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Thursday, May 13, 2010

What Legal Risks Does Your Family Face And Are You Financially Protected?


Agricultural risk management not only includes such protections as crop insurance and forward contracts, but also requires having a good understanding of the law surrounding crop production and animal husbandry. Fence law, lease law, and many other prickly issues can arise and ruin an otherwise good day on the farm. Management of legal risk requires a clear mind at all times as seen in several recent court cases.

Operators of a cash rent Michigan farm were alerted one day that the owners, had decided to sell the farm and were giving the operators a chance to buy the land for $2,850 per acre. But the operators said they could not afford that asking price. Soon after a “for sale” sign appeared on the property and the operators inquired about a possible purchase. Before they could assemble their financing, the owners sold the land to another buyer and the cash rent lease was terminated. As expected the next stop for everyone was the court where the former operators contended they had the “right of first refusal.” The trial court ruling was upheld by the appellate court that while “right of first refusal” was a legal prerogative, the lease did not specifically contain those words, and the owners who sold the land did give the operator a chance to buy the land before it was put on the market, and the operators declined to buy it. (Review the summary of the Right of First Refusal.)

Hedge-to-arrive grain contracts became the bane of the grain elevator industry in the mid-1990’s when corn prices doubled and thousands of farmers defaulted on their HTA commitment to deliver at a lower price and took their grain to elevators paying higher prices. An HTA contract is a forward contract with an open delivery date, and at the time, many farmers were rolling them into the next marketing year, planning to deliver from the next crop that might have a lower value. An Indiana farmer with four HTA contracts rolled them several times and eventually cancelled the contracts worth $234,465, signing promissory notes to cover the shortfall for the elevator. But when the owners of the coop decided to sell the elevator and collect the debt, he sued contending the HTA contracts were void “speculative futures contracts.” The trial court held in his favor and ordered the coop to reimburse the farmer the payments he had made on the promissory notes. But the appellate court reversed the decision. The appeals judges determined the HTA contracts were cash contracts between the farmer and the elevator and were not speculative futures contracts between the CBOT and the farmer. Subsequently, he was held liable for the promissory notes he signed to the former coop. (Review the summary of the hedge to arrive contracts.)

Most farmers are aware they are responsible for any misdeeds of their hired employees, but what about such individuals as airplane pilots hired to spray crops? The answer is “yes” as the court ruled in a Federal Aviation Administration case against a crop duster, which was warned about flying too near a “congested area,” and then repeated his misdeeds a short time later. While the “congested area” was an intersection and 2-3 homes, the definition became the controversy in the court because of the lack of a precise definition in cases of agricultural aircraft. The appellate court ruled that the crop duster and the farmer had every opportunity to understand what the FAA inspectors had previously ruled and expected the pilot to observe their warning. The bottom line is that crop dusting near any residential area is subject to regulation, regardless of the number of people living in the proximity. (Review the summary of the crop dusting complaint.)

While some laws are not much more than common sense, other laws are subject to debate even within the judicial profession. That means for farmers whose focus is on commodity production and profitability, the interpretation of certain laws may come as a surprise. Most farmers will find a need for liability insurance to protect them in most cases, but whether that amount of insurance will cover potential losses is always subject to question.

Posted by Stu Ellis on 05/13 at 01:42 AM | Permalink

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