapter 455K and Chapter 459. The provisions are enforced by the Iowa Department of Natural Resources or, on limited occasions, by the Iowa Attorney General. The Iowa environmental laws include several provisions that impose liens on real estate. These liens relate to the failure to pay an environmental protection charge (IA Code ) or to the potential of recovery by the State of certain underground storage tank payments (IA Code 455G.9(5) and 455G.13(5)). An Environmental Indemnity 5

6 Agreement from the owner of the mortgaged property (and any guarantors of the Loan) should be executed in favor of the Lender. vi. Prepayment Pursuant to IA Code 535.9, a borrower obtaining a loan to purchase and occupy a single-family or two-family dwelling or obtaining a loan which is payable over a term of 5 years or less for the purpose of purchasing agricultural land, cannot be required to pay a prepayment penalty. This also applies to the refinancing of a purchase money loan. vii. Due on Sale or Encumbrance Clauses IA Code 535.8(2)(c) provides that if the purpose of the loan is to enable the borrower to purchase a single-family or two-family dwelling for the borrower's residence, any provision of a loan agreement which prohibits the borrower from transferring the borrower's interest in the property to a third party for use by the third party as the third party's residence, or any provision which requires or permits the lender to make a change in the interest rate, the repayment schedule or the term of the loan as a result of a transfer by the borrower of the borrower's interest in the property to a third party for use by the third party as the third party's residence, shall not be enforceable unless the lender, on reasonable grounds, believes that its security interest or the likelihood of repayment is impaired, based solely on criteria which is not more restrictive than that used to evaluate a new mortgage loan application. viii. Cancellation of Mortgages or Deeds of Trust When the debt secured by a mortgage or deed of trust is paid, the Lender must record a satisfaction of the instrument. IA Code Chapter 655. IA Code provides the mortgagor with a right to damages and attorneys fees if the Lender fails to record such satisfaction within thirty days after request by the mortgagor. ix. Mechanic s Liens Mechanic s liens for labor or materials are provided for in IA Code Chapter 572. A claim of lien must be filed with the state construction registry. Generally, mechanic s liens are prior to any mortgage or other lien except liens of record prior to the original commencement of work or improvements. IA Code Thus, if work has been performed, or materials furnished, to a property site prior to the filing of a mortgage, the mortgagee should obtain a release or subordination from such potential lien holder. 6

7 x. Recordation To be effective against subsequent purchasers or mortgagees in good faith and for a valuable consideration (including a bankruptcy trustee), a mortgage or deed of trust must be recorded in the county where the land is located. IA Code All recorded documents must be acknowledged by a notary public or other appropriate official. IA Code Chapter 9E sets out the Iowa law regarding acknowledgment of recorded documents. Acknowledgments in Iowa are almost always taken before notaries public, although certain other officials are empowered to take them. Iowa has very strict statutory requirements for the formatting of documents to be recorded. See IA Code B. Acknowledgments taken outside the state are acceptable, but only if they meet the requirements of IA Code Chapter 9E. It is generally preferable to use the Iowa forms of acknowledgment for documents to be recorded in Iowa. xi. Title Opinions and Title Insurance For residential mortgages, lenders generally rely on title opinions rendered by Iowa lawyers who have examined the abstract of title pertaining to the subject property. As an adjunct to such title opinion, and particularly for the secondary marketplace, additional guaranties to the title are obtainable through the Iowa Title Guaranty Program. IA Code 16.3(15). A corporation authorized to do business in Iowa cannot sell title insurance on mortgages and deeds of trust on commercial property in Iowa from companies located outside of Iowa. D. Non-Real Estate Loans i. The Security Agreement. The Security Agreement may be an authenticated record (viz. allows the debtor to either sign or to adopt a symbol, or encryption) and must sufficiently describe the collateral. Description by reference to a UCC Article category (e.g. all equipment, inventory, accounts, deposit accounts, farm products and general intangibles ) is deemed sufficient except for commercial tort claims which must be specifically described (e.g. all claims arising out of the explosion occurring at the debtor s fireworks factory on July 4, 2013 would work). Unlike financing statements, a description of collateral in a security agreement may not use a generic statement such as all of debtor s personal property. ii. Perfection: Filing. A. Location of the Debtor. Article 9 provides that the only place to file for substantially all kinds of collateral is the place of the debtor s location. Location is deemed to be: (i) for an entity created by a filing with a state (e.g. corporation or limited liability company), the entity s location is that state. Thus, for a debtor incorporated in Delaware with its chief executive office in Iowa, you would file the 7

