Get Up to Speed: Potential Laws for You, Your Farm, Your Business
Call your Iowa State Senator by February 20 The bulk of our work at Ag & Business Legal Strategies is focused on helping farmers navigate complex court processes in bankruptcy, as well as laws and regulations that affect their livelihood. But our attorneys also devote time and expertise to working with state and federal legislators to try improving laws that govern these, as well. Ultimately, lawmakers serve you, the people. So from time to time, we like to update you on pending or potential legislation that could impact your daily life at some point so that you may reach out to your elected representative and share your opinion. File the first two items in this article under “Needs Attention NOW.” Updating for inflation in Iowa Last year we worked with an Iowa state lawmaker on draft legislation to better assist farmers and other small business owners seeking debt solutions by updating Iowa’s exemption laws for inflation. We explained what that means, and how it would help struggling parties protect more of their property, in this article. That legislation was introduced in the Iowa Senate last month and was assigned to a subcommittee of the Judiciary Committee. Not only would it bring up to date long-overlooked indexing, going forward it would require periodic indexing every three years. The subcommittee has recommended that the main Committee vote Senate File 2054 out to the full Senate for debate and consideration. Here is what’s needed: If the Judiciary Committee does not vote on this by February 20, 2026 (later this week, as of this publication), it will become much more difficult to get the bill to the Senate floor for a vote this year—if at all. If you’re in favor of fair protection for debtors while supporting economic recovery in the debt reorganization/bankruptcy process, contact your State Senator TODAY and ask that the Committee vote on S.F. 2054 by February 20. If you don’t know your Senator, find them here. ABCs of business liquidation In addition to farmers, we also advise small business owners. Section 681 of Iowa Code governs assignment for benefit of creditors, commonly referred to in legal circles as ABC. The concept has been around for centuries, crossing from common law of England to the U.S., and allows a failing business to close efficiently and the owner(s) to maintain credibility by liquidating assets to pay its creditors. This process happens largely outside of court supervision, saving court expenses and potential time delays related to oversight. Used efficiently, ABC lets a business owner transfer its assets to a neutral third party, whose job is to sell them and recover the best prices to pay creditors. When the state enacted its current ABC laws in Iowa Code Chapter 681 more than a century ago, it imposed significant court oversight and bonding requirements. The bond requirement has historically proven onerous and expensive, crippling this tool—in fact, the last case we can find using this was in 1949. Because ABC liquidation can be a more affordable alternative to bankruptcy when a business owner is not trying to reorganize to stay in business, we have been working with Iowa legislators to overhaul this state law. Senate File 2213 would do that, repealing Section 681 and replacing it with more modern, uniform language recently drafted and also under consideration in other states. UPDATE: The Governor signed the final bill, SF 2497, into law on June 2, 2026 As with the above-mentioned S.F. 2054, this bill has been recommended by the Judiciary Committee’s subcommittee for passage, so the full Committee can take it up for consideration. It too must be voted on by February 20, or it may be difficult-to-impossible for the full Senate to vote on this year. Contact your State Senator to request a Committee vote before February 20. Protect farmer safety, legal relief Recent approval of the use of dicamba herbicide by the U.S. Environmental Protection Agency (EPA) puts us in mind of an effort from the past two years, in Iowa, to nullify farmers’ rights to sue for relief if harmed by pesticides. In 2024 and 2025, the Iowa Senate voted twice to approve a bill that stated if the EPA approves registration of a pesticide under the federal Insecticide, Fungicide and Rodenticide Act, that “shall be sufficient to satisfy any requirements for a warning or labeling regarding health or safety” for its use. And twice, the Iowa House refused to make it law. Although we are not aware of any effort yet so far this year to revive the bill, it’s never a bad idea to get out ahead of potential action and let your legislators know that you are not in favor of taking away a farmer’s right to sue for injury from something they may be required to handle on a regular basis. Why it matters: Several years ago, Ag & Business Legal Strategies had a client who grew very sick and nearly died when he was mixing a pesticide and some landed on his skin. It turned out that in the 1980s this chemical had contained a “loud” dye so the user could more easily see if it was applied or spilled, and caused it to sting so the user could wash it off promptly. By the early 2000s, however, the dye and warning sting had been eliminated. The Eighth Circuit Court ruled this elimination a design defect that was an exception to how the EPA had registered the pesticide, and the farmer prevailed. EPA registration of a pesticide is predicated on how well it works for your crops, which has nothing to do with how safe it may be to use. Manufacturers and others will argue lawsuits raise the price or make approval a longer process. We ask: At what price do you really need those chemicals if they’re not going to be safe for everyday handling and exposure? Federal bankruptcy goals Next month, Ag & Business Legal Strategies Founding Attorney Joe Peiffer is headed to Washington, D.C.,
Keeping Up With the Times: Indexing Exemptions to Inflation
When the Bill of Rights amending the U.S. Constitution went into effect in late 1791, the Seventh Amendment stated in part that “the right of trial by jury shall be preserved” for “the value of controversy” over $20. This meant that anyone could demand a civil jury trial for a dispute involving something exceeding that value. That $20 in 1791 is worth about $700 today. But since the Seventh Amendment isn’t indexed for inflation, anyone can still demand a jury trial for a dispute of over $20. Indexing just means adjusting for inflation over time. One place most of us see this in action is when completing our federal tax returns each year. You may notice the “standard deduction” that applies if you do not itemize your deductions throughout the year (as most individuals don’t). This, coupled with shifts in income brackets from year to year, aims to fairly adjust the taxes you owe so you’re not penalized with a higher tax rate if your income only rises at the same rate as the cost of goods and services. Your buying power isn’t increasing — so your tax rate shouldn’t, either. So how does indexing apply to bankruptcy and debt collection? Personal property exemptions By and large, the legislators who write bankruptcy and debt collection laws recognize that while it’s important for filers to repay debts, it’s also vital that they not be left destitute with no belongings. Federal and state bankruptcy laws contain exemptions from debt collection for things like homes, vehicles, clothing, household goods and furnishings, some cash, retirement accounts, and more. There are several reasons for this. Stripping someone of all assets to satisfy debts, including tools of their trade, a means of travel, a place to live, everyday supplies, and all cash could make it difficult for them to reasonably support themselves, which in turn costs society in public assistance and reduced economic productivity. It’s in our collective interest for debtors to be able to live their lives even after creditors have collected their debts. The law also recognizes the dignity of keeping certain possessions, with exemptions for valuables such as wedding rings, books, and similar things with a sentimental value greatly exceeding their typically marginal market value. This article will focus on personal property exemptions, or everything that’s not real estate. Iowa generally offers robust personal exemptions — in addition to the categories above, the state allows debtors to protect their interest in disability income, veterans’ benefits, alimony, firearms, 529 college savings accounts, structured personal injury settlements, federal pensions, medical aids (why take someone’s CPAP or walker?), and internment spaces from creditors. In many cases, however, Iowa has not kept up with the times, and decades of inflation have eroded the value of the exemptions the state legislature granted to debtors. Inflation indexing: Not new, but not common The federal Bankruptcy Code and at least eight states index personal property exemption values for inflation, but as in most states, Iowa has not done this. When they have been updated, Iowa lawmakers have generally set fixed dollar amounts that remain unchanged until the next legislative update. The most recent update to any Iowa personal property exemption values was nearly 20 years ago, and others go back even further. One exemption, for a bankruptcy debtor’s interest in accrued wages and tax refunds, has not been updated since 1981 — the Iowa legislature set that exemption at $1,000 and it remains the same today. Had it been indexed for inflation according to the U.S. Department of Labor’s Consumer Price Index (CPI), that exemption would now be more than $3,600! For a more concrete example, consider Iowa’s motor vehicle exemption. In 2006, lawmakers updated the exemption for a motor vehicle to $7,000; with a CPI-indexed update, that amount would be close to $11,150 today. Inflation’s effects on this exemption are real — in researching Iowa’s exemption history, I found a Cedar Rapids Gazette classified ad from 2006 that listed a 2001 Grand Caravan with 103,000 miles for $7,000. Right now, Kelley Blue Book states a 2020 Grand Caravan with 103,000 is worth around $11,230 — not far off from an inflation-indexed exemption of $11,150. Because of inflation and the fixed value of Iowa’s motor vehicle exemption, the vehicle a debtor could exempt today is likely to be in significantly worse shape than the vehicle they could have exempted when the law was passed, since $7,000 doesn’t buy the same used car it did in 2006. Inflation devalues other exemptions too Other categories last updated in 2006 were post-marriage wedding/engagement rings, $7,000 (which would index in 2025 to $11,150); jewelry other than wedding/engagement rings, $2,000 ($3,175); household goods and furnishings, $7,000 ($11,150); and “wildcard” or otherwise uncategorized items often used for cash, $1,000 ($1,600). The residential rental or utility deposits or prepaid rent exemption of $500 was last updated in 1996 — this allows a debtor to keep up to $500 of cash deposits or paid-ahead rent on an unexpired lease. This is the amount they do not have to turn over to a bankruptcy trustee or a creditor’s garnishment. However, if the law had included CPI indexing, that exemption would now be $1,025. Other Iowa exemptions include: The last two are particularly relevant to farmers. The farming tools exemption is obviously a benefit to them, but many also work on the side in construction, trucking, manure hauling, or another job. Farmers with a side business can use the non-farming tools of the trade exemption in addition to the farming tools of the trade exemption. I recently had a bankruptcy client who was both a farmer and did construction, so he was able to take advantage of the $10,000 for what he used in each category. If Iowa law indexed exemptions for inflation, my client could today exempt up to $28,800 each for farming tools of the trade, and non-farming tools. See what a difference indexing makes? Indexing for inflation makes sense While nobody likes to think about it,
