Managing the ranch and lender liability
October 8, 2015
Around this time of the year, ranchers are busy with fall work, preconditioning calves, pregnancy testing, and shipping. It is also a time when the current year's financial cycle comes to an end, and plans for the next year are made. Those of us who borrow money from the friendly banker are thinking of this as we finish marketing our livestock and take the proceeds for a year of our labor into the bank and make our payments.
As we reflect on successes and failures of the past year, and make our plans for the oncoming year with adequate adjustments, it is necessary to keep in mind that our banker must not be considered our consultant. As a matter of legal liability, bank personnel are prohibited from advising you how to run your operation. However, this does not seem to inhibit many lenders from putting their two cents worth into your plan. With falling commodity markets, I felt this issue needed to be discussed further.
Some years ago, I was called as key expert witness in a lawsuit that occurred in the Dakotas regarding lender liability. Being a bank manager at the time, and having provided expert testimony in the court room on several cases in previous years, I was referred to plaintiff's attorney to provide this service. Only this case was much different than bankruptcy cases I had been in, as it was a case where a banker had overstepped his bounds in providing management decisions on his customer's operation.
As the case unfolded, the facts showed the plaintiffs had listened to their lender's advice, and the operation began to go financially backwards resulting in the bank foreclosing on the plaintiffs. The plaintiffs were forced to sell off a large portion of their real estate holdings to pay the bank off just prior to land prices significantly appreciating. The resulting loss to the plaintiffs was devastating, thus the reason for the lawsuit. After several years of depositions and testimony, the case was settled out of court literally hours before jury trial was to begin, and the bank paid millions to the plaintiffs to keep it from going to trial.
The experience taught me much regarding borrower/lender relationships…and it also showed me how banks can be very intimidating when they put their team of retained lawyers on you to scare you off. I applauded the one lone attorney representing the plaintiff in this case, as he dedicated hours and hours of his time into researching and investigating the case, passionately pursuing justice in this matter, only to be paid if he won the case. I will note that I initially turned this case down, as it appeared to be a conflict of interest, however, the attorney insisted I take the weekend to review the preliminary disclosures and complaint. I was convinced the plaintiffs had been dealt with unjustly, and that kind of banking was not a good reflection for the rest of us in the business.
One of the points that came to the surface in this case, was that the plaintiffs were not the only people who experienced this same activity by its bank. When others were interviewed, it was learned that their lender also insisted they do certain activities in their operations, and were made to feel that if they did not comply with the lender's advice, they would not qualify for the loan. Looking at this relationship through both the eye of the lender and the eye of the borrower, I can see this can be a slippery slope on both sides. As a loan officer, I have had many customers call and want my advice on the purchase of property, livestock, equipment, etc, or want me to tell them what I thought they should do in buying or selling commodities. So naturally, this tends to stroke your ego and make you feel like folks look to you to fill that capacity as their consultant. And banking schools fail to teach you any dos and don'ts when it comes to providing advice.
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To be an effective and successful banker is to be and stay informed on the businesses within your jurisdiction. It is true, as a banker, you have more idle time to watch markets and maintain a larger picture of the business climate because you are knowledgeable of many customer operations and take note of what works and what doesn't. This knowledge provides a near perfect foundation to be a consultant, outside of actual experience. However, you have to be cognizant of the fact that general knowledge still does not account for each customer's character…meaning discipline, habits, and work ethics. Character can make or break any operation, and the outcome can be much different with all other variables constant. Character is an analytical component of loan approval, however, seems to take the back seat to the other components in many cases, such as collateral values, credit scores, etc.
To conclude, farmers and ranchers need to make their own decisions on their operations based on their own research and knowledge. Do not rely on the banker's advice, as he has his own agenda to feed, and contrary to what you might think, they do not know that much about what is going on in the countryside. And bankers need to take care not to impose their suggestions or advice on their customer's operations, as you do not see all the variables involved, and can incur liability. Your only obligation is to your depositors and to either say yes or no to the loan request. When you start telling the customer what you think he should do, or tell him that he needs to to this or that, you have overstepped the line and are open to liability. Making statements of fact are not out of line, such as this is what I see the markets are doing, etc, but if asked what you would do in their case? You should answer with "it is not my business to make that decision. "