Summary of a Recent
Judicial Development in
Bankruptcy

Chapter 12 Debtors Required to Treat All
Allowed Unsecured Claims Similarly

Gaby R. Jabbour
National AgLaw Center Research Assistant

Summary of Decision

In In re Baker, 300 B.R. 639 (Bankr. W.D.Pa. 2003), the United States Bankruptcy Court for the Western District of Pennsylvania held that Chapter 12 debtors were required to pay in full allowed unsecured claims held by the Farm Service Agency if the debtors proposed to pay in full the allowed unsecured claims of other creditors.

Background

The debtors were dairy farmers who filed a Chapter 12 bankruptcy petition. See id. at 640. The Farm Service Agency ("FSA") held an undisputed second-position mortgage lien against certain properties owned by the debtors and a first-position security interest in livestock and equipment owned by the debtors. See id. After learning that one of the debtors was to receive a sizeable inheritance, the debtors brought a motion to establish and authorize the payment in full of the allowed unsecured claims held by their creditors, except for the allowed unsecured claims held by the FSA. See id.

Arguments

The FSA objected to the debtors' proposed distribution, arguing that it should also receive payment in full of its allowed unsecured claims. See id. at 640. The debtors argued that the FSA was not entitled to payment of its allowed unsecured claim "because it took no step to establish a deficiency claim." Id. at 643. They also argued that the FSA was excluded from receiving payment in full of its allowed unsecured claims because the precise amount that the FSA received from the sale of one of their properties was not known. See id. at 644.

Analysis and Holding

The court explained that a claim "'is a secured claim to the extent of the value of such creditor's interest in the estate's interest in such property . . . and is an unsecured claim to the extent that the value of such creditor's interest . . . is less than the amount of such allowed claim.'" Id. at 643 (citation omitted). It also explained that a claim, "proof of which is filed under § 501 of the Bankruptcy Code, as FSA's claim in this case was, is deemed allowed unless a party in interest objects to the claim." Id.

The court rejected the debtors' argument that the FSA was required to establish a deficiency claim in order to be entitled to payment of its allowed unsecured claim. See id. With respect to this argument the court stated only that "[w]hen pressed for authority for the proposition that FSA was required to do so in light of the clear language of § 506(a), counsel to debtors conceded that he had none." Id.

The court also rejected the debtors' argument that the FSA was not entitled to payment on its allowed unsecured claim because the precise amount the FSA received from the sale of one of the debtors' property was not known. See id. Noting that the FSA previously reported that it received $50,448.68 from the sale of the property, the court stated that the debtors' argument was "false, perhaps even disingenuous." Id.

The court concluded that

for reasons of their own, debtors simply do not want to pay the unsecured portion of FSA's allowed [claim]. The reasons they have proffered for not paying this portion of FSA allowed claim are bogus at best and must be rejected. If debtors propose paying other general unsecured creditors with allowed claims in full, FSA is entitled to the same treatment.

Id.

The case was decided on Oct. 31, 2003; this summary was posted Feb. 9, 2004.