Monday, June 19, 2017 Ag Law Rooms: 312-313 Ag Lien Update: Loan Workout Concerns and Lender Liability Issues in Today s Ag Economy 3:15 p.m. 4:15 p.m. Presented by Robert Hartwig Legal Counsel Iowa Bankers Association 8800 NW 62nd Avenue PO Box 6200 Johnston, IA 50131-6200 Phone: 515-286-4211
IOWA STATE BAR ASSOCIATION ANNUAL CONVENTION Ag Lien Update, Loan Workout Concerns and Lender Liability Issues in Today s Ag Economy Presented by: Bob Hartwig Legal Counsel, Iowa Bankers Association Iowa State Bar Association Annual 1 Current Issues with Ag Liens 1. Scope and Definition: State statutory ag liens are subject to the perfection and priority requirements of Article 9 of the Iowa Uniform Commercial Code as of July 1, 2001. 2. Iowa Code 554.9310(1) states: A financing statement must be filed to perfect all agricultural liens. 3. Types of Ag Liens. Landlord s Lien (570), Ag Supply Dealer s Lien (570A), Harvester s Lien (571), Custom Cattle Feedlot Lien (579A), Commodity Production Contract Lien (579B), Veterinarian s Lien (581) Annual 2 1
Ag Liens, continued Proceeds. Reading Article 9 literally in Iowa Code 554.9315(1)(b), an ag lien does not necessarily attach to proceeds as any attachment to proceeds must come from the ag lien statute itself. See, 9 322 Official Comment 12. A recent Northern District of Iowa Bankruptcy decision however held a lien does apply to proceeds as applying the ag supplier lien to only the hogs themselves would not make sense and would provide little protection to the feed supplier and the lien does in fact make reference to the sale price of livestock. In re, Schley, 509 B.R. 901 (Bankr. N.D. Iowa 2014). Annual 3 Ag Liens, continued Perfection and priority. Although ag liens are swept into Article 9 for priority purposes (the lien itself governs creation and attachment) where generally the first to file or perfect wins, 9 322 creates a special rule for ag liens which states: A perfected agricultural lien on collateral has priority over a conflicting security interest in or agricultural lien in the same collateral if the statute creating the lien so provides. Annual 4 2
Ag Supply Dealer s Lien (Chapter 570A) This lien applies to retail cost of all ag supplies, such as chemicals, seed, feed or a petroleum product used for an agricultural purpose. The lien applies to both crops and livestock consuming the feed. The lien becomes effective or attaches when the farmer purchases the agricultural supply. Perfection. The lienholder must file a UCC 1 financing statement within 31 days after the date the farmer purchases the agricultural supply. Iowa Code 570A.4 Priority. Ag suppliers have an equal lien on crops and a superior lien on livestock against a prior perfected security interest. The lien (at least on crops) is subject to an affirmative defense of the security interest holder in 570A.2(3). Annual 5 Ag Supply Dealer s Lien, continued Priority, cont d. Specifically for a lien on livestock for the purchase of feed, the lien has priority over an earlier perfected lien or security interest to the extent of the difference between the acquisition price of the livestock and the fair market value of the livestock at the time the lien attaches or the sale price of the livestock, whichever is greater. Iowa Code 570A.5(3) For all other ag supplies, except for the affirmative defense provided in 570A.2(3), the lien will have an equal priority to a prior perfected security interest. The lien is subordinate however to a Landlord Lien and a Harvester s Lien. Iowa Code 570A.5(2). Annual 6 3
Ag Supply Dealer s Lien, continued Lien procedure: 1. The bank typically will receive a certified written request from the supply dealer prior to or upon a sale of ag supplies. The bank then has four business days to respond with a memorandum stating whether or not the farmer has a sufficient net worth or a line of credit to assure payment to the supplier. This request from the supplier must state the amount of the purchase and terms of the sale, be accompanied by a waiver of confidentiality signed by the farmer, along with a $15 fee. The memorandum from the bank can act as an irrevocable letter of credit for 30 days past the due date of the supplies if the bank indicates the farmer has sufficient net worth to assure payment of the purchase price. Annual 7 Ag Supply Dealer s Lien, continued 2. If the bank fails to respond within four business days of receiving the certified request from the supply dealer, or if the memorandum is incomplete, the supplier can proceed to make the sale and perfect the lien as provided for in 570A.3. 3. An action to enforce such a lien in 570A.3 (which applies to both crops and livestock) is subject to an affirmative defense by the bank (and proof of the bank s priority lien) that the bank either did not receive a certified request and waiver or did receive it and provided the supplier a financial history of the farmer which reasonably indicated the farmer did not have a sufficient net worth or line of credit to assure payment of the purchase price. Annual 8 4
