Lenders LearnTM Chapter Agricultural Lending...4/14/2016 17 RRussell©2016 33 Representations and...
Transcript of Lenders LearnTM Chapter Agricultural Lending...4/14/2016 17 RRussell©2016 33 Representations and...
Your State Association Presents
Lenders LearnTM Chapter 10Agricultural Lending
Program Materials
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Monday, April 18, 2016 Presenter: Robin Russell
Technical Support (for faster service please submit inquiries via email or online): (Registration & Tech Support): Email- [email protected], Phone- (877)988-7526 FOR ADDITIONAL ASSISTANCE PLEASE REFER TO OUR FAQs
About Lenders LearnTM
Lenders LearnTM provides lenders and compliance officers with a deep understanding of secured lending. For each of the 15 core courses (30 hours total), attendees receive a copy of the slides and at least one chapter from Robin’s new 2016 Multistate Secured Lending Guide.
Once you have completed the core curriculum, you will have a 17 chapter reference. Whether your bank registers for one or all 15 webinars, you will find the information practical and valuable. See below for 2016 broadcast dates.
1: Basic Business Entities (1/21)2: The UCC for Lenders (2/3)3: Loan Doc 101: The Basics (2/10)4: Loan Doc 101: Business Collateral (2/23)5 & 6: Loan Doc 101: Perfection by Possession & Control (2/18) 7 & 8: Basic RE Loan Documentation (3/2 & 3/3)9: Oil & Gas Lending (4/6) 10: Agricultural Lending (4/18)11: Commercial Loan Documentation (5/3 & 5/4)12: Letters of Credit (5/17)13: Lending to Municipalities (8/24)14, 15, 16: Basic Bankruptcy for Bankers (11/2)17: Loan Participations (11/15)
Also Recommended: • Top Loan Documentation Mistakes (TBD),• Advanced Commercial Loan Documentation (6/1)• Understanding Commercial Loan Documents (9/20)• Understanding Real Estate Loan Documents (9/22)• Commercial Real Estate Loan Documentation (12/7)
All programs will be recorded and available for viewing after the broadcast date. If you would like to complete the Lenders LearnTM curriculum and missed the webinar, please visit the on-demand catalog to register.
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Agricultural Lending: Loan Documentation and
Administration
Robin RussellAndrews Kurth LLP
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• Robin Russell
ROBIN RUSSELL Robin is a fellow in the American College of Bankruptcy. She combines a depth of experience inbankruptcy restructuring and litigation with financial transactions. She has represented corporate debtors, liquidatingtrustees, bondholders, unsecured creditors' committees, bank groups, private equity funds, landlords, trade creditors andbidders for estate assets in Chapter 11 and Chapter 7 bankruptcy proceedings and has litigated fraudulent conveyanceand preference claims in bankruptcy and district court. She has also represented banks, institutional lenders andcorporate borrowers in commercial loan transactions and debt restructurings. Robin is the principal author of ThomsonReuters’ Texas Practice Guides for both Creditors’ Rights and Financial Transactions and the Texas BankersAssociation’s Texas Secured Lending Guide, Texas Real Estate Lending Guide, Texas Problem Loan Guide and TexasAccount Documentation Guide. She is a frequent speaker on banking, bankruptcy and financial restructuring relatedtopics, an elected member of the American Law Institute and has served as a Chapter 7 Trustee. Robin received herLL.M. in Banking Law from Boston University and her J.D. from Baylor University where she was Editor in Chief of theBaylor Law Review and the highest ranking graduate in her class. Prior to joining the firm she clerked for the TexasSupreme Court.
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Notice
This presentation is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that neither the presenter nor your State Bankers Association is engaged in rendering legal, accounting or other professional advice or service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought — from a Declaration of Principles Adopted by the American Bar Association and a committee of Publishers and Associations.
