An Arkansas attorney for immigrant chicken farmers has filed multiple lawsuits against three southern banks in recent months, and more could be on the way.
The suits allege that the banks lent more money to the farmers - members of the Hmong tribe of southeast Asia - than they could afford to repay.
According to the suits, the borrowers needed loans to buy poultry farms and relied on the banks' advice and projections on how much they would earn. The suits also allege that the banks were not concerned about overlending, because the loans were backed by a government guarantee that would cover up to 95% of the principal amount if they went bad.
The six plaintiffs are all represented by the Henry Law Firm in Fayetteville. Five of the plaintiffs defaulted on their loans and have filed for protection from creditors under Chapter 12 of the federal Bankruptcy Code. The sixth plaintiff has not filed for protection.
Mark Henry, a lawyer with the Henry Law Firm, said that his firm has met with about 60 more families who are struggling to repay their loans, and that it expects to file more suits against more banks.
"When I signed on to this several months ago, I had no idea the scope of this problem. It is like a giant cloud. We are getting anticipatory calls from banks' lawyers we have not even sued yet, asking for a heads up," he said.
The Department of Agriculture's Farm Service Agency provides the loan guarantees. Bob Bonnet, its chief of guaranteed lending, said the agency is monitoring the situation. It held a meeting last month in Fort Smith to find out whether more banks were being hit with suits and whether there was a widespread problem with loans to Hmong farmers.
"I don't want to leave the impression that there is no problem or leave the impression there is. At this point we haven't found any," Mr. Bonnet said.
Still, he said bankers at the meeting are worried that farmers' financial woes are an indication of problems in the poultry sector.
"I would say their concern is that the Hmong are a very large segment of recent buyers of poultry farms in the last few years. We are in a down cycle, because of the increase in energy costs and interest rates, and many of them are being squeezed," Mr. Bonnet said.
Over the last few months three farmers have filed suits against the $80.3 billion-asset Regions Financial Corp. in Birmingham, Ala. Two have sued the $487 million-asset Chambers Bank in Danville, Ark., and one has sued the $197 million-asset Simmons First Bank in Russellville. The appraisers the banks used to evaluate the farmland were also named as defendants.
One of the cases against Regions was dismissed, and the plaintiffs and the bank are negotiating a settlement, according to Sean Brister, an attorney with the Henry Law Firm.
According to court documents, each plaintiff is asking the court to award "damages in an amount in excess of $1 million, award punitive damages, attorneys' fees, costs, and grant all other relief to which they may be entitled."
The suits allege that the banks overstated the amount of income the farms could earn, even though the banks had information from poultry companies showing the farms would earn less.
Representatives of Regions and Chambers said they could not comment about ongoing litigation. Simmons First said its president was out of the office and unavailable for comment.
However, in a response filed July 27 in the Circuit Court of Sebastian County, Regions denied allegations of fraud, negligence, and failure of fiduciary duty. It acknowledged that the plaintiffs had filed for bankruptcy protection, and it said that their complaints should be handled by arbitration.
Michael J. Pappone, an partner with Goodwin Proctor LLP in Boston, said that many suits that allege banks lent too much money are dismissed before they ever go to trial, but there are cases where plaintiffs can show lender liability.
If a bank deliberately gave false information to a customer, it could be a case of fraud, said Mr. Pappone, who is not involved in the Arkansas suit. If a bank gave a borrower information that might have affected the borrower's business, then negligence could be argued, he said, and if a bank gave a borrower advice, then a fiduciary duty might arise.
"As a practice point, if a bank were talking to me, I would insist that a borrower independently verify any facts they are acting on, especially if they heard them from the lender first," Mr. Pappone said. "Furthermore, the lender should not steer the borrower towards appraisers, business consultants, or other people who have a long-standing relationship or closeness to the bank."
Jerry Bullard, chief operating officer with the $504 million-asset First Financial Banc Corp., in El Dorado Ark., said that he is not involved in any of the suits, but that higher energy prices make it hard for poultry farmers who use propane to heat their birdhouses to be profitable.
"They are not hitting their projected cash flows because the propane has gone up so much, and nobody could have foreseen that," Mr. Bullard said.
At the Farm Service Agency meeting, Mr. Bonnet and the lenders discussed the need for banks to maintain good communications with their borrowers and how to help those having problems repaying loans. He said the agency wants bankers to work with their borrowers to keep them on the farm.
Mr. Bullard said that bankers would not make a loan they thought was risky just because it has a Farm Service Agency guarantee, since it is uncertain whether the banker would collect on the guarantee.
"If we start having trouble" with a guaranteed loan, "even if it does go directly into foreclosure, it takes such an extended period of time, you end up losing money over time, because of the attorney's costs, the opportunity costs while that money is sitting and not earning any interest, and it sucks a lot out of your people to work these out," he said.
