Monday, October 12, 2020

Principles of Agricultural Law

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Overview

The fields of agricultural law and agricultural taxation are dynamic.  Law and tax impacts the daily life of a farmer, rancher, agribusiness and rural landowner practically on a daily basis.  Whether that is good or bad is not really the question.  The point is that it’s the reality.  Lack of familiarity with the basic fundamental and applicable rules and principles can turn out to be very costly.  As a result of these numerous intersections, and the fact that the rules applicable to those engaged in farming are often different from non-farmers, I started out just over 25 years ago to develop a textbook that addressed the major issues that a farmer or rancher and their legal and tax counsel should be aware of.  After three years, the book was complete – Principles of Agricultural Law - and it’s been updated twice annually since that time. 

The 47th edition is now complete, and it’s the topic of today’s post – Principles of Agricultural Law.

Subject Areas

The text is designed to be useful to farmers and ranchers; agribusiness professionals; ag lenders; educational professionals; lawyers, CPAs and other tax preparers; undergraduate and law students; and those that simply want to learn more about legal and tax issues.  The text covers a wide range of topics.  Here’s just a sample of what is covered:

Ag contracts.  Farmers and ranchers engage in many contractual situations, including ag leases, to purchase contracts.  The potential perils of verbal contracts are numerous and can lead to unnecessary litigation. What if a commodity is sold under forward contract and a weather event destroys the crop before it is harvested?  When does the law require a contract to be in writing?  For purchases of goods, do any warranties apply?  What remedies are available upon breach? If a lawsuit needs to be brought to enforce a contract, how soon must it be filed? Is a liability release form necessary?  Is it valid?  What happens when a contract breach occurs?  What is the remedy? 

Ag financing.  Farmers and ranchers are often quite dependent on borrowing money for keeping their operations running.  What are the rules surrounding ag finance?  This is a big issue for lenders also?  What about dealing with an ag cooperative and the issue of liens?  What are the priority rules with respect to the various types of liens that a farmer might have to deal with? 

Ag bankruptcy.  A unique set of rules can apply to farmers that file bankruptcy.  Chapter 12 bankruptcy allows farmers to de-prioritize taxes.  That can be a huge benefit.  Knowing how best to utilize those rules is very beneficial.  That’s especially true with the unsettled issue of whether Payment Protection Program (PPP) funds can be utilized by a farmer in bankruptcy.  The courts are split on that issue.

Income tax.  Tax and tax planning permeate daily life.  Deferral contracts; depreciation; installment sales; like-kind exchanges; credits; losses; income averaging; reporting government payments; etc.  The list could go on and on.  Having a basic understanding of the rules and the opportunities available can add a lot to the bottom line of the farming or ranching operation as well as help minimize the bleeding when times are tough.

Real property.  Of course, land is typically the biggest asset in terms of value for a farming and ranching operation.  But, land ownership brings with it many potential legal issues.  Where is the property line?  How is a dispute over a boundary resolved?  Who is responsible for building and maintaining a fence?  What if there is an easement over part of the farm?  Does an abandoned rail line create an issue?  What if land is bought or sold under an installment contract?  How do the like-kind exchange rules work when farmland is traded? 

Estate planning.  While the federal estate tax is not a concern for most people and the vast majority of farming and ranching operations, when it does apply it’s a major issue that requires planning.  What are the rules governing property passage at death?  Should property be gifted during life?  What happens to property passage at death if there is no will?  How can family conflicts be minimized post-death?  Does the manner in which property is owned matter?  What are the applicable tax rules?  These are all important questions.

Business planning.  One of the biggest issues for many farm and ranch families is how to properly structure the business so that it can be passed on to subsequent generations and remain viable economically.  What’s the best entity choice?  What are the options?  Of course, tax planning is a critical part of the business transition process.

Cooperatives.  Many ag producers are patrons of cooperatives.  That relationship creates unique legal and tax issues.  Of course, the tax law enacted near the end of 2017 modified an existing deduction for patrons of ag cooperatives.  Those rules are very complex.  What are the responsibilities of cooperative board members? 

Civil liabilities.  The legal issues are enormous in this category.  Nuisance law; liability to trespassers and others on the property; rules governing conduct in a multitude of situations; liability for the spread of noxious weeds; liability for an employee’s on-the-job injuries; livestock trespass; and on and on the issues go.  Agritourism is a very big thing for some farmers, but does it increase liability potential?  Nuisance issues are also important in agriculture.  It’s useful to know how the courts handle these various situations.

Criminal liabilities.  This topic is not one that is often thought of, but the implications can be monstrous.  Often, for a farmer or rancher or rural landowner, the possibility of criminal allegations can arise upon (sometimes) inadvertent violation of environmental laws.  Even protecting livestock from predators can give rise to unexpected criminal liability.  Mail fraud can also arise with respect to the participation in federal farm programs.  The areas of life potentially impacted with criminal penalties are worth knowing, as well as knowing how to avoid tripping into them.

Water law.  Of course, water is essential to agricultural production.  Water issues vary across the country, but they tend to focus around being able to have rights to water in the time of shortage and moving the diversion point of water.  Also, water quality issues are important.  In essence, knowing whether a tract of land has a water right associated with it, how to acquire a water right, and the relative strength of that water rights are critical to understand.

Environmental law.  It seems that agricultural and the environment are constantly in the news.  The Clean Water Act, Endangered Species Act and other federal (and state) laws and regulations can have a big impact on a farming or ranching operation.  Just think of the issues with the USDA’s Swampbuster rules that have arisen over the past 30-plus years.  What constitutes a regulatory taking of property that requires the payment of compensation under the Constitution?  It’s good to know where the lines are drawn and how to stay out of (expensive) trouble.

Regulatory law.  Agriculture is a very heavily regulated industry.  Animals and plants, commodities and food products are all subject to a great deal of regulation at both the federal and state level.  Antitrust laws are also important to agriculture because of the highly concentrated markets that farmers buy inputs from and sell commodities into.  Where are the lines drawn?  How can an ag operation best position itself to negotiate the myriad of rules?   

Conclusion

It is always encouraging to me to see students, farmers and ranchers, agribusiness and tax professionals get interested in the subject matter and see the relevance of material to their personal and business lives. Agricultural law and taxation is reality.  It’s not merely academic.  The Principles text is one that can be very helpful to not only those engaged in agriculture, but also for those advising agricultural producers.  It’s also a great reference tool for Extension educators. It’s also a great investment for any farmer – and it’s updated twice annually to keep the reader on top of current developments that impact agriculture.

If you are interested in obtaining a copy, perhaps even as a Christmas gift, you can visit the link here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html.  Instructors that adopt the text for a course are entitled to a free copy.  The book is available in print and CD versions.  Also, for instructors, a complete set of Powerpoint slides is available via separate purchase.  Sample exams and work problems are also available.  You may also contact me directly to obtain a copy.

If you are interested in obtaining a copy, you can visit the link here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html.  You may also contact me directly. 

October 12, 2020 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Friday, April 17, 2020

Disrupted Economic Activity and Force Majeure – Avoiding Contractual Obligations in Time of Pandemic

Overview

The China-originated virus that has impacted major parts of the globe, including the United States, has created health problems for some and, in the United States, governmental reaction to it has created legal and economic issues for many more.  One of those legal issues involves existing contracts.  In the United States, the issuance of various Executive Orders by state governors as a result of the anticipated impact of the virus has shut down significant economic activity in those states and triggered problems up and down the food supply chain.  What happens when a supply chain is disrupted?  What recourse exists for a farmer that entered into a contract to sell corn to an ethanol plant, and now the ethanol price has collapsed and the plant refuses to pay?  What if a hog buyer won’t buy hogs because the processing plant is shut-down?  What if a milk buyer backs out of a milk contract because the milk market has disintegrated?  Grain can be stored and milk can be dumped, but what do you do with a 300-lb. fat hog?

The non-performance of contract obligations in the time of massive economic disruption and the concept of “force majeure” – it’s the topic of today’s post.

Force Majeure

Clause contained in a written contract.  A common provision in some agricultural contracts (particularly hog production contracts) is known as a “force majeure” provision. Under such a provision, a contracting party is not liable for damages due to the delay or failure to perform under the contract because of an event that is beyond the party’s control.  Performance is excused until it becomes possible for the party to perform under the contract. But, does the China Flu (commonly referred to as COVID-19) constitute an event covered by a force majeure provision that would excuse a contracting party’s performance?  Recently, some hog integrators, ethanol plants and contract milk buyers have claimed that it does and have attempted to either terminate or renegotiate contracts with farmer-producers.   

Force Majeure means “superior force” or “unavoidable accident.”  It applies when there are circumstances beyond a party’s control that excuses the party from performing, such as an extraordinary event like war, riot, crime, pandemic, etc. Most often, a “force majeure” event involves an “act of God” (i.e. flooding, earthquakes, or volcanoes) or the failure of third parties (such as suppliers and subcontractors) to perform their obligations to a contracting party. However, sometimes a contracting party will attempt to use the clause to extract themselves from a contract that has turned out to not be profitable for them.

A force majeure clause is not uncommon in contracts.  It concerns how the parties allocate risk and, in essence, frees the contracting parties from liability or obligation when an extraordinary event or circumstance beyond their control prevents at least one party from fulfilling their contractual obligations.  The event or circumstance must be one that the parties couldn’t have anticipated at the time the contract was entered into; the party seeking to remove themselves from the contract must not have caused the problem; and the event or circumstance makes it impossible or impractical to perform the contract.  As noted, a force majeure clause can apply when the contract is impacted by a war or strike or riot or an epidemic or pandemic or some other event that is deemed to be an “act of God” such as a flood, or earthquake, etc.  But, the clause does not cover occurrences that are within the control of a contacting party such as negligence or a party’s malfeasance (misconduct or wrongdoing) that significantly impacts the ability of the party to perform under the contract.  A force majeure clause is not intended to shield a party from the normal risks associated with an agreement. See, e.g., The Pillsbury Company v. Well’s Dairy, Inc., 752 N.W.2d 430 (Iowa 2008)In addition, non-performance may, however, only be suspended for the duration of the event or circumstance that triggered application of the clause.

The wording of a force majeure clause is critical and should be negotiated by the contracting parties so that it applies equally to all parties to the contract. Often, it is helpful if the clause includes examples of acts that will excuse performance under the provision. The following is a sample force majeure clause that is being used in some hog production contracts in Iowa:

“Any party to this agreement shall be relieved of its responsibilities and obligations hereunder when the performance of those responsibilities and obligations becomes impossible because of, but not limited to, acts of God, war, disaster, destruction of the party’s facilities not attributable to the action or inaction of the party, or change in governmental regulations or laws making this agreement illegal.”

The provision’s language is fairly standard force majeure language and includes examples of what events excuse nonperformance – acts of God, war, disaster, and change in regulations or law that make the contract illegal. But, is the present virus a covered event?  Some hog integrators think so, as do some ethanol plants and milk buyers. Some of these parties are having their suppliers allege force majeure on them, citing current market conditions as a result of executive orders of state governors.   

There is no “one-size-fits-all” force majeure clause language that will work for all contracts.  In addition, the contracting parties should specify the affected party’s obligations upon the occurrence of a Force Majeure event.  Perhaps the affected party should be given more time to perform under the contract rather than being completely excused from performance.  The point is that “boilerplate” clause language will likely not properly allocate the risk between the parties. While the future is difficult, if not impossible to predict, thought should be given to the contingencies that might occur that are beyond the control of the parties and how risk should be allocated upon the happening of an unforeseen circumstance that renders performance impossible. 

No clause language.  If a contract doesn’t contain a force majeure clause what happens?  In that event, common law principles apply. How does the law deal with unforeseen events?  One common law principle is “frustration of purpose.”  This can serve as a defense to contract enforcement and applies when some event that the parties did not contemplate makes contract performance substantially different than what the parties originally bargained for.  Sometimes, frustration of purpose can be the result of government action.  Impossibility of performance may also be another common law principle that might be invoked.

Without a force majeure clause, the basic assumption is that the risk associated with an unforeseen event was not assigned and performance is not possible.  But, the common law typically looks to the impracticability of performance.  But a question is commonly raised as to whether part performance can be made.  If so, it will be required.  But, remember, if performance can be rendered but doing so would result in a bargain that is completely different from what was originally bargained for, “frustration of purpose” may be a complete defense to performance. 

What is covered?  Some force majeure clauses also include acts of government.  That’s an important point with respect to the present virus.  The virus is not disrupting supply chains and causing contract legal issues.  State governors are issuing Executive Orders dictating the businesses that can operate and those that cannot.  These diktats, constitutionality aside, are having a significant negative impact on supply chains.  For those force majeure clauses that include acts of government, an argument can be made that the clause will apply.  However, the present economic chaos is not being created by a “change in governmental laws or regulations” that make the contract illegal (as the sample language quoted above states it).  It is being created unilaterally by state governors.  There has been no deliberative legislative body enact a law or a regulatory agency promulgate regulations after going through the notice and comment procedure.  So, with respect to the virus, is it really “government action” that would be included in force majeure clause language?  That perhaps is an open question. Standard force majeure clause language may need to be modified to account for these emergency declarations.   

“Acts of God”

A contract may distinguish between “acts of God” and force majeure, and a contract may include an “act of God” clause rather than a force majeure clause.  Many contracts contain language specifying that if a particular event occurs, then no performance is required.  That type of language tends to deal with “acts of God.”  Again, it’s a matter of how the parties allocated risk. For example, agricultural leasing arrangements are generally differentiated by the allocation of risk between the landlord and tenant.  While this is a function of the type of lease involved, risk allocation is also dependent upon the terms of a written lease agreement or common law principles for oral leases. For example, a clause common in many leases requires the tenant to farm the land in accordance with good farming practices (i.e., not commit waste on the premises). See, e.g., Keller v. Bolding, 2004 N.D. 80, 678 N.W.2d 578 (2004).  As a result, an understanding of the potential legal and economic risks involved in a leasing relationship and the negotiation of lease terms is very important.  With that notion in mind, consider the case of K & M Enterprises v. Pennington, 764 So. 2d 1089 (La. Ct. App. 2000)In this case, the plaintiff leased ground from the defendant and planted 406 acres to corn.  The growing crop was consumed by deer, and the tenant sued to recover the lost crop.  The issue was whether the tenant bore the risk of the loss of the corn crop.  The court determined that he did.  The parties had a written lease, and the court determined that the contract language was clear and unambiguous.  “Acts of God” were among the risks assumed by the tenant.  While the parties clearly were thinking weather-related events to be “acts of God” that the tenant would assume any resulting damage on account of (and not consumption of the corn crop by deer), the court concluded that the complete devastation of the crop by deer was such an event.  In addition, while the tenant sought permission (largely after the fact) to put up an electric fence, the court held that right was not included in the landlord’s responsibility to convey “peaceable possession” to the tenant.  

Is the virus such an event that is comparable to those that fall under the category of an “act of God”?  It likely is.  Similar to the deer destroying over 400 acres of corn in Pennington, a pandemic isn’t typically an event that is foreseen.  While it’s not a weather-related event that an act of God clause contemplates, it could be treated as an act of God.  Thus, how the parties contractually allocated that risk is critical. 

Other Possible Protection

In some states, an agricultural producer may be able to obtain a lien under state law to protect against contract termination or non-payment.  For example, Iowa law provides for the filing of a “Commodity Production Contract Lien” with the Iowa Secretary of State’s office (commonly referred to as a “contract finisher’s lien.)  Iowa Code §579B.  The law applies to a “contract livestock facility” which is defined as an animal feeding operation where livestock is produced according to a production contract by a contract producer who owns or leases the facility.  Iowa Code §579B.1(4)A qualifying “production contract” is an oral or written agreement that provides for the production of a commodity by a contract producer that is in force on or after May 24, 1999.  Iowa Code §579B.1(16).   A lien of this type is an agricultural lien and a producer who is a party to a production contract, if properly executed, automatically has a lien and the buyer is automatically a debtor, owing the amount under the contract in the event of a default.  Iowa Code §579B.4(1)(a).  State law in some states may also provide for a lien that could apply in the case of corn grown and sold under contract to an ethanol plant.

Interstate Commerce Issues

As noted above, it has been the unilateral actions of state governors that has had the effect of largely shutting down the national economy.  The Congress has reacted by providing (at this time) $2.2 trillion in federal spending to deal with the economic effect of  the actions of the state governors.  Over 22 million people have filed for unemployment compensation.  The governors’ actions have had a national interstate effect.  State governors, however, do not have plenary police power when the exercise and effect of that power impacts interstate commerce.  There has been much debate and discussion about federalism (the manner in which power is shared between the federal and state governments).  What the governors are doing, however, has little to do with federalism.  Clearly, the states have the power to regulate commerce within their respective boundaries.  But, the Congress, under the Constitution, has the exclusive constitutional power to regulate interstate commerce.  U.S. Constitution, Article I, Section 8, Clause 3.  But, the discussion and analysis doesn’t end there.

