CHAPTER 12: BANKRUPTCY RELIEF FOR FAMILY FARMERS
Chapter 12 of title 11 was enacted in 1986 to provide specially-tailored
bankruptcy relief for "family farmers."(2491) Chapter 12 was originally scheduled to
expire in 1993, but the expiration was extended to October 1, 1998. (2492) A total of
18,212 Chapter 12 cases have been filed since it was enacted in 1986. (2493) The
principal Chapter 12 issue facing the Commission, and Congress, is whether Chapter
12 provides necessary relief to family farmers and should become a permanent part
of the Bankruptcy Code. The Commission concluded that Chapter 12 should become
a permanent form of relief under the Bankruptcy Code. Senator Charles Grassley
(R.- Iowa) recently introduced legislation, The Working Family Farmer Protection
Act of 1997 (S. 1024), to make Chapter 12 permanent.
RECOMMENDATIONS
4.4.1 Sunset Provision and Chapter 12 Eligibility
The sunset provision should be eliminated. Chapter 12 should be made
a permanent addition to the Bankruptcy Code. Section 101(18) should
be amended to increase the aggregate debt limits to $2,500,000. The
other eligibility requirements in section 101(18) should remain
unchanged.
4.4.2 Direct Payment Plans
28 U.S.C. § 586(e) should be amended to clarify that the calculation of
the standing trustee's percentage fee should be based upon the aggregate
of those payments "made under the plan" on account of claims impaired
or modified by operation of bankruptcy law regardless of who makes the
payment.
DISCUSSION
Specially-tailored relief for farmers is a relatively new concept under the
Bankruptcy Code. As originally enacted, the Bankruptcy Act of 1898 did not accord
farmers any special treatment other than protection from the filing of an involuntary
bankruptcy case. (2494) Section 75 of the Bankruptcy Act was the first bankruptcy
statute aimed specifically at farmers and was promulgated as part of the Bankruptcy
Act of 1933 in response to the economic depression of the 1920s and 1930s. (2495)
Section 75 was enacted as emergency legislation and given only limited duration.
The provision permitted an insolvent farmer to propose a "voluntary composition"
to the farmer's creditors, but did not allow a farmer to impair the lien of a secured
creditor or reduce the amount of the secured claim without the creditor's consent. (2496)
The statute proved to be of limited value because a majority of the debtor's creditors
retained the power to disapprove proposed compositions or extensions. (2497)
In 1934, Congress strengthened section 75 by passing the Frazier-Lemke
Act, (2498) which permitted a farmer to retain possession of all farm assets for a five-year
period while collection proceedings were stayed upon the payment of a reasonable
annual rental fee. (2499) Farmers had the right to purchase the property free and clear of
all liens at any time during the five-year period by paying the creditor the property's
appraised value. (2500)
Secured creditors were particularly hostile to the Frazier-Lemke Act because
its "express purpose . . . imping[ed] upon the rights of secured creditors, . . . [by]
provid[ing] a moratorium for farmers to relieve them from overburdening mortgage
indebtedness and the harshness resulting from a loss of their farms through
foreclosure in a period of unprecedented depression."(2501) Although real estate lenders
greeted the Frazier-Lemke Act with much dismay, Congressional supporters of the
legislation hailed its virtues. (2502) Within a year, however, the United States Supreme
Court ruled that the Frazier-Lemke Act deprived secured creditors of their property
rights in violation of the Fifth Amendment to the Constitution. (2503) Congress quickly
responded to the Supreme Court's decision by enacting a revised Frazier-Lemke Act
in 1935. (2504) The revised Act was designed to cure the constitutional deficiencies of
the original enactment. (2505) The Supreme Court upheld the revised act against a
constitutional challenge in 1937, (2506) and it remained in effect until expiring by its own terms in 1949.
After the revised Frazier-Lemke Act expired, the Bankruptcy Act had no
specific provision that applied only to farmers other than the original prohibition
against the commencement of an involuntary case against a farmer. A financially
distressed farmer was generally subject to the same rules as any other debtor.
Similarly, when the Bankruptcy Code was enacted in 1978, (2507) the only special
provision for farmers was the prohibition against an involuntary Chapter 7 petition
or involuntary conversion of the case to a Chapter 7. (2508) Despite the lessons of the
twenties and thirties and the fact that the 1978 Reform Act represents the single most
extensive revision of bankruptcy law in American history, the Bankruptcy Reform
Act did not provide any special protection to farmers. Chapters 7, 11 and 13
(assuming that a farmer could satisfy the eligibility requirements) were the only
avenues of relief available. 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 farm reorganization.
The agricultural crisis in the United States, which began in the 1920s and
continued through the Great Depression, reappeared in the 1980s. Increases in the
loan-to-value ratios of mortgage debt extended to farmers under the Farm Credit Act
in 1971, combined with general farm prosperity throughout the 1970s, led to
increased leveraging in the agricultural sector of the economy. (2509) Higher interest
rates in the early 1980s made it increasingly difficult for farmers to keep current on
the new debt. (2510) In addition, higher production costs and lower commodity prices
caused by the 1980 grain embargo, combined with a sharp decrease in the value of
farm land, drove many farmers to the edge of a financial cliff. (2511) At least one
bankruptcy judge clearly recalls that the era was marked with farmers throwing up
their hands and parking their tractors and equipment in front of the federal
courthouse. (2512)
Hearings in the U.S. House of Representatives and the Senate led Congress
to conclude that Chapter 11 did not provide effective relief for farmers and that dire
economic conditions required immediate action. (2513) Congress created a separate
chapter of the Bankruptcy Code for farm debtors as part of the Bankruptcy Judges,
United States Trustees, and Family Farmer Bankruptcy Act of 1986. (2514) Enacted as
emergency legislation, Congress provided for a seven-year sunset provision in order
to (1) evaluate whether the chapter was serving its intended purpose and (2)
determine whether it should be a permanent addition to the Code. (2515) On August 6,
1993, Congress enacted legislation extending the sunset provision to October 1,
1998. (2516)
4.4.1 Sunset Provision and Chapter 12 Eligibility
The sunset provision should be eliminated. Chapter 12 should be made
a permanent addition to the Bankruptcy Code. Section 101(18) should
be amended to increase the aggregate debt limits to $2,500,000. The
other eligibility requirements in section 101(18) should remain
unchanged.