8 financing statement with the Secretary of State in Delaware, the state of the debtor s formation. Note: if the debtor reincorporates in another state, perfection will lapse after 4 months. (ii) for an entity not created by a filing (e.g. partnership), the entity s location is the state where it has its chief executive office. Note: if the debtor moves its chief executive officer to another state, perfection will lapse after 4 months. (iii) for an individual, the person s location is the state of his/her principal residence. Note: Vehicles (not held in inventory for sale) are still perfected by noting your lien on the title. Notation on each car s title is necessary if the debtor is in the business of leasing, but not selling, cars. Note: Perfection of a security interest in a vehicle occurs upon receipt by the appropriate state official of a properly tendered application for a lien notation. Note: If the vehicle is retitled in another state without your lien being noted, you could lose to a good faith purchaser or new lender. Note: fixtures require a UCC-2 filing or mortgage in the county where the fixtures are affixed to the real estate. iii. The Debtor s Name. Article 9 contains a statutory rule to determine when a mistake in the debtor s name is so incorrect as to make the financing statement ineffective. The financing statement is effective if a computer search run under the debtor s correct name turns up the financing statement with the incorrect name. If it does not, then the financing statement is not effective as a matter of law. The Court supposedly has no discretion to determine that the incorrect name is close enough. As a result the secured party is dependent on the kind of computer search logic used by a particular state s filing office. iv. Generic Description of Collateral. A supergeneric all assets indication of collateral in a financing statement is permitted but a supergeneric description will not suffice in a security agreement. v. Crops. A perfected security interest in crops has priority over an owner or mortgagee of the real estate on which the crops are grown, if the debtor is in possession of, or has an interest of record in, such real estate. vi. Financing the Equipment Lessor. Double-tiered perfection is required, to wit: between the Bank and the lessor, and between the lessor and lessee. As between the Bank and equipment lessor, a lease constitutes chattel paper which Bank can perfect by possession of the lease and/or a UCC filed with the Secretary of State. The equipment to be leased constitutes inventory. If leases are deemed disguised installment sales, Bank needs to make sure that lessor has filed a UCC on equipment in state where lessee is located. vii. Insurance. Bank needs to make sure it is named as loss payee on non-real estate policy and mortgagee loss payee under real estate policy. Giving notice to insurance 8

9 company immediately upon casualty loss is recommended. What about business interruption insurance proceeds? viii. Agricultural Liens. Agricultural liens must be perfected in the state where the farm products are located. An agricultural lien means an interest, other than a security interest, in farm products: (i) which secures payment or performance of an obligation for: (a) goods or services furnished in connection with a debtor s farming operation; (b) rent on real property leased by a debtor in connection with its farming operation; (ii) which is created by statute in favor of a person that: (a) in the ordinary course of its business furnished goods or services to a debtor in connection with a debtor s farming operation; or (b) leased real property to a debtor in connection with the debtor s farming operation; and (iii) whose effectiveness does not depend on the person s possession of the personal property. The following are possible agricultural liens: (i) (ii) (iii) (iv) (v) agricultural supply dealer lien; harvester s lien; cold storage locker lien; vet lien; and custom cattle feedlot lien. ix. Perfection by Control. a. Article 9 permits control of investment property to serve as a method of perfecting a security interest in investment property. For a security entitlement, this requires an agreement between the secured party and securities intermediary that the securities intermediary will comply with entitlement orders originated by the secured party without further consent of the debtor. Present control (and therefore perfection) will not exist if the secured party s future exercise of control requires the consent of the debtor. b. Article 9 provides that a secured party must have control of a deposit account to be perfected as original collateral (viz., filing a financing statement is not sufficient). There are three ways to obtain control over a deposit account: i) if the account is maintained with the secured party, and the debtor has pledged the deposit account in the security agreement, control and hence perfection, is automatic; or 9