While “commerce” is not explicitly defined in the Constitution, its interpretation determines the dividing line between federal and state power.  Likewise, how “interstate” commerce is to be viewed remains debatable.  In any event, however, the actions of state governors via executive orders that shut down selective businesses, etc., have affected interstate commerce in a very negative way.  As such, they are largely unconstitutional on Commerce Clause grounds based on U.S. Supreme Court opinions dating back over 80 years.  In those cases, the Supreme Court has determined that activity constitutes “commerce” if it has a “substantial economic effect” on interstate commerce or if the “cumulative effect” of one act could have such an effect on commerce.    For example, in 1937, the U.S. Supreme Court said, in a case involving alleged unfair labor practices, that “though activities may be intrastate in character when separately considered, if they have such a close and substantial relation to interstate commerce that their control is essential or appropriate to protect that commerce from burdens and obstructions, Congress cannot be denied the power to exercise the control.”  NLRB v. Jones & Laughlin Steel Corp., 301 U.S. 1 (1937). Thus, even within a state, if commerce is regulated in a way that it harms interstate commerce, only the Congress has the power to regulate it.  Indeed, in 1942, the U.S. Supreme Court dealt with a case involving a farmer that grew wheat and consumed it on his own farm.  Wickard v. Filburn, 317 U.S. 111 (1942).  The wheat never touched interstate commerce.  Even so, the Court said his conduct could still be regulated by the Congress because, “the stimulation of commerce is a use of the regulatory function quite as definitely as prohibitions or restrictions thereon.”  Even purely local activity can impact the interstate commercial economy.  As an example, the Court has upheld the federal regulation of intrastate marijuana production.  Gonzales v. Raich, 545 U.S. 1 (2005).    

This all means that it is the Congress that has the power to stimulate (and regulate) interstate commerce and, therefore, if actions are taken in a state that either prevent the stimulation of or have the effect of regulating interstate commerce, the federal government can act.  The President, as the head of the executive branch and via the Justice Department certainly has the constitutional authority to do so.  To say that the President, as some have claimed, is powerless to make decisions concerning economic activity and that those decisions lie solely with the governors is absurd.  The only argument is whether the President can act alone or whether the President’s power is concurrent with the state’s power to regulate intrastate activity.  However, the issue is not a federalism issue, it’s a commerce issue and one where the conduct of governors has certainly had widespread interstate commerce economic impacts.  While some of the state governors may believe that federalism gives them all of the power without accountability to deal with public health issues, that's not the way that federalism works.  It's also not the manner in which the U.S. Supreme Court has interpreted the Commerce Clause in a very long time. 

Conclusion

The actions of state governors in response to the virus has disrupted economic activity and has had a significant impact on agricultural contracts.   Whether a party can be excused from performing, such as buying corn or hogs or milk, depends on the contract language and, perhaps, the common law in a particular jurisdiction.  Farmers who find themselves in the situation of contract termination on the basis of “force majeure” would be well-advised to seek legal counsel immediately. By accepting a contract termination or failing to respond to an attempted termination, a contracting party implicitly agrees to mitigate their own damages. Mitigation of damages requires a reasonable effort to contract with another source.  Hopefully, the restrictions on economic activity will be short-lived and the contract issues some farmers are facing will diminish.

April 17, 2020 in Contracts, Regulatory Law | Permalink | Comments (0)

Wednesday, April 8, 2020

Hemp Production - Regulation and Economics

Overview

The 2018 Farm Bill legitimized the commercial production of hemp by removing it from being a “controlled substance” under federal law.  As a result, it becomes another possible crop for commercial production.  But, many questions abound surrounding hemp production.  What must a producer know to engage in the commercial production of hemp?  Will there be a market for hemp that is produced?  Are any special loans available to help start up the hemp growing operation?  What about labeling and licensing requirements?  How can risk best be managed?  How should contracts for the production of hemp be structured?    

As part of the requirements for my agricultural law course at the law school, Emily J. Young, devoted her research paper to the topic of hemp production.  Emily will be graduating from Washburn Law School next month.  Today’s post is the result of her research into the matter.

Questions surrounding hemp production - it’s the topic of today’s post.

2018 Farm Bill

Historically, federal law made no distinction between hemp and other cannabis plants.  They were considered to be a Schedule I drug – a controlled substance under federal law.  However, the Agriculture Improvement Act of 2018, P.L. 115-334 (also known as the 2018 Farm Bill), removed hemp from the Controlled Substances Act.  21 U.S.C. §§801 et seq. While hemp is a plant from the cannabis family, the 2018 Farm Bill excludes hemp from the statutory definition of marijuana under the Controlled Substance Act if it contains a delta-9 tetrahydrocannabinol (THC, marijuana’s primary psychoactive chemical) concentration of not more than 0.3% on a dry weight basis.  7 USC § 1639o(1). 

In addition, the 2018 Farm Bill establishes a framework where the states and the federal government share regulatory authority over hemp production.  See generally 7 U.S.C § 5940; 7 CFR Part 990.  Section 10111 of the 2018 Farm Bill requires each state department of agriculture to consult with the state’s governor and attorney general to develop a plan for hemp licensing and regulation.  The plan must be submitted to the United States Department of Agriculture (USDA).  A state’s plan cannot be implemented until the USDA approves it.  If a state does not develop its own regulatory program for hemp, the USDA will develop a system regulating hemp growers in that state.

Kansas enacted industrial hemp legislation in 2018 (K.S.A. 2018 Supp. 2-3901 et seq.) and experienced its first harvest in 2019.  The Industrial Hemp Research Program is administered through the Kansas Department of Agriculture (KDA).  The KDA anticipates making a Commercial Industrial Hemp Program available for the 2020 growing season, but the timeline and transition to a commercial program is presently unknown. The KDA submitted the state plan on January 23, 2020 for inclusion into the U.S. Domestic Hemp Production Program and is awaiting a response. Currently, the KDA lists 24 active processor licenses that may accept hemp during the 2020 growing season.

The 2018 Farm Bill also provides that farmers growing industrial hemp can receive banking services in the same manner available to farmers of other commodities.  Indeed, the Board of Governors of the Federal Reserve System along with the Federal Deposit Insurance Corporation, Financial Crimes Enforcement Network, Office of the Comptroller of the Currency, and the Conference of State Bank Supervisors issued a joint press release on December 3, 2019 emphasizing that banks are no longer required to file a Suspicious Activity Report (SAR) for customers solely because they are engaged in the growth or cultivation of hemp in accordance with applicable laws and regulations.  However, for hemp-related customers, the Board of Governors indicated that banks are expected to follow standard SAR procedures and file a SAR if indicia of suspicious activity is present.

While the 2018 Farm Bill legalizes hemp, the production of hemp is more heavily regulated than is the production of other crops due to the effect of the presence of Cannabidiol (CBD), the natural compound in the flower of the female cannabis plant, which is contained in both the hemp and marijuana varieties.  While the CBD derived from hemp does not contain THC at illegal levels, the present uncertainty concerning hemp varieties and growing methods could, at least theoretically, potentially cause illegal levels of THC to be present in a harvested hemp crop.  In addition, hemp has a similar appearance to marijuana that can make it more difficult for law enforcement officials to enforce drug laws governing marijuana.   

Thus, while marijuana remains a Schedule I controlled substance (making illegal its cultivation and sale) CBD can legally be produced from hemp if it is produced by a licensed grower in accordance with federal and state regulations.  In 2018, there were approximately 75,000 acres of hemp grown via permit in the U.S.  It is estimated that permitted U.S. acres of hemp grown in 2019 was between 100,000 and 200,000.

Production Methods and Economics

Farmers grow hemp for grain, fiber, and floral material.  Hemp is usually planted between May and June and harvested in September or October.  It is either cultivated as a row crop or via a horticultural method. Row crop cultivation is generally cheaper and less risky compared to horticultural cultivation and is typically used to grow grain and fiber. The horticultural method involves hemp growing in a manner similar to marijuana. The grower typically uses clone plants (cuts from the mother plant) instead of seeds to have a more uniform crop and higher CBD content. January 2020 pricing indicates that a prospective grower would pay an average of $4.25/plant for clone plants.  Plant spacing under the horticultural method is approximately of 1,000 to 2,200 plants per acre. If the crop is grown for CBD extraction, the current market price is anywhere between $63 and $675 per pound for the hemp flower and approximately $1.00 per percent of CBD per pound for biomass (the organic material of the hemp plant remaining after the flower is harvested and processed). Each plant yield approximately one pound of flower. CBD content varies based on the variety planted and the growing conditions.

The January 2020 industrial seed price average ranged from $3.72 to $8.00 per pound, with an average price of $4.57. Viable seeding density is 25 to 35 pounds per acre.  Hemp grain can sell for an amount between $0.60 to $1.70 per pound, and on average, a farmer can harvest 1,100 pounds of grain per acre. This “traditional” hemp is grown for the manufacture of such items as textiles and bioplastics, and is drilled in a manner comparable to wheat at an approximate rate of 100 plants per square yard. The plant grows tall with the tops harvested for seed production.  It is the stalks that are used for industrial purposes. 

After input and harvest costs, farmers can net approximately $250-300 per acre on grain (traditional hemp). Hemp fiber is presently selling for approximately $275 per ton, and crops can yield between 4 and 5 tons of hemp fiber per acre. These returns are presently higher than returns on corn, soybeans and wheat.  According to data from the Department of Agricultural Economics at Kansas State University, a Kansas farmer in the North Central region of the state can expect net revenue of $46.20 per acre on corn; $48.12 per acre on soybeans and a net loss of $62.93 per acre on wheat. https://agmanager.info/farm-mgmt-guides/2020-farm-management-guides-non-irrigated-crops.

Funding the operation

The 2020 growing season is the first-time hemp producers are eligible to apply for operating, ownership, beginning farmer, and farm storage facility loans through the Farm Service Agency (FSA). A complete loan application requires proof of crop insurance (unless ineligible); a farm operating plan with income history; and a contract for the sale of the crop.  New growers are likely unable to secure a purchase contract before the season starts.  As a result, most hemp producers in Kansas are either using private funding or local credit unions.

Initial license requirements

As of March 2020, the Industrial Hemp Research Program is the only program available to growers in Kansas. Anyone interested in a license for 2021 growing season should review the application checklists to determine the requirements and fees associated with the type of license being sought. See https://agriculture.ks.gov/divisions-programs/plant-protect-weed-control/industrial-hemp/industrial-hemp-applications. 

A license is required for the listing and use of an approved variety of industrial hemp.   K.A.R. 4-34-5(e)(1) https://agriculture.ks.gov/docs/default-source/pp-industrial-hemp/approved-varieties-final.pdf?sfvrsn=9faf85c1_4.   Only authorized seeds or clone plants are permitted to be grown at this time unless otherwise approved by the KDA during the application processK.A.R. 4-34-2; 2018 Supp. K.S.A. 2-3901(b)(11).  Authorized seeds include properly imported seeds or clones from another state and accompanied with a proper certification label or seeds from local Kansas distributers that have been tested and the certificate of analysis (COA) meets KDA standards. 2018 Supp. K.S.A. §2-3901(b)(11).  These labels will need to be retained until the pre-harvest inspection (and for 5 years after) to prove that the hemp inspected was grown from the seeds or clones as shown on the label.   §§K.A.R. 4-34-17; K.A.R. 4-34-21. 

Risk Management

Several private insurance companies offer small hail policies and limited coverage for hemp growers. The USDA presently offers two programs to help with loss of a hemp crop. Producers may apply now through their local FSA office, and the deadline to sign up for both programs was March 16, 2020. However, these programs do not cover loss of ‘hot’ crops (THC in excess of 0.3%).

Multi-Peril Crop Insurance Pilot Insurance Program.  This program provides coverage against loss of yield because of insurable causes (natural causes such as weather, insects and disease) of loss for hemp grown for fiber, grain or Cannabidiol (CBD) oil. There are minimum acreage requirements - 5 acres for CBD and 20 acres for grain and fiber. To be eligible for MPCI, a hemp producer must also have at least a one-year history of production and have a contract for the sale of the insured hemp.   The program is available in 21 states, including Kansas.

Noninsured Crop Disaster Assistance Program.  This program protects against losses associated with lower yields, destroyed crops or prevented planting where no permanent federal crop insurance program is available. In general, assistance is available for losses that exceed 50 percent of the crop or for prevented plantings that exceed 35 percent of the intended crop acres. The amount paid is 55 percent of the average market price for crop losses.

Contractual Issues

Types of contracts.  A purchase contract is typically entered into after a grower has completed harvest or immediately before harvest once quantity and grade of the crop is known. The buyer then makes a purchase offer for the crop with the price reflecting market demands and crop quality.

A production contract is an agreement entered into between the grower and buyer for the crop before planting. The contract denotes the obligations of the parties and specifies the quantity, quality, and price or a method to determine price of the crop.  Under a production contract, a processor usually supplies the seed and inputs and the grower provides the labor and the land. The harvested crop is then delivered to the processor who pays the agreed upon price adjusted for certain contract specifications.  Typically, under a production contract, the grower has no ownership rights in the seed or the harvested crop.  As such, the grower cannot legally sell the crop to a third party or pledge it as collateral. 

Under a split processing agreement, the processor extracts the CBD and returns a portion of the finished product to the grower.  Under a typical agreement, the processor retains 40 percent of the extract as the processing fee and returns 60 percent to the grower either in kind or in accordance with market value.

Quantity.  A contract may require production from a set number of acres or the delivery of pounds of biomass.  If production from an acreage is specified, the grower is obligated to deliver all the crop produced on the identified acres in accordance with a “best efforts” or “best farming practices” measure of performance. Thus, if there is complete crop failure and the grower has utilized “best efforts” or utilized “best farming practices,” the grower is not liable for the shortfall and the buyer is not obligated to pay.  Currently, litigation in Oregon involves claims surrounding a “best farming practices” clause.  See https://hempindustrydaily.com/oregon-hemp-production-lawsuits-may-offer-lessons-for-farmers/. 

Alternatively, a contract may contain a “passed acreage clause.”  This clause allows the buyer to refuse acceptance of the entire crop produced from the designated acreage.  This clause is common in vegetable contracts and may could be utilized in hemp contracts.  

A contract could also be structured as an output contract where no quantity is specified, and the grower sells the entire output to the buyer.

Quality and crop conditions.  A contract will likely set forth quality standards for the crop and how those quality standards are to be established.  Related provisions will denote acts that can give rise to contract termination, the grower’s right to cure and whether the grower retains the right to sell the crop if a processor (buyer) rejects it. 

A contract will likely contain language specifying the condition of the crop on delivery and the buyer’s right of inspection.  A processor may require a sample from each load a grower brings in before accepting the crop. They may also want to specify the timeframe they have to inspect the crop to account for changes in the crop.  For example, contract language may address the issue of crop rejection as well as applicable discounts if a delivered crop’s CBD content falls below the contract-specified percentage after delivery but before processing.  This clause could also address any related pricing issues associated with the change in CBD or THC content from time of delivery to time of processing. 

Force majeure events/cancellation provision.  A force majeure provision allows a party to suspend or terminate its obligations when certain events happen beyond their control. Such a clause may be present in a contract involving hemp production with thought given to triggering events. 

Other provisions.  Additional contract clauses may address such matters as choice of law and dispute resolution.

Tax Issues

I.R.C. §280E limits income tax deductions for businesses that traffic in controlled substances to cost-of-goods-sold (COGS) as an adjustment to gross receipts.   See also C.C.A. 201504011 (Dec. 12, 2014).  Because hemp is no longer a Schedule I controlled substance, the I.R.C. §280E limitations don’t apply.  While hemp producers and resellers must follow the inventory costing methods of Treas. Reg. §1.471, they are not subject to the uniform capitalization rules if average gross receipts are $25 million or less (inflation-adjusted for years beginning after 2017) for the three preceding tax years and the business does not fall within the definition of a “tax shelter.”  Likewise, if these tests are met, the business need not calculate an I.R.C. §263A adjustment. 

Conclusion

The removal of hemp as a federally controlled substance provides another crop growing option for growers to consider.  However, the regulatory system governing hemp production is complex and involves both state and federal regulatory bodies.  Contracts for hemp production also present unique issues.  Economically, hemp production can be an addition to a farmer’s common crop production routine or may serve as an alternative depending on anticipated net revenues.   Is hemp the present-day equivalent of the Jerusalem Artichoke of the 1980s?  Only time will tell.

April 8, 2020 in Contracts, Criminal Liabilities, Income Tax, Regulatory Law | Permalink | Comments (0)

Friday, January 31, 2020

The Statute of Frauds and Sales of Goods

Overview

On April 16, 1677, the English Parliament passed the “Statute of Frauds.”  The new law required that certain contracts be in writing to be enforceable.  In the United States, nearly every state has adopted, and retained, a statute of frauds.  Most recently, state legislatures have had to amend existing laws to account for electronic communications and specify whether those communications satisfy the writing requirement.

A type of contract that must be in writing to be enforceable is one that involves the sale of goods worth $500 or more.  Obviously, this type of contract will involve many contracts involving the sale agricultural commodities and other agricultural goods.  But, there are exceptions to the writing requirement for contracts that would otherwise have to be in writing to be enforceable. 

The enforceability of oral contracts for the sale of goods – it’s the topic of today’s post.

The Writing Requirement

The writing requirement for sales of goods is found in a state’s version of §2-201 of the UCC. The official version, adopted by most states, is applicable only when the goods have a price of $500 or more. In addition, under UCC §1-206, there is an overall statute of frauds for every contract involving a contract for the sale of personal property having a value in excess of $5,000. Thus, for personal property except “goods” a contract is not enforceable beyond $5,000 unless there is some writing signed by the party against whom enforcement is sought.

Obviously, farmers and ranchers engage in many contractual situations that require a writing to be enforceable.  They also engage in many deals on a handshake and/or verbal basis.  Often these informal arrangements work out fine, but when they don’t the Statute of Frauds issue can arise.  An example of this occurred in a Nebraska case involving an alleged oral contract for the sale of beans in 1990.  It’s an older case, but the principles of the case are still directly applicable today. 

