FARGO, N.D. - The Chapter 7 bankruptcy liquidation of a large high-value crop farm in the northern Red River Valley has people wondering about the financial viability of farmers in general, says David Saxowsky, a North Dakota State University associate professor.
Saxowsky, part of the Agribusiness and Applied Economics Department, teaches law courses for undergraduates at NDSU and sometimes for law students at the University of North Dakota. He says the liquidation of the unusually large McM Inc. farm at St. Thomas, N.D., may or may not be an indicator of a significant trend or a parallel to the 1980s farm credit crisis. Smaller farm businesses may be experiencing similar changes without much notice.
McM Inc. included 39,000 acres in 2016, growing several crops including non-irrigated potatoes, sugar beets and dry beans. The company recently had invested in specialized potato handling facilities.
The bankruptcy case is just getting started. Cheryl Bergian, a Fargo, N.D., attorney, is the court-appointed trustee in the case. Exact lists of who is owed what in the McM Inc. case haven't yet been filed in court, but that is expected by a March 10 deadline. A first meeting of creditors is scheduled March 16 at 1 p.m. at the Ronald N. Davies Courthouse in Grand Forks, N.D. The case is handled by U.S. Bankruptcy Judge Shon Hastings.
"I would expect these people aren't going to retire," Saxowsky says of the owners and top management of McM Inc. Skills and knowledge can continue in another business, and even in the same area. "That's the purpose of bankruptcy. It goes back to the Roman Empire - the chance to shake off debt and get back on your feet."
In the 1980s, a significant percentage of farms throughout the country were under extreme financial stress, Saxowsky says.
"Are we looking at anything of that extent this time around? Hopefully not," he says. "There are always businesses that struggle financially.
"Is it going to be a little worse because crop prices have dropped and costs haven't gone down nearly as quickly? People have guessed about it, that's the best we can do. I'm not sure our lenders know beyond their own institutions," he says. "There are some very good farm managers out there, and most will make the adjustment to the lower prices."
Most relationships between individual borrowers and lenders ordinarily are handled under state laws. Bankruptcy is a federal matter, where borrowers need some actual reduction of the debt and all creditors are brought into the situation.
"Bankruptcy has the discharge of the debt," Saxowsky says. "They've tried to settle their financial obligations as best that they can. The bankruptcy court has the authority to say that the rest of the debt is discharged."
That's a big thing because it's essentially "taking the creditors' property rights."
Saxowsky says agriculture may need to shake off the cobwebs about their knowledge of bankruptcy law. He and others describe the three "chapters" that typically relate to farms.
• Chapter 7 - This is the basic theory of bankruptcy under which a debtor gathers their assets, liquidates them, pays as many bills as possible, and then the unpaid bills go unpaid. "In this case, the debtor is hoping to hold onto a few dollars so that (he) can keep on going with (his) own life and re-establish some economic foundation for (himself)," Saxowsky says.
Individual debtors discharge as much debt as possible, but keep as much exempt property as possible for a "fresh start." A corporation has no exemptions.
• Chapter 11 - The debtor wants to reorganize and hold onto their business. This is typically used for corporations and individuals whose debt limits are too high to qualify for Chapter 13, a class for wage-earners, Minch says. There are no debt limits in Chapter 11.
Saxowsky says the debtor may have to repay debts over a longer period of time than in the original loan agreement. Debtors continue to run the business as a debtor-in-possession, unless the court finds that assets are improperly managed or that the debtor in possession is violating court orders. Then a trustee is appointed.
• Chapter 12 - This is a special chapter created by Congress in 1985, during the last farm credit crisis. It is especially for smaller "family farms" and "family fisherman" to avoid liquidation and foreclosure. It was created as a temporary measure and made permanent in 2005.
Roger Minch, a Fargo lawyer who works in business law, says a Chapter 12 is the way to go for farmers in need of debt reorganization, but it's only possible if the farm is within limits.
Under Chapter 12, farm debt ceilings are indexed to inflation and currently must not be more than $4,153,150, according to the law. Also, a debtor's total debts must be at least 50 percent from farming and the debtor must derive at least 50 percent of their gross income from farming. Partnerships and corporations are not eligible, unless a single farm owns more than half of their stock in equity interests.
Minch sees no big trend toward farm bankruptcies, and noted that many farmers paid down debt during the good times in 2012 and 2013 but are probably negotiating down their land lease deals when leases expire.
Saxowsky urges farmers or agribusinesses with questions about handling disputed debts to work with a lawyer or other professional.