Summary of a Recent
Judicial Development in
Bankruptcy

Court Denies Confirmation of Chapter 12 Plan Due to
Length of Proposed Repayment Period

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Schreiner, No. BK08-41014-TLS, 2009 WL 924418 (Bankr. D. Neb. Mar. 30, 2009), the United States Bankruptcy Court for the District of Nebraska held that the 20-year repayment duration of the Chapter 12 debtors' proposed plan was excessive, because 20 years was a considerably longer period than the length of the original loans or the creditors' customary repayment periods for similar loans, and was not what the creditors had anticipated when they signed the notes.

Background

The Chapter 12 bankruptcy debtors' proposed plan provided for 20-year repayment to their creditors with a low fixed rate of interest based on the prime lending rate as of January 2009, to which the creditors objected. Id. at *1. The debts underlying the creditors' claims were originally short-term loans with interest rates significantly higher than the current prime lending rate. Id.

Arguments

Both creditors challenged the duration and feasibility of the plan, and creditor Rabo AgServices argued that the prime lending rate in late January 2009 was half of what it had been one year prior, so the debtors were attempting "to parlay the deflated prime rate of interest in the near term to a long term lending relationship." Id.

Analysis and Holdings

The court explained that pursuant to 11 U.S.C. § 1222(c), a plan must generally provide for repayment of claims within five years, but § 1225(a)(2) allows secured claims to be paid over longer terms if the claimholders approve, or if a debtor surrenders the collateral, or if the proposed treatment of the claims provides for payment of the claims' present values. Id. at *2. Since the creditors had not approved and the debtors had not surrendered the collateral, the issue was whether the plan provided for payment of the claims' present values. Id. In determining whether the debtors' proposed formula rate was sufficient, the court considered the estate's circumstances, the nature of the security, and the duration and feasibility of the plan. Id. The court determined that the proposed formula interest rate was appropriate, noting that the current economic situation was beyond the debtors' control and reasoning that interest rates are generally cyclical. Id. However, the court added that as an over-secured creditor, Rabo AgServices was entitled to its contract rate of interest through the date of confirmation and the formula interest rate thereafter. Id.

In determining whether the proposed 20-year duration of the plan was appropriate, the court considered the length of the underlying notes and the creditors' customary repayment periods for similar loans, and held that a shorter amortization with a balloon payment was appropriate under the circumstances. Id. at *2-3. The court noted that the loans at issue were intended to be short-term operational loans, and reasoned that "[n]either lender anticipated a 20-year repayment schedule when it signed the notes, and they should not be compelled to accept such terms." Id. at *3. The court therefore denied confirmation of the Chapter 12 plan. Id.

The case was decided on March 30, 2009.