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Searching for Articles by Christopher M. Seelen
Christopher M. Seelen
Eau Claire Office
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Recent Bankruptcy Decision from the Western District of Wisconsin Discusses Negative Equity, Car Loans, and the Chapter 13 Cram Down

Posted on July 19, 2017, Authored by Christopher M. Seelen, Filed under Banking and Financial Matters

A quick introduction for those of you who are not bankruptcy nerds.  For certain types of collateral, Chapter 13 allows a Debtor to reduce a secured creditor’s claim down to the value of the collateral.  This is called “cram down.”  But, there are certain limits on the Debtor’s “cram down” powers.  For example, the Debtor can’t cram down the value of a claim secured only by a security interest in the Debtor’s principal residence.  See 11 U.S.C. section 1322(b)(2).  Similarly, the Debtor cannot cram down a purchase money security interest in a personal use motor vehicle acquired within 910 days of the bankruptcy filing date.  See the “hanging paragraph” in 11 U.S.C. 1325(a). So, imagine a typical situation in which a Debtor trades in a vehicle with negative equity (meaning that the value of the trade-in vehicle was less than the debt owed on the trade-in vehicle) and obtains a loan to purchase another vehicle.  In this situation, the new loan includes both the negative equity from the trade-in vehicle and the purchase price of the new vehicle.  Now, imagine the Debtor files for bankruptcy within 910 days of obtaining that loan.  Can the Debtor cram down the negative equity?  That was the situation faced by the Bankruptcy Court for the Western District of Wisconsin in In re: Manor (Western District of Wisconsin Bankruptcy Court Case No. 17-10248). In a decision dated June 27, 2017, the Bankruptcy Court held that the Debtor could not cram down the negative equity.  In other words, the negative equity was held to be part of the purchase money loan and therefore the Debtor could not cram down that negative equity on a personal-use motor vehicle purchased within 910 days of the bankruptcy filing date.  The Manor decision does not break new ground.  Indeed, the Court noted that similar decisions were reached by the Seventh Circuit and the Sixth Circuit in 2010 and by the other Circuit Courts as well. But, the moral of the story is to pay close attention to the details of your car loan whenever a Debtor files a Chapter 13 bankruptcy case.  Was your loan made within 910 days?  Was it a purchase money loan?  Is it a personal use vehicle?  If so, the Debtor can’t cram down your loan, not even the negative equity.  Remember there are strict deadlines in Chapter 13 cases.  So, secured creditors with questions about the Debtor’s plan should make sure they contact their counsel immediately.

