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News Room

Chapter 12 Working Group:
Elimination of Sunset Provision

Background

United States bankruptcy laws did not originally accord farmers any special treatment other than protection from the filing of an involuntary bankruptcy case. This legislative gap was closed as a result of the economic depression of the 1920s and 1930s and its severe impact on the agricultural community. Section 75 of the Bankruptcy Act was enacted as emergency legislation in order to provide farmers with a measure of relief that was otherwise unavailable under the Act. Section 75 expired by its own terms in 1949.

After the expiration of section 75, a financially distressed farmer was generally subject to the same rules as any other debtor. The Bankruptcy Act contained no specific provision that applied only to farmers other than the prohibition against the commencement of an involuntary case. The Bankruptcy Code similarly did not provide farmers with any special protections other than protection from an involuntary petition or conversion of a reorganization case to a chapter 7. [ FN: See 11 U.S.C. § § 1121(1), 1307(3) (1978)(amended).] Consequently, most farmers seeking to reorganize under the Bankruptcy Code attempted to do so under chapter 11. The plan confirmation requirements of chapter 11, however, often proved to be insurmountable barriers to a successful reorganization and family farms, tied to the land by history and emotion, were often forced to liquidate.

The agricultural crisis which occurred in the United States in the 1920s and continued through the Great Depression, revisited the country in the 1980s. Hearings in the House and Senate led Congress to the conclusion that chapter 11 did not provide effective relief for farmers and that dire economic conditions required immediate action. [ FN: H.R. Rep. No. 958, 99th Cong., 2d Sess. 4548 (1986), reprinted in 1986 U.S.C.C.A.N. 5227, 5249.] chapter 11 was viewed by Congress as inordinately expensive, needlessly complicated, time-consuming and simply unworkable for too many farmers. [ FN: See id. See also 132 Cong. Rec. 28,593 (1986)(remarks of Sen. Charles Grassley).] Consequently, chapter 12 was enacted as emergency legislation in order to address the plight offarmers with the impetus of facilitating plan confirmation without the complications of chapter 11. [ FN: chapter 12 was created in order to respond to the sharp downturn in the farm economy during the early 1980s. Farm foreclosures were frequent and the value of farm real estate declined as thousands of farms flooded the market. Agricultural lenders were forced to liquidate their collateral in substantially depressed markets. See H.R. Rep. No. 32, 103d Cong., 1st Sess. (1993), reprinted in 1993 U.S.C.C.A.N. 373.] Relief for family farmers was provided in a separate chapter of the Bankruptcy Code as part of the Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986. [ FN: Pub. L. No. 99-554, 100 Stat. 3105 (1986).] Congress provided for a seven-year sunset provision in order to (i) evaluate whether chapter 12 was serving its intended purpose and (ii) determine whether it should be a permanent addition to the Code. [ FN: H.R. Rep. No. 958, 99th Cong., 2d Sess. 45-48 (1986), reprinted in 1986 U.S.C.C.A.N. 5227, 5249.] On August 6, 1993, Congress extended the sunset provision to October 1, 1998. [ FN: Pub. L. No. 103-65, 107 Stat. 311 (1993).]

Proposal

The sunset provision should be eliminated. Chapter 12 should be made a permanent addition to the Bankruptcy Code.

Discussion

chapter 12 will not be an available avenue of relief for family farmers absent Congressional action on or before October 1, 1998.

The test of time has revealed that chapter 12 generally provides financially distressed family farmers with an effective framework within which to reorganize their operation and restructure their debts. The available evidence suggests that the primary purpose in enacting chapter 12 has been achieved, giving "family farmers facing bankruptcy a fighting chance to reorganize their debts and keep their land." [ FN: H.R. Rep. No. 958, 99th Cong., 2d Sess. 48 (1986), reprinted in 1986 U.S.C.C.A.N. 5227, 5249. See H.R. Rep. No. 32, 103d Cong., 1st Sess. (1993), reprinted in 1993 U.S.C.C.A.N. 373 (indicating that testimony received by the Subcommittee on Economic and Commercial Law in hearings held during the 102d and 103d Congresses revealed that " chapter 12 is, by and large, operating effectively and serving its intended purpose " ).] chapter 12 has saved literally thousands of family farms, [ FN: U.S. General Accounting Office, Farm Finance: Participant ’ s Views on Issues Surrounding chapter 12 Bankruptcy 18-19 (May 1989)(cited in Jonathan K. Van Patten, chapter 12 in the Courts , 38 S.D. L. Rev. 52 (1993)).] stabilized farm values, and encouraged more out-of-court negotiations and settlements between lenders and farmers. [ FN: See, e.g. , To Extend the Period During Which chapter 12 of Title 11 of the United States Code Remains in Effect: Hearing on H.R. 5322 Before the Subcommittee on Economic and Commercial Law of the House Committee on the Judiciary , 102d Cong., 2d Sess. 21 (1992)(cited in Van Patten, supra note 9)(testimony of the Honorable Thomas A. Small, one of the principal drafters of chapter 12, before the House Judiciary Committee). Chapter 12 has been beneficial in giving the financially distressed farm debtor " ‘ something when he comes to the negotiating table with the [lender]. Without that . . . he ’ s virtually helpless. He would only be liquidated. ’ " Id. (quoting testimony of Judge Richard L. Bohanon).] Accounts of professionals and jurists similarly reveal that the confirmation and consummation ratesin chapter 12 cases greatly exceed those in chapter 11 cases. [ FN: Id. at 6. Judge Richard L. Bohanon testified before the House Judiciary Committee that approximately 60 percent of the chapter 12 cases filed had achieved confirmation and that of those confirmed cases, nearly 90 percent had been successfully completed. Id.]

chapter 11 reorganization is still unworkable for effective family farm debt restructuring. Indeed, since chapter 12's enactment in 1986, chapter 11 has become even more difficult for distressed family farmers. In the 1988 decision of Northwest Bank Worthington v. Ahlers, [ FN: 485 U.S. 197 (1988).] the United States Supreme Court ruled that the absolute priority rule bars chapter 11 farm debtors from retaining an equity interest in the farm over the objections of unsecured creditors unless those creditors are paid in full. [ FN: Id. at 202-03 .] The Court further held that the debtors’ promise of future labor ("sweat equity") would not satisfy the requirements of the new value exception. [ FN: Id. at 203.] As a consequence of the Court’s decision in Ahlers and the fact that most farm debtors cannot satisfy the requirements of the absolute priority rule, the use of chapter 11 in family farm bankruptcies will more than likely result in liquidation or dismissal.

Competing Considerations

There do not appear to be any competing considerations to the proposal.

 

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