FUNDAMENTALS OF BANKRUPTCY FOR LENDERS
Chapter 12 Bankruptcy
Chapter 12 Bankruptcy is reserved exclusively for Family Farmers, and under BAPCPA, for Family Fishermen.
Chapter 12 functions as essentially a hybrid of Chapter 11 and Chapter 13, while providing a debtor with a number of enhanced powers. Many provisions of Chapter 11 were unworkable for farming operations, and many farmers exceed the debt limits placed on a Chapter 13 filing.
In addition to extending the availability of Chapter 12 to Family Fishermen, Congress also used BAPCPA to make the provisions of Chapter 12 a permanent part of the Bankruptcy Code.
a. Chapter 12 is available to family farmers and family fisherman with regular annual income.
b. Regular Annual Income requirement
(1) A “family farmer with regular annual income” is a family farmer whose annual income is sufficiently stable and regular to enable such family farmer to make payments under a Chapter 12 plan
(2) Likewise, a “family fisherman with regular annual income” is a family fisherman whose annual income is sufficiently stable and regular to enable such family fisherman to make payments under a Chapter 12 plan.
c. Individual Family Farmer is defined as [§ 101(18)(A)]:
(1) An individual (or individual and spouse) engaged in a farming operation;
(2) With aggregate debts that do not exceed $3,237,000 ($1,500,000 under old law);(3) With not less than 50% (80% under old law) of aggregate noncontingent, liquidated debts (excluding a principal residence) arising out of a farming operation owned or operated by the individual; and
(4) With 50% or more of the individual’s income generated from such farming operation for either the one tax year immediately preceding the bankruptcy filing or for each of the 2nd and 3rd tax years immediately preceding the bankruptcy filing.
(5) Under BAPACPA, a family farmer can be eligible to file for protection under Chapter 12 even if the debtor obtained more than 50% of his income from sources other than farming during the immediately preceding tax year, so long as the debtor obtained more than 50% of his income from farming in the 2nd and 3rd years immediately prior to filing.
(6) Under prior law, a family farmer could only qualify for protection under Chapter 12 if he received more than 50% of his income from farming during the tax year immediately preceding the filing of the bankruptcy petition.
d. Corporate Family Farmer is defined as [§ 101(18)(B)]:
(1) A corporation or partnership in which more than 50% of the outstanding stock or equity is held by one family, or by one family and the relatives of the members of such family, and such family or such relatives conduct the farming operation;
(2) With more than 80 percent of the value of its assets consisting of assets related to the farming operation;
(3) With aggregate debts that do not exceed $3,237,000 ($1,500,000 under old law);(4) With not less than 50% (80% under old law) of aggregate noncontingent, liquidated debts (excluding a debt for one dwelling which a shareholder or partner uses as a principal residence) arising out of a farming operation owned or operated by the corporation or partnership; and
(5) Whose stocks (if any) are not publicly traded.
e. A “farming operation” includes farming, tillage of the soil, dairy farming, ranching, production or raising of corps, poultry, or livestock, and production of poultry or livestock products in an unmanufactured state.
f. Individual Family Fisherman is defined as [§ 101(19A)(A)]:
(1) An individual (or individual and spouse) engaged in a commercial fishing operation;
(2) With aggregate debts that do not exceed $1,500,000;
(3) With not less than 80% of aggregate noncontingent, liquidated debts (excluding a principal residence) arising out of a commercial fishing operation owned or operated by the individual; and
(4) With 50% or more of the individual’s income generated from such commercial fishing operation for the tax year immediately preceding the bankruptcy filing.
g. Corporate Family Fisherman is defined as [§ 101(19A)(B)]:
(1) A corporation or partnership in which more than 50% of the outstanding stock or equity is held by one family, or by one family and the relatives of the members of such family, and such family or such relatives conduct the commercial fishing operation;
(2) With more than 80% of the value of its assets consisting of assets related to the commercial fishing operation;
(3) With aggregate debts that do not exceed $1,500,000;
(4) With not less than 80% of aggregate noncontingent, liquidated debts (excluding a debt for one dwelling which a shareholder or partner uses as a principal residence) arising out of a commercial fishing operation owned or operated by the corporation or partnership; and
(5) Whose stocks (if any) are not publicly traded.
h. A “commercial fishing operation” is defined as:
(1) The catching or harvesting of fish, shrimp, lobsters, urchins, seaweed, shellfish, or other aquatic species or products of such species; or
(2) Aquacultural activities consisting of raising for market any species or product described above
g. A “commercial fishing vessel” is a vessel used by a family fisherman to carry out a commercial fishing operation.
a. As with a Chapter 13, the filing of a Chapter 12 bankruptcy petition also stays action against any co-debtor or co-pledgor of a consumer debt, of the debtor, unless:
(1) the co-debtor became liable in the ordinary course of its business; or
(2) the case is closed, dismissed or converted.
b. The creditor may obtain relief from the co-debtor stay to the extent that:
(1) The co-debtor actually received the consideration for the claim held by the creditor;
(2) The Plan filed by the debtor proposes not to pay such claim; or
(3) The creditor would be irreparably harmed.
c. Nothing in the New Law limits the effect of the co-debtor stay upon multiple filings within a single year.
