Betting on the Farm: Feasible Chapter 12 Plans.

AuthorSickler, Alexandra Power Everhart


The tradition of the small family farmer persists in the United States against all odds. These businesses, which constitute about 90 percent of U.S. farms, (1) are often highly leveraged. They have substantial debt service payments to finance their operations (2) but narrow profit margins. (3) Moreover, they operate subject to the perils of extreme weather, market fluctuations, and government policy changes, all variables beyond their control. Any one of these stressors inflicts financial harm, but when they combine, as they have in recent history, America's smaller farms face a risk of extinction. (4)

Chapter 12 of the U.S. Bankruptcy Code provides a solution for this special category of honest but unfortunate debtors. (5) Congress created chapter 12 as a temporary, emergency response to the 1980s farm crisis, (6) and made it permanent in 2005. (7) It is a restructuring tool designed to "give [farm ily] farmers a fighting chance to reorganize their debts and to keep their land" through a repayment plan. (8) But only farms that meet the Bankruptcy Code's debt and income eligibility requirements qualify for chapter 12. (9) Initially, farms with $1.5 million or less in aggregate debts could file a chapter 12 case, (10) an amount Congress later increased to $3.2 million and prescribed periodic adjustments for inflation. (11) But in the intervening years, farmers took on record levels of farm debt because the capital requirements for farming (land, equipment and inputs) are higher than the 1980s. Meanwhile, their net farm income, a key measure of farm financial wellbeing, (12) declined from around 2014 to 2018. (13) More farmers struggled to service higher debt payments with lower net income, and chapter 12 filing rates rose. (14) In response, Congress raised the aggregate debt thresholds again to $10 million in 2019, (15) making about 5,000 more family famers eligible to file for chapter 12 relief. (16)

The ability to file a chapter 12 case does not guarantee a successful out come. The Bankruptcy Code's eligibility restrictions are only the first of many hurdles debtors must dear to receive a discharge. Chapter 12 debtors also must file the required paperwork, obtain confirmation of a reorganization plan, and complete plan payments, all while the continued viability of their farming operations remain susceptible to external factors largely beyond their control.

Among the requirements for plan confirmation is a feasibility test. Pursuant to section 1225(a)(6) of the Bankruptcy Code, chapter 12 debtors must demonstrate that their plans are feasible, meaning that they "will be able to make all payments under the plan and to comply with the plan." (17) Feasibility is bankruptcy law's shorthand for the court's assessment of the probability of actual performance of the debtor's proposed plan. It is a prediction about the continued financial viability of a farm business. The feasibility assessment is not a rigid, mathematical formula. (18) Rather, it requires bankruptcy courts to consider and weigh objective evidence about whether chapter 12 debtors realistically can achieve their reorganization plans while accounting for the risks inherent in farming. (19)

Feasibility merits scrutiny because family farms continue to face cyclical financial pressures, which lead to higher chapter 12 filing rates alongside increasing consolidation in the U.S. agricultural sector. Feasibility was commonly litigated in early chapter 12 cases (20) and remains a challenging issue to navigate in contemporary chapter 12 cases. (21) Even when feasibility is not contested at confirmation, secured creditors can use it as leverage in negotiating plan terms.

This paper qualitatively examines the feasibility requirement and provides insight about formulating feasible chapter 12 plans. When bankruptcy courts resolve feasibility disputes, they make key findings about whether chapter 12 debtors can perform their proposed plans. These findings, when viewed in the aggregate, provide debtors and their attorneys guidance for structuring feasible plans and navigating feasibility challenges. This paper reviews the chapter 12 feasibility caselaw, catalogs plan features that impact the feasibility assessment, and provides insight about how to formulate feasible chapter 12 plans.

Admittedly, this paper is not a comprehensive review of every chapter 12 feasibility determination. Bankruptcy judges often issue feasibility determinations orally that do not find their way to electronic research databases. But there are more than 150 written decisions available in Westlaw that touch on feasibility and date from chapter 12's early days to recent months.