Sunset Provision. The Commission recommends that Chapter 12 be made a
permanent part of the Bankruptcy Code. 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
operations and restructure their debts. (2517) 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."(2518)
Chapter 12 has saved literally thousands of family farms, (2519) stabilized farm values,
and encouraged more out-of-court negotiations and settlements between lenders and
farmers. (2520) Accounts of professionals and jurists similarly reveal that the
confirmation and consummation rates in Chapter 12 cases greatly exceed those in
Chapter 11 cases. (2521)
A total of 18,212 Chapter 12 cases have been filed since its enactment in
1986 through June 30, 1996. (2522) Chapter 12 filings peaked at the 6,664 cases filed
during the 13 months following its enactment in 1986. (2523) Chapter 12 filings leveled
off after 1986 and have begun to decline despite the marked increases in Chapter 7
and 13 filings over the past few years. For the 12-month period ending June 30,
1997, Chapter 12 filings dropped 5.4% compared to the same period last year. (2524)
These numbers are not indicative of Chapter 12's usefulness. Commentators agree
that Chapter 12 provides a uniform system of debt restructuring that facilitates out-of-court restructurings. (2525)
Chapter 11 reorganization is still unworkable for effective family farm debt
restructuring. Indeed, since the enactment of Chapter 12 in 1986, Chapter 11 has
become even more difficult for distressed family farmers than it was when Chapter
12 was first passed. In the 1988 decision of Norwest Bank Worthington v. Ahlers, (2526)
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. (2527) The Court further held
that the debtors' promise of future labor ("sweat equity") would not satisfy the
"money or moneys worth" requirement of the new value exception. (2528) As a consequence of the Court's decision in Ahlers and the fact that most farm debtors do
not have adequate cash to 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.
Eligibility Amount. Chapter 12 of the Bankruptcy Code is available only to
a "family farmer with regular annual income" who is "engaged" in a "farming
operation."(2529) The eligibility requirements impose an aggregate debt limitation of
$1,500,000 as well as standards for the nature and character of the income. (2530) The
purpose of such narrowly-tailored definitional prerequisites for eligibility is to
exclude investors and speculators and limit relief to only "true" family farmers. (2531)
Large agribusinesses are excluded from Chapter 12 but are still able to restructure
their debts in Chapter 11. The nature of farming as a business does not require
special relief, but rather the size and structure of small family farms makes relief
under Chapter 11 unworkable. Chapter 12 is specifically geared towards the needs
of the small family farmer. Great care was taken during the drafting of Chapter 12
to limit relief to "true" family farmers. (2532) In addition to the dollar cap of $1,500,000,
a variety of other safeguards limit the types of individuals and entities eligible for
Chapter 12 relief.
Rationale. The eligibility cap in Chapter 12 was set in 1986 when farm land
values were low. While farming continues to be a very cyclical industry, farm land
values have increased in recent years, enabling family farmers to increase their
leverage in order to purchase equipment, grow different crops and generally remain
competitive. The Chapter 12 aggregate debt eligibility cap has not been modified
accordingly to respond to the changing cost of operating a family farm, despite an
increase generally in the eligibility and other dollar amounts in the Bankruptcy
Code. (2533) The lower cap precludes Chapter 12 relief for individuals and entities who
are rightfully family farmers within the Bankruptcy Code definition.
The Commission voted 5-4 on the proposal to raise the Chapter 12 eligibility
cap to $2,500,000. The Recommendation to raise the Chapter 12 eligibility cap to
$2,500,000 is consistent with the 1994 inflation adjustments to certain dollar
amounts in the Bankruptcy Code. This amount is also consistent with the statistical
analysis provided to the Commission, which demonstrates that the weighted average
effect of certain economic indicators on farm debt of $1.5 million in 1986 is
$2,644,731. (2534) Raising the cap to $2,500,000 should capture the majority of family
farmers who have been priced out of Chapter 12 relief only because of the effects of
inflation.
The Recommendation will not expand Chapter 12 relief to many more family
farmers than are currently eligible. There are approximately 2 million family farms
in the United States. (2535) Of these two million family farms, 99.81% have debt of $1.5
million or less; .12% have debt between $1.5 million and $2.5 million; and .07%
have more than $2.5 million in debt. The .12% of family farms that have between
$1.5 and $2.5 million in debt represent approximately 2,436 family farms. These are
the family farms that would be affected by the Chapter 12 debt ceiling
Recommendation.
While fewer than 2,500 family farms would be affected by the proposed
change, these operations owe over $4.5 billion dollars, which accounts for over 4%
of all reported farm operation debt. It is important to note that these family farms
represent a disproportionate amount of total outstanding farm debt. The data
obtained from the Department of Agriculture does not indicate the relative financial
strength of these family farm sectors. Historically, however, highly-leveraged family
farming operations have been hardest hit by adverse growing conditions and weak
economic environments.
Competing Considerations. It may be argued that raising the Chapter 12
eligibility cap would permit large agribusinesses to file for Chapter 12 relief. A cap
of $2.5 million, however, still precludes large agribusinesses and, as discussed above,
will not significantly expand the universe of eligible Chapter 12 debtors. Even at the
family farm level, farming is a debt-intensive business. Farm debt does not only
include land and equipment financing, but the cyclical nature of farming requires
farmers to finance their working capital on a year-to-year basis. (2536)
The aggregate debt dollar cap is only one component of the rigorous
requirements for Chapter 12 eligibility under section 101(18). For example, in
addition to the aggregate debt requirements, individual debtors must derive at least
50% of their income from the farming operation in order to qualify for Chapter 12
relief. Similarly, entities must have 50% of stock or interests held by family
members; 80% of the assets must be related to the farm operation; at least 80% of the
aggregate noncontingent, liquidated debts (excluding a residence) must arise out of
the farming operation; and stock, if any, may not be publicly traded. The Proposal
limits Chapter 12 eligibility to small family-controlled farming operations. Raising
the aggregate debt limits does not unduly expand Chapter 12 to include nonfamily-controlled agribusinesses. Similarly, large (over $2.5 million in debt), family-controlled agribusinesses are precluded from Chapter 12 relief, which is consistent with Congress' original intent.
4.4.2 Direct Payment Plans
28 U.S.C. § 586(e) should be amended to clarify that the calculation of
the standing trustee's percentage fee should be based upon the aggregate
of those payments "made under the plan" on account of claims impaired
or modified by operation of bankruptcy law regardless of who makes the
payment.
Like Chapter 13, Chapter 12 requires the appointment of a trustee in each
case to, among other things, oversee compliance by the debtor and disburse plan
payments. Trustees in these cases are compensated based on a percentage of the
payments made under the plan. Problems arise, however, when debtors make
payments under the plan directly to the creditor without going through the Chapter
12 trustee. Debtors argue that since the trustee did not disburse the payment, she is
not entitled to receipt of the percentage fee. The courts are sharply divided on the
issue of whether debtors may make direct payments to creditors whose claims have
been impaired or modified in bankruptcy and whether the standing trustee's
percentage fee may be avoided on those direct payments. (2537) At least three divergent approaches have emerged in the reported decisions.
