Joe Peiffer on the Big Show
Joe Peiffer recently chatted with Doug Cooper, one of the hosts of the Big Show on WMT and other midwest radio stations, about the changes in Chapter 12 bankruptcy laws and the current farm economy. Here are the first two segments of that interview (We will update this post when more segments have aired). If you would prefer to read the transcripts, you may find them below.
Doug Cooper: Cedar Rapids lawyer Joe Peiffer has been working, basically since the farm crisis in the 80s, to get Chapter 12 in place and workable. Joe, give us a little history here:
Joe Peiffer: Doug, back in 1986, Senator Grassley and Congress responded to the farm crisis by having Chapter 12 bankruptcy added to the Bankruptcy Code. At the time it was added to the Code, nobody thought, or didn’t have a chance to deal with the tax problems that could arise. Chapter 12 was designed to change the balance of power so that under-secured creditors, Farm Credit, or banks, could not veto a farmer’s Chapter 11 bankruptcy. By going to Chapter 12 there was no veto power in the hands of a creditor which came up in the voting of cases for plan confirmation. Chapter 12 eliminated that so the farmer could show the plan was feasible and they could also show that they met all of the statutory qualifications, they paid creditors as much as they would get in a Chapter 7, their plan would be confirmed and they could continue farming.
DC: What happened?
JP: Shortly thereafter, we learned that as farmers right-sized their farm by selling assets by selling assets that they didn’t necessarily need to keep operational, there were tax problems and the tax people had a first priority claim meaning that out of unsecured assets, those tax claims had to be paid in full and if there wasn’t enough to show that they could be paid in full over 5 years, the IRS or the state department of revenue could stay to the Court, “The plan doesn’t meet the code requirement of paying us in full over five years, so you can’t confirm it.” At that point, the taxing people controlled whether the farmer could confirm the plan or not. Fast forward from 1986 to 1999. Many people came up with many different ideas trying to solve the problem. None of them went anywhere. In December of 1998, I proposed to Senator Grassley that instead of trying to get the tax paid by taking money to the bankers and paying the IRS, we should move the claim of the IRS from the front of the line to the back of the line so that it would be discharged at the end of the bankruptcy. So if unsecured creditors were going to get perhaps a nickel on the dollar, that’s all the IRS and the state departments of revenue would get, and the plan could be confirmed. Grassley liked the idea. He had his staffers write it up, and in January of ’99, Farm Safety 2000 was introduced by Grassley. I told him that I didn’t like the language and I didn’t think it’d work. They said, “You get this language or no language.” The following year became part of the Bankruptcy Reform Bill of 2000. It was passed by veto-proof margin in both the House and Senate. It went on to President Clinton’s desk and he pocket-vetoed the bill. It wasn’t until 2005 with the Bankruptcy Abuse Prevention Consumer Protection Act of 2005 was passed. April 20, 2005 it was signed by President George W. Bush. And it contained the language that had been taken from my idea so that we could make the taxes payable as an unsecured claim.
I litigated the first case; a hog farmer out of Mitchell County, Iowa. We went all the way to the Eighth Circuit Court of Appeals. And the Eighth Circuit said we did not need to worry, you could file the case, right-size, and then incur the tax and treat it as an unsecured claim at the end of the bankruptcy and it would be discharged. While the Eighth Circuit said that, and the Eighth Circuit does Arkansas, Missouri, Iowa, Nebraska, North Dakota, South Dakota, Minnesota, for those states that worked fine: we could right-size a farm and we could deal with the tax and not have to pay in full. Dark clouds are on the horizon. In the Ninth Circuit, Arizona, California, and some of the western states, a different approach is being taken. The Bankruptcy Court said in the Hall case said, “You’re wrong, Eighth Circuit. Instead, you can’t file bankruptcy, sell the farm, and then have the tax dealt with as an unsecured claim and discharged.” They read the statute literally. District Court reversed them and said, “It’s okay. The Eighth Circuit is right.” The Ninth Circuit Court of Appeals said, “No.” At that point, we have a split in the circuits: the Eighth Circuit says a farmer can file bankruptcy, right-size, and deal with the taxes through the bankruptcy plan. Ninth Circuit says no, the farmer can’t file, right-size after filing, and then deal with the taxes. It goes to the Supreme Court. The Supreme Court hears arguments in November of 2011 and issues its ruling May 14, 2012. In a 5-4 decision the Supreme Court says, “The farmer cannot file bankruptcy, sell the assets, incur the tax, and deal with it as an unsecured claim. Instead, that claim will survive and will be there when the bankruptcy is over, and the IRS can then collect from the farmer.” That afternoon I had a bill on Grassley’s desk that could change that. Finally now, last week, it was enacted, passed by the senate, went to President Trump’s desk and was signed last Thursday. It is now effective.
