~16J1<hJ Y. Junl'
29, ] ')$7
TH.E NAnONAL LAW JOURNAL
BANI~RUP1"\CY
21
LAW
By John Krahmer
Provisions of New Cha,p ter 12
Help Stave Off FarnlLiquidations
T
HE FINANCIALdtl\vntums faced
." . by-farmers in re.cent years have
been Se·:ere. rn additidn to the
usual hazards <if farming, Such as
:m a.tket f1u.ctuationana weather. there,
have peen increased difficUlties-i.n obtaJnJng OPe:rating loans. <iecUnes in agdOU,ltural landvallles and lnctea,S'e d
prices foJ;' farm eqUipment and, supplies•.
Formaoy fal'Jner$, these ad.<led
probl-emsUllye meant tbat ,O ankrqptcy
is the only vlaple altern<iltiye. ~ut untU
the 'e nd of 1,~S6, tb/l.t option ~,su~ny included a decision to le"ave, f'a rming. be~
cause ena,p ter 7 liqu!i:daUon
proceedings' would divest the .farmer
Of necessary land and eqUipment and
Chapter 11 re9.uirements 'Often pre·
vente.a the formulation ola viable,
plan.! If a flu-mer Wanted to stay- '11)
farming:, but needed redrganiZ'ationof
existing d,e bts, the Bariktu;ptcY' Code
was rtdt especially help'ful.
In a,n attempt to meet thesI'ecilil
needs of f.a rmers- for a workable reorganization procedure, Cong're~s
amended -the .B.ankruptcy COde in late
1986 to inclUde a new Chapter 12 enti~
, tied ·'A.djushnen:t of.Pebts of a Fan.;lily
F 'arm,er Wjth Regular Annual Income.!" Tills new chaptef. became effective Nov., '21. l:l!86. with. an autqmatic
repea,le,r da,(e ot Oct,~ .1, 1993.: This column outlines, the provistons of eM,pter
.12 and ,nQtes ,s ome of tl!ose areas Where
signi~icant ·c'n.anges have been mAde to
accommodate: specifiGally farm reorganization plans.
To qualify un!iElr Chapter 12., a debt·
or must be: a "family farm£r" as, defined in Sec. 101 of the Bankruptcy
Code.; A family farm.er 15 a,n in.llividual. or an lniilvidual anD. spbuse,e::ngag'ed in fa:rming With aggregate: debts
not exceeding ~1.5millibn. A.t least 80
perc.ent of the debt ·and 50 percen~ of
the gross tn,c ome m.t ist be related to
the farming operatinn. Debt ill,c urred
foI" tbe individual's prinCipal residence
is exc.l'Ud,e:a unless that debt ari:Ses out
01 (arming operalions.
. Ifa. farm is QPerate,d as, a cor-pora.tlon or pArtnership. mot'e(ha.n SO percent of the stock Qr equHy rou.s tOe held
by one family. or by QQ!.l family /lind
relatives , of the, famiiy l}1eJnber~,; and,
the family: or relatives must conduct
the farmin~' ql'e'I'a,tioJl$;" Furthermore,
more than 80 pe,r cent of tb~ assets of
the: CQr-peration or p,i;lrtnershjp must be
relatM to the Jarrningeperati'on and
the aggregate debts rnustnot ex:ceed
$J ..S million, wttb 80 percent of t.he.
depts afising Crom farmwg:l lf tbe <:.01'...
poraUon i.ssue.s ~toQk;. the stack musl'
not be PUblicly traded:
The family farmer Ultl,st ha\'e. "regu'
lax jnco:me;" defined as ~nnJ.!.a.l ineQme.
th/l.t is "sulJiclenl1y stable and regular
to enabl~ lthe I family fanner to Il\l.a.k e
paymen ts under a plan un~er Chapter
1'2: " ·
-met',
If these te<t:uirementsa..e
th~
farmer-debtor is e.ntitled to tUe a petitiOn for relief under Chapter 12.
lMPORTANT feature Of bank~
ruptcyis.theautomatic stay that
comes into eff.ect upon the fil{ng
ofapetiti6n.'o While, the auto,matic stay
ill. a useful device to prevent credjtQrs
from playing "grab law:' a secured
c:redltor' can move to lift the$tay a:Jld
such motion must be granted unlesS
the· debtor can prOVide ':' adequate protectl.on h for the se.cured blte:rest." :
Among other things. "ad.equate prote(:tion" includes providing the "ind1,.\1:)ita.ble .eqUivalent" of the se<:tJl:ed cla.irn.u I
The. much-criticized ca~e of In T~ I
A me.nean Marinet' In.dust'rjes [nc.'! in- i
terpreted the co·neeptot "ind,ubitable
equivalent" to inc.lude payment ·of in- '
terest .o r lost opportunity costs as part .
of the adequate protec,tion required for
a securedclaim.'rbis ha.s 1,>een a maJor
stumbling bloc.k. in ae.ve.loping 'wotk~
able farm. xeorgaI:1ization planli'. As .R.
