A cyclical doldrum in the agriculture economy has caused a nationwide rise in farm bankruptcies, while changes in U.S. financial laws open the door for even more.
In August last year, the U.S. Congress raised the Chapter 12 farm bankruptcy debt eligibility from
$4 million to $10 million, making more growers eligible for the debtor-friendly reorganization plans. The change aligned with a sluggish farm economy that boosted the rate of bankruptcies nationwide, in recent years anyway.
So far, the trend has not hit tree fruit. Farmers in traditional fruit-growing areas have used Chapter 12 bankruptcy relatively little, either before or after the statute change. Regions such as Eastern Washington, Western Michigan and Western New York have not seen a rise in filings the past three years, according to U.S. bankruptcy court records.
The eligibility change opens the door for more Chapter 12 filings in fruit country, said Bill Hames, a Kennewick, Washington, attorney with more than 30 years of experience in agricultural bankruptcy, but it won’t tip the scales for any growers not already facing bankruptcy. The majority of his cases are for farms with less than $4 million in debt.
Hames certainly doesn’t recommend any form of bankruptcy. “It’s not something that people would do by choice,” said Hames, a former president of the Bankruptcy Bar Association for the Eastern District of Washington.
However, if bankruptcy is inevitable for a grower, Chapter 12 can provide a simpler, quicker road with light at the end of a shorter tunnel, he said.
Hames represented a Columbia Basin hay farmer who filed in 2014, recently paid off the bank and continues farming. Another client, a Washington corn grower, used it as a way to “self-liquidate” — get out of farming — using the farm sale to pay everybody in full while keeping property such as his house and cars. A cherry grower who filed in 2019 aims to do the same, selling the orchard, paying off creditors and keeping the longtime family home for retirement.
For growers facing bankruptcy, Hames recommends talking to an attorney early on. For example, he advises growers to file before they use crop proceeds to pay the bank operating loans, to give them some cash leverage and collateral. That way, they have capital to keep farming during and after bankruptcy. A farm without operating money could be forced into Chapter 7 bankruptcy, which is liquidation.
Changes for creditors, too
A Portland, Oregon, lawyer who represents creditors has noticed a small uptick in her cases since the rule changes, and she expects more. Two new Chapter 12 bankruptcies, since August, have come across the desk of Brandy Sargent of the law firm K&L Gates. A third, an Oregon berry farmer, would have qualified for Chapter 12 but filed just before the debt limit change.
Not only banks are at stake, Sargent said.
“Chapter 12 can change the relationship between a lot of the different parties,” Sargent said. Secured equipment vendors may have to accept longer payment plans. Property owners may have to accept lower lease payments. Farm labor contractors with agricultural liens may end up receiving payment for their services on a payment plan, instead of right away like normal.
The changes could chill lending, too. Creditors may pause before extending credit in that $10 million category.
“It does cause a lender to take a closer look,” Sargent said.
Chapter 12 bankruptcy was created in 1986 during the economic agricultural crisis, offering Midwest family farmers a middle ground between the complicated corporate bankruptcy of Chapter 11 and Chapter 13, meant only for individuals. It was designed specifically to help keep farmers in business.
The law presumes farmers will keep farming at the end of bankruptcy. They are under no mandate to sell all their property to pay creditors.
Among the other differences: Creditors may object to a farmers’ payment restructuring plan, but get no formal vote, as they would in Chapter 11. Meanwhile growers leasing property may be able to lower their lease payment to market value, something tougher to do in Chapter 11. Also, debtors may more easily “cram down” their secured debt by either lowering their interest rates or stretching out their payments over a longer period of time.
Midwest dairy producers have been a large part of the recent spike in farm bankruptcy, said John Newton, chief economist for the American Farm Bureau Federation. He blames a poor farming economy, rising labor costs and international trade conflicts.
A total of 580 farms filed for Chapter 12 from October 2018 to September 2019, an increase of 24 percent from the previous 12 months and the highest since 2011, according to the American Farm Bureau Federation. More than 40 percent of those were in 13 Midwest states.
The problem is nowhere near the crisis of the 1980s that prompted Chapter 12 in the first place; 580 bankruptcies overall is only about 10 percent of the figures seen then, Newton said. Nonetheless, it raises concerns for ag-reliant rural areas.
“It’s still moving in the wrong direction,” Newton said. •
—by Ross Courtney