Pub. 7 2012-2013 Issue 6

March | April 2013 11 Extraordinary Service for Extraordinary Members. Managing Risk in Custom-Feeder Lending: A Case Study Stinking Up Negotiability (Part I of III) Gene Summerlin and Andrew Weeks , Husch Blackwell LLP M OST FEEDLOTS IN NEBRASKA offer custom-feeder ser- vices. Normally, the feed- er and the feedlot 1 will need financing. Banks must carefully manage the risks associated with these lending relationships. This article is the first in a three-part series that ex- amines lessons learned from a recent Iowa case. 2 Nebraska lendersmust take steps to limit exposure to the same risks highlighted in the Iowa case. Today, we examine language that destroyed the negotiability of a prom- issory note. Part II will explore the consequences to the Iowa bank of losing negotiability on the note. In the final installment, we will discuss rec- ommendations for managing risk in custom-feeder lending relationships. The Parties A typical custom-feeder relation- ship involves three primary parties: COUNSELOR’S CORNER 1) a feeder that owns cattle and has them finished at a feedlot; 2) a feedlot that feeds, cares for, andmarkets cattle provided by the feeder; and 3) a bank that offers financing to the feeder, feedlot, or both. Banks can choose a direct lending relationship with the feeder. However, in the Iowa case, the bank chose to have a direct lending relationship with the feedlot only. The bank financed the feedlot’s operation and also financed the feedlot’s extension of credit to feeders. The Lending Arrangement The Iowa bank provided the feedlot with a standard-form promissory note that was copied by the feedlot every time it received a load of cattle. The note contained blank spaces for the number, weight of cattle, and the esti- mated cost to feed the cattle to slaugh- ter weight. The bank 3 drafted the note for execution by the feeder, payable to the feedlot. The note included both a monetary obligation to pay back the note and a security interest in the cattle that were the subject of the note. The note was likely intended by the bank to be a negotiable instrument. When the feedlot received a load of cattle froma feeder, the feedlot filled in the blanks in the note and sent it to the feeder. The feeder then executed and returned the note to the feedlot. Upon receipt of an executed note, the feedlot assigned the note to the bank. In a separate transaction, the feedlot directed the bank to advance the value of the cattle less $150.00 of equity per head to the feeder. The bank also advanced funds to the feedlot to feed, care for, and market the cattle. When the cattle were marketed, the feedlot deposited the packer checks into the bank. The feedlot sent the net proceeds and a closeout statement to the feeder. The feedlot also directed the Q Negotiability — continued on page 12