Class 33 Chap. 13, continued to page 402

Case page Brief Question

In re Welch 395 action, issue, facts; Jeanna

holding, rule/law; Tom Brett

Mary Freese 399 action, issue, facts; Amanda

holding, rule/law; Kristen Daniel

Quiz 111. An interest in property to

secure a debt a. Mortgage b. Security interest c. Lien d. all the above. e. just c. 2. A security interest in

“crops and farm inventories” is an interest in:

a. Land b. Personal property

3. Generally, a lender must “file” (a financing statement) to have a perfected security interest in goods (crops, equipment, inventory …).

4. A “central filing system” for liens is with the County Recorder.

5. Private, installment contracts for land may preclude a “right to redemption”.

Other Security Arrangements & Special

Problem/Strategies Landlord’s Lien – a non-consensual lien --What happens if the tenant is unable to pay his

production loan nor the landlord’s rent? -- An “unsecured landlord” will be like any unsecured

creditor with respect to unpaid cash rent. --A landlord could obtain a “UCC security interest” in

crops, and perfects with direct notice to buyers. -- Also, landlord may require subrogation of other

parties, with a security interest, if necessary. Other alternatives: “letter of credit” or rent in

advance!

“Landlord’s”—Crops Paid as Rent Liens

By statute, at: IC 32-31-1-19 To obtain: There must be filing of a financing

statement, centrally, with Sec. of State (under prior law filing was, local, in the county courthouse for the county where crop was growing, – See, IC 26 -1-9.1- 501) New Law!!

-- at least 30 days before the “crop matures.” -- A crop-share tenant owns a crop until it

comes out of the field under common law!

Landlord’s Lien in Indiana

A “landlord’s lien” has priority over liens filed subsequent to it -- including UCC liens.

But, a non-consensual lien is inferior to a prior UCC lien, and will be avoided in bankruptcy! Note, a tenant need not consent (has not consented) to

this statutory lien. It is like all other non-consensual liens compared to a

UCC (Art. 9) consensual lien. A “landlord’s lien” in Indiana is more an emergency lien

than a planning tool or a safety net.

Mechanic’s Lien -- also statutory

- Non-consensual - Extends to the actual improvement and real estate it stands on, and is

available to contractor(s), subcontractors and materials suppliers.

It must be filed within 60 days of the last service or materials provided if for a 1 or 2 person residence—a “Class 2” structure (as defined in IC 22-12-1-5), otherwise within 90 days of the last service or materials provided.

A suit must be brought within a year or the lien is null and void.

Mechanic’s LienIC 32-28-3

A landowner may demand a suit (day in court) to settle the matter!

---If so, the lien holder has 30 days to respond. See, Wind Dance Farm v. Hughes Supply Inc., 729 N.

E. 2d 79 (Ind. App. 2003) Alternative strategies: 1. A “no lien” contract, which requires a filing

within five days of contract execution. 2. Another strategy is to pay the suppliers directly

for materials.

Bankruptcy

Lower than expected incomes may bring insolvency to anyone who borrows.

Bankruptcy allows an individual or a business a “fresh start” (albeit with a taint) by paying into court, the available and non-exempt assets for the satisfaction of creditors according to a priority of interests.

Note: detailed steps for bankruptcy are at: http://www.bankruptcyaction.com/questions.htm#p

Bankruptcy

Bankruptcy may be: Involuntary-- upon the petition of creditors Voluntary -- upon the petition of the individual

debtor(s)--on their own initiative --- An individual, couple, business entity need not be

insolvent to have a petition accepted in bankruptcy. --- One need only show “bills can’t be paid when

they come due.”

Bankruptcy– How it works.

Automatic Stay (delay) -- A petition in bankruptcy stops the enforcement

of liens on the debtor’s assets. -- The delay allows for “breathing room” and time

to “plan” perhaps to “reorganize a business.” Trustee in bankruptcy may be appointed or a

standing trustee steps-in.

Bankruptcy

A trustee is a fiduciary that takes charge of the bankrupt’s affairs.

For businesses in a reorganization the debtor typically remains in possession of his assets.

To get relief, a bankrupt debtor is required to: 1. list all assets and liabilities, and 2. a list of all creditors! Filings are published in a local newspaper so

creditors and the public (3rd parties) may “take note!”

Bankruptcy

Alternative Bankruptcy Proceedings -- Chapter 7 – a Liquidation bankruptcy --- Exempt assets are set aside, --- “super priorities” are paid first --- then creditors according to their “secured”

ranking under the UCC, --- the unsecured creditors at the “end of the line.”

