Your State Association Presents. Program Materials

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1 Your State Association Presents Lenders Learn TM Chapter 10 Agricultural Lending Program Materials Use this document to follow along with the webinar. Please test your system before the broadcast. Be sure to print enough copies for all listeners. Chapter 10 of the Lenders Learn TM secured lending guide is provided as a separate handout. Monday, April 18, 2016 Presenter: Robin Russell Technical Support (for faster service please submit inquiries via or online): (Registration & Tech Support): - support@conferenceedge.com, Phone- (877) FOR ADDITIONAL ASSISTANCE PLEASE REFER TO OUR FAQs

2 About Lenders Learn TM Lenders Learn TM provides lenders and compliance officers with a deep understanding of secured lending. For each of the 15 core courses (30 hours total), attendees receive a copy of the slides and at least one chapter from Robin s new 2016 Multistate Secured Lending Guide. Once you have completed the core curriculum, you will have a 17 chapter reference. Whether your bank registers for one or all 15 webinars, you will find the information practical and valuable. See below for 2016 broadcast dates. 1: Basic Business Entities (1/21) 2: The UCC for Lenders (2/3) 3: Loan Doc 101: The Basics (2/10) 4: Loan Doc 101: Business Collateral (2/23) 5 & 6: Loan Doc 101: Perfection by Possession & Control (2/18) 7 & 8: Basic RE Loan Documentation (3/2 & 3/3) 9: Oil & Gas Lending (4/6) 10: Agricultural Lending (4/18) 11: Commercial Loan Documentation (5/3 & 5/4) 12: Letters of Credit (5/17) 13: Lending to Municipalities (8/24) 14, 15, 16: Basic Bankruptcy for Bankers (11/2) 17: Loan Participations (11/15) Also Recommended: Top Loan Documentation Mistakes (TBD), Advanced Commercial Loan Documentation (6/1) Understanding Commercial Loan Documents (9/20) Understanding Real Estate Loan Documents (9/22) Commercial Real Estate Loan Documentation (12/7) All programs will be recorded and available for viewing after the broadcast date. If you would like to complete the Lenders Learn TM curriculum and missed the webinar, please visit the on-demand catalog to register.

3 Agricultural Lending: Loan Documentation and Administration Robin Russell Andrews Kurth LLP 1 Robin Russell ROBIN RUSSELL Robin is a fellow in the American College of Bankruptcy. She combines a depth of experience in bankruptcy restructuring and litigation with financial transactions. She has represented corporate debtors, liquidating trustees, bondholders, unsecured creditors' committees, bank groups, private equity funds, landlords, trade creditors and bidders for estate assets in Chapter 11 and Chapter 7 bankruptcy proceedings and has litigated fraudulent conveyance and preference claims in bankruptcy and district court. She has also represented banks, institutional lenders and corporate borrowers in commercial loan transactions and debt restructurings. Robin is the principal author of Thomson Reuters Texas Practice Guides for both Creditors Rights and Financial Transactions and the Texas Bankers Association s Texas Secured Lending Guide, Texas Real Estate Lending Guide, Texas Problem Loan Guide and Texas Account Documentation Guide. She is a frequent speaker on banking, bankruptcy and financial restructuring related topics, an elected member of the American Law Institute and has served as a Chapter 7 Trustee. Robin received her LL.M. in Banking Law from Boston University and her J.D. from Baylor University where she was Editor in Chief of the Baylor Law Review and the highest ranking graduate in her class. Prior to joining the firm she clerked for the Texas Supreme Court. 2 1

4 Notice This presentation is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that neither the presenter nor your State Bankers Association is engaged in rendering legal, accounting or other professional advice or service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought from a Declaration of Principles Adopted by the American Bar Association and a committee of Publishers and Associations. 3 Common Ag Loan Collateral Farm products crops including sharecropper s share, livestock Documents of Title Equipment Fixtures Accounts General intangibles including payments under certain federal farm programs Certificated motor vehicles Real property< leasehold fee 4 2

5 Types of Loans Short term Long term 5 Short Term Loans Made to finance crop and livestock production Typically repaid at the end of the production cycle Paid from the proceeds of the sale of the grain or livestock produced during cycle 6 3

