How Recently Enacted Amendment to Clarify Chapter 12 Will Help Struggling Farmers – Ep. 208
Joe Peiffer recently chatted with Sam Gerdano of the American Bankruptcy Institute regarding the changes in Chapter 12 bankruptcies. Here’s their conversation:
If you prefer to read along, the transcript is below:
Welcome to another American Bankruptcy Institute podcast. I’m Sam Gerdano, ABI executive director. It’s fair to say that the current 115th Congress hasn’t had any legislative achievements this year, given the sharply partisan, if not toxic, environment here in Washington. But, in late October, something bipartisan and good happened. As part of a bill to provide some $36.5 billion in badly needed disaster relief to areas devastated by the fall hurricanes, Congress attached legislation to reauthorize 14 temporary bankruptcy judgeships in danger of expiration, while creating four new temporary positions in districts of need. Congress funded it with an increase in quarterly fees charged to Chapter 11 debtors. The last section of the legislation did something else, too. It amends the Bankruptcy Code to treat tax consequences from the sale of farming property in Chapter 12 as a pre-petition claim, not entitled to priority status, and thus eligible to be discharged in a plan of reorganization.
Joe Peiffer is our guest today. He is a lawyer from Cedar Rapids, Iowa who’s been intimately involved with this issue for years, and he joins us today to discuss this new development and its impact, so welcome Joe to ABI Podcasts.
JP: Thank you, it’s great to be here.
SG: In the coming issue of the ABI Journal, you write about the tortured history of this legislative fix, and we will indeed get into a bit of that area, but first, let’s start with the basics. What does this amendment do and what problem does it solve for Chapter 12 debtors?
JP: What this amendment does is reverse the United States Supreme Court Case, Hall vs. United States, and in the Hall case which came down May 14, 2012, the Supreme Court held that the taxes that accrue from the sale of farm assets after filing the bankruptcy cannot be afforded special treatment that Congress had put in as part of BAPCPA. In part of BAPCPA, Congress sought to have the taxes on the sale of farm assets used in the debtor’s farming operation treated as a pre-petition, unsecured claim. Unfortunately, Congress was inarticulate and the Supreme Court, while being able to understand that that was indeed the intent of Congress, said that it did not write it in a fashion that would allow the Court to determine that the taxes could be de-prioritized. And it basically sent it back to Congress to rewrite the statute.
SG: And in Congress, in fact, over the years since 2012, has attempted to legislatively overturn Hall, which we should mention was a 5-4 decision, a close, close, call, and did deal with statutory interpretation and as you point out, the imprecision of the language being perhaps contrary to the legislative history and legislative intent. So what happened to legislatively overturn Hall in the past. I take it they didn’t succeed?
JP: None of them succeeded. In September of 2012, a bill was introduced by Senator Grassley and Senator Franken. It was assigned to the Senate Finance Committee, where it died at the end of the 112th Congress. Then, in January I believe, of ’13, a new bill was introduced, and that bill was initially assigned to the Senate Finance Committee, and it was then moved to the Senate Judiciary Committee, where it languished till the end of the 113th Congress. The 114th Congress reintroduced the bill that had been introduced in the 113th Congress. It was assigned to Senate Judiciary and died. And finally, in the 115th Congress, the one we have, Senator Grassley and Senator Franken reintroduced the same bill that had been introduced in the 113th and 114th Congress on May 25th of this year, and it became essentially the law that was signed by President Trump on October 26th.
SG: And happily, the circumstance that helped distinguish this latest effort was as I mentioned at the outset, the underlying legislation, which was a must-pass item creating, authorizing disaster funding relief for areas affected by the hurricane. In addition to that, it became a vehicle for the judgeship bill, which had also languished over the last couple of Congresses, so that’s how Washington works.
JP: Right. Senator Coons and Senator Grassley worked together. Senator Coons, from Delaware, wanted the bankruptcy judgeships. Senator Grassley wanted the Chapter 12 fix, and so they worked together to negotiate on that and those two ideas were put together in one bill. And then that bill had passed the Senate and was waiting at the House, and then the House decided they wanted to do the supplemental appropriations, and they wanted a vehicle with which to send it back to the Senate, where there would be minimal debate, and this bill happened to be poised and waiting when House Appropriations moved forward.
SG: Right. Sometimes you’ve gotta be lucky in the legislative process as well. Even for issues that are relatively non-controversial, as this, I think, was. At the end of the day, nobody disagreed with the idea that Hall was perhaps even technically correct, but not faithful to the original Congressional intent, so there was support for changing the law, but we just needed the appropriate timing and vehicle to do it. So let me ask you Joe, what is the, you described the change and why it’s necessary. What’s the effective date of this change? Will it help debtors in cases that are pending now?
JP: It will help family farmers in Chapter 12 that have not confirmed their plan of reorganization. If a plan of reorganization has been or was confirmed before October 26, the effective date of the legislation, this will not affect them. If, and I have four cases right now that were filed in late August, early September, it affects all of them, and they can all use this legislation.