Influencing Legislation: Putting Your Voice to Work for Laws
Be honest: What comes immediately to mind when someone talks about how Congress makes a law? For generations of Americans it’s the 1976 “I’m Just a Bill” episode of Schoolhouse Rock. It was a catchy introduction when we were young, but we soon learn there’s much more to the process than, “He signed you, Bill! Now you’re a law!” Your participation in democracy doesn’t have to end at the ballot box. You can tell your legislators what laws you’d like to see, or which you oppose. There’s an old saying that “if you don’t vote, you can’t complain”—the same could be said of legislation that passes, if you don’t share concerns with your members of Congress. My hope here is to help you effectively do that and feel comfortable doing so. If you already know the finer points of crafting legislation, you may want to skip over this next section. For everyone else, here’s a quick overview of lawmaking at the federal level. Journey from bill to law Any legislator can create and introduce a bill in their chamber of Congress, the Senate or House of Representatives. It is then assigned to the proper committee, which may hold hearings, conduct research, and possibly rewrite parts of the bill. If the bill is to advance and not just languish in committee, it needs to be voted out of committee to the full Senate or House—where the Speaker of the House or the Majority Leader of the Senate can decide whether to allow it to come to the floor for debate and a vote. The committee could alternately decide to just study the matter longer, or vote to kill the bill. One note on the above is that bills that expressly require federal funding must start in the House. Once on the full House or Senate floor, a bill can pass to the other chamber after it receives a majority of “yes” votes—51 in the Senate or 218 in the House. There are some rules unique to the Senate, however, that can put a snag in this process. One is the fact that any Senator, for any reason, can place a hold on legislation and prevent it from coming to a vote. Another rule is the filibuster, which is designed to delay the voting process. Under filibuster, a member can talk on the Senate floor as long as they like, about the bill or any topic, and no vote can be taken until they are finished. Cloture is a way around the filibuster—if a Senator invokes cloture and at least 60 members vote to agree on that, it ends all debate, filibusters, and holds and forces another vote on the bill itself. Probably the latest example of cloture at the writing of this article was on March 14 when several Democrats joined Republicans 62-38 to force a vote on the stopgap spending bill to avert government shutdown. For the sake of argument and to keep this short, let’s say the House or Senate does approve a bill and sends it to the other, but the second chamber makes some changes to pass it. This creates two versions, which must go to a reconciliation committee made up equally of Senators and Representatives. If they can agree on a single compromise version, that’s what goes back to both House and Senate for votes. Once both chambers have approved the same language—whether on first pass or through reconciliation—it goes to the White House, where the President has 10 days (minus Sundays) to sign it into law or expressly veto it and state their objections. If they fail to sign or veto the bill in that time, it automatically becomes law. A vetoed bill that can win a two-thirds “yes” in each chamber (67 in the Senate, 290 in the House) will become law… but this doesn’t happen often. One more note about veto power: If Congress sends the President a bill but adjourns before the 10 days is up, making the President unable to return an express veto, he or she can do nothing and kill the bill with a pocket veto. Congress can’t override this type of veto, so the process would need to start all over again with the introduction of a new bill. An example of ongoing advocacy For more than 30 years, I have been involved in federal legislative efforts both as a concerned citizen and an attorney who represents farmers. I have had successes, such as when I helped write legislation for Chapter 12 bankruptcy that addresses farmers’ unique concerns. And then there are issues that take longer to solve, which I continue to work on with legislators. One longtime cause is venue reform for bankruptcy cases. I believe large companies filing Chapter 11 bankruptcy should be required to do so in the court closest to where they conduct business, but there is a loophole in federal law that permits them to set up subsidiaries in other states with courts historically sympathetic to the specific relief the corporation desires. Having that subsidiary organized in a favored state allows not only the subsidiary to file there, but by extension, the parent corporation to be able to do the same—often far from their creditors. This tactic has been used to deny farmers and other creditors fair payment for supplies and services when massive corporate assets are liquidated. It happened when ethanol manufacturer VeraSun Energy, headquartered in Sioux Falls, South Dakota, filed its Chapter 11 bankruptcy in 2008—in Delaware, a state notably lacking in ethanol plants or cornfields—leaving many Midwest farmers with grain contracts holding the bag. Just last month, crop ag-tech firm Benson Hill headquartered just outside St. Louis filed its Chapter 11 in faraway Delaware, as well. Why is this issue important to farmers? Bankruptcy proceedings happening several states away discourage creditors who can’t take the time or afford to travel from attending to testify or observe. Also, if I’m representing an Iowa farmer in a Delaware courtroom, we need to hire an extra lawyer who is licensed in that state
Protecting Your Pork Assets: Time to Reorganize, or Get Out?
If you’re a swine integrator or producer, chances are high that 2023 has not been kind to you. More integrators are filing for bankruptcy protection or seriously considering it, which puts the producers who grow pigs for them at risk—and, in turn, their employees. Even if you haven’t faced the potential of bankruptcy or debt organization, you’ve likely seen your income take a hit. Various factors are responsible for this, even before the U.S. Supreme Court upheld California’s Proposition 12 last May, in a decision that will be felt across the pork industry for a long time. One integrator Ag & Business Legal Strategies is working with was losing approximately $1 million in income per month earlier in 2023, and will ultimately end up shuttering their 200,000+ head business because they cannot find sufficient funds to continue operations. This loss will cascade down through the 102 producers who supply the integrator, who must each either find a new buyer or go out of business. This is far from an isolated incident; there are much larger integrators losing that much per week. In just one three-week period earlier this year, two sizable integrators in Iowa alone either filed for bankruptcy or liquidated their assets and went out of business. California Law Causes Concern Let’s look just briefly at the impact of Prop 12. It requires that all pork sold in California have a certification that each gestating sow had minimum gestation pen space of 24 square feet. Since California consumes 15% of the nation’s pork production but only contributes 3% of it, this law affects top-producing Midwest states including Iowa, Indiana, and Illinois. Most gestation houses in this region did not comply with that mandate as of May, which means the producers caring for those sows essentially have four choices: get out of the pig-raising business, retrofit their facilities, construct new facilities, or sell only to processors that separate their California pork from their pork for the rest of the country. It may actually be less expensive and simpler to build new than to retrofit! The ramifications of Prop 12, coupled with hog producers trying to stay in business in the short term, are staggering. States with large concentrations of swine production could see economic hits to rival the 1980s farm crisis. Trouble Brewing for Swine Integrators and Others In Iowa alone pigs outnumber people by a factor of more than 7:1, More than 22 million head are distributed through every county in the state. If the swine industry takes a big hit, the impact will be far-reaching and devastating. Loss of their integrator forces a producer to go out of business or find another job if they cannot find another buyer, but it also puts each of their workers out of a job. Then there’s the ripple effect of the producers’ inability to pay off loans for finishing houses, related facilities, and operating loans. This will impact the banks involved, and the loss of these producers affects the whole supply chain—local veterinary practices, feed mills, and more. All of this brings up many questions for swine producers who have taken on debt for the animals, facilities, and labor to supply integrators. Even if an integrator stays in business, they may cut operating costs—likely starting with their least-efficient suppliers. How might this affect you, the producer? How will you make payments on your loans if you cannot find another integrator? If you need to take a lower payment per pig-space from an integrator, how low can you go and still keep the farm going? How long can you afford to feed and care for the animals while you search for a replacement integrator? Where can you sell your pigs if you cannot stay in business? After all, closing a gestation or finishing house is not like shutting down a factory. Finally, if you do exit your business, what do you do about any personal guaranties you may have signed with the bank, putting your own assets up to ensure repayment of business-related loans? It is important to consult with experts who can honestly help you evaluate your situation and move forward with making informed decisions about your own financial future as well as your business’s, whether you are a producer or an integrator. Ag & Business Legal Strategies can provide this kind of legal review and clarity, as well as negotiate with creditors on your behalf; help you file the necessary liens if you are a producer not being paid; and assist with debt restructuring, exiting the business, or filing for bankruptcy—whatever is appropriate. Contact us today to set up a consultation. Don’t stall until it’s too late to plan adequately to protect your assets or your production future. At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and, if necessary, assist you with the legal, tax, and practical aspects of debt restructuring or bankruptcy. Don’t wait for the problems to become insurmountable. Connect with someone you can trust today, not tomorrow. Contact us here!