10 ii) a control agreement is entered into among debtor, the secured creditor and the institution holding the deposit account (Note: the depository institution is not obligated to enter into the control agreement); or iii) the secured party becomes the depository institution s customer with respect to the deposit account (not very practical). Note: a security interest perfected by control has priority over any security interest not perfected by control. Note: among security interests perfected by control, the automatically perfected security interest of the depository bank has priority over a security interest perfected by a control agreement, regardless of the time of perfection. X. Priority Among Competing Security Interests. General rule. Generally, the first secured party to file a financing statement or to perfect its security interest has priority. However, there are certain exceptions, generally based on the method of perfection. Some of these are described below. a. Filing v. control. A secured party with a security interest in investment property or electronic chattel paper may perfect its security interest by filing or control. A secured party that perfects a security interest in investment property only by filing will not have priority against a secured party that later perfects by control, even if the second secured party knows of the prior perfected security interest. A secured party that does not fear a debtor double-financing its collateral can rely on the simple filing of a financing statement to perfect the security interest and defeat a lien creditor, including a trustee in bankruptcy and debtor in possession. b. Filing v. possession. Similarly, the right to perfect a security interest in an instrument (e.g. promissory note) by the filing of a financing statement does not protect the secured party that perfects by filing against a subsequent secured party that perfects by taking possession of the instrument. Once again, the decision of whether to depend solely on the filing of a financing statement to perfect a security interest will turn on the secured party s level of confidence in the debtor. xi. Purchase-money security interests. Purchase-money security interests have certain priority rights. xii. Enforcement of Lien. There exists much litigation under Article 9 in connection with the enforcement of a security interest. a. Commercial reasonableness. Each aspect of a foreclosure sale must be commercially reasonable. Some debate has occurred over the years on whether the foreclosure sale price itself must satisfy that test. Article 9 indicates that a low price of itself will not make a foreclosure sale commercially unreasonable. However a low price obtained at the foreclosure sale suggests that the court should scrutinize carefully all aspects of a disposition. 10

11 b. Notices. A secured party must give enforcement notices to other secured parties, as well as the debtor. c. Guarantors. A guarantor of an obligation subject to Article 9 is entitled to the same notices and protections as the debtor and may not waive those rights before default to the extent the debtor could not waive them. b. Rebuttable Presumption Rule. The courts have long debated whether a failure to meet the notice or commercial reasonableness requirements of Article 9 would: bar all deficiencies (the absolute bar rule ), or reduce the secured party s deficiency to the extent that the failure to comply affected the price obtained at the foreclosure sale (the rebuttable presumption rule ). Except in consumer transactions, Article 9 establishes by statute the rebuttable presumption rule. II. Collecting the Loan. A. INITIAL ACTION TO BE TAKEN CONCERNING A PROBLEM LOAN. 1. Examine your loan documents to determine if they have been adequately prepared. a. Is the Borrower correctly described? b. Is your collateral adequately described? c. UCC filing in correct place? Has it been timely continued? d. Lien notations on vehicles timely made? e. Proper mortgage acknowledgments? f. Signer(s) for borrower conform to articles or resolutions? g. Have you noticed buyers of borrower s farm products? h. Is your collateral insured and are you the loss payee? i. How well will your dragnet clause drag? 2. Are there any adverse smoking guns in the your files? 3. Update lien search to determine conflicting liens (UCC and county land records) are there any other creditors with prior perfected liens? 4. Review file for notices of purchase money security interests. 5. Can Borrower s landlord assert a lien superior to yours? 6. Federal or state tax liens filed? 11

