Summary of a Recent
Judicial
Development in
Bankruptcy
Debtor Must Prove Feasibility of His Proposed
Plan to Obtain Confirmation
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In In re Hughes, Case No. 06-80219, 2006 Bankr. LEXIS 2288 (Bankr. M.D.N.C. Sept. 11, 2006), the United States Bankruptcy Court for the Middle District of North Carolina held that a debtor had failed to prove his plan was feasible under 11 U.S.C. § 1225(a)(6), and thus denied confirmation of his proposed Chapter 12 plan.
Background
Debtor filed his Chapter 12 petition in February 2006. Id. at *1. He had been in default on his Farm Service Agency (FSA) loans since 1997, and FSA had initiated foreclosure proceedings prior to the filing. Id. at *2-3. In July 2006, the Debtor filed his plan which proposed to retain his real property and fund a five-year plan with income from the farm. Id. at *5. The plan projected an annual net farm profit of $51,966 available to fund the plan, and without including any payments to the IRS, the Debtor had obligations of approximately $48,000 per year. Id. at *6. FSA, the trustee, the IRS, and another creditor all filed objections to the plan. Id.
Arguments
The Debtor argued that his projected income was supported by the fact that in the past year he had become certified to grow organic products and so he expected his income to increase, and he also joined an organic farming cooperative which enhanced his ability to sell his produce in larger markets. Id. at *8.
The creditors objected to the confirmation of the plan and argued that the proposed plan was not feasible. Id. at *6.
Analysis and Holdings
Under 11 U.S.C. § 1225(a)(6), also known as the "feasibility test," a debtor must "be able to make all payments under the plan and to comply with the plan" for his plan to be confirmed. Id. at *6. The court stated that it must be persuaded that "it is probable, not merely possible or hopeful, that the Debtors can actually pay the restructured debt and perform all obligations of the plan." Id. The court noted that the Debtor's projected performance far exceeded his past performance. Id. at *8. The court acknowledged that the Debtor had shown that his projected income for the next year would be higher than previous years due to his obtaining organic farming certification, but found nothing to support his contention that his income would be three times higher than it had been in years past, which is the amount that would have been required to fund the plan. Id. The court also noted that his projected expenses were far lower than in previous years. Id. at *8-9. The court found that the Debtor had failed to prove that his projections were accurate, and therefore held that his plan was not feasible and denied confirmation. Id. at *10-11.
The case was decided on September 11, 2006.