The Case of the Contentious Crop

Facts.  In Joseph Heiting & Sons v. Jacks Beans Co., 236 Neb. 765 (1990), the plaintiff sued for breach of an alleged oral contract for the sale of beans to the defendant.  The defendant’s business involves buying beans and processing them for later sale.  The defendant’s procedure for buying beans is for a grower to bring the beans to the defendant’s facility where the facility manager samples 500 grams from a load to grade them.  If the result of the grading was acceptable to the grower, the beans would be dumped in a bin at the facility and commingled with beans from other growers.  When the defendant’s bins are filled, the beans are transported to the defendant’s processing plant for processing.  If the grower and the defendant don’t reach a sale/purchase agreement within 30 days, the beans are considered to be stored (even though they may have already been processed) and a storage charge of $.003/hundredweight/day applies.  The price paid for beans is set daily and is posted in the grading room at the facility and broadcast over a local radio station.  Typically, the process of calling in and selling the beans is not in writing. 

The plaintiff delivered beans to the defendant over an 11-day period totaling 2,837.75 hundred-pound bags.  Each load was graded, weighed and a scale ticket was provided.  The beans were of the highest quality and were commingled with other beans at the defendant’s facility.  The day after all of the plaintiff’s beans had been delivered, the plaintiff told the defendant to sell the plaintiff’s beans at a time when the posted price at the facility was $19 per bag.  The defendant’s manager told the plaintiff that he would “call them in.”  The plaintiff believed that all of the plaintiff’s beans would be sold, but was later informed of “limited buying,” although the defendant claimed to have informed the plaintiff of the limited buying restriction at the time the plaintiff called to request the defendant to sell the beans.  However, the defendant made no attempt to sell the beans until they were actually sold six months later at a price of $15 per bag.  The plaintiff sued for breach of an alleged oral contract for the sale and purchase of the beans at $19 per bag.  

The trial court granted summary judgment for the defendant, finding that no contract had been formed.

Contract elements.  On appeal, the plaintiff claimed that the defendant’s posting of the price at its facility constituted an offer that the plaintiff accepted.  However, the Nebraska Supreme Court (Court) determined that the posting was only an invitation for growers to negotiate with the defendant.  The Court reasoned that the offer was actually the plaintiff informing the defendant of the plaintiff’s willingness to sell beans stored at the defendant’s facility for the posted price – the sell orders.  The defendant didn’t notify the plaintiff of any acceptance or rejection of the offer, and did not verify the “purchase” of the beans when they were sold six months later.  Rather, the acceptance was by silence.  But, the Court determined that whether the plaintiff’s offer was accepted when the beans were delivered (via silence or inaction) was a material issue of fact as to contract existence.  Thus, the trial court’s grant of summary judgment was improper. 

Statute of Frauds.  On the Statute of Frauds issue, the Court concluded that it clearly applied.  The sale of beans involved a sale of goods in excess of $500.  Thus, the sale/purchase transaction for the beans had to be in writing to be enforceable.  However, the plaintiff claimed that the commingling of the delivered beans followed by shipment of beans to the processing facility where there were eventually processed amounted to receipt and acceptance of the goods under the applicable state version of the Uniform Commercial Code (UCC).  Neb. U.C.C. §2-201(3)(c).  If that were the case, the transaction would be removed from the Statute of Frauds.  But, the Court disagreed, noting that the defendant had to “receive and accept” the beans to make the Statute of Frauds inapplicable.  Mere delivery of the beans to the defendant’s facility was not enough, by itself.  An “acceptance” was also required.  Whether acceptance had occurred was inconclusive, the Court determined - the beans had left the plaintiff’s control; the plaintiff’s particular beans could not be returned after they were commingled; and the defendant had nothing left to do except pay for the beans.  As a result, the Court held that an issue remained as to whether there was receipt and acceptance of the beans to bar the application of the Statute of Frauds.  The trial court’s grant of summary judgment for the defendant on this issue was also improper. 

The Court also determined that the conduct of the parties could also indicate that a binding oral contract had been formed.  This was another fact question for the trial court jury to determine. 

Final decision.  Ultimately, the Court reversed the trial court and remanded the case for further proceedings.  The trial court jury had to dig into the facts and determine whether an oral contract existed as an exception to the Statue of Frauds.

Conclusion

The case points out the peril of oral agreements.  Farmers and ranchers engage in frequent transactions similar to the one in the 1990 Nebraska case.  The rules applicable to such transactions haven’t changed, and one can be fairly certain that the farming operation in the case had sold beans like this on many prior occasions.  A good lesson is to get agreements in writing; give good thought concerning how the agreement is written; and abide by it.  While a written agreement is no guarantee that problems wont’ arise, it will likely minimize the chances that they will.

January 31, 2020 in Contracts | Permalink | Comments (0)

Friday, January 17, 2020

Principles of Agricultural Law

Overview

Principles2020springedition400x533The fields of agricultural law and agricultural taxation are dynamic.  Law and tax impacts the daily life of a farmer, rancher, agribusiness and rural landowner practically on a daily basis.  Whether that is good or bad is not really the question.  The point is that it’s the reality.  Lack of familiarity with the basic fundamental and applicable rules and principles can turn out to be very costly.  As a result of these numerous intersections, and the fact that the rules applicable to those engaged in farming are often different from non-farmers, I started out just over 25 years ago to develop a textbook that addressed the major issues that a farmer or rancher and their legal and tax counsel should be aware of.  After three years, the book was complete – Principles of Agricultural Law - and it’s been updated twice annually since that time. 

The 46th edition is now complete, and it’s the topic of today’s post – Principles of Agricultural Law.

Subject Areas

The text is designed to be useful to farmers and ranchers; agribusiness professionals; ag lenders; educational professionals; laywers, CPAs and other tax preparers; undergraduate and law students; and those that simply want to learn more about legal and tax issues.  The text covers a wide range of topics.  Here’s just a sample of what is covered:

Ag contracts.  Farmers and ranchers engage in many contractual situations, including ag leases, to purchase contracts.  The potential perils of verbal contracts are numerous as one recent bankruptcy case points out.  See, e.g., In re Kurtz, 604 B.R. 549 (Bankr. D. Neb. 2019).  What if a commodity is sold under forward contract and a weather event destroys the crop before it is harvested?  When does the law require a contract to be in writing?  For purchases of goods, do any warranties apply?  What remedies are available upon breach? If a lawsuit needs to be brought to enforce a contract, how soon must it be filed?

Ag financing.  Farmers and ranchers are often quite dependent on borrowing money for keeping their operations running.  What are the rules surrounding ag finance?  This is a big issue for lenders also?  For instance, in one recent Kansas case, the lender failed to get the debtor’s name exactly correct on the filed financing statement.  The result was that the lender’s interest in the collateral (a combine and header) securing the loan was discharged in bankruptcy.   In re Preston, No. 18-41253, 2019 Bankr. LEXIS 3864 (Bankr. D. Kan. Dec. 20, 2019). 

Ag bankruptcy.  A unique set of rules can apply to farmers that file bankruptcy.  Chapter 12 bankruptcy allows farmers to de-prioritize taxes.  That can be a huge benefit.  Knowing how best to utilize those rules is very beneficial.

Income tax.  Tax and tax planning permeate daily life.  Deferral contracts; depreciation; installment sales; like-kind exchanges; credits; losses; income averaging; reporting government payments; etc.  The list could go on and on.  Having a basic understanding of the rules and the opportunities available can add a lot to the bottom line of the farming or ranching operation. 

Real property.  Of course, land is typically the biggest asset in terms of value for a farming and ranching operation.  But, land ownership brings with it many potential legal issues.  Where is the property line?  How is a dispute over a boundary resolved?  Who is responsible for building and maintaining a fence?  What if there is an easement over part of the farm?  Does an abandoned rail line create an issue?  What if land is bought or sold under an installment contract? 

Estate planning.  While the federal estate tax is not a concern for most people and the vast majority of farming and ranching operations, when it does apply it’s a major issue that requires planning.  What are the rules governing property passage at death?  Should property be gifted during life?  What happens to property passage at death if there is no will?  How can family conflicts be minimized post-death?  Does the manner in which property is owned matter?  What are the applicable tax rules?  These are all important questions.

Business planning.  One of the biggest issues for many farm and ranch families is how to properly structure the business so that it can be passed on to subsequent generations and remain viable economically.  What’s the best entity choice?  What are the options?  Of course, tax planning is part and parcel of the business organization question. 

Cooperatives.  Many ag producers are patrons of cooperatives.  That relationship creates unique legal and tax issues.  Of course, the tax law enacted near the end of 2017 modified an existing deduction for patrons of ag cooperatives.  Those rules are very complex.  What are the responsibilities of cooperative board members? 

Civil liabilities.  The legal issues are enormous in this category.  Nuisance law; liability to trespassers and others on the property; rules governing conduct in a multitude of situations; liability for the spread of noxious weeds; liability for an employee’s on-the-job injuries; livestock trespass; and on and on the issues go.  It’s useful to know how the courts handle these various situations.

Criminal liabilities.  This topic is not one that is often thought of, but the implications can be monstrous.  Often, for a farmer or rancher or rural landowner, the possibility of criminal allegations can arise upon (sometimes) inadvertent violation of environmental laws.  Even protecting livestock from predators can give rise to unexpected criminal liability.  Mail fraud can also arise with respect to the participation in federal farm programs.  The areas of life potentially impacted with criminal penalties are worth knowing, as well as knowing how to avoid tripping into them.

Water law.  Of course, water is essential to agricultural production.  Water issues vary across the country, but they tend to focus around being able to have rights to water in the time of shortage and moving the diversion point of water.  Also, water quality issues are important.  In essence, knowing whether a tract of land has a water right associated with it, how to acquire a water right, and the relative strength of that water rights are critical to understand.

Environmental law.  It seems that agricultural and the environment are constantly in the news.  The Clean Water Act, Endangered Species Act and other federal (and state) laws and regulations can have a big impact on a farming or ranching operation.  Just think of the issues with the USDA’s Swampbuster rules that have arisen over the past 30-plus years.  It’s good to know where the lines are drawn and how to stay out of (expensive) trouble.

Regulatory law.  Agriculture is a very heavily regulated industry.  Animals and plants, commodities and food products are all subject to a great deal of regulation at both the federal and state level.  Antitrust laws are also important to agriculture because of the highly concentrated markets that farmers buy inputs from and sell commodities into.  Where are the lines drawn?  How can an ag operation best position itself to negotiate the myriad of rules?   

Conclusion

The academic semesters at K-State and Washburn Law are about to begin for me.  It is always encouraging to me to see students getting interested in the subject matter and starting to understand the relevance of the class discussions to reality.  The Principles text is one that can be very helpful to not only those engaged in agriculture, but also for those advising agricultural producers.  It’s also a great reference tool for Extension educators. 

If you are interested in obtaining a copy, you can visit the link here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html

January 17, 2020 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Friday, September 13, 2019

Ag Contracts – What if Goods Don’t Conform to the Contract?

Overview

Not all contractual transactions for agricultural goods function smoothly and without issues.  From the buyer’s perspective, what rights does the buyer have if the seller breaches the contract?  One of the ways in which a breach can occur is if the contracted-for goods fail to conform to the contract requirements.  That can be a particularly important issue for contracts involving agricultural goods.  Ag goods, such as crops and livestock, are not standard, “cookie-cutter” goods.  They vary in quality; size; shape; germination rate; and moisture content, for example.  All of those aspects can lead to possible non-conformity issues. 

Non-conforming agricultural goods – when is a nonconformity significant enough to constitute a breach.  Contracts and non-conforming ag goods – it’s the topic of today’s post.

Non-Conformity and the Right of Rejection

A buyer has a right to reject goods that do not conform to the contract.  Under the Uniform Commercial Code (UCC), a buyer may reject nonconforming goods if such nonconformity substantially impairs the contract.  A buyer usually is not allowed to cancel a contract for only trivial defects in goods.  Triviality is highly fact dependent.  It is tied to industry custom, past practices between the parties and the nature of the goods involved in the contract. 

For example, in Hubbard v. UTZ Quality Foods, Inc., 903 F. Supp. 444 (W.D. N.Y. 1995), a manufacturer of potato chips rejected shipments of potatoes for failure to conform to the contract based on the color of the potatoes. The contract provided that the potatoes had to meet certain quality standards.  The buyer was entitled to reject the potatoes if they failed to do so. The potatoes had to meet USDA standards for No. I white chipping potatoes. They had to have a minimum size and be free from bruising, rotting and odors which made them inappropriate for use in the processing of potato chips.  The main issue was the color of the potatoes.  That issue was decided in accordance with industry custom.  Based on industry custom, the court held that the failure to conform substantially impaired the contract and justified the manufacturer’s refusal to accept the potatoes.  The defect was not merely trivial.     

In a more recent case, Albrecht v. Fettig, 27 Neb. App. 371 (2019), the plaintiff raised Red Angus cattle with operations touching every stage of cattle production, including a feedyard. The plaintiff contacted the defendant (who was not the plaintiff’s usual cattle buyer) to purchase calves for the yard. In May of 2015 the defendant purchased cattle for the plaintiff, with the load consisting mostly of black cattle. The plaintiff accepted the load but stated that he would reject any subsequent load if it consisted primarily of black cattle. Two months later, the defendant purchased another batch of cattle for the plaintiff, promising that there would only be “five or so black hides this time.” The contract for this transaction stated "APPROX 150 - HD," that would be "80% Red Angus cross [and] 20% Bl[ac]k Angus cross steers" at a base average weight of 780 pounds. The price was specified as “$235 per hundredweight with a $0.15 slide.” The contract specified a delivery window of between October 10 and 25, 2015. In early October the defendant contacted the plaintiff with an additional 10 head at $185 per hundredweight. The defendant felt that these 10 head would fall under the “approx” in the contract but notified the plaintiff out of courtesy. The plaintiff never looked at the cattle before delivery.

The cattle were delivered to the plaintiff late at night on October 14, after it was dark outside. The next morning, the plaintiff saw the cattle in the daylight and observed that there were many black-hided steers.  The plaintiff stated that he "knew there was more than 20 percent without even counting them...” From a video taken of the cattle the Plaintiff counted 88 red steers, 68 black steers, and 4 “butterscotch” steers. That amounted to 160 head of cattle that were 55 percent red hided, 42.5 percent black hided, and 2.5 percent Charolais influenced. The plaintiff called the defendant on October 15, expressing frustration and displeasure at receiving so many black steers. The defendant offered to take back the black steers, leaving the plaintiff with 88 head of red steers. The plaintiff rejected the offer. The next day, after discussions with family and an attorney, the plaintiff rejected the load. The defendant sent trucks to pick up the rejected cattle on October 17, and the plaintiff requested the $6,000 deposit back. Another agreement for the deposit and trucking costs to be covered by the defendant was also signed on October 17. The defendant never attempted to cure the issue before the specified October 25 date. The defendant kept and fed the cattle himself and later sold them for a loss. On November 9, the plaintiff texted the plaintiff to inquire about the $6,000 deposit refund. The defendant replied that he had filed a lawsuit and that his attorney instructed him not to discuss the matter.

On November 11, the plaintiff sued for breach of the July 15 contract to recover the $6,000 deposit, yardage fees, feed costs and labor and miscellaneous costs associated with loading the cattle for the return trip. The defendant counterclaimed that the plaintiff breached the July 15 contract by refusing to accept delivery of cattle. The defendant requested that the court award damages in the amount of the value lost on the cattle between their delivery and their eventual sale on December 5, 2015, along with associated costs and expenses. The trial court found that the plaintiff did not breach the sale contract and could reject all or part of the delivery. The trial court also found that the defendant failed to cure under the contract before October 25th and the only cure attempted, to take the black calves, would have breached the quantity amount of the contract. The trial court ordered the defendant to refund the $6,000 deposit and 12 percent prejudgment interest on the $6,000 deposit from October 17, 2015, and 12 percent post-judgment interest. The trial court also ordered the defendant to pay incidental damages based on the costs incurred in caring for the cattle on his property from October 14-17, totaling $449.53, and post-judgment interest at the rate of 3.61 percent until paid in full. The defendant filed a motion to alter or amend arguing that prejudgment interest was inappropriate and that a post judgment interest rate of 12 percent was also inappropriate. After a hearing the trial court agreed, dropping the prejudgment interest and setting post-judgment interest at 3.61 percent. Both parties appealed.

The appellate court affirmed the award of the refund of the $6,000 deposit to the plaintiff, and incidental damages for the cost of caring for the cattle between the time of delivery and their return. The appellate court also awarded court costs to the plaintiff, and the denial of prejudgment interest. The appellate court determined that the plaintiff was entitled to reject delivery notwithstanding the contract's additional ground for rejection if the cattle were unmerchantable. The contract, the appellate court noted, was specific as to quantity and weight but the hide colors were more than a trivial variation and the defendant had time post-rejection to correct the error and deliver the correct color of cattle. The appellate court took the issue of interest under advisement. 

Inspecting Nonconforming Goods

A buyer has a right before acceptance to inspect delivered goods at any reasonable place and time and in any reasonable manner.  The reasonableness of the inspection is a question of trade usage and past practices between the parties. If the goods do not conform to the contract, the buyer may reject them all within a reasonable time and notify the seller, accept them all despite their nonconformance, or accept part (limited to commercial units) and reject the rest. Any rejection must occur within a reasonable time, and the seller must be notified of the buyer's unconditional rejection.  For instance, in In re Rafter Seven Ranches LP v. C.H. Brown Co., 362 B.R. 25 (B.A.P. 10th Cir. 2007), leased crop irrigation sprinkler systems failed to conform to the contract.  However, the buyer indicated an attempt to use the systems and did not unconditionally reject the systems until four months after delivery.  As a result, the buyer was held liable for the lease payments involved because the buyer failed to make a timely, unconditional rejection.

The buyer’s right of revocation is not conditioned upon whether it is the seller or the manufacturer that is responsible for the nonconformity. UCC § 2-608. The key is whether the nonconformity substantially impairs the value of the goods to the buyer.

