Opinion: In appreciation of Neil E. Harl making farm credit work for everybody – Ames Tribune

John Blanchfield| Guest columnist

Reading about the recent passing of Professor Neil Harl caused me to reflect back on my 40 years in agricultural banking, 25spent at the American Bankers Association in Washington. While Professor Harls obituary mentioned his involvement in the farm debt crisis of the 1980s, it failed to mention what was perhaps his most lasting achievement, creation by Congress in 1986 of a special chapter of bankruptcy for family farmers know as Chapter 12.

Professor Harl created the intellectual framework that allowed members of Congress to envision how such a provision could work. He recognized early on that farmers, after being hit by a triple whammy in the early 1980s; high interest rates, the resulting collapse of farm asset values, and the collapse of commodity prices following the Russian Grain Embargo in 1980, that many of them had more debt than they could ever repay. Farmers who were going out of business in the Heartland at an alarming rate. Farmers were committing suicide. Open conflict developed between farmers and their bankers, and in some cases bankers were murdered. A full-blown crisis had developed.

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Being an attorney, Professor Harl was very aware that large businesses were able to reorganize their operations by utilizing Chapter 11 of the US Bankruptcy code. By reorganizing, they were able to get debt written off, repayment terms lengthened, and in some cases interest rates lowered. Many businesses during the 1970s and 1980s successfully used Chapter 11, or the threat of filing bankruptcy to bring their creditors and their suppliers to the table to negotiate a reorganization plan. Chrysler was perhaps the most famous example at the time with a threat to go into bankruptcy in 1979 resulting in federal assistance that helped them continue as a going concern.

While farmers at the time had the option of filing Chapter 11 bankruptcy, Professor Harl and others recognized that it was far too expensive and far too time consuming for a family farmer to successfully reorganize under Chapter 11. He came up with the idea of a special chapter of the US Bankruptcy code specifically for family farmers (family fishermen were included in the enabling legislation).

Features of the legislation included a lower cost of filing, a court appointed trustee, a promise of a rapid turnaround, a requirement that those filing were indeed family farmers as evidenced by a cap on total debt and how much debt came from their farming operation. The most potent feature of the legislation was a cramdown provision that allowed the farmer to argue, in court, what the current market value of the farm was and if that number was lower than the debt owed against it, the court had the power to order the unsecured portion of the debt to be written off.

Understandably the cramdown provision was the bone that stuck in the throats of all those who had loaned money to farmers that was secured by their real estate. Despite the objection of the banking industry, Congress pushed ahead with the legislation and it went into effect on Nov.26, 1986. Over the years Chapter 12 has been expanded. In addition, Chapter 12 was supposed to sunset at a particular date, but that too was removed, and 35years after enactment Chapter 12 is still on the books.

Chapter 12 never lived up to the hype that surrounded it when it was debated and when it became law. It did help some farmers successfully reorganize and continue farming. But the promise that it would get farmers into and out of Bankruptcy Court quickly never materialized. On the bankersside, the cramdown provision did result in some real losses. As a result, Chapter 12 might have made it harder for some farmers to get credit because some bankers were loath to consider deals that were less than perfect. But over time, bankers overcame their fears and today the banking industry has over 50% of the farm credit market.

So, given the uneven success that Chapter 12 has had, why were Professor Harls contributions so pivotal in helping to settle the farm credit crisis of the 1980s? With the creation of Chapter 12, farmers and their lenders were driven to seek solutions before and/or without going to court. The existence of Chapter 12 brought both parties to the table. These table top bankruptcies enabled bankers and their customers to come to terms knowing that failure to do so would end up with both parties in court, with the knowledge that Chapter 12 was a huge pain to deal with. Shortly after Chapter 12 was enacted, the USDA, Farmers Home Administration began voluntarily writing down debt that was uncollectable. While lender losses were great at the time, Professor Harls contribution was that he unblocked the farm debt logjam. By finally coming to terms with the fact that much farm debt from that period was uncollectable, the agricultural credit system thawed and the farm economy recovered.

Finally, Professor Harl was instrumental in de-stigmatizing farm bankruptcy. The literature of the 1980s farm debt crisis in filled with stories about farmer suicides and banker killings. By removing the stigma of business reorganization, many farmers were able to successfully continue their operations or, at least, exit from farming with something. In either case, lives were saved and for that we owe a huge debt to Neil E. Harl.

John Blanchfield directed the Center for Agricultural and Rural Banking at the American Bankers Association in Washington, DC for 25 years.

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Opinion: In appreciation of Neil E. Harl making farm credit work for everybody - Ames Tribune