What the new bill does, that just got passed and enacted, is that it now says that you can file the bankruptcy, you can sell the assets, then that post-petition tax claim can be dealt with as a pre-petition, unsecured, claim. That statute is effective immediately. It applies to all Chapter 12s filed after October 26, 2017. It also applies to all Chapter 12s that were filed before that time in which a plan has not been confirmed, or a discharge granted.
DC: I’ll visit more with Joe Peiffer, a Cedar Rapids lawyer, on Chapter 12 as recently-passed and signed into law and how it can be utilized and used in bankruptcy proceedings for farmers. I’m Doug Cooper on the Big Show.
DC: Yesterday I visited with Joe Peiffer, a bankruptcy lawyer with Ag & Business Legal Strategies out of Cedar Rapids. He discussed how Chapter 12 has been in the mill since the mid-1980s during the farm crisis. But, the language of the law was not suitable to actually assist farmers needing assistance. Joe Peiffer says, “That all changed last week.”
JP: The Supreme Court says the farmer cannot file bankruptcy, sell the assets, incur the tax, and deal with it as an unsecured claim. Instead, that claim will survive and will be there when the bankruptcy is over, and the IRS can then collect from the farmer. That afternoon, I had a bill on Grassley’s desk to change that. Finally, now, last week it was enacted, passed by the senate, went to President Trump’s desk and was signed last Thursday. It is now effective.
What the new bill does, that just got passed and enacted, is that it now says that you can file the bankruptcy, you can sell the assets, then that post-petition tax claim can be dealt with as a pre-petition, unsecured, claim. That statute is effective immediately. It applies to all Chapter 12s filed after October 26, 2017. It also applies to all Chapter 12s that were filed before that time in which a plan has not been confirmed, or a discharge granted. That gets us to what the law does, but what’s up for the farmer facing the fourth year of below-profitability?
Right now, farmers are harvesting crops. They’ll be selling crops and getting checks, and of course the operating lenders, the banks, and the production credit association are going to want those checks. If the farmer’s not sure he’s going to be able to farm next year because the banker has not agreed to renew the line of credit, the farmer has an option here. He could hold onto the checks and speak with a bankruptcy attorney, who would then help him work with the bank to make certain he’s going to be financed next year. If not, he could then, if the bank isn’t going to make the commitment, “If you turn over the checks, I’ll finance you.” What will then happen is, the farmer needs to consider filing a bankruptcy and use those checks as what’s known as cash collateral. Cash collateral is something that can be used to pay next year’s rent. It can also be used to pay seed costs, chemical costs, anything you need to produce. In return for the banker having to give up the claim to this year’s checks, you’ll be given a replacement lien in the 2018 crops, a replacement lien in the crop insurance, and also a replacement lien in the government program payments. Once the bank has the checks and has cashed them and applied it to the loan, the farmer has no power to make the bank let him farm next year.
If you’re marginal, you need to have this reviewed, you need to have it done quickly before you’ve paid the checks over to the bank.
DC: Joe, are you saying that there are a lot of red flags out there for the stability for the farm economy right now in, let’s say, the corn belt?
JP: There are all sorts of concerns. We’ve seen Iowa State and other universities say the cost of production is greater than what’s being fetched in the sale of crops, and I’ve had some of my farmer clients that they’re harvesting a better crop this year than even last year, which was a phenomenal crop. The problem with that is, it’s still not enough to make the payments and if we’re getting a larger crop this year than we had last year, we’re going to increase the surplus, which means we’re looking for lower prices again in the future, unless we can get demand to go up. With the ethanol plant closing in Nevada, that is a big problem that we are facing. Where’s the demand for our crop? And if we can’t pay what it costs to produce it, we certainly aren’t gonna pay down the debt.
DC: What advice would you give farmers, Joe, that may find themselves in this position?
JP: The best advice right now is to make certain that before the checks are given to the bank to have it in writing, signed by the banker, that they’re gonna finance you next year, what your operating agreement is going to be. Otherwise, you may want to consider what your other options are. Chapter 12 does allow you now to right-size your farm if you need to pay that debt down and deal for the tax in a much better fashion than it has in, frankly, 30 years since it was enacted.
DC: Joe Peiffer is a bankruptcy lawyer with Ag & Business Legal Strategies in Cedar Rapids.