USDA OKs Choice for Farmers to Keep Inflation Reduction Act Relief—or Not
In the months since we visited the scenarios of Robert and Charles—two fictional farmers who received farm debt relief under Section 22006 of the 2022 Inflation Reduction Act (IRA)—the Farm Service Agency (FSA) has announced two major changes in how recipients can choose to deal with their new windfall. Last year FSA repaid more than 13,000 farmers’ delinquent FSA-direct or FSA-guaranteed loans with IRA funds. With FSA’s new guidance in April, those farmers have choices and tools they can use to remedy the unintended consequences this repayment caused. Distressed Borrowers Now Have Choices In February, we met Robert and Charles, two fictional farmers who benefited from $800 million in IRA funds the USDA paid out in relief for distressed borrowers. To recap: Robert defaulted on his FSA-direct loan in 2010 and the FSA foreclosed on his property, leaving an unpaid $100,000 deficiency judgment. His account was moved to currently not collectible, or CNC, status with no payment since. As of last year, his total balance was $150,000, including $50,000 interest. Charles took out an FSA-guaranteed loan from a local bank and has been in default for several years. He has continued to farm while working with his bank under forbearance agreements, and his debt was moved into CNC status in 2019. The FSA repaid the remaining $400,000 of his loan last year, along with $12,000 in interest. The IRA at first seemed like a win for both farmers, until each was left with a massive tax headache because the Internal Revenue Service (IRS) treats the principal repayments as income for 2022. For tax purposes, Robert earned an extra $100,000 and Charles, $400,000; now each owes additional taxes of approximately one-fourth of their principal relief. (The repaid interest is deductible.) Worse, this additional income could push Robert or Charles above income thresholds for nutrition assistance such as SNAP or WIC, or from being able to use federal subsidies to help offset the premiums of self-employed health insurance. It could also cap their ability to contribute to certain retirement accounts. Updates Offer New Options Thanks to overwhelming feedback from advocates including Ag & Business Legal Strategies, on April 6 the FSA sent affected farmers a letter notifying them of two new options they have to deal with this sudden “principal income” (reflected on tax Form 1099-G, “Certain Government Payments” as part of reportable income for 2022). The first is simply a change in status afforded to FSA-direct loan recipients. The FSA recharacterized these direct debts as being canceled rather than repaid; affected farmers should have since received an amended Form 1099-G and Form 1099-C, “Cancellation of Debt.” For Robert cancellation means if he was insolvent before the forgiveness, his tax bill is reduced. If he was still insolvent after the cancellation, then there will be no tax bill. Returning IRA Aid—Some Farmers’ Best Option The second major change the FSA announced is that farmers who had their debts repaid by IRA funds now have the choice to opt out of this assistance. While refusing free money might seem odd, tax consequences might make this the right choice. Note that Charles doesn’t get the choice of the FSA canceling his debt—the FSA can’t cancel debt it guaranteed, it can only repay it or not. Faced with owing about $100,000 to the IRS, he might see smaller payments to the bank on the $400,000 over a long time as easier than paying the taxes sooner. He also has the option to file for bankruptcy, as FSA debt (or FSA-guaranteed debt) is generally dischargeable in bankruptcy while recent tax debts are not. If he decides one of these choices is better, he has until December 31, 2023, to contact his loan officer or the FSA with a written request declining IRA Section 22006 assistance. On the other hand, maybe Charles’s accountant can work out a longer payment plan or an offer in compromise with the IRS, in which it would accept less than the $100,000. This could be better if maintaining the original debt to the bank is hindering his ability to borrow again and he can’t file for bankruptcy. Another exception that could allow Robert or Charles to avoid paying taxes is if the debt is qualified farm indebtedness: ABLS urges farmers with tax problems to ask their accountants about deferring their tax liability through the qualified farm indebtedness exclusion — accountants may wish to read this blog post written by Ag & Business Legal Strategies friend and agricultural law and tax expert Roger McEowen. If you received Section 22006 assistance but wish to decline, remember to contact your loan officer or the FSA before the end of this year and express your intent in writing. The FSA Call Center number is 1-877-508-8364. In Conclusion The final major clarification FSA offered is that accepting IRA assistance, whether that is debt repayment or debt cancellation, will not affect a farmer’s eligibility for future FSA funding. This was a concern at least one Ag & Business Legal Strategies client had. In March the FSA announced it was providing a new round of $123 million in IRA relief to direct-FSA borrowers who qualify. These repayments were set to start going out in April. If you received notification on your loan, or have questions about qualifying factors, you can read more here. The USDA’s and FSA’s efforts to provide additional relief in the wake of the IRA’s unintended tax consequences are certainly welcome. Ag & Business Legal Strategies is grateful the agencies recognized and addressed this, and that we were able to help shine a spotlight on these issues for them. If you have questions about your situation and how to proceed, contact your accountant, then reach out to Ag & Business Legal Strategies. We would be happy to help you plan a strategy to achieve your repayment and/or business goals. At Ag & Business Legal Strategies, we want our clients to be honest with themselves and have a solid business plan. Our attorneys and financial strategist will help you create and execute that business plan, and,
Unintended Consequences: The Inflation Reduction Act of 2022’s Farm Debt Relief Causes Farmers Massive Tax Headaches
For a deeper analysis into this topic, see a version of this article written for tax professionals and other interested parties here. On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. Section 22006 of the IRA provided $3.1 billion for the United States Department of Agriculture (USDA) to provide relief for distressed borrowers under certain Farm Service Agency (FSA) direct and guaranteed loans. On October 18, 2022, USDA provided nearly $800 million in assistance to distressed borrowers to help cure delinquencies and resolve uncollectable farm loan debts: Unintended Consequences of the IRA Payments Farm debt relief is certainly welcome, especially to its recipients. However, when Congress authorized the IRA payments it did not consider that those payments would be counted as income for many recipients, leading to: Two Distressed Borrowers, Similar Problems Consider these two typical borrowers with FSA debts who are in currently not collectible (CNC) status, both of whom benefitted from IRA farm debt relief: Scenario 1: In 2010, Robert defaulted on his FSA-direct loan, which was secured by a lien on his property. When he could not obtain further financing, he could not continue his farming business and the loan went into default. FSA foreclosed, leaving a $100,000 deficiency judgment. Although FSA initially contacted Robert to collect on the debt after the foreclosure, the account was moved into CNC status, where it has remained for 12 years. As of 2022, his past due balance was $150,000, with interest.[1] Scenario 2: Charles has been in default on his FSA-guaranteed loan from a local bank for several years. Charles has continued to farm while working with his bank under forbearance agreements. The debt was moved to the CNC status in 2019. In October of 2022, FSA repaid his entire guaranteed loan to local bank. The payment consisted of principal of $400,000 and interest of $12,000. Now, instead of owing a long-term debt to his bank, with low payments and the option of obtaining a forbearance, he faces a large tax liability (equal to multiple years of payments) due all at once. IRA’s Effects: Increased Taxes While the IRA’s debt relief payments could have many consequences for recipients, for Robert and Charles the primary consequences are increased federal income taxes. Because of this repayment Robert could owe $24,000 or more in additional federal income taxes, and Charles $96,000. Since this debt relief was targeted at farmers who were behind on their payments, Robert and Charles likely cannot pay these bills. Current Nonviable and Viable Options Robert and Charles do have options to address their taxes, but all of them have significant downsides. However, two of the common tools for addressing these taxes are off the table from the get-go. Bankruptcy will not help Robert or Charles any time soon, because these tax debts will be nondischargeable (they will survive a bankruptcy) until at least 2026. Similarly, while insolvent taxpayers don’t pay tax on debt cancellation, that does not apply to a debt repayment like this. Robert and Charles could enter into an installment agreement to pay off their tax debts (with interest and penalties) over six year, if the IRS agrees and they can afford that additional cost. They could make an offer in compromise to the IRS to reduce the amount they owe, but that is a lengthy, difficult, and expensive process, often requiring professional assistance. Moreover, the IRS can take up to two years to review an offer in compromise. USDA is Considering Options to Assist Farmers with their Income Tax Problems. After being informed of the significant problems caused by the repayment of the debt for over 13,000 farmers, the USDA has held a series of meeting and considered three options to ease the income tax problems experienced by farmers: asking the IRS to streamline and ease offer in compromise criteria, giving farmers the option to retroactively opt out of this debt relief, and recharacterizing this debt repayment as debt cancellation instead. The USDA is also considering asking the IRS to grant IRA farm debt relief beneficiaries an extension of time to file their tax returns so they can better plan for and adapt to this unexpected income. It is also considering sponsoring professional tax assistance for affected farmers. Get the Advice You Need and Contact your Members of Congress! If you or someone you know received IRA farm debt relief but now don’t know how to deal with the tax consequences contact Ag & Business Legal Strategies today! We can assist in assessing the consequences, navigating the options, and making an informed decision. Moreover, contact your members of Congress! Tell them USDA needs to find ways to help farmers with the unforeseen tax consequences of the IRA’s farm debt relief. Download a letter template here. Read a deeper analysis here. [1] Thanks to Kristine Tidgren of Iowa State University’s Center for Agricultural Law and Taxation for Robert’s scenario.
