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Sixth Circuit BAP on Chapter 12

Sixth Circuit BAP on Chapter 12

March 14, 2018
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By: Dean Langdon

Farming is tough, and family farmers are dealing with several years of low prices and weather-related issues. As we head into planting season, family farmers should be aware that Chapter 12 may help them reorganize and have a brighter future.

On March 13th, the Bankruptcy Appellate Panel for the Sixth Circuit (“BAP”) issued In re Perkins, a published decision on Chapter 12 eligibility and plan feasibility. Sixth Circuit case law on Chapter 12 is somewhat sparse, so this decision helps clarify what standards apply and allows practitioners to better advise their clients.

First, the BAP adopted the Sixth Circuit’s Chapter 13 standard for calculating debts from In re Pearson, 773 F.2d 751 (6th Cir. 1985), and held that determining if a Chapter 12 debtor exceeds the debt limits, a court should normally rely on the debtor’s schedules, as long as they were filed in good faith. Second, the BAP held that income generated by the sale of non-debtor partnership and S corporation entities which were both owned and operated by the debtor constituted “farm income” for eligibility purposes under Chapter 12. Finally, in a fact-intensive review, the BAP affirmed the bankruptcy court’s determination that the debtor’s Chapter 12 plan was feasible because a) the testimony of the farm manager and prior years’ production supported the income projections for the plan; b) oral leases of cropland for less than a year were not required to comply with the statute of frauds; c) the court’s use of the Till method for setting an interest rate on the secured lender’s claim was permissible (while not holding that Till must be applied); and d) the value of crops already in the ground were included in the debtor’s liquidation analysis for purposes of the best interest of creditors test. The BAP relied upon the holding in a Chapter 11 case that to be feasible, a plan need not guarantee success, but must provide a “reasonable assurance” of same.

So, Chapter 12 practitioners in the Sixth Circuit can now offer clients some clearer guidance on the issues of eligibility for Chapter 12 and what factors may impact on plan feasibility. Let’s keep those family farmers in good financial health!

Read the opinion here

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