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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