A buyer rejecting nonconforming goods is entitled to reimbursement from the seller for expenses incurred in caring for the goods. The buyer may also recover damages from the seller for non-delivery of suitable goods, including incidental and consequential damages.  If the buyer accepts nonconforming goods, the buyer may deduct damages due from amounts owed the seller under the contract if the seller is notified of the buyer’s intention to do so.  See, e.g., Gragg Farms and Nursery v. Kelly Green Landscaping, 81 Ohio Misc. 2d 34; 674 N.E.2d 785 (1996).

Timeframe for Exercising Remedies

The UCC allows buyers a reasonable time to determine whether purchased goods are fit for the purpose for which the goods were purchased, and to rescind the sale if the goods are unfit.  Whether a right to rescind is exercised within a reasonable time is to be determined from all of the circumstances. UCC §1-204.  The buyer’s right to inspect goods includes an opportunity to put the purchased goods to their intended use.  Generally, the more severe the defect, the greater the time the buyer has to determine whether the goods are suitable to the buyer.

Statute Of Limitations

Actions founded on written contracts must be brought within a specified time, generally five to ten years.  For unwritten contracts, actions generally must be brought within three to five years.  In some states, however, the statute of limitations is the same for both written and oral contracts.  A common limitation period is four years.  Also, by agreement in some states, the parties may reduce the period of limitation for sale of goods but cannot extend it.

Conclusion

Most contractual transactions for agricultural goods function smoothly.  However, when there is a problem, it is helpful to know the associated rights and liabilities of the parties.

September 13, 2019 in Contracts | Permalink | Comments (0)

Monday, March 11, 2019

Developments in Agricultural Law and Taxation

Overview

Earlier in the year I devoted a blog post to a few current developments in the realm of agricultural law and taxation.  That post was quite popular with numerous requests to devote a post to recent developments periodically.  As a result, I take a break from my series of posts on the passive loss rules to feature some current developments.

Selected recent developments in agricultural law and taxation – that’s the topic of today’s post. 

Bankruptcy

While economic matters remain tough in Midwest crop agriculture and dairy operations all over the country and the projection is for the third-lowest net farm income in the past 10 years, it hasn’t resulted in an increase in Chapter 12 bankruptcy filings.  For the fiscal year ended September 30, 2018, filings nationwide were down 8 percent from the prior fiscal year.  However, the number of filing is still about 25 percent higher than it was in 2014.  The filings, however, are concentrated in the parts of the country where traditional row crops are grown and livestock and dairy operations predominate.  For example, according to the U.S. Courts and reports filed by the Chapter 12 trustees, the states comprising the U.S. Circuit Court of Appeals for the Eighth Circuit (Midwest and northern Central Plains) show a 45 percent increase in Chapter 12 filings when fiscal year 2018 is compared to fiscal year 2017.  The Second Circuit (parts of the Northeast) is up 38 percent during the same timeframe.  Offsetting these numbers are the Eleventh Circuit (Southeast) which showed a 47 percent decline in filings during fiscal year 2018 compared to fiscal year 2017.  The far West and Northwest also showed a 41 percent decline in filings during the same timeframe. 

USDA data indicates some rough economic/financial data.  Debt-to-asset ratios are on the rise and the debt-service ratio (the share of ag production that is used for ag payments) is projected to reach an all-time high.  The current ratio for farming operations is projected to reach an all-time low (but this data has only been kept since 2009).  Unfortunately, the U.S. is very good at infusing agriculture with debt capital.  In addition, there are numerous tax incentives for the seller financing of farmland.  In addition, federal farm programs encourage higher debt levels to the extent they artificially reduce farming risk.  This accelerates economic vulnerability when farm asset values decline.

Recent case.  A recent Virginia case illustrates how important it is for a farmer to comply with all of the Chapter 12 rules when trying to get a Chapter 12 reorganization plan confirmed.  In In re Akers, 594 B.R. 362 (Bankr. W.D. Va. 2019), the debtor owed three secured creditors approximately $350,000 in addition to other unsecured creditors. Two of the secured creditors and the trustee objected to the debtor’s proposed reorganization plan. At the hearing on the confirmation of the reorganization plan, it was revealed that the debtor had not provided any of the required monthly reports. As a result, the court denied plan confirmation and required the debtor to put together an amended plan. The debtor subsequently submitted multiple amended plans, and all were denied confirmation because of the debtor’s inaccurate financial reporting and miscalculation of income and expense. In addition, the current proposed plan was not clear as to how much the largest creditor was to be paid. The creditor had foreclosed, and some payments had been made but the payments were not detailed in the plan. The court denied plan confirmation and denied the debtor’s request to file another amended plan and dismissed the case. The court was not convinced that the debtor would ever be able to put together an accurate and manageable plan that he could comply with, having already had five opportunities to do so. 

Contracts

A recent Iowa case illustrates the need for ag producers to put business agreements in writing.  In Quality Egg, LLC v. Hickmans’s Egg Ranch, Inc., No 17-1690, 2019 Iowa App. LEXIS 158 (Iowa App. Ct. Feb. 20, 2019), the plaintiff, in 2002, entered into an oral contract to sell eggs to the defendant via a formula to determine the price paid for the eggs. The business relationship continued smoothly until 2008, when the plaintiff received a check from the defendant that it determined to be far short of the amount due on the account. Notwithstanding the discrepancy, the parties continued doing business until 2011. In 2014, the plaintiff filed sued to recover the amount due, claiming that the defendant purchased eggs on an open account, and still owed about $1.2 million on that account. The defendant counter-claimed, asserting that the transaction did not involve an open account but simply an oral contract to purchase eggs that had been modified in 2008. Consequently, the defendant claimed that the disputed amount was roughly $580,000, based on the modified oral contract.

The trial court jury found that the ongoing series of transactions for the sale and purchase of eggs was an “open and continuous account” at the time of the short pay, yet still found for the defendant. The plaintiff appealed, asserting that the trial court had erred by allowing oral testimony used to prove the existence of a modified oral contract in violation of the statute of frauds. The appellate court remanded for a new trial on the issue, and the second jury trial in 2017 again found for the defendant. The plaintiff again appealed, asserting the statute of frauds as a defense. The plaintiff also asserted that the trial court had failed to instruct the jury on an open account, depriving the jury of the ability to decide the specific elements of its open account claim. The trial court provided only jury instructions on the elements of the breach of contract counter-claim brought by the defendant. On the statute of frauds issue, the appellate court noted that the defendant had admitted written correspondence, checks, and credit statements to support the oral testimony at trial in support of the oral testimony. Thus, the statute of frauds was not violated. However, on the open account jury instruction issue, the appellate court found that the instructions given were improper because the plaintiff’s burden was to prove its claim of money due on an open account, not to disprove an assertion from the defendant of an amended oral contract. The appellate court found that the instructions never mentioned an open account or discussed an open account in any way, and because of that, the jury was never able to render a proper verdict on the plaintiff’s claim. Accordingly, the appellate court concluded that the jury instructions were insufficient and reversed and remanded for a new trial limited to the open-account claim.

Get it in writing! 

Taxation

The qualified business income deduction (QBID) continues to bedevil the tax software programs.  It’s the primary reason that the IRS extended the March 1 filing deadline to April 15.  The IRS also released a draft Form 8995 to use in calculating the QBID for 2019 returns.  But, the actual calculation of the QBID is not that complicated.  The difficult part is knowing what is QBI and whether the specified service trade or business limits apply.  No worksheet is going to help with that.  Understand the concepts!  Also, the IRS now says that a PDF attachment of the safe harbor election for rental activities must be combined with the e-filed return.  In addition, the election must be signed under penalty of perjury.  As I see it, this is just another reason to not use the QBID safe harbor election if you don’t have to.   

The U.S. Senate is finally working on tax extender legislation that will extend provisions that expired at the end of 2017.  The legislation would extend those expired provisions for two years, 2018-2019.  The Senate Finance Committee has released a summary of the proposed bill language:  https://www.finance.senate.gov/imo/media/doc/Tax%20Extender%20and%20Disaster%20Relief%20Act%20of%202019%20Summary.pdf

Court says that “Roberts tax” is a non-dischargeable priority claim in bankruptcy.  United States v. Chesteen, No. 18-2077, 2019 U.S. Dist. LEXIS 29346 (E.D. La. Feb. 25, 2019). The debtor filed Chapter 13 bankruptcy. The IRS filed a proof of priority claim for $5,100.10, later amending the claim to $5,795.10 with $695 of that amount being an excise tax under I.R.C. §5000A as a result of the debtor’s failure to maintain government mandated health insurance under Obamacare. The debtor object to the $695 amount being a priority claim that could not be discharged, and the bankruptcy court agreed, finding that the “Roberts Tax” under Obamacare was not a priority claim, but rather a dischargeable penalty in a Chapter 13 case. On appeal, the appellate court reversed. The appellate court noted that the creditor bore the burden to establish that the Roberts Tax was a priority claim and noted that it was the purpose and substance of the statute creating the tax that controlled whether the tax was a tax or a penalty. The appellate court noted that a tax is a pecuniary burden levied for the purpose of supporting government while a monetary penalty is a punishment for an unlawful act or omission. On this point, the appellate court noted that Chief Justice Roberts, in National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012), upheld the constitutionality of Obamacare on the basis that the “shared responsibility payment” was a tax paid via a federal income tax return and had no application to persons who did not pay federal income tax. The appellate court noted that the amount was collected by the IRS and produced revenue for the government. It also did not punish an individual for any unlawful activity and, the appellate court noted, the IRS has no criminal enforcement authority if a taxpayer failed to pay the amount. 

Court says that the IRS can charge for PTINs.In 2010 and 2011, the Treasury Department developed regulations that imposed certain requirements that an individual had to comply with to be able to prepare tax returns for a fee - a person had to become a “registered tax return preparer.” These previously unregulated persons had to pass a one-time competency exam and a suitability check. They also had to (along with all other preparers) obtain a Preparer Tax Identification Number (PTIN) and paying a user fee to obtain the PTIN. The plaintiff class challenged the authority of the government to require a PTIN and charge a fee for obtaining it. The IRS claimed that the regulations were necessary for the need to oversee tax return preparers to ensure good service. I.R.C. §6109(a)(4), in existence prior to the regulations at issue, requires a preparer to provide identification and state that the preparer’s social security number shall be used as the required identification. The regulations at issue, however, required preparers to obtain (at a fee paid to the Treasury) a PTIN as the identifying number. Preparers without a PTIN could no longer prepare returns for a fee. The IRS argued that by creating the PTIN requirement, it had created a “thing of value” which allowed it to charge a fee, citing 31 U.S.C. §9701(b). However, the plaintiffs claimed that the PTIN requirements are arbitrary and capricious under the Administrative Procedure Act or, alternatively is unlawful as an unauthorized exercise of licensing authority over tax return preparers because the fee does not confer a “service or thing of value.”

The trial court determined that the IRS can require the exclusive use of a PTIN because it aids in the identification and oversight of preparers and their administration. However, the trial court held that the IRS cannot impose user fees for PTINs. The trial court determined that PTINs are not a “service or thing of value” because they are interrelated to testing and eligibility requirements and the accuracy of tax returns is unrelated to paying a PTIN fee.  Steele v. United States, 260 F. Supp. 3d 52 (D. D.C. 2017).  A prior federal court decision held that the IRS cannot regulate tax return preparers (Loving v. IRS, 742 F.3d 1013 (D.C. Cir. 2014), thus charging a fee for a PTIN would be the equivalent of imposing a regulatory licensing scheme which IRS cannot do. The trial court determined that prior caselaw holding that the IRS can charge a fee for a PTIN were issued before the Loving decision and are no longer good law.

On appeal, the appellate court vacated the trial court’s decision and remanded the case. The appellate court determined that the IRS does provide a service in exchange for the PTIN fee which the court defined as the service of providing preparers a PTIN and enabling preparers to place the PTIN on a return rather than their Social Security number and generating and maintaining a PTIN database. Thus, according to the appellate court, the PTIN fee was associated with an “identifiable group” rather than the public at large and the fee was justified on that ground under the Independent Offices Appropriations Act. The appellate court also believed the IRS claim that the PTIN fee improves tax compliance and administration. The appellate court remanded the case for further proceeding, including an assessment of whether the amount of the PTIN fee unreasonable exceeds the costs to the IRS to issue and maintain PTINs. Montrois, et al. v. United States, No. 17-5204, 2019 U.S. App. LEXIS 6260 (D.C. Cir. Mar. 1, 2019), vac’g,. and rem’g., Steele v. United States, 260 F. Supp. 3d 52 (D. D.C. 2017).

Sanders (and Democrat) transfer tax proposals.  The Tax Cuts and Jobs Act (TCJA) increased the exemption equivalent of the federal estate and gift tax unified credit to (for 2019) $11.4 million.  Beginning for deaths occurring and for gifts made in 2026, the $11.4 million drops to the pre-TCJA level ($5 million adjusted for inflation).  That will catch more taxpayers.  This is, of course, if the Congress doesn’t change the amount before 2026.  S. 309, recently filed in the Senate by Presidential candidate Bernie Sanders provides insight as to what the tax rules impacting estate and business planning would look like if he (or probably any other Democrat candidate for that matter) were ever to win the White House and have a compliant Congress. The bill drops the unified credit exemption to $3.5 million and raises the maximum tax rate to 77 percent (up from the present 40 percent.  It would also eliminate entity valuation discounts with respect to entity assets that aren’t business assets, and impose a 10-year minimum term for grantor retained annuity trusts.  In addition, the bill would require the inclusion of a grantor trust in the estate of the owner and would limit the generation-skipping transfer tax exemption to a 50-year term.  The present interest gift tax exclusion would also be reduced from its present level of $15,000.

Conclusion

These are just a snippet of the many developments in agricultural taxation and law recently.  Of course, you can find more of these developments on the annotation pages of my website – www.washburnlaw.edu/waltr.  I also use Twitter to convey education information.  If you have a twitter account, you can follow me at @WashburnWaltr.  On my website you will also find my CPE calendar.  My national travels for the year start in earnest later this week with a presentation in Milwaukee.  Later this month finds me in Wyoming. Also, forthcoming soon is the agenda and registration information for the ag law and tax seminar in Steamboat Springs, Colorado on August 12-14. Hope to see you at an event this year.

On Wednesday, I resume my perusal of the rental real estate exception of the passive loss rules.  I get a break on the teaching side of things this week – it’s Spring Break week at both the law school and at Kansas State University. 

March 11, 2019 in Bankruptcy, Contracts, Income Tax | Permalink | Comments (0)

Friday, January 18, 2019

Negotiating Cell/Wireless Tower Agreements

Overview

Presently, over 300,000 cell/wireless towers have been erected in the United States.  Some of those are on farm and ranch land with the landowners having been presented an agreement to sign allowing the wireless carrier to use of some of the land.  But, not all agreements are created equally. 

What makes a cell/wireless tower agreement a good one?  What are the key elements of a good agreement?  What should or should not be included in an agreement from the landowner’s perspective?  These questions are the topic of today’s post.

The Battle of the Forms

A key point for a landowner to understand is that when presented with an agreement to sign, the standard form of the wireless carrier is one-sided.  It is one-sided in the favor of the wireless carrier.  That’s to be expected.  After all, a maxim of contract law is that the party who drafts a contract drafts the contract in their favor.  So, a wireless carrier, via a landowner agreement, will attempt to take as much advantage of a naïve landowner as possible.  That means a landowner presented with a wireless carrier’s boilerplate form could incur substantial legal fees to have the form edited in the negotiation process to reach a more balanced agreement that protects the landowner’s property rights.   

A better approach might be for attorneys that represent landowners to develop their own standard form that thoroughly protects a landowner’s property rights while also ensuring that the wireless carrier can still experience an economic benefit from the placement of the tower on the landowner’s property. 

Foundational Principles

There are a couple of basic points to be made when drafting a cell/wireless tower agreement.  These are:  1) clearly identify the premises that is subject to the agreement; and 2) clearly identify the grant of authority.  An exhibit should be included with the agreement that contains the legal description of the subject property along with drawings and/or photos.  The more detail that is provided, the easier it will be to police the agreement.  That’s particularly true with respect to unauthorized collocations (the placement of additional electronic devices on a tower) and subleases.  In addition, any standard agreement should address the usage of common areas and access points.  Similarly, the landowner will want the retained right to control signage, conduct and look.  Nobody wants an eyesore on their property. 

The grant of authority to the carrier involves the property rights that are given to the company.  The grant of authority should be either a license or a lease.  An easement should not be granted.  The grant of an easement may result in granting others access to the same property.  Instead, a license is all the legal authority that a wireless company needs.  A license simply gives the wireless company exclusive permission to enter the property to establish the tower and perform necessary maintenance activities.   A lease can also be utilized if it grants exclusive use to the wireless company and not shared use.  In addition, a lease may provide more protection to the landowner in the event of the bankruptcy of the wireless company. 

Individual Provisions

Whether a license or a lease is utilized, some basic elements should be included in the document.   

Term.  The term of the agreement and any renewal options should be clearly specified.  For larger installations of wireless towers, the term is typically a series of five-year terms totaling somewhere between 20 and 30 years.  For smaller installations that are placed in a right-of-way, a shorter term is generally better because of uncertainly that may exist due to governmental regulatory authority.  Each particular situation will be different in terms of that the optimal term will be, whether an automatic renewal clause should be included and whether actual affirmative notice should be required of renewals.  

Care should be given, however, to the use of a clause that gives the wireless company the “option to lease” or a clause that provides for a long “due diligence” period.  The problem with those clauses are that they can tie up the site for a set amount of time with no guarantee of rent flowing to the landowner.  Relatedly, a landowner should not allow the wireless company to have a long delivery or construction period for obtaining the necessary permits without requiring additional compensation.  Ideally, the term of the agreement should begin immediately with a construction period of 30-60 days being added to the overall term.    