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Common Ag Loan Collateral• Farm products – crops including sharecropper’s
share, livestock
• Documents of Title
• Equipment
• Fixtures
• Accounts
• General intangibles including payments under certain federal farm programs
• Certificated motor vehicles
• Real property< leasehold
fee
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Types of Loans
• Short‐term
• Long‐term
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Short‐Term Loans
• Made to finance crop and livestock production
• Typically repaid at the end of the production cycle
• Paid from the proceeds of the sale of the grain or livestock produced during cycle
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Long‐Term Loans
• Primarily associated with purchase and development of capital assets
• Generally repaid from cash flows from operations
• Used to finance: ‐ real estate‐ equipment‐ breeding herds ‐ orchards
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Carry‐Over Debt
• Restructured short‐term debt
• Typically unpaid portion of an annual operating line of credit
• Borrower is unable to pay off the debt due to bad crop year
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Risks Associated With Agri‐Business Lending
• Credit
• Production
• Market
• Governmental/Legal
• Liquidity
• Operational
• Compliance
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Credit Risk
Risk of the Borrower’s ability to successfully:
• Plant crops or breed animals
• Grow or raise the product
• Harvest finished products (such as grains and livestock for slaughter)
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Production Risk
• Risk of adverse weather conditions and other natural disasters
• Unexpected increase in the expense of harvesting, fertilizing and transporting product
• Feed shortages
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Market Volatility
• Commodity price fluctuations
• Unfavorable weather
• Changes in domestic and global supply and demand
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Government Policies and Legal Risks
• Regulated by federal, state or even local jurisdictions
• Zoning (swine, dairy, feedlot and poultry operations) not permitted near populated areas
• Environmental regulation
• Federal government assistance programs effect (good and bad) Borrower’s ability to keep its loans.
Example: the Agricultural Act of 2014 eliminated direct payments to agricultural producers while continuing crop insurance options and conservation programs.
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Liquidity Risk
• Crop losses
• Unfavorable market conditions
• Loan payment deferrals
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Operational Risk = Loan Collection Problems
• Documentation
• Inspection
• Control and monitoring requirements
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Compliance Risk
• Appraisal requirements
• Real estate lending standards
• Special lending limits applicable to agricultural loans (Regulation D)
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Farm Products
• Crops grown, growing or to be grown, including:
‐ crops produced on trees, vines and bushes (fruit and nuts from trees or berries from bushes) and
‐ aquatic goods produced in aquacultural operations• Livestock, born or unborn, including aquatic goods
produced in aquaculture operations
• Supplies used or produced in a farming operation; or
• Products of crops or livestock in their unmanufactured states (ginned cotton is “unmanufactured” as is milk that has been pasteurized or sap boiled to produce maple syrup; while the canning of farm products such as tomatoes would likely be manufacturing)
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Livestock
• Dairy and beef cattle• Hogs• Sheep• Goats• Horses• Mules• Poultry• Fish
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Farming Operations
• Raising
• Cultivating
• Propagating
• Fattening
• Grazing
• Any other farming, livestock, or aquacultural operation
• Aquatic goods may be either livestock (e.g., catfish raised on a catfish farm) or crops (e.g., kelp)
• Ranching is farming
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Basic Agricultural Loan Documentation (Non‐Real Estate)
• Loan Application
• Agricultural Financial Statement
• Promissory Note
• Security Agreement
• Form UCC‐1 Financing Statement
• Lien Search
• Authorization Documentation
• Title Verification Documentation
• Evidence of Insurance
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Additional Documents
• Account Control Agreement for commodity contracts
• Mortgage/Deed of Trust
• Survey
• Title Commitment and Policy
• Title Insurance
• Warehouse Receipts
• Bills of Lading
• Registration Papers on Livestock
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Centum = Latin for 100
CWT = hundred weight
vet
Real Estate
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Security Agreement
Mandatory
• Identify parties• Identify what obligation is being secured• Identify collateral• Contain “words of grant” granting lien on collateral• In writing
• Signed by owner of collateral
Optional
• Representations/Warranties• Covenants• Events of Default
• Remedies
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Collateral Description
• UCC Collateral may be described by item or type
• A collateral description in the UCC‐1 (but not the security agreement) on non consumer collateral may simply state “all assets” or “all property”
• A commercial tort claim also must be described with specificity
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Collateral Description For UCC Ag Assets
“All of the following property of Debtor now owned, hereafter acquired or produced: all farm products including, but not limited to, all livestock and their products, feed, feed additives, feed supplements; all crops, whether annual or perennial, seed, fertilizer, chemicals and supplies; all equipment including, farm machinery, tools and other implements and all additions, accessions, parts and equipment now or hereafter incorporated into, affixed to or used in connection with said equipment; all inventory; all now existing or hereafter arising; all documents, chattel paper and notes receivable; all investment property including all commodities futures contracts, margin deposits and any funds maintained by any broker for the benefit of Debtor; and all general intangibles including all government payments and payments‐in‐kind to which Debtor may now or hereafter be entitled;
Supplements to be added when applicable:
• The aforementioned livestock will include, but not limited to livestock branded (sketch of brand) on (location on animal)
• All fixtures located on the property described as [legal description of the property]
NOTE: A real property description is not required on crop filings but is required on fixture filings
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Collateral Description For Crops
All of Debtor’s crops, including, but not limited to, (describe here the specific type(s) of crops to be taken, e.g., cotton, corn, oranges, etc.), now growing or to be grown, together with all seed, fertilizer, chemicals and supplies, plus all products thereof, and any and all proceeds arising from the disposition thereof and all accounts and general intangibles
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Collateral Description For Livestock
All livestock now owned or hereafter acquired by Debtor and the young conceived thereof, together with all increases thereof wherever located and all feed, feed additives, feed supplements, including any and all product and proceeds arising therefrom to be added when applicable. The aforementioned livestock will include, but not be limited to livestock branded (sketch of brand) on (location on animal).