6 Long Term Loans Primarily associated with purchase and development of capital assets Generally repaid from cash flows from operations Used to finance: real estate equipment breeding herds orchards 7 Carry Over Debt Restructured short term debt Typically unpaid portion of an annual operating line of credit Borrower is unable to pay off the debt due to bad crop year 8 4

7 Risks Associated With Agri Business Lending Credit Production Market Governmental/Legal Liquidity Operational Compliance 9 Credit Risk Risk of the Borrower s ability to successfully: Plant crops or breed animals Grow or raise the product Harvest finished products (such as grains and livestock for slaughter) 10 5

8 Production Risk Risk of adverse weather conditions and other natural disasters Unexpected increase in the expense of harvesting, fertilizing and transporting product Feed shortages 11 Market Volatility Commodity price fluctuations Unfavorable weather Changes in domestic and global supply and demand 12 6

9 Government Policies and Legal Risks Regulated by federal, state or even local jurisdictions Zoning (swine, dairy, feedlot and poultry operations) not permitted near populated areas Environmental regulation Federal government assistance programs effect (good and bad) Borrower s ability to keep its loans. Example: the Agricultural Act of 2014 eliminated direct payments to agricultural producers while continuing crop insurance options and conservation programs. 13 Liquidity Risk Crop losses Unfavorable market conditions Loan payment deferrals 14 7

10 Operational Risk = Loan Collection Problems Documentation Inspection Control and monitoring requirements 15 Compliance Risk Appraisal requirements Real estate lending standards Special lending limits applicable to agricultural loans (Regulation D) 16 8

11 Farm Products Crops grown, growing or to be grown, including: crops produced on trees, vines and bushes (fruit and nuts from trees or berries from bushes) and aquatic goods produced in aquacultural operations Livestock, born or unborn, including aquatic goods produced in aquaculture operations Supplies used or produced in a farming operation; or Products of crops or livestock in their unmanufactured states (ginned cotton is unmanufactured as is milk that has been pasteurized or sap boiled to produce maple syrup; while the canning of farm products such as tomatoes would likely be manufacturing) 17 Livestock Dairy and beef cattle Hogs Sheep Goats Horses Mules Poultry Fish 18 9

12 Farming Operations Raising Cultivating Propagating Fattening Grazing Any other farming, livestock, or aquacultural operation Aquatic goods may be either livestock (e.g., catfish raised on a catfish farm) or crops (e.g., kelp) Ranching is farming 19 Basic Agricultural Loan Documentation (Non Real Estate) Loan Application Agricultural Financial Statement Promissory Note Security Agreement Form UCC 1 Financing Statement Lien Search Authorization Documentation Title Verification Documentation Evidence of Insurance 20 10

13 Additional Documents Account Control Agreement for commodity contracts Mortgage/Deed of Trust Survey Title Commitment and Policy Title Insurance Warehouse Receipts Bills of Lading Registration Papers on Livestock 21 Centum = Latin for 100 CWT = hundred weight Real Estate vet 22 11

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15 25 Security Agreement Mandatory Identify parties Identify what obligation is being secured Identify collateral Contain words of grant granting lien on collateral In writing Signed by owner of collateral Optional Representations/Warranties Covenants Events of Default Remedies 26 13

16 Collateral Description UCC Collateral may be described by item or type A collateral description in the UCC 1 (but not the security agreement) on non consumer collateral may simply state all assets or all property A commercial tort claim also must be described with specificity 27 Collateral Description For UCC Ag Assets All of the following property of Debtor now owned, hereafter acquired or produced: all farm products including, but not limited to, all livestock and their products, feed, feed additives, feed supplements; all crops, whether annual or perennial, seed, fertilizer, chemicals and supplies; all equipment including, farm machinery, tools and other implements and all additions, accessions, parts and equipment now or hereafter incorporated into, affixed to or used in connection with said equipment; all inventory; all now existing or hereafter arising; all documents, chattel paper and notes receivable; all investment property including all commodities futures contracts, margin deposits and any funds maintained by any broker for the benefit of Debtor; and all general intangibles including all government payments and payments in kind to which Debtor may now or hereafter be entitled; Supplements to be added when applicable: The aforementioned livestock will include, but not limited to livestock branded (sketch of brand) on (location on animal) All fixtures located on the property described as [legal description of the property] NOTE: A real property description is not required on crop filings but is required on fixture filings 28 14