Unintended Consequences: The Inflation Reduction Act of 2022’s Farm Debt Relief Causes Farmers Massive Tax Headaches (Deep Dive)
On August 16, 2022, President Biden signed the Inflation Reduction Act (IRA) into law. Section 22006 of the IRA provided $3.1 billion for the United States Department of Agriculture (USDA) to provide relief for distressed borrowers under certain Farm Service Agency (FSA) direct and guaranteed loans. On October 18, 2022, USDA provided nearly $800 million in assistance to distressed borrowers to help cure delinquencies and resolve uncollectable farm loan debts. Unintended Consequences of the IRA Payments Farm debt relief is certainly welcome, especially to its recipients. However, when Congress authorized the IRA payments it did not consider that those payments would be counted as income for many recipients, leading to: Two Distressed Borrowers, Similar Problems Consider these two typical borrowers with FSA debts who are in currently not collectible (CNC) status, both of whom benefitted from IRA farm debt relief: Scenario 1: In 2010, Robert defaulted on his FSA-direct loan, which was secured by a lien on his property. When he could not obtain further financing, he could not continue his farming business and the loan went into default. FSA foreclosed, leaving a $100,000 deficiency judgment. Although FSA initially contacted Robert to collect on the debt after the foreclosure, the account was moved into CNC status, where it has remained for 12 years. As of 2022, his past due balance was $150,000, with interest.[1] Scenario 2: Charles has been in default on his FSA-guaranteed loan from a local bank for several years. Charles has continued to farm while working with his bank under forbearance agreements. The debt was moved to the CNC status in 2019. In October of 2022, FSA repaid his entire guaranteed loan to local bank. The payment consisted of principal of $400,000 and interest of $12,000. Now, instead of owing a long-term debt to his bank, with low payments and the option of obtaining a forbearance, he faces a large tax liability (equal to multiple years of payments) due all at once. IRA’s Effects: Increased Taxes While the IRA’s debt relief payments could have many consequences for recipients, for Robert and Charles the primary consequences are increased federal income taxes. In 2022, the IRA program paid Robert’s deficiency, including interest, triggering $150,000 in 2022 taxable income. FSA will send Robert and the IRS a 1099‑G to report this income. Although Robert can deduct the $50,000 in interest paid on his behalf, he is liable for around $24,000 in federal tax, which he cannot pay. If Robert’s state levies an income tax, Robert might also owe state income taxes. When the IRA program paid Charles’s $412,000 debt, he also faced the prospect of significant income taxes, possibly exceeding $100,000. Fortunately, his CPA assisted him in avoiding payment of the income taxes in 2023 for his 2022 income. When FSA notified Charles of the debt repayment to his local bank, Charles immediately turned to his CPA who helped him prepare for this unexpected income surge. The interest is deductible, and won’t increase Charles’s taxable income, but the principal is not deductible. Charles was able to defer collection on some grain sales into 2023, he had Net Operating Losses (NOL) he could use to offset some of the income, and he purchased his 2023 inputs in 2022 to decrease his 2022 Schedule F income and minimize his 2022 self-employment taxes. Current Nonviable and Viable Options Robert and Charles do have options to address their taxes, but all of them have significant downsides. Bankruptcy is not a viable option. Right off the bat, one of the primary tools for dealing with debts is off the table: Any income taxes that Robert or Charles cannot pay would be priority debts in a bankruptcy and not dischargeable in bankruptcy until at least 2026. In that time the IRS and state departments of revenue are likely to file tax liens. There is nothing exempt from an IRS lien, meaning that if the taxpayer had any property with equity, like an exempt homestead, the tax lien would make the tax debt a secured claim in any bankruptcy. While a bankruptcy in several years could discharge the tax debt, it would not eliminate the tax lien, and the IRS or state department of revenue could levy on the property and sell it to collect the tax debt. The insolvency exception to tax liability for debt cancelation is not available. IRC § 108 provides an avenue to avoid the taxes due because of debt cancelation or debt forgiveness. § 108 is commonly referred to as the insolvent taxpayer exception. It allows taxpayers that were insolvent before the debt cancelation to exclude the income from taxation to the extent of their insolvency.[2] Because the debt was paid, not canceled, Robert and Charles cannot reduce their tax liability under IRC § 108. If the debt had been canceled instead of repaid, IRC § 108 would have been available to them to potentially eliminate the income occasioned by the cancelation of the debt. Alas, Congress did not take this route. Installment agreement. It is possible that Robert or Charles could work with the IRS to set up an installment agreement to pay off his tax debt over six years. This could put a significant strain on their finances until the tax debt is repaid. The IRS usually places a tax lien on the taxpayer’s assets until the installment agreement is completed. Moreover, interest and penalties continue to accrue until the debt is paid in full, and the IRS is not required to accept a payment plan. Offer in compromise. Robert and Charles’s best legal remedy may be to hire legal counsel and seek to negotiate an offer in compromise (OIC) with the IRS to lower the amount of tax for which they are liable. The OIC process is complicated and time consuming.[3] It can take many months to finalize, and it includes costly fees. There is no guarantee the IRS will accept an OIC, but IRS states that it generally approves offers in compromise when the amount offered represents the most the IRS
7 + 13 = 10: The CBRA’s Huge Proposals to Change Consumer Bankruptcy
When a consumer is facing bankruptcy, many are given the choice between Chapter 7 and Chapter 13. While some consumers have successful bankruptcies under these chapters, these gloves don’t fit many financially distressed consumers. The Consumer Bankruptcy Reform Act (CBRA) was introduced to streamline consumer bankruptcy and provide more consumers with the opportunity to receive a discharge. The CBRA was introduced as a 188-page bill with many provisions addressing a variety of areas of bankruptcy reform., Most significantly, the bill consolidates Chapter 7 for individuals and Chapter 13 into a new Chapter 10. Chapter 10 Single-Track System Chapter 7 offers consumers the chance to liquidate their non-exempt assets in exchange for a discharge, while Chapter 13 allows a consumer to make payments over the course of a three- to five-year plan. The CBRA would make individuals ineligible for Chapter 7 and would repeal Chapter 13. All individuals with assets worth less than $7.5 million are instead eligible for Chapter 10 bankruptcy. Individuals with assets over $7.5 million would be required to file for Chapter 11, or 12 if eligible. Chapter 10 acts like a hybrid of Chapter 7 and 13 but is meant to completely replace both. Consumer flexibility was one of the bill authors’ primary concerns when drafting the CBRA. While a consumer may have a choice between Chapter 7 and 13, that choice is often meaningless. Chapter 7 does not allow attorney’s fees to be paid through liquidation of estate assets. In effect, this makes many individuals too poor to file for Chapter 7. This pushes consumers to Chapter 13, which is more expensive, and it is less likely the debtor will receive a discharge because many debtor’s plans fail. Moreover, the “means test” is another barrier to Chapter 7 relief that forces consumers into a Chapter 13 plan. The single-track system proposed by the CBRA prevents this bifurcation by putting all consumers in the same Chapter 10 pool. Chapter 10 looks to a debtor’s nonexempt assets and future income simultaneously, instead of the current approach in which Chapter 7 looks at nonexempt assets, and Chapter 13 looks to future disposable income. In a Chapter 10 bankruptcy, the debtor is no longer confronted with the difficult choice of choosing whether to liquidate assets but retain their future income under a Chapter 7 or to keep all their assets while paying their disposable income to creditors throughout a Chapter 13 plan. Significantly, Chapter 10 does not consider a debtor’s expenses like a Chapter 13 does, so a debtor will not have to justify expenses to the bankruptcy court. How to Receive a Discharge Under Chapter 10 Under Chapter 10, a debtor must pay a “minimum payment obligation” equal to the sum of the debtor’s nonexempt assets and a graduated percentage of the debtor’s annual income exceeding 135% of the state median income for a household of the same size. The goal of this minimum payment obligation requirement is to quickly separate debtors who can pay and debtors who cannot. Thus, if a debtor’s minimum payment obligation is zero, the debtor is eligible for an immediate discharge of all dischargeable unsecured debts, much like a Chapter 7 currently, whereas debtors with a non-zero minimum payment obligation will receive a discharge upon confirmation of a repayment plan. If a debtor can pay a minimum payment obligation, they must create a repayment plan to repay their creditors over the course of at least a three-year plan. This plan can be paid by using a combination of future income, exempt assets, and nonexempt assets. Distributions are made according to the same priority levels of 11 U.S.C. § 726, but there is no requirement that priority claims be paid in full. Chapter 10 also gives flexibility to a debtor who cannot pay the minimum payment obligation if they are justifiably excused for “circumstances the debtor cannot reasonably avoid.” Creditors are given some protection by allowing them to request the case be dismissed, but the CBRA removes the judge-created “substantial abuse” standard, allowing a creditor to have a case dismissed only if the debtor engaged in a “manifestly improper use of the bankruptcy system.” It is unclear, what the difference is between these two standards, but it seems clear that the drafters are intentionally rebuking the “substantial abuse” language. The bankruptcy court must confirm any feasible plan that is not proposed in bad faith and covers court fees, so long as the debtor current on their domestic support obligations incurred post-petition. If the plan is proposed without any objections, then it will be confirmed immediately without a hearing. This is another example of the CBRA’s commitment to expediting the bankruptcy process for consumers to reduce costs. One of the most significant changes under Chapter 10, is that a debtor receives a discharge immediately upon plan confirmation. Under Chapter 13, a debtor receives a discharge only after completing their plan, which debtors often fail to do. Chapter 10 drastically changes the supervision of the bankruptcy court over the life of a plan, making the trustee responsible for enforcing the debtor’s bankruptcy obligations. The trustee does this through liens on the debtor’s nonexempt assets. A default on the plan does not revoke the discharge like under Chapter 13, and Chapter 10 provides the debtor with more flexibility to modify their plan because of changing financial conditions. What About Secured Debt? Secured debt is handled under separate “property” and “residence” plans. These plans allow a debtor to change the terms of their obligations but by themselves do not result in a discharge. This allows for a debtor to file a “limited” bankruptcy to address falling behind on a mortgage or car loan without having to bring all the debtor’s other creditors into court. However, a combination of a repayment plan and a property or residence plan can lead to a discharge, and there is still an immediate discharge for a debtor whose minimum payment obligation is zero. Property and residence plans give the debtor the option to adjust interest
Terminating the Technicality: Venue Reform, Why It’s Important, and What You Can Do About It
