Dairymen Should Be Proactive Concerning Possible Loan Default Notices
Jan 09, 2012
In the first article of our new "Fiscal Fitness" column, attorney Riley Walter helps producers look for ways to gain the knowledge and power they need to address a default notice.
By Riley Walter, attorney
It can hardly be disputed that times are very tough for many dairymen. Who knows when relief will arrive? These difficult times lead to numerous farm bankruptcies and workouts.
Loan defaults often occur after several good years, and often occur many years after the loans in question were documented. All too often, dairymen facing a potential default are frightened, confused, embarrassed and unknowledgeable. They want to avoid the default, want to keep the bank happy and want to avoid the cost and expenses attendant to legal proceedings. No one likes paying lawyer bills.
Also all too often, dairymen facing a default simply do nothing. They wait for the notice of default to arrive, then make an appointment with the bank and its attorney and sign an extension, forbearance waiver or similar legal document without doing their homework, without knowing their rights and without getting themselves into the best possible position.
I have represented dozens and dozens of dairymen who were declared to be in default. Perhaps the most surprising part of the initial interview has been to learn how little had been done to inform themselves about the status of their finances and their rights as a borrower. In many instances, they were like deer frozen in the path of an oncoming truck, ready for the roadkill pile.
Below is a list of a few of the many things dairymen facing a default may wish to do. The list is not exhaustive.
1. What is your current financial situation? What are all of your assets? What are they worth on a going concern and liquidation basis? Who are your creditors? Are there any contingent creditors (environmental clean-up, claims not covered by insurance)? You cannot just rely on your last formal financial statement. You need to know your current position based on current market values. Appraised values do not count for much, especially stale appraisals.
2. Who has liens against your assets? Which ones? Are there any assets that are free and clear of liens? Which liens have priority?
3. Are there any title defects as to any of your assets?
4. Are there any lawsuits, filed or threatened, against you? Are any of these covered for defense or indemnity by any of your insurance policies? Are there any counter or cross claims?
5. What is the status of your budgets? Do you have a good idea of what your financial position really is? Where can you economize, delete or defer? Can you generate other or additional income?
6. Do you have assets that can be sold or refinanced?
7. If you need to sell assets, what will be the tax consequences? (Do not assume you can shelter the gains.) This is often a huge issue with dairy operators.
8. Do you owe any debts that would have priority in or be non-dischargeable in bankruptcy (such as income taxes and payroll taxes) that should be paid ahead of general non-priority claims?
9. What assets are exempt from creditor claims? What can be done to expand these assets?
10. Are any of your debts guaranteed by another? What is the impact of default on the guarantor? Is anyone else’s property security for your debts?
11. If you are a Farm Credit System or Farm Service Agency borrower, have you already used your borrower’s rights? What rights do you have? Have you already waived any of our rights?
12. Are your assets in a trust? A trust may not be eligible for bankruptcy protection. Does it need to be revoked?
13. If things are really serious, what are your bankruptcy options? There are different eligibility requirements for Chapters 13, 12 and 11 and different uses for these chapters.
14. Is a lender’s security interest about to attach to your crops? Usually this occurs when the crop comes into existence. This means timing your response to the default notice may be critical.
15. Should you preempt commencement of foreclosure by a strategic bankruptcy filing? While this is not usually advised, it may be considered in some circumstances.
16. Are there cross default clauses so that a default in one loan constitutes a default as to other loans?
17. Are you good at communicating with your creditors? Too many make the mistake of playing ostrich -- putting head into sand thinking if they cannot see others, others cannot see them. This does not work. Just imagine the target it leaves. The lender is entitled to know what is going on. Failure to communicate is a common reason for a default notice.
18. If matters are far progressed and workout documents have been drawn, what rights are you waiving or conceding? Are you releasing the lender from even unknown claims? Waiving the right to file bankruptcy? Stipulating that you have no defenses to debt? Do you really know what your rights are?
19. Are there any creditors having statutory liens such as dairy cattle lien claimants, producers’ lien claimants or livestock service lien claimants? Do you have any environmental problems that are not disclosed to your lenders?
As stated above, these questions are not by any means a complete list of all the questions that can arise out of a loan default notice. However, they are enough to demonstrate that knowledge is power. Knowing your own situation in advance of the default notice may give you the ammunition to head off the notice, or at least handle it more effectively.
Therefore, if you think you could be a candidate for a default notice, do not sit back and do nothing. Be proactive. Do not be a deer in the headlights.
Remember, being proactive is a good offense. Being reactive is not productive.
While being the recipient of a default notice is not one of the highlights of your career, being aware of the consequences of the default and being prepared to deal with it is a proactive way to lessen the pain.
Riley Walter is an attorney and founder of the Central Valley-based Walter & Wilhelm Law Group, a law firm specializing in agribusiness, reorganization and bankruptcy. Contact him at 559-435-9800 or RileyWalter@W2LG.com