Bankruptcy by alicejenny


									                     Class 33
 Chap. 13, continued to page 402

Case          page         Brief        Question

In re Welch 395 action, issue, facts; Jeanna
                holding, rule/law; Tom        Brett
Mary Freese 399 action, issue, facts; Amanda
                 holding, rule/law; Kristen  Daniel
Quiz 11
1. An interest in property to        3. Generally, a lender must
   secure a debt                      “file” (a financing statement)
 a. Mortgage                         to have a perfected security
 b. Security interest                interest in goods (crops,
 c. Lien                             equipment, inventory …).
 d. all the above.                  4. A “central filing system”
 e. just c.                          for liens is with the County
 2. A security interest in           Recorder.
   “crops and farm inventories”      5. Private, installment
   is an interest in:                 contracts for land may
 a. Land                             preclude a “right to
 b. Personal property                redemption”.
     Other Security Arrangements &
      Special Problem/Strategies
   Landlord’s Lien – a non-consensual lien
   --What happens if the tenant is unable to pay his
    production loan nor the landlord’s rent?
   -- An “unsecured landlord” will be like any unsecured
    creditor with respect to unpaid cash rent.
   --A landlord could obtain a “UCC security interest” in
    crops, and perfects with direct notice to buyers.
   -- Also, landlord may require subrogation of other
    parties, with a security interest, if necessary.
   Other alternatives: “letter of credit” or rent in
    “Landlord’s”—Crops Paid as Rent
   By statute, at: IC 32-31-1-19
   To obtain: There must be filing of a financing
    statement, centrally, with Sec. of State
    (under prior law filing was, local, in the county
    courthouse for the county where crop was
    growing, – See, IC 26 -1-9.1- 501) New Law!!
    -- at least 30 days before the “crop matures.”
   -- A crop-share tenant owns a crop until it
    comes out of the field under common law!
          Landlord’s Lien in Indiana

   A “landlord’s lien” has priority over liens filed
    subsequent to it -- including UCC liens.
   But, a non-consensual lien is inferior to a prior UCC lien,
   and will be avoided in bankruptcy!
   Note, a tenant need not consent (has not consented) to
    this statutory lien.
     It is like all other non-consensual liens compared to a
       UCC (Art. 9) consensual lien.
   A “landlord’s lien” in Indiana is more an emergency lien
    than a planning tool or a safety net.
        Mechanic’s Lien -- also statutory
                      - Non-consensual     -
   Extends to the actual improvement and real estate it
    stands on, and is
   available to contractor(s), subcontractors and materials
   It must be filed within 60 days of the last service or
    materials provided if for a 1 or 2 person residence—a
    “Class 2” structure (as defined in IC 22-12-1-5),
    otherwise within 90 days of the last service or materials
   A suit must be brought within a year or the lien is null and
                   Mechanic’s Lien
                        IC 32-28-3
   A landowner may demand a suit (day in court) to
    settle the matter!
   ---If so, the lien holder has 30 days to respond.
       See, Wind Dance Farm v. Hughes Supply Inc., 729 N.
        E. 2d 79 (Ind. App. 2003)
    Alternative strategies:
   1. A “no lien” contract, which requires a filing
    within five days of contract execution.
   2. Another strategy is to pay the suppliers directly
    for materials.

   Lower than expected incomes may bring
    insolvency to anyone who borrows.
   Bankruptcy allows an individual or a business a
    “fresh start” (albeit with a taint) by paying into
    court, the available and non-exempt assets for the
    satisfaction of creditors according to a priority of
   Note: detailed steps for bankruptcy are at:

   Bankruptcy may be:
   Involuntary-- upon the petition of creditors
   Voluntary -- upon the petition of the individual
    debtor(s)--on their own initiative
   --- An individual, couple, business entity need not
    be insolvent to have a petition accepted in
   --- One need only show “bills can’t be paid
    when they come due.”
Bankruptcy– How it works.