If the wireless company desires either an option to lease or a due diligence clause, such a clause should be negotiated as an addition to the basic agreement for additional compensation.  For instance, a “due diligence” period is a timeframe that the wireless company is given to obtain the necessary legal clearances and ensure that the location works for the company.  This landowner should not give this time period away without additional compensation, even if the underlying agreement is not yet in force.  Likewise, during this due diligence period, the landowner should consider requiring the wireless to carry insurance for any activities on the site by the company or consultants (and require copies of consultant reports be provided to the landowner), require prior written consent for any borings, and require the wireless company to indemnify the landowner for liability arising from the conduct of the company or consultants, etc.

Rent. The amount of rent or license fee paid to the landowner will depend on whether the installation is inside or outside the existing right-of-way.  If it is inside the right-of way, the amount should be a reasonable approximation of cost.  If it is outside the right-of-way, it will likely be tied to the market rate.  In either event, a landowner should do the necessary “homework” to determine what an appropriate level of compensation should be, but the landowner’s compensation should be comprised of a base amount with additional compensation for collocation (additional devices added to the existing structure).  In addition, a provision for late fees, interest and the possibility of holdover should be included in the agreement.  Late fees are essentially whatever the landowner is able to negotiate, with interest on late fees typically limited by state law.  A “savings” clause should be included to ensure that a state law barring usury won’t be violated.  The hold-over rent amount will likely be in the range of 125 percent to 150 percent of the rent amount at the time the hold-over began. 

Assignment. Often, the wireless company will desire to assign the lease to another related (affiliate) company, such as a “tower operating company.”  Any assignment should require the landowner’s written approval.  One option for a landowner to consider is to execute a property management agreement.  But, in no event should the landowner agree to release the original wireless company from responsibility for liability associated with hazardous chemicals (battery leakage, etc.) and insurance. 

Relatedly, a landowner should not allow the wireless company to sublicense or sublease without the landowner’s prior written approval.  In addition, the landowner should retain the ability to consent to any proposed sublicense or sublease involving the placement of another carrier’s equipment (“facilities”) on the existing tower (or other structure).  If additional equipment is desired to be placed on the existing tower or structure, additional rent or fees should be paid to the landowner. 

Interference.  The landowner is legally obligated to provide the tenant with “peaceable possession” of the premises.  “Peaceable possession” means that the landowner will provide the premises to the tenant in a condition that will serve the intended purpose(s) of the tenant’s use.  As applied to cell/wireless tower license or lease situations, that means that the landowner should not cause any interference problems for the existing tenant or licensee.  For facilities and structures that are outside of a right-of-way and entirely on the landowner’s property, the landowner should ensure that subsequent tenants/licensees (collocators) do not cause interference.  While the legal burden is on a newcomer to cure interference issues that are caused by the subsequent placement of a facility on an existing tower/structure, the landlord should take steps to ensure the landlord’s non-responsibility for interference or curing the problem.  Also, the landlord should ensure that no rights have been granted that could lead to an interference.    

Improvements.  A significant area of concern for landowners is how to deal with improvements that the wireless company may desire to place on the tower/structure after the initial installation.  Any proposed improvement should require detailed plans with prior approval and, of course, additional compensation for the landowner.  The landowner should not agree to clause language such as, “approval not to be unreasonably withheld, delayed or conditioned…”.  Also, the landowner should control the appearance of any improvements, and require that any improvement by the licensee/tenant be performed in compliance with applicable laws, codes and ordinances.  In addition, the licensee/landlord should not be authorized to contract for or on behalf of the licensor or impose any additional expense (such as utilities) on the landowner. 

The landowner should ensure that improvements will be maintained and upgraded to continuously be in compliance with applicable laws, and that any new installations will not be heavier, or exceed capacity or space than the original grant permitted.  Similarly, the agreement should specify that the wireless company pay for utilities and that the landlord is not responsible for any interruptions in cell/wireless service.  Concerning an operational issue, the landowner should not allow the wireless company to use the landowner’s electric connection with a submeter. 

Access.  The landowner should make sure that the agreement provides sufficient protection related to access to the property.  In general, it is advisable to require the landowner to be given 24-hour notice when access to the property is desired or will be occurring.  In addition, access to the property should be limited to just what is necessary to accomplish the purpose of gaining access.  Also, some provision should be included in the agreement for emergency access to the property.  If the wireless facilities are installed on the roof of a building, access to the facilities should be limited to just those areas that the wireless company needs.  In addition, if the facility is placed on the top of a commercial building the roof contractor should approve of the access and roof penetrations should be avoided that could possibility invalidate roof warranties.  Relatedly, the size, weight and frequency of roof access should be limited.  If the installation of the cell/wireless facility is on private land (such as farmland), access should similarly be limited, and provisions included to protect fencing and animals, for example.  The burden of maintaining secure fencing should be on the wireless company. 

Default.  The agreement should provide for events of default and termination by the landlord.  Common events of default would be the non-payment of rent by the wireless company or habitual late payments.  Likewise, default could be triggered on the violation of any term of the agreement, including non-permitted collocations and the bankruptcy of the wireless company.  Consideration may need to be given as to whether a clause should be included that allows default to be cured by a monetary payment provision. 

Care should be taken to clearly specify how and when the wireless company can terminate the agreement.  Commonly, wireless carriers want a provision included in the agreement that allows them to terminate the agreement for “technological, economic, or environmental” reasons.  A landowner should not accept this clause.  It is a “get out of jail free” clause for the wireless company.  From the landowner’s perspective, the agreement should either bar terminations by the wireless company or allow it for an additional payment (such as rent for the balance of the then-existing term or an amount of rent equal to a year or two).          

Decommissioning.  Thought should be given in the agreement concerning the ultimate removal of the tower and related improvements.  Removal should also apply to improvements that have been made beneath the surface of the property.  The manner of removal may depend on the type of facility that has been erected.  If possible, the agreement should provide for immediate ownership of the facility/improvement in the landowner (although this likely won’t work if the structure has been added to a light pole that is on the landowner’s property located in a right-of-way).  Alternatively, an option can be included in the agreement for the landowner to retain improvements or require removal of structures, footings and foundations. 

Miscellaneous provisions.  A well-drafted agreement should contain provisions dealing with numerous other issues.  The following is a breakdown of the major “miscellaneous” provisions:

  • Insurance provisions should apply to contractors and subsidiaries without reciprocal indemnity (which may be banned by state and/or local law). It’s a good idea to have insurance professionals review the insurance provisions.
  • A tax provision should clearly state that taxes due are in addition to the rent amount due under the agreement. Likewise, the agreement should make the wireless company pay any increase in any property tax or insurance as a result of the installation and associated improvements.
  • A “notice” provision should require that all notices, requests, demands and other communications be in writing and delivered to a specific address, and have multiple government entities copied (such as the city/county clerk; county/township/city engineer, etc.).
  • Clause language should be included to limit the ability of the wireless company to store items on the property. This is an environmental concern.  Stored batteries and generators can leach, and diesel fuel can leak. 
  • A provision should be included for attorney fees.
  • Give thought as to whether a severability provision should be included as well as a clause providing that the landlord is not liable for brokerage or agent fees.
  • A governing law provision should specify that the governing law is where the premises subject to the agreement is located and that jurisdiction is in the state rather than federal court.
  • Other clauses to consider include a mortgage subordination provision; a clause providing for the limitation of liability; no relocation assistance (condemnation payments need to go to the landlord); and that time is of the essence.
  • A provision addressing the sale of the agreement.
  • It might be a good idea to include a provision addressing the possible sale of the agreement.

Conclusion

Perhaps the biggest key for a landowner in achieving a good agreement with a cell/wireless company is to control the drafting process.  A good agreement can produce a good economic result for a landowner.  A bad agreement that is not put together well can result in undesireable situations for the landowner.  Good legal counsel is a must in getting a good agreement that will provide long-term benefits.  

January 18, 2019 in Contracts, Real Property | Permalink | Comments (0)

Monday, December 31, 2018

The "Almost Top Ten" Ag Law and Tax Developments of 2018

Overview

2018 was a big year for developments in law and tax that impact farmers, ranchers, agribusinesses and the professionals that provide professional services to them.  It was also a big year in other key areas which are important to agricultural production and the provision of food and energy to the public.  For example, carbon emissions in the U.S. fell to the lowest point since WWII while they rose in the European Union.  Poverty in the U.S. dropped to the lowest point in the past decade, and the unemployment rate became the lowest since 1969 with some sectors reporting the lowest unemployment rate ever.  The Tax Cuts and Jobs Act (TCJA) doubles the standard deduction in 2018 compared to 2017, which will result additional persons having no federal income tax liability and other taxpayers (those without a Schedule C or F business, in particular) having a simplified return.  Wages continued to rise through 2018, increasing over three percent during the third quarter of 2018.  This all bodes well for the ability of more people to buy food products and, in turn, increase demand for agricultural crop and livestock products.  That’s good  news to U.S. agriculture after another difficult year for many commodity prices.

On the worldwide front, China made trade concessions and pledged to eliminate its “Made in China 2025” program that was intended to put China in a position of dominating world economic production.  The North-Korea/South Korea relationship also appears to be improving, and during 2018 the U.S. became a net exporter of oil for the first time since WWII.  While trade issues with China remain, they did appear to improve as 2018 progressed, and the USDA issued market facilitation payments (yes, they are taxed in the year of receipt and, no, they are not deferable as is crop insurance) to producers to provide relief from commodity price drops as a result of the tariff battle. 

So, on an economic and policy front, 2019 appears to bode well for agriculture.  But, looking back on 2018, of the many ag law and tax developments of 2018, which ones were important to the ag sector but just not quite of big enough significance nationally to make the “Top Ten”?  The almost Top Ten – that’s the topic of today’s post.

The “Almost Top Ten” - No Particular Order

Syngenta litigation settles.  Of importance to many corn farmers, during 2018 the class action litigation that had been filed a few years ago against Syngenta settled.  The litigation generally related to Syngenta's commercialization of genetically-modified corn seed products known as Viptera and Duracade (containing the trait MIR 162) without approval of such corn by China, an export market. The farmer plaintiffs (corn producers), who did not use Syngenta's products, claimed that Syngenta's commercialization of its products caused the genetically-modified corn to be commingled throughout the corn supply in the United States; that China rejected imports of all corn from the United States because of the presence of MIR 162; that the rejection caused corn prices to drop in the United States; and that corn farmers were harmed by that market effect.  In April of 2018, the Kansas federal judge handling the multi-district litigation preliminarily approved a nationwide settlement of claims for farmers, grain elevators and ethanol plants.  The proposed settlement involved Syngenta paying $1.5 billion to the class.  The class included, in addition to corn farmers selling corn between September of 2013 and April of 2018, grain elevators and ethanol plants that met certain definition requirements.  Those not opting out of the class at that point are barred from filing any future claims against Syngenta arising from the presence of the MIR 162 trait in the corn supply.  Parties opting out of the class can't receive any settlement proceeds, but can still file private actions against Syngenta.  Parties remaining in the class had to file claim forms by October of 2018.   The court approved the settlement in December of 2018, and payments to the class members could begin as early as April of 2019. 

Checkoff programs.  In 2018, legal challenges to ag “checkoff” programs continued.  In 2017, a federal court in Montana enjoined the Montana Beef Checkoff.  In that case, Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America v. Perdue, No. CV-16-41-GF-BMM, 2017 U.S. Dist. LEXIS 95861 (D. Mont. Jun. 21, 2017), the plaintiff claimed that the federal law requiring funding of the Montana Beef Council (MBC) via funds from the federal beef checkoff was unconstitutional.  The Beef Checkoff imposes a $1.00/head fee at the time cattle are sold. The money generated funds promotional campaigns and research, and state beef councils can collect the funds and retain half of the collected amount with the balance going to the Cattleman’s Beef Production and Research Board (Beef Board). But, a producer can direct that all of the producer’s assessment go to the Beef Board. The plaintiff claimed that the use of the collected funds violated their First Amendment rights by forcing them to pay for “speech” with which they did not agree. The defendant (USDA) motioned to dismiss, but the Magistrate Judge denied the motion. The court determined that the plaintiffs had standing, and that the U.S. Supreme Court had held in prior cases that forcing an individual to fund a private message that they did not agree with violated the First Amendment. Any legal effect of an existing “opt-out” provision was not evaluated. The court also rejected the defendant’s claim that the case should be delayed until federal regulations with respect to the opt-out provision was finalized because the defendant was needlessly dragging its heels on developing those rules and had no timeline for finalization. The court entered a preliminary injunction barring the MBC from spending funds received from the checkoff. On further review by the federal trial court, the court adopted the magistrate judge’s decision in full. The trial court determined that the plaintiff had standing on the basis that the plaintiff would have a viable First Amendment claim if the Montana Beef Council’s advertising involves private speech, and the plaintiff did not have the ability to influence the advertising of the Montana Beef Council. The trial court rejected the defendant’s motion to dismiss for failure to state a claim on the basis that the court could not conclude, as a matter of law, that the Montana Beef Council’s advertisements qualify as government speech. The trial court also determined that the plaintiff satisfied its burden to show that a preliminary injunction would be appropriate. 

The USDA appealed the trial court’s decision, but the U.S. Court of Appeals for the Ninth Circuit affirmed the trial court in 2018.  Ranchers-Cattlemen Action Legal Fund, United Stockgrowers of America v. Perdue, 718 Fed. Appx. 541 (9th Cir. 2018).  Later in 2018, as part of the 2018 Farm Bill debate, a provision was proposed that would have changed the structure of federal ag checkoff programs.  It did not pass, but did receive forty percent favorable votes.    

GIPSA rules withdrawn.  In the fall of 2016, the USDA sent to the Office of Management and Budget (OMB) an interim final rule and two proposed regulations setting forth the agency’s interpretation of certain aspects of the Packers and Stockyards Act (PSA) involving the buying and selling of livestock and poultry. The proposals generated thousands of comments, with ag groups and producers split in their support. The proposals concern Section 202 of the PSA (7 U.S.C. §§ 192 (a) and (e)) which makes it unlawful for any packer who inspects livestock, meat products or livestock products to engage in or use any unfair, unjustly discriminatory or deceptive practice or device, or engage in any course of business or do any act for the purpose or with the effect of manipulating or controlling prices or creating a monopoly in the buying, selling or dealing any article in restraint of commerce. The “effect” language of the statute would seem to eliminate any requirement that the producer show that the packer acted with the intent to control or manipulate prices. However, the federal courts have largely interpreted the provision to require a plaintiff to show an anti-competitive effect in order to have an actionable claim. 

The interim final rule and the two proposed regulations stemmed from 2010.  In that year, the Obama administration’s USDA issued proposed regulations providing guidance on the handling of antitrust-related issues under the PSA. 75 Fed. Reg. No. 119, 75 FR 35338 (Jun. 22, 2010).  Under the proposed regulations, "likelihood of competitive injury" was defined as "a reasonable basis to believe that a competitive injury is likely to occur in the market channel or marketplace.” It included, but was not limited to, situations in which a packer, swine contractor, or live poultry dealer raises rivals' costs, improperly forecloses competition in a large share of the market through exclusive dealing, restrains competition, or represents a misuse of market power to distort competition among other packers, swine contractors, or live poultry dealers. It also includes situations “in which a packer, swine contractor, or live poultry dealer wrongfully depresses prices paid to a producer or grower below market value, or impairs a producer's or grower's ability to compete with other producers or growers or to impair a producer's or grower's ability to receive the reasonably expected full economic value from a transaction in the market channel or marketplace." According to the proposed regulations, a “competitive injury” under the PSA occurs when conduct distorts competition in the market channel or marketplace. The scope of PSA §202(a) and (b) was stated to depend on the nature and circumstances of the challenged conduct. The proposed regulations specifically noted that a finding that a challenged act or practice adversely affects or is likely to affect competition is not necessary in all cases. The proposed regulations also specified that a PSA violation could occur without a finding of harm or likely harm to competition, contrary to numerous court opinions on the issue.

On April 11, 2017, the USDA announced that it was delaying the effective date of the interim final rule for 180 days, until October 19, 2017, with the due date for public comment set at June 12, 2017.  However, on October 17, 2017, the USDA withdrew the interim rule.  The withdrawal of the interim final rule and two proposed regulations was challenged in court.  On December 21, 2018, the U.S. Court of Appeals for the Eighth Circuit denied review of the USDA decision.  In Organization for Competitive Markets v. United States Department of Agriculture, No. 17-3723, 2018 U.S. App. LEXIS 36093 (8th Cir. Dec. 21, 2018), the court noted that the USDA had declined to withdraw the rule and regulations because the proposal would have generated protracted litigation, adopted vague and ambiguous terms, and potentially bar innovation and stimulate vertical integration in the livestock industry that would disincentivize market entrants.  Those concerns, the court determined, were legitimate and substantive.  The court also rejected the plaintiff’s argument that the court had to compel agency action.  The matter, the court concluded, was not an extraordinary situation.  Thus, the USDA did not unlawfully withhold action. 

No ”clawback.”   In a notice of proposed rulemaking, the U.S Treasury Department eliminated concerns about the imposition of an increase in federal estate tax for decedents dying in the future at a time when the unified credit applicable exclusion amount is lower than its present level and some (or all) of the higher exclusion amount had been previously used. The Treasury addressed four primary questions. On the question of whether pre-2018 gifts on which gift tax was paid will absorb some or all of the 2018-2025 increase in the applicable exclusion amount (and thereby decrease the amount of the credit available for offsetting gift taxes on 2018-2025 gifts), the Treasury indicated that it does not. As such, the Treasury indicated that no regulations were necessary to address the issue. Similarly, the Treasury said that pre-2018 gift taxes will not reduce the applicable exclusion amount for estates of decedents dying in years 2018-2025.