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Inventory
If the Bank takes a security interest in farm products, the Bank also should take a security interest in “inventory” to protect itself in the event the Borrower ceases to qualify as “person engaged in farming operations” or the collateral is transferred to a person not engaged in farming operations.
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Standard Security Agreement CovenantsDuties Toward Property
• Possession
• Good repair (ag equipment)
• Payment of taxes
• Access to inspect collateral (livestock & crops)
• Notification of loss
• Access to books and records
• Nondisposition (unless ordinary course)
• Recordation of security interest on chattel paper
• Proper collection and settlement of accounts
• No commingling of proceeds
• Direct payment of accounts receivable
• List of buyers for Farm Security Act notices
• Insurance
Other Duties
• Authorization of secured party to file financing statement
• Authorization of secured party to protect collateral
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Representations and Warranties
• Valid existence as entity
• Authorization to execute and perform
• Past, present and future name
• Ownership of collateral
• Use of property (i.e., agricultural)
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Defaults
• Failure to pay principal and/or interest
• Breach of covenant
• Rep or warranty untrue
• Bankruptcy/insolvency
• Deemed insecure
Remedies
• Charge default interest
• Turn over collateral
• Enter and take possession of collateral
• Foreclose
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• The “Covered Dish Supper” Rules of Priority
EquityUnsecuredSecuredPMSIAdministrative Priority Claims
Statutory Possessory
Liens
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UCC‐1 Financing Statement
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UCC‐1 Financing Statement Requirements
To be effective, a Financing Statement must:
• Give the name of the debtor(s)
• Give the name of the secured party
• Give a description of the collateral
• Provide a mailing address for the debtor and the Secured Party of record
• Indicate whether the debtor is an individual or an organization
• Signature of debtor not required
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Agricultural Liens• Secures payment or performance of an obligation for
‐ goods or services furnished in connection with a debtor’s farming operation or
‐ rent on real property leased by debtor in connection with its farming operation
• That is created by statute in favor of a person that
‐ in the ordinary course of its business furnished goods or services to a debtor in connection with a debtor’s farming operation or
‐ leased real property to a debtor in connection with the debtor’s farming operation; and
‐ whose effectiveness does not depend on the lender or other creditor’s possession of the personal property
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Examples of Ag Liens on Farm Products(vary from State to State)
• A chemical and seed supplier’s lien on crop proceeds
• A stock breeder’s lien on offspring
• A feed supplier’s lien on proceeds
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Examples of Possession Statutory Liens on Farm Products
(vary from State to State)
• A cotton ginner’s lien on ginned cotton
• An agricultural landlord’s lien
• An agister’s/feed lot owner’s lien on livestock • Warehouseman’s lien on stored grain• A lien on livestock, carcasses and related products with
respect to livestock sold for slaughter
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UCC‐1 Filing Location
• If the debtor is an individual, the financing statement should be filed in the Central Filing Office of the state in which the debtor has its principal residence
• If the debtor is a partnership, the financing statement should be filed in the Central filing office of the state where the partnership has its principal place of business
• If the debtor is a corporation, a limited liability company or a limited partnership, the financing statement should be filed in the central filing office of the state under which the debtor is organized or formed
• In most states, but not all, the Central Filing Office is the Office of the Secretary of State
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Food Security Act of 1985
• Allows a buyer in the ordinary course to buy farm products from a farmer free and clear of any security interest created by that seller
