Chapter 12 Bankruptcy – Feasibility of the Reorganization Plan

Overview

From an economic standpoint, recent years have not been friendly to many agricultural producers.  Low commodity prices for various grains and milk and increasing debt loads have made it difficult for some farmers to continue.  Chapter 12 bankruptcy filings have been on the rise.  In parts of the Midwest, for instance, filings have been up over 30 percent in the past couple of years compared to prior years. 

There are 94 bankruptcy judicial districts in the U.S.  In 2017, the Western District of Wisconsin led all of them with 28 Chapter 12 cases filed.  Next was Kansas and the Middle District of Georgia with 25 each.  Nebraska was next with 20 Chapter 12 filings.  Minnesota had 19.  Both the Eastern District of Wisconsin and the Eastern District of California had 17.  In the “leader” – the Western District of Wisconsin – filings were up over 30 percent from the prior year for the second year in a row. 

One of the requirements that must be satisfied for a bankruptcy court to get a Chapter 12 reorganization plan confirmed by the bank.  However, it’s becoming a more difficult proposition for some of the Chapter 12 filers. 

The feasibility of a Chapter 12 reorganization plan – that’s the focus of today’s post.   

Chapter 12 Plan Confirmation

Unless the time limit is extended by the court, the confirmation hearing is to be concluded not later than 45 days after the plan is filed. The court is required to confirm a plan if—(1) the plan conforms to all bankruptcy provisions; (2) all required fees have been paid; (3) the plan proposal was made in good faith without violating any law; (4) unsecured creditors receive not less than the amount the unsecured creditors would receive in a Chapter 7 liquidation; (5) each secured creditor either (a) accepts the plan, (b) retains the lien securing the claim (with the value of the property to be distributed for the allowed amount of the claim, as of the effective date of the plan, to equal not less than the allowed amount of the claim), or (c) the creditor receives the property securing the claim; and (6) the debtor will be able to comply with the plan.

Also, under a provision added by The Bankruptcy Act of 2005, an individual Chapter 12 debtor must be current on post-petition domestic support obligations as a condition of plan confirmation.

Feasibility of the Reorganization Plan 

If the court determines that the debtor will be unable to make all payments as required by the plan, the court may require the debtor to modify the plan, convert the case to a Chapter 7, or request the court to dismiss the case.  Over the years, numerous Chapter 12 cases have involved the feasibility issue.  Most recently, a Chapter 12 case from (you guessed it) the Western District of Wisconsin, involved the question of whether a debtor’s reorganization plan was feasible. 

Recent Case

In In re Johnson, No. 17-11448-12, 2018 Bankr. LEXIS 74 (Bankr. W.D. Wisc. Jan. 12, 2018), the debtor was a farmer who primarily raised corn and soybeans. He also was the sole owner of grain farming LLC. The debtor filed a Chapter 12 petition on April 25, 2017, and a Chapter 12 plan on August 22, 2017. On September 25, 2017 a bank objected to plan confirmation. The debtor filed an amended Chapter 12 plan on November 3, 2017 and a second amended Chapter 12 plan on December 14, 2017.

The amended plan proposed payments of $8,150 per month for 12 months, then $11,700 per month for 36 months, and finally $13,700 per month for 12 months. In total the plan proposed payments of $683,400 over 60 months. The debtor claimed that this would pay the creditors in full. However, the court determined that the debtor’s plan was not feasible. At confirmation, the debtor would be required to immediately pay $67,155.70 to cure defaults on leases to be assumed and $40,000 to another creditor. Other than vague testimony that funds were available to satisfy the immediate payments to the other creditor, there was no evidence presented that supported any ability to make the lease cure payments. In addition, the evidence to which the debtor pointed supporting his ability to make payments were his tax returns for the years 2012 through 2015. However, those returns also included crop insurance payments which the debtor was no longer eligible to receive. Yet, according to the debtor’s estimates, he would do better in each of the next three years than he did at any time between 2012 and 2015. The bankruptcy court determined that, based on the picture presented by the debtor’s tax returns and testimony, the debtor’s projections were unpersuasive and lacked credibility.

The debtor also estimated that his gross income from crop sale would swell over the next three years and that his expenses would be less than any of the last four years. Yet, the debtor offered no explanation for how he arrived at these estimates. The debtor claimed that his expenses would decrease because he was no longer paying for crop insurance. However, that would only lower his expenses by approximately $30,000 and there was no reserve for crop loss in the projections, which had ranged from $39,210 to $274,933 in the past. For these reasons, the court determined that the debtor failed to meet his burden in showing that the plan was feasible.

In addition, the debtor’s plan proposed paying the bank’s various secured claims at a 5.5 percent interest rate. The court determined that under Till v. SCS Credit Corp., 541 U.S. 465 (2004), the bank was entitled to a “prime-plus” interest rate. Moreover, in the context of chapter 12 cases, the court noted that risk is often heightened due to the unpredictable nature of the agricultural economy. The court found that the interest rate proposed for the bank in the debtor’s plan was inadequate under Till. The court noted that the current national interest rate was 4.5 percent and the debtor proposed the minimum risk adjustment of 1 percent. The fact that the debtor’s tax returns show that he was consistently reporting losses or barely breaking-even in addition to the many other risk factors led the court to hold that the bank would be subject to a significant degree of risk under the plan and that the debtor’s proposed interest rate was insufficient.

Finally, the court held that because the debtor’s projections lacked any credibility or support it would be impossible for the debtor to propose a confirmable plan. As such, the court dismissed the case. 

Conclusion

Chapter 12 bankruptcy is a difficult experience for a farm debtor to experience.  But, putting a feasible reorganization plan together is essential for getting a plan confirmed.  In the current economic environment, that’s becoming more difficult for many farmers.