The first view holds that all payments to creditors whose claims are modified
under a Chapter 12 plan both must be collected and disbursed by the standing trustee
and are subject to the trustee's fee. (2538) A claim is generally deemed to be "modified"
or "impaired" if the plan alters the legal, equitable or contractual rights of the
creditor. (2539)
The second view holds that either the trustee or the debtor may disburse a
particular plan payment, but without regard to the identity of the party making the
actual disbursement, the standing trustee's percentage fee is computed as a
percentage of the aggregate of all modified claims. The reference in the Bankruptcy
and Judicial Code to payments "made under the plan" focuses on whether the
creditors' rights are modified by operation of bankruptcy law. (2540) Courts embracing
this view generally hold that it is the actual treatment of the claim that determines
whether the trustee's percentage fee is owing. (2541)
The first circuit court to address the issue in Chapter 12 was the Court of
Appeals for the Ninth Circuit in Fulkrod v. Savage (In re Fulkrod). (2542) Aligning
itself with the courts that have adopted the second view, the Ninth Circuit found that
any construction of the statutory scheme that "renders superfluous the trustee fee
provision or, for that matter, the trustee himself," should be avoided. (2543) The Ninth
Circuit reasoned that it "is fairly certain" that if the debtor is allowed to confirm a
direct payment plan and avoid the trustee's percentage fee, "the trustee will receive
nothing."(2544) The court therefore concluded that a Chapter 12 debtor may not escape
liability for the trustee's statutory compensation by making payments directly to an
impaired creditor. (2545)
The third view focuses on the language of the Judicial Code and holds that
the debtor may bypass the trustee and directly disburse payments on modified claims,
with the trustee's fee being calculated only on those payments actually "received"
and disbursed by the trustee. (2546) Some courts under this view impose little or no
restriction on a debtor's ability to make direct payments to secured creditors and
thereby shelter those payments from the calculation of the trustee's percentage fee. (2547)
Other courts hold that a debtor's right to make direct payments to impaired claimants
is not absolute and employ guidelines for determining when direct payments should
be permitted. (2548) The Sixth Circuit in Michel v. Beard (In re Beard)(2549) and the
Eighth Circuit inWagner v. Armstrong (In re Wagner)(2550) have allowed debtors to
avoid paying the trustee's percentage fee through direct payment plans.
In holding that Chapter 12 debtors may make direct payments on impaired
claims and avoid the statutory percentage fee on those payments, the Sixth Circuit
in Beard noted that the statute is devoid of any reference to "payments that could
have been received" or other similar language "which would mandate payment of the
percentage fee on a constructive receipt basis."(2551) Similarly, the Eighth Circuit in
Wagner rejected the trustee's contention that the Bankruptcy Code precluded direct
payments to secured creditors whose claims were modified under the plan. The court
concluded that "the code does not prohibit plan provisions of this sort."(2552)
Consequently, under Wagner, a debtor has the discretion to draft a plan that provides
for direct payments, thereby avoiding payment of the trustee's fee. The court
expressly rejected the Fulkrod analysis, finding that it was based upon policy
arguments rather than a close textual analysis. The Wagner court found that direct
payment provisions in Chapter 12 plans "are not in conflict with the bankruptcy
code" and are "valid" even if they preclude the payment of the percentage fees from
those payments made directly by the debtor. (2553)
Standing Chapter 12 trustees argue that direct payments on impaired debt
should not be exempt from the statutory percentage fee in 28 U.S.C. �
586(e)(1)(B)(ii). They argue that the Chapter 12 trustee system was modeled after
the Chapter 13 trustee system. As a result, trustees play a central role in the
administration of Chapter 12 cases. (2554) Among standing trustees' statutorily-prescribed duties, (2555) are a host of services that benefit the court, the debtor, and the
creditors. These duties include: accounting for all property received; investigating
the financial affairs of the debtor; ensuring that the debtor performs in accordance
with the provisions of a confirmed plan; maintaining information regarding the
administration of the estate and furnishing information regarding the estate's
administration to creditors and other parties in interest; making a final report and
filing a final accounting with the bankruptcy court and the United States trustee;
appearing and being heard at any hearing concerning the confirmation of a plan or
the sale of property of the estate; and taking control of the debtor's assets and
operating the farming operation if the court removes the debtor as debtor in
possession. (2556)
Disbursing plan payments is another important duty that standing trustees
perform in connection with the administration of Chapter 12 bankruptcy cases. (2557)
The Bankruptcy Code requires the Chapter 12 plan to "provide for the submission of
all or such portion of future earnings or other future income of the debtor to the
supervision and control of the trustee as is necessary for the execution of the
plan."(2558) Additionally, the Code directs the standing trustee to make payments to
creditors under the plan "[e]xcept as otherwise provided in the plan or in the order
confirming the plan . . . ."(2559)
As compensation for performing the services in connection with the
administration of the Chapter 12 case, the standing trustee is directed to deduct from
"each" of the debtor's plan payments a percentage based upon payments made under
the debtor's plan. (2560) The Attorney General, after consultation with the United States
trustee, fixes the percentage fee to be charged by the standing trustee. In Chapter 12
cases, the percentage fee may not exceed 10% of the first $450,000 "made under the
plan" plus 3% of payments "made under the plan" after the "aggregate amount of
payments made under the plan exceeds $450,000."(2561) The standing trustee "shall
collect such percentage fee from all payments received" by the trustee in the cases
in which such individual serves. (2562)
The amounts levied upon payments made under the plan are applied to offset
three costs of the system. First, as previously indicated, a portion of the fee is applied
toward the payment of the standing trustee's personal compensation. (2563) Second, a
part is used to pay the salaries of the trustee's staff and other actual overhead
expenses. (2564) Third, a portion of the fee is remitted to the "United States Trustee
System Fund."(2565)
The laudable purpose of the Congressionally mandated payment
structure is to maintain a predominantly self-funding program which
compensates standing trustees from funds generated by debtors who
elect to participate in the bankruptcy system. More specifically,
Congress intended those who reap the benefits of Chapter 12 to
assume a substantial portion of the costs of administering the
bankruptcy estate by requiring that a percentage of estate assets be
dedicated to funding the trustee system. This purpose is consonant
with the long-standing precept under all chapters of the Bankruptcy
Code that the payment of administrative expenses should be derived
from the assets administered. (2566)
A number of the provisions of the Bankruptcy and Judicial Code governing
the distributions to creditors and the trustee's percentage fee refer to payments "made
under the plan" or to claims "provided for by the plan." This suggests that Congress
contemplated that certain payments might not be "made under the plan" or that there
may be claims which are not "provided for by the plan."(2567) The directive is not,
however, clear on whether those payments can be sheltered from the statutory fee.