17 Collateral Description For Crops All of Debtor s crops, including, but not limited to, (describe here the specific type(s) of crops to be taken, e.g., cotton, corn, oranges, etc.), now growing or to be grown, together with all seed, fertilizer, chemicals and supplies, plus all products thereof, and any and all proceeds arising from the disposition thereof and all accounts and general intangibles 29 Collateral Description For Livestock All livestock now owned or hereafter acquired by Debtor and the young conceived thereof, together with all increases thereof wherever located and all feed, feed additives, feed supplements, including any and all product and proceeds arising therefrom to be added when applicable. The aforementioned livestock will include, but not be limited to livestock branded (sketch of brand) on (location on animal)

18 Inventory If the Bank takes a security interest in farm products, the Bank also should take a security interest in inventory to protect itself in the event the Borrower ceases to qualify as person engaged in farming operations or the collateral is transferred to a person not engaged in farming operations. 31 Standard Security Agreement Covenants Duties Toward Property Possession Good repair (ag equipment) Payment of taxes Access to inspect collateral (livestock & crops) Notification of loss Access to books and records Nondisposition (unless ordinary course) Recordation of security interest on chattel paper Proper collection and settlement of accounts No commingling of proceeds Direct payment of accounts receivable List of buyers for Farm Security Act notices Insurance Other Duties Authorization of secured party to file financing statement Authorization of secured party to protect collateral 32 16

19 Representations and Warranties Valid existence as entity Authorization to execute and perform Past, present and future name Ownership of collateral Use of property (i.e., agricultural) 33 Defaults Failure to pay principal and/or interest Breach of covenant Rep or warranty untrue Bankruptcy/insolvency Deemed insecure Remedies Charge default interest Turn over collateral Enter and take possession of collateral Foreclose 34 17

20 The Covered Dish Supper Rules of Priority PMSI Statutory Possessory Liens Secured Administrative Priority Claims Unsecured Equity 35 UCC 1 Financing Statement 36 18

21 UCC 1 Financing Statement Requirements To be effective, a Financing Statement must: Give the name of the debtor(s) Give the name of the secured party Give a description of the collateral Provide a mailing address for the debtor and the Secured Party of record Indicate whether the debtor is an individual or an organization Signature of debtor not required

22 Agricultural Liens Secures payment or performance of an obligation for goods or services furnished in connection with a debtor s farming operation or rent on real property leased by debtor in connection with its farming operation That is created by statute in favor of a person that in the ordinary course of its business furnished goods or services to a debtor in connection with a debtor s farming operation or leased real property to a debtor in connection with the debtor s farming operation; and whose effectiveness does not depend on the lender or other creditor s possession of the personal property 39 Examples of Ag Liens on Farm Products (vary from State to State) A chemical and seed supplier s lien on crop proceeds A stock breeder s lien on offspring A feed supplier s lien on proceeds 40 20

23 Examples of Possession Statutory Liens on Farm Products (vary from State to State) A cotton ginner s lien on ginned cotton An agricultural landlord s lien An agister s/feed lot owner s lien on livestock Warehouseman s lien on stored grain A lien on livestock, carcasses and related products with respect to livestock sold for slaughter

24 43 UCC 1 Filing Location If the debtor is an individual, the financing statement should be filed in the Central Filing Office of the state in which the debtor has its principal residence If the debtor is a partnership, the financing statement should be filed in the Central filing office of the state where the partnership has its principal place of business If the debtor is a corporation, a limited liability company or a limited partnership, the financing statement should be filed in the central filing office of the state under which the debtor is organized or formed In most states, but not all, the Central Filing Office is the Office of the Secretary of State 44 22

25 Food Security Act of 1985 Allows a buyer in the ordinary course to buy farm products from a farmer free and clear of any security interest created by that seller Allows Banks to take action to prevent a buyer from buying farm products free of the security interest Bank s procedure depends upon whether the applicable state has established a central notification system ( CNS ) 45 States with CNS (19) Alabama Colorado Idaho Louisiana Maine Minnesota Mississippi Montana Nebraska New Hampshire New Mexico North Dakota Oklahoma Oregon South Dakota Utah Vermont West Virginia Wyoming 46 23