Ag Supply Dealer s Lien, continued Legal Controversy in the Statute. From approximately 2009 2016, there have been a flurry of cases testing the inconsistency in the statute between 570A.2(3), which provides an affirmative defense for all supplier liens, and 570A.5, which states only supplier liens other than liens on livestock for unpaid livestock feed are subject to this affirmative defense. These cases all have had similar fact patterns: Most are swine cases where the feed supplier properly filed their liens but failed to send the bank lienholder a certified written request. The courts then had to decide who had priority: the banks because they did not receive the certified request or the feed supplier because the section of the law specifically referring to feed liens did not subject the suppliers to the affirmative defense of the bank. Annual 9 Ag Supply Dealer s Lien, continued Cases: 1. Oyens Feed & Supply, Inc. v. Primebank I, 808 N.W.2d 186 (Iowa 2011). The Iowa Supreme Court settled the matter litigated by various Iowa and federal courts where they ruled feed liens are superior to the bank s security interest even though a certified written request of the feed lien is not sent to the lender. The Court stated in deciding the ambiguity in the statute that it makes sense the legislature would have given feed suppliers a super priority over the new value created in the animal without having to comply with the certified request procedure. They said since feed is supplied on an ongoing basis, it is different than financing crop inputs and would be impractical and cumbersome for them to file multiple certified requests with ever changing amounts and fees. Annual 10 5
Ag Supply Dealer s Lien, continued 2. Oyens Feed & Supply, Inc. v. Primebank, II, 879 N.W.2d 853 (Iowa 2016). The Iowa Supreme Court answered two certified questions which arose from an earlier federal district court case through the swine producer s Ch. 12 bankruptcy. On the first certified question, the Court held Iowa Code 570A.4(2) creates a rule specific to ag supplier liens where the dealer must file a new UCC 1 every 31 days to maintain perfection of its lien on feed sold within the preceding 31 day period. The court also stated this is a compromise between banks and ag supply dealers as a reasonable exchange for the super priority status. Annual 11 Ag Supply Dealer s Lien, continued 2. Oyens v. Primebank II, cont d. On the second certified question the Iowa Supreme Court held the acquisition price for pigs raised in a farrow tofinish operation is zero (this again relates back to the priority section of 570A.5(3) where the feed lien on livestock has priority over an earlier perfected bank lien to the extent of the increase in value of the livestock by the FMV or sale price minus the acquisition price). Therefore an ag supply dealer of feed is entitled to a super priority position against other creditors for the full value of the feed as in farrow to finish situations they will have a lien on the entire animal as long as they file these UCC 1 statements every 31 days. Banks in these situations will now collect on their secured claim after the feed dealer collects on their super priority claim. Annual 12 6
Ag Supply Dealer s Lien, continued 3. Cases involving proceeds and application of payments. a. A recent bankruptcy decision out of Iowa s Northern District held the 570A feed lien also applied to proceeds despite a literal reading of the UCC (mentioned earlier) where ag liens will not apply to proceeds unless specifically stated in the ag lien statute itself. The Court in this case held that applying the feed lien only to the hogs themselves and not proceeds would not make sense in that it would provide little protection to the feed supplier and would discourage them from working with troubled farmers. See, In re Schley, 509 B.R. 901, (Bankr. N.D. Iowa 2014). b. The same court