Firm to Farm: The Potential Peril Associated With Deferred Payment Contracts

A recent news story involving a group of farmers in Mississippi reveals the potential downside of selling grain under a deferred payment contract. The risk of deferred payment ag commodity sales and what can be done for protection—that is the topic of today’s blog post.

A corn, grain, and currency.


A recent news story involving a group of farmers in Mississippi reveals the potential downside of selling grain under a deferred payment contract. Unless a farmer-seller takes steps to gain protection, the farmer is an unsecured creditor of the buyer after delivery is made and before payment is made. If the buyer files bankruptcy in that interim period, the farmer-seller will be a general unsecured creditor and could lose out on the vast amount of income anticipated from the sale.

The risk of deferred payment ag commodity sales and what can be done for protection – that is the topic of today’s blog post.

The Mississippi Matter

On November 8, a group of Mississippi farmers filed a class action against UMB Bank, N.A. for misleading them about the financial status of a grain elevator they sold grain to that filed bankruptcy before paying them. Island Farms, LLC, et al. v. UMB Bank, N.A., No.___, (S.D. Miss. filed Nov. 8, 2021).

Fact of the case. Based on the plaintiffs’ complaint as filed, they delivered grain to a grain elevator that, unbeknownst to them, was insolvent and being propped up by the defendant bank. The elevator’s grain purchases involved the farmers delivering and transferring title to the grain to the elevator. The elevator would then weigh, inspect and access the grain, and deliver payment in the form of a check within a period of a few days, or at another date if any particular farmer so desired

The grain elevator is one of the largest grain elevator operations serving farmers in the Mississippi Delta. However, the grain elevator was highly leveraged with massive amounts of debt. The grain elevator’s principal creditor was the bank, with loans dating back to 2015. The total balance on the loans was approximately $70 million as of September 2021. $37 million was the balance on a revolving loan and $33 million was the balance on a term note. The bank required the grain elevator to post collateral, which meant that virtually all of its assets were collateralized. The loan agreements gave the bank a continuing security interest upon all property of the grain elevator, whether then owned or later acquired. The grain elevator’s most valuable collateral was the grain they stored, and the amount they could borrow was determined in part by the amount of grain in inventory.

By the spring of 2021, the grain elevator was in serious financial distress, having less than $4,000 cash on hand, and was effectively insolvent. In addition, throughout 2021 the grain elevator failed to make payments to reduce the balance of the revolving loan, which it was contractually obligated to pay down. However, the bank permitted the grain elevator to keep the balance of the loan at the maximum level throughout the year. The elevator was required to furnish audited financial statements to the bank within 120 days of December 31, the end of its fiscal year.

The plaintiffs claim that the grain elevator was kept afloat by the bank’s forbearance on their loans. The bank was aware that if it called the loans, there would be little grain it could claim as security for the grain elevator’s debt. As a result, the plaintiffs claim that the bank proposed to wait until the grain elevator had as much grain as practicable before calling the loan and thereby effectively forcing the grain elevator into bankruptcy. The elevator ultimately filed Chapter 11 (reorganization) bankruptcy on September 29, 2021.

Although the grain elevator was in financial distress, it continued to hold out to farmers the opposite. In the spring of 2021, the grain elevator issued an update that stated the elevator would be better prepared financially than in years past. The update also mentioned that the grain elevator had funding in place from multiple sources to ensure everyone got paid on time. However, several checks that the grain elevator wrote bounced during the harvest season. By the end of September, the bank notified the grain elevator that all amounts owed under the loans would be due immediately. The effect of the elevator’s bankruptcy was to place the bank in priority position as a secured creditor in accordance with its security agreements and the farmers in non-priority, general unsecured creditor status.

The plaintiffs claim that the grain elevator made knowingly false representations and concealed information that it had a duty to disclose. Additionally, the plaintiffs claim the bank aided and abetted the fraud perpetrated by the grain elevator by remaining silent, while knowing that the grain elevator’s customers would deliver their crops with a time interval before being paid. They specifically claim that the bank deliberately propped up the grain elevator until the crops were delivered during harvest season. The plaintiffs claim that the bank was the beneficiary of the fraud perpetrated by the grain elevator, and that it has been unjustly enriched at the plaintiffs’ expense. The plaintiffs further claim that in addition to equitable title of the crops, they had a constructive trust over the grain for the purpose of getting paid. They assert that had the grain elevator clearly indicated its financial position, the plaintiffs would have brought their crops elsewhere. Ultimately, the plaintiffs are seeking forfeiture of all money received by the bank through their alleged conduct.

