Tuesday, July 9, 2019
Agriculture and the law intersect in many ways. Of course, tax and estate/business planning issues predominate for many farmers and ranchers. But, there are many other issues that arise from time-to-time. Outside of tax, leases and fences are issues that seem to come up repeatedly. Other issues are cyclical. Bankruptcy is one of those issues that has increased in importance in recent months. Of course, legal issues associated with the administration of federal farm programs is big too. In addition, legal issues associated with market structure and competition in various sectors of agriculture are of primary importance particularly in the poultry and cattle sectors.
Periodically, I step away from the technical article aspect of this blog and do a survey of some recent ag-related developments in the courts. That’s what today’s post is about – it’s “ag in the courtroom” day today – at least with respect to a couple of recent cases.
Abandoned Rail Lines
One matter that is a big one in ag for those farms and ranches impacted by it involves the legal issues associated with abandoned rail lines. It’s often a contentious matter, and it doesn’t help that the Congress changed the rules several decades ago to, in the view of many impacted adjacent landowners, diminish private property rights.
Recently, another abandoned rail line case was decided. This time the decision was rendered by the Kansas Court of Appeals. In Central Kansas Conservancy, Inc., v. Sides, No.119,605, 2019 Kan. App. LEXIS 29 (Kan. Ct. App. May 17, 2019), the Union Pacific Railroad acquired a right-of-way over a railroad corridor that it abandoned in the mid-1990s. At issue in the case was a 12.6-mile length of the abandoned line between McPherson and Lindsborg, Kansas. A Notice of Interim Trail Use (NITU) was issued in the fall of 1995. The corridor was converted into a trail use easement under the National Trails System Act. In 1997, Union Pacific gave the plaintiff a "Donative Quitclaim Deed" to the railroad’s easement rights over the corridor, with one-quarter mile of it running through the defendant’s property at a width of 66 feet. Pursuant to a separate agreement, the plaintiff agreed to quit claim deed its rights back to the railroad if the railroad needed to operate the line in the future. By virtue of the easement, the plaintiff intended to develop the corridor into a public trail.
In 2013, the plaintiff contacted the defendant about developing the trail through the defendant’s land. The defendant had placed machinery and equipment and fencing in and across the corridor which they refused to remove. In 2015, the plaintiff sued to quiet title to the .75-mile corridor strip and sought an injunction concerning the trail use easement over the defendant’s property. The defendant admitted to blocking the railway with fencing and equipment, but claimed the right to do so via adverse possession or by means of a prescriptive easement. The defendant had farmed, grazed cattle on, and hunted the corridor at issue since the mid-1990s. The defendant also claimed that the plaintiff had lost its rights to the trail because it had failed to complete development of the trail within two years as the Kansas Recreational Trail Act (KRTA) required.
In late 2016, the trial court determined that the two-year development provision was inapplicable because the Interstate Commerce Commission had approved NITU negotiations before the KRTA became effective in 1996. The trial court also rejected the defendant’s adverse possession/prescriptive easement arguments because trail use easements are easements for public use against which adverse possession or easement by prescription does not apply.
During the summer of 2017 the plaintiff attempted work on the trail. When volunteers arrived, the defendant had placed equipment and a mobile home on the corridor preventing any work. The plaintiff sought a "permanent prohibitory injunction and permanent mandatory injunction." The defendant argued that he had not violated the prior court order because "[a]ll the Court ha[d] done [was] issue non-final rulings on partial motions for summary judgments, which [were], by their nature, subject to revision until they [were] made final decisions." Ultimately, the trial court granted the plaintiff’s request for an injunction, determined that the defendant had violated the prior summary judgment order, but also held that the plaintiff had not built or maintained fencing in accordance with state law.