• Allows Banks to take action to prevent a buyer from buying farm products free of the security interest
• Bank’s procedure depends upon whether the applicable state has established a central notification system (“CNS”)
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States with CNS (19)
• Alabama
• Colorado
• Idaho
• Louisiana
• Maine
• Minnesota
• Mississippi
• Montana
• Nebraska
• New Hampshire
• New Mexico
• North Dakota
• Oklahoma
• Oregon
• South Dakota
• Utah
• Vermont
• West Virginia
• Wyoming
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Central Notification Systems
• Secured party files EFS (i.e., effective financing statement) with the Secretary of State to notify buyers of Bank’s lien
• An EFS is not a UCC‐1 financing statement
• Buyers of farm products must ‐ subscribe to lists of filed EFS records provided
on a regular basis by the Secretary of State, or ‐ conduct their own searches of EFS records
• If farmer appears on list or search, buyer must ensure the proceeds reach the Bank
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Content of EFS
• Each state with a CNS system has its own EFS form
• Be careful not to confuse EFS and UCC‐1 forms
• Contents typically include:
• Borrower’s name and address
• Borrower’s social security number (or unique identifier)
• Description and location of the farm products
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States with No CNS
• Bank must prenotify individual buyers of individual liens based upon information about contemplated buyers given the Bank by the Borrower
• Banks must obtain Verification of List of Potential Buyers from Borrower
• Bank gives each potential buyer Notice of Security Interest
• When loan paid off Notice of Termination of Security Interest is given
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Selling “Off‐List”
• Farmer who sells to buyer who was not notified of a security interest because the farmer failed to give Bank the name of the potential buyer
• Farmer subject to a mandatory fine of at least $5,000
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Fixture
• An item of equipment used in a farming operation may also constitute a “fixture” under the UCC
• A “fixture” is an item of personal property which has become affixed to real property in such a manner that the item is viewed by the law as part of the real property
• If the Bank decides that a fixture filing is appropriate, the Bank should also try to get a subordination or release of the interest in the farm equipment of any mortgagee of the real property where the farm equipment is located
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Farm Vehicles
• Trucks and farm tractors may be subject to a certificate of title act
• Perfection of the security is by a notation on the certificate of title evidenced
• In some states farm tractors and other “implements of husbandry” are exempt from titling laws and should be perfected by UCC‐1 filing on equipment
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Farm Products and Equipment Located on Leased Premises
• Bank’s security interest in farm products and equipment may be subject to prior interest of the landlord pursuant to state law
• Landlord’s lien does not show up on UCC search
• Bank should seek subordination, waiver or release of lien from the Borrower’s landlord.
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Landlord’s Subordination or Waiver
• Often difficult to obtain from a landlord
• Landlord or mortgagee will seek to extract something from the Borrower (lessee) in return which the Borrower (lessee) is unwilling to give
EXAMPLE: If Borrower (lessee) has outstanding complaints under the lease, Landlord may seek release of complaints in return for his execution of the subordination.
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Crops on Mortgaged Real Property
• Bank may take lien on crops growing or to be grown
• Crops growing on real property, unless severed by actual harvesting, a prior lease or a prior security interest, may pass with the real property upon foreclosure of an existing deed of trust or mortgage
• Bank should obtain agreement with the mortgagee to allow Bank to harvest crops after foreclosure
• Lien on crops growing on real property has priority over mortgagee or owner of the property if the debtor is the owner or is in possession of the real estate
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Agricultural Leases
• Leases of farm land may be a source of collateral
• The Bank may take assignment of rentals due the Borrower under an existing cash lease.