Is There a Way That Cash Grain Sellers Can Achieve Security?

The Mississippi farmers’ plight points out the peril of selling grain on a deferred basis – whether via a properly structured deferred payment contract or by an informal understanding of the parties that there will be a time lag between delivery and payment. Every farmer must understand that, after an agricultural commodity is delivered to a buyer but before payment is made, the farmer-seller is an unsecured creditor of the buyer. If the buyer files bankruptcy in that interim period, the farmer-seller will likely not get paid. While state indemnity funds and bonding programs might be available, they often don’t go far in making any particular farmer whole.

Letter of credit. While there isn’t any indication in the Mississippi case, as filed, that the farmers were using a deferral strategy for tax purposes, there is legal risk involved anytime that grain is delivered and payment is delayed. This is typically not a problem with livestock sales because unpaid cash sellers of livestock to a buyer that is covered by the Packers and Stockyards Act (PSA) have their funds set aside for them in trust that remains outside of any bankruptcy filing of the buyer.

As for grain sales, is it possible to achieve legal protection comparable to that provided by a PSA trust and achieve income tax deferral? In some instances, farmers have tried the use of escrow accounts or letters of credit via third parties (an agent). However, with a handful of exceptions, the weight of the authority is that an agent’s receipt is considered the taxpayer’s (farmer’s) receipt. That means that such an arrangement is ineffective to defer income into the following tax year.

In Griffith v. Comr., 73 T.C. 933 (1980), a farm couple reported income on the cash method and sold cotton in 1973 under a deferred payment contract for payment in 1974. The buyer’s obligation under the contract was secured by a standby letter of credit. The Tax Court determined that the strategy didn’t work for deferral purposes, holding that the contractual rights and the letter of credit were the same as cash. The dissent pointed out the Tax Court’s prior decision in Oden v. Comr., 56 T.C. 569 (1971), where the Tax Court held that funds placed in escrow as security for payment on a deferred payment contract may not be constructively received in the year of sale based on the facts and circumstances of the case. While the taxpayer lost in Oden, the key to the case was that the taxpayer actually looked to and received payment from the escrow account. The taxpayer was not treating the account as intended for security. But, in Porterfield. v. Comr., 73 T.C. 91 (1979), the court determined that the parties intended an escrow account to serve as security for the buyer’s obligation and that, as a result, the taxpayer was entitled to report the sale on the installment method. The dissent in Griffith pointed out that a nontransferable letter of credit was used that specifically provided it was to serve as security and could only be collected in the event of the buyer’s default. The buyer didn’t default, and the couple looked to and received payment from the buyer.

This all means that if a letter-of-credit is not done absolutely correctly, it won’t achieve tax-deferral (including the interest on the funds in the account) and it may not even provide security. It is a fact-based determination despite what the majority in Griffith said.

Escrow account. Although the general rule is that funds placed in escrow as security for payment are not constructively received in the year of sale, it is critical for a farmer-seller to clearly indicate that the buyer is being looked to for payment and that the escrow account serves only as security for this payment. See, e.g., Watson v. Comr., 613 F.2d 594 (5th Cir. 1980); Busby v. Comr., 679 F.2d 48 (5th Cir. 1982); Scherbart v. Comr., 463 F.3d 987 (8th Cir. 2006). The cases point out that there is a possibility that an escrow account can successfully achieve deferral and provide security, but the account must be set-up and used properly. Clearly, the escrow arrangement should be a separate agreement between the buyer and the seller and not a self-imposed limitation that the seller creates.


The Mississippi case points out the problems that a farmer can encounter when a buyer fails before making paying on delivered grain. Certainly, the financial status of a buyer should be examined carefully before delivery is made. That means seeing a certified audit of the buyer before making delivery. Reliance on an audit can mean that the firm providing the audit can be held liable to a farmer that detrimentally relied on the audit. See, e.g., KPMG Peat Marwick v. Asher, 689 N.E.2d 1283 (Ind. Ct. App. 1997). Also, carefully using a letter of credit or an escrow account might provide security against a buyer’s default and achieve deferability. In any event, planning is required anytime an ag commodity is sold on a deferred basis to a buyer.

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