26 Central Notification Systems Secured party files EFS (i.e., effective financing statement) with the Secretary of State to notify buyers of Bank s lien An EFS is not a UCC 1 financing statement Buyers of farm products must subscribe to lists of filed EFS records provided on a regular basis by the Secretary of State, or conduct their own searches of EFS records If farmer appears on list or search, buyer must ensure the proceeds reach the Bank 47 Content of EFS Each state with a CNS system has its own EFS form Be careful not to confuse EFS and UCC 1 forms Contents typically include: Borrower s name and address Borrower s social security number (or unique identifier) Description and location of the farm products 48 24

27 States with No CNS Bank must prenotify individual buyers of individual liens based upon information about contemplated buyers given the Bank by the Borrower Banks must obtain Verification of List of Potential Buyers from Borrower Bank gives each potential buyer Notice of Security Interest When loan paid off Notice of Termination of Security Interest is given

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30 Selling Off List Farmer who sells to buyer who was not notified of a security interest because the farmer failed to give Bank the name of the potential buyer Farmer subject to a mandatory fine of at least $5, Fixture An item of equipment used in a farming operation may also constitute a fixture under the UCC A fixture is an item of personal property which has become affixed to real property in such a manner that the item is viewed by the law as part of the real property If the Bank decides that a fixture filing is appropriate, the Bank should also try to get a subordination or release of the interest in the farm equipment of any mortgagee of the real property where the farm equipment is located 56 28

31 Farm Vehicles Trucks and farm tractors may be subject to a certificate of title act Perfection of the security is by a notation on the certificate of title evidenced In some states farm tractors and other implements of husbandry are exempt from titling laws and should be perfected by UCC 1 filing on equipment 57 Farm Products and Equipment Located on Leased Premises Bank s security interest in farm products and equipment may be subject to prior interest of the landlord pursuant to state law Landlord s lien does not show up on UCC search Bank should seek subordination, waiver or release of lien from the Borrower s landlord

32 Landlord s Subordination or Waiver Often difficult to obtain from a landlord Landlord or mortgagee will seek to extract something from the Borrower (lessee) in return which the Borrower (lessee) is unwilling to give EXAMPLE: If Borrower (lessee) has outstanding complaints under the lease, Landlord may seek release of complaints in return for his execution of the subordination. 59 Crops on Mortgaged Real Property Bank may take lien on crops growing or to be grown Crops growing on real property, unless severed by actual harvesting, a prior lease or a prior security interest, may pass with the real property upon foreclosure of an existing deed of trust or mortgage Bank should obtain agreement with the mortgagee to allow Bank to harvest crops after foreclosure Lien on crops growing on real property has priority over mortgagee or owner of the property if the debtor is the owner or is in possession of the real estate 60 30

33 Agricultural Leases Leases of farm land may be a source of collateral The Bank may take assignment of rentals due the Borrower under an existing cash lease. Under a cropshare lease, Bank may take assignment of the Borrower s landlord s share of all harvested crops Crops taken under landlord s share may be subject to a prior security interest; (i.e., the advancement of seed money ) 61 Registered Animals Thoroughbred animals are generally registered with a private association that maintains records of ownership of the particular type of animal (i.e., The American Quarter Horse Association) Possession of registration is essential component of the sale of animal or its breeding services Bank should take possession of certificate(s) of registration This does not constitute perfection/ucc 1 must be filed 62 31

34 Purchase Money Security Interests Priority A purchase money security interest ( PMSI ) is a security interest in goods (including livestock and equipment) securing the credit extended to enable the Borrower to acquire or use the goods Gives a super lien to Bank providing the financing for the Borrower to pay the purchase price of the goods Possessory Lien PMSI Secured Debt Unsecured Debt 63 PMSI in Livestock PMSI is perfected when the debtor receives possession of the livestock Bank sends authenticated notification (a writing) to holder of the conflicting security interest Holder of the conflicting security interest receives notification within six months before the debtor receives possession of the livestock Notification states that the person sending the notification has or expects to acquire a purchase money security interest in livestock of the debtor and describes the livestock 64 32