On appeal, the appellate court partially affirmed, partially reversed, and remanded the case. The appellate court determined that the defendant did not obtain rights over the abandoned line via adverse possession or prescriptive easement because such claims cannot be made against land that is held for public use such as a recreational trail created in accordance with the federal rails-to-trails legislation. The appellate court also determined that the plaintiff didn’t lose rights to develop the trail for failing to comply with the two-year timeframe for development under the KRTA. The appellate court held that the KRTA two-year provision was inapplicable because a NITU was issued before the effective date of the KRTA. However, the appellate court determined that the plaintiff did not follow state law concerning its duty to maintain fences. The appellate court held that Kan. Stat. Ann. §58-3212(a) requires the plaintiff to maintain any existing fencing along the corridor and maintain any fence later installed on the corridor. In addition, any fence that is installed on the corridor must match the fencing maintained on the sides of adjacent property. If there is no fencing on adjacent sides of a landowner’s tract that abuts the corridor, the plaintiff and landowner will split the cost of the corridor fence equally. The appellate court remanded the case for a determination of the type and extent of fencing on the defendant’s property, and that the plaintiff has the right to enter the defendant’s property to build a fence along the corridor. Any fence along the corridor is to be located where an existing fence is located. If no existing fence exists along the corridor, the corridor fence is to be located where the plaintiff’s trail easement is separated from the defendant’s property. The appellate court remanded to the trial court for a reconsideration of its ruling on fence issues.
Feasibility of Chapter 12 Plan
As I mentioned at the beginning of the post, bankruptcy is one of those ag legal issues that has increased in relevancy in recent months. In certain parts of the country Chapter 12 (farm) bankruptcy has been on the rise. Once a farmer qualifies for Chapter 12 (not always an easy task), the reorganization plan was be proposed in good faith and be feasible. Those issues were at stake in a recent case from Iowa.
In In re Fuelling, No. 18-00644, 2019 Bankr. LEXIS 1379 (Bankr. N.D. Iowa May 1, 2019), the debtor was a farmer that granted the bank a first priority lien on all farm assets other than a truck and cash proceeds to the 2017 crop. To pay for the 2017 inputs, the debtor secured financing though another creditor (not the bank). The creditor obtained a subordination agreement from the bank, giving the creditor a $151,000 first priority lien in the 2017 crop sale proceeds. However, the proceeds from the 2017 crop were not enough to repay the creditor or continue making payments to the bank. The debtor filed Chapter 12 bankruptcy in May of 2018. The debtor sold the 2017 crops and various equipment to repay secured creditors. The creditor’s remaining claim was $107,506.45, $66,625.37 of which is secured by the remaining 2017 crop sale proceeds that the debtor still held.
The parties agreed that the bank's secured claim was $214,093.86 for purposes of plan confirmation. The creditors filed a motion for relief that would allow them to collect the remainder of the 2017 crop proceeds. The debtor filed a motion to use cash collateral to start a cattle feeding operation and grant the creditor a lien in the cattle and feed. The debtor also proposed to use rental payments from the grain bins on the property to make interest payments to the creditor and the bank for five years. The entire principal of the loans would come due as a balloon payment at the end of the plan period.
The bank, the Chapter 12 Trustee, the Iowa Department of Revenue, and the creditor objected to the debtor’s plan. The bankruptcy court denied the debtor’s proposed plan and motion to use cash collateral. The creditors’ motion for relief of stay was granted due to the court finding that the debtor’s plan was not feasible. The court denied the plan for multiple reasons. First the plan improperly substituted the creditor’s lien in the crop with a lien in cattle. Second the plan impermissibly utilized rental payments covered by the bank lien for payments towards the other creditors. The court also determined that the debtor’s proposed interest rate was not correct. The court agreed with the bank and the creditor that the plan was not feasible based on the information in the record. The debtor’s health issues, overly optimistic rental rates for the grain bins, and the balloon payment all factored in the court’s decision of lack of feasibility, even though the plan was submitted in good faith. Since the debtor’s plan to feed cattle was impermissible and not feasible, the court did not need any additional analysis to deny the debtor’s motion to use cash collateral. The debtor claimed that the remaining proceeds were necessary for reorganization, but the court concluded that the debtor’s proposed use of the proceeds impermissibly substituted the creditors. In the end, the court simply could not find a permissible way for the funds to be utilized in reorganization.
These are just two recent cases involving ag legal issues. There are many more. This all points out the need for well-trained lawyers in the legal issues that face farmers and ranchers.