Summary of a Recent
Judicial Development in
Bankruptcy

Explanation and Application of the Feasibility Test
and the Best Interest of Creditors Test

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In Rice v. Dunbar, 357 B.R. 514 (B.A.P. 8th Cir. 2006), the Eighth Circuit Bankruptcy Appellate Panel held that the bankruptcy court had discretion to dismiss the Debtors' case; the Debtors' proposed plan failed the "best interest of creditors test" because it did not provide for payment of any interest to the Creditors, and the plan also failed the "feasibility test" because the Debtors failed to show that they were capable of repaying their required debts under the plan.

Background

The Debtors refinanced their loans through the Farm Service Agency in 2000. See id. at 516. They stopped making payments after November 2002, and the Creditors commenced a foreclosure action which the Iowa District Court granted in January of 2005. See id. The Debtors appealed and lost, then filed for bankruptcy in October 2005. See id. The bankruptcy court rejected their first plan and ordered them to submit a new plan containing a detailed liquidation analysis, cash flows for the past two years and the current year to date, and projections for the next three years. See id. The Debtors filed a new plan but it did not include detailed cash flows from previous years. See id. at 516-517. The Debtors then fired their attorney two weeks before their hearing and asked for a continuance until they could obtain new counsel. See id. at 517. The court refused their request and the Debtors proceeded pro se. See id. In the hearing, the bankruptcy court found that their plan did not pass the "best interest of the creditors test" because it did not provide for interest to be paid to the Creditors, and also failed the "feasibility test" because the Debtors did not show they were capable of making the required payments, and dismissed their case. See id. The Debtors appealed.

Arguments

The Debtors argued that they were entitled to a continuance until they could obtain new counsel. They also argued that the court erred in refusing their plan.

The Creditors argued that the debtors' bankruptcy plans were not feasible and thus should not be approved, and petitioned the court to remove the automatic stay preventing foreclosure.

Analysis and Holdings

The panel found that the Debtors alone were responsible for their lack of counsel at their hearing, and so were not entitled to a continuance. See id. at 517. The panel also affirmed the bankruptcy court's dismissal of the Debtors' case because their plan failed the "best interest of creditors test" and the "feasibility test." See id. at 518-19. Under the "best interest of creditors test," creditors must receive as much under the debtors' Chapter 12 plan as they would receive in a liquidation. See id. at 518. Under 11 U.S.C. § 726(a)(5), if there is money available after the payment of claims, interest at the legal rate must be paid to the creditors. See id. There is no universal definition of "legal rate of interest" and courts are divided on that issue, but the panel concluded that issue was irrelevant here since the Debtors' plan did not pay the Creditors any interest at all, and so did not pass the best interest of creditors test. See id.

In addition, 11 U.S.C. § 1225(a)(6) requires a debtor to show he is able "to make all payments under the plan and to comply with the plan" in order for the court to confirm a Chapter 12 plan. See id. This is known as the "feasibility test." See id. The panel agreed with the bankruptcy court that the Debtors failed to show that they would be able "to make all payments under the plan." See id. at 519. They did not provide cash flows from previous years, so it was impossible to determine whether their future cash flow projections were accurate and reasonable. See id. Moreover, the income projections that the Debtors did provide showed they would have to receive two years of income every year just to make the required plan payments, which made the plan not feasible on its face and gave the bankruptcy court sufficient reason to doubt their ability to "make all the payments under the plan." See id. In summary, the panel held that "[t]he debtors failed to create a workable plan despite three chances, eight months, and the help of the court. It was not an abuse of discretion for the court to dismiss the debtors' case." See id.

The case was decided on December 11, 2006.