35 PMSI Farm Equipment The PMSI is perfected when the Borrower receives possession; or Within 20 days after the Borrower receives possession 65 Real Property Liens Liens on real property such as acreage and timber are created by the granting of a mortgage or a deed of trust executed by the Borrower to the Bank 66 33

36 Insurance Policy for Ag Collateral Fire insurance on grain crops Hail insurance if crops are in an area with a history of hail damage Frost insurance when appropriate and available Flood insurance when appropriate and available 67 Federal Crop Insurance Corporation Administered by U.S. Department of Agriculture Provides coverage against losses due to low price, low yield and destruction of crops Bank may receive insurance proceeds directly Aspecial assignment is required In hands of farmer, they are insurance proceeds under the UCC subject to Bank s lien on underlying crops 68 34

37 Types of Crop Insurance Yield Based Crop Coverage Actual Production History Group Risk Plan (county index) Dollar Plan (declining value) Crop Revenue Insurance Plans Group Risk Income Protection Adjusted Gross Revenue Income Protection Revenue Assurance Catastrophic Coverage 69 Ag Credit Enhancements FSA programs SBA programs State level programs Personal guarantees Insurance policies 70 35

38 USDA Guarantee Programs Farm Services Agency Guarantees repayment of up to 90% of loan Bank must notify FSA when borrower is 30 days overdue and unlikely to be current within 60 days Commodity Credit Corporation Export credit guarantee program guarantees payments under export sales contract Commodity Price Support Loan and Purchase Program guarantees farmer will receive the support price for commodity pledged as collateral 71 Federal Farm Program Payments Payments to farmers for price support, conservation or disaster assistance Programs administered by the Farm Service Agency ( Farm Service Agency ) and the Commodity Credit Corporation ( CCC ) Farmers may assign cash payments to the Bank with Assignment of Payment. The conservation payments are general intangibles. The crops are farm products. Bank must have a security agreement covering the collateral and perfect by filing a UCC

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40 Equity Interest in Agricultural Cooperatives is General Intangible Agricultural cooperatives process, store and/or sell a farmer s milk or grain Interest in Ag coop is general intangible Perfect security interest by filing UCC 1 75 Commodity Contracts Farmers purchase and sell commodity contracts to protect against unanticipated adverse changes in the future prices If held in a securities account are investment property of the debtor Perfect a lien under UCC with Investment Property Security Agreement and Account Control Agreement 76 38

41 Important Commodity Definitions Commodity account means an account maintained by a commodity intermediary in which a commodity contract is carried for a commodity customer. Commodity contract means a commodity futures contract, an option on a commodity futures contract, a commodity option, or another contract if the contract or option is: traded on or subject to the rules of a board of trade that has been designated as a contract market for such a contract pursuant to federal commodities laws; or traded on a foreign commodity board of trade, exchange, or market and is carried on the books of a commodity intermediary for a commodity customer. Commodity customer means a person for which a commodity intermediary carries a commodity contract on its books Commodity intermediary means a person that: Is registered as a futures commission merchant under federal commodities law; or In the ordinary course of its business provides clearance or settlement services for a board of trade that has been designated as a contract market pursuant to federal commodities law. 77 Perfection of Security Interest in Investment Property The Perfection of a security interest occurs when the Bank obtains control. The Bank has control of an investment property if: The Bank becomes the entitlement holder (changes the name on the brokerage or commodity account to the name of the Bank) or A securities intermediary has agreed that it will comply with entitlement orders originated by the Bank without further consent by the farmer/entitlement holder, (i.e., executed an Account Control Agreement)

42 Documents of Title Warehouse receipts and bills of lading are documents of title Can be negotiable or non negotiable Receipts issued by a person engaged in the business of storing, transporting or forwarding goods for hire act as evidence of title to goods Commitment by issuer to deliver the described goods to the owner of the receipt and to use reasonable care to protect goods from damage May be electronic or paper receipt Entitles person in possession to receive, hold and dispose of the goods 79 Warehouse Receipt Covers Borrower s harvested crops stored off the farm premises in a warehouse Title to crops typically evidenced by electronic or paper warehouse receipts Describes goods stored in a warehouse 80 40