The Treasury also stated that federal gift tax on gifts made after 2025 will not be increased by inclusion in the tax computation a tax on gifts made between 2018 and 2015 that were sheltered from tax by the increased applicable exclusion amount under the TCJA.  The Treasury concluded that this is the outcome under current law and needed no regulatory “fix.” As for gifts that are made between 2018-2025 that are sheltered by the applicable exclusion amount, the Treasury said that those amounts will not be subject to federal estate tax in estates of decedents dying in 2026 and later if the applicable exclusion amount is lower than the level it was at when the gifts were made. To accomplish this result, the Treasury will amend Treas. Reg. §20.2010-1 to allow for a basic exclusion amount at death that can be applied against the hypothetical gift tax portion of the estate tax computation that is equal to the higher of the otherwise applicable basic exclusion amount and the basic exclusion amount applied against prior gifts.

The Treasury stated that it had the authority to draft regulations governing these questions based on I.R.C. §2001(g)(2). The Treasury, in the Notice, did not address the generation-skipping tax exemption and its temporary increase under the TCJA through 2025 and whether there would be any adverse consequences from a possible small exemption post-2025. Written and electronic comments must be received by February 21, 2019. A public hearing on the proposed regulations is scheduled for March 13, 2019. IRS Notice of Proposed Rulemaking, REG-106706-18, 83 FR 59343 (Nov. 23, 2018).

Conclusion

These were significant developments in the ag law and tax arena in 2018, but just not quite big enough in terms of their impact sector-wide to make the “Top Ten” list.  Wednesday’s post this week will examine the “bottom five” of the “Top Ten” developments for 2018. 

December 31, 2018 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Thursday, November 1, 2018

Disclaiming Implied Warranties

Overview

Because such items as livestock, feed, seed or pesticides are goods, sales and other transactions involving them result in the creation of warranties.  These warranties can be either express or implied.  Express warranties are stated as part of the sales agreement and become part of the basis of the bargain, but implied warranties are read into the sales agreement by the law, absent specific language or circumstances excluding them. 

Contract warranties create legal rights and liabilities between the parties to the transaction.  That means knowing whether and how they can be disclaimed can be important. 

Disclaiming implied warranties – that’s the topic of today’s post. 

Methods for Disclaiming

The Uniform Commercial Code (UCC) specifically provides three ways in which all implied warranties can be excluded.  First, unless the circumstances indicate otherwise, all implied warranties are excluded by expressions like “as is,” “with all faults” or other language which in common understanding calls the buyer’s attention to the exclusion of warranties and makes plain that there is no implied warranty.  For example, in Rayle Tech, Inc. v. DEKALB Swine Breeders, Inc. 133 F.3d 1405 (11th Cir. 1998), the court held that a swine breeder who purchased diseased pigs could not sue the seller for fraud where the seller clearly disclaimed any liability for disease in the sales contract, despite a salesman’s assurances to the contrary.  However, in Snelten v. Schmidt Implement Co. 269 Ill. App.3d 988, 647 N.E.2d 1071 (1995), the court held that an implement dealer that sold a tractor to a farmer limited the scope of its “as is” disclaimer by making other representations to the buyer.

The second manner in which an implied warranty can be excluded is when the buyer, before entering into the contract, examines the goods or a sample or a model as fully as desired or refuses to examine the goods.  In this instance, there is no implied warranty with regard to defects which an examination should have revealed to the buyer. 

The third way an implied warranty can be excluded is by course of dealing, course of performance or usage of trade.  UCC § 2-316(3)(C). The seller’s relationship with the buyer, industry practice or usage of trade can exclude an implied warranty.  For example, if the parties have previously engaged in contracts for the sale of livestock or feed with all previous contracts containing a disclaimer provision, or the industry practice is to limit liability, implied warranties may be excluded. 

Federal Statutory Law

At the federal level, the Magnuson-Moss Warranty Federal Trade Commission Improvement Act (15 U.S.C. §§ 2301-2312) precludes the disclaimer or modification of any implied warranty created by state law when a consumer product supplier makes any written warranty with respect to a product.  The implied warranties can only be limited to the duration of the express warranties, unless the express warranties are designed as a “Full Warranty,” in which case the implied warranties cannot be limited even in their duration.  Thus, the only way for a consumer product supplier to avoid extending implied warranties is to not provide any express warranties.  Also laws in some states prohibit sellers in consumer transactions from excluding, modifying or limiting implied warranties of merchantability or fitness.  For example, in Kansas, a supplier in a consumer transaction is prohibited from disclaiming or limiting UCC implied warranties of merchantability and fitness for a particular purpose. See, e.g., Kan. Stat. Ann. §§ 50-623 to 50-644.  Any such limitation is usually considered void unless the buyer knew of the defect before purchasing and this knowledge became part of the basis of the sale.  The only exceptions are for sales of livestock for agricultural purposes and sales of seed for planting. 

In seed sale transactions, the Federal Seed Act (FSA) allows the seed sellers to use disclaimers, limited warranties, or non-warranty clauses in invoices, advertising or labeling.  However, the FSA does not permit such limitation on warranties to be used as a defense in any criminal prosecution or other civil proceeding based on the FSA. 7 U.S.C. § 1574 (1995). As a result, seed purchasers may be faced with label disclaimers limiting liability to the price of the seed.  Courts are split on the validity of such disclaimers with most courts invalidating them only if liability results from the seller’s own negligence or intentional violation of the law. 

Special Rules

In order to disclaim or modify an implied warranty of merchantability, the seller’s “language must mention merchantability and in case of a writing must be conspicuous....”  UCC § 2-316(2). For example, in Day v. Tri-State Delta Chemicals, Inc., 165 F. Supp. 2d 830 (E.D. Ark. 2001), the court determined that there had been no breach of an implied warranty in a transaction involving cotton seed purchased on credit where the credit agreement carried a limitation of warranty denying any representation as to the seed’s fitness.

Oral disclaimers of implied warranties of merchantability must use the word “merchantability,” and in written disclaimers, the disclaiming language must be conspicuous within the written document.  See, e.g., R.J. Meyers Company v. Reinke Manufacturing Co., 885 N.W.2d 429 (Iowa Ct. App. 2016).   A disclaimer of an implied warranty of fitness for a particular purpose must be in writing.  

Conclusion

Transactions involving the sales of goods often occur without any issue.  However, it is helpful to know what the rules concerning the disclaimer of implied warranties are in case an issue concerning the purchased goods arises and the goods don’t live up to the buyer’s expectations.

November 1, 2018 in Contracts | Permalink | Comments (0)

Thursday, October 18, 2018

Agricultural Law Online!

Overview

For the Spring 2019 academic semester, Kansas State University will be offering my Agricultural Law and Economics course online. No matter where you are located, you can enroll in the course and participate in it as if you were present with the students in the on-campus classroom.
Details of next spring’s online Ag Law course – that’s the topic of today’s post.

Course Coverage

The course provides a broad overview of many of the issues that a farmer, rancher, rural landowner, ag lender or other agribusiness will encounter on a daily basis. As a result, the course looks at contract issues for the purchase and sale of agricultural goods; the peril of oral contracts; the distinction between a lease and a contract (and why the distinction matters); and the key components of a farm lease, hunting lease, wind energy lease, oil and gas lease, and other types of common agricultural contractual matters. What are the rules surrounding ag goods purchased at auction?

Ag financing situations are also covered – what it takes to provide security to a lender when financing the purchase of personal property to be used in the farming business. In addition, the unique rules surrounding farm bankruptcy is covered, including the unique tax treatment provided to a farmer in Chapter 12 bankruptcy.

Of course, farm income tax is an important part of the course. Tax planning is perhaps the most important aspect of the farming business that every day decisions have an impact on and are influenced by. As readers of this blog know well, farm tax issues are numerous and special rules apply in many instances. The new tax law impacts many areas of farm income tax.

Real property legal issues are also prevalent and are addressed in the course. The key elements of an installment land contract are covered, as well as legal issues associated with farm leases. Various types of interests in real estate are explained – easements; licenses; profits, fee simples, remainders, etc. Like-kind exchange rules are also covered as are the special tax rules (at the state level) that apply to farm real estate. A big issue for some farmers and ranchers concerns abandoned railways, and those issues are covered in the course. What if an existing fence is not on the property line?
Farm estate and business planning is also a significant emphasis of the course. What’s the appropriate estate plan for a farm and ranch family? How should the farming business be structured? Should multiple entities be used? Why does it matter? These questions, and more, are addressed.

Agricultural cooperatives are important for the marketing of agricultural commodities. How a cooperative is structured and works and the special rules that apply are also discussed.

Because much agricultural property is out in the open, that means that personal liability rules come into play with respect to people that come onto the property or use farm property in the scope of their employment. What are the rules that apply in those situations? What about liability rules associated with genetically modified products? Ag chemicals also pose potential liability issues, as do improperly maintained fences? What about defective ag seed or purchased livestock that turns out to not live up to representations? These issues, and more, are covered in the scope of discussing civil liabilities.

Sometimes farmers and ranchers find themselves in violation of criminal laws. What are those common situations? What are the rules that apply? We will get into those issue too.

Water law is a very big issue, especially in the western two-thirds of the United States. We will survey the rules surrounding the allocation of surface water and ground water to agricultural operations.

Ag seems to always be in the midst of many environmental laws – the “Clean Water Rule” is just one of those that has been high-profile in recent years. We will talk about the environmental rules governing air, land, and water quality as they apply to farmers, ranchers and rural landowners.
Finally, we will address the federal (and state) administrative state and its rules that apply to farming operations. Not only will federal farm programs be addressed, but we will also look at other major federal regulations that apply to farmers and ranchers.

Further Information and How to Register

Information about the course is available here:
https://eis.global.ksu.edu/CreditReg/CourseSearch/Course.do?open=true&sectionId=127126

You can also find information about the text for the course at the following link (including the Table of Contents and the Index):
https://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/principlesofagriculturallaw/index.html

If you are an undergraduate student at an institution other than Kansas State, you should be able to enroll in this course and have it count as credit towards your degree at your institution.  Consult with your academic advisor to see how Ag Law and Economics will transfer and align with your degree completion goals.

If you have questions, you can contact me directly, or submit your questions to the KSU Global Campus staff at the link provided above.

I hope to see you in January!

Checkout the postcard (401 KB PDF) containing more information about the course and instructor.

KStateAgriculturalLawandEconomicsPostcard

October 18, 2018 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Wednesday, July 18, 2018

Agricultural Law and Economics Conference

Overview

Next month, Washburn Law School and Kansas State University (KSU) will team up for its annual symposium on agricultural law and the business of agriculture.  The event will be held in Manhattan at the Kansas Farm Bureau headquarters.  The symposium will be the first day of three days of continuing education on matters involving agricultural law and economics.  The other two days will be the annual Risk and Profit Conference conducted by the KSU Department of Agricultural Economics.  That event will be on the KSU campus in Manhattan.  The three days provide an excellent opportunity for lawyers, CPAs, farmers and ranchers, agribusiness professionals and rural landowners to obtain continuing education on matters regarding agricultural law and economics.  

Symposium

This year’s symposium on August 15 will feature discussion and analysis of the new tax law, the Tax Cuts and Jobs Act, and its impact on individuals and businesses engaged in agriculture; farm and ranch financial distress legal issues and the procedures involved in resolving debtor/creditor disputes, including the use of mediation and Chapter 12 bankruptcy; farm policy issues at the state and federal level (including a discussion of the status of the 2018 Farm Bill); the leasing of water rights; an update on significant legal (and tax) developments in agricultural law (both federal and state); and an hour of ethics that will test participant’s negotiation skills. 

The symposium can also be attended online.  For a complete description of the sessions and how to register for either in-person or online attendance, click here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/continuingeducation/businessofagriculture/index.html

Risk and Profit Conference

On August 16 and 17, the KSU Department of Agricultural Economics will conduct its annual Risk and Profit campus.  The event will be held at the alumni center on the KSU campus, and will involve a day and a half of discussion of various topics related to the economics of the business of agriculture.  One of the keynote speakers at the conference will be Ambassador Richard T. Crowder, an ag negotiator on a worldwide basis.  The conference includes 22 breakout sessions on a wide range of topics, including two separate breakout sessions that I will be doing with Mark Dikeman of the KSU Farm Management Association on the new tax law.  For a complete run down of the conference, click here:  https://www.agmanager.info/risk-and-profit-conference

Conclusion

The two and one-half days of instruction is an opportunity is a great chance to gain insight into making your ag-related business more profitable from various aspects – legal, tax and economic.  If you are a producer, agribusiness professional, or a professional in a service business (lawyer; tax professional; financial planner; or other related service business) you won’t want to miss these events in Manhattan.  See you there, or online for Day 1.

July 18, 2018 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Wednesday, June 20, 2018

Contract Rescission – When Can You Back Out Of A Deal?

Overview

Contracts are a fundamental part of life.  We all enter into various contracts on many occasions.  But, sometimes a deal doesn’t live up to expectations.  It’s those times that we might attempt to back out of the deal.  But, is that possible?  When can a deal be negated if the other party or parties to the agreement don’t want to cancel the deal?

Rescinding a contract – that’s the topic of today’s post.

Contract Rescission

Rescission refers generally to the cancellation of a contract.  Rescission can occur as a result of innocent or fraudulent representation, mutual mistake, lack of legal capacity, an impossibility to perform a contract not contemplated by the parties, or duress and undue influence.  Rescission may be mutual – all of the parties to the agreement agree (in writing) to terminate their respective duties and obligations under the contract.  Rescission may also be unilateral – where one party to the agreement seeks to have the contract cancelled and the parties restored to the position they were in economically at the time the agreement was entered into. 

An innocent as well as intentional misrepresentation may serve as the basis for a unilateral rescission of contract.  To be successful on such a claim, the plaintiff must have justifiably relied on a false statement, which was material to the transaction.  The rule prevents parties who later become disappointed at the outcome of their bargain from capitalizing on any insignificant discrepancy to void the contract. 

Duty to investigate?  There is a split of authority regarding a buyer’s duty to investigate a seller’s fraudulent statements, but the prevailing trend is toward placing a minimal duty on the buyer.  With respect to land sale transactions, the general rule is that a seller’s defense that the buyer failed to exercise due care is disallowed if the seller has made a reckless or knowing misrepresentation.  See, e.g., Cousineau v. Walker, 613 P.2d 608 (Alaska 1980); Fox v. Wilson, 211 Kan. 563 (1973).  However, the defense is typically allowed if the buyer’s fault was so negligent that it amounted to a failure to act in good faith and in accordance with reasonable standards of fair dealing.  So, in general, a purchaser of land may rely on material representations of the seller and is not obligated to ascertain whether such representations are truthful. 

Illustrative case.  In a 2006 New York case, Boyle, et al. v. McGlynn, et al., 814 N.Y.S.2d 312 (2006), the plaintiff bought the defendant’s farm (including the residence) and later sought to have the sale contract rescinded based on the seller’s alleged fraud and misrepresentations for not disclosing that plans were in the works for the construction of large aerogenerators on an adjacent parcel.  The plaintiffs submitted the affidavit of a neighbor of the defendant who detailed two conversations with the defendant that occurred months before the defendant put his farm on the market during which the wind energy development project was discussed.  The defendant, at that time, stated that the presence of commercial aerogenerators on the adjacent tract would “force” him to sell his farm.  When the plaintiff sought to rescind the contract, the defendant claimed he had no duty to the plaintiff and that the doctrine of caveat emptor (“buyer beware”) was a complete defense to the action.

The appellate court affirmed the trial court’s denial of the defendant’s summary judgment motion.  The appellate court noted the plaintiff’s claim that the defendants were well aware of their desire to buy a property with a scenic view that was free of environmental controversy and land use battles, and that the status of the land where the aerogenerators were planned was specifically discussed with the defendant before the contract closed.  The appellate court also noted that during this same conversation, the defendant told the plaintiff that the property was “protected.”  In addition, the sale brochure for the property stated that the property as “backing up to one of the largest areas of undeveloped land in the County.”   The defendant also apparently told the plaintiff that “what you see if what you get” and that the area was “secluded and protected.” 

The appellate court further noted that while there was an article in a local paper about the development project before the purchase offer for the property was made, the appellate court also noted that the plaintiff did not live in the area.  Likewise, no public documents concerning the project were filed with the local planning board until a month after the parties’ closing.     

Conclusion

It is important to note that the purchaser's claims in Boyle were based on the purchaser's allegations of unclear oral conversations between the purchaser and the seller, and a statement in a real estate brochure used to market the property.  The principle in Boyle could be applied in similar agricultural land sale transactions where plans are being made for the development of any activity that could be considered a nuisance.  In addition to the wind energy development project at issue in Boyle, known future development of a large-scale animal confinement operation, ethanol plant or similar activity that produces odors, obscures view or could create unreasonably objectionable noise, light or traffic, may need to be disclosed to a buyer to avoid a rescission action.

June 20, 2018 in Contracts | Permalink | Comments (0)

Thursday, February 22, 2018

Some Thoughts on The Importance of Leasing Farmland

Overview

Leasing is of primary importance to agriculture.  Leasing permits farmers and ranchers to operate larger farm businesses with the same amount of capital, and it can assist beginning farmers and ranchers in establishing a farming or ranching business.

Today’s post takes a brief look at some of the issues surrounding farmland leases – economic; estate planning; and federal farm program payment limitation planning.   