on the same day also addressed the question of whether under 570A the feed dealer is required to apply payments made by the farmer during each 31 day period to feed purchased during that period or if the dealer could apply those payments to older feed purchases, even those that were unperfected. The Court held absent an agreement between the parties the default under Iowa common law is to apply the payments on open account to the oldest items first. In re Big Sky Farms, 512 B.R. 901 (Bankr. N.D. Iowa 2014). See also United Prairie Bank v. Galva Holstein Ag, LLC, (WL 6223416 Minn. Ct. App. 2013). Annual 13 Ag Supply Dealer s Lien, continued Summary. It is now established law that the 570A Ag Supply Lien does not require a feed supplier to send a certified notice to a prior perfected lender with a security interest in the livestock. The certified notice requirement applies to all other ag supplier liens (seed, fertilizer, chemicals, etc.). The scope of the lien however will require the supplier (in order to have a super priority lien) to file a UCC 1 with the Iowa Secretary of State within 31 days after the feed is purchased. Annual 14 7
Ag Supply Dealer s Lien, continued Financial institutions dealing with livestock borrowers may wish to consider: 1. Specific loan conditions or covenants with livestock producers; 2. Controlling proceeds by loaning for all feed costs, or at least requiring producers to provide monthly feed bills to the lender; 3. Requiring notice, subordination or waiver of the feed lien by feed suppliers; 4. Adjusting borrowing limit based on unpaid feed bills. Annual 15 Loan Workout Issues 1. Steps to Success A. Communication B. Recognition C. Engage D. Incent E. Results 2. Challenges Facing Ag Lenders In Today s Economy 1. Lender Liability 2. Loan Classification Iowa State Bar Association Annual 16 8
Step 1: Communication Help customer, protect bank and stock holders Know your (Bankers) decision making authority Involve and know who are the owners and decision makers Have the facts and as much information about the credit as you can possibly ascertain. Understand to the best of your ability, the goals and desires of the customer as well as the bank Borrower needs to maintain communication with all creditors, owners, guarantors, managers, family and employees Iowa State Bar Association Annual 17 Step 2: Recognition Educate and explain the financial challenges, work diligently with the borrower to recognize the issues. Bank must first make certain they understand the issues By the Numbers: Let the numbers do the talking Some things may have to give: Identify what must be changed Identify and overcome objections Review the ultimate goal: Is it reasonable? Agree on a plan of action Iowa State Bar Association Annual 18 9
Step 3: Engage Borrower to take ownership of plan Cash flow projection prepared by the borrower(s). IT IS NOT THE LENDER S RESPONSIBILITY TO PREPARE THE PROJECTION. Understand this isn t business as usual Changes most likely need to be made quickly Expenses may need to be reduced to match income Borrowers still have be in control of their destiny All loan requirements agreed upon and fully understood by everyone Term debt payments may need to be deferred or loan restructured If bank needs to re amortize its term debt, 3 rd party lenders may have to do the same Understand mutually, that typically the quicker borrowers can reduce expenses and debt, the quicker their road to improved financial health will begin. Iowa State Bar Association Annual 19 Understand Mutual Benefits Step 4: Incent Point out Borrowers net worth and state goal is to preserve Borrowers wealth Provide incentive to Borrower to meet plan More work done by Borrower; Less work by bank Plan needs to be borrowers plan so they are motivated to execute Lower or waive fees / maintain vs. raise interest rate Agree upfront if Borrower meets plan: Possible lower interest rate / fees Relax specific hot button terms, loan covenants. Both parties absolutely follow loan agreement requirements Recognize successes no mater how small Iowa State Bar Association Annual 20 10
Step 5: Results Bank and Borrower to agree on well defined action plan A Have defined trigger points: Review goals and desires of the customer as well as the bank Monitor progress: Actual vs. projection line balance Actions completed by projected amounts Action completed on time / specific dates Discuss and document plan B options acceptable to Borrower if plan A is not achieved Start over with Step 1: Communication is critical to success; Communicate when on track and when not; if not, borrower needs to revise plan or move to Plan B Iowa State Bar Association Annual 21 Lender Liability and Other Challenges in Today s Ag Economy Iowa State Bar Association Annual 22 11