Indiana Exemptions

Items Limitation* A. Residence (Individual) $15,000

($30,000 with a spouse also in bankruptcy) B. Other realty or tangible personal property $8,000 C. Intangible personal property $300 Professionally prescribed health aids Tenant by the entireties interests on the date of the petition unless the

spouse of the bankrupt is in a joint or separate bankruptcy petition. Money in a medical savings account. Must exempt certain pension & retirement benefits covered under a federal

statute. * See IC 34-55-10-2, Amended by legislation in 2005, for more details. available at: http://www.state.in.us/legislative/ic/search.html

and Information on Exemptions for other states is at:

http://www.bankruptcyaction.com/inexemptions.htm

Bankruptcy

Chapter 13 - consumer bankruptcy reorganization repayment plan

Debt limits are substantial, but only for individuals/sole proprietors in business—not corporations or partnerships.

-- general for consumers to have supervision invoked in their financial lives,

-- to get extended terms so they may be able to “cash flow.”

New Bankruptcy Law -- effective on October 17, 2005: The major intent of bankruptcy reform is to require people, who can afford to make some payments towards their debt, to make these payments, while still affording them the right to have the rest of their debt erased. These people MUST file Chapter 13.

Bankruptcy

Chapter 11 - Business Reorganization -- a plan is sought, that creditors will approve -- else the business may end up in a Ch. 7 liquidation.

Farmers in Ch. 11 often find it impossible to get a plan approved because of the requirement to satisfy certain creditors under Ch.11 rules.

Chapter 12 Family Farm Bankruptcy Act became law in 1986 with requirements so that a “typical” farm could get a reorganization plan approved.

Chapter 12 offers a farmer (and now fishermen) the opportunity to reorganize with a plan for the creditors that offers at least as much as they would get if the debtor were in a liquidation bankruptcy.

Chapter 12 Farm Bankruptcyunder revised permanent law Eligibility requirements 1.-- Individual, or individual and spouse in a farming

operation whose aggregate debts does not exceed $3.237 million (indexed, CPI) with

2.-- 50% of this debt excluding principal residence arising out of the farming operation owned or operated by the petitioning debtor, and

3.-- with 50% of the gross income in the year prior to filing from farming or 2 and 3 years prior to filing (an extension of time under the 2005 Act to allow for the reality that farmers in financial stress make adjustments before filing).

Chapter 12 Plan—The Rules

-- The debtor must file a plan “within 90 days” of a petition in bankruptcy. -- The plan must have a portion of future earnings for the trustee to dispense in deferred installments to all priority claims, e.g., secured

creditors and those who obtain a super-priority. --- All claims in the same class must get the same treatment. Note: There are three types of debt: Secured Debts: those for which the creditor has the right to pursue specific pledged

property upon default. Priority Debts: those granted special status by the bankruptcy law, such as most taxes

and the costs of the bankruptcy proceeding. Unsecured Debts: generally are characterized as those debts for which credit was

extended based solely on the creditor’s assessment of the debtor’s future ability to pay.

Note, tax claims are added to this unsecured category by the 2005 Act! (since April 26, 2005)

Chapter 12 Plan—What does(did) it do?

-- A key to Chapter 12 relief at least in the past is that mortgaged land is re-valued in a plan at the “current value.” This was huge in the mid to late ‘80’s when land values dropped substantially from 1981 to 1987! What now in 2005?

--- That is, marked down with the difference between secured amount and current value being essentially “written-off,” and the lower value amortized in a Chap. 12 plan.

-- The farmer must be able to show a regular income sufficient to service the “restructured” debt in the plan.

--- In many cases, the income is fortified by off-farm income.

Chapter 12 Farm Bankruptcy

Chapter 12 Plan --Upon completion of a 3 or 5 year plan, the debtor

is/maybe discharged from unsecured debts. --Long term financing arrangements continue – During a plan, there may be “extra” income to pay

toward claims that are not otherwise allowed in a plan –”Disposable income”– but the bankrupt may use this money to “maintain” the farm operations rather than make it available to unsecured debt owed under “the plan” after a 10% trustee fee.

Chapter 12 Farm Bankruptcy

Chapter 12 Plan

“Disposable Income” is defined as income which is not reasonably necessary for the maintenance or support of the debtor or his/her dependents or for the payment of expenditures necessary for the continuation, preservation, and operation of the debtor’s business.

Note, the interpretation and litigation relating thereto could be a course paper topic. (see Susan Schneider’s paper for cites on this topic.

In re Welch U. S. Dist. Ct. S.D. Ohio ‘87

Action? Jeanna To dismiss from Ch. 12 Bankruptcy. Issue? Are the bankrupts as a married couple eligible for

Chapter 12? Facts: In Dec. ‘86 James, and in Jan. ‘87, Betty Welch

filed for bankruptcy independently, and then filed a joint plan under Chap.12

-- Major creditors, FCS and FLB both filed motions to dismiss.

In re Welch

Holding? Tom Creditors’ motions to dismiss are denied. -- The court analyzed the creditors’ attempt to show

that the components of James Welch’s income were not from farming in 1986.

-- 1986 is the “income test” year -- the year before the Chapter 12 filing which was in 1987.

-- Court said the, share of “milk check,” government payments, as well as what appeared to be cash rent all should count!