Common Types of Leases

Different types of agricultural land leasing arrangements exist.  The differences are generally best understood from a risk/return standpoint.  Cash leases involve the periodic payment of a rental amount that is either a fixed number of dollars per acre, or a fixed amount for the entire farm.  Typically, such amounts are payable in installments or in a lump sum.  A flexible cash lease specifies that the amount of cash rent fluctuates with production conditions and/or crop or livestock prices.  A hybrid cash lease contains elements similar to those found in crop-share leases.  For example, a hybrid cash lease usually specifies that the rental amount is to be determined by multiplying a set number of bushels by a price determined according to terms of the lease, but at a later date.  The tenant will market the entire crop.  The landlord benefits from price increases, while requiring no management or selling decisions or capital outlay.  However, the rental amount is adversely affected by a decline in price.  The tenant, conversely, will not bear the entire risk of low commodity prices, as would be the case if a straight-cash lease were used, but does bear all of the production risk and must pay all of the production costs. 

Under a hybrid-cash lease, known as the guaranteed bushel lease, the tenant delivers a set amount of a certain type of grain to a buyer by a specified date.  The landlord determines when to sell the grain, and is given an opportunity to take advantage of price rises and to make his or her own marketing decisions.  However, the landlord must make marketing decisions, and also is subject to price decreases and the risk of crop failure.  For tenants, the required capital outlay will likely be less, and the tenant should have greater flexibility as to cropping patterns.  While the rental amount may be less than under a straight-cash lease, the tenant will continue to bear the risk of crop failure. 

Another form of the hybrid-cash lease, referred to as the minimum cash or crop share lease, involves a guaranteed cash minimum.  However, the landlord has the opportunity to share in crop production from a good year (high price or high yield) without incurring out-of-pocket costs.  For a tenant, the minimum cash payment likely will be less than under a straight-cash lease because the landlord will receive a share of production in good years.  The tenant, however, still retains much of the production risk.  In addition, the tenant typically does not know until harvest whether the tenant will receive all or only part of the crop.  This may make forward cash contracting more difficult.

Under a crop-share leasing arrangement, the rent is paid on the basis of a specified proportion of the crops.  The landlord may or may not agree to pay part of certain expenses.  There are several variations to the traditional crop-share arrangement.  For example, with a crop share/cash lease, rent is paid with a certain proportion of the crops, but a fixed sum is charged for selected acreage such as pasture or buildings, or both.  Under a livestock-share leasing arrangement, specified shares of livestock, livestock products and crops are paid as rent, with the landlord normally sharing in the expenses.  For irrigation crop-share leases, rent is a certain proportion of the crops produced, but the landlord shares part of the irrigation expenses.  Under labor-share leases, family members are typically involved and the family member owning the assets has most of the managerial responsibility and bears most of the expenses and receives most of the crops.  The other family members receive a share of yield proportionate to their respective labor and management inputs.

Estate Planning Implications

Leasing is also important in terms of its relation to a particular farm or ranch family's estate plan.  For example, with respect to Social Security benefits for retired farm-landlords, pre-death material participation under a lease can cause problems.  A retired farm-landlord who has not reached full retirement age (66 in 2018) may be unable to receive full Social Security benefits if the landlord and tenant have an agreement that the landlord shall have “material participation” in the production of, or the managing of, agricultural products.

While material participation can cause problems with respect to Social Security benefits, material participation is required for five of the last eight years before the earlier of retirement, disability or death if a special use valuation election is going to be made for the agricultural real estate included in the decedent-to-be's estate.  I.R.C. §2032A.  A special use valuation election permits the agricultural real estate contained in a decedent's estate to be valued for federal estate tax purposes at its value for agricultural purposes rather than at fair market value.  The solution, if a family member is present, may be to have a nonretired landlord not materially participate, but rent the elected land to a materially participating family member or to hire a family member as a farm manager.  Cash leasing of elected land to family members is permitted before death, but generally not after death. The solution, if a family member is not present, is to have the landlord retire at age 65 or older, materially participate during five of the eight years immediately preceding retirement, and then during retirement rent out the farm on a nonmaterial participation crop-share or livestock-share lease.

Farm Program Payments

Leases can also have an impact on a producer's eligibility for farm program payments.  In general, to qualify for farm program payments, an individual must be “actively engaged in farming.”  For example, each “person” who is actively engaged in farming is eligible for up to $125,000 in federal farm program payments each crop year.  A tenant qualifies as actively engaged in farming through the contribution of capital, equipment, active personal labor, or active personal management.  Likewise, a landlord qualifies as actively engaged in farming by the contribution of the owned land if the rent or income for the operation's use of the land is based on the land's production or the operation's operating results (not cash rent or rent based on a guaranteed share of the crop).  In addition, the landlord's contribution must be “significant,” must be “at risk,” and must be commensurate with the landlord's share of the profits and losses from the farming operation.

A landowner who cash leases land is considered a landlord under the payment limitation rules and may not be considered actively engaged in farming.  In this situation, only the tenant is considered eligible.  Under the payment limitation rules, there are technical requirements that restrict the cash-rent tenant's eligibility to receive payments to situations in which the tenant makes a “significant contribution” of (1) active personal labor and capital, land or equipment; or (2) active personal management and equipment. Leases in which the rental amount fluctuates with price and/or production (so-called “flex” leases) can raise a question as to whether or not the lease is really a crop-share lease which thereby entitles the landlord to a proportionate share of the government payments attributable to the leased land.

 Under Farm Service Agency (FSA) regulations (7 C.F.R. §1412.504(a)(2)), a lease is a “cash lease” if it provides for only a guaranteed sum certain cash payment, or a fixed quantity of the crop (for example, cash, pounds, or bushels per acre).”  All other types of leases are share leases.  In April 2007, FSA issued a Notice stating that if any portion of the rental payment is based on gross revenue, the lease is a share lease. Notice DCP-172 (April 2, 2007).  However, according to FSA, if a flex or variable lease pegs rental payments to a set amount of production based on future market value that is not associated with the farm’s specific production, it’s a cash lease. Id.  That was the FSA’s position through the 2008 crop year.  Beginning, with the 2009 crop year, FSA has taken the position that a tenant and landlord may reach any agreement they wish concerning “flexing” the cash rent payment and the agreement will not convert the cash lease into a share-rent arrangement.

Conclusion

There are many issues that surround farmland leasing.  Today’s post just scratches the surface with a few.  Of course, many detailed tax rules also come into play when farmland is leased.  The bottom line is that the type of lease matters, for many reasons.  Give your leasing arrangement careful consideration and get it in writing.

February 22, 2018 in Contracts, Estate Planning, Real Property | Permalink | Comments (0)

Friday, February 2, 2018

Is a Farmer a Merchant? Why It Might Matter

Overview

On April 16, 1677, the English Parliament passed the “Statute of Frauds.”  The new law required that certain contracts for the sale of goods be in writing to be enforceable.  In the United States, nearly every state has adopted, and retained, a statute of frauds.  Most recently, state legislatures have had to amend existing laws to account for electronic communications and specify whether those communications satisfy the writing requirement.

A type of contract that must be in writing to be enforceable is one that involves the sale of goods worth $500 or more.  Obviously, this type of contract will involve many contracts involving the sale agricultural commodities and other agricultural goods.  But, there are exceptions to the writing requirement for contracts that would otherwise have to be in writing to be enforceable.  One of those exceptions turns on whether a farmer is a merchant or not, and the rule involving the matter is known as the “merchant’s confirmatory memo rule.”  It often comes up in situations involving the sale of grain under a forward contract.

That’s the focus of today’s post – the merchant’s confirmatory memo rule.

The Writing Requirement and the UCC

The writing requirement for sales of goods is found in a particular state’s version of § 2-201 of the Uniform Commercial Code (UCC).  The official version, adopted by most states, is applicable only when the goods have a price of $500 or more.  In addition, under UCC § 1-206, there is an overall statute of frauds for every contract involving a contract for the sale of personal property having a value in excess of $5,000.  Thus, for personal property except “goods” a contract is not enforceable beyond $5,000 unless there is some writing signed by the party against whom enforcement is sought.

Contracts involving merchants.  As indicated above, a contract for the sale of goods for $500 or more is generally not enforceable unless there is some writing signed by the party against whom enforcement is sought sufficient to indicate that the contract had been made between the parties.  For contracts between merchants, it is common for one merchant to send the other merchant a letter of confirmation, or a pre-printed form contract.  This confirmation will be signed by the party who sent it, thus leaving one party at the other party’s mercy.  The UCC remedies this situation by providing that unwritten contracts between merchants are enforceable if a writing in confirmation of the contract is received within a reasonable time unless written notice of objection to the contents of the writing is given within ten days.  UCC § 2-201(2); see also Topflight Grain Cooperative, Inc. v. RJW Williams Farms, Inc., No. 4-12-1079, 2013 Ill. App. Unpub. LEXIS 1753 (Ill. Ct. App. Aug. 13, 2012).

Thus, the effect of this “merchants” exception is to take away from a merchant who receives a writing in confirmation of a contract the statute of frauds defense if the merchant does not object to the confirmation.  In any event, the sender of the written confirmation must still be able to persuade a jury that a contract was in fact made orally, to which the written confirmation applies. 

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Consider the following example:

 

In December of 2017, Jesse telephoned his local elevator for a price quote on wheat.  During their telephone conversation, Jesse and the elevator agreed that Jesse would sell the elevator 25,000 bushels of wheat at a specified quality at the December price next June, with performance to be completed no later than June 30, 2018.  The elevator sent Jesse a written confirmation asking that it be signed and returned within ten days.  Jesse did not sign the written confirmation.  Because of unexpected market conditions, the June 2018 wheat price was substantially higher than the December 2017 price.  Jesse refused to perform in accordance with the forward contract, preferring instead to sell his wheat crop at the higher current market price.  The elevator sued to enforce the forward contract.  Jesse asserted the statute of frauds as a defense – because they didn’t have a written contract, he didn’t have to deliver.

If Jesse is a merchant with respect to the kind of goods contemplated in the forward contract (wheat), he will be bound by the oral contract. If Jesse is not a merchant, the elevator might be able to recover if it can establish that it changed its position in reliance on Jesse’s conduct, that Jesse knew or reasonably should have known the elevator would sell the forward contract, or can demonstrate that Jesse’s nonperformance was based on his desire to benefit from a higher market price.

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When Is A Farmer a Merchant?

A “merchant” is defined as one who deals in goods of the kind being sold, or one who by occupation holds himself or herself out as having knowledge or skill peculiar to either the goods involved or the practice of buying and selling such goods.  Courts are divided on the issue of whether a farmer or rancher is a merchant, with the outcome depending on the jurisdiction and the facts of the particular case.  See, e.g., Huprich v. Bitto, 667 So.2d 685 (Ala. 1995); Smith v. General Mills, Inc., 968 P. 2d 723 (Mont. 1998); Brooks Cotton Co., Inc. v. Wilbine, 381 S.W.3d 414 (Tenn. Ct. App. 2012).

Unfortunately, in many instances, farmers and ranchers cannot know with certainty whether they are merchants without becoming involved in legal action on the issue.  Courts consider several factors in determining whether a particular farmer is a merchant.  These factors include (1) the length of time the farmer has been engaged in marketing products on the farm; (2) the degree of business skill demonstrated in transactions with other parties; (3) the farmer’s awareness of the operation and existence of farm markets; and (4) the farmer’s past experience with or knowledge of the customs and practices unique to the marketing of the product sold.  For a couple of courts opinions on the issue of whether a farmer is a merchant that reached different outcomes, see Nelson v. Union Equity Co-Operative Exchange, 548 S.W.2d 352 (Tex. 1977) and Harvest States Cooperatives v. Anderson, 217 Wis. 2d 154 (Wis. Ct. App. 1998)

Conclusion

Whether a farmer is a merchant or not is the key to determining whether an oral conversation involving the sale of goods is enforceable. Just another one of those interesting aspects of agricultural law – with its roots dating back to 1677. 

February 2, 2018 in Contracts | Permalink | Comments (0)

Thursday, November 2, 2017

Sales of Agricultural Goods and the Implied Warranty of Merchantability

Overview

The Uniform Commercial Code (UCC) holds merchants to a higher standard of business conduct than other participants to sales transactions.  In every sale by a merchant who deals in goods of the kind sold, there is an implied warranty that the goods are merchantable.  The warranty of merchantability exists even if the seller made no statements or promises and did not know of any defect in the goods. 

What are the rules for merchantable goods? 

What are Merchantable Goods?

In order for goods to be merchantable, they must be goods that:

  • pass without objection in the trade under the contract description;
  • in the case of fungible goods, are of fair average quality within the description;
  • are fit for the ordinary purposes for which such goods are used;
  • run, within the variations permitted by the agreement, of even kind, quality and quantity within each unit and among all units involved;
  • are adequately contained, packaged, and labeled as the agreement may require; and
  • conform to the promises or affirmations of fact made on the container or label if any.

Requirements (a) through (c) above are most often encountered in agricultural sales, with much of the focus on whether the goods are fit for the ordinary purposes for which they are used.   For instance, as to the fair average quality requirement, one court held that beetle infestation exceeding an acceptable level of contamination for fungible flour made the flour unmerchantable.  T.J. Stevenson & Co., Inc. v. 81,193 Bags of Flour, 629 F.2d 338 (5th Cir. 1980)As for the requirement that the goods be properly packaged, the warranty is breached when defective packaging results in damage to the product or personal injury, when the package does not adequately warn about dangers with the product, and when misleading packaging inhibits subsequent resales.  See, e.g., Agricultural Services Association, Inc. v. Ferry-Morse Seed Co., Inc., 551 F.2d 1057 (6th Cir. 1977).

The ordinary purpose standard is breached when goods are not reasonably safe or when they cannot be used to meet their normal functions. For example, in Latimer v. William Mueller & Son, 149 Mich. App. 620, 386 N.W.2d 618 (1986), the Michigan Court of Appeals ruled that bean seed was unfit for its ordinary purpose when the purchaser discovered, after planting, that the seed was infected with a seed-borne bacterial disease. This defect, the court held, invalidated the label provisions that attempted to disclaim warranties for merchantability and fitness. Likewise, in Eggl v. Letvin Equipment Co., 632 N.W.2d 435 (N.D. 2001), the court found that a tractor sold with defective O-rings was not fit for the ordinary purpose for which it was intended and, thus, breached the warranty of merchantability.    

Requirement (d) involves bulk purchases and specifies that goods sold in bulk must be of an even kind, quality and quantity.  Requirements (e) and (f) pertain to goods that are sold in containers or packaging, and reflect an overlap between express warranties and the implied warranty of merchantability.  They are especially important in sales of labeled goods, such as feed, seed or pesticides.  Some courts have suggested that statements on labels or containers create both an express and an implied warranty.

Merchantability also involves the standard of merchantability in the particular trade.  Usage of trade is defined as “any practice or method of dealing having such regularity of observance in a place, vocation or trade as to justify an expectation that it will be observed with respect to the transaction in question.” UCC § 1-205(2). If a product fails to satisfy industry standards, an implied warranty of merchantability may arise.  For example, in one case, the Pennsylvania Supreme Court held that feed for breeding cattle normally does not contain the female hormone stilbestrol because it is known to cause abortions in pregnant cows and sterility in bulls.  Kassab v. Central Soya, 432 Pa. 217, 246 A.2d 848 (1968).

Even if a particular farmer does not qualify as a “merchant,” known product defects must be disclosed to a potential buyer.  Every seller with knowledge of defects must fully disclose defects that are not apparent to the buyer on reasonable inspection.  This duty arises out of the underlying rationale behind the implied warranty of merchantability, which is to assure that the buyer is getting what is being paid for, and the UCC’s requirement that market participants operate in “good faith.” 

The UCC warranty provisions also apply to sales transactions involving livestock.  In a series of cases in the 1970s, courts applied the UCC implied warranty provisions to the sale of livestock as goods. See, e.g., Vorthman v. Keith E. Myers Enterprises, 296 N.W.2d 772 (Iowa 1980); Holm v. Hansen, 248 N.W.2d 503 (Iowa 1976); Ruskamp v. Hog Builders, Inc., 192 Neb. 168, 219 N.W.2d 750 (1974); Hinderer v. Ryan, 7 Wash. App. 434, 499 P.2d 252 (1972).     The livestock industry strongly reacted and successfully lobbied for an exclusionary provision limiting the application of implied warranties in livestock sales. Some version of the statutory exclusion now exists in about half of the states, especially those states where the livestock industry is of major economic importance. The statutes are of three general types: those that exempt sellers from implied warranties in all situations, those providing that no implied warranty exists unless the seller knew the animals were sick at time of sale, and those providing an exemption if certain conditions are met.  

The statutory exclusion of warranties in livestock sale transactions applies only to implied warranties; express warranties are not affected.  Express warranties can still be made in livestock transactions and may be particularly important in transactions involving breeding livestock.  Many sellers tend to make statements that might rise to the level of an express warranty in order to induce buyers to conclude the sale. Such statements can become a part of the basis of the bargain and create an express warranty enforceable against the seller.

The typical statutory exclusion also is inapplicable in situations where the seller “knowingly” sells animals that are diseased or sick.  However, it is likely to be difficult for a livestock buyer to prove that the seller knew animals were diseased or sick at the time they were sold.  Under the UCC, a seller “‘knows’ or ‘has knowledge’ of a fact when the seller has ‘actual knowledge’ of it.”  UCC § 1-201(25). Thus, in order to overcome the statutory exclusion, the buyer must prove (most likely by circumstantial evidence) the seller’s actual knowledge regarding the animal’s disease or sickness.