43 Perfection of Security Interest in Documents of Title If receipt is non negotiable, security interest is perfected in stored goods by the issuance of the receipt in the name of Bank If receipt is negotiable, must be endorsed to Bank, delivered to Bank, and retained in Bank s possession to perfect a security interest in the stored goods Security agreements should also describe warehouse receipt and the stored goods as collateral File UCC 1 describing all assets or both the warehouse receipt and the stored goods by item or type as collateral 81 Bill of Lading Document of title Issued by a carrier in connection with the shipment of goods Enables remote buyer and remote seller to consummate a transaction with limited risk to either party 82 41

44 Non Negotiable Receipts A non negotiable receipt is preferable to a negotiable receipt as collateral as there is less risk of loss The Bank can retain possession of a non negotiable receipt when goods are released. A non negotiable warehouse receipt specifies the person to whom the described goods are to be delivered without adding either bearer or order, the words of negotiability. The Bank must be named by a non negotiable receipt as the person to whom the goods are to be delivered, otherwise it is unacceptable as collateral 83 Negotiable Warehouse Receipts A negotiable warehouse receipt contains words of negotiability, either stating that the described goods are to be delivered to any bearer of the receipt or stating that the described goods are to be delivered to the order of a named person A bearer receipt is negotiated by delivery of the receipt to a transferee An order receipt is negotiated by the signature of the named person to whose order it runs, plus delivery to a transferee Borrower must endorse it with an endorsement that states that receipt thereafter runs to the order of Bank Bank should obtain borrower s guaranty of the signatures of any unknown endorsers 84 42

45 Warehouse Receipt Financing Used as a hedge against supply shortages and price fluctuations Used to cope with seasonal inventory buildups, especially in the agricultural industry Enables the borrower to avoid The fixed repayment terms of many other credit arrangements and Holding idle borrowed funds 85 The Warehouse Warehouse should be bonded Warehouse should be owned and operated by a third party that is independent of the borrower Bank should avoid a bonded subsidiary warehouse in which the borrower has an interest Terminal warehouse engaging in general storage for the public is the typical 86 43

46 Storage Agreement Between a borrower and a third party warehouse Should obligate the borrower to pay all warehouse charges Should acknowledge the Bank s security interest in stored goods Holder of statutory landlord or warehousemen s lien is protected as to rentals or charges Consider getting waiver or subordination of any statutory warehouse lien to the security interest of the Bank (HARD TO GET) 87 Due Diligence Checklist for Warehouse Receipts Adequate bonding Adequate warehouse insurance coverage If the warehouse is leased, lease term must equal or exceed the duration of loan Adequate physical facility and method of operation Experience of warehouse Financial status, credit rating and general reputation 88 44

47 Terms of a Warehouse Receipt Name and location of the warehouse Negotiable receipts: statement that goods are deliverable either to bearer or to a specified person or his or her order ; Non negotiable receipts: statement that the goods will be delivered to a specified person without also using either bearer or order words; Date receipt issued The consecutive number of the receipt Either the rate of storage and handling charges of a terminal or field warehouse or a statement that a non negotiable receipt was issued by a field warehouse; 89 Terms of a Warehouse Receipt Adescription of the goods or of the packages contained, identifying them by weight, quantity, etc.; Signature of the issuing warehouse made by authorized agent of the warehouse; Name and address of every person, (including the issuing warehouse), with an ownership interest in the stored goods Statement of the advances and other liabilities for which the issuing warehouse claims a lien or a security interest

48 Inflow and Outflow of Warehouse Goods All goods received by the warehouse should be formally documented at the time received Bank should receive a copy of the warehouse s record of the receipt of goods If a warehouse receipt is non negotiable a warehouse release form signed by the Bank is necessary to release goods Bank should require check for the agreed upon percentage of the advance covering the stored goods described in the release 91 Contents of Warehouse Release Name and location of the warehouse Warehouse receipt number Description of type and quantity of the stored goods to be released The agreed upon release value of the stored goods to be released The name of the person to whom release is authorized An authorized signature of the Bank 92 46

