Seeking financial advice early might save your dairy.
Mike Cherniske was 50 years old when he lost his Utah dairy to bankruptcy. Financial distress resulting from a series of unfortunate events had caught up with him, and, by 2008, his cows and cash were gone.
"If I’d had the right attorney, I’d still have my dairy," the fourth-generation dairy producer says.
U.S. dairies large and small have gone bankrupt or may be headed that way after the financial meltdown of the past two years. It’s hard to pin down how many dairy bankruptcies have occurred since 2009, but sources report cases in California, Idaho, Colorado, Texas, Arizona and the Midwest.
It may be too late for many dairies. But for others, seeking bankruptcy expertise now could help them weather their insolvency and even bring them through their financial problems. "In many cases, I tell dairymen that if they had come to me six months earlier, they could have avoided bankruptcy," says Riley Walter, an insolvency attorney in Fresno, Calif.
Seeking help earlier gives a financial and legal team time to review your documents and craft a plan to help you come through insolvency. Knowing your financial options can lower the intimidation factor that comes with restructuring and bankruptcy.
But perhaps most importantly, the longer you wait for help, the more depleted your assets can become.
No one knows better than Cherniske how painful the loss of a dairy can be. His problems stemmed from stray voltage from a power plant eight miles from his dairy. Underground electrical currents sickened and killed his cows, lowering production and contributing to massive medical bills. Between 1999 and 2003, he lost more than 500 of his 1,200-cow herd. After lengthy testing, Cherniske joined 17 other Utah dairies in a 2003 lawsuit against the utility.
Amid all that, Cherniske discovered that his loan officer at a major bank was illegally using the funds in his account. The bank eventually fired the officer but also pulled Cherniske’s loan. As he slipped toward bankruptcy, his business suffered from crucial mistakes by attorneys.
"I was up against something I couldn’t control," says Cherniske, originally a Connecticut dairy producer. "Everything that could go wrong did go wrong. It was a gut-wrenching experience."
Forced to choose between pursuing a lawsuit against the power plant or the bank, he stuck with the case against the utility. (The suit is still ongoing.) He eventually went into an ill-advised bankruptcy and had to liquidate his dairy assets.
Cherniske’s California-based accountant, David Sousa, helped him get to the bottom of the errors that had occurred. They brought Riley Walter onboard for legal help, but it was too late to save the dairy.
With his wife, Linda, Cherniske moved to central California in 2008 to work with Sousa and Walter. He began by helping their dairy clients meet the Central Valley’s stringent waste discharge requirements.
But so many dairy producers came in with lender problems—something Cherniske knew plenty about—that he formed his own company to serve as a middleman between dairies and banks. His keen dairy eye helps bankers understand the ins and outs of dairying, which ultimately benefits his producer clients.
"I want to make sure that what happened to me doesn’t happen to others," Cherniske says.
Cherniske recommends that financially distressed producers find a CPA and an attorney who can strategize plans and go forward with alternate solutions. He points to Sousa and Walter as examples of professionals who can help.
"Dave has a unique way of talking through the problems," Cherniske says. "Most accountants cannot think outside the box like Dave can. He finds the people you need or a solution to use.
"In our environment, where banks are pulling loans, you’ve got to do your homework," Cherniske adds. "Try to find someone who’s gone through it and can tell you what to expect and what the pitfalls are—and that you can come through on the other side."
Prepare, Position and Protect
|"Bankruptcy is very emotional," says former Utah dairy producer Mike Cherniske. "It’s the hardest thing you’ll ever live through in your business. You feel like you’re the only one."
Consider these steps for improving the outcome of financial distress:
Get an annual financial checkup. Family dairies can often benefit from reevaluating their structure. Sole proprietorships are vulnerable to immense liability. Partnerships also should be re-evaluated. "Dairy partnerships are wonderful when you’re making money but horrible when you’re losing money," says California attorney Riley Walter. In general, having a limited liability structure makes sense.
Understand all aspects of your dairy’s fiscal condition. Many dairy owners are "woefully lacking in accounting information," Walter says. "They rely only on their accountant and their creamery," he says. "You can’t run your dairy out of a checkbook. If you don’t have accurate, up-to-date numbers, you’re not going to make it." Detailed numbers also build credibility with lenders. Lock in inputs, especially as feed prices climb. "If you don’t, you’re exposed and totally at risk," Walter says.
Know your lien structure. Who has the first or second deed of trust on your property, cows or quota? Who’s in line to get your milk check? Are there any cattle supply liens on your dairy? "A dairyman needs to know who has the right to payment and the order of priority," Walter says.
Get familiar with tax consequences. These can surprise you. "If you had to sell your herd and incurred $300,000 in tax consequences, how would you pay that?" Walter asks. An attorney can structure a sale in ways that may reduce taxes and can suggest sophisticated tax maneuvers under Chapters 11 and 12.
Get past the pride. Denial, ego, embarrassment—all are common reactions. But you must get past those when your dairy’s future is on the line. Often, a dairy’s problems result from problems that are out of the owner’s control.
Don’t go into hiding. Too often, financially troubled dairy owners stop talking to their lender. "That makes the lender nervous," Walter says. "There are many steps producers can take if only they would be open to talk to experts. Don’t wait until after you’ve signed a workout agreement to seek help."