• Under a cropshare lease, Bank may take assignment of the Borrower’s “landlord’s share” of all harvested crops
• Crops taken under “landlord’s share” may be subject to a prior security interest; (i.e., the advancement of “seed money”)
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Registered Animals
• Thoroughbred animals are generally registered with a private association that maintains records of ownership of the particular type of animal (i.e., The American Quarter Horse Association)
• Possession of registration is essential component of the sale of animal or its breeding services
• Bank should take possession of certificate(s) of registration
• This does not constitute perfection/UCC – 1 must be filed
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Purchase Money Security Interests Priority
• A purchase‐money security interest (“PMSI”) is a security interest in goods (including livestock and equipment) securing the credit extended to enable the Borrower to acquire or use the goods
• Gives a super lien to Bank providing the financing for the Borrower to pay the purchase price of the goods
UnsecuredDebtPMSI
Possessory Lien
SecuredDebt
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PMSI in Livestock
• PMSI is perfected when the debtor receives possession of the livestock
• Bank sends authenticated notification (a writing) to holder of the conflicting security interest
• Holder of the conflicting security interest receives notification within six months before the debtor receives possession of the livestock
• Notification states that the person sending the notification has or expects to acquire a purchase‐money security interest in livestock of the debtor and describes the livestock
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PMSI Farm Equipment
• The PMSI is perfected when the Borrower receives possession; or
• Within 20 days after the Borrower receives possession
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Real Property Liens
Liens on real property such as acreage and timber are created by the granting of a mortgage or a deed of trust executed by the Borrower to the Bank
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Insurance Policy for Ag Collateral
• Fire insurance on grain crops
• Hail insurance if crops are in an area with a history of hail damage
• Frost insurance when appropriate and available
• Flood insurance when appropriate and available
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Federal Crop Insurance Corporation
• Administered by U.S. Department of Agriculture
• Provides coverage against losses due to low price, low yield and destruction of crops
• Bank may receive insurance proceeds directly
• A special assignment is required
• In hands of farmer, they are insurance proceeds under the UCC subject to Bank’s lien on underlying crops
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Types of Crop Insurance
• Yield Based Crop Coverage Actual Production History Group Risk Plan (county index) Dollar Plan (declining value)
• Crop Revenue Insurance Plans Group Risk Income Protection Adjusted Gross Revenue Income Protection Revenue Assurance Catastrophic Coverage
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Ag Credit Enhancements
• FSA programs• SBA programs• State level programs• Personal guarantees• Insurance policies
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USDA Guarantee Programs
Farm Services Agency• Guarantees repayment of up to 90% of loan• Bank must notify FSA when borrower is 30 days
overdue and unlikely to be current within 60 days
Commodity Credit Corporation• Export credit guarantee program guarantees
payments under export sales contract• Commodity Price Support Loan and Purchase
Program guarantees farmer will receive the support price for commodity pledged as collateral
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Federal Farm Program Payments
• Payments to farmers for price support, conservation or disaster assistance
• Programs administered by the Farm Service Agency (“Farm Service Agency”) and the Commodity Credit Corporation (“CCC”)
• Farmers may assign cash payments to the Bank with Assignment of Payment. The conservation payments are “general intangibles.” The crops are “farm products.”
• Bank must have a security agreement covering the collateral and perfect by filing a UCC‐1
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Equity Interest in Agricultural Cooperatives is General Intangible
• Agricultural cooperatives process, store and/or sell a farmer’s milk or grain
• Interest in Ag coop is “general intangible”
• Perfect security interest by filing UCC‐1
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Commodity Contracts
• Farmers purchase and sell commodity contracts to protect against unanticipated adverse changes in the future prices
• If held in a securities account are “investment property” of the debtor
• Perfect a lien under UCC with Investment Property Security Agreement and Account Control Agreement
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Important Commodity Definitions• “Commodity account” means an account maintained by a commodity
intermediary in which a commodity contract is carried for a commodity customer.
• “Commodity contract” means a commodity futures contract, an option on a commodity futures contract, a commodity option, or another contract if the contract or option is:
• traded on or subject to the rules of a board of trade that has been designated as a contract market for such a contract pursuant to federal commodities laws; or
• traded on a foreign commodity board of trade, exchange, or market and is carried on the books of a commodity intermediary for a commodity customer.
• “Commodity customer” means a person for which a commodity intermediary carries a commodity contract on its books
• “Commodity intermediary” means a person that:
• Is registered as a futures commission merchant under federal commodities law; or• In the ordinary course of its business provides clearance or settlement services for
a board of trade that has been designated as a contract market pursuant to federal commodities law.
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Perfection of Security Interest inInvestment Property
The Perfection of a security interest occurs when the Bank obtains “control.” The Bank has “control” of an investment property if:
• The Bank becomes the entitlement holder (changes the name on the brokerage or commodity account to the name of the Bank) or
• A securities intermediary has agreed that it will comply with entitlement orders originated by the Bank without further consent by the farmer/entitlement holder, (i.e., executed an Account Control Agreement).
