Troubled Debt Issues

PREPARED FOR 2017 IBA Ag Banker’s Conference

By

Joseph A. Peiffer Peiffer Law Office, P.C.

PO Box 11425 Cedar Rapids, IA 52410-1425

(319) 363-1641

Fax (319) 200-2059

E-mail: joe@peifferlaw.com

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I. THE REALITY OF THE TROUBLED FARM DEBTOR Picture the realities faced by the typical troubled family farmers walking into your bank. The troubled family farmer may be facing any and/or all of the following personal and financial problems. Thinking about how things appear from the borrower’s perspective can assist the work-out officer in successfully negotiating a win-win restructuring with the borrower.

Personal Problems:

- Psychological pressure that is off the chart because of feelings and thoughts like “I’m the SOB that lost the family farm that has been in the family for X generations;”

- Alcoholism and/or other drug abuse;

- Domestic violence;

- Feelings of being trapped and the inability to function, or come up with a plan of action to solve the myriad of problems;

- Family problems caused by stress and debt; - Depression – suicidal thoughts caused by the situation and hopelessness of the

financial problems; and,

- Inability to function enough to assist the banker and/or his lawyer in ascertaining the true extent of the financial and legal problems.

Financial Problems:

- A mountain of debt;

- Secured creditors having threatened repossession of key farm equipment,

trucks, cars;

- Some equipment having been repossessed;

- Unsecured creditors suing on open accounts;

- Unfiled tax returns for multiple years coupled with the fear of the IRS and State Department of Revenue seeking to collect unpaid taxes;

- Potential income taxes exceeding $100,000 if farm assets are liquidated;

- Inability to cash flow their operation as structured; and,

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- Inability to earn enough after payment of operating expenses and secured debt

to feed the family.

II. INITIAL ACTION TO BE TAKEN CONCERNING A PROBLEM LOAN

A. Examination of Loan Documents: Examine your loan documents to determine if they were adequately prepared. 1. Correct Description of the Borrower: Is the Borrower correctly

described on the loan documents?

- Individual(s) - Corporation - Limited Liability Company (LLC) - Limited Liability Partnership (LLP) - General Partnership - Limited Partnership - Trust

2. Review Operating Agreements: If the Borrower is a Limited

Liability Company or a Limited Liability Partnership, do you have a copy of the Operating Agreement? Is it properly ratified? If not, the person(s) that signed the loan documents may not have had the authority to sign them and the loan documents may not be valid or enforceable.

3. Ownership of the Borrower: If the Borrower is not an individual, who owns the Borrower?

4. Guaranties: Have the owners of the Borrower signed guaranties?

- If not, consider granting forbearance in return for guaranties by the individual owners.

5. Description of Collateral: Is your collateral adequately described in the security agreements, mortgages and deeds of trust?

- Is the legal description correct on the mortgages and/or deeds of trust? If the property you believe to be your collateral is not properly described on the mortgage or deed of trust, you will not be able to foreclose on that property. You can only foreclose on what is described on the mortgage or deed of trust.

- Is the description of the collateral accurate on the security agreements and the UCCs? You cannot repossess assets in

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which your institution does not have a security interest. If the UCC is not correct, other creditors with the collateral properly described on their security agreements and UCCs will step in front of you in the battle for collateral.

6. Proper filings of UCCs: Are the UCC filings made in the correct place(s)?

- For individuals, in the state of residence.

- For entities, in the state of organization.

7. UCC continuations: Have they been continued on a timely basis? Remember, UCCs are only good for 5 years and must be renewed prior to expiration in order to retain the creditor’s priority positioning vis-à-vis other creditors.

8. Has the Borrower Moved: If the individual Borrower has changed states of residence, there is a limited time to file a UCC in the new state of residence so that the security interest remains perfected. Iowa law provides that a security interest perfected in the debtor’s initial jurisdiction remains perfected in the debtor’s new state of residence until the earliest of:

a. The time perfection would have ceased under the law of that jurisdiction;

b. The expiration of four months after a change of the debtor’s location to another jurisdiction; or

c. The expiration of one year after a transfer of collateral to a person that thereby becomes a debtor and is located in another jurisdiction. Iowa Code § 554.9316(1).

9. Assignment of Crop Insurance Policy Benefits Not Covered by Security Agreement and UCC: If crops are collateral, do you have an assignment of the crop insurance? The exclusive form to use to secure a pledge of Federal Crop Insurance Benefits to a creditor is NCIS 757 – Assignment of Indemnity. In re Duckworth, 2012 WL 986766 (Bankr. C.D. Ill. 2012). A copy of NCIS 757 is attached as Exhibit “A”.

10. Assignment of Government Program Benefits Not Covered by Security Agreement and UCC: Does the bank have an assignment of CCC and/or FSA program benefits? The proper form to use to

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pledge Government Program Benefits for the programs listed below is form CCC 36. A copy of CCC 36 is attached as Exhibit “B.”

Programs requiring CCC 36 for pledge of benefits: 7 CFR part 701 Emergency Conservation Program; 7 CFR part 704 Conservation Reserve Program; 7 CFR part 1413 Commodity Incentive Payment Programs; 7 CFR part 1430 Milk Income Loss Contract Program; 7 CFR part 1468 Conservation Farm Option; 7 CFR part 1472 Program Name Unknown; and, 7 CFR part 1475 Program Name Unknown.

Assignment of all other CCC or FSA Program payments and contracts requires use of forms CCC 251 and 252 that are attached as Exhibits “C” and “D” respectively. The instructions for the Assignment of FSA and CCC Payments are attached as Exhibit “E.”

11. Notice to Buyers of Borrower’s Farm Products: Have you noticed buyers of borrower's farm products to place the creditor’s name on the checks? The Iowa Code requires notice to potential buyers of farm products to maintain a lien in the livestock, and/or crops. The noticing will depend upon your state’s requirements.

a. Central Noticing: States that have adopted central noticing require that liens on farm products will be taken from a single central noticing cite like the fashion in which UCC financing statements are filed. In the states that have opted for central filing under the federalized farm products rule, the lender will, in addition to the usual financing statement, prepare and file centrally with the Secretary of State an additional paper document, an effective financing statement (EFS).

States that have adopted central noticing Alabama New Hampshire Colorado New Mexico Idaho North Dakota Louisiana Oklahoma Maine South Dakota Minnesota Utah Mississippi Vermont Montana West Virginia Nebraska Wyoming

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b. Direct Actual Notice -- No Central Noticing: In states that have not adopted Central Noticing, individual written noticing of buyers is required. In these states the lender will obtain a list of potential buyers form the debtor and will mail separate paper notice at least once a year to all potential buyers, and perhaps other potential buyers not named on the list.

c. Dual Noticing Could be Required: If your borrower is growing crops in Iowa as well as a state that uses central noticing, you will need to comply with both central noticing in those states as well as direct actual noticing of buyers in Iowa. Iowa’s border states of Minnesota, Nebraska and South Dakota utilize central noticing.

12. Notation of Liens on Titles: Were the lien notations on vehicle titles made within the time prescribed by statutes? Iowa does not limit the amount of time in which a lien is to be noted on the title. However, under bankruptcy, if the lien was not noted within 30 days of the debtor’s granting the security interest, the trustee can set aside the perfection of the creditor’s lien on the title to a motor vehicle as a preferential transfer.

13. Dragnet Clause aka Future Advance Clause: How well will your "dragnet clause" drag? In In re Duckworth, 2012 WL 986766 (Bankr. C.D. Ill. 2012), the court held that since the security agreement did not specify that it secured debts incurred in the future, it was not effective to collateralize loans made later. Dragnet clauses are enforceable provided that they are clearly expressed in the security agreement. Iowa Code § 554.9204(c) makes provision for the use of dragnet clauses.

14. General Hazard Insurance: Is your collateral, both real and personal, insured and are you the loss payee? If you do not have a certificate of insurance naming the creditor as a loss payee, you should require it.

15. Proper Mortgage and Deed of Trust Acknowledgments: Are the mortgage acknowledgments proper? Did the execution of the mortgage take place in front of the notary public? See, In re Linnez, 414 B.R.536 (Bankr. D. N.D. 2008) in which a mortgage was set aside by a bankruptcy judge because it was not signed in the presence of a notary public. Iowa law, like North Dakota law, requires that the mortgage or deed of trust be signed in the physical presence of a

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notary public. Iowa Code §9B.2.10.a. “Personal appearance” does not include appearances which require video, optical, or technology with similar capabilities. Iowa Code §9B.2.10.b.

16. Corporate or Entity to Execute Mortgages and Deeds of Trust: Do the person(s) that signed the mortgages comply with the authority set forth in the company’s articles of organization, by-laws and/or corporate resolutions? E.g. if the Articles of Organization require the signature of the President and Secretary to mortgage property and the mortgage is only signed by the President it is invalid and the mortgage will not protect the Bank.

17. Assignment of Rents Clause: If borrower is a landlord and the land is part of your collateral does your mortgage or deed of trust contain an assignment of rents clause? If so, have you given notice to the tenant(s) to make the rent payments jointly payable to your institution and the borrower?

18. Lease Terminations: If the borrower is a landlord, have the leases been terminated by September 1st? Iowa Code § 562.7(3) requires that a notice of termination be sent before September 1st by certified mail return receipt requested. However, in Auen v. Auen, No. 13-1501, 2014 Iowa App. LEXIS 541 (Iowa Ct. App. May 14, 2014), the Iowa Court of Appeals ignored long established Iowa law and upheld an oral termination of a lease. Auen appears to be an aberration. Therefore, insist upon written terminations of leases that comply with Iowa law whenever they are needed. Failure to have a lease terminated means that you will be dealing with a tenant that may be paying below market rent.

B. Smoking Guns: Are there any adverse "smoking guns" in your loan files?

1. Written commitments to make loans or release collateral that have not

been honored;

2. Lack of Notice of Sale of Collateral;

3. Sales of repossessed collateral at less than fair market value; and,

4. Unsigned collateral documents in file.

5. Have there been breaches of confidentiality involving the borrower’s financial information? If so, these could lead to counter suits against the Bank if collection proceeds through legal channels.

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C. Location and Value of Collateral: Where is your collateral and what is it worth? — Consider a quick sale vs. orderly liquidation. The values may be quite different.

- What is the risk to the collateral value if it is retained by borrower? If

the borrower is trustworthy, the risk of the collateral remaining with the borrower may not be substantial. If the borrower has been selling collateral out of trust, you may need to seek an attachment or have a receiver appointed to preserve the collateral.

- Is any collateral non-essential to borrower's ongoing business? If

not, it may make sense to suggest liquidation of non-essential collateral to lower the indebtedness of the borrower thereby lowering risk.

- Has the loan been properly administered? Do you have a recent collateral inspection? It should not be a casual examination. Consider the following:

a. Do you have serial numbers of the equipment? b. What is the condition of the equipment? c. Do you have photos of the equipment? d. Where is the equipment? e. Is the equipment on property owned or leased by your

borrower? f. What breed is the livestock? g. How many of each type of livestock does the producer

own? h. What is the weight of the livestock? i. Is the livestock registered? If so, where are the registration

papers?

Machinery and Equipment Inspection Report

Item

Man

ufac

.

Mod

el

Yea

r

Un

its

MFW

D

Seri

al N

um

ber

Con

d

Insp

Lev

el

% O

wne

d

Qu

anti

ty

Mar

ket

Val

ue

Hay Rake/Inverter

KUHN SR300 2015 N/A No AA A 100 1 $12,000 **

Disc KEWANEE 21' 0 21 - 30 feet

No A A 100 1 $3,500 **

Seed Tender/Drill Fill

2 Box tender

2- 2000 lbs

2014 4000 N/A No A A 100 1 $3,500 **

Grain Cart J & M 1000 2015 > 600 bushels

No AA A 100 1 $32,500

Bale Processor/Grinder

HIGHLINE CFR 650 2015 2 N/A No AA A 100 1 $25,600 **

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Livestock Inspection Report

Type Number Weight/Age Breed Cond Insp Level

Location % Own

Per Unit Market

Value

Market Value

Bred Cows,4-8 yrs

20 1400 Lbs. A A Headquarters 100 $1,650.00 Head

$33,000

Bulls 3 2000 Lbs. A A Headquarters 100 $2,100.00 Head

$6,300

Mixed 20 550 Lbs. A A Headquarters 100 $175.00 Cwt.

$19,250

Total # of Livestock:

43 Total Market Value $58,550

D. Are these Collateral Inspection Reports Adequate? What other information will your lawyer want if you need to file a replevin action?

- Hiring an appraiser to view and identify the collateral could be the best

investment you can make to verify your collateral.

E. Update Lien Searches on Real and Personal Property: Have you done an updated lien search to determine whether there are conflicting liens (UCC and county land records)?

1. Purchase Money Security Interests: Are there any other creditors with prior perfected liens such as creditors with purchase money security interests (PMSIs)?

2. Tax Liens: Are there tax liens that jump in front of liens on accounts receivable after 45 days?

a. Tax liens affecting personal property are filed in the office of the Secretary of State of the Debtor.

b. Tax liens affecting real estate must be filed in the county recorder’s office where the real estate is located.

3. Contract Producer Liens: Are there liens on livestock under the

Contract Producer Lien provisions of the Iowa Code? Iowa Code Chapter 579B.

F. Purchase Money Security Interests: Review file for notices of purchase money security interests.

G. Landlord Liens: Can Borrower's landlord assert a lien superior to yours?

Has the landlord filed a UCC timely, (within 30 days of possession being delivered to tenant)? If so, the landlord’s lien will be superior to the Bank’s security interest.

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H. Ag Supplier’s Liens: Are there any agricultural suppliers that can assert liens that are superior to the creditor’s liens? Iowa Code §570A.

1. Has the Bank received a “Certified Notice” requesting information about the borrower?

a. If so, how has the Bank responded by sending Confidential Memorandum to the proper address?

b. If the Confidential Memorandum said farmer has sufficient equity it serves as an irrevocable letter of credit in favor of Supplier.

c. If the Confidential Memorandum says the farmer does not have sufficient equity the Supplier has to make his own decision regarding supplying inputs.

d. If no response is made, the Supplier is granted a super priority defeating the Bank’s security interest for the supplies provided within 31 days before the Supplier’s UCC was filed.

e. Was the response timely – 4 business days after receipt?

In April of 2011, the operation of Iowa Chapter 570A as it applies to livestock farmers was explained in In re Shulista, 451 B.R. 867 (Bkrtcy. N.D. Iowa 2011). In Shulista, the bank received Certified Notices filed on behalf of four of its hog farmer’s feed suppliers and mailed one of the Confidential Memorandums to the Borrower instead of the feed supplier. UCCs had also been filed on behalf of the feed suppliers. The result was that the feed supplier’s lien that was mailed to the incorrect address was treated as if there had been no response. Therefore, the bank’s lien was behind the lien of the feed supplier. The liens of the three other feed suppliers to whom Confidential Memorandums had been mailed, indicating that the farmer did not have sufficient equity had liens that were inferior to the lien of the bank. The timeline explaining the lien priority under Shulista that still applies to crop farmers follows.

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2. Confidential Memorandums are not Required for Suppliers to Gain Priority Over Banks making loans to livestock farmers.

In December of 2011, the Iowa Supreme Court held that even if no Confidential Memorandum is sent to the Bank, the Ag Supplier’s filing of a UCC will perfect a lien in the farmer’s livestock that is superior to the bank’s security interest in the farmer’s livestock for the feed supplied 31 days before filing. Oyens Feed & Supply, Inc. v. Primebank, 808 N.W.2d 186, 187 (Iowa 2011). The super-priority lien is limited to the difference between the acquisition price of the hogs and the market value of the time the lien attached or sale price of the hogs, whichever was greater. 808 N.W. 2d at 195.

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The Ag Supplier’s Lien can trump the lien of a bank, thereby decreasing the value of the collateral available to secure repayment of the indebtedness owed to the bank. This is a very real problem for banks making loans to livestock farmers. If you suspect that your livestock borrower is in trouble you would be well advised to check the UCC records at least monthly to verify the existence of Ag Supplier Liens.

I. Authorization to Sell Collateral: Have you expressly or impliedly

authorized the borrower to sell your collateral without remitting the proceeds to you? (i.e. "course of dealing").

J. Credit Report: Get a credit report to review status of Debtor’s payments on other debts as well as the existence of other debts that may not be shown on the Debtor’s balance sheet.

K. Check on Status of Lawsuits: Are there lawsuits pending or threatened

against the borrower?

L. Unusual Activity: Has there been any unusual activity by borrower (e.g. repayment of loans to insiders, preferred vendors, transfer of assets, accounts at other institutions)?

M. Cooperation of Debtor: What has the level of cooperation has been received to date from the borrower been?

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III. GIVING THE DEFAULT NOTICE & REQUEST FOR MEDIATION.

A. Agricultural Real Estate.

1. Notice of Default. For loans secured by agricultural real estate, you must send a default notice by certified mail giving the borrower 45 days to cure the default. The notice must meet the requirements of Iowa Code §§ 654.2A and 654.2B.

2. Request for Mediation. Further, Iowa Code §654.2C requires that if the debt is exceeds, $20,000.00, you must go to mediation and obtain a Mediation Release before you commence foreclosure.

3. Mediation Release is Not Required if the collateral is valued at over $20,000 only if a court determines that the time delay required for mediation would cause the bank irreparable harm. That is a very high standard to meet. Therefore, you should request mediation at the same time as you send the default notice.

B. Non-Agricultural Real Estate, One and Two Family Homesteads.

- Notice of Default. For loans secured by non-agricultural, one and two family homesteads, Iowa Code § 654.D requires that you must send a default notice (either by delivering notice to the borrower or mailing notice to the borrower's residence) giving the borrower 30 days to cure the default.

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C. Non-agricultural, Non-homestead Assets.

1. No Statutory Notice. For loans secured by non-agricultural, non-homestead assets, there is no statutory notice requirement.

2. Notice to Cure is a Prerequisite to Recovery of Attorney Fees. Although, pursuant to Iowa Code § 625.25 you may not be able to recover your attorneys' fees unless you first gave the borrower a reasonable opportunity to cure the default (e.g. a 10-day cure notice is probably sufficient).

D. Mediation Release Required Before Levy for Judgment Creditors. A creditor who holds a claim against an agricultural borrower of $20,000.00 or more must get a mediation release before levying or taking other action against "agricultural property." § 654A.4. "Agricultural property" is defined in § 654.A.1 as "agricultural land primarily used for farming and personal property that is used as security to finance a farm operation or used as part of a farm operation, including equipment, crops, livestock and proceeds of security."

E. Consumer Loans. For consumer loans — (those used primarily for personal, family or household purposes that do not exceed $25,000.00) (limit found in Iowa Code § 537.1301(14)), Iowa Code §§ 537.5110 and 537.5111 requires a 20-day cure notice and compliance with certain requirements therein (either by delivering notice to the borrower or mailing notice to the borrower's residence). The borrower can sue the bank for failure to comply with the notice provision (damage award of $100.00 to $1,000.00 plus attorneys' fees).

IV. COLLECTING DEBTS SECURED BY REAL ESTATE.

A. Judicial Foreclosure: The thought of instituting litigation is one of the last things creditors wish to pursue. However, if there is continued collateral loss, the likelihood of the farmer successfully continuing the operation is remote, and if the farmer is unwilling to cooperate in a voluntary liquidation or refinance the debt, litigation could be the best option to pursue after mediation.

Foreclosure allows a creditor to enlist the courts to have the title of the farmer eliminated for failure to pay the debt. A foreclosure will also eliminate the title of junior lien creditors in real estate. In a foreclosure, the ownership rights of the farmer are surrendered when the mortgage or deed of trust was transferred to the creditor are eliminated. When a foreclosure is filed, the farmer can defend to maintain ownership of the property. If the creditor did a thorough job when the mortgage or deed of trust was taken, there will be little chance that the farmer can prevent the

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creditor from foreclosing the mortgage or deed of trust. Foreclosure is a time-consuming proposition as is shown below.