Seizing the permissive grant of authority in the Code, (2568) Chapter 12 debtors have
drafted plan provisions that enable them to act as disbursing agents in order to make
"direct payments" (often referred to in bankruptcy parlance as "outside the plan"
payments), thereby avoiding payment of the statutory fee. (2569)
Rationale. The Proposal clarifies that the calculation of the statutory
percentage fee should be based upon payments made on account of all claims that are
"impaired" or "modified" under a plan of reorganization. The Proposal does not
disrupt the provisions in Chapter 12 which allow a debtor to make certain payments
directly in limited circumstances. (2570) There may be legitimate reasons for permitting
such direct payments. The bankruptcy court should have the discretion to make the
determination. Such direct payments, however, if made on claims that are impaired
or modified "under the plan," would not be exempt from the calculation of the
percentage fee.
The inconsistent case law that has emerged from an interpretation of the
labyrinthine language in section 586(e) threatens the integrity of the Chapter 12
trustee program. The present state of the law on direct payments in some
jurisdictions impairs the bankruptcy system's ability to attract and retain qualified
individuals to serve as standing trustees and assume the fiduciary obligations
imposed by the Bankruptcy Code.
Competing Considerations. The Proposal calls into question the necessity of
a standing trustee in Chapter 12. Does a principled basis exist for differentiating
between a Chapter 12 debtor in possession and a Chapter 11 debtor in possession.
If the Commission views the oversight and administrative functions performed by the
standing trustee in Chapter 12 as necessary to the administration of Chapter 12 cases,
the fundamental question then becomes how best to ensure an adequate
compensation structure in order to fund the system. Absent an adequate assurance
of remuneration for the services provided, the United States trustee will simply be
unable to attract and retain qualified individuals willing to serve as standing trustees.
It has been argued that standing trustees should be compensated like all other
professionals based upon the reasonable value of the services rendered. (2571) Similarly,
the reasonableness of that compensation in an individual case should be subject to
judicial review. The genesis for this contention is that the statutory percentage fee
in Chapter 12 (due to the often very substantial debt payment being serviced under
a plan) is disproportionate to the amount of time and resources actually expended in
administering an individual case. Although this argument has some facial appeal, it
fails to accord proper consideration to the fact that the percentage fee structure
contemplates an economies-of-scale method of compensation in order to fund the
administration of the entire system. (2572) Under a self-funding system entirely
dependent upon fees based on a percentage of payments, some debtors inevitably will
pay more than their share of the costs of the trustee program. This is, however,
necessary because other debtors that avail themselves of the system will pay less, or
nothing at all.
The statutory percentage fee, in some cases, adversely affects the feasibility
of a plan of reorganization because the larger debt service can make the fee
substantial. Additionally, the imposition of the percentage fee on payments made on
modified claims under a plan effectively reduces, and often eliminates, the amount
of disposable income that otherwise would be available for unsecured creditors. The
steep ten percent fee may also have the undesireable effect of enabling marginal
family farms to restructure out of court (to avoid the trustee surcharge) and forcing
the cases that are least able to afford a 10 percent surcharge into Chapter 12. The
collective proceeding that Chapter 12 offers is voluntary and benefits both debtors
and creditors, however, who each must share the concomitant risks and costs of
administration.
Notes:
2491 Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub. L. N. 00-554, 100 Stat. 3105 (1986).
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2492 Pub. L. No. 103-65, 107 Stat. 311 (1993).
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2493 United States Dep't of Agriculture, Are Farmer Bankruptcies a Good Indicator of Rural Financial Stress, 3 (Ag. Info. Bull. No. 724-06 Dec. 1996) [hereinafter Agric. Info. Bulletin].
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2494 The Bankruptcy Act of 1898 shielded a "person engaged chiefly in farming or in tillage of soil" from creditor-initiated bankruptcy. See Bankruptcy Act of 1898, ch. 541, § 4(b), 30 Stat. 544.
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2495 Bankruptcy Act of 1933, Pub. L. No. 420, 72d Cong., ch. 204, 47 Stat. 1467. Farm land
and commodity prices dropped sharply and continued to plummet throughout the decade. David Ray
Papke, Rhetoric and Retrenchment: Agrarian Ideology and American Bankruptcy Law, 54 Mo. L.
Rev. 871, 881 (1989). It was estimated that by 1929, the average per capita income of farmers
amounted to only 36 percent of that for all Americans. Id. (citing R. MCELVAINE, THE GREAT
DEPRESSION: AMERICA, 1929-1941, at 21 (1984)). An overwhelming number of farmers were losing
the family farm due to real estate foreclosures. Id. (noting that on a single day in 1932, a quarter of
all the land in the state of Mississippi was sold at foreclosure auctions).
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2496 8 COLLIER ON BANKRUPTCY � 1200.01[b], pp. 1200-2 (Lawrence P. King et al. eds., 15th rev. ed. 1996).
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2497 A significant indicator of the reform's limited impact is that during the eight months which followed the enactment of section 75, only forty bankrupt farmers sought relief under that
section of the Act. John Hanna, Agriculture and the Bankruptcy Act, 19 MINN. L. REV. 1, 6 (1934).
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2498 Act of June 28, 1934, ch. 869, 48 Stat. 1289.
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2499 11 U.S.C. § 75(s)(3) (repealed 1935).
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2500 Id. § 75(s)(7).
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2501 John C. Anderson, An Analysis of Pending Bills to Provide Family Farm Debtor Relief Under the Bankruptcy Code, 132 CONG. REC. S15,076-S15,078 (Oct. 3, 1986) (citations omitted).
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2502 Representative Charles U. Truax vigorously supported the Frazier-Lemke Act:
When this law becomes effective, I can but wonder what will become of the ruthless money
lender when the breath of gold leaves his feculent body and a financial depth stops the
rattling of his grasping brain, for he is unfit for the higher realm of life and too foul for the
one below. He cannot be buried in the earth, lest he provoke a pestilence; nor in the sea, lest
he poison the fish; nor waving in space like Mahomet's coffin, lest the circling worlds, in
trying to avoid the contamination, crash together, wreck the universe and bring again the
noisome reign of chaos and Satan.