49 Monitoring the Stored Goods Monitor the market value and quality of the goods stored in a warehouse Require detailed monthly goods and value report from warehouse Report should summarize all transactions by individual item, by units and by dollar value Compare with Bank s records Look for slow movers, possible shortages, etc. Physical inspection of the warehoused goods by Bank Storage agreement should authorize inspection 93 Process for Negotiating Receipt If warehouse receipt was issued in negotiable form, Bank must surrender the warehouse receipt to Borrower and execute a release Borrower should execute a security agreementtrust receipt describing the negotiable receipt as collateral before the Bank surrenders negotiable receipt 94 47

50 The Security Agreement Trust Receipt Documents the date upon which the negotiable warehouse receipt was delivered to Borrower Sets out the rights of Borrower and Bank Supplements the Security Agreement After withdrawal, negotiable warehouse receipt (that either has been canceled or had a partial delivery noted upon it) should be returned to the Bank by the borrower, with payment of the agreed upon percentage of the amount advanced upon the stored goods to be released Upon redelivery of the negotiable receipt and delivery of the payment, the Security Agreement Trust Receipt covering the negotiable receipt is to be canceled 95 Supplementing and Amending Security Agreement and UCC 1 Describe the negotiable warehouse receipts or bills of lading with collateral descriptions such as: Warehouse receipt issued by [warehouseman] covering [quantity] of [goods] and dated and all goods covered thereby. Negotiable bill of lading issued by [carrier] covering [quantity] of [goods] and dated and all goods covered thereby

51 Additional Loan Documents for Warehouse Receipts Warehouse Receipts or Bills of Lading Negotiable or non negotiable Collateral Receipt Guaranties of the signatures of endorsers of negotiable receipts Report verifying the financial condition of the warehouse, including proof of the existence and the amount of bonding Copy of any Warehouse Lease Copy of Warehouse Storage Agreement Warehouse Waiver or Subordination Goods Grading Certificate with respect to the stored goods A memorandum from the loan officer, accompanying a warehouse receipt, stating the percentage of advance and the release value and, if no known market exists, the value of the collateral and the method by which it was determined 97 Additional Documents for Warehouse Receipts (cont d) Hazard Insurance. Comprehensive casualty insurance, including flood insurance, naming the Bank as loss payee Formal verification by the warehouse of the validity of any outstanding receipts to be taken as collateral Proof of authorization of Agent signing warehouse receipt in place of warehouseman, if needed Formal consent by the warehouse to periodic inspection of the stored goods 98 49

52 Additional Documents for Warehouse Receipts (cont d) Copies of all warehouse receiving records, which should be reconciled with the inventory reports mentioned above, which are received at regular time intervals Regular, detailed, inventory reports from the warehouse, verifying quantities and value of the inventory on hand together with a monthly statement from the warehouse verifying that all accrued warehousing fees and charges have been paid by the borrower 99 Additional Documents for Warehouse Receipts (cont d) Authorization for the release of merchandise, on behalf of the borrower and the Bank (If the receipts are negotiable) Security Agreement Trust Receipts

53 Crop Inspection and Valuation Verify location and current market price! Inspections should be performed several times during the growing season Local and regional crop yields should be monitored The bank should use published commodity price yields (or have good support for why it doesn t!) Report should breakdown by crop and by irrigated or dryland 101 Livestock Inspection and Valuation Bank must maintain in its files an inspection and valuation for the livestock pledged Must be reasonably current, taking into account the nature and frequency of turnover of the livestock Never more than 12 months old Breakdown by sex, breed and number in each category with condition of each noted Supported by published livestock prices

54 Lending Limits Bank s total outstanding loans and extensions of credit to one borrower may not exceed 15% of the bank s capital and surplus An additional 10% of Bank s capital and surplus is allowed if the amount that exceeds Bank s 15% general limit is fully secured by readily marketable collateral Bank must perfect security interest in the collateral under applicable law Collateral must have a current market value at all times of at least 100% of the amount of the loan or extension of credit that exceeds the bank s 15% general limit 103 Special Ag Lending Limits Cumulative When loans and extensions of credit qualify for more than one special lending limit, the special limits are cumulative

