A recent Chapter 12 (farm) bankruptcy case highlights an issue that farmers can run into when in financial distress. In recent years, the expansion of the size of farm and ranch operations (due largely to increased crop prices and land values) caused some many farming operations to expand. It also caused many of those same operations to take on more debt. When crop prices collapsed and land values declined, that created financial distress in the farm sector. Chapter 12 then became a major reality for these operations. Chapter 12 reorganization has favorable provisions for farmers, including the ability to move any IRS (and state) tax claims to the general unsecured status that are related to the sale of farm assets that are used in the debtor's farming operation. (11 U.S.C. Sec. 1222(A)(2)(a)) But, the debtor can't have more than $4,031,575 of aggregate debt (presently inflation-adjusted to $4,153,150). That limit is too low for many of the farming operations that have expanded in recent years, and bars them from filing Chapter 12. A legislative effort has been attempted over the past year to increase the debt limit, but hasn't been successful yet. The aggregate debt limitation of Chapter 12 was illustrated in a recent case.
In the case, the debtor filed a Chapter 12 petition along with schedules showing aggregate debt of almost $4.5 million. A creditor filed a motion to dismiss the debtor’s Chapter 12 petitioner because the debtor’s aggregate debt exceeded that allowed by Chapter 12 – $4,031,575. The debtor then filed a motion to convert the Chapter 12 case to a Chapter 11, which has no limit on a debtor’s aggregate debt. The debtor claimed that conversion to Chapter 11 was permissible because 11 U.S.C. §1208 doesn’t expressly bar conversion from Chapter 12 to Chapter 11, and because the Chapter 12 had been filed in good faith, conversion would not prejudice creditors, and conversion would be equitable. The creditor objected to conversion on the basis that there is no statutory authority for such conversion. The court noted that the issue had not been addressed by the First Circuit, but that other Circuits were split on the issue. The court examined the legislative history of Chapter 12 to note that early draft versions of Chapter 12 legislation contained limited authority to convert a Chapter 12 to Chapter 11 or 13, the final conference report did not contain any allowance for good faith conversion. Thus, based on a plain reading of the statute, the court denied conversion.
The case is In re Colon, No. 16-0060, 2016 Bankr. LEXIS 2344 (Bankr. D. P.R. Jun. 21, 2016).