78 CONG. REC. 11,923 (1933). Return to text
2503 See Louisville Joint Stock Land Bank v. Radford, 295 U.S. 555 (1935). In Radford, a
farming couple from Kentucky defaulted on their mortgages to the Louisville Joint Stock Land Bank,
which commenced foreclosure proceedings. The Radfords attempted to obtain the approval of
creditors for a composition, but the requisite number of creditors refused to assent. Enactment of the
Frazier-Lemke Act two days prior to the court order was the only opportunity the Radfords had to try
and save the farm. The Radfords filed amended bankruptcy petitions and the bankruptcy referee
granted a five-year stay of all proceedings.
The referee's order was affirmed by the United States district court and by the Court of
Appeals for the Sixth Circuit. On appeal to the Supreme Court, numerous private lawyers and
attorneys general submitted briefs in support of the legislation. William Lemke, author of the
legislation and acting as Special Assistant Attorney General of North Dakota, deplored the arguments
of John W. Davis, of Davis Polk & Wardwell, for contending that Congress "cannot extend to a class
of citizens who formed the Republic, defended it, and for a century and a half have been regarded as
its backbone, the right . . . to so reorganize their financial affairs that they may remain as the
dependable, stable and conservative bulwark of the nation." Brief of Petitioner at 4, Louisville Joint
Stock Land Bank v. Radford, 295 U.S. 555 (1935), in 295 RECORDS AND BRIEFS OF CASES DECIDED
BY SUPREME COURT OF THE UNITED STATES 495-632 (1935). Lemke argued that the state of affairs
prior to the enactment of the legislation "tended to convert our home owning farmers into mere
tenants and homeless, impoverished citizens." Id. at 42. Only the Act, he contended, saved the
farmer "from being reduced to a beggar, a mendicant, a mere homeless man in search of a home and
a place to rent at the mercy of his landlord." Id.
The Supreme Court struck down the Act as unconstitutional, unanimously ruling that the
legislation exceeded the power of Congress. See Radford, 295 U.S. at 594-602. Justice Brandeis,
writing for the Court, opined that the Act went too far since its "avowed object" was "to take from
the mortgagee rights in the specific property held as security." Id. at 602. Return to text
2504 Act of August 28, 1935, ch. 792, 49 Stat. 942, 943-45.
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2505 Specifically, amended section 75(s) provided for (1) the unqualified retention of the
secured creditor's lien with reference to its appraised value; (2) the secured creditor's right to force
a public sale; and (3) the unqualified right of the secured creditor to credit bid its debt at the sale. See
11 U.S.C. § 75(s)(1)-(6) (repealed 1978). The revised Act also reduced the five-year forced rental
period to three years and required semi-annual, rather than annual, rental payments.
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2506 See Wright v. Vinton Branch of Mountain Trust Bank, 300 U.S. 440 (1937).
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2507 Bankruptcy Reform Act of 1978, Pub. L. No. 95-598, 92 Stat. 2549.
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2508 See 11 U.S.C. �� 1112(1), 1307(e) (1978) (amended).
Return to text
2509 Statement of Wayne D. Rasmussen, Agricultural Historian, 133 CONG. REC. S11651-01. See also, Agric. Info. Bulletin, supra note 2493 ("The economic climate of the 1970s encouraged
farmers to expand production and benefit from export opportunities and strong commodity prices.
High rates of inflation and low real interest rates further encouraged investment in farmland. Per acre
farmland values increased more than threefold from $196 in 1970 to $823, its 1982 peak. Total farm-sector equity grew 255 percent during 1970-80. Total farm business debt nearly quadrupled from
$48.8 billion in 1970 to $193.8 billion at its peak in 1984. A considerable number of farmers were
financially extended and vulnerable to sudden shifts in economic forces.")
Return to text
2510 Agric. Info. Bulletin, supra, note 2493.
Return to text
2511 For example, the values of farmland in Nebraska and Iowa fell nearly 50 percent by
early 1985. Janet A. Flaccus & Bruce L. Dixon, The New Bankruptcy Chapter 12: A Computer
Analysis of If and When a Farmer Can Successfully Reorganize, 41 ARK. L. REV. 263 (1988)(citing
Econ. Research Serv., U.S. Depot of Agric., For Farm Finances: Promising Signs of a Cooling
Crisis, 8 FARMLINE NO. 4 (1987)). Indiana, Minnesota, Missouri and Ohio experienced a 40 percent
decline in the value of farmland. Id.
Return to text
2512 Personal Interview with the Honorable William A. Hill, Bankruptcy Judge for the District
of North Dakota (1995). There are a number of risk factors unique to farmers: "The concerns about
farmer bankruptcies stem from several factors: (1) the long held view of farmers as landowner and
patriot; (2) empathy for these rural citizens; (3) concerns that wealthier farmers (and banks and
lending institutions) may end up controlling the majority of farms; and (4) the perception that
creditors/lenders have an unfair advantage in the legal system. The interaction of bankruptcy policy
and farm policy is important because the farm sector is dependent upon a lengthy biological process
that generates considerable physical and financial risk. The U.S. farm sector has historically been
based on smaller firms that are more vulnerable to these risks. Public concern over farm policy rises
when bankruptcy appears to be taking an inordinate toll on smaller farms. . . . Chapter 12 has reduced
farmer failure rates, but the short-run gain to financially stressed farmers comes at the expense of
some creditors and, ultimately, other borrowers." Agric. Info. Bulletin, supra note 2493, at 1-2.
Return to text
2513 H.R. REP. NO. 99-958, at 45-48 (1986), reprinted in 1986 U.S.C.C.A.N. 5227, 5249.
Chapter 11 was viewed as an inordinately expensive, needlessly complicated, time-consuming and
unworkable for too many farmers. See id.; see also 132 CONG. REC. 28,593 (1986) (remarks of Sen.
Grassley).
Return to text
2514 Pub. L. No. 99-554, 100 Stat. 3105 (1986). The impassioned remarks of Congressional leaders shed a powerful ray of light on the necessity for the legislation:
I doubt there will be anything we do that will have such an immediate impact in the
grassroots of our country with respect to the situation that exists in most of the
heartland, and that is in the agricultural sector. . . .
[T]hose family farmers who are facing that brink of disaster where they
would have to be thrown off their farms can now look to this Congress and to this
Government for new hope. That new hope is that we are going to give them the
same standard that a small businessman or an individual has at this present time,
which is the ability to reorganize.
. . . .
So this legislation is significant. It is important, because I think it is sending a
message that we here in the U.S. Congress, we in this Government are sensitive to
the family farmers who are facing this very terrible plight at this time.