    Automatic Stay (delay)
    -- A petition in bankruptcy stops the enforcement
     of liens on the debtor’s assets.
    -- The delay allows for “breathing room” and time
     to “plan” perhaps to “reorganize a business.”
    Trustee in bankruptcy may be appointed or a
     standing trustee steps-in.

   A trustee is a fiduciary that takes charge of the
    bankrupt’s affairs.
   For businesses in a reorganization the debtor
    typically remains in possession of his assets.
   To get relief, a bankrupt debtor is required to:
   1. list all assets and liabilities, and
   2. a list of all creditors!
   Filings are published in a local newspaper so
    creditors and the public (3rd parties) may “take note!”

   Alternative Bankruptcy Proceedings
   -- Chapter 7 – a Liquidation bankruptcy
   --- Exempt assets are set aside,
   --- “super priorities” are paid first
   --- then creditors according to their “secured”
         ranking under the UCC,
   --- the unsecured creditors at the “end of the line.”
    Indiana Exemptions

   Items                                                Limitation*
   A. Residence (Individual)                        $15,000
       ($30,000 with a spouse also in bankruptcy)
   B. Other realty or tangible personal property        $8,000
   C. Intangible personal property                        $300
   Professionally prescribed health aids
   Tenant by the entireties interests on the date of the petition unless the
    spouse of the bankrupt is in a joint or separate bankruptcy petition.
   Money in a medical savings account.
   Must exempt certain pension & retirement benefits covered under a federal
   * See IC 34-55-10-2, Amended by legislation in 2005, for more details.
   available at:
   Information on Exemptions for other states is at:

   Chapter 13 - consumer bankruptcy reorganization
    repayment plan
   Debt limits are substantial, but only for individuals/sole
    proprietors in business—not corporations or partnerships.
   -- general for consumers to have supervision invoked in
    their financial lives,
   -- to get extended terms so they may be able to “cash
   New Bankruptcy Law -- effective on October 17, 2005: The major
    intent of bankruptcy reform is to require people, who can afford to make
    some payments towards their debt, to make these payments, while still
    affording them the right to have the rest of their debt erased. These
    people MUST file Chapter 13.

   Chapter 11 - Business Reorganization
   -- a plan is sought, that creditors will approve
   -- else the business may end up in a Ch. 7 liquidation.

   Farmers in Ch. 11 often find it impossible to get a plan approved
    because of the requirement to satisfy certain creditors under Ch.11
   Chapter 12 Family Farm Bankruptcy Act became law in 1986 with
    requirements so that a “typical” farm could get a reorganization plan
   Chapter 12 offers a farmer (and now fishermen) the opportunity to
    reorganize with a plan for the creditors that offers at least as
    much as they would get if the debtor were in a liquidation
Chapter 12 Farm Bankruptcy
under revised permanent law
   Eligibility requirements
   1.-- Individual, or individual and spouse in a farming
    operation whose aggregate debts does not exceed
    $3.237 million (indexed, CPI) with
   2.-- 50% of this debt excluding principal residence
    arising out of the farming operation owned or operated
    by the petitioning debtor, and
   3.-- with 50% of the gross income in the year prior to
    filing from farming or 2 and 3 years prior to filing (an
    extension of time under the 2005 Act to allow for the
    reality that farmers in financial stress make adjustments
    before filing).
     Chapter 12 Plan—The Rules