B. Foreclosure Defenses can include counterclaims for lender liability. Counterclaims can slow down a foreclosure action as the equitable mortgage foreclosure is delayed pending the completion of the counterclaim. Harrington v. Polk County Federal Savings and Loan, 196 N.W.2d 543 (Iowa 1972). Allowing the counterclaim to proceed to trial prior to finalization of the foreclosure allows a determination of the amount of an offset before the Sheriff’s sale. Most counterclaims to lender collection activities have been unsuccessful since the institution of Iowa Code § 535.17, which became effective January 1, 1991. That section was added to the Iowa Code to forestall litigation over oral agreements allegedly made between the creditor and borrower at the inception of the loan or later. It requires that all agreements between the creditor and borrower be in writing signed by all parties. This statute has significantly reduced the number of counterclaims brought by borrowers against foreclosing creditors.

C. Receiverships. Iowa Code Chapter 680 provides the framework to

appoint a receiver. Most mortgages and deeds of trust contain provisions to appoint a receiver upon default. Most mortgages and deeds of trust also contain a rents and profits clause pledging the rents and profits from the mortgaged property to the secured lender as collateral. Where the rents and profits have been pledged to the creditor, a receiver can be appointed without showing insolvency. Iowa Code § 654.14 provides

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that if a receiver is appointed to take charge of the real estate, preference shall be given to the owner or other person in actual possession of the of real estate in leasing the mortgaged premises. It further provides that the owner or person in actual possession shall be appointed as receiver without bond, provided all parties agree to the appointment. The receivership protects the mortgaged property, collects rents, accounts for the rents collected, and disburses the rents under Iowa law.

D. Redemption. Only equitable redemption is available to the mortgagor

until entry of the foreclosure decree. Under equitable redemption, the mortgagor repays the debt in full prior to the decree of foreclosure. Thereafter, the redemption available to parties is statutory redemption governed by Iowa Code Chapter 628. The timeline for statutory redemption is depicted below.

E. Junior Lienholders have Statutory Rights of Redemption. The Iowa

Supreme Court determined that junior lienholders’ rights of redemption depend upon whether the mortgagor or assignee has redeemed. In a curious interpretation of the statutory right of redemption, the Iowa Supreme Court determined that a junior mortgage holder could maintain a foreclosure action after the assignee of the mortgagor’s right of redemption. PCA v. McFarland, 374 N.W.2d 654 (Iowa 1985). The redemption timeline in PCA v. McFarland follows. Professor Bauer’s CLE Materials dealing with PCA v. McFarland are attached as Exhibit “6.” Holders of mechanic’s liens are not entitled to statutory redemption unless the mechanic’s lien has been reduced to judgment. Iowa Code §

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628.6.

F. Mortgagor’s First Right of Refusal is set forth in Iowa Code § 654.16A. It requires the purchaser of the property at a sheriff’s sale to offer the property to the mortgagor at the same price it will sell it to a third party. The purchaser at sheriff’s sale may provide financing to the proposed buyer, however, offering to finance the purchase by the mortgagor is not required.

G. Non-Judicial Foreclosure (Two Ways)

1. The use of a non-judicial foreclosure provided in Iowa Code § 654.18 allows farmers and their creditors to fashion remedies that can be mutually beneficial. This remedy can be utilized either before or as a part of a mediated settlement. If it is not part of a mediated settlement, the farmer must waive mediation, which presumably has occurred if the farmer executes the non-judicial foreclosure agreement. The creditor gets possession and ownership of the real estate collateral much quicker than would be the case in a traditional foreclosure. The right of redemption and right of first refusal present in a traditional foreclosure are eliminated. The creditor waives any deficiency that could exist if the collateral cannot cover the indebtedness.1 In return, the creditor can generally make other concessions that will benefit the farmer. Under a non-judicial foreclosure, the farmer deeds the farm to the creditor subject to a five-business day time to cancel the transaction. If the transaction is not cancelled, the creditor gives notice of the non-judicial foreclosure to junior lien holders who then have thirty days to redeem from the creditor and each other. The time line for a non-judicial foreclosure is set forth below:

1 Farmers must be mindful of the potential for discharge of indebtedness income if this procedure is utilized and they have exempt assets that could make them solvent given a forgiveness of a potential deficiency.

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2. Non-agricultural Real Estate (Chapter 655A)

a. Lender waives deficiency

b. Notice of default to borrower

c. Notice to junior lien holders

d. If default is not cured within 30 days, foreclosure is completed

e. Cannot be used for single family residential or duplexes where the owner occupies the property as a homestead.

H. Deed In Lieu of Foreclosure (Iowa Code § 654.19)

-- Applies to Agricultural Land

1. Mortgagor and Mortgagee enter into agreement deeding property secured by mortgage back to Mortgagee in satisfaction of part or all of the debt secured by the mortgage;

2. Mortgagor can retain right to repurchase property for up to five years;

3. Mortgagee may retain the right to lease the agricultural land until it is sold;

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4. The agreement shall be recorded with the deed transferring ownership to the mortgagee.

5. Does not clear junior liens from property like non-judicial foreclosure.

I. Receiverships (Iowa Code § 680)

1. Can be obtained in any civil action upon application and showing that property to which a party has a right is in danger of dissipation or loss.

2. Requires posting of a bond with the clerk of court and taking an oath by the receiver.

3. Authorizes receiver to take control of property subject to the receivership.

4. Provides priority of payment from rents and profits collected by receiver.

J. Real Estate Contract Forfeiture

Real estate contract forfeiture is a statutory remedy provided in Iowa Code Chapter 656. The Iowa State Bar Association real estate contract follows Iowa law which provides for forfeiture. Under a forfeiture, after a mediation release is procured,2 a Notice of Forfeiture is served upon the contract vendee and parties in possession of the property mortgagees of record and on any person asserting a claim against the vendee’s interests and all the vendee’s mortgagees setting forth the defaults under the contract.3 After the Notice is served, the vendee and those parties notified

2 Iowa Code § 656.8 requires that a mediation release be procured if the debt secured exceeds $20,000.00. 3 Iowa Code § 656.2. To be entitled to receive notice of a forfeiture the party must serve a notice on the vendor that provides the following information:

REQUEST FOR NOTICE PURSUANT TO IOWA CODE SECTION 656.2, SUBSECTION 2

The undersigned requests service of notice under Iowa Code sections 656.2 and 656.3 to forfeit the contract recorded on the ... day of .... (month), ... (year), in book or roll ...., image or page ..., office of the .... county recorder, ..... county, Iowa, wherein .......... is/are seller(s) and .......... is/are buyer(s), for sale of real estate legally described as: [insert complete legal description] NAME

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of the impending forfeiture have thirty days to cure the defaults. If the defaults have not been cured within thirty days of service, the vendor can file a copy of the Notice with the Proofs of Service of the Notice and an affidavit setting forth the failure to cure the default. When this filing has been recorded, it shall serve as constructive notice to all parties of the forfeiture and cancellation of the contract. Iowa Code § 656.5. The timeline for a real estate contract forfeiture follows:

V. COLLECTING DEBTS SECURED BY PERSONAL PROPERTY

A . Replevin (Iowa Code Chapter 643)

1. Petition – where brought. Can be brought in any county where some of the property is located. The petition must include the following:

ADDRESS CAUTION: Your name and address must be correct. If not correct, you will not receive notice requested because notice need only be served on you at the above address. If your address changes, a new request for notice must be filed. Recording the Notice given to the contract vendor is the best way for a person requesting notice to ensure that it receives the Notice. The Notice is effective for five years from the date of recording. Iowa Code § 656.2.2.b.

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(a) Particular description of property claimed;

(b) Value of property on an item by item basis;

(c) Facts constituting plaintiff’s right to present possession of the property including the extent of plaintiff’s interest (full or qualified) in the property;

(d) The mode of taking the property, by order on a judgment against the plaintiff nor under an execution or attachment against the plaintiff or the property, and if so taken, facts constituting an exemption from these methods of seizure;

(e) The facts constituting the borrower’s cause of detention of the property to the creditor’s best belief;

(f) The amount of damages that the affiant believes the plaintiff should recover for the detention of the property by borrower.

2. Ordinary Proceedings – Joinder or Counterclaim. No counterclaims are allowed in a replevin. However, this will not stop a borrower from bringing an independent action against the creditor.

3. Process on Sunday. Process can be issued on Sunday if alleged that a loss of the property could occur if process is not served on Sunday;

4. New Parties. Third parties claiming an interest in the property can intervene or the rightful defendants can be substituted.

5. Writ Issued. The court can enter an order after the notice it deems appropriate and a hearing as the court may prescribe requiring the officer (sheriff) to take the property and deliver it to the plaintiff.

6. Filing – Purpose of Bond. The bond is required for the purpose of protecting any person injured by the replevin.

7. Bond. The bond is twice the value of the property sought under the replevin. Plaintiff must appear in court to prosecute the action to judgment and return property to the person from whom it was taken if a return is awarded as well as pay all costs and damages that may be awarded against the plaintiff.

8. Wrongful Removal – Service. If property is taken to another county away from where the replevin was commenced, the writ may issue from the initial county where the replevin was filed and it may be served in any county where the property may be found.

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9. Following the Collateral (Replevined Property) – Duplicate Writs. Duplicate writs of replevin may be issued and served as the original.

10. Execution of Writ. The officer must execute the writ by taking possession of the property if found in the possession of the defendant or the defendant’s agent or any person who obtained possession after the writ was placed in the officer’s hands. The officer has authority to break open a house or other enclosure after having demanded entrance and exhibited his authority.

11. Examination of Defendant. The court can compel the attendance of the defendant claiming or concealing the property and examinee the person under oath as to the situation of the property and punish a willful obstruction of hindrance or disobedience of the court order as in contempt.

12. Delivery Bond. Defendant can deliver a bond to the plaintiff in an amount approved by the court, conditioned that the defendant will appear and defend the action and deliver the property to the plaintiff if the plaintiff recovers a judgment for the property, that the property will be in as good condition as it was when the action was commenced, and defendant will pay all costs and damages that may be entered against defendant for taking or detaining the property.

13. Release – Return of Bond. If the defendant posts bond, it will be attached to the writ, the property returned to the defendant, and it shall be returned to the sheriff.

14. Inspection – Appraisement. If the property is retained by the defendant posting bond, the defendant must allow inspection by the court officer and the plaintiff as well as by plaintiff’s appraisal. If the parties cannot agree on an appraiser, each will select an appraiser who will jointly select a third appraiser.

15. Return of Writ. The officer shall return the writ of replevin within 60 days of issuance and provide a list of property taken pursuant to the writ.

16. Assessment of Value, Damages and Right to Possession. The jury will assess the value of the property and damages for taking or retention of the property.

17. Judgment. Judgment can be rendered for or against the plaintiff or defendant and can be collected from the surety bond posted.

18. Execution. After judgment, the officer must deliver the possession of the property to whom it has been awarded and the officer can be

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required to satisfy any costs damages rents and profits recovered by the party to whom the property is returned.

19. Plaintiff has the option to take the property not in possession if awarded or can have an execution for the value of the property determined by the jury.

20. Bond. The party in whom a bond has been delivered a judgment can be entered against the bond for the value of the property wrongly detained.

21. Concealment. If it appears that property has been concealed the court can require the concealer of remover to attend and be examined under oath regarding the matter and can deal with it as a matter of contempt.

B . Specific Attachment (Iowa Code Chapter 640). Collateral has been or is about to be sold, concealed or removed from the state.

1. Requires a verified petition stating the plaintiff’s reasons for entitlement to an attachment.

2. Fraudulently induced sales. Sales induced by fraudulent practices can be the subject of specific attachment.

3. Specific attachment is granted under the terms set by the court.

4. Form of Writ. The attachment writ shall describe the specific property subject to the writ and shall include the directions of the court as to the disposition of the property to be attached.

5. Bond to discharge. Court may direct the terms and conditions of the bond to be executed by the defendant with security and the terms for release of the attachment or the release of the property.

C . General Attachment (Iowa Code Chapter 639): For use when lender doesn't have a security interest. To proceed under this Chapter, the plaintiff must plead at least one of the following grounds: 1. That the defendant is a foreign corporation or acting as such. 2. That the defendant is a nonresident of the state. 3. That the defendant is about to remove the defendant's property out of

the state without leaving sufficient remaining for the payment of the defendant's debts.

4. That the defendant has disposed of the defendant's property, in whole

or in part, with intent to defraud the defendant's creditors.

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5. That the defendant is about to dispose of the defendant's property with intent to defraud the defendant's creditors.

6. That the defendant has absconded, so that the ordinary process

cannot be served upon the defendant. 7. That the defendant is about to remove permanently out of the county,

and has property therein not exempt from execution, and that the defendant refuses to pay or secure the plaintiff.

8. That the defendant is about to remove permanently out of the state,

and refuses to pay or secure the debt due the plaintiff. 9. That the defendant is about to remove the defendant's property or a

part thereof out of the county with intent to defraud the defendant's creditors.

10. That the defendant is about to convert the defendant's property or a

part thereof into money for the purpose of placing it beyond the reach of the defendant's creditors.

11. That the defendant has property or rights in action which the defendant

conceals. 12. That the debt is due for property obtained under false pretenses. 13. That the defendant is about to dispose of property belonging to the

plaintiff. 14. That the defendant is about to convert the plaintiff's property or a part

thereof into money for the purpose of placing it beyond the reach of the plaintiff.

15. That the defendant is about to move permanently out of state, and refuses to return property belonging to the plaintiff.

D . Remedies Under UCC:

1. Foreclosure via judicial process; 2. Repossession without breaching peace;

3. Dispose of property in commercially reasonable manner - public or

private sales - must give at least 10 days notice to borrower, guarantors and junior lien holders;

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4. Lender can disclaim warranties to buyer;

5. Retention of collateral in full satisfaction of debt;

6. Setoff of bank account (be aware of 90-day "improvement in position" factor and IRS levy factor)

VI. COLLECTING DEBTS WHEN YOU HAVE A JUDGMENT BUT NO SECURITY INTEREST

A. Execution Against Non-Exempt Real Estate. In Iowa, the debtor’s homestead is exempt from the claims of all creditors except those claims for pre-acquisition debt, debts for improvement of the homestead and consensual liens. The homestead exemption is unlimited in amount. However, within the city limits a homestead cannot exceed one-half acre. Outside a city limits, a homestead cannot exceed forty acres. If the debtor moves to another state, the new state’s exemptions apply immediately unless the debtor files bankruptcy, in which case the old homestead state’s laws apply if the bankruptcy is filed less than 730 days after establishing residence in the new state.

B. Execution against non-exempt personal property. Iowa Personal Property Exemptions are as follows:

1. Any wedding or engagement ring owned or received by the debtor or the debtor's dependents (subject to some limitations).

2. All jewelry of the debtor and the debtor's dependents owned or received by the debtor or the debtor's dependents, not to exceed in value two thousand dollars in the aggregate.

3. One shotgun, and either one rifle or one musket. (unlimited value per gun)

4. Private libraries, family bibles, portraits, pictures and paintings not to exceed in value one thousand dollars in the aggregate.

5. Household Goods and Wearing Apparel. The debtor's interest in all wearing apparel of the debtor and the debtor's dependents kept for actual use and the trunks or other receptacles necessary for the wearing apparel, musical instruments, household furnishings, and household goods which include, but are not limited to, appliances, radios, television sets, record or tape playing machines, compact disc players, satellite dishes, cable television equipment, computers, software, printers, digital video disc players, video players, and cameras held primarily for the personal, family, or household use of the debtor and

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the debtor's dependents, not to exceed in value seven thousand dollars in the aggregate.

6. Life Insurance Cash Value. Cash value, accrued dividend or interest, cash surrender value or other interest in life insurance policy owned by the individual provided that the beneficiary is the debtor’s spouse, child or dependent. The limit on this is $10,000.00 within two years that the exemption is claimed. If the cash value has been there over two years, there is no limit on the amount of property that can be claimed as exempt under this section.

7. Professionally prescribed health aids for the debtor or a dependent of the debtor.

8. The debtor's rights in:

(a) A social security benefit, unemployment compensation, or any

public assistance benefit.

(b) A veteran’s benefit.

(c) A disability or illness benefit.

(d) Alimony, support, or separate maintenance, to the extent reasonably necessary for the support of the debtor and dependents of the debtor.

(e) A payment or a portion of a payment under a pension, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, unless the payment or a portion of the payment results from contributions to the plan or contract by the debtor within one year prior to the filing of a bankruptcy petition, which contributions are above the normal and customary contributions under the plan or contract, in which case the portion of the payment attributable to the contributions above the normal and customary rate is not exempt.

(f) ERISA qualified profit or pension plans under §401(a) of the Internal Revenue Code; rollover IRAs; Roth IRAs and regular IRAs limited to the amount of contributions that would be tax deductible in the year made together with the earnings on them; Keogh plans or H.R. 10 plans.

9. Motor Vehicle. The debtor's interest in one motor vehicle, not to exceed in value seven thousand dollars.

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10. Interest in accrued wages and state and federal tax refunds limited to $1,000.00. This is in addition to the exemptions found in the Iowa Consumer Credit Code that are as follows:

• $250.00 per year if income is $12,000.00 or less annually

• $400.00 per year if income is >$12,000.00 but <$16,000.00

• $800.00 per year if income is >$16,000.00 but < $24,000.00

• $1,500.00 per year if income is >$24,000.00 but <$35,000.00

• $2,000.00 per year if income is >$35,000.00 but <$50,000.00

• 10% of expected earnings if income >$50,000.00

11. Tools of Trade – Non-farmer. If the debtor is engaged in any

profession or occupation other than farming, the proper implements, professional books, or tools of the trade of the debtor or a dependent of the debtor, not to exceed in value ten thousand dollars in the aggregate.

12. Tools of Trade – Farmer No Delay of Foreclosure deficiency. If the debtor is engaged in farming and does not exercise the delay of the enforceability of a deficiency judgment or general execution under section 654.6 in relation to the execution under which the exemption is claimed, any combination of the following, not to exceed a value of ten thousand dollars in the aggregate: (a) Implements and equipment reasonably related to a normal farming

operation. This exemption is in addition to a motor vehicle held exempt under subsection 9.

(b) Livestock and feed for the livestock reasonably related to a normal

farming operation.

13. Tools of Trade – Farmer Exercising Delay of Foreclosure deficiency. If the debtor is engaged in farming the agricultural land upon the commencement of an action for the foreclosure of a mortgage on the agricultural land or for the enforcement of an obligation secured by a mortgage on the agricultural land, if a deficiency judgment is issued against the debtor, and if the debtor does not exercise the delay of the enforceability of the deficiency judgment or general execution under section 654.6 in relation to the execution under which the exemption is claimed, the disposable earnings of the debtor are exempt from garnishment to enforce the deficiency judgment after two years from

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the entry of the deficiency judgment, §§ 642.21 and 642.22 notwithstanding. However, earnings paid to the debtor directly or indirectly by the debtor are not exempt. The preceding sentence makes no sense even though it is found in Iowa Code §627.6(13).

14. Wild card exemption. The debtor's interest, not to exceed one thousand dollars in the aggregate, in any cash on hand, bank deposits, credit union share drafts, or other deposits, wherever situated, or other personal property not otherwise specifically provided for in this chapter.

15. Deposits. The debtor's interest, not to exceed five hundred dollars in the aggregate, in any combination of the following property: (a) Any residential rental deposit held by a landlord as a security

deposit, as well as any interest earned on such deposit as a result of any statute or rule requiring that such deposit be placed in an interest-bearing account.