You know, William Jennings Bryan in his famous speech , the "Cross of Gold"
almost 60 years ago, stated these words: "Destroy our cities and they will spring
up again as if by magic; but destroy our farms, and the grass will grow in every
city in our country." This legislation will hopefully stem the tide that we have seen
so recently in the massive bankruptcies in the family farm area.
132 CONG. REC. 28,147 (1986) (statement of Rep. Mike Synar (D.- Okla.)). Return to text
2515 H.R. REP. NO. 99-958, at 45-48 (1986), reprinted in 1986 U.S.C.C.A.N. 5227, 5249.
Return to text
2516 Pub. L. No. 103-65, 107 Stat. 311 (1993).
Return to text
2517 An April 2, 1997 article in the Des Moines Register discussed the Commission's Des
Moines regional meeting: "[a]ll seven panelists, including university professors, bankruptcy judges,
an assistant U.S. attorney and a banker, told the commission that Chapter 12 should be kept, primarily
because bad weather, low crop prices or other factors could again put many farmers into bankruptcy."
John McCormick, Committee: Keep Bankruptcy Code that Aids Farmers, DES MOINES REG., April
2, 1997, at 10.
Return to text
2518 H.R. REP. NO. 99-958, at 48 (1986), reprinted in 1986 U.S.C.C.A.N. 5227, 5249. See
H.R. REP. NO. 103-32 (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").
Return to text
2519 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)).
Return to text
2520 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)
(testimony of Honorable A. Thomas 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 Honorable Richard L. Bohanon).
Return to text
2521 Id. at 6. Judge 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.
Return to text
2522 Agric. Info. Bulletin, supra note 2493, at 3.
Return to text
2523 Id.
Return to text
2524 Administrative Office of the United States Courts, Statistics for the Period Ending June 30, 1997 (August 15, 1997).
Return to text
2525 See Agric. Info. Bulletin at 3 (citing that the number of Chapter 12 cases has been stable
since 1988 and that "Chapter 12 essentially brought about national farm debt restructuring under
fairly uniform rules."). Participants in the Commission's Chapter 12 discussions agree that Chapter
12 is a very successful settlement tool that provides a clear picture of what parties will receive in
bankruptcy that facilitates out-of-court restructurings. Discussion Notes - April 1, 1997 Regional
Meeting of the National Bankruptcy Review Commission in Des Moines, IA, at 4 (April 5, 1997)
(comments of Professor Neil Harl noting that Chapter 12 has an influence beyond the filing numbers.
Its very existence, he continued, creates an environment where people are willing to settle their
differences without bankruptcy. Close to 32% of the cases he tracked settled, he reported. Assistant
U.S. Attorney Clare Hochhalter agreed, stating that Chapter 12 has become a marvelous collection
agency.)
Return to text
2526 485 U.S. 197 (1988).
Return to text
2527 Id. at 202-03.
Return to text
2528 Id. at 203.
Return to text
2529 11 U.S.C. �� 109(f), 101(18) (1997). A "family farmer" is defined to mean:
(A) individual or individual and spouse engaged in a farming operation whose
aggregate debts do not exceed $1,500,000 and not less than 80 percent of whose
aggregate noncontingent, liquidated debts (excluding a debt for the principal
residence of such individual or such individual and spouse unless such debt arises
out of a farming operation), on the date the case is filed, arise out of a farming
operation owned or operated by such individual or such individual and spouse, and
such individual or such individual and spouse receive from such farming operation
more than 50 percent of such individual's or such individual and spouse's gross
income for the taxable year in which the case concerning such individual or such
individual and spouse was filed; or
(B) corporation or partnership in which more than 50 percent of the outstanding
stock or equity is held by one family, or by one family and the relatives of the
members of such family, and such family or such relatives conduct the farming
operation, and
(i) more than 80 percent of the value of its assets consists of assets related to the
farming operation;
(ii) its aggregate debts do not exceed 1,500,000 and not less than 80 percent of its
aggregate noncontingent, liquidated debts (excluding a debt for one dwelling which
is owned by such corporation or partnership and which a shareholder or partner
maintains as a principal residence, unless such debt arises out of a farming
operation), on the date the case is filed, arise out of the farming operation owned
or operated by such corporation or such partnership; and
(iii) if such corporation issues stock, such stock is not publicly traded;
Id. § 101(18) (emphasis added). A "'family farmer with regular annual income' means family farmer
whose annual income is sufficiently stable and regular to enable such family farmer to make payments
under a plan under Chapter 12 of this title." Id. § 101(19). A "'farmer' means (except when such
term appears in the term 'family farmer') person that received more than 80 percent of such person's
gross income during the taxable year of such person immediately preceding the taxable year of such
person during which the case under this title concerning such person was commenced from a farming
operation owned or operated by such person." Id. § 101(20). A "'farming operation' includes
farming, tillage of the soil, dairy farming, ranching, production or raising of crops, poultry, or
livestock, and production of poultry or livestock products in an unmanufactured state." Id. § 101(21). Return to text
2530 Id.
Return to text
2531 See 130 CONG. REC. 5614 (1986).
Return to text
2532 The narrow provisions regarding family farmer eligibility were first introduced by
Senator Grassed.See S. 2249, 99th Cong., 2d Sess., reprinted in 131 CONG. REC. 6348 (1986).
Return to text
2533 Section 108 of the Bankruptcy Reform Act of 1994 increased a number of the dollar amounts set forth in the Bankruptcy Code including the debt limits for Chapter 13 eligibility, the
amount of debt required for a creditor to commence an involuntary case, the prepetition wages and
benefits priority amount for employees, and the exemption amounts in section 522.
Return to text
2534 See Letter of M. Nelson Enmark to National Bankruptcy Review Commission (June 3, 1997).
Return to text
2535 The data was obtained from Jim Ryan, an economist with the Department of
Agriculture. A "family farm" was defined in the search as all farm operations excluding nonfamily
corporations and cooperatives. As a result, the search results may be over inclusive of those family
farm operations that do not meet the income and ownership requirements of Section 101(18).
Telephone Interview with Jim Ryan, Economist, U.S. Department of Agriculture (August 19, 1997).