Under most state exclusionary statutes, the meaning of “diseased or sick” is unclear.  For instance, in breeding animals, the failure to provide offspring may result from recognizable diseases or from defects, often genetic, that historically have not been considered diseases.  It is uncertain whether the statutory exclusion of implied warranties applies in circumstances involving genetic defects.  Presently, no court in a jurisdiction having the exclusion has addressed the issue.  Similarly, uncertainty exists with respect to the application of the exclusion to the sale of semen or embryo transfers, which are increasingly common in the livestock industry. Arguably, the livestock exclusion does not apply to semen sales since semen is not “livestock.”

Conclusion

The implied warranty of merchantability arises in many sales transactions involving agricultural goods.  The rule for merchantability have produced some very interesting cases over the years.

November 2, 2017 in Contracts | Permalink | Comments (0)

Thursday, October 5, 2017

What Remedies Does a Buyer Have When a Seller of Ag Goods Breaches the Contract?

Overview

 

Not all contractual transactions for agricultural goods function smoothly and without issues.  From the buyer’s perspective, what rights does the buyer have if the seller breaches the contract?  That’s an important issue for contracts involving agricultural goods.  Ag goods, such as crops and livestock, are not standard, “cookie-cutter” goods.  They vary in quality, size, shape, and moisture content, for example.  All of those aspects can lead to questions as to contract breach.

So, what rights does a buyer have if there is a breach?  A basic review of those rights is the topic of today’s post.

 

Right of Rejection

A buyer has a right to reject goods that do not conform to the contract.  Under the Uniform Commercial Code (UCC), a buyer may reject nonconforming goods if such nonconformity substantially impairs the contract.  A buyer usually is not allowed to cancel a contract for only trivial defects in goods.  For example, in a 1995 New York case, a manufacturer of potato chips rejected shipments of potatoes for failure to conform to the contract based on the color of the potatoes.  The court held that the failure to conform substantially impaired the contract and justified the manufacturer’s refusal to accept the potatoes.  The defect was not merely trivial.  Hubbard v. UTZ Quality Foods, Inc., 903 F. Supp. 444 (W.D. N.Y. 1995). 

Triviality is highly fact dependent.  It will be tied to industry custom, past practices between the parties and the nature of the goods involved in the contract.    

 

Right To “Cover” 

The traditional measure of damages for a seller’s total breach of contract is the difference between the market price and the contract price of the goods.  For example, in Tongish v. Thomas, 251 Kan. 728, 840 P.2d 471 (1992), the seller breached a contract to sell sunflower seeds to a buyer.  The buyer recovered damages for the difference in the market price and the contract price.  The UCC retains this rule, (UCC § 2-713(1)) but also allows an aggrieved buyer to “cover” by making a good faith purchase or contract to purchase substitute goods without unreasonable delay. UCC § 2-712(1). The buyer that covers is entitled to recover from the seller the difference between the cost of cover and the contract price.  UCC § 2-712(1).


Most of the agricultural cases concerning “covering” focus on the difference between the goods purchased as cover and the goods called for in the contract (cover goods must be like-kind substitutes), and the timeframe within which cover was carried out (there must be no unreasonable delay).  On the timeframe issue, a Nebraska case serves as a good illustration of how the courts analyze the issue.  In, Trinidad Bean and Elevator Co. v. Frosh, 1 Neb. App 281 494 N.W.2d 347 (1992), a navy bean producer was able to terminate a contract without penalty, even though prices had doubled by harvest (the delivery date specified in the contract).  The farmer notified the elevator in May, when market prices were identical to the forward price, that the farmer would not fulfill the contract later that fall.  The court noted that under the UCC when a seller repudiates a forward contract before delivery is required, the buyer is entitled to the difference between the contract price and the price of the goods on the date of repudiation if it is commercially reasonable for the buyer to cover at that time.  The court ruled that the elevator was not entitled to damages because it could have filled the contract at the forward contract price at the time it was notified of the seller’s contract repudiation.

Right Of Specific Performance

If the goods are unique, the buyer may obtain possession of the goods by court order.  This is known as specific performance of the contract.  Contracts for the sale of real estate or art work, for example, are contracts for the sale of unique goods and the buyer’s remedy is to have the contract specifically performed.  Monetary damages can be awarded to a contracting party along with specific performance if it can be shown that damages resulted from the other party’s failure to render timely performance.  See, e.g., Perry v. Green, 313 S.C. 250, 437 S.E.2d 150 (1993).

Nonconforming Goods

A buyer has a right before acceptance to inspect delivered goods at any reasonable place and time and in any reasonable manner.  The reasonableness of the inspection is a question of trade usage and past practices between the parties. If the goods do not conform to the contract, the buyer may reject them all within a reasonable time and notify the seller, accept them all despite their nonconformance, or accept part (limited to commercial units) and reject the rest. Any rejection must occur within a reasonable time, and the seller must be notified of the buyer's unconditional rejection.  For instance, in In re Rafter Seven Ranches LP v. C.H. Brown Co., 362 B.R. 25 (B.A.P. 10th Cir. 2007), leased crop irrigation sprinkler systems failed to conform to the contract.  However, the buyer indicated an attempt to use the systems and did not unconditionally reject the systems until four months after delivery.  As a result, the buyer was held liable for the lease payments involved because the buyer failed to make a timely, unconditional rejection.

The buyer’s right of revocation is not conditioned upon whether it is the seller or the manufacturer that is responsible for the nonconformity. UCC § 2-608. The key is whether the nonconformity substantially impairs the value of the goods to the buyer.

A buyer rejecting nonconforming goods is entitled to reimbursement from the seller for expenses incurred in caring for the goods. The buyer may also recover damages from the seller for non-delivery of suitable goods, including incidental and consequential damages.  If the buyer accepts nonconforming goods, the buyer may deduct damages due from amounts owed the seller under the contract if the seller is notified of the buyer’s intention to do so.  See, e.g., Gragg Farms and Nursery v. Kelly Green Landscaping, 81 Ohio  Misc. 2d 34; 674 N.E.2d 785 (1996)

Timeframe for Exercising Remedies

The UCC allows buyers a reasonable time to determine whether purchased goods are fit for the purpose for which the goods were purchased, and to rescind the sale if the goods are unfit.  Whether a right to rescind is exercised within a reasonable time is to be determined from all of the circumstances. UCC §1-204.  The buyer’s right to inspect goods includes an opportunity to put the purchased goods to their intended use.  Generally, the more severe the defect, the greater the time the buyer has to determine whether the goods are suitable to the buyer.

Statute Of Limitations

Actions founded on written contracts must be brought within a specified time, generally five to ten years.  For unwritten contracts, actions generally must be brought within three to five years.  In some states, however, the statute of limitations is the same for both written and oral contracts.  A common limitation period is four years.  Also, by agreement in some states, the parties may reduce the period of limitation for sale of goods but cannot extend it.

Conclusion

Most contractual transactions for agricultural goods function smoothly.  However, when the seller breaches, it is helpful for the buyer to know the associated rights and liabilities of the parties.

October 5, 2017 in Contracts | Permalink | Comments (0)

Thursday, September 21, 2017

Ag Contracts and Express Warranties

Overview

Understanding warranties with respect to contracts is important.  One important aspect concerns their creation.  There are various types of warranties that are recognized by the law.  One type, an express warranty, generally results from explicit statements made by the seller and are the most common way of imposing liability on sellers of agricultural products.  Once an express warranty has been made, it is very difficult to disclaim and, in general, an express warranty cannot be limited.  Under the Uniform Commercial Code (UCC), an express warranty can be created in three ways.  In each case, it is important that the event creating the express warranty occur at a time when the buyer could have relied upon it.

Today’s post looks at express warranties and ag contracts.

Creation

The first way an express warranty can be created is for the seller to make “ any affirmation of fact or promise” that relates to the goods and becomes part of the basis of the bargain.  The warranty is that the goods will conform to the affirmation or promise.  Oral or written statements concerning the goods that the buyer relies on in purchasing the goods can create an express warranty. In agricultural sales, express warranties usually involve the seller’s oral or written statements concerning the goods.  If the statements become “part of the basis of the bargain,” that is, if they tend to induce the buyer to make the purchase, they may be considered express warranties.   But, statements do not create an express warranty if they are statements of opinion, honestly held, or merely commendation of the goods (“puffing talk”).  See, e.g., American Italian Pasta Co. v. New World Pasta Co., 371 F.3d 387 (8th Cir. 2004)For example, in a South Dakota case, a seller’s statement that allegedly defective seeds were “good seed” created no express warranty. Schmaltz v. Nissen, 431 N.W.2d 657 (S.D. 1988)Similarly, in a North Carolina case a seller’s statement that a herbicide would “do a good job” also did not create an express warranty. Tyson v. Ciba-Geigy Corp., 82 N.C. App. 626, 347 S.E.2d 473 (1986).  Also, in a Wisconsin case, Fulton v. Vogt, 583 N.W.2d 673 (Wis. Ct. App. 1998), a broker’s statement that “there is no reason that this property cannot be a successful sod farm” did not create an express warranty.

However, at some point a statement moves from being merely an opinion and becomes an express warranty because the buyer reasonably understands that only an opinion is involved.  For example, a statement by the seller that “all of my cows are bred,” or “all of my hay is of the highest quality” creates an express warranty that the goods (cows or hay) will conform to the particular affirmation or promise. See, e.g., Smith v. Bearfield, 950 S.W.2d 40 (Tenn. Ct. App. 1997); Reilly Construction Co., Inc. v. Bachelder, Inc., 863 N.W.2d 302 (Iowa Ct. App. 2016); Smith v. Penbridge Associates, Inc., 440 Pa. Super. 410, 655 A.2d 1015 (1995).  Likewise, statements contained in product labels may be deemed to create express warranties. 

An express warranty can also be created if the seller provides “any description of the goods” that becomes part of the basis of the bargain.  The warranty is that the goods will conform to the description.  Similarly, an express warranty can be created if the seller displays a “sample or model” of the goods.  If the sample or model becomes part of the basis of the bargain, the warranty is that all of the goods will conform to the sample or model. See, e.g., Dakota Grain Co., Inc. v. Ehrmantrout, 502 N.W.2d 234 (N.D. 1993).  The UCC creates a presumption that any sample or model is intended to become a basis of the bargain.  UCC §2-313, Comment 6.  To prevent a sample or model from creating an express warranty, the presumption must be rebutted by the seller.  See, e.g., Sylvia Coal Co. v. Mercury & Coke Co., 151 W. Va. 818, 156 S.E.2d 1 (1967).

In general, express warranties are not subject to exclusion or modification and, once made, are very difficult to disclaim or limit.  The UCC requires that “[w]ords or conduct relevant to the creation of an express warranty [be construed as consistent with] words or conduct tending to negate or limit warranty...wherever reasonable...[and] negation or limitation is inoperative to the extent that such construction is unreasonable.  UCC § 2-316(1). 

Disclaiming An Express Warranty

While it is difficult for an express warranty to be disclaimed once created, it may not be created if it doesn’t become a basis of the bargain between the parties.  For example, the statement by a tractor seller that the tractor was in “excellent condition” and “field ready” did not become a basis of the bargain with the buyer because the buyer inspected the tractor, determined it was in need of some repairs and was familiar with tractors based on his experience.

Other Related Issues

Parties to sales contracts should exercise caution when reducing oral agreements to writing with the intent of making the written contract the final agreement between the parties.  Oral statements may inadvertently be omitted from a later writing, but could have served as the basis of the bargain.  As such, an express warranty could have been created orally, but eliminated by a subsequent writing omitting the relied upon oral statements.  The best approach may be to ensure that all previously negotiated terms are included in any subsequent written agreement.

Any representations made by a company, its employees, consultants or agents pertaining to a product, whether oral or written, can potentially be treated as express warranties.  Thus, an important part of any loss prevention program is to closely monitor any representations made and provide training concerning appropriate representations.

Conclusion

When entering into contracts for ag products, statements and conduct can create an express warranty.  That can have legal implications.  Care must be taken to make sure only what is intended to be warrantied occurs.  It can be easy to create an express warranty, but difficult to disclaim.  Take care when contracting.

September 21, 2017 in Contracts | Permalink | Comments (0)

Tuesday, August 22, 2017

The Business of Agriculture – Upcoming CLE Symposium

Overview

On September 18, Washburn School of Law will be having its second annual CLE conference in conjunction with the Agricultural Economics Department at Kansas St. University.  The conference, hosted by the Kansas Farm Bureau (KFB) in Manhattan, KS, will explore the legal, economic, tax and regulatory issue confronting agriculture.  This year, the conference will also be simulcast over the web.

That’s my focus today – the September 18 conference in Manhattan, for practitioners, agribusiness professionals, agricultural producers, students and others. 

Symposium Topics

Financial situation.  Midwest agriculture has faced another difficult year financially.  After greetings by Kansas Farm Bureau General Counsel Terry Holdren, Dr. Allen Featherstone, the chair of the ag econ department at KSU will lead off the day with a thorough discussion on the farm financial situation.  While his focus will largely be on Kansas, he will also take a look at nationwide trends.  What are the numbers for 2017?  Where is the sector headed for 2018? 

Regulation and the environment.  Ryan Flickner, Senior Director, Advocacy Division, at the KFB will then follow up with a discussion on Kansas regulations and environmental laws of key importance to Kansas producers and agribusinesses. 

Tax – part one.  I will have a session on the tax and legal issues associated with the wildfire in southwest Kansas earlier this year – handling and reporting losses, government payments, gifts and related issues.  I will also delve into the big problem in certain parts of Kansas this year with wheat streak mosaic and dicamba spray drift.

Weather.  Mary Knapp, the state climatologist for Kansas, will provide her insights on how weather can be understood as an aid to manage on-farm risks.  Mary’s discussions are always informative and interesting. 

Crop Insurance.  Dr. Art Barnaby, with KSU’s ag econ department, certainly one of the nation’s leading experts on crop insurance, will address the specific situations where crop insurance does not cover crop loss.  Does that include losses caused by wheat streak mosaic?  What about losses from dicamba drift?

Washburn’s Rural Law Program.  Prof. Shawn Leisinger, the Executive Director of the Centers for Excellence at the law school (among his other titles) will tell attendees and viewers what the law school is doing (and planning to do) with respect to repopulating rural Kansas with well-trained lawyers to represent the families and businesses of agriculture.  He will also explain the law school’s vision concerning agricultural law and the keen focus that the law school has on agricultural legal issues.

Succession Planning.  Dr. Gregg Hadley with the KSU ag econ department will discuss the interpersonal issues associated with transitioning the farm business from one generation to the next.  While the technical tax and legal issues are important, so are the personal family relationships and how the members of the family interact with each other.

Tax – part two.  I will return with a second session on tax issues.  This time my focus will be on hot-button issues at both the state and national level.  What are the big tax issues for agriculture at the present time?  There’s always a lot to talk about for this session.

Water.  Prof. Burke Griggs, another member of our “ag law team” at the law school, will share his expertise on water law with a discussion on interstate water disputes, the role of government in managing scarce water supplies, and what the relationship is between the two.   What are the implications for Kansas and beyond?

Producer panel.  We will close out the day with a panel consisting of ag producers from across the state.  They will discuss how they use tax and legal professionals as well as agribusiness professionals in the conduct of their day-to-day business transactions.

Conclusion

The Symposium is a collaborative effort of Washburn law, the ag econ department at KSU and the KFB.  For lawyers, CPAs and other tax professionals, application has been sought for continuing education credit.  The symposium promises to be a great day to interact with others involved in agriculture, build relationships and connections and learn a bit in the process.

We hope to see you either in-person or online.  For more information on the symposium and how to register, check out the following link:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/continuingeducation/businessofagriculture/index.html

August 22, 2017 in Bankruptcy, Business Planning, Civil Liabilities, Contracts, Cooperatives, Criminal Liabilities, Environmental Law, Estate Planning, Income Tax, Insurance, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)

Monday, July 31, 2017

Agricultural Law in a Nutshell

Overview

Today's post is a deviation from my normal posting on an aspect of agricultural law and tax that you can use in your practice or business.  That’s because I have a new book that is now available that you might find useful as a handbook or desk reference.  Thanks to West Academic Publishing, my new book “Agricultural Law in a Nutshell,” is now available.  Today’s post promotes the new book and provides you with the link to get more information on how to obtain you copy.

Content

The Nutshell is taken from my larger textbook/casebook on agricultural law that is used in classrooms across the country.  Ten of those 15 chapters are contained in the Nutshell, including some of the most requested chapters from my larger book – contracts, civil liabilities and real property.  Also included are chapters on environmental law, water law and cooperatives.  Bankruptcy, secured transactions, and regulatory law round out the content, along with an introductory chapter.  Not included in this Nutshell are the income tax, as well as the estate and business planning topics.   Those remain in my larger book, and are updated twice annually along with the other chapters found there. 

Style

The Nutshell is designed as a concise summary of the most important issues facing agricultural producers, agribusinesses and their professional advisors.  Farmers, ranchers, agribusinesses, legal advisors and students will find it helpful.  It’s soft cover and easy to carry.

Rural Law Program

The Nutshell is another aspect of Washburn Law School’s Rural Law Program.  This summer, the Program placed numerous students as interns with law firms in western Kansas.  The feedback has been tremendous and some lawyers have already requested to be on the list to get a student for next summer.  Students at Washburn Law can take numerous classes dealing with agricultural issues.  We are also looking forward to our upcoming Symposium with Kansas State University examining the business of agriculture and the legal and economic issues that are the major ones at this time.  That conference is set for Sept. 18, and a future post will address the aspects of that upcoming event.

Conclusion

You can find out more information about the Nutshell by clicking here:  http://washburnlaw.edu/practicalexperience/agriculturallaw/waltr/agriculturallawnutshell/index.html

July 31, 2017 in Bankruptcy, Civil Liabilities, Contracts, Cooperatives, Environmental Law, Real Property, Regulatory Law, Secured Transactions, Water Law | Permalink | Comments (0)