Updated April 12, 2019 with new data
Agricultural economists have warned of a looming farm crisis for several years now. For the most part, however, they have been wrong. The agricultural sector has certainly slowed a bit, but it has avoided a full-scale crisis. But some of those same economists are still predicting a farm downturn. Falling commodity prices and higher input costs, coupled with uncertain trade policies and tariffs, all cast a pall on agriculture. Maybe 2019 will finally be the year where distress comes to the farmland.
It stands to reason farm bankruptcies will increase if the farm economy stumbles. Chapter 12 bankruptcy filings have increased slightly in 2019. Chapter 12 of the Bankruptcy Code, enacted in 1987, provides relief for family farmers who want to reorganize their financial affairs. While Chapter 12 was very popular in the first few years after its enactment, the number of Chapter 12 cases decreased after the farm economy stabilized. Nevertheless, hundreds of Chapter 12 cases are still filed every year in the United States. Furthermore, a bill was introduced in the Senate in early 2019 that would more than double the maximum amount of debt (to $10 million) that a family farmer may have to be eligible to file a Chapter 12 case.
With all of that in mind, it is a good time to examine how Chapter 12 has worked in practice in Missouri.
The methodology of this examination was simple. I identified all Chapter 12 bankruptcy cases filed in Missouri between 2000 and 2018 through online searches of the dockets for both the Eastern and Western Districts. After adjusting for various anomalies, 148 unique Chapter 12 cases were filed in Missouri between 2000 and 2018. 20 of those cases are still pending. Of those 20 cases, the family farmer confirmed a Plan in 10 of them but is still awaiting a discharge. No plan has been confirmed in the other 10.
Outcomes of Chapter 12 cases
There are four primary possible outcomes for a Chapter 12 case:
- Converted to Chapter 7 or dismissed before plan filed. If the Debtor fails to file a Plan, there are two possible dispositions of the case: (a) conversion of the case to one under Chapter 7, or (b) dismissal of the case. Because of the Bankruptcy Code’s longstanding hostility to involuntary liquidations of farmers, the Court can convert a Chapter 12 case only if the Debtor consents or the Debtor commits fraud in connection with the case. 22 cases were either voluntarily converted to Chapter 7 or dismissed before a Plan was filed.
- Case converted or dismissed after a plan was filed but before confirmation. This occurs when the debtor files a Plan, but is unable to obtain confirmation of the Plan. If the Debtor does not voluntarily convert its case to Chapter 7, the Court will eventually dismiss the case. 7 cases were dismissed or converted after a Plan was filed but before confirmation.
- Plan confirmed but no Chapter 12 discharge. This occurs when a Plan is confirmed, but no discharge is entered. Unlike Chapter 11, where the discharge can be obtained on the Effective Date of the Plan, in Chapter 12 the discharge is normally not entered until all Plan payments have been made. Many Chapter 12 debtors are able to confirm a Plan but thereafter default in making the Plan payments. These cases are typically either dismissed at some point after the default or the Debtor voluntarily converts the case to Chapter 7. 38 cases fall into this category, but 12 of them are still pending and a discharge may be granted at some point in the future.
- Plan confirmed and discharge entered. This is the most desired outcome for a Chapter 12 debtor. Not only does this Chapter 12 debtor obtain a confirmed Plan, the debtor also completes payments under the confirmed Plan and receives a discharge. All data in this article excludes cases that resulted in a hardship discharge under Section 1228(b), which are very rare. A total of 61 cases fall into this category.
Table 1 summarizes the outcomes for all Missouri Chapter 12 cases from 2008 - 2018 (excludes pending cases).
There are several interesting conclusions that can be drawn from the data in Table 1. First, nearly one-half of Missouri debtors achieved the ultimate objective in a Chapter 12 case, i.e. confirmation of a Plan, followed by completion of Plan payments and receipt of a Chapter 12 discharge. The remaining Chapter 12 cases end in either conversion to a Chapter 7 liquidation or dismissal.
Second, most Chapter 12 debtors are able to at least file a repayment Plan. 85% of all Chapter 12 debtors propose a repayment Plan at some point in their cases. And over 94% of all debtors that are able to file a Plan eventually convince a court to confirm it.
Third, many debtors fail to perform under their confirmed Plans. Of the 99 closed cases where a Plan was confirmed, no Chapter 12 discharge was entered in 36 of them. Therefore, about 36.3% of all confirmed Plans result in a post-confirmation default that precludes entry of a discharge.
Another interesting metric is comparing Missouri Chapter 12 outcomes with Chapter 12 outcomes nationwide. While there is no readily available data for nationwide Chapter 12 outcomes for 2000 through 2018, the Executive Office of the United States Trustee (EOUST) does maintain a database that shows cases outcomes for 1,809 Chapter 12 cases that were closed nationwide in fiscal years 2009-2014. See generally, Flynn, Chapter 12: Outcomes for Family Farmers and Fishermen, American Bankruptcy Institute Journal (September 2015) at p. 36.
Therefore, Missouri debtors have on the average a slightly more positive set of outcomes than Chapter 12 debtors nationwide. Missouri debtors are slightly more likely to receive a Chapter 12 discharge, and they are slightly less likely to have their Chapter 12 cases dismissed or converted. Successful Missouri cases, however, proceed at a slightly slower pace than their counterparts nationwide.
Under Section 1221, a Chapter 12 debtor must file a Plan within 90 days after the petition date. The court can extend the filing period if it concludes that the need for an extension is “attributable to circumstances for which the debtor should not justly be held accountable.” For the most part, the Missouri Chapter 12 debtors filed their Plans on a timely basis as the median number of elapsed days between the petition date and the date of the first Plan was 92 days.
However, the data suggest that many farmers struggle to obtain confirmation of their Plans. The median number of days between the petition date and entry of a confirmation order is 196 days, which means that it typically takes over 100 days after filing a Plan to obtain confirmation. This is probably because most Chapter 12 debtors have to amend their original Plan in order to secure confirmation. In fact, of those Chapter 12 debtors that obtain a confirmed Plan, 70.6% of them file at least one amended Plan before confirmation. In fact, slightly over 30% of all debtors with confirmed Plans file at least three Plans before confirmation.
- While Chapter 12 is far from a cure-all, it does work a significant percentage of the time as evidenced by the 47.4% of Chapter 12 debtors that obtain a discharge.
- Chapter 12’s liberal rules governing amendments, both pre- and post-confirmation, are frequently used. Farmers clearly need flexibility in proposing their Plans and pursuing confirmation. A debtor’s need to file an amended Plan is not necessarily an omen that the Plan will ultimately fail. In many instances, a debtor was eventually be able to obtain a discharge in spite of filing one or more post-confirmation amendments. Both debtors and lenders should recognize at the outset that a substantial number of confirmed Plans require post-confirmation modification.
- Missouri’s experience with Chapter 12 is very close to the nation as a whole.
- The influence of Chapter 12 is probably much more significant than the modest number of cases indicate. The results in Chapter 12 cases provide a spectrum of potential outcomes that influence both lenders and borrowers in out-of-court workout discussions.