   -- The debtor must file a plan “within 90 days” of a petition in bankruptcy.
   -- The plan must have a portion of future earnings for the trustee to
      dispense in deferred installments to all priority claims, e.g., secured
    creditors and those who obtain a super-priority.
   --- All claims in the same class must get the same treatment.
   Note: There are three types of debt:
   Secured Debts: those for which the creditor has the right to pursue specific pledg
    property upon default.
   Priority Debts: those granted special status by the bankruptcy law, such as most
    taxes and the costs of the bankruptcy proceeding.
   Unsecured Debts: generally are characterized as those debts for which credit wa
    extended based solely on the creditor’s assessment of the debtor’s future ability to
       Note, tax claims are added to this unsecured category by the 2005 Act! (since Apr
        26, 2005)
Chapter 12 Plan—What does(did) it
   -- A key to Chapter 12 relief at least in the past is that mortgaged
    land is re-valued in a plan at the “current value.” This was huge in the
    mid to late ‘80’s when land values dropped substantially from 1981 to
    1987! What now in 2005?
   --- That is, marked down with the difference between secured amount
    and current value being essentially “written-off,” and the lower value
    amortized in a Chap. 12 plan.
   -- The farmer must be able to show a regular income sufficient to
    service the “restructured” debt in the plan.
   --- In many cases, the income is fortified by off-farm income.
Chapter 12 Farm Bankruptcy

    Chapter 12 Plan
   --Upon completion of a 3 or 5 year plan, the debtor
    is/maybe discharged from unsecured debts.
   --Long term financing arrangements continue –
   During a plan, there may be “extra” income to pay
    toward claims that are not otherwise allowed in a plan –
    ”Disposable income”– but the bankrupt may use this
    money to “maintain” the farm operations rather than
    make it available to unsecured debt owed under “the
    plan” after a 10% trustee fee.
Chapter 12 Farm Bankruptcy

   Chapter 12 Plan
   “Disposable Income” is defined as income which is
    not reasonably necessary for the maintenance or
    support of the debtor or his/her dependents or for the
    payment of expenditures necessary for the continuation,
    preservation, and operation of the debtor’s business.
   Note, the interpretation and litigation relating
    thereto could be a course paper topic. (see Susan
    Schneider’s paper for cites on this topic.
       In re Welch
       U. S. Dist. Ct. S.D. Ohio ‘87
   Action? Jeanna
   To dismiss from Ch. 12 Bankruptcy.
   Issue?
    Are the bankrupts as a married couple eligible for
    Chapter 12?
   Facts: In Dec. ‘86 James, and in Jan. ‘87, Betty Welch
    filed for bankruptcy independently, and then filed a joint
    plan under Chap.12
   -- Major creditors, FCS and FLB both filed motions to
In re Welch
Holding? Tom
 Creditors’ motions to dismiss are denied.
 -- The court analyzed the creditors’ attempt to show
  that the components of James Welch’s income were
  not from farming in 1986.
 -- 1986 is the “income test” year -- the year before
  the Chapter 12 filing which was in 1987.
 -- Court said the, share of “milk check,” government
  payments, as well as what appeared to be cash rent
  all should count!
 Question--Brett
Chapter 12 Eligibility Dilemma
   Note, like the Welch case, the problem presented in
    financial stress situations, is the farmer in financial stress
    often cuts back his farming activity in an effort improve
    financially, i.e., he or she or they,
   -- takes an off-farm job(s)
   -- rented out, and sells his livestock and equipment.
   Thus, when bankruptcy is a necessary option, to keep
    the land, Ch.12 may not be available because “debtor”
    has abandoned an active “farmer” status and fail the
    50% gross income test in the prior year.
   2005 Act may help with this dilemma since 2nd and 3rd
    prior years may be considered for the 50% test.
   “Rule:” Plan carefully when in financial stress!
Mary Freese Farms, Inc.
U.S. Bankruptcy Ct. N.D. Iowa ‘87

Action? Amanda
 To bar or dismiss Freese Corp. from Ch. 12

 Issue?

 Is Freese eligible for Chap. 12

 Facts: Baxter and Mary Freese, and children own
  the stock in a farm corporation.
Mary Freese Farms, Inc.

    They meet the % tests of Chapter 12
    but, their two mortgaged farms are cash rented.
    No member of the family had farmed any of the
    land for several years.
   They own no equip., mach. or livestock,
    and there was no evidence they planned to
    change their involvement.
Mary Freese Farms, Inc.