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Documents of Title
• Warehouse receipts and bills of lading are “documents of title”
• Can be negotiable or non‐negotiable
• Receipts issued by a person engaged in the business of storing, transporting or forwarding goods for hire act as evidence of title to goods
• Commitment by issuer to deliver the described goods to the owner of the receipt and to use reasonable care to protect goods from damage
• May be electronic or paper receipt
• Entitles person in possession to receive, hold and dispose of the goods
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Warehouse Receipt
• Covers Borrower’s harvested crops stored off the farm premises in a warehouse
• Title to crops typically evidenced by electronic or paper warehouse receipts
• Describes goods stored in a warehouse
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Perfection of Security Interest in Documents of Title
• If receipt is non‐negotiable, security interest is perfected in stored goods by the issuance of the receipt in the name of Bank
• If receipt is negotiable, must be endorsed to Bank, delivered to Bank, and retained in Bank’s possession to perfect a security interest in the stored goods
• Security agreements should also describe warehouse receipt and the stored goods as collateral
• File UCC‐1 describing “all assets” or both the warehouse receipt and the stored goods by item or type as collateral
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Bill of Lading
• Document of title
• Issued by a carrier in connection with the shipment of goods
• Enables remote buyer and remote seller to consummate a transaction with limited risk to either party
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Non‐Negotiable Receipts
• A non‐negotiable receipt is preferable to a negotiable receipt as collateral as there is less risk of loss
• The Bank can retain possession of a non‐negotiable receipt when goods are released.
• A non‐negotiable warehouse receipt specifies the person to whom the described goods are to be delivered without adding either “bearer” or “order,” the words of negotiability.
• The Bank must be named by a non‐negotiable receipt as the person to whom the goods are to be delivered, otherwise it is unacceptable as collateral
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Negotiable Warehouse Receipts
• A negotiable warehouse receipt contains words of negotiability, either stating that the described goods are to be delivered to any “bearer” of the receipt or stating that the described goods are to be delivered “to the order” of a named person
• A “bearer” receipt is negotiated by delivery of the receipt to a transferee
• An “order” receipt is negotiated by the signature of the named person to whose order it runs, plus delivery to a transferee
• Borrower must endorse it with an endorsement that states that receipt thereafter runs “to the order of” Bank
• Bank should obtain borrower’s guaranty of the signatures of any unknown endorsers
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Warehouse Receipt Financing
• Used as a hedge against supply shortages and price fluctuations
• Used to cope with seasonal inventory buildups, especially in the agricultural industry
• Enables the borrower to avoid
‐ The fixed repayment terms of many other credit arrangements and
‐ Holding idle borrowed funds
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The Warehouse
• Warehouse should be bonded
• Warehouse should be owned and operated by a third party that is independent of the borrower
• Bank should avoid a bonded “subsidiary” warehouse in which the borrower has an interest
• “Terminal” warehouse engaging in general storage for the public is the typical
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Storage Agreement
• Between a borrower and a third‐party warehouse
• Should obligate the borrower to pay all warehouse charges
• Should acknowledge the Bank’s security interest in stored goods
• Holder of statutory landlord or warehousemen’s lien is protected as to rentals or charges
• Consider getting waiver or subordination of any statutory warehouse lien to the security interest of the Bank (HARD TO GET)
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Due Diligence Checklist forWarehouse Receipts
• Adequate bonding
• Adequate warehouse insurance coverage
• If the warehouse is leased, lease term must equal or exceed the duration of loan
• Adequate physical facility and method of operation
• Experience of warehouse
• Financial status, credit rating and general reputation
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Terms of a Warehouse Receipt
• Name and location of the warehouse
• Negotiable receipts: statement that goods are deliverable either to “bearer” or to a specified person or his or her “order”;
• Non‐negotiable receipts: statement that the goods will be delivered to a specified person without also using either “bearer” or “order” words;
• Date receipt issued
• The consecutive number of the receipt
• Either the rate of storage and handling charges of a terminal or field warehouse or a statement that a non‐negotiable receipt was issued by a field warehouse;
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Terms of a Warehouse Receipt
• A description of the goods or of the packages contained, identifying them by weight, quantity, etc.;
• Signature of the issuing warehouse made by authorized agent of the warehouse;
• Name and address of every person, (including the issuing warehouse), with an ownership interest in the stored goods
• Statement of the advances and other liabilities for which the issuing warehouse claims a lien or a security interest.
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Inflow and Outflow of Warehouse Goods
• All goods received by the warehouse should be formally documented at the time received
• Bank should receive a copy of the warehouse’s record of the receipt of goods
• If a warehouse receipt is non‐negotiable a warehouse release form signed by the Bank is necessary to release goods
• Bank should require check for the agreed‐upon percentage of the advance covering the stored goods described in the release
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Contents of Warehouse Release
• Name and location of the warehouse
• Warehouse receipt number
• Description of type and quantity of the stored goods to be released
• The agreed‐upon release value of the stored goods to be released
• The name of the person to whom release is authorized
• An authorized signature of the Bank
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Monitoring the Stored Goods
• Monitor the market value and quality of the goods stored in a warehouse
• Require detailed monthly goods and value report from warehouse
• Report should summarize all transactions by individual item, by units and by dollar value
• Compare with Bank’s records
• Look for slow movers, possible shortages, etc.