(b ) Any residential utility deposit held by any electric, gas, telephone,

or water company as a condition for initiation or reinstatement of such utility service, as well as any interest earned on such deposit as a result of any statute or rule requiring that such deposit be placed in an interest-bearing account.

(c ) Any rent paid to the landlord in advance of the date due under any

unexpired residential lease. Notwithstanding the provisions of this subsection, a debtor shall not be permitted to claim these exemptions against a landlord or utility company, with regard to sums held under the terms of a rental agreement, or for utility services furnished to the debtor.

16. Personal Injury Settlements. The debtor's interest in payments reasonably necessary for the support of the debtor or the debtor's dependents to or for the benefit of the debtor or the debtor's dependents, including structured settlements, resulting from personal injury to the debtor or the debtor's dependents or the wrongful death of a decedent upon which the debtor or the debtor's dependents were dependent.

C. Garnishment (normally wages and bank accounts): Effective for 70

days - then must be renewed. Bank has a duty to continue to monitor the account that is garnished until the garnishment has expired or it is notified that the garnishment has been satisfied. Iowa Code §642.22.

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D. Judgment Debtor Examinations: Iowa Code Chapter 630. Cannot be obtained until after an execution has been returned unsatisfied and the Application for Judgment Debtor Exam must include that the judgment debtor has property that the debtor unjustly refuses to apply towards the satisfaction of the judgment.

VII. THE GUARANTOR'S DEFENSES.

A. No consideration: This defense is usually not successful when the credit is extended contemporaneously with the Guaranty. But when the credit has already been extended (e.g., loan is in default), you need to show the bank's forbearance of its remedies, etc.

B. Statute of limitations: For written contracts, the statute of limitations in Iowa is 10 years after the last payment is due.

C. Conditions precedent to liability: (e.g., must pursue primary obligor

and/or collateral first). Most bank drafted guarantees do not include such language.

D. Revocation of Guaranty: Guarantors can revoke a guaranty

prospectively. It does not affect the guarantor’s liability as of the date the guaranty is revoked.

E. Impairment of collateral: Failure to document loan correctly (lien

perfection) thus increasing Guarantor's exposure. Failing to pay down loans from collateral sales.

F. Negligent administration of the loan: For example, failing to pay down

loans from accounts receivable while allowing new entity to pay unsecured debts when entity is dissolving.

G. Failure to give Guarantor notice of sale of collateral: Can give rise to a

defense unless it was waived. H. Failure to conduct a commercially reasonable sale of collateral:

Failure to conduct a commercially reasonable sale of collateral can lead to the inability to collect the difference between the sale price and the commercially reasonable sale price.

I. Material alteration of underlying debt: (e.g. creditor extends maturity

date or payment terms or amount of loan or purpose of loan). J. Release of co-guarantors: It is not prudent to release co-guarantors from

their liability without knowledge and permission of remaining guarantors.

K. Regulation B violations

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VIII. HOMESTEADS A. Waiver on Mortgage: A mortgage against an agricultural homestead

must contain the disclosure contained in Iowa Code Section 561.22 that must be in boldface type that is at least 10 points in size. That disclosure reads as follows:

I understand that homestead property is in many cases protected from the claims of creditors and exempt from judicial sale; and that by signing this contract, I voluntarily give up my right to this protection for this property with respect to claims based upon this contract.

Failure to include the required disclosure invalidates a mortgage on an agricultural property, provided that the mortgage covers a parcel 40 acres or larger. It is not required for agricultural properties less than 40 acres. Iowa Code §561.22(2).

B. Spousal Signatures: Regardless of the state of title (whether the husband, wife, or both are the owners), both spouses must sign a mortgage on homestead property. If the spouse does not sign, the mortgage is invalid. Given the advent of same-sex-marriage, it is very important to ascertain the marital status of the borrower whenever a mortgage or deed of trust is taken. The requirement of a spouse’s signature would appear to apply to same-sex couples.

C. Order of Collection: A lender that holds as collateral a debtor's homestead with other non-homestead property (whether real or personal) must collect its debt from the non-homestead property first.

D. Truth in Lending Act—Notice of Right to Rescind: A lender that is taking a security interest in the debtor's principal dwelling must give the debtor written notice of his right to rescind the transaction within three days of signing the mortgage documents. If the notice is not given, the debtor may rescind the mortgage at any time within three years. If the debtor is in bankruptcy, this means that the debtor can rescind the mortgage, leaving the lender with an unsecured obligation that is discharged in bankruptcy, and the debtor with an unencumbered homestead that is exempt pursuant to Iowa Code Section 561.16. See e.g., In re Quenzer, 266 B.R. 760, 764-66 (Bankr. D. Kan. 2001) reversed, Quenzer vs. Advanta Mortgage Corp., 288 B.R. 884 (D. Kan. 2003).

E. Parceling on Sale: If the homestead is agricultural, the debtor is allowed to parcel the homestead, up to forty acres, and redeem that ground at fair market value, separate and apart from the remaining land in the tract.

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E.g., Assume a mortgage is granted on 160 acres. The debtor can require that all property excluding the 40 acres that is platted as the homestead be sold first to satisfy the debt. If it satisfies the mortgage debt, the mortgage lien will be released on the remaining 40-acre homestead.

F. Pre-Acquisition Debt: A homestead is not exempt from debts contracted prior to its acquisition. Because a debtor can tack homestead ownership periods together as the Debtor moves from homestead to homestead, pre-acquisition debt as a practical matter is generally limited to debt incurred before the debtor acquired his first homestead. In many instances, student loans will be pre-acquisition debt for many home owners.

IX. PERSONAL PROPERTY LIEN PERFECTION

A. General Rule: A security interest is generally perfected when the secured

party files a UCC financing statement in the state where the debtor is located. Is the proper name of the debtor utilized on the UCC? In re EDM Corp., 431 B.R. 459 (8th Cir.BAP Neb. 2010), the Bankruptcy Appellate Panel (“BAP”), held that:

(1) under Nebraska law, the financing statement filed by bank, which included both debtor's organizational name and its trade or “d/b/a” name in the name field, did not sufficiently provide the name of the debtor, as required for financing statement to perfect bank's security interest, and (2) the addition of debtor's trade or “d/b/a” name to the name field on the financing statement made the document seriously misleading as to the name of debtor.

Homestead

SELL LAST

Sell B/4 Homestead

Sell B/4 Homestead

Sell B/4 Homestead

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This is how the Debtor’s Name filed by Hastings State Bank on the UCC that was filed with the Nebraska Secretary of State’s Office in EDM Corp. was completed. It was found to be seriously misleading and the creditor’s security interest was not perfected.

Incorrect Completion of a UCC for a Business with a DBA:

Correct Completion of a UCC with a DBA:

If Hastings State Bank had completed the UCC as shown below, Hastings State Bank would have properly perfected its security interest in the collateral:

B. Location of the Debtor: Corporations, and other formal entities, are

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located in their state of formation. An individual or non-registered business entity is located in the state of the individual's residence, or the entity's place of business (if the entity has more than one place of business, it is located in the state where it has its chief executive office).

C. Consumer Goods: A purchase money security interest in consumer goods is perfected upon attachment of the security interest. This provides very little protection, however, and even these creditors should generally file a UCC financing statement.

D. Motor Vehicles: A party still must comply with Iowa's certificate of title

laws rather than the filing requirements for regular security interests. This does not apply when seeking to perfect a lien in motor vehicle inventory for a seller of titled motor vehicles. In cases involving sellers of titled motor vehicles, a UCC identifying inventory as collateral must be properly filed with the appropriate secretary of state. A security interest in titled vehicles (other than inventory of a vehicle dealer) is not perfected for bankruptcy purposes until it is actually noted on the certificate of title.

E. Deposit Accounts: A secured party must perfect a security interest in a deposit account by taking control of the deposit account. To obtain control of the deposit account, the secured creditor essentially has to ensure that it can get the funds in the deposit account without the debtor's approval. Specifically, the secured party must be one of the following:

1. The bank that holds the account;

2. A party to a control agreement between the debtor and the bank that holds the account; or,

3. The customer named on the account.

X. CONSIDER HOW THE LENDER'S PERFECTED SECURITY INTEREST STACKS UP AGAINST: A. Advances from the Livestock Remediation Fund: The State of Iowa

providing feed to under the livestock remediation fund established by Iowa Code § 459.501. Under Iowa Code § 717.5.3.c.(1), the money received from the sale of neglected livestock rescued by a local authority shall be paid to the local authority before satisfying indebtedness secured by any security interest in or lien on the livestock.

B. PASA Trust Claims: If the borrower has pledged a security interest in

inventory, receivables, proceeds, and products of borrowers that are subject to PASA, the Bank’s collateral will not include the inventory,

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receivables, proceeds and products of the Borrower if the producers have not been paid and the claims fall under the PASA trust. See PASA article attached as Exhibit “F”.

If the packer’s check is dishonored, the following timeline applies:

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C. Another lender's set off of collateral proceeds D. Garnishing judgment creditor E. Junior lien holder paid in ordinary course of business F. Account debtor of borrower G. Federal tax liens H. Insurance proceeds of collateral paid by insurance company to

borrower I. Bankrupt individual borrower seeking to avoid non-PMSI J. DIP or bankruptcy trustee K. Borrower's conversion of collateral

XI. TAX PROBLEMS FOR FARMERS LIQUIDATING COLLATERAL

A. Gain is generally recognized on sale of farm assets. Gain is the

difference between the net price received by the farmer and the adjusted tax basis of the asset sold.

Example: In 1987, David Farmer purchased 160 acres of bare ground for $1,000.00 per acre. Since then, he tiled the farm in 1990 at a cost of $50,000.00. The tile has been depreciated on a straight-line basis over 7 years. Therefore, it was fully depreciated when he sold the farm in 2008 for $5,000 per acre. The gain calculation for David Farmer is set forth below:

Cost Basis 160 Acres x $1,000 $160,000 Improvement (tile) 50,000 Total Basis (Before Adjustments) $210,000 Adjustments: Depreciation: 50,000 Adjusted Tax Basis $160,000 Sale Price 160 Acres x $10,000 $1,600,000 (less) Adjusted Tax Basis (160,000) Taxable Gain $1,440,000 Depreciation Recapture (50,000) Long Term Capital Gain $1,390,000 Assuming the ordinary income tax rate for David Farmer is 20%, he will be obligated to pay the following federal income taxes:

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Depreciation Recapture $50,000 x 20% $10,000 Long Term Capital Gain $1,390,000 x 15% 208,500 Total Federal Income Tax $218,500

B. Farmer’s Dilemma: How to pay the income taxes? Generally, in

troubled loan situations, the farmer has liens against his property of sufficient size that the secured creditors receive all of the net proceeds from the sale of a farm leaving the farmer with no farm, perhaps a deficiency to the Bank and a non-dischargeable tax debt to the IRS.

C. Chapter 12 Potential Solution: If the liquidation of collateral can take place in the tax year before filing a Chapter 12 bankruptcy, the tax on the sale of the farm assets used in the farming operation can be treated as an unsecured claim. A review of relevant portions of Chapter 12 bankruptcy is set forth below:

1. Only available for "family farmers" (husband and wife are treated as one debtor)…

(a) that are engaged in a farming operation

(b) whose aggregate debts on the date the bankruptcy is filed do not exceed $4,031,575.00, and, not less than 50% of aggregate non-contingent, liquidated debts (excluding debt for homestead unless it arises out of a farming operation) arise out of a debtor's farming operation

(c) more than 50% of the debtor's gross income must come from the

farming operation for either the tax year immediately preceding year of filing or, both the second and third taxable years prior to filing, and

(d) who have regular annual income.

2. If the debtor is a corporation or partnership, more than 50% of the stock or equity must be held by one family, or by one family and the relatives of the members of such family who conduct the farming operation, and (i) more than 80% of the value of the assets must be related to the farming operation and (ii) whose aggregate debts on the date the bankruptcy is filed do not exceed $4,031,575.00, and not less than 50% of aggregate non-contingent, liquidated debts (excluding debt for one dwelling which a shareholder or partner maintains as a homestead, unless it arises out of a farming operation) arise out of a debtor's farming operation.

3. Voluntary — Debtor cannot be forced into Chapter 12.

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4. Contemplates the repayment of some or all of debts from debtor's future disposable income, without liquidation of the debtor's assets. Plan is usually for 3 years, but can be extended to a maximum of 5 years. Plan must be feasible and give creditors no less than if debtor was liquidated under Chapter 7.

5. Extraordinary Tax Relief is available in Chapter 12:

(a) Taxes due to the sale of farm assets used in the debtor’s farming

operation are treated as unsecured claims. For example, credit cards are discharged when the farmer receives the Chapter 12 discharge.

(b) Applies to transactions in the tax year prior to filing the

bankruptcy petition. Hall v. U.S., 132 S. Ct. 1882 (2012). (c) May apply to sales of farm assets that would produce ordinary

income such as the sale of fat hogs. See, Knudsen v. IRS, 581 F.3d 696 (8th Cir. 2009).

6. Opportunity for Creditors: Realizing that many beleaguered farmers

are ready to cease farming operations, the savvy ag banker may encourage the farmer to quit farming and offer him some financial assistance to retain a bankruptcy counsel to assist him in discharging the taxes using a Chapter 12 bankruptcy.

XII. BANKRUPTCY.

A. Types of Bankruptcy

1. Chapter 7 - "straight" bankruptcy;

2. Chapter 11 - business reorganizations;

3. Chapter 12 - family farmers (reorganization) discussed above; and

4. Chapter 13 - individual reorganization.

B. Automatic Stay: In effect as of date of bankruptcy filing and lasts until creditor files motion and gets order lifting stay, or: 1. Case is closed;

2. Case is dismissed; or

3. Date a discharge is granted or denied. After discharge, all collection activity by creditors of discharged debts is forbidden, including set off.

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C. Relief from Stay: To obtain relief from the automatic stay a creditor must

show that either:

1. There is no equity in property, and 2. The property is not necessary for an effective reorganization of

borrower's business. OR 3. The Debtor is not providing adequate protection to the creditor.

Adequate Protection can be provided by the Borrower in four fashions: (a) periodic cash payments to the extent property is depreciating in

value

(b) grant lender a replacement lien on other property to the extent original collateral is depreciating in value

(c) grant lender an administrative expense priority to the extent of lender's loss, or

such other relief as the Court finds adequate.

D. Cash Collateral and Adequate Protection: Pertains to accounts, inventory and cash proceeds of collateral e.g., sale proceeds of livestock and crops.

E. First Meeting of Creditors: Should you go? It is an opportunity to learn more about the debtor’s operation, and plans during and after bankruptcy. In most Chapter 7 cases, the first meeting of creditors only lasts 5 to 10 minutes. Therefore, unless you have questions that have not been answered in the schedules and statement of affairs, it may not be worth your time in a Chapter 7 bankruptcy.

F. Filing a Proof of Claim: File a claim in Chapters 11, 12 and 13 cases. Your claim is deemed secured to the extent of the fair market value of your collateral. Therefore, a creditor is not entitled to collect post-petition interest or attorney fees unless it is over-secured.

G. Borrower's Reaffirmation of Debt – Only Chapter 7 Cases 1. Reaffirmation is a written agreement entered into between the debtor

and the creditor after bankruptcy but before discharge date – it must

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advise the debtor of 60-day rescission right.

2. Reaffirmation Agreements must be filed with Bankruptcy Court.

3. Debtor's attorney must sign an affidavit that reaffirmation is voluntary and that agreement does not impose undue hardship on debtor or debtor's dependents in order to avoid a hearing on the reaffirmation. Note: some debtors’ attorneys refuse to sign these affidavits, so there will be a hearing before the bankruptcy judge so the judge can make the determination that the reaffirmation agreement does not impose an undue hardship on the debtor or the debtor’s dependents.

H. Debtor's Redemption of Property: In Chapter 7 cases, the debtor has the

right to redeem personal property used for personal, family, or household use (e.g., vehicle) free from a lien by paying the secured party the fair market value of the property.

I. Trustee's Abandonment of Property: Occurs when the Trustee determines that administering the property will provide no value to the estate.

J. Objection to Debtor's Exemptions: You have 30 days from the Meeting

of Creditors to object to exemptions. If you have an objection to the property that the debtor has claimed as exempt and do not file it by the deadline, it is waived. If no creditor objects to a debtor’s claimed exemptions the property claimed as exempt is exempt by operation of law and the property will be unavailable for use to satisfy the claims of creditors. The Debtor's valuation of assets, particularly of assets secured to lender, is usually the issue in objections to exemptions. Sometimes the debtor claims something as exempt that is not exempt, e.g., life insurance in which more than $10,000.00 has accumulated as cash surrender value within the 2 years preceding the claim of exemption.

K. Debtor's Avoidance of Non-Purchase Money Liens: Debtors are

allowed to avoid non-purchase money security interests in tools of trade up to the amount of the tool of trade exemption, in Iowa, $10,000.00 per individual debtor.

L. Preferences: Allows the Trustee to recover transfers, including perfection

of security interests, and payments made within 90 days of filing that allow creditors to receive more than they would receive in a Chapter 7 bankruptcy for the benefit of the bankruptcy estate meaning the money will be shared with all unsecured creditors after administrative expenses and priority claims are paid in full.

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M. Fraudulent Transfers: Trustees in bankruptcy can seek to have fraudulent transfers set aside. A transfer is fraudulent if it is made with the intent to hinder, delay or defraud creditors, or made the debtor insolvent. Fraudulent transfer litigation can be brought by based upon the Bankruptcy Code as well as under state law. The Trustee or Debtor-in-Possession has the authority to bring fraudulent transfer litigation.

N. Dismissal for Bad Faith: Bankruptcy Code §707(b) allows a Chapter 7

bankruptcy case to be dismissed if there is unreasonable delay by the debtor that is prejudicial to creditors; nonpayment of fees or charges; and failure by the debtor to file information required on Schedules and the Statement of Affairs. In addition, a Chapter 7 bankruptcy can be dismissed, if the Debtor has primarily consumer debts, if completing the case would be an abuse of the provisions of Chapter 7.

O. Involuntary Proceedings:

1. Require three creditors having minimum aggregate claims totaling at least $15,325, unless there are fewer than 12 creditors, in which case one creditor can file an involuntary bankruptcy petition.

2. Involuntary bankruptcies cannot be filed against farmers. 3. Bad faith liability exposure can exist for creditors filing Involuntary

Bankruptcies as the Bankruptcy Court can require a petitioning creditor to pay the Debtor’s attorney fees and damages from filing an involuntary bankruptcy that is dismissed.

P. Debts Not Discharged From Bankruptcy

1. Tax or customs duty with some exceptions; 2 . Debts obtained using false financial statements; 3 . Debts not listed or scheduled in time for a creditor to file a proof of

claim;

4 . Debts for fraud or defalcation while acting in a fiduciary capacity;

5 . Debts for domestic support obligations;

6 . Willful and malicious injury to person or property;

7 . Fines or penalties or forfeitures to governmental units;

8 . Student loans unless excepting the debt from discharge would impose

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an undue hardship on the debtor or debtor’s dependents;

9 . Debts or personal injury caused by debtor’s operation of a motor vehicle, vessel, or aircraft is such operation was unlawful because the debtor was intoxicated from using alcohol, a drug or another substance;

10. Debts that could have been listed or scheduled by the debtor in a prior

case in which the debtor waived a discharge or was denied a discharge;

11. Debts in a final order or consent order in any court of the United States or a State issued by the Federal depository institutions with the debt arising from an act of fraud or defalcation while acting in a fiduciary capacity committed involving a depository institution or credit union;

12. Debts involving reckless or malicious failure to fulfill a commitment

to a Federal depository institution to maintain the capital of an insured depository institution;

13. Debts for any payment of an order of restitution issued under the

federal criminal code;

14. Debt incurred to pay a non-dischargeable tax;

15. Debts incurred to pay fines or penalties imposed under federal election law;

16. Debts to a spouse, former spouse, or child of the debtor not consisting

of domestic support obligations incurred in the course of a divorce or separation;

17. Condominium fees after the date of filing while the trustee or debtor

has legal, equitable or possessory interest in the unit;

18. Fees imposed by any court for filing fees associated with assertions of poverty by a prisoner;

19. Debts to pension, profit-sharing or stock bonus plans under the

Internal Revenue Code;

20. Debts for violation of federal security laws;

Q. Time Limit to Object to Some Debt Dischargeability. Debtors will have the debts listed in subparagraphs 2, 4 and 6 above discharged unless the creditor files a complaint within the time limits set by the bankruptcy rules (60 days after the date the meeting of creditors if finalized).