Fred .Dunlbaugh. .a b/l.nkruptcy attorney, stated in bls testimony before the
r.~
, J',
w
Senate $ubco;m mittees working 01
Chapter 12:
[A) great deal Of, the time and resources of the Farmer'Pebtor are
spent in negotiations and litigation
involving stay motionS. By a large
margin, stay mOtions consume
more time and resources of the
Pebtor than any other aspect of the
case ... Many creditors see stay
motions as a way to defeat the reorganization effort at an ea:rly
stage, Or to demand, a 'larger chunk
of the pie' than they might otherwis,e get had no stay motion been
filed.
The reaSOn why the FarmerPebtor must spend so much time
and resources in combatting stay
litigation ls that the,r e is so much
"at risk" for the Farmer-Debtor
shOUld the movant prevail in havtng the automatic stay tenninated
... GiVen the recent trend in C'ase,
tl,W interpretation of the requirements of adequate protection, the
risk to the F,arIller-Debto,r in.·
creases each 4ay. tRefering to
A ffl,erican .Marill~.]"
Chapter 12 has rejected the stringent
approach to ' adequate protection d,e~
manded by American Mariner. and lost
opportunity costs are not a compensableelement in a Chapter 12 proceeding.
"Adequate protection" is deij,n ed instead as a payment or payments for a
"d,e crease in the, valUe of property securin,g a claim," or the provisionaf an
,a ddiUonalor replacement lien for such
4e,c rease. or payment of the reasonabJe
rental value for farmland to a creditor
wlth a security interest in the farmland, or the granting of suc,h other relief as wi'll "adequately protect" the
secured clai'm.'·
The most striking change in this def- I
inition is probably the option to allow i
llayment of fait rental value. instead of .
payments based on market value. As
rental va1ues often are based on prospeds for income generation, they are
likelY to be lowet than a market value
approach would require under Chapter
11.
Another feature of Chapter 12. is the
extension of the automatic stay to actioos by Creditors to COllect from codebtors of the famnyfariner.'~ This
concept Was borrowed from Chapter
13," and prot.ects individual:; who cosigned lOan documents or furnished
collateral to assist the. debtor in obtaining farm credit.
Because a substantial amount of
farm debt is extended on the basiS of
co-signed instruments. in the CQntoxt of
family farming, this provision should
be of .c onsiderable I;lssislance in developing workable reorganization plans
by freeing relatives from fore.closures
and litigation dUring the pendency of a
Chapter 12 proceeding as Well as freeing the debtor from the pressures that
can result from SUch collection efforts.
I
"'\ NOTHER CONCEPT borrowed
from Chapt.er 13 is that of the
.l.standing trustee." The standing
trUstee under Chapter 12 has the responsibility to acao1J,nt for property,
examine proofs of claim, provide information and, reports, and oppose discharge when appropriate.
Chapter 12 also has taken. some of
the appointed trustee's duHe.s from
Chapter 11 and made them part of the
obligation of a standing trustee under
Chapter 12.(; These include investigation of the debtor's operation upon order of the court and, if the debtor
Ceases to be a debtor in possession, the
takeover of the far'ming operation. The
standing trustee also may be heard on
issue.s affecting valuation and saleaf
pJ;operty and confirmatio.n Or modification of a plan.
Despite the existenee of a standing
trustee, the. debtor under Chapter 12
may continue as a debtor irtpossession
for p:u.rposes of conducting the farming
operation and proposing a plan. 20 Unless removed for cause, the debtor has
essentially the same rights and powers
as a Cbapter 11 debtor in possession.
, In addition to authorizations for sale
contained elsewhere in the codel' the
trustee, or the debtor i,n possession is
e.m powered to sell fal,'mland or farm
eqUipment free and clear of any interest in the land or equipment.21 aut the
proceeds of such a sale a,re then subjetted to the security interest in the
land or eqUipment.
The debtor can convert a Cha.pter 12
procee~ing to a Chapter 7 proceeding
at any time." tf a case has not pre viouslybeen converted, the debtor may
alsci request dismissal at any time," A
qUestion that recently has ' M.e n appearing in several. cases is Whether a
case Originally filed. under Chapter 7
can be converte;d to Chapter 12. The
courts are split on this issue"~
Under Chapter 12, the debtor must
propose a plan within 90 days from the
time a petition is filed,. unless the court
finds that a request for extension is
"substantially justified,."'· A confirmation hearing must be concluded within ,
4;5 days ufter a plan is proposed."
I
These t.ime limits were adopted to '
prevent unreasonable delay in formulating. a plan becau.s e only the debtor
may propose a plan; credito'r plans are
not authorized und.e r Chapter 12." The
plan must provid,e for the SUbmission
of .future earnings or future income to
the supervision and control of the
standing trustee!' The plan must also
provide .f or the full payment, in deferred cash payments, of all claims entitled to priority under Sec. l)07 of the
Banltr:u.ptcy Code.)~ The plan may designate classes of unsecured cla,ims, So
long as it does not discrimtnateunfairly a.g ainst any class, and the plan may
treat claims for co~signed COnsume'r
debt differently than other unsecured
claims."
I \
r
F PARTICULA.R importance i!i
the <:.bolition of the "absolute
.
Priority rule" that applies to t.he
other chapters of the Bankcuptcy Code.