Part I explains some of the features and advantages of chapter 12 as a restructuring tool that distinguish it from chapters 11 and 13. Part II urn packs the feasibility requirement and synthesizes the standards courts use to test plan feasibility. Part III categorizes plan features that impact the feasibility assessment and uses case illustrations to provide guidance to chapter 12 debtors and their attorneys about how to satisfy the feasibility requirement. Part IV concludes by summarizing the feasibility guidance and noting observations about feasibility in contemporary chapter 12 cases.


    In the 1980s, the U.S. agricultural sector experienced its worst economic crisis since the Great Depression. (22) Farmers carried staggering debt loads that they could not refinance. (23) The Federal Reserve had lowered interest rates to combat inflation, leading to substantially depressed farmland values in the Midwest from 1981 to 198 5. (24) Meanwhile, surplus production drove down commodity prices, U.S. exports declined, and a new presidential administration tried to cut back on government support. (25) Droughts in the Midwest compounded these problems. (26) There were many farm foreclosures and bankruptcies while banks and other businesses closed and rural towns died off. (27)

    At that time, farmers had too much to debt to satisfy chapter 13's eligibility requirements, but found chapter 11 too complicated, time-consuming, and expensive. (28) In 1986, Congress enacted chapter 12 of the Bankruptcy Code to respond to the farm crisis 29 Chapter 12 allows family farmers and family fisherman who meet the Code's eligibility requirements to restructure their debt and continue operating. It "balances the Congressional policy of preserving and fostering American family farms with the rights of creditors to payment." (30) Chapter 12 has been characterised as a hybrid of chapters 11 and 1331 that accounts for the unique context in which the U.S. family farmer operates by making bankruptcy restructuring more accessible than chapter 13 and less complicated than chapter 11. (32)

    Chapter 12's eligibility requirements have much higher debt limits than chapter 13, which is designed for regular wage earners with smaller aggregate debt amounts. (33) Yet many features of chapter 12 resemble chapter 13. (34) For instance, a chapter 12 debtor similarly must commit all disposable income to pay creditors during a three-to-five-year plan. (35) And a standing chapter 12 trustee supervises and administers cases with powers similar to those of standing chapter 13 trustees. (36) Also, only the debtor may propose a plan in both chapters 12 and 13, but the respective timeframes for submitting a plan and confirmation are different. (37)

    Moreover, chapter 12 is more streamlined than chapter 11 because it does not subject debtors to some key chapter 11 requirements for plan confix mation. Unlike in chapter 11, creditors do not vote on chapter 12 plans, (38) though they may object to confirmation of the plan. (39) No disclosure statement accompanies chapter 12 plans. (40) And because chapter 12 presumes debtors will maintain ownership of farm assets, the absolute priority rule does not apply--classes of claims do not need to be paid in full before debtors can retain ownership. (41)

    Chapter 12 "offers debtors more powerful debt restructuring tools" than chapters 13 and 11 to promote family farmer rehabilitation. (42) For instance, chapter 12 debtors have expanded cramdown rights as compared with chapter 13 debtors. Chapter 12 debtors may modify secured creditors' rights, including loans secured by primary residences, the latter of which is prohibited in chapter 13. (43) As a result, in chapter 12, secured creditors are entitled to a secured claim only in the amount of the collateral's fair market value as of the effective date of the plan. (44) The remaining debt is an unsecured claim that is discharged upon completion of plan payments. (45) This ability to strip down home mortgage debt in chapter 12 helps debtors retain their home' stead. In addition, courts allow lengthy cramdown terms that exceed the plan period and apply to real estate loans and to fully matured, prepetition short'term equipment loans to save the family farm. (46)

    Chapter 12 applies a different adequate protection standard to account for the uniqueness of farm restructuring. Specifically, section 1205 negates application of section 361, the adequate protection standard that applies in other kinds of bankruptcy cases. (47) Instead, family farmers may satisfy the requirement of adequate protection by paying reasonable market rent. (48) Also, section 1205 does not include the "indubitable equivalent" alternative for satisfying the requirement of adequate protection. (49) This separate test exists because at the time Congress created chapter 12, farmland values were severely depressed and many lenders were undercollateralized. Without a different test, farm restructurings would be thwarted by secured creditors' early motions to lift the stay due to lack of adequate protection. (50)

    Chapter 12 debtors also enjoy tax advantages that do not exist in chapters 13 and 11. In bankruptcy, federal and state taxes generally are classified as priority...

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