3. APPOINTMENT OF A CHAPTER 12 TRUSTEEa. In every Chapter 12 case, a Trustee is appointed to monitor the case, examine proofs of claim, and object to the allowance of any improper claim, oppose discharge of the debtor (if appropriate), provide information to parties in interest related to the administration of the estate, receive and disburse payments, and make a final report and final accounting of the administration of the bankruptcy estate.
b. Even though there is a Trustee appointed to oversee the case, the debtor functions as a debtor-in-possession, much like a Chapter 11 debtor.
c. As with cases under Chapter 7, 11 and 13, a creditor must file a Proof of Claim to receive distributions under a Chapter 12 plan.
d. If the Court determines that the debtor, for cause, should no longer be allowed to operate as a debtor in possession, then the Trustee will be required to take on the same duties that would be required of a Trustee appointed in a Chapter 11 case.
e. If a claim is made for a domestic support obligation owed by the debtor, then the Trustee shall:
(1) provide written notice to the holder of the claim of his/her rights to use services of the State child support enforcement agency for assistance in collection child support during and after the bankruptcy case, and provide the holder of the claim with the address and telephone number of the appropriate state agency;
(2) provide written notice to the appropriate State child support enforcement agency of the claim and provide the agency with the name, address, and telephone number of the holder of the claim; and
(3) upon the granting of a discharge to the debtor, provide written notice to the holder of the claim and the State child support enforcement agency of:
(a) the granting of the discharge;
(b) the last known address of the debtor;
(c) the last known name and address of the debtor’s employer; and
(d) the name of each creditor that holds a claim that was reaffirmed or not discharged
(4) The holder of a claim for a domestic support obligation (and the State child support enforcement agency) may contact those creditors holding claims against the debtor and request the last known address of the debtor. Any creditor providing such information to an authorized party shall not be liable for making such disclosure under any other provision of law.
4. CHAPTER 12 PLAN OF REPAYMENT
a. In addition to filing statements, schedules, a petition, and creditor mailing matrix, a Chapter 12 debtor must file a Chapter 12 Repayment Plan
b. Time for filing:
(1) § 1221 of the Bankruptcy Code requires the Chapter 12 Plan to be filed within 90 days of the filing of the bankruptcy petition
(2) The Court may extend the 90-day requirement if the debtor shows that an extension is necessary due to circumstances for which the debtor should not justly be held accountable.
c. Objections:
(1) In most jurisdictions, creditors must object to confirmation of a Chapter 12 Plan no later than five(5) business days prior to the scheduled confirmation hearing.
d. Common grounds for objection:
(1) Failure of the debtor to provide all future disposable income to the Plan.
(2) Excessive expenses in the debtor’s budget.(3) Unfair classification of similar types of creditors.
(4) A proposal to cure delinquent payments on secured debt over a period greater than thirty-six months or failure to properly state the pre-bankruptcy delinquency.
(5) In a cramdown situation, failure to (i) provide for interest, (ii) properly value the collateral, or (iii) correctly state the balance due.
(6) Lack of good faith in filing the case or the plan.
(7) Failure to provide at least as much as would be provided in a Chapter 7 liquidation.
(8) If the Plan runs for less than thirty-six months, failure to pay unsecured creditors 100%.
(9) Lack of feasibility of the Plan.
(10) Lack of regular income to fund a plan.
e. The Chapter 12 Plan must provide for payments to be made over a period of not more than three (3) to five (5) years.
f. As with a Chapter 13 Plan, if the debtor proposes to pay 100% of the amounts owed to all creditors there is no minimum time frame placed on the Chapter 12 Plan.
g. Modification of Rights of Holders of Secured Claims
(1) The Chapter 12 Plan may modify the rights of holders of secured claims, including the terms of a mortgage on the debtor’s principal residence.
(2) This is an advantage for the debtor over the provisions of Chapter 13, which preclude the debtor from modifying any consensual liens existing on the debtor’s principal residence.
h. Confirmation:
(1) Prior to confirmation of the Chapter 12 Plan, the debtor must have paid all domestic support obligations which became due prior to the filing of the bankruptcy petition
(2) The Court must hold a confirmation hearing no more than 45 days after the filing of the Chapter 12 Plan. This timeframe may be extended for good cause shown.