Return to text
2536 Statement of Wayne D. Rasmussen, Agricultural Historian, 133 CONG. REC. S11,651-01.
Return to text
2537 The same dispute has arisen in the context of Chapter 13. Compare In re Aberegg, 961
F.2d 1307 (7th Cir. 1992) (finding that bankruptcy courts have the discretion to permit debtors to act
as disbursing agents and make direct payments, thereby avoiding the trustee's percentage fee); Foster
v. Heitkamp (In re Foster), 670 F.2d 478 (5th Cir. 1982) (examining a number of factors, including
the degree of debtor responsibility and reasons contributing to the need for relief under Chapter 13,
which govern the determination); In re Gregory, 143 B.R. 424, 427-28 (Bankr. E.D. Tex. 1992)
(requiring justifiable cause as a prerequisite and the balancing of a number of considerations), with
In re Bernard, 201 B.R. 600, 603 (Bankr. D. Mass. 1996); In re Harris, 200 B.R. 745, 748 (Bankr.
D. Mass. 1996) (holding that to the extent that plan payments on modified or impaired claims are
funded with future income, such payments must be submitted to the trustee and the court may not
permit direct payment); In re Ford, 179 B.R. 821, 823 (Bankr. E.D. Tex. 1995) (opining that allowing
debtors "to pick and choose those claims they will submit to the supervision of the trustee undermines
the integrity of the entire trustee system").
Return to text
2538 See, e.g., In re Marriott, 161 B.R. 816, 819 (Bankr. S.D. Ill. 1993); In re Finkbine, 94 B.R. 461, 463-67 (Bankr. S.D. Ohio 1988).
Return to text
2539 Wagner v. Armstrong (In re Wagner), 36 F.3d 723, 725 n.3 (8th Cir. 1994)(defining an impaired claim as "one whose legal, equitable, or contractual rights have been diluted by the
bankruptcy plan"). Cf. 11 U.S.C. § 1124 (1994). A claim that is in any way modified or impaired
by a plan is said to be "provided for by the plan" or "made under the plan." Marriott, 161 B.R. at
819-21.
Return to text
2540 Fulkrod v. Barmettler (In re Fulkrod), 126 B.R. 584, 586 (Bankr. 9th Cir. 1991), aff'd sub nom., Fulkrod v. Savage (In re Fulkrod), 973 F.2d 801 (9th Cir. 1992).
Return to text
2541 See, e.g., id.; In re Golden, 131 B.R. 201, 203 (Bankr. N.D. Fla. 1991);In re Oster, 152
B.R. 960, 963 (Bankr. D.N.D. 1993); In re Cannon, 93 B.R. 746, 748 (Bankr. N.D. Fla. 1988);In re
Sutton, 91 B.R. 184, 186 (Bankr. M.D. Ga. 1988); In re Logemann, 88 B.R. 938, 941 (Bankr. S.D.
Iowa 1988);In re Hildebrandt, 79 B.R. 427, 429 (Bankr. D. Minn. 1987); In re Hagensick, 73 B.R.
710, 713-14 (Bankr. N.D. Iowa 1987); In re Rott, 73 B.R. 366, 375 (Bankr. D.N.D. 1987).
Return to text
2542 973 F.2d 801 (9th Cir. 1992).
Return to text
2543 Id.
Return to text
2544 Id. at 802.
Return to text
2545 Id. at 803 (rejecting the suggestion gleaned from the decision of the bankruptcy appellate panel that "limited circumstances" may justify permitting a debtor to make direct payments
on impaired claims without trustee compensation as an unauthorized reading of the statute).
Return to text
2546 See 28 U.S.C. § 586(e)(2) (1994). See, e.g., Wagner v. Armstrong (In re Wagner), 36
F.3d 723, 725 n.3 (8th Cir. 1994). Although the diversity of tests used to reach the result has created
confusion and a nonuniform body of law, the majority of the courts have held that, under certain
circumstances, a court may confirm a plan proposing a direct payment to creditors whose claims have
been impaired or modified under the plan.See Michaela M. White, Direct Payment Plans, 29
CREIGHTON L. REV. 583, 598 (1996)(collecting cases); See also 3 COLLIER ON BANKRUPTCY �
326.02[3][c][ii], at 326-16 (Lawrence P. King et al. eds., 15th rev. ed. 1996).
Return to text
2547 See, e.g., In re Cross, 182 B.R. 42 (Bankr. D. Neb. 1995), aff'd sub nom., Lydick v.
Cross, 197 B.R. 321 (D. Neb. 1995); In re Crum, 85 B.R. 878, 879 (Bankr. N.D. Fla. 1988); In re
Land, 82 B.R. 572, 578-80 (Bankr. D. Colo. 1988); In re Erickson Partnership, 77 B.R. 738, 747
(Bankr. D.S.D. 1987), aff'd sub nom., Yarnall v. Erickson Partnership, 83 B.R. 725, 727-28 (D.S.D.),
rev'd on other grounds, 856 F.2d 1068 (8th Cir. 1988).
Return to text
2548 See, e.g., Overholt v. Farm Credit Servs. (In re Overholt), 125 B.R. 202, 212-13 (S.D.
Ohio 1990); Westpfahl v. Clark (In re Westpfahl), 168 B.R. 337, 364 (Bankr. C.D. Ill. 1994); In re
Teigen, 142 B.R. 397, 401-02 (Bankr. D. Mont. 1992); In re Beard, 134 B.R. 239, 243-44 (Bankr.
S.D. Ohio 1991); In re Martens, 98 B.R. 530, 534 (Bankr. D. Colo. 1989); In re Bettger, 105 B.R.
607 (Bankr. D. Or. 1989) (enunciating a multi-part test to be used as a template for determining
whether direct payments should be allowed); In re Pianowski, 92 B.R. 225, 233-34 (Bankr. W.D.
Mich. 1988)(setting forth 13 nonexclusive factors courts should consider when determining whether
to permit a debtor to serve as a disbursing agent for plan payments). See also In re McCann, 202 B.R.
824, 830 (Bankr. N.D.N.Y. 1996) (refusing to impose a multi-factored test which would serve as a
scorecard for evaluation in favor of a case-by-case assessment with the caveat that direct payments
on modified or impaired claims are the exception, not the rule).
Return to text
2549 45 F.3d 113 (6th Cir. 1995).
Return to text
2550 36 F.3d 723 (8th Cir. 1994).
Return to text
2551 Michael, 45 F.3d at 119 (quoting Pianowski, 92 B.R. at 232).
Return to text
2552 Wagner v. Armstrong (In re Wagner), 36 F.3d 723, 726 (8th Cir. 1994). The Wagner
opinion has been broadly interpreted by a number of courts. See, e.g., In re Cross, 182 B.R. 42
(Bankr. D. Neb. 1995) (interpreting Wagner to hold that debtors have the unfettered right to bypass
the trustee and pay any debt directly absent a court order under section 105), aff'd sub nom., Lydick
v. Cross, 197 B.R. 321 (D. Neb. 1995); In re Wruck, 183 B.R. 862, 864 (Bankr. D.N.D. 1995).