Bankruptcy is a legislative creation aimed at giving debtors the opportunity for a fresh start while still recognizing the rights of their creditors to be paid. Chapter 11 Bankruptcy allows an entity experiencing financial distress, typically a corporation or partnership, to seek relief through reorganization, while retaining their business in hopes of generating revenue to pay debts as completely as possible. The debtor first files its bankruptcy petition and proposes a plan for repayment. Creditors are given the opportunity to vote on whether the plan is acceptable, and after considering those votes, the court may or may not confirm the plan. The expectation is that a company will file bankruptcy where it is actually located. Unfortunately, many large companies have found a way to circumvent the statutory requirements and file in a jurisdiction with which they have no meaningful connection in hopes of obtaining a more favorable outcome. The Technicality The current law requires an entity to file its bankruptcy in one of two places: (1) the district where the entity’s place of incorporation, residence, principal place of business, or principal assets in the United States have been located for at least 180 days or (2) the district where an affiliate of the entity has a pending bankruptcy matter. The second option is where companies found an opportunity for creativity. Say Company X wants to file bankruptcy in front of a judge who is historically more likely to accept its arguments. By setting up a subsidiary in that judge’s district, having that subsidiary guarantee the debts of the already-struggling company, and then having the subsidiary file for bankruptcy, Company X suddenly has an affiliate with a pending bankruptcy matter there, albeit a manufactured one. Company X is then legally entitled to file its bankruptcy petition in that judge’s district and potentially have its plan confirmed when other judges would have declined. Purdue Pharma’s Filing In re Purdue Pharma, L.P. is a textbook case of this tactic. Opioid manufacturer Purdue Pharma sought to use bankruptcy as a mechanism to compel acceptance of a global settlement by the plaintiffs in numerous civil actions brought against it and various members of the Sackler family who indirectly owned the corporation, as those were the company’s only major creditors. Among other things, its reorganization plan included what is known as a third-party release, which would shield the Sackler family from liability relating to Purdue’s role in the opioid crisis. Bankruptcy courts are split over whether third-party releases are an appropriate inclusion in reorganization plans, and those that allow them do so on a very limited basis. Appearing in front of the “right” judge in the “right” jurisdiction is paramount. Purdue recognized an opportunity and worked to get its matter into the Southern District of New York in front of the Honorable Judge Robert D. Drain, who had previously indicated an openness to entering a third-party release as part of a Chapter 11 reorganization plan. Over multiple creditor objections, Judge Drain approved Purdue’s reorganization plan, including the third-party release that protects the Sacklers from current and future litigation relating to the opioid epidemic. The bankruptcy plan sets aside funds for programs to be established by cities, counties, and other entities, as well as money to be paid to individuals affected by opioids after an adjudication process. However, holding members of the Sackler family liable for their role is no longer an available avenue. In exchange for paying a fraction of their estimated personal profits from the opioid epidemic over nearly a decade, the Sacklers have immunized themselves from further liability, despite objections from those harmed by the opioid epidemic. Exploitation The creative maneuvering employed by these companies, known as “forum shopping”, is an exploitation of flexibility purposefully built into the bankruptcy venue statute by its drafters, and Purdue is not alone in the practice. When the statute was adopted back in 1974, the committee fully expected that allowing companies multiple options for choice of venue would get the cases placed in the most appropriate court. This expectation rested on a belief that judges who found bankruptcy cases filed in their courts without a meaningful connection to the district would kick those cases to the court where it should have been originally filed “in the interest of justice or for the convenience of the parties” as they are authorized to do under 28 U.S. Code § 1412. The unfortunate reality is that judges tend not to exercise that discretion, and even if they do it often doesn’t occur until many of the most important decisions in the case have been made and after significant expenditures of money and effort by objectors. These realities only serve to encourage forum shopping. Termination Current legislation takes aim at closing the loophole and strengthening the integrity of the bankruptcy system while increasing public confidence and fairness. The Bankruptcy Venue Reform Act of 2021 (H.R. 4193), introduced in June of 2021, and the identical Senate bill (S.2827), introduced in September of 2021, acknowledge the practice of forum shopping and the resulting concentration of bankruptcy cases into just a few districts. The bill’s text also notes that not only does forum shopping prevent important stakeholders from fully participating in the bankruptcy process, it removes the possibility of the unchosen district participating meaningfully in the development of the bankruptcy law that will inevitably affect its constituents. In hopes of removing the enticement to forum shop, H.R. 4193 and S.2827 propose to add significantly more detail to the venue statute. Along with formatting changes that would make the statute more readable, the legislation includes important changes, including: specifically defining the term “principal place of business”; significantly limiting the option to file in a district where an affiliate has a case pending; placing the burden of proving correct venue on the entity that files the bankruptcy; and requiring cases filed in an improper venue be either dismissed or moved to the appropriate district rather than leaving it to the judge’s discretion. Leaving limited room for interpretation
A Call for Bankruptcy Venue Reform
In February of 2021, Belk, a North Carolina department-store chain, filed for Chapter 11 bankruptcy in the United States Bankruptcy Court of the Southern District of Texas. After the large retail company with over 90,000 creditors filed on the evening of February 23rd, their plan was confirmed and consummated by the end of the next day. The U.S. Trustee, the Department of Justice’s bankruptcy watchdog, was quick to object to the plan’s confirmation with the understandable concern that about 90,000 creditors would be swindled of their Due Process rights by not being notified prior to plan confirmation. The bankruptcy court appeared to think little of these concerns and granted a toothless 35-day objection period. It was clear to the parties involved that the case was over upon consummation, and Belk’s bankruptcy would sweep through the court before most of their creditors could even blink. Through the rapid administration of this case, the court ignored basic elements of bankruptcy rules and procedure, and the rights of creditors were relegated to an afterthought. Unfortunately, Belk’s bankruptcy is not unlike other Chapter 11 cases. Many courts have been willing to bend the Bankruptcy Code in large Chapter 11s to the whims of the debtors’ executives, debtors’ counsel, and debtor-in-possession lenders who often finance the bankruptcy. These judges have engaged in this Bankruptcy Code puppeteering to compete for large Chapter 11 cases to be filed in their court, and because of flexible bankruptcy venue laws, debtors can easily flock to the courts where the judges will be the most pliable. A Case Study Consider how Belk, a North Carolina company, was able to file in the Southern District of Texas. The current bankruptcy venue statute, 28 U.S.C. § 1408 allows a debtor to file in the district “in which the domicile, residence, principal place of business in the United States, or principle assets in the United States” of the debtor are located. However, the debtor cannot just move from one district to another and file immediately; the statute requires the debtor to be eligible for over 180 days in the district. The issue is that the statute has a built-in exception that allows large companies to file virtually anywhere. Section 1408(2) allows the debtor to file anywhere “in which there is a pending [bankruptcy] case … concerning such [debtor’s] affiliate.” This is how Belk made it to the Southern District of Texas. Belk had subsidiaries file in the Southern District of Texas, and the affiliates’ bankruptcies acted as a venue “hook” to allow Belk to file in the Southern District of Texas. Concerningly, the court did not even appear to accurately apply the existing venue statute, because Belk never showed that any of these affiliates were eligible in the Southern District of Texas either. Regardless, the result was a bankruptcy case that did not belong in the Southern District of Texas being administered expeditiously by a judge who chose to abdicate his duties of enforcing the bankruptcy code in exchange for bolstering the court’s reputation as a Chapter 11 destination. Incentives for Shady Venue Practices Under the current bankruptcy venue statute, two incentives combine for disastrous results. First, debtors and their case managers are incentivized with their broad discretion to maneuver Chapter 11 cases to the judges that will bend to their will. Second, some judges are incentivized to either violate the law or manipulate it to attract glamorous Chapter 11 cases. These incentives have produced a competition over what court or judge can give results most favorable to bankruptcy case placers (most often debtor’s attorneys and financiers for bankruptcy debtors). Currently, five bankruptcy courts that hear more than 90% of the bankruptcy cases in the United States – Houston, Delaware, White Plains, Richmond, and New York. This is enormous control in the hands of very few judges. Even worse, large companies and their attorneys are sometimes able to choose the specific judge that will administer the case by manipulating local bankruptcy court rules. The Argument for Reform The solution is bankruptcy venue reform. On June 28, 2021, H.R. 4193, the Bankruptcy Venue Reform Act of 2021, was introduced in the House as a bipartisan solution, and a substantively identical reform act was introduced in the Senate as S.2827 on September 23, 2021. The Act limits the ability of large companies to forum shop by requiring that the debtor file where its headquarters or principal assets are located. Moreover, it puts the burden on the debtor to show by “clear and convincing” evidence that the venue selected is proper under the act. This would prevent large companies from filing wherever they please and thus would eliminate incentives for bankruptcy judges to cow tow to the demands of large corporations and their financiers. It is easy to see why state attorneys general as well as bankruptcy professionals and scholars are calling for venue reform but make no mistake, this issue has broad ramifications. Look no further than Purdue Pharma’s Chapter 11 bankruptcy. Purdue Pharma, though based in Connecticut, was able to pick the court and even the judge for its bankruptcy. Exploiting the flexibility of the current venue statute, Purdue Pharma was able to file in the Southern District of New York. Even worse, Purdue was able to select their judge by using a local rule that made Judge Robert Drain the only possible bankruptcy judge for the case. This was exactly as Purdue Pharma’s owners had planned. Purdue Pharma and its owners, the Sackler family, had been implicated in the opioid crisis. Judge Drain approved a plan that shielded the Sackler family from liability in future opioid-related cases even though none of the Sacklers had personally filed for bankruptcy. In response to Judge Drain’s questionable decisions, Connecticut’s Attorney General, William Tong, said “[the Sacklers] should not be able to manipulate bankruptcy laws to evade justice and protect their blood money.” Essentially, Judge Drain, through bankruptcy, eliminated the rights of opioid victims to recover potentially billions of dollars in damages. Contact your Elected Officials!
