HAN­DLING BANK­RUPTCY

HERE ARE 8 POINTS TO KEEP IN MIND.

Successful Farming - - CONTENTS - By Brent King

Know­ing how farm leases are treated in bank­ruptcy helps both ten­ants and land­lords pro­tect their busi­nesses. Ac­cord­ing to Eric John­son, an agri­cul­tural law and bank­ruptcy at­tor­ney with Spencer Fane in Kansas City, Mis­souri, farm-re­struc­tur­ing bank­rupt­cies oc­cur un­der Chap­ter 12 or Chap­ter 11 of the bank­ruptcy code. Farms that ex­ceed the small farm Chap­ter 12 debt lim­its must re­struc­ture in a Chap­ter 11, says John­son. Dif­fer­ent rules ap­ply in each, and each has a dif­fer­ent im­pact on the cost and amount of a party’s ne­go­ti­at­ing lever­age in a case.

If you are a land­lord or ten­ant, you should keep the fol­low­ing points in mind when deal­ing with a farm lease and bank­ruptcy, says John­son:

1

Leases in a farm bank­ruptcy are pri­mar­ily con­trolled by fed­eral bank­ruptcy law. How a lease is treated can also be in­flu­enced by state law. As a re­sult, there may be dif­fer­ences on how your farm lease is treated de­pend­ing upon which state the land is lo­cated in and where the bank­ruptcy is filed.

2

The date a bank­ruptcy pe­ti­tion is filed can de­ter­mine how claims are treated. If a land­lord’s claim is treated as an un­se­cured prep­e­ti­tion claim, it may be a lower pri­or­ity. If it is treated as a post­pe­ti­tion claim, it will gen­er­ally be given greater pri­or­ity. This in­creases both the odds of the claim get­ting paid in full and the land­lord’s lever­age in a case. There are sev­eral crit­i­cal dead­lines un­der both fed­eral and state laws. You and your at­tor­ney should know these dead­lines. Whether you are a land­lord or a ten­ant, fail­ure to com­ply could be costly.

3

A ter­mi­nated or ex­pired lease will limit a ten­ant’s rights. While a bank­ruptcy can pro­vide ten­ants ad­di­tional lever­age and flex­i­bil­ity with leases, that flex­i­bil­ity is eroded if the lease is ter­mi­nated or ex­pired prior to bank­ruptcy.

4

Ten­ants in bank­ruptcy may as­sume, as­sume and as­sign, or re­ject an un­ex­pired lease. Re­struc­tur­ing ten­ants can evalu- ate ev­ery un­ex­pired lease and as­sume the de­sir­able leases, as­sign cer­tain leases to oth­ers, and re­ject the re­main­der. If you do not act promptly, a lease can be au­to­mat­i­cally re­jected un­der bank­ruptcy law. Your fi­nan­cial ad­viser and at­tor­ney should eval­u­ate the le­gal, op­er­a­tional, and fi­nan­cial im­pli­ca­tions of each lease to de­ter­mine the best op­tion. 5

An un­ex­pired lease re­mains valid when a ten­ant files bank­ruptcy. The au­to­matic stay of bank­ruptcy halts an evic­tion ac­tion and gives a ten­ant time to cre­ate a re­struc­tur­ing plan. Use that time to eval­u­ate leases and find fund­ing to make lease pay­ments. In or­der to mit­i­gate be­ing left with a bank­rupt ten­ant dur­ing the grow­ing sea­son, a land­lord may sched­ule the ten­ant’s first rent pay­ment be­fore plant­ing dates. If the ten­ant misses the dead­line and can­not pay, use the ex­tra time to end the de­faulted lease and bring in a new ten­ant.

6

Land­lords are in a good po­si­tion to col­lect post­pe­ti­tion rents. A ten­ant in bank­ruptcy must pay post­pe­ti­tion lease obli­ga­tions. A land­lord should ask coun­sel to make it a pri­or­ity to learn how the ten­ant will make these pay­ments. Ten­ants should present a paid and out­stand­ing rent re­port to your at­tor­ney be­fore fil­ing, so your at­tor­ney is pre­pared to deal with post­pe­ti­tion lease is­sues.

7

Bank­ruptcy is a process of ne­go­ti­ated so­lu­tions. Par­ties may at­tempt to vol­un­tar­ily rene­go­ti­ate leases in bank­ruptcy. Par­ties may also ne­go­ti­ate de­fault cure amounts. Ne­go­ti­ated so­lu­tions can lead to bet­ter leases that strengthen the land­lord/ten­ant re­la­tion­ship and re­duce the costs of lit­i­ga­tion.

8

Mit­i­gate bank­ruptcy dur­ing lease ne­go­ti­a­tions. Ten­ants who share fi­nan­cial state­ments with land­lords can ne­go­ti­ate health­ier leases. Struc­ture lease pay­ments to co­in­cide with the cash flows of the ten­ant’s mar­ket­ing plan. Con­sider us­ing a base­plus-bonus pay­ment sys­tem to avoid stress­ing ten­ants in low-price years while re­ward­ing land­lords with healthy bonus pay­ments in prof­itable years.

Ten­ants can of­fer col­lat­eral or ob­tain a third­party guar­anty to fur­ther se­cure the obli­ga­tions un­der the lease. Se­cu­rity is most com­fort­ing when land­lords rent to a farmer who doesn’t have a strong bal­ance sheet or in years when cash flows are tight. Land­lords must prop­erly per­fect a se­cured in­ter­est, so make sure the doc­u­ments are filed on time.

Most im­por­tantly, con­sult with an at­tor­ney be­fore tak­ing ac­tion in a bank­ruptcy. Ask your at­tor­ney to ex­plain the unique com­bi­na­tion of state and fed­eral bank­ruptcy statutes that ap­ply in your ju­ris­dic­tion, and let your at­tor­ney re­view your leases. Each phase of the crop sea­son cre­ates a dif­fer­ent set of is­sues for ten­ants and land­lords in bank­ruptcy.

about the au­thor

Brent King is man­ag­ing direc­tor at Glass Rat­ner Ad­vi­sory & Cap­i­tal Group LLC in Kansas City. Email: king@glass­rat­ner.com

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