• Physical inspection of the warehoused goods by Bank
• Storage agreement should authorize inspection
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Process for Negotiating Receipt
• If warehouse receipt was issued in negotiable form, Bank must surrender the warehouse receipt to Borrower and execute a release
• Borrower should execute a security agreement‐trust receipt describing the negotiable receipt as collateral before the Bank surrenders negotiable receipt
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The Security Agreement‐Trust Receipt
• Documents the date upon which the negotiable warehouse receipt was delivered to Borrower
• Sets out the rights of Borrower and Bank
• Supplements the Security Agreement
• After withdrawal, negotiable warehouse receipt (that either has been canceled or had a partial delivery noted upon it) should be returned to the Bank by the borrower, with payment of the agreed‐upon percentage of the amount advanced upon the stored goods to be released
• Upon redelivery of the negotiable receipt and delivery of the payment, the Security Agreement Trust‐Receipt covering the negotiable receipt is to be canceled
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Supplementing and Amending Security Agreement and UCC‐1
Describe the negotiable warehouse receipts or bills of lading with collateral descriptions such as:
‐ Warehouse receipt issued by [warehouseman] covering [quantity] of [goods] and dated ______ and all goods covered thereby.
‐ Negotiable bill of lading issued by [carrier] covering [quantity] of [goods] and dated ______ and all goods covered thereby.
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Additional Loan Documents for Warehouse Receipts
• Warehouse Receipts or Bills of Lading
‐ Negotiable or non‐negotiable
• Collateral Receipt
• Guaranties of the signatures of endorsers of negotiable receipts
• Report verifying the financial condition of the warehouse, including proof of the existence and the amount of bonding
• Copy of any Warehouse Lease
• Copy of Warehouse Storage Agreement
• Warehouse Waiver or Subordination
• Goods Grading Certificate with respect to the stored goods
• A memorandum from the loan officer, accompanying a warehouse receipt, stating the percentage of advance and the release value and, if no known market exists, the value of the collateral and the method by which it was determined
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Additional Documents for Warehouse Receipts (cont’d)
• Hazard Insurance. Comprehensive casualty insurance, including flood insurance, naming the Bank as loss payee
• Formal verification by the warehouse of the validity of any outstanding receipts to be taken as collateral
• Proof of authorization of Agent signing warehouse receipt in place of warehouseman, if needed
• Formal consent by the warehouse to periodic inspection of the stored goods
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Additional Documents for Warehouse Receipts (cont’d)
• Copies of all warehouse receiving records, which should be reconciled with the inventory reports mentioned above, which are received at regular time intervals
• Regular, detailed, inventory reports from the warehouse, verifying quantities and value of the inventory on hand together with a monthly statement from the warehouse verifying that all accrued warehousing fees and charges have been paid by the borrower
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Additional Documents for Warehouse Receipts (cont’d)
• Authorization for the release of merchandise, on behalf of the borrower and the Bank (If the receipts are negotiable)
• Security Agreement‐Trust Receipts
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Crop Inspection and Valuation
• Verify location and current market price!
• Inspections should be performed several times during the growing season
• Local and regional crop yields should be monitored
• The bank should use published commodity price yields (or have good support for why it doesn’t!)