42

R. Challenging the Debtor's Entire Discharge of Debts: 1. Corporations, limited liability companies, etc. (non-individuals) cannot

get a bankruptcy discharge in a liquidation bankruptcy; 2. Debtor's destruction or concealment of property; 3. Debtor's destruction or concealment of books and records; 4. Debtor makes fraudulent false oaths or withholds information; 5. Debtor's failure to explain loss or deficiency of assets; 6. Debtor's refusal to obey an order of Bankruptcy Court; and 7. Previous bankruptcy discharge within 8 years (but can still file Chapter

12 or 13).

S. Chapter 11

1. Who may file? 2. Debtor has 120-day exclusive time to file plan of reorganization unless

debtor is a single asset real estate or a small business debtor. This can be extended to no more than 18 months after filing the case. Small business debtors are allowed the exclusive period of 180 days to file their plan. This cannot be extended beyond 300 days after filing the case.

3. Cash collateral, adequate protection issues:

(a) Is the collateral insured?

(b) Is it declining in value?

(c) Is the debtor willing to provide a replacement lien in post petition assets such as accounts receivable, or post petition crops?

(d) If livestock, is it being properly fed?

4. Contents of Plan:

(a) Creditors are placed in different classes - those with substantially

similar claims are to be placed in same class, but each secured

43

creditor is placed in a separate class. (b) Some creditors may be unimpaired (their claims will be treated

exactly as if the case had not been filed) - they are deemed to have accepted the plan.

(c) Defaults can be cured or waived.

(d) Debtor can retain some or all of property.

(e) Collateral can be sold or returned to creditor.

(f) Interest rates can be modified.

(g) Maturity dates can be extended far beyond your loan terms.

(h) Votes for a plan cannot be solicited except pursuant to a Court-

approved Disclosure Statement.

(i) A class of claimants is deemed to have accepted the plan if it has been accepted by claimants with allowed claims who hold at least 2/3 in amount and more than 1/2 in number of the allowed claims voting within the class.

(j) Absolute priority rule (a debtor may not keep or retain the

ownership interest unless all creditors are paid in full or have consented to payment of less than all of their claims) may be your best weapon to prevent an unfavorable plan from being confirmed. The absolute priority rule may not apply in individual Chapter 11 cases. The Eighth Circuit has not ruled on this important issue, however, two bankruptcy courts on the Eighth Circuit have held that the absolute priority rule does not apply to individual Chapter 11 cases. However, several courts have recently taken the position that the absolute priority rule does apply in individual Chapter 11 cases.

T. Comparison of Chapter 11 & 12 for Farmers is attached as Exhibit “C.”

U. Chapter 13:

1. Only available for individuals (husband and wife are treated as one individual) with regular income who owe less than $383,175 in non-contingent, liquidated, unsecured debts and less than $1,149,525 in non-contingent, liquidated, secured debts.

44

2. Voluntary: Debtor cannot be forced into Chapter 13. 3. Contemplates the repayment of some or all of debts from the debtor's

future disposable income, without liquidation of the debtor's assets. Plan is usually for 3 years, but can be extended to a maximum of 5 years. Plan must be feasible and give creditors no less than if the debtor was liquidated under Chapter 7.

4. Advantages to debtor:

(a) Protects co-debtors of consumer debts; (b) Discharge otherwise non-dischargeable debts; and (c) Can modify the rights of secured creditors: can cure mortgage

defaults, expunge mortgages with no lien value, etc., but cannot modify the rights of a creditor secured only by a mortgage on the homestead.

5. When a lender can go against co-debtor:

(a) When co-debtor actually received the borrowed funds; and

(b) Plan filed by debtor proposes not to pay debt in full.

XIII. DEBT RESTRUCTURING NEGOTIATIONS

Debt restructuring negotiations take place informally, outside of mediation and formally, inside of mediation. Consideration of the priorities of the parties to a negotiation can facilitate a successful negotiation. The creditor’s prime goals are typically to collect on a debt that is delinquent; shore up a marginal loan by obtaining the guarantees by solvent guarantors or a FSA or SBA government guarantee; and obtain additional collateral to allow it to continue with the line of credit. The farmer’s goals typically include staying in business; maintaining ownership of assets; maintaining the lifestyle to which they have become accustomed; and right-sizing their operations through liquidations provided income taxes will not cause a substantial hardship. Both sides must determine which goals are most important (prioritize them) and determine if their goals are realistic. Unrealistic goals must be eliminated so the parties can focus on realistic goals. Examples of unrealistic goals often include the ability of the farmer to retain all assets and the creditor’s goal of payment in full on time. Areas of agreement should be explored to determine whether a solution can be fashioned that is acceptable to both parties. If an agreement is to be reached, it will generally require give and take by both parties. Entering mediation with an absolutist mentality, like that displayed by the contract vendor in Graham v. Baker, 447 N.W.2d 397, 401 (Iowa 1989), while fulfilling the letter of the law will generally not result in a mediation agreement. While a mediation release will be procured, litigation will generally not be avoided. Thinking out of the box can result in solutions that can work for both parties.

45

A. Out of the Box Thinking

A banker I worked against in 2009 exhibited an exceptional willingness to think out of the box. The farm debtor was hopelessly in debt. The loan balance exceeded the collateral values by well over $1,000,000.00, the dairy operation was losing money, and the bleed rate was more than $70,000.00 per month. There was virtually no likelihood of a successful reorganization. At mediation, the Banker suggested that if the farmer would immediately surrender the cows, calves, grain, sileage and other personal property securing the loan, and agree to surrender the farm under non-judicial foreclosure he would pay my clients $100,000.00. His reasoning was that by paying them $100,000.00, the amount he expected to pay his attorney if the farmers filed a Chapter 12 bankruptcy, they could have a fresh start and he would speedily obtain control of the collateral minimizing his losses. My clients thought long and hard about the prospect of getting $100,000.00 and not having the uncertainty of a bankruptcy. They opted to take the money offered to them. We could structure the transaction so that the $100,000.00 paid by the Bank was in consideration for them selling their homestead to the Bank. Since the money constituted proceeds from the sale of their homestead, these funds were exempt from the claims of their other creditors for a reasonable time to allow purchase of a later homestead. See, Benham v. Chamberlain, 39 Iowa, 358 (1874). Vittengl v. Vittengl, 156 Iowa 41, 135 N.W. 63, 65 (Iowa 1912). After closing, the farmers held the proceeds separate from all other money they had in an account titled “Homestead Account.” They did not add other money to that account, nor did they spend the money in that account until they purchased a new homestead. B. Non-Judicial Foreclosure Can be Beneficial

The use of a non-judicial foreclosure provided in Iowa Code § 654.18 allows farmers and their creditors to fashion remedies that can be mutually beneficial. This remedy can be utilized either before or as a part of a mediated settlement. If it is not part of a mediated settlement, the farmer must waive mediation, which presumably, has occurred if the farmer executes the non-judicial foreclosure agreement. The creditor gets possession and ownership of the real estate collateral much quicker than would be the case in a traditional foreclosure. The right of redemption and right of first refusal present in a traditional foreclosure are eliminated. The creditor waives any deficiency that could exist if the collateral cannot cover the indebtedness.4 In return, the creditor can generally make other concessions that will benefit the farmer. Under a non-judicial foreclosure, the farmer deeds the farm to the creditor subject to a five-business

4 Farmers must be mindful of the potential for discharge of indebtedness income if this procedure is utilized and they have exempt assets that could make them solvent given a forgiveness of a potential deficiency. .

46

day time to cancel the transaction. If the transaction is not cancelled, the creditor gives notice of the non-judicial foreclosure to junior lien holders who then have thirty days to redeem from the creditor and each other.

C. Deed Back to Bank with Sale of Homestead Back to Farmer on Real

Estate Contract

Many debts were restructured in the 1980’s by farmers deeding back their farms to the creditor with the creditor then selling back the house and 5 to 10 acres on a real estate contract. This approach allowed the farmer to retain the homestead while allowing the Bank to realize cash from the balance of its real estate collateral. In addition, the Bank had a short leash on the farmer as if a payment were missed, it could institute a contract forfeiture procedure that would take only 30 days to finish once the Notice of Forfeiture was properly served. D. Sale of Non-Essential Assets in the Tax Year Before Filing a Chapter

12 The “right-sizing” of a farm operation must always be considered as a

part of a debt restructuring negotiation. If the farmer has over-encumbered assets it can be in his best interest to liquidate some, reduce debt, and restructure the farming operation. Unfortunately, this often leads to incurring significant income taxes. Use of 11 U.S.C. § 1222(a)(2)(A) can be effective in discharging the income taxes incurred through the “right-sizing” of the operation. Liquidation of unnecessary assets can also decrease the family farmer’s debt to qualify for Chapter 12 filing. E. Formal Written Agreements Contained in Bank Minutes are Essential

All debt restructuring agreement involving federally insured institutions

must be in writing, approved by the Board of Directors, sealed and included in the bank’s minutes to be enforceable if the institution is declared insolvent.5 Copies of the resolution from the Board minutes required by this section are attached as Exhibit “I.” Reliance on any oral agreements with a Bank is not wise as they are unenforceable, as pointed out in the discussion on Iowa Code § 535.17 and 12 U.S.C. §1823(e). If any agreement with a Bank is to be enforced, it must be in writing, signed by the proper parties and with the formalities required by the statutes.

5 12 U.S.C. 1823(e). See, Willow Tree Investments, Inc. v. Wagner, 453 N.W.2d 64 (Iowa 1990) (the purchaser of a note from a failed bank takes free of any oral agreements between the maker of the note and the bank); Matter of Estate of Thies, 463 N.W.2d 40 (Iowa 1990) (oral agreement to return guarantee after FmHA loan was received and was unenforceable, estate liable to pay over $400,000.00 to failed bank).

47

XIV. CONCLUSION

Debt restructuring negotiations provide farmers and their creditors with

substantial opportunities to reach amicable accords that satisfy both parties’ needs. These negotiations can lead to significant “thinking outside the box” to find middle ground. Preparation is the key to a successful negotiation for both creditors and farmers. Consideration of the other party’s priorities and needs can lead to opportunities for cooperation that will minimize the need for court intervention and bankruptcies. Frequently, the need to “right-size” a farming operation will lead to significant income tax consequences that can only be addressed in a Chapter 12 bankruptcy. When this occurs, cooperation between the creditor and farmer can allow the creditor to receive the liquidation proceeds of most of its collateral in the tax year before filing the bankruptcy while allowing the farmer to avail himself of the favorable tax provisions of 11 U.S.C. § 1222(a)(2)(A). All parties to debt restructuring negotiations should be prepared to accept reality, make reasonable concessions and consider the needs of the other party to reach an agreement.

2006 National Crop Insurance Services, Inc.

CROP-HAIL INSURANCE and/or 2006-NCIS 757 (Rev. 10-2006) MULTIPLE PERIL CROP INSURANCE

ASSIGNMENT OF INDEMNITY

Approved Insurance Provider’s Name & Address:

Policy Number:

Insured’s Name

Effective Crop Year:

Insured’s Authorized Representative

Crop Name and County Name:

Street or Mailing Address

City State Zip Code

The insured assigns to (Name of Creditor)

of (Mailing Address) (City, State and Zip Code) the right and interest of any indemnity payment(s) which may be payable to the insured under the insurance policy for the county/commodity(ies) shown above.

CONDITIONS 1. This assignment will be binding upon the person(s) who succeed the Insured’s interest in the insurance policy. 2. Indemnity payments made under the insurance policy will be subject to a deduction for any indebtedness due this Approved

Insurance Provider by the Insured. 3. This assignment will not grant the Creditor any greater rights than originally held by the Insured. 4. The Creditor’s interest will be recognized upon Approved Insurance Provider’s approval of this assignment and the Creditor

will have the right to submit the loss notices and other forms as required by the Policy. 5. The Approved Insurance Provider will determine the person(s) entitled to any indemnity payment(s) and the payment(s) will

be by joint check. 6. If the assignment is not cancelled according to item 7 below, the assignment will cease at the end of the effective crop year. 7. Cancellation of this assignment prior to and during the crop year stated above will be accepted by the Approved Insurance

Provider only upon notification in writing by the above identified Creditor(s). It is understood and agreed that this assignment will be subject to the terms and conditions of the insurance policy.

Insured’s Signature Date Creditor’s Signature Date

Witness’ Signature Date Witness’ Signature Date

Approved The Insurance Provider hereby approves the foregoing assignment.

This assignment was filed with the Approved Insurance Provider on

at

Approved Insurance Provider Authorized Representative’s Signature Date

(Month, Day, Year)

a.m. p.m.

(See reverse side of form for statement required by Privacy Act of 1974.)

2017 Ag Banker's Presentation Exhibit "A" Page 1 of 2

COLLECTION OF INFORMATION AND DATA (PRIVACY ACT)

To the extent that the information requested herein relates to your individual capacity as opposed to your business capacity, the following statements are made in accordance with the Privacy Act of 1974, as amended (5 U.S.C. 552a). The authority for requesting information to be furnished on this form is the Federal Crop Insurance Act (7 U.S.C. 1501 et seq.) (Act) and the Federal crop insurance regulations contained in 7 C.F.R. chapter IV. Collection of the social security account number (SSN) or the employer identification number (EIN) is authorized by section 506 of the Act and is required as a condition of eligibility for participation in the Federal crop insurance program. The primary use of the SSN or EIN is to correctly identify you, and any other person with an interest in you or your entity of 10 percent or more, as a policyholder within the systems maintained by the Federal Crop Insurance Corporation (FCIC). Furnishing the SSN or EIN is voluntary; however, failure to furnish that number will result in denial of program participation and benefits. Your policy also specifies other information that must be provided. The principle purposes of this information are to provide insurance; reinsurance; determine eligibility; determine the correct parties to the agreement; determine and collect premiums or other monetary amounts (including administrative fees and over payments); and pay benefits. The routine uses of this information include: (1) Referral to the appropriate agency, whether Federal, State, local or foreign including the Department of Justice, charged with the responsibility of investigating or prosecuting a violation of law, or of enforcing or implementing a statute, rule regulation or order issued pursuant thereto, of any record within this system when information available indicates a violation or potential violation of law, whether civil, criminal, or regulatory in nature, and whether arising by general statute or particular program statute or by rule, regulation or order issued pursuant thereto; (2) Disclosure to a court, magistrate or administrative tribunal, or to opposing counsel in a proceeding before a court, magistrate or administrative tribunal, of any record within the system that constitutes evidence on that proceeding, or which is sought in the course of discovery, to the extent that FCIC determines that the records sought are relevant to the proceeding; (3) Disclosure to a congressional office in response to any inquiry from the congressional office made at the request of that individual; (4) Disclosure to Approved Insurance Providers (AIP) for any purpose relating to the sale, service, and administration of the Federal crop insurance program and the policies insured under the authority of the Act; (5) Disclosure to other Federal agencies and contractors, cooperators, and partners of FCIC for the purpose of conducting research, development, analyses, and evaluation into all aspects relating to new and existing crop insurance programs and other risk management tools; (6) Disclosure to contractors or other Federal agencies to conduct research and analysis to identify patterns, trends, anomalies, instances and relationships of AIP’s, agents, loss adjusters and policyholders that may be indicative of fraud, waste, and abuse; (7) Disclosure to AIPs, contractors, and other applicable Federal agencies to determine whether information has been accurately provided to FCIC and the AIP’s and to determine compliance with program requirements; and (8) Disclosure to AIPs, contractors, cooperators, partners of FCIC, and other Federal agencies for any purpose relating to the sale, service, administration, analysis and evaluation of the Federal crop insurance program. Furnishing other information is also voluntary. However, failure to report the information specified in your policy may result in rejection of any claim for indemnity, replanting payment, or other benefit; ineligibility for insurance; a unilateral determination of any monetary amounts due; or any remedy provided in the policy.

NONDISCRIMINATION STATEMENT The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, age, disability, and where applicable, sex, marital status, familial status, parental status, religion, sexual orientation, genetic information, political beliefs, reprisal, or because all or a part of an individual’s income is derived from any public assistance program. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for communication of program information (Braille, large print, audiotape, etc.) should contact USDA's TARGET Center at (202) 720-2600 (voice and TDD). To file a complaint of discrimination, write to: USDA, Director, Office of Civil Rights,1400 Independence Avenue, S.W., Washington, D.C. 20250-9410, or call (800) 795-3272 (voice) or (202) 720-6382 (TDD). USDA is an equal opportunity provider and employer.

2017 Ag Banker's Presentation Exhibit "A" Page 2 of 2

This form is available electronically. Form Approved - OMB No. 0560-0183U.S. DEPARTMENT OF AGRICULTURE

Commodity Credit Corporation

ASSIGNMENT OF PAYMENTSee Page 2 for Privacy Act and Public Burden Statements.PART A - GENERAL INFORMATION1. STATE 2. COUNTY

3. PRODUCER'S (ASSIGNOR'S) NAME AND ADDRESS (Including Zip Code) 5. ASSIGNEE'S NAME AND ADDRESS (Including Zip Code)

4. PRODUCER'S (ASSIGNOR'S) TAX IDENTIFICATION NUMBER 6. ASSIGNEE'S IDENTIFYING NUMBER TAX ID

PART B - APPLICABLE PROGRAM(S)9.

Assigned Amount for Each Applicable Year

Year

Amount

Year Year Year Year Year

Amount Amount Amount Amount Amount

Year

Amount

Amount

10. Program Name

11.Program Year or Payment Year

12.Assigned Amount

PART C - REPRESENTATION OF ASSIGNOR AND ASSIGNEEIn order to assign a cash payment in accordance with the programs specified by the assignor in Items 8 and 11, this form must be completed by both the assignor and theassignee. This assignment is applicable only to payments issued by the county FSA office specified in Item 2. This assignment is applicable only to programs publiclyannounced before this form is filed and is subject to the terms stated in this form and the provisions of 7 CFR Part 1404.

The assignee agrees to repay promptly to the Federal Government any amount by which the assigned payment exceeds the amount secured by the assignment. Theassignor and the assignee agree that they will promptly notify the county FSA office of any change affecting this assignment. This assignment may be revoked at any timeby written request signed by the assignee.

13A. PRODUCER'S (ASSIGNOR'S) SIGNATURE

14A. ASSIGNEE'S SIGNATURE 14B. DATE (MM-DD-YYYY)

PART D- REVOCATION OF ASSIGNMENTAssignment of payment authorization above is hereby revoked.15A. ASSIGNEE'S SIGNATURE

16. DATE FILED (MM-DD-YYYY) 17. TIME FILEDFOR COUNTY OFFICEUSE ONLY

COUNTY FSA COMMITTEE ASSIGNEE PRODUCER

Year Year Year Year

Amount Amount Amount Amount

From: YearMilk Income LossContract To: Amount

Year Year Year

Amount Amount Amount Amount

7.Program

8.Program Year

or Payment Year

Direct and Counter-Cyclical Payment

Amount

Amount

From:

Year

Year

To:

From:

To:

To:

From:

Year

Year

Year

Amount

Amount

Amount

Year

Year

Year

Amount

Amount

Year

Year

Year

Amount

Amount

Amount

Year

Year

Year

Year

Amount

Amount

Year

Year

Year

Amount

Amount

Amount

$

$ $

CCC-36(01-10-06)

$

ConservationReserve Program

From:

To:

13B. DATE (MM-DD-YYYY)

15B. DATE (MM-DD-YYYY)

Amount

Other:

Loan DeficiencyPayment

2017 Ag Banker's Presentation Exhibit "B" Page 1 of 2

CCC-36 (01-10-06) (Page 2)SPECIAL PROVISIONS RELATING TO ASSIGNMENTS

The original of this assignment, properly executed, must be filed in the Farm Service Agency office in the countywhere the farm or operation subject to this assignment is administratively located with respect to the programinvolved.