Under Chaptet 1,2, a p .1 anmay "mpdify
the ri.g hts of hplders of. secured claims,
or Of: hold;ers of unsecured claims, or
le~ve unaffected the rights of holders
of any class of claims."'· 'I'he debtor
rna.y continue. t9 have an equity in t.he
farm without providing fpr the paY'menl of all unsecured claims and may
pay unsecured claims before all securt!d claims are paid infull.13
This rejectio.n of the absol.ute priority rule WiIlsignificanUy affect the formulation Of a p,lan and, if it .s ee.ms to be
successful under Chapter 12, then~
may well be attempts to adopt a similarapproacb u.n der Chapter 11-.
The vole of unsecured creditors i;s
not necessary to obtain confirmation ot
apIa?: o.nly . the vote of sec?red credj-I
tors .1S needed,lt The standmg ttustee
or the holder of an unsecured claim '
may object to the confirmation of a '
plan, but the plan :;ItiU :may be con~
firmed if the value a! the property to
be distributed under the plan is not less
than the amouu-t of the chlim or if the
plan prov~des tbat aU the debtor'S projected disposable income during the
lif~ of the plan will Q~ apl?,lied to make
pay~ents under the plan.'"
4 plan if! limited to a period of' three
years, unless the court approves a
long'e r period of no mere than five
yeats, Except for fraud, a c.o nfi.rilled
plan is binding' on the debter, creditors
and eqUity holders wh.ether or .n ot they
are provided fbr in the plan."
At ant time after confirmation, the
debtor, the standing trustee or a bolder.
of 'a n allowed unsecured claim. may
move to modify a plan by increasing or
de.c reasing payments, by extending or
redUcing the UmefoX' payments or by
altering the amount of a distribution tQ
take account of payments made outside theplan"~
After the debtor has completed payments under the plan, the court shall
grant .a discharge of: aU d~btspr6vided
for by the plan, except 'f ar debts With
pay.ments due beyond the time period
covered by the plan,unless a diSCharge
should
denied. under See. 523 of the
Bankruptcy Code ..• A discharge can be
overturned for fraud for a period.of one
year following the discharge if the
mOVing party ' was not aware of the
fraud until after the diSCharge was
granted.
EvenU: a plan. has not be.en cOl'fiplet· .
ed, the court may grant a discharge if
the debtor's failure to make all payments required under the pl)J.n "'is due
O
be
to circumstances fCir which the debtor
shouid 'not justly beheld accountable."" This would nc doubt include
crop losses. Or market changes that adversely affect the projected inC()lne en
which the plan was based.
Chapter 12 is a unique experlmentin
the bankruptcy law that significantly
changes the definition . of "adequate
protection," reject,s the absolute priori,
ty rille and, for the first. time, allQWs
tbe. inodifica.ticn, Qf the rights (lfsecured creditors.. Nothing in Chaptet l2,
however, ,g uarantees that a fanner
c·
The courts are. divide.d
about ,,,hether a case
that was originally filed
under Chapter 7 can' be
changed to Chapter 12.
will be able teget a loanfot curte.n t
prodUction, anll perhaps no plan can
suce.e ed unless tne ,a,gricultural economy iJnproves and loan funds become
mote readily avaUable. Thene\\' provisions do, however, provIde. an ·a lternative that may buy farmers a little time
:w hilc· they await a general economjc
upswing~
Perba'p s the most serious question
aboutCha;pter 12 is ,,'bethel' it gives
too Il)uchrelief to the farmer-dobter at
the e"pense ofagricult1l.ral lenders already hard hit ' 'b y a faltering farm
economy. The failure rate of rural
bank~ and changes i.n the assets of the
Farm Crectit System maybe the touahstene for determining whe1.her Chapter
12. is. a useful addition to the Bankruptc.'y Code."
III Th(' p i'c,t'cdurc5 fflr Cha pt('r ~ liqufd il!ion
SOm('lilllC' ~ ('!tUed "slrai{:hl 'bank-·
rup\ry :' l!:PP~R' in t p(' B;mlu:Vplcy Cope. 11 ll .S.C.
proccl'cingS'.
'j{)1 ·i66 1, 19~ ~1.
(21 Ch a pler 11 app.car~ as 11 F .S.C. ilOl·]j74
11f· 7 ~ 1 . Ti ,,· lwo n';:' ~ ~' dHfj:~ult nquirc.menl~ of
Ch ;'f'I 't'!' l] lot f ~'rmct s \.0 m ecl ha.v(' bNm U'lr, ~~ of
prQlc('ticn llno absolute p,iorHy. The~('
art' h ::';b di !t(" U5S~d la ler in Ihis colUmll.
;;d ~' ql! ;d('
1] U.S.C. 120]'1..2&] 11.9b' I ,
(4) ·P ul,: L . 99·55!., Tille .Ill. Sec.. 3021f) repeals
IS 'I
Chapter 12 on Oct. 1. 1.993. Sell hotE Ie. .20 U,S,C. 581
n9F', .
.
(5) '11 U .S.C. 10H17)(A) 1;]9871.
1(;) Id ..• St'e. 1011l7J(BI.
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