Indeed, the standing trustee in at least one jurisdiction (North Dakota, the jurisdiction from which
Wagner arose) is required to seek appointment on a case-by-case basis and seek compensation under
sections 326 and 330 of the Bankruptcy Code like any other professional.
Return to text
2553 Wagner, 36 F.3d at 727-28; accord Pelofsky v. Wallace, 102 F.3d 350, 353, 356 n.7 (8th
Cir. 1996) (affirming the principles set forth in Wagner but indicating that because "the meaning of
section 586 concerning calculation of the standing trustee's percentage fee under section 586(e) has
split inferior federal courts, perhaps Congress, or the Supreme Court, will clarify the issue").
Return to text
2554 The United States trustee system, originally constituted in 1978 as a pilot program in a
few judicial districts, was permanently adopted in 1986 in virtually every jurisdiction (Bankruptcy
Administrators are used in Alabama and North Carolina rather than U.S. trustees). Bankruptcy
Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub. L. No. 99-554, 100
Stat. 3088 (codified as amended at 28 U.S.C. �� 581-589a (1994)). The system was created to
remove case administration responsibilities from the judiciary. H.R. REP. NO. 99-178, at 18-22
(1986), reprinted in 1986 U.S.C.C.A.N. 5227, 5229-34. The legislative history reveals that the
appointment of private trustees to administer bankruptcy estates adequately separates the
administrative and judicial functions and places the administrative duties in the branch of government
most capable of exercising independent oversight. Id.
Return to text
2555 If the case load in a particular region warrants, the United States trustee for each region
may, subject to the approval the Attorney General, appoint and supervise a standing Chapter 12
trustee. 28 U.S.C. § 586(b) (1994).
Return to text
2556 11 U.S.C. § 1204(a) (1994). It has been recognized that:
The trustee is the nucleus of a reorganization; his or her responsibilities
begin the day the case is filed and continue until the day the case is closed. The
trustee is a fiduciary to all parties in interest, an adviser to the court and a source
of information, education and mediation leading hopefully to confirmation. . . . [I]n
the real world of debtors, creditors and the attendant emotions and fragile psyches,
the trustee is often the difference between success and failure. His or her voice is
one of reason endeavoring to find a common ground among the various
adversaries.
In re McCann, 202 B.R. 824, 830 (Bankr. N.D.N.Y. 1996). Return to text
2557 11 U.S.C. § 1202(b) (1994).
Return to text
2558 Id. § 1222(a)(1). Accord id. § 1322(a)(1).
Return to text
2559 Id. § 1226(c). Accord id. § 1326(c).
Return to text
2560 Id. �� 1202(d); 1226; 28 U.S.C. § 586(e) (1994). The Bankruptcy Code specifies the order in which plan payments are to be disbursed:
(b) Before or at the time of each payment to creditors under the plan, there shall be
paid:
(1) any unpaid claim off the kind specified in section 507(a)(1) of this title; and
(2) if a standing trustee appointed under section 1202(c) of this title is serving in the case, the percentage fee fixed for such standing trustee under section 1202(d) of this title.
11 U.S.C. § 1226(b) (1994) (emphasis added). Return to text
2561 28 U.S.C. § 586(e)(1)(B) (1994) (emphasis added).
Return to text
2562 Id. � 586(e)(2) (emphasis added).
Return to text
2563 Id. � 586(e)(2)(A), (B)(i).
Return to text
2564 Id. § 586(e)(2)(B)(ii).
Return to text
2565 Id. § 586(e)(2).
Return to text
2566 George H. Singer, Zeroing Out the Standing Trustee's Percentage Fee: The Eighth
Circuit Approves "Outside the Plan" Payments for Chapter 12 Debtors, 11 NORTON BANKR. L.
ADVISER 7 (1994). It is important to note that a Chapter 12 standing trustee assumes significant
financial risks. A trustee receives absolutely no remuneration for the services performed in any case
in which the plan is not confirmed by the court. The compensation structure's economy-of-scale
results in trustees often receiving no compensation in cases in which substantial effort and outlay have
been expended and receive increased compensation in other cases where the labor and expense have
not been as great. See In re Harris, 200 B.R. 745, 748 (Bankr. D. Mass. 1996) (quoting with approval
In re Savage, 67 B.R. 700, 706-08 (D.R.I. 1986) ("The 'no asset' or 'meager asset' cases can be
handled professionally, because the system is not dependent on each individual matter to generate its
own fees.")).
Return to text
2567 See, e.g., 11 U.S.C. �� 1225(a)(5), 1226(b) & (c) (1994); 28 U.S.C. § 586(e) (1994).
Return to text
2568 Section 1225, which sets forth the requirements of plan confirmation, provides:
(a) . . . the court shall confirm a plan if-
. . .
(5) with respect to each allowed secured claim provided for by the plan-
. . .
(B)(ii) the value, as of the effective date of the plan, ofproperty
to be distributed by the trustee or the debtor under the plan on account of such
claim is not less than the allowed amount of such claim . . . .
11 U.S.C. § 1225(a)(5)(B)(ii) (1994) (emphasis added). Accord id. § 1226(c) (set forth supra at text accompanying note 2485). Notably, the ostensibly affirmative grant contained in section
1225(a)(5)(B)(ii) is absent from Chapter 13 despite its many mirror-image similarities. Seeid. �
1325(a)(5)(B)(ii). Return to text
2569 It is frequently argued that if a Chapter 12 plan provides for direct payments, submitting
that portion of the income to the standing trustee is not necessary for the execution of the plan, as
required under the statute, because the plan specifically provides for the debtor to deal with that
creditor's claim in a manner separate and apart from the plan itself. See Jason S. Brookner, Primer
on Debtor Direct Payments in Chapter 12 Cases, 15 AM. BANKR. INST. J. 26, 26 (1996); see also 11
U.S.C. �� 1222(a)(1), 1226(c), 1322(a)(1), 1326(c) (1994).
Return to text
2570 It should be recognized that permitting a debtor to act as a disbursing agent for payments
made under the plan makes it difficult for a standing trustee, who is required to monitor the plan
payments and make an accounting of disbursements, to perform its fiduciary obligations. The impetus
for making payments directly, however, will vanish in many cases, if a debtor can no longer escape
liability for the statutory fee.
Return to text
2571 See, e.g., 11 U.S.C. �� 328-330 (1994).
Return to text
2572 See Singer, supra note 2566 (noting that standing trustees receive no remuneration for the
services performed in any cases which do not result in a confirmed plan since the fee is calculated
based upon disbursements made under the plan).
Return to text
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