A.

B. If the assignor assigns a specified value of payments to more than one assignee:

CCC and FSA will recognize assignments for each program per program year or group of years ifmulti-year is selected.

1.

Assignments will be honored in chronological sequence based on the order of filing with the county FSAoffice.

2.

C. The payment due the producer may be applied first against indebtedness owing by the producer to the United States,including debts arising after the execution of a Form CCC-36, which may be offset in accordance with theregulations governing, 7 CFR Parts 3, 1403, and 1951, and any balance will be subject to assignment.

D. Neither the United States of America, the Commodity Credit Corporation, the Secretary of Agriculture, anydisbursing officer, nor any other Government employee or official shall be subject to any suit or liable for paymentof any amount if payment is inadvertently made to the assignor without regard to this assignment.

This assignment does not extend to any successor of the assignee, nor may the assignee re-assign this assignment.

18. COUNTY FSA OFFICE NAME AND ADDRESS (Including Zip Code)

NOTE: The following statement is made in accordance with the Privacy Act of 1974 (5 USC 552a) and the Paperwork Reduction Act of 1995, asamended. The Commodity Credit Corporation Charter Act, the Federal Agriculture Improvement and Reform Act of 1996, the Food Security Act of1985, the Agricultural Act of 1949, and the Soil Conservation and Domestic Allotment Act authorizes collection of this data. Furnishing theassignee's identifying number is voluntary. Furnishing all other data is also voluntary; however, without it a payment to assignee cannot beissued. The information will be used to authorize CCC to make program payments to an assignee. This information may be provided to otheragencies, IRS, Department of Justice, or other State and Federal law enforcement agencies and in response to a court magistrate oradministrative tribunal. The provisions of criminal and civil fraud statutes, including 18 USC 286, 287, 371, 651, 1001; 15 USC 714m; and 31USC 3729, may be applicable to the information provided.

According to the Paperwork Reduction Act of 1995, an agency may not conduct or sponsor, and a person is not required to respond to, acollection of information unless it displays a valid OMB control number. The valid OMB control number for this information collection is 0560-0183.The time required to complete this information collection is estimated to average 10 minutes per response, including the time for reviewinginstructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection ofinformation. RETURN THIS COMPLETED FORM TO YOUR COUNTY FSA OFFICE.

The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, gender,religion, age, disability, political beliefs, sexual orientation and marital or family status. (Not all prohibited bases apply to all programs.) Persons withdisabilities who require alternative means for communication of program information (Braille large print, audiotape, etc.) should contact USDA's TARGETCenter at (202) 720-2600 (voice and TDD). To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326-W, Whitten Building,1400 Independence Avenue, SW, Washington, D. C. 20250-9410 or call (202) 720-5964 (voice or TDD). USDA is an equal opportunity provider andemployer.

TELEPHONE NO. (Including area code):

E.

2017 Ag Banker's Presentation Exhibit "B" Page 2 of 2

Form Approved - OMB No. 0560-0183This form is available electronically.CCC-251 U.S. DEPARTMENT OF AGRICULTURE

Commodity Credit Corporation(06-11-98)

NOTICE OF ASSIGNMENT

7. INSTRUCTIONS:Monies payable from the U.S. under a USDA or CCC contract may be assigned to a bank, trust company, federal lending agency, or other recognized lending institution.However, if such contract was made with a corporation whose stock is wholly owned by the federal government, such contract may be assigned to a prior lienholder, or, withthe prior approval of the contracting officer, to an individual.

Further, the rights of the assignee to the proceeds of a USDA or CCC contract are subject to, inter alia, defenses arising under the contract which the government could haveasserted against the assignor absent the assignment.Unless expressly permitted by the contract, that any assignment shall cover all amounts payable under the contract and not already paid and shall not be made to more thanone party, except that any assignment may be made to one party as agent or trustee for two or more parties participating in such financing. If the contract was made withCCC, it shall not be subject to further assignment.

Since such assignment shall be recognized only if and when the assignee thereof files written notice of the assignment, these instructions shall be followed carefully in order toavoid delay, inconvenience, and possible impairment of the validity of the assignment.

A. Upon execution of an assignment, the assignee shall prepare, sign and forward the original signed copy of this notice, together with the original signed copy of the instrument of Assignment to the addressee. Photocopies of each executed form shall be sent to the surety or sureties upon the bond or bonds (if any) in connection with the contract.

B. The addressee shall acknowledge receipt of this notice, if in order, in the space provided and return photocopies of each acknowledged form to the assignee.

D. CCC or USDA may offset any amounts for which the assignor is indebted to the United States for taxes with respect to which a notice of lien was filed, or a Notice of Levy was served, in accordance with the provisions of the Internal Revenue Code of 1954 (26 U.S.C. 6323; 6331), prior to acknowledgement by CCC or USDA of receipt of the notice of assignment.

E. Such assignment shall remain in force until addressee receives written advice from the assignee to release this assignment.

The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race color, national origin gender, religion age disability, political beliefs sexual Persons withdisabilities who require alternative means for communication of program information (Braille, large, print, audiotape, etc.) should contact USDA's TARGET Center at (202) 720-2600 (voice and TDD). To file acomplaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326-W, Whitten Building, 1400 Independence Avenue, SW, Washington, DC 20250-9410 or call (202) 720-5964 (voice or TDD).USDA is an equal opportunity provider and employer.

IMPORTANT: This document is used to make assignments for both the Commodity Credit Corporation (CCC) and the United States Department of Agriculture (USDA).Assignments for the two Agencies are similar, but the rules governing them are not identical. Please make sure you know whether CCC or USDA is the agency named in thecontract before completing this form.

C. It is the policy of CCC and USDA to notify the assignee of the amount of any indebtedness of the contractor which is to be collected by CCC or USDA by offset from payments due under the contract. The assignee will generally receive such offset notice when receipted copies of the Notice of Assignment are returned to him or her. Whenever the assignee is given an offset notice by CCC or USDA, the amounts payable under the contract will be the amounts remaining to be paid after offset.

NOTE: Payment due or to become due under the contract identified above will be made to the undersigned assignee.

See Page 2 for Privacy Act and Public Burden Statements.1. DATE OF NOTICE (MM-DD-YYYY)

2. CONTRACT MADE BY (Check one) 3. CONTRACT

Commodity CreditCorporation

United States DepartmentOf Agriculture

8. NAME AND ADDRESS OF ASSIGNEE (Please limit name to one line (30 spaces) and limit address to two lines (30 spaces each).

9A. STATUS OF ASSIGNEE AT TIME OF ASSIGNMENT (Check appropriate box)

FINANCIAL INSTITUTION

PERSON OR FIRM HOLDING A LIEN OR ENCUMBRANCE (Valid for CCC Contracts only.)

10C. BY (Signature) 10D. TITLE

5. CONTRACT MADE WITH (Name and address of contractor and warehouse code, if applicable) 6. TYPE OF CONTRACT

DATE (MM-DD-YYYY)CONTRACT NUMBER

4. RETURN TO (Name and address of addressee) (For CCC contracts, this is the USDA office to which invoices will be submitted for payment. For USDA contracts, this the contracting officer.)

PERSON OR FIRM NOT HOLDING A LIEN OR ENCUMBRANCE (Valid for CCC Contracts only. Assignee understands a valid assignment for allpurposes in this case requires the contractor to obtain approval of the contracting officer or other designated official of CCC in writing before the assignmentwill be recognized by CCC.)

Receipt is acknowledged of this notice and a signed copy of the above-mentioned instrument of assignment. Date and time of receipt is as follows:

9B. BY (Name of Signing Officer for Assignee) 9C. TITLE 9D. DATE (MM-DD-YYYY)

10. ACKNOWLEDGMENT

10A. TIME 10B. DATE (MM-DD-YYYY)

2017 Ag Banker's Presentation Exhibit "C" Page 1 of 2

CCC-251 (Page 2) (06-11-98)NOTE: The following statement is made in accordance with the Privacy Act of 1974 (5 USC 552a) and the Paperwork Reduction Act of 1995, as amended.

The authority for requesting the following information is the Food Security Act of 1985 (Pub. L. 99-198), as amended, and the regulationspromulgated under 7 CFR Part 1400 for Payment Eligibility Review requirements. The information will be used to determine eligibility for programbenefits and other financial assistance administered by USDA agencies. Furnishing the requested information is voluntary. Failure to furnish therequested information will result in a determination of ineligibility for certain program benefits and other financial assistance administered by USDAagencies. This information maybe provided to other agencies, IRS, Department of Justice or other State and Federal Law enforcement agenciesand in response to a court magistrate or administrative tribunal. The provisions of criminal and civil fraud statutes, including 18 USC 286, 287, 371,651, 1001, 15 USC 714m; and 31 USC 3729, may be applicable to the information provided.

According to the Paperwork Reduction Act of 1995, an agency may not conduct or sponsor, and a person is not required to respond to, a collectionof information unless it displays a valid OMB control number. The valid OMB control number for this information collection is 0560-0183. The timerequired to complete this information collection is estimated to average 5 minutes per response, including the time for reviewing instructions,searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. RETURNTHIS COMPLETED FORM TO YOUR COUNTY FSA OFFICE.

2017 Ag Banker's Presentation Exhibit "C" Page 2 of 2

Form Approved - OMB No. 0560-0183 See Page 2 for Privacy Act and burden statements.This form is available electronically.

DATED (b)CONTRACT NUMBERED (a)

KNOW ALL MEN BY THESE PRESENTS: That (c)

I (We) (d)

day of (f)this (e) , for value

received, do hereby assign to (g)

of (h)

all right, title, and interest, to all monies due or to become due from the United States or from any agency or department thereof, or

any corporation whose stock is wholly owned by the federal government, under Contract No. (i)

dated (j)

I (We) stipulate that such monies payable from the U.S. under such contract are being assigned to a bank, trust company, federal lendingagency, or other recognized lending institution, unless such contract was made with a corporation whose stock is wholly owned by thefederal government, in which case such contract may be assigned to a prior lienholder, or, with the prior approval of the contracting officer,to an individual.

I (We) further stipulate that the rights of the assignee to the proceeds of this contract are subject to, inter alia, defenses arising under thecontract which the government could have asserted against the assignor absent the assignment.

I (We) further stipulate that no previous assignment has been made and agree that no additional assignments will be made under thiscontract; that payments thereunder will be made by checks drawn to the order of the assignee; that the assignment shall remain in forceuntil released on written advice by the assignee.

(k) Contractor

(l) By

(m) Title

(n) ATTEST:

(SECRETARY)

The U.S. Department of Agriculture (USDA) prohibits discrimination in all its programs and activities on the basis of race, color, national origin, gender, religion, age, disability, political beliefs, sexualorientation, and marital or family status. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for communication of program information (Braille, large print,audiotape, etc.) should contact USDA's TARGET Center at (202) 720-2600 (voice and TDD). To file a complaint of discrimination, write USDA, Director, Office of Civil Rights, Room 326-W, Whitten Building,1400 Independence Avenue, SW, Washington, D. C. 20250-9410 or call (202) 720-5964 (voice or TDD). USDA is an equal opportunity provider and employer.

CCC-252(06-11-98)

U.S. DEPARTMENT OF AGRICULTURECommodity Credit Corporation

INSTRUMENT OF ASSIGNMENT

.

(o) RETURN TO:

(Affix Corporate Seal)

2017 Ag Banker's Presentation Exhibit "D" Page 1 of 2

CCC-252 (Page 2) (06-11-98)

The following statement is made in accordance with the Privacy Act of 1974 (5 USC 552a) and the Paperwork Reduction Act of 1995, asamended. The authority for requesting the following information is 7 CFR 1404.4 and the Commodity Credit Corporation (CCC) Charter Act. Theinformation will be used to establish the parties to which a payment received under a USDA or CCC contract will be assigned. Furnishing therequested information is voluntary; however, without it monies payable from the U.S. under a USDA or CCC contract will not be assigned.. Thisinformation may be provided to other agencies, IRS, Department of Justice, or other State and Federal Law enforcement agencies, and inresponse to a court magistrate or administrative tribunal. The provisions of criminal and civil fraud statutes, including 18 USC 286, 287, 371, 641,651, 1001; 15 USC 714m; and 31 USC 3729, may be applicable to the information provided.

According to the Paperwork Reduction Act of 1995, an agency may not conduct or sponsor, and a person is not required to respond to, acollection of information unless it displays a valid OMB control number. The valid OMB control number for this information collection is 0560-0183.The time required to complete this information collection is estimated to average 5 minutes per response, including the time for reviewinginstructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection ofinformation. RETURN THIS COMPLETED FORM TO YOUR COUNTY FSA OFFICE.

NOTE:

2017 Ag Banker's Presentation Exhibit "D" Page 2 of 2

Fact Sheet

Assigning FSA and CCC Payments

September 2004

1

Background

An “assignment of payment” is aservice provided by the FarmService Agency (FSA) forproducers. Producers who areeligible to receive specified programpayments from FSA or CommodityCredit Corporation (CCC) programsmay arrange to have all or part oftheir payments assigned directly toanother party either by electronicfunds transfer (EFT) using theAutomated Clearing House (ACH)method or by check. This allows athird party, such as a person orentity, to receive a select programpayment directly from FSA/CCC inlieu of receiving the payment from aproducer.

How to Assign a ProgramPayment

To assign eligible FSA or CCCprogram payments, producers musteither use the web-basedAssignment application or submit acompleted CCC-36, Assignment ofPayments form. Contractors mustcomplete CCC-251, Notice ofAssignment form, and CCC-252,Instrument of Assignment form.

Payments issued to assignees(third parties) can be processedthrough the EFT system. Theassignee must complete and signSF-1199A, Direct Deposit Sign-upform, or SF-3881, ACH Vendor/Miscellaneous Payment Enrollmentform to initiate EFT transactions.

continues

Eligible Programs for AssignedPayments

Many FSA and CCC programs areeligible for assignment ofpayments. Producers may assignprogram payments, as specified byprogram law or regulation, for FSAand CCC programs that have beenpublicly announced except for FSAor CCC loans or purchaseagreement proceeds.

Assignment Conditions

An assignment of payment may befor any purpose and must be for aspecific amount, butcannot be issued:■ for a reassigned payment■ when the assigned payment is

the subject of an administrativeappeal

■ when the dollar amount beingassigned is not stated.

Producers must inform the localFSA county office staff immediatelyof any changes affecting anassigned payment, such as whenan assigned amount is beingreduced or an assignment is beingterminated. After the assignment isestablished, the assignee mustconcur before a change is appliedor an assignment is terminated.

Overpayment of AssignedPayment(s)

The assignor (producer) must workwith the assignee to receive theoverpayment of an assignment.

Assignment Payment Priority

If there is any indebtedness owedby the producer to the Federalgovernment on the day a paymentis being made, the amount may besubtracted from the assignedpayment before it is made to theassignee according to the specialprovision related to assignments asstated on the reverse side of formCCC-36, Assignment of Payment.

Reproducing Electronic FormCCC-36, Assignment of Payment

Form CCC-36, Assignment ofPayment, is available at USDAService Centers. Producers,financial institutions, or third partiescan also print the form byaccessing the USDA eForms Website at: http://forms.sc.egov.usda.gov/

A financial institution may create anelectronic version of CCC-36.However, the created electronicversion must:■ be the mirror image of the most

current version of the form■ contain all privacy act

information■ include the following verbiage

along the bottom margin of theform: “Electronic versionreproduced by (insert name ofcompany) using (insert name ofthe software used)”

2017 Ag Banker's Presentation Exhibit "E" Page 1 of 2

Fact SheetAssigning FSA and CCC Payments

2

■ be registered with the U.S.Department of Agriculture, FarmService Agency, ManagementServices Division, InformationManagement Branch, Forms,Graphics, and RecordsManagement Section.

Gaining Access to the WebBased Assignment Application

In order to protect personal identity,an assignor or assignee must firstregister for a level 2 account withUSDA’s e-Authentication system toobtain a user ID and password.The process is easy and starts on-line by creating a user ID andpassword and confirming the user’se-mail address. On the USDA Website at www.usda.gov, click on thelink to “View USDA CustomerStatement”. From there, the usercan request to get a log on ID.

Once an assignor or assignee hasobtained a level 2 e-AuthenticationID, the secured FSA FinancialServices’ Web site becomesavailable to complete anassignment for the assignor orassignee registered to the user ID.Log on to the FSA Web site atwww.fsa.usda.gov, and select theFinancial Inquiries link under the“Services/Programs” banner.

For additional information to gainaccess to the web-basedassignment application, and otherFSA financial services, contact yourlocal FSA county office.

For More Information

For additional information onassigning FSA and CCC programpayments and other FSA programsand services, contact your localFSA county office, or visit FSA’sWeb site at: http://www.fsa.usda.gov

September 2004

The United States Department of Agriculture (USDA) prohibitsdiscrimination in all its programs and activities on the basis of race,color, national origin, sex, religion, age, disability, political beliefs,sexual orientation, or marital or family status. (Not all prohibitedbases apply to all programs.) Persons with disabilities who requirealternative means for communication of program information (Braille,large print, audiotape, etc.) should contact USDA’s TARGET Centerat 202-720-2600 (voice and TDD).

To file a complaint of discrimination, write USDA, Director, Office ofCivil Rights, Room 326-W, Whitten Building, 1400 IndependenceAvenue, SW, Washington, DC 20250-9410 or call (202) 720-5964(voice and TDD). USDA is an equal opportunity provider andemployer.

2017 Ag Banker's Presentation Exhibit "E" Page 2 of 2

Packers and Stockyards Act PASA What You Don’t Know Can Impact You Delivered to the Iowa State Bar Association Commercial and Bankruptcy Law Seminar Des Moines, IA May 20, 2011 Joseph A. Peiffer Day Rettig Peiffer, P.C. PO Box 2877 Cedar Rapids, IA 52406-2877 (319) 365-0437 F (319) 365-5866

2017 Ag Banker's Presentation Exhibit "F" Page 1 of 8

Packers and Stockyards Act1 Government regulation of stockyards is designed to protect the producer from the abuses

of middlemen and to assure consumers adequate supplies of red meat. The Packers and Stockyards Act (PSA)2 is enforced by the USDA's Packers and Stockyard Administration, the regulator of the country's livestock and poultry marketing system. The PSA's purpose is to assure the free flow of livestock from livestock farms and ranches to the marketplace.123 The PSA regulates both packers and stockyards.

[a]-History of the Act. The United States Senate authorized an investigation of the

buying and selling of livestock in 1888 to determine if anti-competitive practices were present. The investigation revealed that major meatpackers were engaging in unfair, discriminatory and anti-competitive practices by means of price fixing, agreements not to compete, refusals to deal and similar arrangements. The Senate report contributed to the political support for the Sherman Act of 1890. In 1902, an injunction was sought against the major meatpackers alleging antitrust violations. The injunction was issued in 1903 and was sustained by the Supreme Court in 1905.4 The injunction, however, was not successful in correcting the situations deemed anti-competitive. The same defendants or their successors were indicted and tried for alleged violations of the antitrust laws, but were acquitted after trial in 1912. The dominance and anti-competitive activities of the packers continued, and in 1917, President Wilson directed the Federal Trade Commission (FTC) to investigate the packing industry. The FTC report documented widespread anti-competitive practices involving operations of stockyards, actions of commission persons, operation of weighing facilities, disposal of dead animals and control of packing plants.

