About McM Inc. Farmland Leases Under Chapter 7

Ron McMartin, Jr., is president of McM Inc., one of the largest specialty high-value crop farms in the region. Photo taken Oct. 10, 2016, near St. Thomas, N.D. (Forum News Service/Agweek/Trevor Peterson)

 

I have received phone calls from farmers and others regarding what comes next with the Chapter 7 bankruptcy of McM, Inc., which is led by Ron McMartin Jr.

“What happens to the land leases?” says one farmer, who acknowledges he’s wondering if there’s is an opportunity to expand his farm by, say, 500 acres or so.

So I called a lawyer — a bankruptcy specialist — who tells me that people in control of land and equipment have to go through proper steps to get leases terminated.

Landlords in multi-year leases fare extremely well under the Bankruptcy Code, according to my expert. When going through Congressional updating in the 1970s, the laws were adjusted to cure concerns brought forth  by owners of strip malls. How could they be protected if tenants went bankrupt and breached their leases?

In a Chapter 7, the court automatically appoints a trustee to act as the manager of the company as it liquidates. In a liquidation, the trustee steps into the shoes of the former farmer/lessee/debtor. The trustee has 60 days from the Chapter 7 filing to decide what to do with leases.

In common practice, 50 percent cash rent payments are often due March 1.  Neither my expert nor I know what McM’s arrangements were.  It is possible that landlords could argue that it is the trustee’s obligation to perform leases and make cash rent payments, my expert says, who says there are really two options:

Option One: The bankruptcy trustee can assume the lease. “It has to cure all defaults, meaning it must make all past-due payments and give adequate assurance that the (lessee) is going to be able to perform in the future. You have to pay the landlord any damages the landlord has suffered because of the breach of a lease,” my expert says.

Option Two: The trustee can reject the lease. Under this option, the lessee (farm operator) vacates the property. Not making a hypothetical March 1 payment would be a sign that the trustee is rejecting the lease.

My expert says that in farm-related bankruptcies, land leases are time-sensitive. The McM Inc. bankruptcy was filed Feb. 10 in Fargo.  In this case, the court-appointed trustee, Cheryl Bergian, has 60 calendar days to decide whether to keep or reject the lease. That would take things to April 10. The bankruptcy judge could decide this is a hardship for landowners and accelerate the schedule.

If the trustee doesn’t assume the lease in 60 days (or a period shortened by the court) the lease is deemed rejected. If the lease is rejected, the landlord has an unsecured claim to be paid, unless objected to.

 

Here’s an intriguing scenario: If the trustee perceives value in keeping the lease it might offer to arrange another party to sublease the land. State law would control whether a sublease could be forced on a landlord a question to decided by the bankruptcy judge, my expert says.

To convince the landowner to take this risk, the sublease sometimes requires a premium price — say, 20 percent or even more, says my expert. The contract might require proof that the subleasing farmer has experience, operating funds and other resources and preparations to farm it in 2017 and through the end of the lease. If the sublease is to a company connected to principles in the original debtor’s business, the landlord might object on that basis.

“An aggressive landlord/farm manager would file a motion to terminate the stay and start eviction,” my expert says.

In the McM case, the BMO Harris Bank — the main secured creditor–  has filed a motion for “relief from the stay” in order to allow the bank to pick up hundreds of equipment items that were pledged as collateral on loans that BMO made. A separate leasing  company has filed for a relief from the stay on about 120 leased items.

Some people have asked me about other assets, including crop insurance claims. Those belong to the trustee, managing the assets of the company for dispersal to creditors, as the estate is closed, as per the Bankruptcy Code.