12 7. Have you expressly or impliedly authorized the borrower to sell your collateral without remitting the proceeds to you? (i.e. course of dealing ) 8. Get a credit report. 9. Are there lawsuits pending or threatened against the borrower? 10. Where is your collateral and what is it worth quick sale v. orderly liquidation. What is the risk to the collateral value if it is retained by borrower? Is any collateral non-essential to borrower s on-going business? 11. Any unusual activity by borrower (e.g. repayment of loans to insiders, preferred vendors, transfer of assets, accounts at other institutions)? 12. Level of cooperation to date from the borrower. B. GIVING THE DEFAULT NOTICE/MEDIATION. 1. For loans secured by agricultural real estate, you must send a default notice by certified mail giving the borrower 45 days to cure the default. The notice must meet the requirements of Iowa Code 654.2A and 654.2B. Further, Iowa Code 654.2C requires that if the debt is in excess of $20,000.00, you must go to mediation and get a release before you commence foreclosure (unless a court determines that the time delay required for mediation would cause the bank irreparable harm). Therefore, you should request mediation at the same time as you send the default notice. 2. For loans secured by non-agricultural, one and two family homesteads, Iowa Code 654.D requires that you must send a default notice (either by delivering notice to the borrower or mailing notice to the borrower s residence) giving the borrower 30 days to cure the default. 3. For loans secured by non-agricultural, non-homestead assets, there is no statutory notice requirement, although, pursuant to Iowa Code you may not be able to recover your attorneys fees unless you first gave the borrower a reasonable opportunity to cure the default (e.g. a 10-day cure notice is probably sufficient); 4. A creditor who holds a claim against an agricultural borrower of $20, or more must get a mediation release before levying or taking other action against agricultural property. 654A.4. Agricultural property is defined in 654.A.1 as agricultural land primarily used for farming and personal property that is used as security to finance a farm operation or used as part of a farm operation, including equipment, crops, livestock and proceeds of security. 5. For consumer loans (viz. primarily for personal, family or household purposes which do not exceed $25,000.00), Iowa Code and require a 20 day cure notice and compliance with certain requirements therein (either by delivering notice to the borrower or mailing notice to the borrower s 12

13 residence). The borrower has a cause of action against the bank for failure to comply with the notice provision ($100 to $1,000 plus attorneys fees); C. COLLECTING DEBTS SECURED BY REAL ESTATE. 1. Judicial Foreclosure. a. Decree. b. Sheriff s Sale (borrower can delay sale) c. Redemption period, if applicable. d. Deed. 2. Non-judicial Foreclosure (two ways) a. All types of real estate ( ) (i) (ii) (iii) (iv) Written agreement between parties; Conveyance from borrower to lender; Waiver of deficiency; Notice to junior lienholders. - OR - b. Non-agricultural Real Estate (Chapter 655A) (i) (ii) (iii) (iv) Lender waives deficiency; Notice of default to borrower; Notice to junior lienholders; If default not cured within 30 days, foreclosure is effectuated. 3. Deed In Lieu of Foreclosure. 4. Receiverships. D. COLLECTING DEBTS SECURED BY PERSONAL PROPERTY. 1. Replevin (Chapter 643). 2. Specific Attachment (Chapter 640). Collateral has been or is about to be sold, concealed or removed from the state. 3. General Attachment (Chapter 639). For use when lender doesn t have a security interest. 4. Remedies Under UCC. a. Foreclosure via judicial process; 13

14 b. Repossession without breaching peace; c. Dispose of property in commercially reasonable manner - public or private sales - must give at least 10 days notice to borrower, guarantors and junior lienholders; d. Lender can disclaim warranties to buyer. e. Retention of collateral in full satisfaction of debt. f. Setoff of bank account (be aware of 90 day improvement in position factor and IRS levy factor). E. COLLECTING DEBTS WHEN YOU HAVE A JUDGMENT BUT NO SECURITY INTEREST. 1. Execution v. non-exempt real estate. 2. Execution v. non-exempt personal property. 3. Garnishment (normally wages and bank accounts) effective for 70 days - then must be renewed. 4. Judgment Debtor Examinations. F. THE GUARANTOR S DEFENSES. 1. No consideration. This defense is usually not successful when the credit is extended contemporaneously with the Guaranty. But when the credit has already been extended (e.g. loan is in default), you need to show the bank s forbearance of its remedies, etc. 2. Statute of limitations. 3. Conditions precedent to liability. (e.g. must pursue primary obligor and/or collateral first) 4. Revocation of Guaranty. 5. Impairment of collateral. Failure to document loan correctly (lien perfection) thus increasing Guarantor s exposure. 6. Negligent administration of the loan. 7. Failure to give Guarantor notice of sale of collateral. 8. Failure to conduct a commercially reasonable sale of collateral. 9. Material alteration of underlying debt. (e.g. creditor extends maturity date or payment terms or amount of loan or purpose of loan). 10. Release of co-guarantors. 11. Regulation B violations. 14