Chapter 12 - Cash Collateral and the Family Farmer

In this next installment of my Chapter 12 bankruptcy blog, I will discuss an issue of critical importance to the success of a Chapter 12 case – the farmer’s ability to use cash collateral to pay creditors and the expenses of the ongoing farming operation.  In most Chapter 12 cases, the debtors will come in to the case owing substantial debt on the farm real estate and farming equipment.  The financing documents of the lender bank securing the repayment of this debt will often include language granting the lender bank a lien in the proceeds of the farmer’s crop, flock or herd when same is sold at market.  Often the farmer will have given the lender bank an assignment on the sale proceeds which allows the bank to obtain payment on its debt before the remaining balance of the sale proceeds are turned over to the farmer.  This lien against the sale proceeds creates an issue as to whether the farmer can use the sale proceeds after the filing of the Chapter 12 bankruptcy petition to pay operational expenses of the farm and other creditors.

Upon filing the Chapter 12 bankruptcy petition, the farmer will propose a plan to pay back his creditors over time and that repayment plan will require approval by the bankruptcy judge.  But before this approval occurs, creditors will want to receive some form of payment in the interim.  As a secured creditor, a lender bank is entitled to have the debt secured by the farmland and equipment adequately protected against depreciation of the assets once the bank’s stream of payments on the debt is interrupted by the filing of the Chapter 12 bankruptcy petition.   In addition, because the lender bank has a lien against the sale proceeds of the farm product, the farmer must obtain permission from the bankruptcy court to use this cash collateral for farm expenses and paying other creditors.  As a result of these two requirements of the Bankruptcy Code, the farmer and the lender bank must come to an agreement as to the use of the cash collateral or the bankruptcy judge will be required to issue an order as to how the money is to be used prior to the Chapter 12 plan being approved.

Clearly, an agreement between the farmer and the lender bank is preferred, as a bird in the hand is better than one in the bush.  But in the event an agreement cannot be reached and the bankruptcy judge must decide the issue, it is important for the farmer to have a detailed list of the monthly farm expenses to present to the court.  In this farm budget special attention should be paid to the payment of vendors necessary to the continued operation of the farm.  Examples of these critical vendors would include propane providers and the electric and water utilities and whether these vendors will be willing to extend post-petition credit or will require cash on delivery.

An attorney experienced in filing Chapter 12 bankruptcies will be able to assist a family farmer or fisherman in navigating the often contentious path of satisfying the lender bank while retaining sufficient monies to fund ongoing farm operations.  If you are considering a bankruptcy option and need assistance please contact one of our locations nearest you for a free, confidential consultation with one of our experienced, licensed attorneys.