5. DISMISSAL OR CONVERSION OF CASE
a. The Debtor has an absolute right to request that his case be dismissed unless the case was previously converted from either a Chapter 7 or a Chapter 11 proceeding.
b. The debtor’s case may be converted to a Chapter 7, 11 or 13 on the motion of any party in interest, if the Court finds that the debtor committed fraud in connection with the bankruptcy case.
c. The debtor’s case may only be converted to another chapter for which the debtor otherwise qualifies under the Bankruptcy Code.
d. Dismissal for Cause
(1) The Bankruptcy Code contains ten (10) specific instances that constitute cause for dismissing a Chapter 12 bankruptcy petition, including:
(a) unreasonable delay, or gross mismanagement, by the debtor that is prejudicial to creditors;
(b) nonpayment of any fees and charges required under Chapter 123 of title 28;
(c) failure to file a plan timely under section 1221 of this title;
(d) failure to commence making timely payments required by a confirmed plan;
(e) denial of confirmation of a plan under section 1225 of this title and denial of a request made for additional time for filing another plan or a modification of a plan;
(f) material default by the debtor with respect to a term of a confirmed plan;
(g) revocation of the order of confirmation under section 1230 of this title, and denial of confirmation of a modified plan under section 1229 of this title;
(h) termination of a confirmed plan by reason of the occurrence of a condition specified in the plan;
(i) continued loss to or diminution of the estate and absence of a reasonable likelihood of rehabilitation; and
(j) failure of the debtor to pay any domestic support obligation that first becomes payable after the date of the filing of the petition.
6. SALE OF ASSETS FREE AND CLEAR OF LIENS
a. A Chapter 12 debtor-in-possession, or a trustee, may sell property free and clear of liens under § 363(b) or (c), if the property to be sold is farm land, farm equipment, or property used to carry out a commercial fishing operation (including a commercial fishing vessel).
b. Under most circumstances, the proceeds of any such sale shall be subject to the liens and interests previously existing against the property sold. Such liens and interests shall apply in the same amount as priority as the would have against the property.
a. The adequate protection provisions of § 361 do not apply in Chapter 12.
b. Section 1205(b) provides that:
(1) In Chapter 12, when adequate protection is required under §§ 362, 363, or 364 of an interest of an entity in property, such adequate protection may be provided by:
(a) requiring the trustee to make a cash payment or periodic cash payments to such entity, to the extent that the stay under § 362, use, sale or lease under § 363, or any grant of a lien under § 364 results in a decrease in the value of property securing a claim or of an entity’s ownership interest in property;
(b) providing to such entity an additional or replacement lien to the extent that such stay, use, sale, lease, or grant results in a decrease in the value of property securing a claim or of an entity’s ownership interest in property;
(c) paying to such entity for the use of farmland the reasonable rent customary in the community where the property is located, based upon the rental value, net income, and earning capacity of the property; or
(d) granting such other relief, other than entitling such entity to compensation allowable under § 503(b)(1) as an administrative expense, as will adequately protect the value of property securing a claim or of such entity’s ownership interest in property.
a. Generally, the use of cash collateral and the granting of adequate protection to entity’s holding interests in cash collateral is procedurally similar to cash collateral issues arising in Chapter 11 proceedings.
a. Upon completion of all payments called for under a confirmed Chapter 12 Plan, the debtor shall be discharged from nearly all unsecured debts.
b. The discharge granted under Chapter 12 is very similar in scope to the discharge available under Chapter 7.
c. Those types of debt that are automatically non-dischargeable under Chapter 7 are likewise automatically non-dischargeable under Chapter 12.
d. Under Chapter 12, the creditor may also file a complaint to object to the discharge of debts obtained though fraud, false pretenses, false financial statement, or willful or malicious injury to the person or property of another.
e. Long-term debt: Any debt on which the last payment is due after the final date of the Plan, however, is typically not discharged in a Chapter 12.
f. The debtor may not obtain a discharge unless the court determines, at a hearing held no more than 10 days before discharge, that:
(1) there is no reasonable basis to believe that the debtor has been convicted of a felony under circumstances that demonstrate that the filing of the case was an abuse of the Bankruptcy Code; or
(2) there is no reasonable basis to believe that the debtor is or may soon be found liable for a debt arising from:(a) a violation of federal securities laws, fraud, deceit or manipulation in a fiduciary capacity of a registered security; or
(b) a civil remedy under the Racketeer Influenced and Corrupt Organizations Act; or
(c) any criminal act, intentional tort, willful or reckless misconduct that caused serious physical injury or death to another individual in the preceding 5 years.
For more information or to request a presentation regarding BAPCPA, please contact Spotts Fain attorneys, Robert H. Chappell, III (804) 697-2025 or Jennifer J. West (804) 697-2094.