SG: And so how does that happen? How do you, if you’re a debtor in a case that is still pending, you’ve got, obviously, this game-changing result which changes the bargaining power and dynamic between the government as principal creditor and the debtor who is trying to reorganize and get a Chapter 12 plan confirmed. How does that negotiating dynamic change based on Public Law 115-72.
JP: Before 115-72 was enacted, the farmer could not file the bankruptcy then decide that he needed to sell land, or some other farm assets, and expect that that tax could be dealt with in Chapter 12. That’s what Hall told us. Now, the farmers that are in and have not confirmed their plans can look at it and say, gee, maybe I do need to sell some other things so I can more, right-size my farm; make it work better. And, if they do sell and there is a tax, it will now be de-prioritized. The result in Hall was that the tax would remain, and be collectable by the IRS at the end of the case, post-discharge. That was a horrible result which meant that the farmers literally had to conceive of their reorganizational plan, or right-sizing, in the tax year before they filed their bankruptcy. So, it’s now late November, mid-November. If a farmer comes to me now, under the laws that was before Public Law 115-72, if we needed to sell a farm, we had to close that farm by December 31, since most of my farmers are on calendar-year tax years, close the farm sale, and then we could file a bankruptcy in January, and deal with the taxes appropriately. If we didn’t get it closed till January 1, and they’re on a calendar year, my farmer would have to wait until 2019 to file the bankruptcy to deal with the taxes.
SG: Right, right.
JP: That was horrible, especially for the farmers that came in late in the year or early in the following year. And keeping everybody at bay until you could deal with the Chapter 12 was tough. So, in many instances, the balance of power, if taxes were an issue, was such that the secured creditor called many of those shots and would be in a position where it would dictate what got sold and maybe the farmer had to sell more because the secured creditor wanted to get paid down further, even though the farmer didn’t want to sell. I had one instance where the farmer figured he could sell 60 acres and everything would cash flow. The bank said no, you’ll sell everything but 60 acres.
JP: He had no choice, no bargaining power.
SG: Now he has bargaining power.
SG: Right. And is that really the long-term effect here, that it makes Chapter 12 more of a useful tool in the toolkit of negotiation that is so much a part of pre-filing considerations?
JP: Chapter 12, I believe, now is set to work as it was envisioned by Congress in 1986. Unfortuantely in 1986, there was nothing, no provision dealing with the taxes and that became readily apparent in the first few cases. If the farmer does need the tax relief of Chapter 12, the pre-negotiations probably won’t be one that will keep them out of Chapter 12 because we have to deal with the taxes.
JP: But now, knowing that the taxes can be dealt with, provides the farmer with option to go the bank and say yes I’m going to file a Chapter 12 and I’m going to sell down so this whole thing cash flows. You’re going to get your money, creditor, and I’m not worried about the IRS or the state department of revenue.
JP: It can make the process much less contentious than it was before. Many times, the farmer would be unwilling to sell, because they’d rather deal with the devil they know, the bank, rather than the devil they didn’t know, the IRS.
JP: Now we can deal with both of the problems, that of the taxing authority and of the secured creditor, in one case.
SG: Right. It does allow you to treat holistically the other stakeholders.
JP: Much more so than we’ve ever had before.
SG: Right, right, right. And I think that’s the, that is the big take away from this new law. Really, for a relatively small provision tacked on a the end of a very long, unrelated bill, I think as your article points out, that tortured history, may all be worth it for a whole new generation of family farmers trying to stay in business and to reorganize and to right-size their operations.
JP: I wholeheartedly agree. And given the fact that we are now in our fourth year of low crop prices, it couldn’t have come at a better time for the family farmers.
SG: We’ll be grateful for that, that this coming Thanksgiving. I recall as someone who worked on the ’86 amendments that became Chapter 12, as I recall, they became effective on Thanksgiving Day of 1986, as it turned out.
JP: November 26, 1986.
SG: And so this could be another year where, truly, Thanksgiving has a meaning for people in rural America.
Well, Joe, that’s all the time we have today. I wanna thank you very much. Joe’s with Ag & Business Legal Strategies in Iowa. Thank you for joining us. Congratulations on this legislative achievement. I know you were intimately involved working with the Senate staff to make this happen. And, we encourage interested listeners to read his article in the forthcoming December issue of the ABI Journal, which also contains the new statutory language that we discussed and another feature about Chapter 12’s 30-year history as part of the Bankruptcy Code. And check out our newsroom section while you’re there at ABI.org to access our archive of over 200 podcasts on bankruptcy topics. So, thanks Joe for being with us.
JP: You’re welcome.
SG: And until next time, this is Sam Gerdano on behalf on the American Bankruptcy Institute, saying thanks for listening and have a great day.
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Categories: Chapter 12, In the Media, Tax