Another Reason to Use a LLC Versus a Partnership
Feb 28, 2011
I came across a recent court case regarding the non-discharge of farm debt for a husband and wife in a partnership. The husband had provided a "borrowing base certificate" to the lender showing the farm owned about 4,700 head of cattle when in reality the farm never had more than 1,000 cattle at any one time. The debtor wife had argued that she did not participate in the issuance of the borrowing base, therefore, her portion of the debt should be discharged.
The court found that a partnership existed between the debtors in that the wife participated in the financial management of the farm, received distributions, and either had knowledge of the information contained in the borrowing base certificate or should have know what was in it. Because the debtors were partners, the court imputed the husband's fraud to the wife and held the debt non-dischargeable to both debtors.
This case illustrates another reason to use a limited liability corporation or regular corporation in the operation of your farm. These types of entities can in most cases prevent the above from happening. However, to effectively use this as a shield, you must discuss this with your legal advisor. Also, farm couples should try to shield the non-participating interest in the farm operation by not having that spouse sign personal guarantees when possible.