During congressional debate of the PSA, the major packers signed a consent decree in an

attempt to ward off the new legislation. The consent decree was entered into on February 27, 1920, and it enjoined the "Big Five" meatpackers (Swift & Co., Armour & Co., Cudahy Packing Co., Wilson & Co., and Morris & Co.) from certain activities. The Big Five were prohibited from maintaining or entering into any contract, combination or conspiracy, in restraint of trade or commerce, or monopolizing or attempting to monopolize trade or commerce. The consent decree also prohibited the Big Five from engaging in any illegal trade practice as well as owning an interest in any public stockyard company, any stockyard terminal railroad or any stockyard market newspaper or journal. The injunction also prohibited the Big Five from having an interest in the business of manufacturing, selling or transporting, distributing or otherwise dealing in any of numerous food products, mainly fish, vegetables, fruits, and groceries and many other commodities not related to the meatpacking industry. Similarly, the injunction prohibited the Big Five from using or permitting others to use their distribution systems or facilities for the purchase, sale, handling, transporting or dealing in any of the enumerated articles or commodities. The injunction also prevented the owning or operating of any retail meat markets except in-plant sales to accommodate employees. Because the Big Five controlled all the

                                                            1 §15.02[2] Principles of Agricultural Law, Roger Mc Eowen Director of Agricultural Law and Taxation, Iowa State University, Ames, Iowa Reproduced with Permission. 2 7 U.S.C. § 181 et seq. (2008). 3 See, e.g., Stafford v. Wallace, 258 U.S. 495 (1922). 4 Swift & Company v. United States, 196 U.S. 375 (1905). 

2017 Ag Banker's Presentation Exhibit "F" Page 2 of 8

warehousing in their exercise of monopoly power, the injunction prevented them from having an interest in any public cold storage warehouse or engaging in the business of selling or dealing in fresh milk or cream.

Even though the Attorney General of the United States personally appeared before the

House Committee on Agriculture and recommended against the proposed legislation on the ground that the consent decree would eliminate the evils in the packing industry and make legislation unnecessary, President Harding signed the PSA into law on April 15, 1921. Consequently, some of the "Big Five" filed suit seeking to have the consent decree either vacated or declared void. However, in 1928, the United States Supreme Court upheld the consent decree.5 Similarly, the Supreme Court turned down requests to modify the decree in 19326 and 1961.7 The decree, however, was terminated on November 23, 1981.8 .

While the PSA was "the most far-reaching measure and extend[ed] further than any previous law into the regulation of private business with few exceptions,,,9 and the powers given to the Secretary of Agriculture were more "wide-ranging" than the powers granted to the FTC, the Act was upheld as constitutional in several court cases from 1922 to 1934. Unquestionably, the PSA extends well beyond the scope of other antitrust law. [b] - Provisions of the Act. [i]-Registration Requirement. The PSA requires all marketing agencies that handle livestock to register with the USDA which has the authority to suspend registration for violations of the Act for insolvency.10

[ii]-Prompt Payment. The PSA also provides for failure to make prompt and full payment for livestock. For instance, before the close of the next business day following the purchase of livestock, the packer, market agency or dealer must deliver a check or wire funds to the seller.11 This provision was added in 1976 and, when the Bankruptcy Act of 1978 was amended in 1987, it was exempted from the Bankruptcy Act so even though a packer goes into bankruptcy, the proceeds of livestock sales are held in trust out of bankruptcy away from the creditors to assure payment to the seller of the livestock. Written notice must be given to the purchaser and the USDA if payment is not made or an instrument of payment is dishonored. Unpaid cash sellers of livestock have priority over holders of perfected security interests of the purchaser as to the purchaser's assets.12 Nothing but "an express agreement in writing" can

                                                            5 Swift & Co. v. United States, 276 U.S. 311 (1928). 6 Swift & Co. v. United States, 286 U.S. 106 (1932). 7 Swift & Co. v. United States, 367 U.S. 909 (1961). 8 United States v. Swift & Co., 1982-1 Trade Cas. (CCH) ¶64,464 (N.D. Ill. 1981). 9 61 Cong. Rec. 1872 (1921). 10 7 U.S.C. Sec. 181 et seq. (2008). 11 Under the PSA a "dealer" is ... "a person who buys or sells livestock in commerce on his or her own account or for another person ...... If a commission is charged, such person is a "market agency." 7 U.S.C. §201 (2008). 12 A cash sale is defined in the PSA as "a sale in which the seller does not expressly extend credit to the buyer." Mailing a check is not an extension of credit. 

2017 Ag Banker's Presentation Exhibit "F" Page 3 of 8

operate as a waiver of the seller's right to next-day cash payment for livestock. Proof of delay or a course of dealing is not sufficient to constitute a waiver. However, with a written agreement to defer the payment or pricing of livestock, there is a danger of waiving the right to prompt next-day payment and becoming no more than an unsecured creditor.

The record-low prices for hogs experienced in 1998 gave rise to a number of concerns with respect to long-term hog marketing contracts and the PSA. More than one-half of hog production in the United States is sold under a long-term (typically three to ten years) marketing agreement between the producer and the packer. Certain types of these contracts establish a minimum price that the producer receives for the hogs. If the market price rises above the floor, the producer receives the floor price and the extra amount is credited to a "ledger" account with the packer. If market price is beneath the floor, the producer receives the floor price and the difference is subtracted from the ledger balance. Because of the record low prices for hogs experienced in 1998, negative balances built-up to substantial levels in many accounts. From a PSA standpoint, these long-term hog contracts appear to involve payment even though payment may take the form of a credit against an existing negative balance. Similarly, questions exist as to whether the guaranteed price aspect of the contracts violates the PSA by restricting access to packers, and whether the contracts could be construed as credit sales under the prompt next-day payment provision or as a loan to the packer. [iii]-Bonding. Packer bonding is required except for those with average annual purchases of $500,000 or less. Thus, there is a danger posed to persons or entities selling livestock to relatively small buyers. Selling to a local locker does not provide the protection that the PSA affords had the sale been to a packer purchasing at least $500,000 worth of livestock per year.

[iv]-False Weighing. False weighing of livestock is also prohibited. False weighing of livestock had been a serious longstanding problem. "Back balancing" had been a relatively common practice (failure to empty the scales to show a balanced condition). False weighing is viewed as a serious offense and the regulations impose several detailed requirements to discourage false weighing.13

[v]-Gratuities. The Packers and Stockyards Act also prohibits the practice of a

stockyard owner or market agency giving gratuities to truckers, consignors or shippers. Providing free trucking to consignors as an inducement to consign livestock to a particular market is an unfair practice and a willful violation of the PSA, and discriminates against those consignors not given free trucking. The practice also constitutes an unfair and unjust practice against competing markets, forcing them to give free trucking in order to remain in business.

[vi]-Coordinated Buying. The "turn system" of selling livestock has been held to

violate the PSA.14 Under the "turn system" of selling livestock, livestock dealers engage in the practice of flipping coins to establish the "order" or "turn" in which they would look at, bid on and have the opportunity to buy stocker and feeder cattle consigned for sale to a market agency. This method of selling livestock limits the number of buyers or prospective buyers which

                                                            13 See, 9 C.F.R. §§ 201.49-201.99. 14 Berigan v. United States, 257 F.2d 852 (8th Cir. 1958).

2017 Ag Banker's Presentation Exhibit "F" Page 4 of 8

increases the value of the position or turn of those not eliminated with the effect of restricting competition and depressing the market.

[vii]-Bribery. The PSA also prohibits the bribery of weighmasters. Likewise,

bribing employees of a market agency by a dealer to obtain favored treatment in sale of livestock has been held to violate the PSA.15 Other violations of the PSA include market agencies purchasing animals from consignments for resale, price discounts being offered to some purchasers of meat products, and the use of "bait and switch" tactics in selling meat.

[viii] - Recordkeeping. The PSA requires that books and records be kept.

Penalties for failure to do so include a $5,000 fine or three years in prison or both. Private actions may be brought for "reparations" under the Act by filing a complaint with the USDA within 90 days after the cause of action accrues. USDA issues the order requiring payment.

[ix]-Price Manipulation. Section 202 of the PSA (7 U.S.C. §§ 192 (a) and (e))

makes it unlawful for any packer who inspects livestock, meat products or livestock products to engage in or use any unfair, unjustly discriminatory or deceptive practice or device, or engage in any course of business or do any act for the purpose or with the effect of manipulating or controlling prices or creating a monopoly in the buying, selling or dealing any article in restraint of commerce. This is a distinct concern in the livestock industry. In recent years, numerous courts have addressed the issue of whether the statutory language requires a producer to prove that a packer's conduct had an adverse impact on competition. For example, in late 2001, a nationwide class action lawsuit was certified against Iowa Beef Processors (subsequently acquired by Tyson Fresh Meats, Inc.) on the issue of whether Tyson 's use of "captive supply" cattle (cattle acquired other than on the open, cash market) violated Section 202 of the PSA.16 The class included all cattle producers with an ownership interest in cattle that were sold to Tyson, exclusively on a cash-market basis, from February 1994 through and including the end of the month 60 days before notice was provided to the class. The claim was that Tyson 's privately held store of livestock (via captive supply) allowed Tyson to need not rely on auction-price purchases in the open market for most of their supply. Tyson was then able to use this leverage to depress the market prices for independent producers on the cash and forward markets, in violation of the PSA. In early 2004, the federal jury in the case returned a $1.28 billion verdict for the cattle producers. However, one month later the trial court judge, while not disturbing the economic findings that the market for fed cattle was national, that the defendant's use of captive supply depressed cash cattle prices and that cattle acquired on the cash market were of higher quality than those the defendant acquired through captive supplies, granted the defendant's motion for judgment as a matter of law, thereby setting the jury's verdict aside. The trial court judge ruled that Tyson was entitled to use captive supplies to depress cash cattle prices to "meet competition" and assure a "reliable and consistent" supply of cattle.17 On appeal, the U.S. Court

                                                            15 See, e.g. , In re McNulty, 13 Agric. Dec. 345 (1954). 16 Pickett v. IBP, Inc., No. 96-A-1103-N, 2004 U.S. Dist. LEXIS 29389 (M.D. Ala. Dec. 26, 2001). 17 Pickett v. Tyson Fresh Meats, Inc., 315 F. Supp. 2d 1172 (M.D. Ala. 2004).

2017 Ag Banker's Presentation Exhibit "F" Page 5 of 8

of Appeals for the Eleventh Circuit affirmed,18 and the U.S. Supreme Court declined to hear the case.19

Most of the other courts that have considered the issue have also determined that Section 202 of the PSA requires a producer to prove that a packer's conduct adversely impacted competition.20 While the United States Court of Appeals for the Fifth Circuit, in a contract poultry production case, ruled that the plain language of Section 202 does not require a plaintiff to prove an adverse effect on competition,21 the court granted en bane review with the full court later reversing the 3-judge panel decision.22

In 2009, contract poultry growers in Texas, Arkansas, Oklahoma and Louisiana brought a

PSA price manipulation case against the company that provided them with chicks, feed, medicine and other inputs.23The company had filed for Chapter 11 bankruptcy and, as part of reorganizing its business activities closed certain facilities and terminated some grower contracts. The terminated growers claimed the defendant's actions violated Section 192(e) of the PSA as actions that had the effect of manipulating the price of chicken by terminating those growers that were not near another poultry integrator so that they couldn't sell their chickens to one of the defendant's competitors, and terminating those growers who would not upgrade their chicken houses to include cool-cell technology even though not required by grower contracts. While the court held that the defendant could have a legitimate business reason for its decisions and might

                                                            18 Pickett v. Tyson Fresh Meats, Inc., 420 F.3d 1272 (11th Cir. 2005). See also Been, el al. v. O.K. Industries, 495 F.3d 1217 (10th Cir. 2007)(to establish a violation of §202 of the PSA, a plaintiff must show that the defendant's practice injured, or was likely to injure, competition; to demonstrate that a monopsonist engaged in unfair practices, a seller must show that the buyer's practices threatened to injure competition by arbitrarily decreasing prices paid to sellers with the likely effect of increasing resale prices). 19 Id., cert. den., 547 U.S. 1040 (2006). 20 See, e.g ., Been v. O.K. Industries, Inc., 495 F.3d 1217 (10th Cir. 2007); London v. Fieldale Farms Corp., 410 F.3d 1295 (11th Cir. 2005), cert. den.., 546 U.S. 1034 (2005); Adkins v. Cagle Foods, JV, LLC, 411 F.3d 1520 (11th Cir. 2005). 21 Wheeler, el al. v. Pilgrim's Pride Corp., 536 F.3d 455 (5th Cir. 2008) (statutory language is plain, clear and unambiguous and other court opinions finding a requirement that a plaintiff prove adverse effect on competition reached well beyond the PSA 's clear and unambiguous text). 22 Wheeler, el al. V. Pilgrim's Pride Corp., No. 07-40651, 2009 U.S. App. LEXIS 27642 (5th Cir. Dec. 15, 2009)(plaintiff must show an anti-competitive effect "for an actionable claim under the PSA [sections 192 (a) and (b)] in light of the PSA's Congressional history and its consistent interpretation by the other circuits"). See also Terry v. Tyson Farms, Inc., 604 F.3d 272 (6th Cir. 2010), reh’g. den., 2010 U.S. App. LEXIS 13116 (6th Cir. Jun. 23,2010)(plaintiff, poultry farmer, claimed that defendant violated PSA by engaging in "unfair, discriminatory or deceptive practices"; case dismissed due to plaintiff's failure to establish that defendant's conduct injured competition under 7 U.S.C. §§ 192(a) and (b), and failed to even plead that defendant's conduct had an adverse effect on competition). 23 City of Clinton v. Pilgrim's Pride Corporation, No. 4:09-CV-386, 2009 U.S. Dist. LEXIS 83664 (N.D. Tex. Sept. 14, 2009). 

2017 Ag Banker's Presentation Exhibit "F" Page 6 of 8

be able to show that the plaintiffs were not harmed by its actions, the court determined that the plaintiffs' pleadings were sufficient to survive a motion to dismiss. In addition, the court held that the Texas growers had posed legitimate claims under the Texas Deceptive Trade Practices Act.

In June of 2010, the USDA issued proposed regulations providing guidance on the

handling of antitrust-related issues under the PSA.24 Under the regulations, "likelihood of competitive injury" is defined as "a reasonable basis to believe that a competitive injury is likely to occur in the market channel or marketplace." It includes, but is not limited to, situations in which a packer swine contractor, or live poultry dealer raises rivals' costs , improperly forecloses competition in a large share of the market through exclusive dealing, restrains competition, or represents a misuse of market power to distort competition among other packers, swine contractors, or live poultry dealers. It also includes situations "in which a packer, swine contractor, or live poultry dealer wrongfully depresses prices paid to a producer or grower below market value, or impairs a producer's or grower's ability to compete with other producers or growers or to impair a producer's or grower's ability to receive the reasonably expected full economic value from a transaction in the market channel or marketplace." According to the regulations, a "competitive injury" under the PSA occurs when conduct distorts competition in the market channel or marketplace. The scope of PSA §202(a) and (b) is stated to depend on the nature and circumstances of the challenged conduct. The regulations specifically note that a finding that a challenged act or practice adversely affects or is likely to affect competition is not necessary in all cases. The regulations note that a PSA violation can occur without a finding of harm or likely harm to competition, but as noted above, that is contrary to numerous court opinions that have decided the issue.

[xl-Other Prohibited Practices. The Act prohibits any "unfair, unjustly

discriminatory, or deceptive practice or device.25 [xi]-Enforcement. Enforcement of the PSA is either by a civil action, initiated by

the person aggrieved by the violation of the PSA, or by an action taken by the U.S. Attorney upon request of the Secretary of Agriculture. Jurisdiction is in the federal district court.

[c]-Livestock Packers and Market Structure. Presently, the four largest firms control

over 80 percent of the market for boxed beef, more than 70 percent of the market for steers and heifers, and more than 60 percent of the hog market. Concentration among the four largest sheep slaughterers exceeds 80 percent. A Wisconsin study in the late 1980s found a very strong negative relationship between regional beef packer concentration and fed cattle prices. For each 10 percent point increase in concentration, fed cattle prices declined about 14 cents a hundred. While good performance is desired, it cannot be legislated. As a result, much of the focus of attention has been on market structure in the livestock industry in the belief that structure influences conduct and conduct influences performance.

                                                            24 75 Fed. Reg. No. 119, 75 FR 35338 (Jun. 22, 2010). 25 7 U.S.C. § 192(a). See, e.g., Kinkaid v. John Morrell & Co., 321 F. Supp. 2d 1090 (N.D. Iowa 2004)(hog contracts containing deduction charge for hogs dying in transit not an unfair or deceptive practice and did not constitute an unauthorized sale of insurance under state (Iowa) law because primary purpose of contracts was sale of hogs). 

2017 Ag Banker's Presentation Exhibit "F" Page 7 of 8

Alternatively, it is in the best interest of both producers and consumers for a packer to operate at optimal efficiency. Much of the structural change in the meatpacking industry in recent years has been motivated by economies of scale and other economic considerations that are justifiable. However, high levels of concentration can encourage other forces relating more to monopoly power to take over.

2017 Ag Banker's Presentation Exhibit "F" Page 8 of 8

How Chapters 11 & 12 Now Work for the Family Farmer & Entity Farmers1

This paper provides a comparison of opportunities for farm debtors available under Chapter 11 and Chapter 12 as they exist under the Bankruptcy Code after the Bankruptcy Abuse Prevention Consumer Protection Act of 2005 BAPCPA. It also covers relevant tax considerations relevant to both chapters for consideration by practitioners.

Comparison of Chapter 11 and Chapter 12 The following chart summarizes differences in Chapter 11 and Chapter 12 as they apply to farmers:

Chapter 11 Chapter 12 Individual Non-Individual Individual Non-Individual

Debt Limit None None $4,031,5752 $4,031,5753

Income Limits

None None

> 50% from farming either in the tax year before filing or both the second and third tax years before filing.4

None

Asset Composition None None None

>80% value of its assets consists of assets related to the farming operation.5

Ownership Restrictions

None None None

>50% of outstanding stock or equity is held by one family, or by one family and relatives of members of the family and the family or relatives farm.6

1 By Joseph A. Peiffer, Day Rettig Peiffer, P.C. (319) 365-0437 e-mail joep@drpjlaw.com. 2 11 U.S.C. §101(18)(A). 3 11 U.S.C. §101(18)(B)(ii). 4 11 U.S.C.§101(18)(A)(i) &(ii). 5 11 U.S.C. §101(18)(B)(i). 6 11 U.S.C. §101(18)(B).

2017 Ag Banker's Presentation Exhibit "G" Page 1 of 7

Chapter 11 Chapter 12 Individual Non-Individual Individual Non-Individual

Publicly Traded Stock

DNA None DNA Not Allowed.7

Farming Operation Required

DNA DNA Yes8 Yes9

Class Voting Yes10 Yes No No

Absolute Priority Applies

Not Always.11 Yes12 No13 No

Discharges Priority Taxes on Sale of Farm Assets

No No Yes14 Yes15

Estate Includes Post-Petition Earnings

Yes16 No Yes17 Yes

7 11 U.S.C. §101(18)(B)(iii). 8 11 U.S.C. §101(18)(A). 911 U.S.C. §101(18)(B). 10 11 U.S.C. §1126(c) provides that an impaired class accepts a plan provided that at least two-thirds in amount and more than one-half in number of the allowed claims. §1126(d) provides that a class of interests accepts a plan if holders of at least two-thirds in amount have accepted the plan. 11 See 11 U.S.C. §1129(a)(15) that provides the following:

(15) In a case in which the debtor is an individual and in which the holder of an allowed unsecured claim objects to the confirmation of the plan--

(A) the value, as of the effective date of the plan, of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or (B) the value of the property to be distributed under the plan is not less than the projected disposable income of the debtor (as defined in section 1325(b)(2)) to be received during the 5-year period beginning on the date that the first payment is due under the plan, or during the period for which the plan provides payments, whichever is longer.

