Farm Lease in Bankruptcy: A Comprehensive Analysis

Notre Dame Law Review Volume 59 | Issue 3 1-1-1984 Farm Lease in Bankruptcy: A Comprehensive Analysis Margaret Rosso Grossman Follow this and additional works at: http://scholarship.law.nd.edu/ndlr Part of the Law Commons Recommended Citation Margaret R. Grossman, Farm Lease in Bankruptcy: A Comprehensive Analysis, 59 Notre Dame L. Rev. 598 (1984). Available at: http://scholarship.law.nd.edu/ndlr/vol59/iss3/3 This Article is brought to you for free and open access by NDLScholarship. It has been accepted for inclusion in Notre Dame Law Review by an authorized administrator of NDLScholarship. For more information, please contact . Article 3 The Farm Lease in Bankruptcy: A Comprehensive Analysis MargaretRosso Grossman* Thomas G. Fischer** During the past five years, the financial condition of many farmers has deteriorated markedly. Three principal factors account for this deterioration: stagnating or even declining land prices; high interest rates; and depressed commodity prices., Stagnating or declining land prices2 have reduced the value of farmers' equity and pose special problems for landowners who borrowed extensively to purchase land at inflated values. Interest expenses have consumed an increasingly large percentage of farm earnings. In 1978, interest had absorbed approximately one-fifth of the total farm income remaining after all other operating expenses had been subtracted; by 1981 it had absorbed approximately two-fifths.3 Depressed commodity prices during recent years have decreased net cash farm income from thirty-seven billion dollars in 1979, to an estimated thirty-one 4 billion in 1982. This decline in farm income has created cash-flow problems for many farmers and has prevented some from meeting their financial obligations. At the end of the 1982 fiscal year, for example, 24.6% of all the Farmers Home Administration active farm-program borrow5 ers, a total of 66,470, were behind in their scheduled payments. During the same year, a record 8,227 borrowers in Farmers Home * Assistant Professor, Agricultural Law, Department of Agricultural Economics, University of Illinois at Urbana-Champaign. B. Mus., 1969, University of Illinois; A.M., 1970, Stanford University; Ph.D., 1977, University of Illinois; J.D., 1979, University of Illinois. ** Research Assistant, 1982-83, Agricultural Law, Department of Agricultural Economics. A.B., 1978, University of Chicago; J.D., 1983, University of Illinois. I See FARM CREDIT ADMINISTRATION, AGRICULTURAL AND CREDIT OUTLOOK '83, at 18 (1983). 2 During the period from February 1981 through April 1982, the average value of farm real estate per acre in the 48 continental states decreased by 1%. See U.S. DEP'T. OF AGRIC. ECONOMIC RESEARCH SERVICE, FARM REAL ESTATE MARKET DEVELOPMENTS 5 (July 9, 1982). In many major agricultural states, however, the decrease was much greater. For example, in Illinois the decrease was 9%; in Indiana, 13%; and in Ohio, 15%. Id 3 See FARM CREDIT ADMINISTRATION, supranote 1, at 20. 4 5 Id at 19. Id at 24. [Vol. 59:598] FARM LEASE IN BANKRUPTCY Administration programs went out of business. 6 Of these, 1,909 voluntarily liquidated their farming operations due to financial difficul7 ties; 6,318 were forced to liquidate under threat of foreclosure. Of those forced to liquidate, 1,245 received discharges in bankruptcy." The American Bankers' Association 1982 Mid-Year Survey of Farm Credit Conditions reveals that during the period from June 1981 through June 1982, 2.2% of the farmers in the lending area of the responding banks went out of business, and 0.75% went through bankruptcy. 9 These statistics indicate that a substantial number of farmer-borrowers in both government-sponsored and private credit arrangements have experienced financial exigencies. Moreover, during the current period of financial stress, a significant number of farmers will undergo, or at least consider, bankruptcy. 0 The existence of landlord-tenant relationships will often complicate the resolution of these farmers' financial difficulties once they enter bankruptcy. According to the 1978 Census of Agriculture, approximately 40% of the land in farms in the United States is rented."I In some states, the percentage is even higher. In Illinois, for example, the figure is over 55%.12 Farm bankruptcies are likely to disrupt the 6 Id 7 Id 8 Id 9 Id at 23. 10 The Bankruptcy Code ("Code") is found at 11 U.S.C. §§ 101-151326 (1982). In June 1982, the United States Supreme Court ruled the current bankruptcy system unconstitutional, because bankruptcy judges hold broad power without adequate protection. Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50 (1982). Although Congress was to alter bankruptcy law to comport with this ruling, no corrective legislation has yet been enacted. See generally Krasno, The Bankruptcy Courts - Caught in Limbo?, 67 JUDICATURE 307 (1984); see also Ginsburg, The ProposedBankrupty Improvements Act: The CreditorsStrike Back, 3 N. ILL. U.L. REV. 1 (1982). The Code provides that a farmer cannot be forced into bankruptcy. 11 U.S.C. § 303(a) (1982). Section 101(17) defines "farmer" as a person who received more than 80% of his gross income during the taxable year immediately prior to the taxable year of the bankruptcy proceeding from a farming operation owned or operated by such person. Under § 101(18), "'farming operation' includes farming, tillage of the soil, dairy farming, ranching, production or raising of crops, poultry, or livestock, and production of poultry or livestock products in an unmanufactured state." However, see Marsh, Farmers' Exemption From Involuntaq, Bankrupty, 15 U.C.C. LJ.162 (1982), where the author suggests that this exemption, as currently written, does not really protect a significant number of farmers, because off-farm income is such an important component of farm sector economics. Many farmers facing serious financial difficulties will want to consider bankruptcy. In some situations, bankruptcy may offer the best means of staying in operation through a Chapter 11 reorganization or a Chapter 13 adjustment of debts; in others, it offers the most favorable method of terminating an operation through a Chapter 7 liquidation. 11 See U.S. DEP'T COMMERCE, 1978 CENSUS OF AGRICULTURE, PT. 51, at 124 (1981). 12 Id NOTRE DAME LAW REVIEW [1984] very essence of the landlord-tenant relationship, which is often an informal, oral arrangement based on mutual trust. In addition, the bankruptcy of either landlord or tenant raises significant and difficult legal issues. Agricultural leases are traditionally divided into three general categories: the cash lease; the crop-share lease; and the livestockshare lease.13 The cash lease involves a cash payment (either a specified sum or an amount determined by formula) for the use of farmland. Although possessing some special features characteristic of farm leases, it does not differ significantly from other commercial lease transaction (...truncated)