Thursday, June 9, 2022
Farmers, ranchers and other rural landowners face many legal and tax issues on a daily basis. The type of legal issues varies, and some are cyclical. Others seem to repeat over and over. In today’s article I discuss two cases from Kansas that illustrate some of the issues that seem to come up frequently with respect to real estate, and one that arises on a cyclical basis.
Various legal issues associated with agricultural production and rural landownership – it’s the topic of today’s post.
Common Issues Involving Ag Real Estate
Removal of Vegetation Within Easement Proper
Presnell v. Cullen, 2022 Kan. App. Unpub. LEXIS 250 (Kan. Ct. App. May 6, 2022)
Farm and ranch land is often burdened by easements. Energy-related easements are common in rural areas as are access easements to a landlocked field or home. One common question is what activities are permissible in the easement area by the easement holder? Without clear specification in the written easement agreement, the rule is one of reasonability. That means that the easement holder can use the easement for the purpose(s) for which it was acquired and other associated purposes, within reason.
In this case, the plaintiff owned land subject to a railroad easement. The Central Kansas Conservancy (Conservancy) acquired the easement from a railroad under the National Trails System Act for the purpose of developing a recreational trail. The plaintiff sued claiming that the Conservancy did not have a right to cut down vegetation located within the easement. The trial court disagreed and awarded the Conservancy legal fees. On appeal, the plaintiff claimed that the Conservancy had a duty to protect and preserve the trees in the easement area, only needed to use 10 to 14 feet of the 66-foot easement, did not control the entire width of the easement, and had actually abandoned the easement.
The appellate court disagreed, finding that the Conservancy had a right to use the railroad corridor to develop and maintain the trail based either based on title ownership or via the easement. Thus, the Conservancy was entitled to remove the vegetation, but only to the extent necessary for developing and maintaining the trail. The appellate court also rejected the plaintiff’s trespass claim. The appellate court affirmed the trial court’s award of attorney's fees under K.S.A. §61-2709(a).
Note: The case points out that reasonable use of the easement is the key when the easement agreement is silent. Here, the Conservancy could remove vegetation, but only if the removal was related to the trail. The landowner’s other trees and vegetation were to be left untouched.
Farmland Adversely Possessed, But No Prescriptive Easement.
Pyle v. Gall, No. 123,823, 2022 Kan. App. Unpub. LEXIS 242 (Kan. Ct. App. Apr. 29, 2022)
Adverse possession has its origin in the English common law. It’s a concept whereby someone who knows that they don’t have legal title to land can gain title by possessing the land long enough without the owner’s permission. There are various elements to adverse possession that have been added over time, but basically if someone openly and knowingly takes possession of someone else’s land and does so for a long enough period of time set by state law, that person can end up the owner of the land via a quiet title action if the true owner knows of the possession and doesn’t do anything within the statutory timeframe to stop it.
Adverse possession was at issue in this case.
The parties disputed the location of the property line between their tracts. The plaintiff routinely planted crops up to what the plaintiff believed to be the property line, but that planting interfered with the crop farming plans of the defendant’s tenant. The plaintiff also regularly used a portion of the defendant’s field as a road to access the plaintiff’s crops. In 2015, the defendant offered to sell the disputed area to the plaintiff and told the plaintiff to stop accessing the plaintiff’s crops via the defendant’s field. Each party hired surveyors, but the surveyors reached different conclusions as to the property line. In March of 2016, the defendant built a fence based on the property line that the defendant’s surveyor found, which was 17 feet beyond what the plaintiff believed to be the property line. In March 2017, the plaintiff sued to quiet title to the field up to the crop line they farmed to by adverse possession and sought either a prescriptive easement or easement by necessity. The trial court held that the plaintiff had adversely possessed the land in dispute and had acquired a prescriptive easement across the defendant’s property.
On appeal, the appellate court upheld the trial court’s determination that the plaintiff had acquired the strip in question by adverse possession. The plaintiff had used the property for the statutory timeframe in an open, exclusive and continuous manner upon belief of true ownership. Use by others for recreational purposes, the appellate court reasoned, did not negate the exclusivity requirement because the use was infrequent compared to the plaintiff’s farming activity on the disputed land. However, the appellate court reversed the trial court on the prescriptive easement issue because both the plaintiff and the defendant used the alleged area on which a prescriptive easement was being asserted. Thus, the plaintiff had not used the easement exclusively. The appellate court remanded to the trial court the issue of whether an easement by necessity had arisen because the trial court had not considered the issue.
Note: Exclusivity is a key element of an adverse possession/prescriptive easement claim
Bankruptcy is a cyclical. With the significant downturn in the economy driven largely by incomprehensible energy policy, it is looking as if 2023 will be an even tougher year for many parts of the agricultural sector. Existing operating loans will be renewed at higher interest rates, and this year’s inputs that were prepaid before major price increases may not work to avoid price increases next year. Thus, farm bankruptcies and foreclosures may tick up in 2023.
One of the key points of a farm bankruptcy is that a reorganization plan must be file in a timely manner and in good faith. A debtor cannot act in bad faith towards creditors.
The following case makes the points, and also points out that a farm bankruptcy requires planning as well as a plan.
Chapter 12 Case Dismissed for Unreasonable Delays
In re Bradshaw, No. 20-40948-12, 2022 Bankr. LEXIS 1424 (Bankr. D. Kan. May 19, 2022)
The debtor filed Chapter 12 bankruptcy in late 2020 but failed to file a confirmable plan for 18 months. The debtor also failed to meet many other Chapter 12 requirements. As a result, the Chapter 12 Trustee filed a motion to dismiss the case under 11 U.S.C. § 1208(c) which allows a case to be dismissed for the debtor’s unreasonable delay or gross mismanagement. Before the court, the Trustee pointed to the debtor’s failure to file a plan in a timely fashion, denial of plan confirmation, continuous loss to the bankruptcy estate and absence of a reasonable likelihood of rehabilitation. The Trustee also noted that the debtor did not file taxes in 2016, 2017, or 2018 and the returns filed in 2019 and 2020 were insufficient. The debtor did not consistently file monthly operating reports and the debtor’s proposed plan did not meet basic bankruptcy code requirements.
The court also noted that the Trustee had no way of monitoring the debtor’s case properly because the debtor only filed three of eighteen monthly reports. Without monthly operating reports, it was impossible to determine if the estate could be rehabilitated. The debtor also had no income from farming operations with no prospect of an improved financial situation. The debtor also gambled with estate property and failed to account for, liquidate, or preserve estate property. The bankruptcy estate was uninsured, and the debtor had abandoned it. The court concluded that this amounted to the debtor’s gross mismanagement of the estate. The court noted that the debtor had ninety days to file a plan and after eighteen months and had not done so. While the debtor proposed one plan in April of 2021, it was denied, and no amended plan was submitted. This constituted an unreasonable delay and prejudice to creditors. The court granted the Trustee’s motion to dismiss the case.
Note: Don’t simply file Chapter 12 without an idea of where you are headed with your farming/ranching operation. Chapter 12 is designed for farmers that intend on continuing in farming after restricting the business to make it viable into the future. It’s not for those that don’t have a plan for the business into the future.