12 11 U.S.C. §1129(b)(2)(B)(ii). 13 A Chapter 12 Plan is confirmed provided that the statutory requirements for confirmation found in §1225 are met. 14 11 U.S.C. §1222(a)(2)(A). 15 Id. 16 11 U.S.C. §1115(a). 17 11 U.S.C. §1207(a).

2017 Ag Banker's Presentation Exhibit "G" Page 2 of 7

Chapter 11 Chapter 12 Individual Non-Individual Individual Non-Individual

Exclusive Period to file Plan

120 days post filing, can be extended to 18 months18

120 days post filing, can be extended to 18 months 19

90 days, can be extended for cause not attributable to debtor20

90 days, can be extended for cause not attributable to debtor21

Exclusive Period to obtain Confirmation

180 days can be extended to 20 months22

180 days can be extended to 20 months

Small Business Debtor

has aggregate noncontingent liquidated secured and unsecured debts as of the date of the petition or the date of the order for relief in an amount not more than $2,343,30023

has aggregate noncontingent liquidated secured and unsecured debts as of the date of the petition or the date of the order for relief in an amount not more than $2,343,30024

Does Not Apply Does Not Apply

Small Business Case Exclusive Period

180 days post petition with limited extensions up to 300 days post petition25

180 days post petition with limited extensions up to 300 days post petition26

Does Not Apply Does Not Apply

The balance of this outline will now focus on comparison of various tax considerations involved with farm debt restructuring.

18 See 11 U.S.C. §1121(b). 19 Id. 20 See 11 U.S.C. §1221. 21 Id. 22 See, 11 U.S.C. §1121(d). 23 See, 11 U.S.C. §101(51D). 24 Id. 25 See, 11 U.S.C. §1121(e). 26 Id.

2017 Ag Banker's Presentation Exhibit "G" Page 3 of 7

Entity Type Income Passes Thru to Owner’s Return

Income taxed on Entity Return

C-Corp No Yes

S-Corp Yes No

LLP Yes No

LLC Yes unless treated as a corporation

No unless treated as a corporation

Partnership Yes No

Whether the income passes thru the entity’s return to the owner’s return is of crucial importance to the attorney reviewing a farm debt case. Sometimes liquidation is needed and if the liquidation can occur inside an entity that does not pass its income thru to the owner’s return, the tax can be trapped inside the entity. This works very well in the C-corp. It can also work in an LLC that has opted to be treated as a corporation.

Eligibility for Short Year Tax Treatment

Chapter 7 Chapter 11 Chapter 12 Chapter13 Corporation No No No NoIndividual Yes27 Yes No NoPartnership No No No NoLLC No No No NoLLP No No No No

Short year tax treatment allows an individual debtor in either a Chapter 7 or Chapter 11 bankruptcy to split the year of filing the bankruptcy into two years. The first tax year beginning on the first day of the individual’s tax year and ending on the day before filing and the second tax year starting on the date of filing and ending on the last day of the individuals normal tax year. For example, for a calendar year tax payer that files either a Chapter 7 or Chapter 11 bankruptcy on July 1st the two tax years would be January 1 to June 30th and the second short tax year would be July 1 to December 31st.

Short tax years are especially helpful if significant tax has been incurred in the year of filing that could be paid from assets of the estate.

27 26 U.S.C. §1398(d). 

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Chapter 12 Opportunities Involving Tax on Sale of Farm Assets Used in the Debtor’s Farming Operation Chapter 12 Issues Surrounding §1222(a)(2)(A)

8th Circuit 9th Circuit 10th Circuit

Applies to Post-Petition Transactions

No Knudsen v. IRS overruled28

No US v. Hall29

No In re Ficken overruled30

Uses Marginal Methodology to calculate taxes to be treated as unsecured claims

Yes Knudsen v. IRS

No Opinion Yes In re Ficken

Applies to sales of farm assets that the IRS considers products, not just capital assets

Yes Knudsen v. IRS

No Opinion Yes In re Ficken

                                                            28 Hall v. U.S., 1392 S. Ct. 1882 (2012) overruled Knudsen v. United States, 581 F.3d 696, 104 A.F.T.R.2d 2009-6384, 52 Bankr.Ct.Dec. 24, Bankr. L. Rep. P 81,581, C.A.8 (Iowa), September 16, 2009 (NO. 08-2820, 08-3627) 29 617 F.3d 1161, 106 A.F.T.R.2d 2010-5848, 2010-2 USTC P 50,566, Bankr. L. Rep. P 81,830, 10 Cal. Daily Op. Serv. 10,549, 2010 Daily Journal D.A.R. 12,790, C.A.9 (Cal.), August 16, 2010 (NO. 08-17267) 30 Hall v. U.S., 1392 S. Ct. 1882 (2012) overruled In re Ficken, 430 B.R. 663, 105 A.F.T.R.2d 2010-2265, 2010-1 USTC P 50,409, 63 Collier Bankr.Cas.2d 1276, Bankr. L. Rep. P 81,772, 10th Cir.BAP (Colo.), May 07, 2010 (NO. CO-09-042, BKR 05-52940, ADV 08-01687)

2017 Ag Banker's Presentation Exhibit "G" Page 5 of 7

Typical Farm Problem – Individuals. Austin and Amy Farmer have been farming since 1983. They own 400 acres with two large hog finishing setups on them. In the past, Austin and Amy operated a farrow to finish operation. Today, they are content to operate a custom finishing operation, colloquially known as a “pig bed and breakfast” for Oinkers, Inc. Oinkers, Inc. pays Austin and Amy $14,000 on a monthly basis for the space in the finishing buildings. When pigs are in the buildings, Austin and Amy care for the pigs according to Oinkers’ protocol. Oinkers, Inc. provides the feed, veterinary care and marketing for its pigs. Austin and Amy plan to sell all of their land except their homestead that includes their hog facilities. The tax basis is $1,000/A. Austin and Amy also have a crop farming operation on the farm they own as well as on two rented farms, which they operate in conjunction with Michael and David, Austin’s father and brother respectively. They share machinery and labor for the crop operation. Austin and Amy grow corn and soybeans on the portion of their property not occupied by hog buildings. Some of the corn is fed to their pigs while the rest is sold along with the entire soybean crop as a product of the farm. Austin and Amy Farmer’s balance sheet follows: Assets Liabilities Parcel 1 120 Acres $600,000. Friendly Bank31 $950,000 Parcel 2 40 Acre homestead32 529,000. Friendly Bank 800,000 Parcel 3 240 Acres 960,000. Farm Credit Services33 1,250,000 Open Accounts 550,000 Iowa Mills34 42,027 Machinery 350,000. John Deere Credit35 325,000 Growing Crops 64,947. Landlords 8,750 2008 Ford F-350 25,000 Ford Motor Credit36 28,000 Other Motor Vehicles 15,000. Friendly Bank 9,000 Oinkers, Inc. Receivable 14,000. IRS & IDOR 2004 Taxes37 56,700 Government Program Payments Unknown Credit Cards 101,000 Stock & Patronage Dividends 29,000. Household Goods 3,800. Other Coop 70,000 Cash & Accounts 540. Total Liabilities $4,540,477 Total Assets $3,075,697 Equity ($1,464,780)

                                                            31 Friendly Bank has first, second and fourth mortgage liens on the Debtors’ 160 acre farmstead that has been split into Parcels 1 & 2. In addition, Friendly Bank has a blanket security interest in the Debtors’ farm machinery, equipment, harvested crops, growing crops and livestock, as well as on contract receivables and the Debtor’s vehicles. 32 All of the Debtors’ hog facilities are on the homestead. 33 Farm Credit Services holds a first mortgage on parcel 4. 34 Iowa Mills has a third mortgage on Parcels 1 & 2 to secure this indebtedness. 35 John Deere Credit holds a valid, perfected purchase money security interest in the machinery. 36 Ford Motor Credit holds a valid, perfected purchase money security interest in the Ford F 350. 37 The 2009 taxes are from Austin and Amy’s sale of sows, fat hogs, farrowing crates and a livestock trailer when the Farmers converted their hog operation from a farrow to finish to a custom finishing operation.

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Opportunities for Austin and Amy Farmer

Chapter 11 Available to Farmers Plan Unconfirmable 1) Income Taxes on 2009 sales must be paidin full to confirm the plan.38 2) Income taxes on post-petition sales of realestate and machinery will need to be paid as required by §1129(a)(9)(B) that requires either

(i) if such class has accepted the plan, deferred cash payments of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or

(ii) if such class has not accepted the plan, cash on the effective date of the plan equal to the allowed amount of such claim

Chapter 12 Unavailable to Farmers Debt Exceeds Limit Of $4,031,575

38 11 U.S.C. §1129(a)(9)(C)(ii) requires the taxes to be repaid no more than 5 years after the date of filing.

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Farmers Production Credit Ass'n v. McFarland374 N.W.2d 654 (Iowa 1985)

Cause of Action

Action to set priority of redemption rights.

Facts

Earlier - The McFarlands owned real estate subject to two mortgages.

06/09/1983 - The junior mortgagee, PCA, filed an action to foreclose itsmortgage.

Shortly - The senior lienholder filed a separate action of thereafter foreclosure in which PCA was joined as a party defendant.

11/11/1983 - The senior lienholder prevailed in its action, and a decree offoreclosure was entered stating that PCA had a valid second lien.

01/10/1984 - The property was sold at the foreclosure sale to the seniorlienholder, and the McFarlands were granted a six-month periodof redemption based on a prior agreement to reduce the fulltwelve-month redemption period.

04/06/1984 - The McFarlands conveyed their redemption rights to a relativewho tendered a check for redemption on that date to the seniorlienholder.

05/03/1984 - PCA tendered its own check to redeem the property.

Thereafter - The McFarlands' assignee intervened in PCA's foreclosureaction, claiming her redemption had extinguished PCA's lien.

Proceedings

The trial court held that PCA was entitled to recover on its note, could redeemthe property from the mortgagors' assignee, and was entitled to a sheriff's deedto the property. The mortgagors and their assignee appeal.

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74 IOWA LAW SCHOOL CLE

Issue

Whether a redeeming mortgagor's assignee takes the property unencumbered byliens, preventing a junior lienholder from redeeming.

Holding

Redemption by a mortgagor's assignee within the exclusive redemption perioddoes not serve to divest the property of junior liens.

Reasoning

Junior creditors may protect themselves by redemption. When no redemptionis allowed the junior creditor, its right of redemption, normally extinguished asagainst an assignee, continues.

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Farmer's Production CreditAssociation v. McFarland

374 N.W.2d 654 (Iowa 1985)

Stephen J. Rapp, Waterloo, for appellants.

Marilyn S. Scheer and David J. Darrell, ofDavis, Hockenberg, Wine, Brown & Koehn, DesMoines, for appellee.

Considered en banc.

SCHULTZ, Justice.

In this appeal a mortgagors' assignee and ajunior mortgage lienholder compete for finalredemption rights in a senior mortgagee'sforeclosure action. Daniel and Linda McFarland(mortgagors) owned real estate that was subject totwo mortgages. On June 9, 1983, the juniormortgage-holder, Production Credit Association(PCA), filed an action to foreclose its mortgage.Shortly thereafter, the senior mortgage-holder,American Federal Savings & Loan Association(AFS), filed a separate foreclosure action againstthe McFarlands naming PCA as a juniorlienholder and party defendant. On November11, 1983, a decree of foreclosure was entered inthe latter action in favor of AFS and it stated PCAhad a valid second lien. The property was sold toAFS at a January 10, 1984, sheriff's sale and themortgagors were granted a six-month period ofredemption. See Iowa Code § 628.26. On April6, 1984, the mortgagors conveyed theirredemption rights to Daniel's mother, DorothyMcFarland. On that date Dorothy (assignee)tendered a check for redemption of the property.The junior mortgage-holder, PCA, on May 3,1984, tendered its own check in an attempt toredeem the property. No issue is advancedconcerning the validity of either tender; however,the assignee claims her redemption precludedfurther redemptions.

In its June 9, 1983, petition for foreclosurePCA alleged Daniel and Linda McFarland hadentered into a collateral agreement and mortgagein the amount of $40,000 to secure other notescontracted between the parties. PCA prayed forjudgment in rem against the mortgaged premisesin the amount of $40,000 plus interest and othercosts and requested the mortgage be foreclosed.In their answer the mortgagors requested the courtto determine the amount they owed PCA.

Following PCA's attempt to redeem the propertyforeclosed in the AFS action, Dorothy McFarlandintervened in PCA's foreclosure action andclaimed her redemption in the AFS foreclosurehad extinguished PCA's lien. At the same time,the mortgagors amended their answer andrequested the court to enter a decree denyingPCA's petition for foreclosure or, in thealternative, hold their mortgage obligation waslimited to $40,000 if foreclosure was ordered.

The PCA foreclosure action was submitted tothe trial court for a ruling upon stipulated facts.We need not detail the stipulation because wehave set out the facts necessary to determineissues on appeal. In addition, however, themortgagors admitted in the stipulated facts theywere in default on the PCA note. As a result ofDorothy McFarland's intervention and theamendments to the pleadings, the issues beforethe trial court in the PCA foreclosure action werethe redemption rights of parties to the AFSforeclosure action and whether PCA's lienremained effective against the assignee. OnOctober 1, 1984, the trial court entered a three-pronged ruling: (1) PCA was entitled to recoverthe principal and interest on its note; (2) PCAcould redeem the property from the mortgagors'assignee; and (3) PCA was entitled to a sheriff'sdeed to the property.

On appeal the mortgagors and assigneemaintain the trial court erred in ruling PCA wasentitled to redeem. They claim a junior lienholdercannot redeem after an assignee of the mortgagorhas redeemed because a redeeming assignee takesthe property unencumbered by liens on theproperty. Although we hold the junior lienholdercannot redeem in this case, the reason for ourdecision is different from that asserted by themortgagors and assignee. Since the assigneeredeemed within the exclusive statutory periodgranted a debtor, we hold the junior lienholderhas no right to redeem. However, we further holdthat a redemption by the debtor or assignee duringthe exclusive period does not allow either party totake the property free and clear of liens on theproperty.

Several sections of Iowa Code chapter 628 arerelevant. Under section 628.3 the debtor's right toredeem is for a period of one year from the date ofa sale "and for the first six months thereafter suchright of redemption is exclusive." Section 628.5provides for redemption by creditors: "If noredemption is made by the debtor as aboveprovided, thereafter, and at any time within nine

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76 IOWA LAW SCHOOL CLE

months from the day of sale, said redemption maybe made by a mortgagee...." The "as aboveprovided" is an obvious reference to the debtor'sexclusive right to redeem pursuant to section628.3. Section 628.26 permits an agreement toreduce the period of redemption, as in this case,so that the mortgagor's period of redemption setforth in section 628.3 is reduced from twelve tosix months, the exclusive right to redeem is thefirst three months, and the creditors' period ofredemption is after three months and within fourmonths from the date of sale.

The plain language of section 628.3 gives thedebtor the exclusive right to redeem during theappropriate six or three month period. "Anexclusive right is one which only the granteethereof can exercise, and from which all othersare prohibited or shut out." Black's LawDictionary 507 (rev. 5th ed. 1979). We interpretthe use of the term "exclusive" to vest the right ofredemption in the debtor only and to shut out allcreditors. In the instant case the mortgagors haveassigned their redemption rights to DorothyMcFarland. Such assignments are permittedunder section 628.25 which provides "[t]he rightsof a debtor in relation to redemption aretransferable, and the assignee has the like powerto redeem." "Like" is defined as "[e]qual inquantity, quality, or degree or exactlycorresponding." Black's Law Dictionary at 834.The plain words of the statute give the assigneethe same quantity and quality of rights as thedebtor, which would include the "exclusive" rightto redeem within three months of the sheriff'ssale.

PCA claims, however, that under our holdingin Tirrill v. Miller, 206 Iowa 426, 429, 218 N.W.303, 304 (1928), a creditor is entitled to redeemfrom a mortgagor's grantee who redeemed withinthe exclusive period. The author of a law reviewarticle was puzzled by the Tirrill holding andstated:

Apparently creditors cannot redeem from amortgagor who redeems within the first sixmonths. Id. § 628.5. This rule would seemlogically to apply as well to redemption by themortgagor's assignee. But see Tirrill v. Miller,... (intimating that redemption may be madefrom an assignee by creditors since theassignee takes title free from all claims againstthe debtor-assignor).

Blum, Iowa Statutory Redemption After MortgageForeclosure, 35 Iowa L.Rev. 72, 73 n. 17 (1949).

In Tirrill neither the debtor nor assignee raised theissue of the exclusive right to redeem. In anyevent, we now find unpersuasive any language inTirrill indicating a junior lienholder has a right toredeem from a debtor or debtor's assignee whohas redeemed during the exclusive statutoryperiod. Consequently, we reverse the portion ofthe district court's order which granted the juniorlienholder, PCA, the right to redeem the propertyfrom the assignee and allowed PCA to obtain asheriff's deed to the property.

Although redemption by the mortgagor orassignee during the exclusive period preventsredemption by a junior lienholder, it does notprovide the redeemer complete relief from juniorliens. We do not agree with the claim of themortgagors and assignee that the assignee is theowner of the property free and clear of liens. Thetrial court did not address this issue because itruled PCA's redemption was valid. In equity ourreview is de novo and our responsibility is todecide as the trial court should have. FarmersSavings Bank, Joice, Iowa v. Gerhart, 372N.W.2d 238, 242 (Iowa 1985). Consequently, wedetermine the respective rights of a mortgagor'sassignee and junior lienholders in a foreclosureaction.

Before addressing this issue, however, we findit necessary to review the rights of a juniorlienholder. After the debtor's exclusive period ofredemption has expired, any creditor can redeemthe property as long as its claim against the debtorhas matured into a lien before the creditor's periodof redemption has ceased. Iowa Code § 628.5. Acreditor's period of redemption is either after sixmonths and within nine months from the date ofsale pursuant to section 628.5 or after three andwithin four months from the sale under section628.26. Creditors can even redeem from eachother. Iowa Code § 628.8.

A judgment creditor who fails to redeemwithin the statutory period of time loses his lienon the property. Paulsen v. Jensen, 209 Iowa453, 458, 228 N.W. 357, 359 (1929).Additionally, a junior mortgagee who is a party tothe foreclosure action and fails to redeem has hislien on the property extinguished. Anderson v.Renshaw, 229 Iowa 93, 98-99, 294 N.W. 274,277-78 (1940). A judgment lien, lost by thefailure to redeem by the junior judgmentlienholder, will attach again to the property whenthe debtor redeems the property, but the juniormortgage lien is not re-established. Id. at 99, 294N.W. at 278. This is because a judgment lien

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automatically attaches to after acquired real estateof the debtor. Id.; see Iowa Code § 624.23(1).The extinguishment of the junior mortgage lien,however, does not destroy the debt itself and themortgagee can later obtain a judgment against thedebtor. Anderson, 229 Iowa at 99, 294 N.W. at278.