   Holding? Kristen
   Farming operation is defined in 11 U.S.C. 101(20) to
    include “farming, tillage of soil, dairy farming, ranching,
    production or raising of crops, …”
    -- for lack of rulings on this point, they look to other cases that
        point to “risk-taking” as being a factor in “farming.”
   Rule: A crop-share lease would constitute risk- taking
   Question -- Tom
Shared Appreciation Mortgage*
   The interest rate is reduced depending on how much of the
    property's appreciation you bargain away. For example:
   Standard 30 Year Fixed Rate Mortgage: 8.00%
    SAM w/20% Appreciation given to investor: 7.50%
    SAM w/30% Appreciation given to investor: 7.00%
    SAM w/40% Appreciation given to investor: 6.50%
    SAM w/50% Appreciation given to investor: 6.00%
   *In fact, by the end of the 80’s the farm credit lenders were essentially
    compelled to “restructure” farmers with bankruptcy potential and
    provide essentially a mark down in debt to repay like a Chap. 12 but
    save the expense and stigma of a Chap. 12, but SAMs were part of the
   At the expiration of these SAM agreements the farmer debtor often
    could not show the he or she could finance the amount added to the
    debt from the SAM agreement, and may have been forced to cease
Shared Appreciation Agreements
-- Restructured Loans --
   An SAA is a contract between FmHA/FSA and the
    borrower in which the borrower promises to pay a
    certain amount of money in the future if the property
    securing the agreement increases in value, allowing
    FmHA/FSA to "recapture" all or a portion of the
    write-down amount.
   See:
   At that site you can find lots of info on SAAs.
Shared Appreciation Agreements
-- Restructure Agreeements --
    As of late 1988, whenever a farm loan borrower
     receives a write-down of debt owed to the Farmers
     Home Administration (FmHA) - now the Farm
     Service Agency (FSA) - the borrower must sign a
     Shared Appreciation Agreement (SAA). At the
     same time, the borrower usually also signs a
     mortgage or other security agreement securing the
    E.g., 10 years after the initial SAAs agreement, the
     borrowers were required to add a part of the
     appreciation to their debt—add it to the principle,
     or pay over the amount– agreed share.
Shared Appreciation Agreements
-- Restructure Agreeements --
   FSA regulations list a number of "trigger" events that require
    payment under the SAA:
   1. Transfer of security property (other than to spouse upon death
    of the borrower).
   2. You stop farming and stop receiving farm income, including
    lease income.
   3. You pay the debt in full.
   4. Acceleration of the written-down debt. [This trigger was added
    on March 10, 1998.]
   If none of these trigger events occur within ten years after the
    write-down, the SAA will "expire" on the ten-year date.
    (Beginning August 18, 2000, the maximum term for all new SAAs
    is five years.)
Indiana Farmland Lease Law—Chapter
   A lease or rental arrangement is a contract.
   Oral leases for Indiana farming are “valid!”
     Written leases are a good business practice, and
    common place for most acreages.
   Indiana has a “three month” “notice to quit” statute.
   Term leases are for a set (stated) time period.
   Term leases require no notice to quit!
   Landowner (landlord) involvement in the farm
    operation matters for federal income, estate, and
    social security tax purposes.
   A UCC type (consensual) lien may be a good
Farm Tenancy

   At least 50% of the farm cropland is not owner-
   Alternative landowner operator/worker
   -- Employer-employee
   -- Independent contractor (custom operator)
   -- A partnership!!
   -- A tenancy (landlord-tenant)
   -- A lease or rental arrangement or ….
         The document is critical.
   --- But, actions may overcome words!
Indiana Farmland Leases

   Writing requirement?
   -- Oral leases are valid as an exception to the
    statute of frauds.
   Notice to Quit (lease termination)
   without other provisions, 3 months advance before
    the end of the “lease year”
   none needed for a “term” leases!
   At least one Indiana trial court has held a term lease
    may be oral.

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