Thinking About Expanding Your Business

Posted on May 30, 2017, Authored by Christopher M. Seelen, Filed under Ag-Visor

Flyte Family Farm in Coloma has grown a lot over the years.  Not only has Flyte grown tons of crops, but Flyte has also grown its business, which has expanded to five greenhouses and 3200 acres. Adam Flyte and his wife, Carrie, started their business growing corn, soybeans and fresh vegetables, which they sold at seasonal farm stands.  In 1999, Adam and Carrie expanded into hydroponics. But, expansion has been gradual.  “As opportunities presented themselves and if it made financial sense, we expanded to meet demand,” said Adam, who built one greenhouse in 1999, one in 2000, two more in 2001, and another in 2004.  Along the way, Adam and Carrie also acquired three farms. The Flyte Family Farm business expansion has been a success.  But, what makes a business expansion successful?  What should you consider when deciding whether to expand your own business?  What do ag lenders say about business expansion?  Here are some things to consider: Why Now?  According to ag lenders, the most important question is why do you want to expand?  “You need to ask yourself ‘What’s driving the need for expansion?’” says Rich Wilcox, an ag lender, who is vice president at BMO Harris Bank. Terry Johnson, vice president of ag/commercial lending at Pioneer Bank agrees, “it all starts with the ability of the producer to explain why” it wants to expand.       In a 2012 article on growth management strategies, David Coggins, executive vice president and chief banking officer at Investors Community Bank, wrote that, “operators have all kinds of reasons for growing/expanding . . .. It all comes down to finding out your own ‘why’ before developing a plan to get there.” In the case of Flyte Family Farm, the “why expand?” question was answered when Adam and Carrie saw demand for hydroponics that also fit the couple’s educational backgrounds in horticulture and agri-business.  That would be classified as a good reason to expand.  What are bad reasons to expand?  “My neighbor is expanding or I read an article that says you need to expand to be profitable,” says Johnson. Going big doesn’t always mean becoming profitable and that leads to our next consideration. Is Your Current Operation Profitable?  Ag lenders will tell you there is nothing magical about business expansion that will make you more profitable. “If you have high operating ratios now, you’re probably going to have high ratios in expansion,” said Johnson, who indicates you should take a look at your existing operation and figure out how to become more profitable before expanding. If your goal is to increase revenue, then expansion should not be the first step you take.  Rather, Coggins writes, you should take “advantage of all the opportunities to ‘get better’ before you work on ‘getting bigger.’”  Wilcox concurs, “Can you work to do better before you strive to do more?”  Have You Factored in a Drop in Commodity Prices?  When commodity prices are high, it is natural for producers to want to expand their business so they can make more money. But, Johnson cautions producers should not “make long-term decisions based on short-term economics.” Johnson points out that expansion is a 20 to 25 year decision that you may make when prices are high, but what happens when prices drop?  Therefore, it is very important producers have a plan in place for dealing with a downturn in commodity prices.  If revenue falls short, how are you going to pay for the costs of expansion? “I would advise them to think it through and record their thoughts as part of a business plan which would include projections of best case, middle case, and worst case scenarios with odds of each,” says Wilcox. To protect against fluctuations in commodity prices, Flyte Family Farm diversified its products.  Flyte grows corn, soybeans, hay, and sweet corn. Flyte also has 800 acres certified as organic. Organic crops include: blueberries, sweet potatoes, sweet corn seed corn, and hay. Maintain Healthy Equity in Your Assets.  Johnson advises that businesses should “not borrow their last dollar in expansion.” “You may need to borrow additional money in the future to deal with unexpected costs.  If you have strong equity, you can get through the hard times.” Johnson says. Wilcox agrees that expansion may cause some issues that were not anticipated.  Therefore, Wilcox asks, “is the business strong enough financially to absorb post expansion drop in equity or missed problems with expansion plans?” Adam Flyte acknowledges that managing your debt load is very important and that “working capital is key.” So, what percent of your assets is it smart to borrow against?  From a collateral standpoint, “No more than 70% of the asset value on the high side. Lower levels might be smarter.” Wilcox said.  From an owner-equity standpoint, Wilcox does not recommend getting below 40%. Ideally, the goal would be a “debt to assets ratio of 50% or less” Johnson said. Make Sure Everyone is on the Same Page.  Expansion sometimes means family members or friends are coming together to boost business. But, your family or friends may disagree on their roles or how the business will be conducted. Wilcox wants to know, “Is the family and employee base on board with expansion plans?” Johnson relayed a story about a father who expanded his dairy business so he could farm with his five sons.  Later, when the operation was struggling, the sons admitted at a family meeting they didn’t like milking cows.  The moral of the story is communication between family members and business partners is critical. Expansion may also bring you additional responsibilities and headaches. Coggins writes that an expanded organization can test your “management talent” and “you need to ask yourself the hard question of whether you have the talent for taking on a bigger and much different job and a more strategic role in the organization.” Seek Out Trusted Advisors.   A good ag lender can be a helpful adviser.  Johnson notes that you should not run away from a lender who asks you lots of questions. “The questions are designed to help you understand whether expansion is appropriate for you.” said Johnson. Coggins writes “Your banker is going to look at a whole host of factors in considering your request for expansion, from working capital, to long-term cash flow assumptions, transition and construction phase issues, contingencies and having a well-documented plan.” Adam Flyte agrees that your ag lender can be a critical part of your success.  The lender is a “friend and a partner,” Adam relates. Finally, be aware that legal issues can arise as you expand your business.  Such issues include: partnership or LLC operating agreements, construction agreements, estate and succession planning, leases and offers to purchase, and employment agreements, to name a few.  So, don’t be afraid to add an attorney to your circle of trusted advisors.   © 2017 The Badger Common Tater.  Antigo, WI.  Reprinted with permission.

Lien Avoidance

Posted on October 30, 2016, Authored by Christopher M. Seelen, Filed under Banking and Financial Matters

Have you made a business or agricultural loan to an individual in Wisconsin?  Have you secured that loan with a non-purchase money, non-possessory lien on personal property that the debtor uses in his business?  If you answered “yes” to both questions, then you should be aware (or at least reminded) that your debtor can avoid your lien in bankruptcy to the extent that your lien impairs the debtor’s exemptions in implements or tools of the trade. (11 U.S.C. sec. 522(f)(1)(B)(ii)). Wisconsin now has a $15,000 exemption for business equipment, inventory, farm products and professional books used in the business of the debtor or in the business of a dependent of the debtor. (Wis. Stats. sec. 815.18(3)(b)1.)  A married couple, who are both engaged in the business, can stack this exemption and thereby double the exemption to $30,000. This means that your non-purchase money, non-possessory lien in implements or tools of the trade can be reduced by $30,000 in a bankruptcy filed by a husband and wife, who use Wisconsin exemptions. Although the Bankruptcy Code  (11 U.S.C. sec. 522(f)(3)(B)) contains a cap in the amount of $6,425 on lien avoidance for some types of state statutes, which amount is revised every 3 years, a federal district court has held that this cap does not apply to the Wisconsin business exemption.  See In re Ehlen, 207 B.R. 179, 184 (W.D. Wis. 1997). Keep in mind that only individuals are entitled to exemptions in bankruptcy court.  LLCs and corporations are not entitled to exemptions.  This means that an LLC or corporation cannot avoid your lien under 11 U.S.C. sec. 522(f)(1)(B) because there is no exemption being impaired.  However, of course, an LLC or corporation could try to cram down the value of your collateral, but that’s an article for another day. The take away here is that when you are valuing your collateral, you need to be aware that a future bankruptcy filing may reduce the value of your non-purchase money, non-possessory lien. You should be vigilant for debtors who attempt to dissolve their LLC (or transfer their LLC assets to the debtors individually) just prior to filing for bankruptcy.  We have seen debtors take such action to place the assets in their individual names just prior to filing for bankruptcy so that they can take advantage of lien avoidance.  Such action may be a fraudulent transfer and may provide you with a basis to defeat the attempted lien avoidance.