There is no question that our decisions havedistinguished between redemption by a mortgagorand that by an assignee with respect to the rightsof junior lienholders that have failed to redeemwithin the statutory period. Under thosecircumstances we have indicated that while ajudgment creditor's lien is re-established when themortgagor redeems, neither the judgment creditornor junior mortgagee's rights attach to propertyredeemed by the assignee. Cadd v. Snell, 219Iowa 728, 733-35, 259 N.W. 590, 592-93 (1935);Paulsen, 209 Iowa at 458, 228 N.W. at 359(1929); Cooper v. Maurer, 122 Iowa 321, 326-27, 989 N.W. 124, 125-26 (1904); Moody v.Funk, 82 Iowa 1, 4, 47 N.W. 1008, 1009 (1891).In Cooper we gave the reason for the distinctionwhen we stated:

If, when the process of redemption iscomplete, the property is again vested in thedebtor either by his having been the last toredeem or by conveyance from the holder of asheriff's deed, then the unsatisfied creditormay reach it, for the simple reason that all thedebtor's property is liable for the payment ofhis debts unless specifically exempted bystatute. If, however, when the last redemptionhas been made, the property is in a thirdperson, it cannot be so subjected for theequally simple reason that the property of oneman cannot be subjected to the payment of thedebts of another.

122 Iowa at 327, 98 N.W. at 126.

These cases, however, do not benefit theassignee in this action. All those cases addressedthe issue of whether liens that have beenextinguished become re-established when theassignee redeems. Under the facts in the presentaction, the mortgagors had subjected theirproperty to the PCA lien, which was in force atthe time of the assignment. By redeeming withinthree months of the sheriff's sale the assigneeprevented any redemption by the mortgagor'screditors. Therefore, PCA's lien was notextinguished because no creditor redemptionperiod existed. PCA's lien remained viable andthe assignee's right to the property is subject to

the PCA lien. The titleholders could not divestPCA's lien on the property merely by assigningtheir redemption rights to Daniel's mother.

The mortgagors and assignee assert ourlanguage in Tirrill indicates that when amortgagor's assignee redeems, the assignee takesthe property free from liens and debts of themortgagor and the property is subjected only tothe debts of the assignee. 206 Iowa at 429, 218N.W. at 304. Although the assignee's redemptionin that case was within the exclusive period, wenote again that the issue of the exclusive right toredeem was neither raised nor discussed in Tirrill.Additionally, under the facts in that case the courtacknowledged the creditor had a right to redeem.Id. Therefore, statements made in the Tirrilldecision were under circumstances in which thecourt recognized the lienholders could haveprotected themselves by redeeming. In thepresent case PCA attempted to redeem, but wedetermined PCA had no right of redemption.Despite language in Tirrill to the contrary, wehold the liens of a junior lienholder or creditor arenot extinguished when a mortgagor or assigneeredeems during the exclusive statutory period.

It could be argued that junior creditors' liensare extinguished either by the entry of theforeclosure decree or the completion of thesheriff's sale. Under such an argument thecreditors then possess only a statutory right ofredemption which is cut off when the debtor orthe debtor's assignee redeems during theexclusive period. Although this cut-off theorywas not advanced by either party at trial or onappeal, we deem it necessary to address it. Weconclude, however, that such a theory is not inline with our statutory scheme and is contrary toour case law.

Our statutes indicate that junior creditors' liensare still in effect after the entry of a foreclosuredecree and the sheriff's sale. Chapter 654 of theCode outlines procedures for the foreclosure ofreal estate mortgages and makes reference to"liens upon the property" at a time subsequent tothe foreclosure decree and sale. See Iowa Code§ 654.7 (disposal of overplus "if there is no otherlien upon the property"); § 654.8 (providing "aperson having a lien on the property which isjunior to the mortgage" can be assigned theinterest of the holder of the mortgage); § 654.9(provision for the payment of "any other liens onthe property sold"). Likewise, the chapter onexecutions, chapter 626, recognizes liens on theproperty after the foreclosure and sale. See Iowa

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Code § 626.82 (overplus paid to the debtor"unless there are liens upon the property").

Our case law also supports the proposition thatjunior creditors' liens continue after theforeclosure decree and sheriff's sale. We havedetermined that the purchaser at a foreclosure saleacquires only an equitable lien for the amount ofthe purchase money, and legal title remains in themortgagor and is not divested until the expirationof the statutory periods of redemption. In reJensen, 225 Iowa 1249, 1252-53, 282 N.W. 712,714 (1938); Wissmath Packing Co. v. MississippiRiver Power Co., 179 Iowa 1309, 1324, 162 N.W.846, 851 (1917); Greenlee v. North British &Mercantile Insurance Co., 102 Iowa 427, 429, 71N.W. 534, 535 (1897). Language in our casesindicates that the junior lienholders' rights areextinguished with the expiration of their period ofredemption. See Anderson, 229 Iowa at 99, 294N.W. at 278 ("the lien of appellee's mortgageupon the foreclosed property was lost at theexpiration of nine months"); Paulsen, 209 Iowaat 458, 228 N.W. at 359 ("[w]hen the juniorcreditor fails to redeem before the expiration ofnine months, he loses his lien upon thatproperty").

In light of our statutory scheme and case lawaddressed to mortgage foreclosures, we concludethat junior creditors' liens continue after theforeclosure decree and sheriff's sale. Juniorlienholders can protect their claims either bybidding at the foreclosure sale or redeeming in adeliberate manner. See Iowa Code chs. 626 and628; Stiles v. Bailey, 205 Iowa 1385, 1388, 219N.W. 537, 539-40 (1928) ("Stiles, as a judgment-creditor had the right to bid at the sale or toredeem therefrom."); Witham v. Blood, 124 Iowa695, 700, 100 N.W. 558, 560 (1904) ("they[junior lienholders] are required to protect theirclaims either by bidding the property up to its fairvalue at the foreclosure sale or by redemptionfrom such sale within the prescribed period");Cooper, 122 Iowa at 326, 98 N.W. at 126 ("thejunior lienholder has it in his power to protecthimself either by bidding at the sale or byexercising his right of redemption").

In summary, the trial court erred in allowingPCA to redeem the property from DorothyMcFarland, and PCA is not entitled to a sheriff'sdeed from the foreclosure sale in the AFS action.Although Dorothy McFarland has a right to titleunder the assignment, her title is subject to therights of PCA against the property in this action.The district court should amend its order to allow

foreclosure in rem on the PCA lien.

AFFIRMED IN PART, REVERSED INPART AND REMANDED.

All Justices concur except UHLENHOPP,CARTER and WOLLE, JJ., who concur in partand dissent in part.

UHLENHOPP, Justice, concurring in part,dissenting in part.

I concur in the holding of the majority that thejunior mortgagee cannot redeem from theassignee, but dissent from the holding that thejunior mortgagee can foreclose against theproperty. I join in Justice Carter's dissent, but addthe following.

Involved is a mortgagor, an assignee of themortgagor's right of redemption, a seniormortgagee whose claim was foreclosed, and ajunior mortgagee. The junior mortgagee was aparty to the action foreclosing the seniormortgage. A total redemption period of sixmonths rather than twelve months is involved byvirtue of a clause in the mortgage under section628.26 of the Iowa Code (1983).

When the sheriff's sale was held under thesenior mortgage foreclosure judgment, the juniormortgagee could have protected itself by biddingon the property if it believed the property hadvalue in excess of the senior mortgage. It did notdo so, and the senior mortgagee bid in theproperty. If the mortgagor had thereafterredeemed at any time during the six-monthredemption period and if the junior mortgageehad meantime obtained judgment against themortgagor on the mortgagor's note, the juniormortgagee would have had a lien on the propertyunder its judgment against the mortgagor byvirtue of the statute which makes a judgment alien against the debtor's real property. IowaCode § 624.23.

The assignee, however, redeemed. Ajudgment in favor of the junior mortgagee againstthe mortgagor would not be against the assignee,and would not be a lien on the assignee's realproperty. The junior mortgagee therefore wouldhave no judgment lien to enforce against theproperty in the assignee's hands.

I would affirm the district court's judgmentthat the junior mortgagee is entitled to judgmenton the mortgagor's note, but would otherwisereverse the judgment.

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CARTER and WOLLE, JJ., join thisconcurrence in part and dissent in part.

CARTER, Justice, dissenting.

I dissent.

The majority opinion unnecessarily andwithout articulating a single policy groundsupporting its result significantly retracts theprotection previously afforded mortgagors underour redemption laws. It is particularlyunfortunate that this occurs at a time when,because of prevailing economic conditions,mortgagors are particularly in need of suchprotection.

There are two issues presented by this appeal:(1) whether, when the mortgagor's assigneeredeems from the sale on foreclosure of a seniormortgage during the six-month period where suchright of redemption is exclusive, a junior lienormay thereafter redeem the property from themortgagor's assignee; and (2) whether, in thecircumstance presented, the mortgagor's assigneeredeems the property free of the liens of juniorcreditors. As to the first question, the answershould be clear, based on the language of IowaCode section 628.5 which conditions creditors'redemption rights to situations in which "noredemption is made by the debtor."

On the second issue, an understanding of theeffect of our redemption laws as they apply to theforeclosure of mortgages requires an examinationof general principles of law which operate in theforeclosure of mortgages prior to the time theredemption statutes come into play. Historically,the chancery courts, in order to protectmortgagors from the strict foreclosures of thecommon law, established a right in the mortgagorto get back his land following default. This wascalled an "equity of redemption." See G.Osborne, Mortgages § 6, at 12-15 (2d ed. 1970)(hereinafter cited as Osborne). Accordingly, inorder for the mortgagee's title in the mortgagedproperty to become absolute, it was necessary forthe mortgagee to go into court and seek a decreecutting off such "equity of redemption" on thepart of the debtor. Osborne § 6, at 12-13. Thiswas ordinarily accomplished by a decreerequiring the debtor to pay by a fixed day or beforever barred. Osborne § 6, at 13.

To protect mortgagors from the loss of theirproperty by foreclosure on account of a debtwhich is less than the value of the security, many

jurisdictions, including Iowa, opted in favor of asystem of foreclosure by sale. See Kramer v.Rebman, 9 Iowa 114 (1859). This type offoreclosure is now mandated by Iowa Codesection 654.5. In foreclosures by sale, thedebtor's "equity of redemption" from themortgage is cut off by the decree, the court orderssale of the mortgaged property to satisfy themortgage obligation and the debtor is accorded aright of redemption from the sale under certainprescribed conditions. This right to redeem fromthe sale is measured by the amount which hasbeen bid for the property. In this regard, we havestated:

The purpose of [foreclosure by sale]apparently is, while preserving to themortgagee an adequate remedy, to provide fora hearing to both parties, and to finally settleand determine their rights, and, in cutting offthe mortgagor's right of redemption, to do sothrough the medium of a sale under decree andsupervision of the court, with a right ofstatutory redemption, and thereby to securefrom the mortgaged property for both partiesthe utmost practicable.

Tice v. Tice, 208 Iowa 145, 149, 224 N.W. 571,573 (1929).

It is also an essential feature of foreclosure bysale that other lienholders on the property bejoined in the action in order that their liens, likethe mortgagee's equity of redemption be cut off"to pass to a purchaser [at the sale] the entire titleto the property." Osborne at 664. The mortgagorhas the right to have the full value of the propertyapplied to the discharge of all liens against it. Westated in Mayer v. Farmers' Bank, 44 Iowa 212,216 (1876):

The equity of redemption must not beconfounded with a right of redemption. Amortgagor has an equity of redemption untilthe sale, and not afterward, and this is truewhether the sale is made upon foreclosure orunder [general execution]. After sale, he [themortgagor] has a right of redemption if thestatute gives it, and so has the [junior]lienholder.

(Emphasis added.) Like the mortgagor, the juniorlienholders obtain, as a substitute for their interestin the property, such rights of redemption as areprovided by statute. No particular words arenecessary in the decree to accomplish this result.See Stoddard v. Forbes, 13 Iowa 296, 298 (1862).

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80 IOWA LAW SCHOOL CLE

Under this system, the junior liens areextinguished by the decree, or, if one prefers toview it that way, at the very latest by the sale.Manifestly, in such a system, junior lienors haveno justifiable expectation that their liens willsurvive the sale. Their expectations are only that,under the statutory scheme of redemption, theymay themselves acquire the property for anamount sufficiently below its value to permitsome recoupment of their obligation. In thisregard, however, they must take the statutorysystem of redemption as the legislature hasestablished it, including the risk of redemption bythe mortgagor or the mortgagor's assignee duringthe exclusive period.

Within the context of our established systemof foreclosure by judicial sale, our decisions havefollowed a consistent course in declaring thatjunior liens are extinguished at the conclusion ofthe statutory redemption process. E.g., Andersonv. Renshaw, 229 Iowa 93, 98-99, 294 N.W. 274,277-78 (1940); Cadd v. Snell, 219 Iowa 728,733-35, 259 N.W. 590, 592-93 (1935); Paulsenv. Jensen, 209 Iowa 453, 458, 228 N.W. 357, 359(1929); Cooper v. Maurer, 122 Iowa 321, 326-27,98 N.W. 124, 125-26 (1904). In the present case,the statutory redemption process terminated uponredemption from sale by the mortgagor's assignee.

The majority seeks to escape from theinevitable consequence of the cited cases bycompletely ignoring the mechanics of foreclosureby judicial sale. It is axiomatic in a system offoreclosure by sale that any interest of themortgagors in the real estate is extinguished bythe sale in order that the purchaser at the sale mayobtain a clear title. All that remained in themortgagor or junior lienholders following the salewas a mere incorporeal hereditament derivedfrom the statutes governing redemption from sale.The majority opinion misinterprets the languagein some of our decisions as establishing the timefor extinguishment of junior liens as theexpiration of the redemption period for creditors.One need only recognize foreclosure by sale forwhat it is in order to realize that such reliance ismisplaced. The extinguishment of all liens at thetime of sale is essential to the successful operationof that system. 5 G. Thompson, Real Property§ 4838 (1924); Comment, 27 Iowa L.Rev. 482,485 (1942). Moreover, in reviewing the policyreasons underlying extinguishment of liens ofjunior lienholders upon foreclosure, there isabsolutely no reason to turn the issue on thetiming of the redemption made by the mortgagoror the mortgagor's assignee.

It is significant that, to the extent some courtshave sought to establish the liens of juniorcreditors against property held by redeemingmortgagors, such cases do not suggest that theliens were not extinguished upon sale. Theprotection of liens in these cases has developedunder theories in which the junior liens may be"revived." See Durfee & Doddridge, Redemptionfrom Foreclosure Sale–The Uniform MortgageAct, 23 Mich.L.Rev. 825, 850 (1925) (hereinaftercited as Durfee & Doddridge ). There is noauthority in our cases for holding as the majoritydoes that, if a mortgagor or a mortgagor'sassignee redeems during the exclusive period,they take the property subject to the junior liens.Indeed, as the majority concedes, Tirrill v. Miller,206 Iowa 426, 429, 218 N.W. 303, 304 (1928)holds otherwise.

If the law really is as the majority suggests,this is a matter of critical importance in thefunctioning of mortgage foreclosure litigation.Vital property interests turn on the timing of themortgagor's redemption. Given thiscircumstance, it is strange that in more than 100years of litigation this court has never beforesuggested that the timing of the mortgagor'sredemption is of any significance in determiningthe status of junior liens. Moreover, at least fourcritical examinations of our redemption system bylegal commentators have been undertaken not oneof which has suggested that the timing of themortgagor's redemption makes any difference indetermining the status of junior liens. See Bauer,Statutory Redemption Reconsidered: TheOperation of Iowa's Redemption Statute in TwoCounties Between 1881 and 1980, 70 IowaL.Rev. 343, 379-84 (1985) (hereinafter cited asBauer ); Osborne § 309, at 642-44; Blum, IowaStatutory Redemption After MortgageForeclosure, 35 Iowa L.Rev. 72, 73 (1949);Durfee & Doddridge at 857.

Indeed, Osborne and Durfee & Doddridgesuggest the contrary. The former states:

The [preferred] scheme is designed to putpressure on the foreclosing mortgagee at thetime of the sale to bid what he thinks theproperty is worth, up to the amount of hisdebt; and it puts pressure on a junior lienorduring the period of his right to redeem to bidmore than the price paid by the seniormortgagee. Iowa at the present time comesclosest to this suggested solution. Under itsstatute the mortgagor's assignee on redemptionclearly takes free of all liens against the

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mortgagor.

Osborne at 642 (footnotes omitted). Similarly,Durfee & Doddridge have suggested that underthe Iowa decisions the redemptioner simplysucceeds to the rights of the purchaser. Durfee &Doddridge at 857. They see this as a desirableresult and suggest that junior lienors like seniorlienors should be forced to bid at the sale at theirperil in order to preserve their security interest.These authors suggest that:

The pressure applied to junior lienors isdesirable and the hardship on them is by nomeans shocking.

We cannot make of the land a miraculouspitcher, and the attempt to do so will merelydiscourage redemption, encourageunderbidding and defeat the purpose of thestatute.

Id. at 853.

It is difficult to suggest any reason for theprovisions of section 628.3 which give themortgagor an exclusive right of redemption forthe first six months, except as a vehicle forexerting pressure on junior lienors to bid at thesale. Under the majority's approach, themortgagee's exclusive right now becomesmeaningless in any case where there are juniorliens. In addition, the presence of such an illusoryright in our statutes creates a trap for the unwarydebtor who will often be acting without advice ofcounsel.

A major flaw in the majority's approach is theresulting overbreadth of the category of creditorswho will be afforded protection. The majorityconcedes that junior lienors who have beenafforded an opportunity to redeem and have notdone so should lose their liens, but holds that it isotherwise when the mortgagor's redemptionduring the exclusive period precludes redemptionby creditors. This distinction is impossible tojustify based on the realities of junior lien status.A recent study indicates that more than ninetypercent of all junior lienholders fail to makeredemption. See Bauer, 70 Iowa L.Rev. at 370,377. Under the majority's holding in the presentcase, there is no method for distinguishinglegitimate redemption rights from purely illusoryredemption rights. The result will be to give awindfall to those junior lienors whose securityinterests are worthless based upon the value of theproperty and who would not have redeemed fromthe sale even if they had enjoyed an opportunity

to do so.

If it were the intent of chapter 628 to protectjunior lienholders in the manner that the majorityproposes, they and not the mortgagor wouldlogically have been given the exclusive right ofredemption at the outset of the redemptionprocess thereby permitting them to establish theirposition if the value of the property warrantedsuch action but extinguishing their liens in thosecases where it did not. The fact that ourlegislature has granted to the mortgagor anexclusive right to go forward in the redemptiontug-of-war and has denied to junior lienors theright to redeem from a previously redeemingmortgagor leads to the inescapable conclusionthat it had no intent to protect junior lienors in thesituation presented in the present case.

UHLENHOPP and WOLLE, JJ., join thisdissent.

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CERTIFIED COPY OF RESOLUTION OF (Insert name of Bank) APPROVING LOAN SETTLEMENT AGREEMENT WITH (Insert name of Borrower(s)) AUTHORIZING EXECUTION AND DELIVERY OF THE LOAN SETTLEMENT AGREEMENT PURSUANT TO 12 U.S.C. §1823(e)

The undersigned Secretary of the Board of Directors of (Insert name and address of Bank) certifies under penalty of perjury that the Board of Directors duly adopted the following Resolution by majority vote at a meeting held on , 2016, at which a quorum was present, in accordance with the current Bylaws of (Insert name of Bank):

BE IT RESOLVED that the attached Loan Settlement Agreement with (Insert Name of Borrower(s)) (the “Agreement”) is approved; and

BE IT FURTHER RESOLVED that (Insert name and title of person executing the Settlement Agreement), shall be and he is hereby authorized to sign and deliver the Agreement for and on behalf of (Insert name of Bank); and

BE IT FURTHER RESOLVED that the Secretary shall place this Resolution and the attached Agreement with the permanent record of Minutes of the Board of Directors of (Insert name of Bank); and

BE IT FURTHER RESOLVED that the Secretary is authorized to furnish a certified copy of this Resolution to interested parties; and,

BE IT FURTHER RESOLVED that this Resolution is intended to comply with the requirements of 12 U.S.C. §1823(e).

Secretary (Insert Name of Bank)

Bank Seal

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