Guest Article: Distressed Credit: A Mediation Solution for Farmer / Banker Disputes

January 6, 2016 | Donald L. Swanson*

Regrets exist, for many farmers and bankers from the 1980s Farm Crisis days, over opportunities-lost.

The regrets often arise like this: the ag economy has been good but is declining.  During good times, a farmer increases standards of living and operating and keeps bills paid—but can't any longer.  Farmer considers partial liquidation while values are strong.  But farmer hates taxes, can't part with land, and won’t give up the current way-of-life; so farmer decides to hope for better days instead.  Better days don't arrive, and banker demands liquidation.  "But asset prices are low," complains the farmer.  Banker begins legal action, and farmer files Chapter 11.  Farmer and banker are now bitter enemies.  Farmer proposes a Chapter 11 plan, hoping to remain in business.  Banker rejects the plan.  The ag economy continues downward.  Farmer runs out of cash, and the farm goes into liquidation.  It sells dirt cheap.  A large deficiency remains, as does a large tax bill—and neither can be paid.  It's an unmitigated disaster.  Everyone has regrets.

A similar problem-in-the-making is from ranching in the 2010s: cattle prices are at all-time highs, as are prices of ranch land, and cow-calf operations are flying high.  A rancher is having best-years-ever but struggles under debt accumulations from disasters of prior years.  Banker asks, "Why not sell some high-priced assets and reduce debts--and use Chapter 12 to discharge liquidation taxes?"  Rancher responds, "Oh, no.  Can't do that."  . . .  It's now a few years later.  High prices are gone.  But the debt load remains. 

What's common in the two examples is this: both operations make lots of money but remain marginally profitable during good times; both struggle when a downturn begins; and both miss a solution opportunity when asset prices are strong.  Will future results for the 2010s rancher be different from the 1980s disaster described above?  Only time will tell—but it’s not looking good.

So, here's the proposed solution: mediation.

Both Iowa and Nebraska require formal mediation before a creditor can sue a farmer: see Iowa Code § 654A.1 et seq. & Neb. Rev. Stat. § 2-4801 et seq.  In my early career, I viewed such requirements as mere compliance details before a lawsuit can be filed.  I did not see mediation as a problem solving device.  But my view on this changed, in a single day, when my bank client attended a mandatory farm mediation with its hometown attorney (I had been retained to file the lawsuit and handle an expected bankruptcy).  My client settled the dispute that day in mediation.  I was shocked!!  "This really works?,” I wondered.  Apparently so.

Since then, I’ve become a believer in mediation—both formal and informal.  Informal mediation is helpful because it can occur before the farmer / banker relationship deteriorates toward a lawsuit. 

Farmers experiencing financial stress and their bankers should utilize informal mediation at an early opportunity to address and resolve financial stress.  An opportune time for informal mediation is when both the farmer and the banker acknowledge that financial stress exists and that changes of some sort are needed.  A neutral mediator, with proper expertise, can help the farmer and banker evaluate and address their stressed circumstances.  An experienced mediator, for example, can help the parties understand what bankruptcy possibilities might look like and then use those possibilities as a backdrop for considering other options.  

I know.  I know.  Most people are not doing informal mediation like this.  But I liken this mediation solution to the Chief Restructuring Officer ("CRO") position in large business cases.  The CRO position developed from virtual-nonexistence in the early 1990s to standard-practice in today's large business cases.  The function of a CRO is to help a business evaluate and address its difficult financial circumstances.  A CRO provides expertise in analyzing financial difficulties, educates the parties on what a bankruptcy might (or might not) accomplish, establishes credibility for decisions that are made, and avoids costs (both economic and otherwise) of an ongoing legal fight.  The CRO position has become prominent because [ . . . drumroll . . . ] it works!  A neutral mediator can provide similar types of benefits and effectiveness to a farmer / banker relationship that suffers from financial stress.

Here is how an informal mediation might work.  It begins, in the midst of financial difficulties, when a farmer and banker are discussing loan renewals for another year.  The parties agree to utilize mediation and select a mediator.  They then provide a complete list of farmer's assets, liabilities and financial condition to the mediator and describe the farmer's financial history and current difficulties.  The parties then meet in one or more sessions with the mediator to evaluate and address their situation.

Regarding mediation costs, the banker and farmer should work with a mediator to set a mediation budget.  My experience is that mediators are highly motivated to accommodate budgetary guidelines set by the parties.

Regrets over opportunities-lost can be avoided by taking proper action at an opportune time—i.e., when financial stress reveals the need to take action.  And mediation can be an effective tool for seizing the opportunity. 


*Donald L. Swanson is a shareholder in the Omaha law firm of Koley Jessen P.C., L.L.O.  His online bio is here. CALT wishes to thank Mr. Swanson for allowing us to publish this article.