Question--Brett

Chapter 12 Eligibility Dilemma

Note, like the Welch case, the problem presented in financial stress situations, is the farmer in financial stress often cuts back his farming activity in an effort improve financially, i.e., he or she or they,

-- takes an off-farm job(s) -- rented out, and sells his livestock and equipment. Thus, when bankruptcy is a necessary option, to keep

the land, Ch.12 may not be available because “debtor” has abandoned an active “farmer” status and fail the 50% gross income test in the prior year.

2005 Act may help with this dilemma since 2nd and 3rd prior years may be considered for the 50% test.

“Rule:” Plan carefully when in financial stress!

Mary Freese Farms, Inc.U.S. Bankruptcy Ct. N.D. Iowa ‘87Action? Amanda To bar or dismiss Freese Corp. from Ch. 12 Issue? Is Freese eligible for Chap. 12 Facts: Baxter and Mary Freese, and children own

the stock in a farm corporation.

Mary Freese Farms, Inc.

They meet the % tests of Chapter 12 but, their two mortgaged farms are cash rented. No member of the family had farmed any of the

land for several years. They own no equip., mach. or livestock, and there was no evidence they planned to

change their involvement.

Mary Freese Farms, Inc.

Holding? Kristen Farming operation is defined in 11 U.S.C. 101(20) to

include “farming, tillage of soil, dairy farming, ranching, production or raising of crops, …”-- for lack of rulings on this point, they look to other cases that

point to “risk-taking” as being a factor in “farming.” Rule: A crop-share lease would constitute risk- taking

behavior. Question -- Tom

Shared Appreciation Mortgage* The interest rate is reduced depending on how much of the

property's appreciation you bargain away. For example: Standard 30 Year Fixed Rate Mortgage: 8.00%

SAM w/20% Appreciation given to investor: 7.50%SAM w/30% Appreciation given to investor: 7.00%SAM w/40% Appreciation given to investor: 6.50%SAM w/50% Appreciation given to investor: 6.00%

*In fact, by the end of the 80’s the farm credit lenders were essentially compelled to “restructure” farmers with bankruptcy potential and provide essentially a mark down in debt to repay like a Chap. 12 but save the expense and stigma of a Chap. 12, but SAMs were part of the deal.

At the expiration of these SAM agreements the farmer debtor often could not show the he or she could finance the amount added to the debt from the SAM agreement, and may have been forced to cease business.

Shared Appreciation Agreements-- Restructured Loans -- An SAA is a contract between FmHA/FSA and the

borrower in which the borrower promises to pay a certain amount of money in the future if the property securing the agreement increases in value, allowing FmHA/FSA to "recapture" all or a portion of the write-down amount.

See: http://www.flaginc.org/saa/saa.htm At that site you can find lots of info on SAAs.

Shared Appreciation Agreements-- Restructure Agreeements --

As of late 1988, whenever a farm loan borrower receives a write-down of debt owed to the Farmers Home Administration (FmHA) - now the Farm Service Agency (FSA) - the borrower must sign a Shared Appreciation Agreement (SAA). At the same time, the borrower usually also signs a mortgage or other security agreement securing the SAA.

E.g., 10 years after the initial SAAs agreement, the borrowers were required to add a part of the appreciation to their debt—add it to the principle, or pay over the amount– agreed share.

Shared Appreciation Agreements-- Restructure Agreeements -- FSA regulations list a number of "trigger" events that require

payment under the SAA: 1. Transfer of security property (other than to spouse upon death

of the borrower). 2. You stop farming and stop receiving farm income, including

lease income. 3. You pay the debt in full. 4. Acceleration of the written-down debt. [This trigger was added

on March 10, 1998.] If none of these trigger events occur within ten years after the

write-down, the SAA will "expire" on the ten-year date. (Beginning August 18, 2000, the maximum term for all new SAAs is five years.)

Indiana Farmland Lease Law—Chapter 15--Overview A lease or rental arrangement is a contract. Oral leases for Indiana farming are “valid!”

Written leases are a good business practice, and common place for most acreages.

Indiana has a “three month” “notice to quit” statute. Term leases are for a set (stated) time period. Term leases require no notice to quit! Landowner (landlord) involvement in the farm

operation matters for federal income, estate, and social security tax purposes.

A UCC type (consensual) lien may be a good idea.

Farm Tenancy

At least 50% of the farm cropland is not owner-operated.

Alternative landowner operator/worker relationships:

-- Employer-employee -- Independent contractor (custom operator) -- A partnership!! -- A tenancy (landlord-tenant) -- A lease or rental arrangement or …. The

document is critical. --- But, actions may overcome words!

Indiana Farmland Leases

Writing requirement? -- Oral leases are valid as an exception to the

statute of frauds. Notice to Quit (lease termination) without other provisions, 3 months advance before

the end of the “lease year” none needed for a “term” leases! At least one Indiana trial court has held a term lease

may be oral.