Thirty-Three Years of Asking, “Are We There Yet?”
The Commercial Law League of America recently published Joe Peiffer’s article “Thirty-Three Years of Asking “Are We There Yet?”” as one of the title articles in the summer edition of their publication, Commercial Law World. Click the image below to read the article. **As of April 1, 2022 the chapter 12 bankruptcy debt limit has increased to $11,097,350.
Chapter 12 Debt Limit on the Big Show
Joseph Peiffer chats with Doug Cooper about Chapter 12 and raising its debt limit on the Big Show The audio from this conversation is below, as well as the transcript. Doug Cooper:I have been spending some time with Joe Peiffer. He is a bankruptcy lawyer with Ag & Business Legal Strategies, and he has been talking about the need to extend the debt limit in Chapter 12 bankruptcy. Joe, give us an update. Joe Peiffer:Yesterday the Senate passed H.R.2336, the Family Farmer Relief Act of 2019. That act increases the debt limit for Chapter 12 to $10 million.* It’ll be effective when President Trump signs the bill. It passed the house a week ago Thursday. It passed the Senate yesterday. The process of getting it passed has been a bit tortured, as most things are in Washington these days. Because we have divided Congress and there’s a lot of polarization, it’s been difficult to get anything through. Farm Bill made it to the Senate this past Monday, and lots of people contacted their senators, said we support this Family Farmer Relief Act, which would increased the debt limit, and they also asked their senators to contact Senator Durbin and tell him to remove his hold. Joe Peiffer:As of Wednesday, the status was that Durbin had released his holds on three bills that had been initiated by Democrats in the house. The only one he hadn’t released it on was a small business reorganization act. That was the only bill that was started by a Republican in the House. The Senate Republicans, since they’re in the majority said, “No, we’re not going to let you have three bills started by Democrats in the House if we don’t get something back in return.” The package went through late yesterday afternoon, about three o’clock is when I got the call that it had just passed the Senate. Senator Durbin removed his hold on the Small Business Bankruptcy Reorganization Act. Then it, along with the Family Farmer Relief Act, the Haven Act, and the National Guard and Reservist Debt Relief Extension Act all passed basically the same time. Now all four of those bills will head to the President. The Family Farmer Relief Act will be effective when President Trump signs it. The expectation is high that the President will sign all four of these bills. Doug Cooper:Joe, I realize that there are some farmers out there that are possibly facing bankruptcy. Will this encourage them to move forward now that Chapter 12 debt limit has moved from $4-plus million to $10 million? Joe Peiffer:The current debt limit’s $4.4 million, and the new one will be $10 million. Will it encourage more? I don’t think it’s going to encourage, but it will allow. And when I say that, I have never found a client coming in saying, “I really want to file bankruptcy.” They come in to me, and the reality of the situation is they’ll file if there’s no better alternative. In many instances, they’ve done many things trying to stave off bankruptcy. They have taken the money out of their retirement plans, they’ve borrowed on everything they’ve got, they’ve sold a lot of things they perhaps shouldn’t have sold trying to stay out of bankruptcy, because nobody likes the thought of the taint of bankruptcy. They’d rather not file bankruptcy, because that to them is an admission of failure. “I couldn’t make my business run.” I doubt it will encourage more, but it will allow them another tool if they need it. Joe Peiffer:The other thing it will do, as was set out in a 1993 study by Dr. Harlan, Iowa State, was that the availability of Chapter 12 allowed banks and farmers to negotiate against the backdrop of some certainty as to what would probably happen if a bankruptcy were filed. And in many instances, with the backdrop of how the case would come out if a bankruptcy were filed, they were able to make a deal that didn’t require bankruptcy, and it helped a great deal doing that. Doug Cooper:Let me ask that a little bit differently, Joe. Does this give farmers more leverage with their financial institutions? Joe Peiffer:If they were over the current $4.4 million limit, yes, it will give them some more leverage, because reorganization within a Chapter 11 for a farmer is virtually impossible. That’s why Chapter 12 was set up in 1986. So by increasing the debt limit to $10 million, we now have many more farmers that can use the power of Chapter 12 to restructure their indebtedness within bankruptcy. And if they need to, they can also, if they have to liquidate assets, within Chapter 12, there is an extremely powerful tax provision that allows that tax to be treated as an unsecured claim. This is what makes Chapter 12 the most powerful chapter of bankruptcy in the bankruptcy code. Doug Cooper:Joe, are your phone’s still ringing? Are farmers calling in and at least asking questions, trying to figure out what direction they should go in dealing with their financial institutions? Joe Peiffer:We have a lot of questions about people saying, “What can we do?” Candidly, I’m hopeful that people will consider their options earlier rather than later. The farmer should be proactive and looking for alternatives before the banker says, “I won’t loan you another dime.” If the farmer says, “I’ve been losing money, and Mr. Banker here’s what I plan to do to try to change things, and let’s change the structuring of our debt,” that will be welcomed by the banker, because you’re now addressing the situation. If you’re not addressing the situation, and you assume that everything’s going to be the same, and you can always assume the bank will loan you money, that’s a bad assumption. It’s far better that the farmer take it head on, get the help he needs management-wise so that they can move forward and hopefully negotiate out without the need for a
Joe Peiffer Discusses Cash Flows on the Big Show
Doug Cooper: Joe Peiffer is a bankruptcy lawyer with Ag & Business Legal Strategies in Cedar Rapids and Joe, we’ve been talking about a number of things and a couple of things slipped through last congress and didn’t get done. One of those was the debt increase on Chapter 12. What’s the latest? Joe Peiffer: Well, Chapter 12, we’ve been talking about Chapter 12 for a long time and the debt limit in Chapter 12. And the debt limit raised a little bit the first of April. The current debt limit for Chapter is $4,411,400. Strange number because it’s only indexed for inflation. Back from 1986 when it was started at $1,500,000 till now. The last congress, Senator Grassley and Senator Klobuchar from Minnesota introduced a bill called the Family Farmer Relief Act of 2018, that was in December, it didn’t go anywhere. On March 27th of this year they introduced the Family Farmer Relief Act of 2019, S897 and it now has 11 co-sponsors and a companion bill has been introduced in the House, HR2336. HR2336 and S897 would increase the debt limit for Chapter 12 to $10,000,000 and continue the indexing. I recently heard something on US Farm Report and John Phipps was decrying increasing the debt limit for Chapter 12, saying it doesn’t provide a fresh start and indicating that perhaps whenever a creditor is listed in a bankruptcy, be it a fertilizer supplier or feed supplier, that the price for that goes up for everyone else. Well, there probably is a situation where people do build in a loss, an allowance for bad debt or loss in their cash flows for these companies, however it doesn’t matter whether it’s a Chapter 12 bankruptcy or a Chapter 7 bankruptcy that’s filed, if the debt’s uncollectible, it’s uncollectible and that really is a hollow reason not to allow Chapter 12 to increase the debt limit so that farmers can use Chapter 12 to get a fresh start, including not having the staggering tax bill that many of them are going to have. It seems right now that we have the never ending trade war and with that trade war going on perhaps farmers are becoming additional collateral damage. I understand the President seeking to ease those losses, but at the same time as he says he’s going to buy product, are we really getting what we need? I don’t know the answer to that, but I do know that a lot of my clients that are in deep trouble will become collateral damage and will need Chapter 12 in order to start over, even if that means a liquidation. Because Chapter 12 now provides the strongest chapter bankruptcy and allows them to start over without a huge tax bill that they would have otherwise. DC: Joe, you mentioned collateral damage that farmers could be caught in, what are you hearing from farmers, their concerns, their stress level right now? JP: What I’m hearing is this, we’re still trying to get people financing to get in the field yet this year. That’s normally something we’ve got lined up by the first of March or the 15th of March, at the latest. Not this year. This year we’re still getting calls from people that do not have financing to go to the filed. This is the latest I’ve had in 37 years of practice, of people having trouble getting financing. DC: Joe, if you haven’t secured financing at this point, isn’t it too late? JP: The likelihood of getting financing now is very low. We have a couple of companies that I would call second tier lenders that are out there that are making some loans, but they’re very proud of their money, it’s very expensive to get it and the question is are you better off letting somebody else rent the land and letting it go than you are trying to farm it? Which way will you lose less, becomes an operative question for a lot of my clients right now. DC: Joe, there are reports that the stress level of farmers has increased for a number of reasons. What’s your best advice? What should they do at this point? JP: Farmers that are under the stress, they’ve planted, they’re wondering what’s going to happen. First off, take care of your mental health. Get the exercise you need, that helps with mental health. Get counseling if you need it. Be big enough to admit you need help. You can’t do it alone. In addition, keep those pencils and computers working, look at your cash flow at all times, especially when you get back in around the first of July or so, you’ve got the final spraying done, look at everything again. See where you are compared to the budget you set forth, move forward and see what changes you need to given the new reality of what you expect your yields to be and what you expect your marketing to be. Be very proactive. You need to be proactive, not reactive. Hopefully, if you need to make adjustments you can go into your bank and say, “Hey, I need to make some adjustments. Here are the adjustments I plan to make. Are you with me?” And work with your banker on this, so that you can move forward and keep an operation together. These are very stressful times and those who do nothing will be in much worse shape than those who are proactive and looking for alternatives. DC: Joe Peiffer, a bankruptcy lawyer with Ag & Business Legal Strategies in Cedar Rapids. I’m Doug Cooper on the Big Show.