Challenges Lenders Face in Today s Agricultural Environment Lender Liability What is it and why should producers care? Lender liability is a result of a lenders conduct. This may include behaviors, activities and communications Most cases are the result of: 1. Negligent conduct 2. Breach of fiduciary obligations 3. Excessive control by the lender Iowa State Bar Association Annual 23 Lender Liability, continued Negligent Conduct Iowa courts have been hesitant to hold lenders liable for negligence in the processing, originating and servicing of loans as banks are typically held to a standard of conducting arms length transactions, and not in the business of making warranties or claims regarding the loan. However if banks are also conducting inspections, appraisals, etc., it could be in the business of supplying such information and would need to do so in a non negligent manner. Iowa State Bar Association Annual 24 12
Lender Liability, continued Breach of Fiduciary Obligations The Lender/Borrower relationship under Iowa law does not automatically create a fiduciary duty on behalf of the lender. Situations where Iowa courts have found a fiduciary duty include: Where there are repeated dealings between the lender and borrower over a long period of time; A lender s advice to the borrower about the borrower s financial position when the lender is in a position of influence or particular trust over the borrower; Lender s exercise of control over borrower s affairs; and When the lender has a self interest in the transaction. Iowa State Bar Association Annual 25 Lender Liability, continued Breach of Fiduciary Obligations Lenders in these transactions will always try to avoid: A chain of events where the borrower has complete trust in his or her lender and the lender takes advantage of that trust and thereby obtains an unconscionable advantage in the eyes of the court. Lenders should also avoid putting into question particularly during a workout situation that it exercised excessive control over the management and operation of the borrower. Iowa State Bar Association Annual 26 13
Lender Liability, continued Excessive Management and Control by Lender A common fiduciary breach claim in the ag lending area, where courts in some situations have held lenders become fiduciaries by reason of their dominion and control over operations of the borrower. Factors holding lenders liable in these cases include: Voting power Section of management Economic leverage Control of financial affairs Most courts have stated that economic leverage alone, without some actual control or ability to control, will not rise to the level of excess dominion and control by lender. Iowa State Bar Association Annual 27 Other Lending Considerations Loan Classification Issues Total Debt Reconstruction What is this and how is it viewed by the federal and state bank regulatory agencies? This is a restructuring of debt that: Is made to a borrower experiencing financial difficulties; and For economic or legal reasons, a creditor grants a concession to a debtor that it would not otherwise consider. Creditors always aim to: Maximize collection/recovery; and Expect that by granting concessions this will increase repayment likelihood by matching with borrowers ability. Iowa State Bar Association Annual 28 14
Loan Classification, continued Total Debt Reconstruction Regulators require banks to write down loan amounts where the loan exceeds: Present value of future cash flows for loans not collateral dependent; and Fair value of collateral if collateral dependent. Collectability of these loans must be reviewed quarterly and any portion of the loan deemed uncollectable must be charged off. Iowa State Bar Association Annual 29 Loan Classification, continued Other General Loan Classification Issues Carry over debt from Ag Operating Loans Not automatically classified by the regulators and charged against loan loss reserve but: Examiners will look at ability to restructure debt and amortize the carry over amount cash flow is very important! Iowa State Bar Association Annual 30 15
Questions? Bob Hartwig 800 532 1423 rhartwig@iowabankers.com Iowa State Bar Association Annual 31 16