Publication

August 6, 2019Client Alert

Anticipated Changes to Bankruptcy Laws will Affect Farmers & Small Businesses

On August 1, 2019, the U.S. Senate passed the “Family Farmer Relief Act of 2019” (H.R. 2336), bipartisan legislation which cleared the U.S. House of Representatives in June. The President is expected to sign the Act into law, and it would go into effect on the date it is signed. The Family Farmer Relief Act of 2019 significantly increases the “debt limit” for agricultural producers seeking to reorganize under Chapter 12 of the U.S. Bankruptcy Code from $4 million to $10 million.

Chapter 12 of the U.S. Bankruptcy Code – enacted in response to the farm crisis of the 1980s – is designed to assist family farmers and fisherman with restructuring their debts. It provides an alternative to the more costly and technical reorganization procedures under Chapter 11. Some advantages to Chapter 12, from the farmer’s perspective, include the ability to “cramdown” almost all secured debt and seek a plan with flexible payment schedules that can align with harvesting and marketing of agricultural products. Chapter 12 offers farmers the ability to quickly, predictably, and relatively affordably reorganize debts and avoid asset liquidation or foreclosure, provided their total debts are below the statutory limit. As such, Chapter 12 is often the preferred method for agricultural producers to restructure their debts. Raising the debt limit to $10 million gives family farmers above the prior threshold the ability to also enjoy the benefits of Chapter 12--instead of being forced into Chapter 11 simply because they are “too big.”

The U.S. agriculture industry has seen difficult times in recent years, particularly with respect to small-to-medium sized diary and livestock operations, and Chapter 12 filings were already on the rise prior to passage of the Family Farmer Relief Act, (with 498 filings in 2018 alone). Given these trends, and the expanded availability of Chapter 12 proceedings to debtors carrying additional debt, Chapter 12 filings are almost certain to increase through the 2019 harvest season and beyond.

In addition to the relief afforded to family farmers, the U.S. Senate also passed the “Small Business Reorganization Act of 2019” (H.R. 3311), which is expected to be signed into law. This Act adds a new subchapter to Chapter 11, aimed at loosening certain requirements for a “small business debtor,” which is defined as a person in commercial or business activity with total non-contingent liquidated secured and unsecured debts of not more than $2,725,625. The revisions are supported by the American Bankruptcy Institute, which believes that the Act will help financially troubled small businesses emerge from bankruptcy in a shorter period of time than under the current statute.

The Act contains provisions geared towards the “expeditious and economical resolution” of the case, requiring the court to hold a status conference within 60 days of the petition date and the debtor to file a report that details the efforts taken to “attain a consensual plan of reorganization.” Unless otherwise extended by the court, the debtor must file a plan within 90 days of the petition date.

Lastly, the standards for confirmation of a plan have been relaxed. The traditional “cramdown” scenario under 11 U.S.C. sec. 1129(a)(8) has been expanded to also excuse the debtor’s compliance with subsections (10), and (15) of that section. In other words, a debtor may still obtain confirmation of a plan if the plan is fair and equitable to each class of claims or interests even if (a) no class has accepted the plan under 1129(a)(10), or (b) if the debtor is an individual, the plan fails to pay each unsecured creditor the full value of its claim (provided that the debtor still pays its projected disposable income to creditors for the time period set under the plan) under 1129(a)(15).

The revisions appear to encourage debtor’s counsel to begin formulating the plan and negotiating with creditors early on in the case—hopefully to the benefit of the debtor and the estate. The new Act would go into effect 180 days after it is enacted into law.

If you have questions about agricultural reorganization cases or business bankruptcy matters, please contact Joe Brydges or Justin Mertz.

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