Venue Reform & Effects for Farmers
From February 25-27 Joe Peiffer and Mark Kuhn (one of the farmers affected by the VeraSun bankruptcy in Delaware) were in Washington DC for the Commercial Law League of America‘s Hill Day to talk with lawmakers about bankruptcy venue reform. While they were there they spoke with Doug Cooper on The Big Show about their efforts. Here are the interviews: Doug’s interview with Joe: Doug Cooper: Joe Peiffer is an agricultural lawyer from Cedar Rapids. He is with Ag & Business Legal Strategies, and he has been working on a potential bill called the Bankruptcy Venue Reform Act of 2018. I caught up with him in the nation’s capital. Joe Peiffer: Doug, I’m out in Washington, D.C. and I’m out here with the Commercial Law League of America, and we are having Hill Day. The prime issue that I’m here to work on behalf of farmers in general is the Bankruptcy Venue Reform Act of 2018. DC: And that is what? JP: The Bankruptcy Venue Reform Act is S.2282. It was introduced on January 8 by Senator Cornyn, a Republican from Texas, and Senator Warren, a Democrat from Massachusetts, and it will reform where bankruptcies can be filed. Currently, bankruptcies can be filed wherever a company is organized or wherever an affiliate, which is another company in the same group of companies, may file a bankruptcy, or wherever significant assets of a company are located. That’s been a problem for Iowa farmers and farmers in the Midwest in general, as illustrated by the VeraSun bankruptcy in 2008. DC: Remind us what happened there. JP: In VeraSun, the bankruptcy was filed on October 31, 2008 in Delaware. VeraSun was the world’s largest producer of ethanol at the time, had 23 plants in 6 states, and filed bankruptcy in Delaware. I checked: Delaware had no ethanol plants and still has no ethanol plants. The farmers had contracted to sell grain to VeraSun, and the market had dropped out and VeraSun had agreed to pay in many instances $7 or upwards of $8/bushel for grain, and it had not protected itself on the other side in the options market. It ran out of cash, so all the sudden it’s got all these contracts due, it files bankruptcy so it has the right to terminate those contracts, and by terminating, the farmer would be free to sell their grain wherever. Unfortunately, they don’t have to assume or reject those contracts until after a plan is confirmed. That could be many months later. In 2008, you’ll probably recall that in the fall, we had grain in the neighborhood of $5/bushel and it was dropping. The farmers were faced with a terrible problem. If they sold their grain to minimize their loss, that was good. They could at least get $5/bushel for their corn, but their concern was what if the market turns and it goes back to $7? So the contract was at $7 and they sold for $5, now that covered their loss, but then if it goes back to $7, VeraSun could’ve required them to cover the difference between what they sold it for and what the market had returned to on the contract. For example, if the farmer who had a contract to sell with VeraSun for $7 and ended up selling at $5 after the bankruptcy, and then it went back to $7, he could have to pay $2/bushel, which means he effectively got $3/bushel for his corn. DC: What kind of reaction have you received in Washington, D.C., and what is the current status of this bill? JP: I’ll start with the current status. The current status of the bill is that it’s in the Senate Judiciary Committee. We are building support, and in fact, I just came out of a meeting with the National Association of Attorneys General, who happen to be having their annual convention here. And we’re hopeful that that group will support it. We’re getting support from many different factors, or many different groups, the Iowa Bankers Association signed on right away, and what we’re hoping to do is to keep building that support. One of the things you need to think about right now is that Ted Cruz is railing against renewable fuel standards. He’s pointing out the Pennsylvania Energy Company bankruptcy, which is a refinery that filed bankruptcy in Delaware recently, saying the employees there are in trouble because of the renewable fuel standards, which is part of the basis of the ethanol plant. If he’s successful, there could be ethanol plant bankruptcies coming up, and under the current bankruptcy laws, I can virtually guarantee they’re going to be filed in either the Southern District of New York or Delaware. If we don’t want that to happen, now’s the time to act. People out here are generally receptive to the idea, with the exception of folk from Delaware or New York, who are getting the bulk of the cases. I was out here in 2008 with Mark Kuhn, and we went to Delaware in the VeraSun bankruptcy, and Mark pointed out he was the only one in the room with blue jeans on. Everybody else had blue suits on. And we could not get the judge to agree that VeraSun should be required to assume or reject the contracts quickly. In fact, all of the farmers that had VeraSun contracts were invited to come to Delaware to seek relief. How many farmers A) can afford to make it to Delaware, B) can afford to hire Delaware counsel, and C) should have to go that far to protect their interests? DC: Joe, it’s early, but what’s your gut feeling? JP: Gut feeling is momentum is building, but it’s a marathon. It’s not a sprint, and we need the support of people who are affected. Not just farmers – it’s other businesspeople that dealt with these companies as well. Because the next one that happens will affect anybody that’s doing business with the companies. DC:
Joseph Peiffer on the Big Show Talking Venue Reform (Part 2)
Joseph Peiffer joined Doug Cooper on the Big Show again last week to talk about the new Bankruptcy Venue Reform Act of 2018 that was recently introduced in Congress. Here’s part 2 of their conversation from January 18, 2018. Doug Cooper: Yesterday I visited with Joe Peiffer, a bankruptcy lawyer with Ag & Business Legal Strategies. He has been working on a bill, the Bankruptcy Venue Reform Act of 2017, that would reduce the number of miles you would have to travel to argue your case if a corporation or business declares bankruptcy. Joe Peiffer: In many instances, they’ll make a deal and pay something for certainty to make sure they’ve gotten rid of the claim of the creditor, despite the fact that they may have good defenses. The cost of hiring Delaware counsel is high, and you always have the uncertainty. Conversely, if you were in the Midwest, and that’s where the case is filed, the cost of defending yourself is far less. DC: Joe, let’s do a little Civics 101 right now. What are some of the hurdles the bill has to go through before it becomes law? JP: Okay. At the current time, the bill has been introduced and was assigned to the Senate Judiciary Committee. The Senate cannot act on it until it comes out of the Judiciary Committee. So at the current time we’re seeking to get lots of senators of both parties to say this is a good bill. If that occurs, then the Judiciary Committee could agree to suspend regular order and report the bill out of committee. Once a bill’s out of committee, it could be added to any other bill and potentially get wings and go through the Senate. Once it’s through the Senate, then it will go to the House. Assuming it ends up being part of a bill that’s identical in both the House and Senate versions, and it’s passed, then it will go on to the President. Something else that could happen in here is that the House could introduce companion legislation through its Judiciary Committee. I believe it’ll be a lot easier to get this bill passed through the House because you don’t have to worry about getting 60 votes, and if that were to happen, then the Senate could take it up, because it had been passed by the House. So we’ve got several ways of getting to go in this. Right now, it’s in the Senate Judiciary Committee. DC: Seems to me that the chair of the Senate’s Judiciary Committee, Chuck Grassley, would have interest in this. JP: I won’t get to talk to him this week. I am talking – I have spoken with his Judiciary staff person, Brad Watts, and he is assigned to handle bankruptcy matters for Senator Grassley. And he is watching this carefully. I’ll be meeting with Senator Grassley’s staffer, Mr. Watts, I believe on Friday. I happen to be going to D.C. for another matter, so I’ll be working the Hill while I’m there. If we can get both of our senators and all of our representatives to be on board, to press this legislation, which is, I believe, good for not only Iowa farmers, but all of Iowa’s citizens by virtue of making certain that if any bankruptcies are filed that involve us with Iowa-based companies or Midwest based companies, that the bankruptcies are filed close to home. DC: What’s your gut feeling at this point? JP: My gut feeling is that if the grassroots gets to work on this thing and supports it, it could become reality. If the grassroots doesn’t get out there and keep pushing their senators and representatives, it could die in the Senate Judiciary Committee. For example, we talked about Chapter 12 bankruptcy changes last fall. It took five and a half years after the Supreme Court handed down a case decision that went against the family farmer for the bill to finally get passed and enacted as legislation. It has taken – I’ve been on the Commercial Law League of America Bankruptcy Venue Reform Committee for over five years. This is the first time that we’ve gotten legislation introduced. That’s a big step, but we need a big push and a lot of help from a lot of people calling their senators and representatives, telling them to support this if we’re going to get it across the finish line. DC: Any final thoughts, Joe? JP: Well, the other thought would be if you support this legislation, be active. If your senator or representative doesn’t call you back or give you a response, call them again. E-mail them again. If you become the squeaky wheel, they recognize who has the power at the ballot box, and that’s the citizens. It’s important for the citizens of the states to be heard because the other side is very well funded, but the other side that has a lot of lobbyists going, they don’t get to vote here. The voters can speak loud. If the voters speak, it’ll outweigh the money that may be offered to them by the other side. DC: Joe Peiffer is a bankruptcy attorney with Ag & Business Legal Strategies in Cedar Rapids, Iowa. I’m Doug Cooper on the Big Show.