• Report should breakdown by crop and by irrigated or dryland
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Livestock Inspection and Valuation
• Bank must maintain in its files an inspection and valuation for the livestock pledged
• Must be reasonably current, taking into account the nature and frequency of turnover of the livestock
• Never more than 12 months old• Breakdown by sex, breed and number in each category
with condition of each noted• Supported by published livestock prices
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Lending Limits
• Bank’s total outstanding loans and extensions of credit to one borrower may not exceed 15% of the bank’s capital and surplus
• An additional 10% of Bank’s capital and surplus is allowed if the amount that exceeds Bank’s 15% general limit is fully secured by “readily marketable collateral”
• Bank must perfect security interest in the collateral under applicable law
• Collateral must have a current market value at all times of at least 100% of the amount of the loan or extension of credit that exceeds the bank’s 15% general limit
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Special Ag Lending Limits Cumulative
When loans and extensions of credit qualify for more than
one special lending limit, the special limits are cumulative
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Lending Limits on Loans Secured by Documents Covering Livestock
• Applies to Bank’s loans or extensions of credit to one borrower secured by shipping documents or instruments that transfer or secure title to or give a first lien on livestock
• May not exceed 10% of Bank’s capital and surplus
• Market value of livestock securing the loan must at all times equal at least 115% of the amount of the outstanding loan that exceeds the bank’s combined general limit
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Loans Secured by Pasturage Liens Covering Livestock
• In some states, persons furnishing pasturage under a grazing contract may have a lien on livestock for the amount due for pasturage
• If lien is assigned to bank by a recordable instrument and protected against being defeated by some other lien or claim, by payment to a person other than the bank, or otherwise, it will qualify under this exception provided the amount of the perfected lien is at least equal to the amount of the loan and the Value of the livestock must be no less than 115% of the portion of the loan or extension of credit that exceeds the bank’s combined general limit
• When amount due is dependent upon future performance, lien does not meet the requirements
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Loans Secured by Dairy Cattle
• Bank’s loans and extensions of credit to one borrower that arise from the discount by dealers in dairy cattle of paper given in payment for the cattle may not exceed 10% of Bank’s capital and surplus in addition to the amount allowed under the bank’s combined general limit
• Paper must carry the full recourse endorsement or unconditional guarantee of the seller; and
• Paper must be secured by the cattle being sold, pursuant to liens that allow the bank to maintain a perfected security interest in the cattle under applicable law
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Loans Secured by Bills of Lading or Warehouse Receipts Covering Readily Marketable Staples
• Applies to Bank’s loans or extensions of credit to one borrower secured by bills of lading, warehouse receipts, or similar documents transferring or securing title to readily marketable staples
• Lending may not exceed 35% of Bank’s capital and surplus • Market value of staples securing loan must at all times equal at least 115% of the amount of outstanding loan that
exceeds the bank’s combined general limit• Staples must be nonperishable, may be refrigerated or frozen, and must be fully covered by insurance if such
insurance is customary• This special limit applies to a loan or extension of credit arising from a single transaction or secured • by the same staples, provided that the duration of the loan or extension of credit is:
‐ Not more than 10 months if secured by nonperishable staples; or‐ Not more than six months if secured by refrigerated or frozen staples
• The holder of the warehouse receipts, order bills of lading, documents qualifying as documents of title under the UCC, or other similar documents, must have control and be able to obtain immediate possession of the staple so that the bank is able to sell the underlying staples and promptly transfer title and possession to a purchaser if default should occur on a loan secured by such documents. The existence of a brief notice period or similar procedural requirements under applicable law, for the disposal of the collateral will not affect the eligibility of the instruments for this special limit.‐ Field warehouse receipts are an acceptable form of collateral when issued by a duly bonded and licensed grain
elevator or warehouse having exclusive possession and control of the staples even though the grain elevator or warehouse is maintained on the premises of the owner of the staples
‐ Warehouse receipts issued by the borrower‐owner that is a grain elevator or warehouse company, duly‐bonded and licensed and regularly inspected by date or federal authorities, may be considered eligible collateral under this provision only when the receipts are registered with an independent registrar whose consent is required before the staples may be withdrawn from the warehouse
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Special Bankruptcy Considerations: Tools of Trade
• § 522(f) permits debtor to avoid certain non‐possessory, non‐purchase money liens “to the extent that the lien impairs an exemption to which the debtor would have been entitled under state exempt property law” up to certain statutory amount [$6,225 in 2014]
• Allows farmers to claim as exempt personal property their tractors, combines and other vehicles which are frequently used to collateralize operating lines of credit
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Mediation
• U.S. Secretary of Agriculture authorized to help states develop USDA Certified State Mediation Programs to resolve disputes between farmers and agricultural lenders
• Programs are administered by the USDA Farm Service Agency
• Exist in more than 30 states
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Regulation Z
• Agricultural purpose loans are exempt from Regulation Z
• “Agricultural purposes” includes the production, harvest, exhibition, marketing, transportation, processing or manufacture of agricultural products by a natural person who cultivates, plants, propagates or nurtures those agricultural products, including but not limited to the acquisition of farmland, real property with a farm residence, and personal property and services used primarily in farming
• “Agricultural products” includes agricultural, horticultural, viticultural and dairy products, livestock, wildlife, poultry, bees, forest products, fish and shellfish and any products thereof, including processed and manufactured products, and any and all products raised or produced on farms and any processed or manufactured products thereof
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