Guidance From Eighth Circuit BAP On Plan Feasibility Issues (Farm Credit v. Swackhammer)

By: Donald L Swanson

Feasibility of a bankruptcy plan is always a tough issue.

Think about it:

• debtors are in bankruptcy because they can’t make their payments when due; and
• in bankruptcy, a debtor must propose a plan for paying creditors—that will work this time.

We now have a new plan feasibility opinion—from the Eighth Circuit BAP—that provides guidance to us all. 

• The opinion is Farm Credit Services of America, PCA v. Swackhammer (In re Swackhammer), Case No. 22-6006 (8th Cir. BAP; filed May 23, 2023).

What follows is a summary of the Swackhammer feasibility issues and analysis.

Background

Debtors file their Chapter 12 bankruptcy in September 2018.

After lengthy and contested proceedings, Debtors confirm a consensual plan in September 2019. 

But Debtors struggle making plan payments; so, they seek and obtain plan modifications in 2020 and 2021.

In March 2022 Debtors move, again, to modify their plan by extending payment deadlines.  They allege that unforeseen revenue losses from their 2021 crops make the modification necessary.

Additionally, Debtors offer to sell part of their homestead, in two transactions, and commit the sale proceeds to creditors.

–Feasibility Issue

A creditor objects on various grounds including, (i) Debtors have already failed to make their plan payments when due, and (ii) the extended payments proposal is not feasible.

The Chapter 12 trustee, in closing arguments after trial, says the modified plan is feasible, based on Debtors’ offer to sell the homestead parcels.

In response, the bankruptcy judge denies confirmation, but:

• says the Chapter 12 Trustee must be “reading my mind”; and
• directs the parties to try agreeing on a revised plan modification.

They cannot agree.

So, Debtors sell the first parcel of land, as previously offered, and pay the sale proceeds to creditors.

And they file a revised plan-modification proposal.

Creditor objects on various grounds, including feasibility.

–Feasibility Hearing

At hearing on confirmation of the modified plan:

• Chapter 12 Trustee says the modified plan is feasible and can be confirmed, if Debtors pay in additional funds;
• Debtors’ counsel responds to the Trustee’s “additional funds” suggestion with an offer to waive unpaid legal fees to make the plan feasible; and
• Creditor’s counsel insists that the modified plan is still not feasible, while admitting that:
  • Creditor received its share of payments from the first land sale; and
  • Debtors are current on payments required by the modified plan.

–Confirmation of Modified Plan

The Bankruptcy Judge, at conclusion of the confirmation hearing:

• overrules Creditor’s objection;
• confirms Debtors’ modified plan; but
• expressing concerns about feasibility; and
• orders that, if Debtors fail to comply with the modified plan, the case will be dismissed upon the Chapter 12 Trustee filing an affidavit showing default.

Appeal of Feasibility

Creditor appeals, and the Eighth Circuit BAP affirms.

What follows a summary of the Eighth Circuit BAP’s feasibility analysis.

–Legal Standards

To prove feasibility:

• Debtors must provide reasonable assurance that the modified plan will cash flow and can be completed; and
• Debtors’ income and expense projections are considered in conjunction with their actual past performance.

The Eighth Circuit recognizes that projecting farm income and expenses is not “an exact science.”  Chapter 12 plan feasibility is:

• “not typically a simple yes-or-no question”; but
• “an analysis of where, on a continuum of feasibility, a particular plan falls”; and
• because most cases fall somewhere in the middle of the feasibility continuum, feasibility issues “compel the Court to reach a determination based on”:
  • “careful analysis”; and
  • “weighing of the totality of facts and circumstances of the case.”

–Factors

The salient factors for evaluating feasibility are wide-ranging and may include:

• value and equity of debtor’s assets;
• nature and amount of debtor’s liabilities;
• efficiency of debtor’s operations;
• debtor’s pre-petition transactions with creditors;
• debtor’s historical performance;
• terms of the proposed plan; and
• other evidence showing a likelihood of success.

How much weight the court assigns to each factor varies from case to case and the nature of objections.

Most feasibility cases fall somewhere in the middle of the continuum (like Debtors’ case).  So, the court:

• is not engaged in a mathematical computation of fixed components; but
• is, instead, “making a judgment based on an assessment of myriad moving and mutable parts.”

–Applying the Factors

The record in Swackhammer shows that Debtors have:

• made payments;
• timely sold the first parcel of their homestead; and
• begun the second sale process.

The Bankruptcy Court looks at Debtors’ most recent operating report, showing that Debtors only broke even in the first half of the year, but accepts counsel’s explanation that:

• January through June is “not the money time” for farmers in Iowa; and
• Debtors have social security and insurance proceeds to supplement their farm income.

–Ruling

The Eighth Circuit BAP concludes:

• “we cannot say that the bankruptcy court clearly erred” in finding that Debtors will be able to make their payments and to comply with the modified plan.

Conclusion

Here’s a “thank you” to the Eighth Circuit BAP and the Southern Iowa Bankruptcy Court for this guidance on plan feasibility.

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