Joseph Peiffer on the Big Show Talking Venue Reform (Part 1)
Joseph Peiffer joined Doug Cooper on the Big Show again last week to talk about the new Bankruptcy Venue Reform Act of 2018 that was recently introduced in Congress. Here’s part 1 of their conversation from January 17, 2018. Doug Cooper: Joe Peiffer with Ag & Business Legal Strategies in Cedar Rapids, Iowa is a bankruptcy lawyer and he says the first step in solving some bankruptcy venue issues has been introduced in Congress. Joe Peiffer: The Bankruptcy Venue Reform Act of 2018 was introduced on Monday, January 8, 2018, by Republican Senator John Cornyn and Democratic Senator Elizabeth Warren. It may sound like the strangest of bedfellows with Republican Cornyn and Democrat Warren; however, the best chance of getting anything done in Congress right now is to have bipartisan support. Senator Cornyn is a ranking member of the Senate Judiciary Committee. Senator Warren is a rising Democratic star. Getting them to work together is very good for this legislation. We spoke about this legislation before Christmas, since we thought it would be introduced then, and it ended up being introduced shortly after Congress returned from its Christmas break. DC: Did they make any changes to it, Joe? JP: They have made only cosmetic changes. The substance of the bill is exactly like we were talking about back in December, but since it’s been filed we’ve had some really interesting developments. The people from the State of Delaware are incensed that we would do this, or have this bill introduced, and they say that our argument that having bankruptcies filed either where the headquarters of the company is or where the principal assets of the company are would promote better access to justice, they claim is false. They say that the judges in the rest of the United States are not prepared or equipped to handle large bankruptcy cases. I find that argument to be a condescending slap in the face of every bankruptcy judge that isn’t in the State of Delaware or the Southern District of New York. All of the bankruptcy judges before whom I have appeared are smart people who have worked hard to get to where they’re at and who would quickly learn what needs to be done in a larger case. DC: Do you think you’ve got enough votes? JP: Well, at this point we’re trying to garner more votes. It’s much easier to get people to support a concept or a bill after the bill has been introduced. Before it’s introduced, we’re talking about a concept, this is our idea of what we’d like to do. Now we have concrete language that folks can look at and see exactly what’s being proposed and why it’s being proposed. We’re building support around the country. It is important, if people are interested in having bankruptcies of companies be filed where the assets are or where the headquarters are, that they let their congressmen know about it, let their senators know, ask their congressmen to support this legislation to potentially introduce it in the House and the senators to co-sponsor it. It’s going to be a long, hard slog because the folks on the other side are very well armed. From 2003 to 2016, the State of Delaware ended up getting 735 Chapter 11 bankruptcies of companies that had no effective business ties to the State of Delaware. Those are companies that might have been from California, from Iowa, from Washington, even from Alaska or Hawaii. I was looking at a case called Lilly Robotics. It was filed in late February of last year. Of the 30 largest creditors, 20 were from the State of California, yet it was filed in Delaware. When cases are filed in Delaware or the Southern District of New York, retirees have to seek to go to New York or Delaware to find out what the Court may do to their retirement benefits. Farmers, like the farmers in VeraSun, could have to go to Delaware to see if they can get their contracts released so they can sell their grain. The involuntary creditors, like the person that extends some credit to a company, like the guy on Main Street that perhaps is selling to the company and didn’t get paid on time could be hauled off to the court in Delaware or New York on a preference theory saying that well, you got paid a little late and the payment you received within 90 days of filing the bankruptcy is a preference. That becomes an economic burden and hardship for the people that are drug halfway or all the way across the country to defend themselves, and in many instances they’ll make a deal and pay something for certain, either to make sure they’ve gotten rid of the claim with the creditor despite the fact that they may have good defenses. DC: Joe Peiffer with Ag & Business Legal Strategies in Cedar Rapids is a bankruptcy lawyer. I’m Doug Cooper on the Big Show.
Doug Cooper and Joe Peiffer on Venue Reform
Doug Cooper recently visited with Joe on the Big Show regarding Bankruptcy Venue Reform. Part 1 (Aired December 18, 2017): Doug Cooper: I’m going to visit today with Joe Peiffer, he’s a lawyer with Ag & Business Legal Strategies, and he says this week he is hoping to get a bill on the floor of Congress called the Bankruptcy Venue Reform that he says will benefit farmers, employees, and creditors of companies doing business in Iowa by limiting the choice of place where bankruptcies can be filed. Joe, give us some background on this. Why is it needed? Joe Peiffer: There’s a move afoot in Congress, and I’ve been working with a group of attorneys and Congressmen from all over the country to change where bankruptcies can be filed. I suspect that there are a lot of the listeners who remember the VeraSun ethanol plant bankruptcy that was filed in 2008. VeraSun had 26 ethanol plants in six midwestern states. Yet, it filed its bankruptcy in Wilmington, Delaware. DC: What difference does that make, and why Delaware? JP: It filed there because it had one of its affiliates, which is like a brother or sister corporation, that was incorporated in Delaware. Then, it could file every other affiliated business in Delaware because it had filed one there. It could properly file, and you can at this time, properly file a bankruptcy where a company is organized, which is where you incorporate. And then, any other brother or sister company, or parent or subsidiary, can follow whoever filed first. In VeraSun, every plant had a separate company. So, because every plant had a separate company, all they needed to do was have one that was organized in Delaware and then every other one could follow it to Delaware. Now, that affected an awful lot of farmers in the Midwest. I put together a short video because I had the privilege of representing over 100 farmers in the VeraSun bankruptcy. In VeraSun, the farmers had contracted to sell grain at very high prices. Unfortunately, the market turned. After the market turned and VeraSun hadn’t properly hedged its supply, it ended up in a cash crunch so it filed a Chapter 11 bankruptcy. Well, in that bankruptcy, all of the contracts that were out there with the farmers to supply grain were still enforceable by VeraSun, even though most of them were out of the money. You might have a contract for $7.00 corn and corn was $5.50. Common sense tells that the ethanol plant isn’t going to agree to pay you $7.00 when the going price is $5.50. The company did not have to reject your contract or let you out of it until it finished its bankruptcy plan. You don’t have to file a Chapter 11 bankruptcy plan for up to 120 days, sometimes that’s extended. So now all of the sudden, we’ve got farmers with contracts out there that VeraSun cannot be forced to honor but then if the price comes back and VeraSun’s in the money, VeraSun could make the farmer honor it—one sided as heck. So the farmers that I represented hired me to go out to Delaware with a farmer, Mark Kuhn, and we went out to seek, ask the judge whether we could speed up the process of VeraSun agreeing to accept or reject these contracts. So we wanted to do it on a plant-by-plant basis, so that we look at the Charles City plant, or we’d look at the plants up in Minnesota, on a plant-by-plant basis and have all the farmers that had contracts there ask the judge at one time to set up a mechanism to make them assume or reject the contract. The judge wasn’t interested. The judge said that every farmer could come out to Delaware and seek his assistance. Well, to me, it becomes a question of what’s the access to justice, because now you’ve got all of the people that had done business with the ethanol plants are out here in Iowa, Minnesota, Nebraska, the Dakotas, I can’t think, there were a couple in Michigan that were being called out to Delaware. When you go to Delaware, I’m not admitted in Delaware, so in order for me to appear in Delaware, I had to hire a lawyer to review everything I was doing and then to be in court with me to introduce me to the judge and ask the judge for permission to allow me to talk. You know, Delaware is a long way from Charles City, Iowa, so what we’ve been doing is working to see if there’s a way to make this more fair and to provide people with better access to the courts. And so what we’ve come upon is some language in a bill that we believe is going to be introduced Wednesday. It’s called the Bankruptcy Venue Reform Act of 2017. So, what I am asking people to do, then I’m going to ask farmers who believe like I do that it’s important that bankruptcy be filed close to where the creditors are and close to where the companies are doing business to support this. Call your senator. Ask your senator to support the bill and to co-sponsor it. Call your representative. Let them know that this bill’s coming, that you’re supporting it, that you want them to support it, and hopefully Congress will actually work quickly and do something. DC: Joe, it’s the holiday season, the tax bill is being debated, what are the odds do you think, it could get done before Christmas or before the end of the year? JP: I’m told there is an outside chance that it could get attached to the budget bill next week. I’m a realist, it probably won’t get done. But if we provide Congress with a lot of people calling in, emailing them, or even writing, my preference is that you, instead of write, that you email or call and tell them
Thirty Years of Asking
Joe Peiffer recently wrote an article for the American Bankruptcy Institute Journal entitled Thirty Years of Asking, “Are We There Yet?”: Congress Rights a Taxing Wrong in Chapter 12. Click the thumbnail below to read the entire article:
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.
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. Part 1: (Aired 11/6/2017) Part 2: (Aired 11/7/2017) Part 1: 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