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Fiscal Fitness

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Caught Unaware: Observations from the Recent Crisis

Apr 30, 2012

Five eye-openers about legal structures, liens, tax consequences and property ownership from an attorney who’s seen them firsthand among dairy producers.

 
Riley Walter bio photoBy Riley Walter, attorney
 
I have had the opportunity and honor to represent at least 40 Central California dairies since the beginning of 2011. It has been an extremely difficult time for many of these dairymen and their families.
 
It has been a real eye opener. Dairymen are among the hardest working people ever. They are also great risk takers, given the tremendous complexity of the dairy business. There is a risk everywhere you turn. 
 
Over the course of a year and a half, some generalized observations can be made. The hope is that readers would be able to apply these observations so as to prevent some of the heartache and hardship that results from not learning the lesson.
The points below are fairly general and are only the tip of the iceberg of my observations about dairymen and their financial acumen. Naturally, not all of these observations apply to every dairyman.
 
1.       It has been a real eye opener to realize that many dairymen do not really understand the consequences of their legal structure. I have heard numerous dairymen express a complete misunderstanding of what it means to be a general partner and have joint and several liability on all of the debts. It also has come as a surprise to realize how many dairies are sole proprietorships even though they are very large, sophisticated, complex businesses.  Lesson No. 1 is to make sure that you understand the consequences of whatever structure you are using.
 
2.       It has also come as a surprise to realize that many dairymen do not understand the nature and extent of the security interests and liens against their assets. Many have expressed a complete misunderstanding of what a blanket security is, such as that typically held by a commercial lender. So many dairymen seem to think that if the item of equipment or livestock is not shown on the list attached to the security agreement, it is free and clear. Not so. The second lesson to be learned is that dairymen would be well served to periodically double check the nature and extent of the liens against their assets.  
 
3.       It seems to come as a huge shock to many dairymen to learn that if their herd and other assets are liquidated they may, nonetheless, end up with a huge tax consequence. Dairymen are masters at playing the tax game and rolling things forward. However, when the merry-go-round stops, it can come as a rude shock to find out that hundreds of thousands of dollars are owed to Uncle Sam and the state governments. The third lesson to be learned is that dairymen would be well served to have a complete understanding of their tax situation and the consequences of a bankruptcy or liquidation.
 
4.       Dairymen often seem surprised to learn that there are a number of “secret liens.” These are liens that arise by statute such as the California Livestock Service Lien and the California Dairy Cattle Supply Lien. These are liens that can be placed against the assets of the dairymen without even obtaining a signature from them. It can tie up a lot of assets and cause great consternation with the dairymen's lender who has been “primed.” The fourth lesson to be learned here is that when times get tough there are a number of secret liens that can pop up and attach to the assets of dairymen.  
 
5.       This observation deals with titles to both real and personal property. Some dairy operations have been going on for generations, and they have transmuted from father, to brothers, to partnership, to limited liability company, etc. Yet many times the title is never changed. It has been a surprise to me to come across so many situations where the land is not in the name of the entity that is farming it or operating it. Similarly, major personal property assets may never have been properly titled. This can create real issues when times get tough. So, the fifth lesson is that dairymen need to make sure that the titles to their assets line up with the operating structure.
 
These five items are just a few of the many observations gleaned over the last year and a half.  In the next article, I will address lessons learned about the financial acumen level of dairymen and what might be done to upgrade that level.  
 
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.
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