2016 Bankruptcy Statistics for the Western District of Wisconsin: Overall Filings Decreased 5.5%, but Chapter 12 Farm Bankruptcies Increased 31%

Posted on March 15, 2017, Authored by Christopher M. Seelen, Filed under Banking and Financial Matters

The 2016 bankruptcy statistics tell an interesting story.  While the total number of bankruptcy cases filed in 2016 in the Western District of Wisconsin (“WDW”) fell 5.5% to its lowest level in ten years, Chapter 12 farm bankruptcy cases actually increased 31% from 2015.    Total Filings.  There were 4,362 total bankruptcy cases filed in the WDW in 2016 compared to 4,619 total cases filed in 2015.   Total bankruptcy cases are now down 54% from 2010 when 9,494 total cases were filed and they are at the lowest level since 2006 when 3,560 total cases were filed.  Total bankruptcy cases have now decreased every year in the WDW since 2010. Chapter 7.  In 2016, there were 3,566 Chapter 7 cases filed in the WDW.  That is a decrease of 7% from 2015, when 3,832 Chapter 7 cases were filed, and a drop of 57% from 2010 when 8,322 Chapter 7 cases were filed. Chapter 11.  In 2016, there were 17 Chapter 11 cases filed in the WDW, which equaled the number of Chapter 11 cases filed in 2015, but that number is down 65% from 2012 when 49 Chapter 11 cases were filed. Chapter 12.  In 2016, there were 21 Chapter 12 farm bankruptcies filed in the WDW.  That is an increase of 31% over 2015 and is the highest since 2010 when 31 Chapter 12 cases were filed.  In 2016, the WDW continued to rank 3rd in the nation in the number of Chapter 12 cases filed.  The WDW was tied with Kansas (21) and behind only Middle District of Georgia (28) and  Puerto Rico (25).  Chapter 13.  In 2016, there were 758 Chapter 13 cases filed in the WDW, compared to 754 Chapter 13 cases filed in 2015, but still down 31% from 2010 when 1,099 Chapter 13 cases were filed. Link to WDW Bankruptcy Statistics.  Here is the link for statistics by month. Here is the link for statistics by Chapter. Keep in mind that things move rather quickly in Chapter 12 and Chapter 13 cases.  If you receive a bankruptcy notice, you should promptly review your file and contact your counsel, as necessary, so you don’t miss any important deadlines.

Western District of Wisconsin Ranks 3rd in Chapter 12 Farm Bankruptcy Filings

Posted on November 15, 2016, Authored by Christopher M. Seelen, Filed under Banking and Financial Matters

The harvest is plenty, but with corn at $3/bushel, soybeans at $9/bushel, and milk at $15-$16/hundred weight, the profits are few.  Did you know that in 2015 and 2016, the Western District of Wisconsin ranks 3rd (out of 94 federal judicial districts) for most Chapter 12 farm bankruptcy filings?  In 2015, the Western District of Wisconsin (16 filings) was tied with the Northern District of New York (16) and behind only the Middle District of Georgia (20), the Eastern District of California (20), and the Middle District of Florida (18). Similarly, through three quarters of 2016, the Western District of Wisconsin (17 filings) again ranks 3rd, which is tied with Kansas (17) and behind only the Middle District of Georgia (25) and Puerto Rico (21). While it is true that overall bankruptcy filings in the Western District of Wisconsin (and throughout the country) are down fairly significantly; unfortunately, Chapter 12 cases are not following that downward trend and remain steady.  We have certainly noticed an increase in Chapter 12 cases that we are handling for our secured creditor clients.  We believe that trend will continue, as debtors’ counsel are indicating that more Chapter 12 cases “are on the way.” Stay tuned for further blog postings that will identify common Chapter 12 issues and what you can do to prepare for a Chapter 12 filing by your loan customer.