55 Lending Limits on Loans Secured by Documents Covering Livestock Applies to Bank s loans or extensions of credit to one borrower secured by shipping documents or instruments that transfer or secure title to or give a first lien on livestock May not exceed 10% of Bank s capital and surplus Market value of livestock securing the loan must at all times equal at least 115% of the amount of the outstanding loan that exceeds the bank s combined general limit 105 Loans Secured by Pasturage Liens Covering Livestock In some states, persons furnishing pasturage under a grazing contract may have a lien on livestock for the amount due for pasturage If lien is assigned to bank by a recordable instrument and protected against being defeated by some other lien or claim, by payment to a person other than the bank, or otherwise, it will qualify under this exception provided the amount of the perfected lien is at least equal to the amount of the loan and the Value of the livestock must be no less than 115% of the portion of the loan or extension of credit that exceeds the bank s combined general limit When amount due is dependent upon future performance, lien does not meet the requirements

56 Loans Secured by Dairy Cattle Bank s loans and extensions of credit to one borrower that arise from the discount by dealers in dairy cattle of paper given in payment for the cattle may not exceed 10% of Bank s capital and surplus in addition to the amount allowed under the bank s combined general limit Paper must carry the full recourse endorsement or unconditional guarantee of the seller; and Paper must be secured by the cattle being sold, pursuant to liens that allow the bank to maintain a perfected security interest in the cattle under applicable law 107 Loans Secured by Bills of Lading or Warehouse Receipts Covering Readily Marketable Staples Applies to Bank s loans or extensions of credit to one borrower secured by bills of lading, warehouse receipts, or similar documents transferring or securing title to readily marketable staples Lending may not exceed 35% of Bank s capital and surplus Market value of staples securing loan must at all times equal at least 115% of the amount of outstanding loan that exceeds the bank s combined general limit Staples must be nonperishable, may be refrigerated or frozen, and must be fully covered by insurance if such insurance is customary This special limit applies to a loan or extension of credit arising from a single transaction or secured by the same staples, provided that the duration of the loan or extension of credit is: Not more than 10 months if secured by nonperishable staples; or Not more than six months if secured by refrigerated or frozen staples The holder of the warehouse receipts, order bills of lading, documents qualifying as documents of title under the UCC, or other similar documents, must have control and be able to obtain immediate possession of the staple so that the bank is able to sell the underlying staples and promptly transfer title and possession to a purchaser if default should occur on a loan secured by such documents. The existence of a brief notice period or similar procedural requirements under applicable law, for the disposal of the collateral will not affect the eligibility of the instruments for this special limit. Field warehouse receipts are an acceptable form of collateral when issued by a duly bonded and licensed grain elevator or warehouse having exclusive possession and control of the staples even though the grain elevator or warehouse is maintained on the premises of the owner of the staples Warehouse receipts issued by the borrower owner that is a grain elevator or warehouse company, duly bonded and licensed and regularly inspected by date or federal authorities, may be considered eligible collateral under this provision only when the receipts are registered with an independent registrar whose consent is required before the staples may be withdrawn from the warehouse

57 Special Bankruptcy Considerations: Tools of Trade 522(f) permits debtor to avoid certain non possessory, non purchase money liens to the extent that the lien impairs an exemption to which the debtor would have been entitled under state exempt property law up to certain statutory amount [$6,225 in 2014] Allows farmers to claim as exempt personal property their tractors, combines and other vehicles which are frequently used to collateralize operating lines of credit 109 Mediation U.S. Secretary of Agriculture authorized to help states develop USDA Certified State Mediation Programs to resolve disputes between farmers and agricultural lenders Programs are administered by the USDA Farm Service Agency Exist in more than 30 states

58 Regulation Z Agricultural purpose loans are exempt from Regulation Z Agricultural purposes includes the production, harvest, exhibition, marketing, transportation, processing or manufacture of agricultural products by a natural person who cultivates, plants, propagates or nurtures those agricultural products, including but not limited to the acquisition of farmland, real property with a farm residence, and personal property and services used primarily in farming Agricultural products includes agricultural, horticultural, viticultural and dairy products, livestock, wildlife, poultry, bees, forest products, fish and shellfish and any products thereof, including processed and manufactured products, and any and all products raised or produced on farms and any processed or manufactured products thereof HOU: