Fact Sheet

& Staff







Dissent From Chapter 12 Report: Debtor Eligibility

by James I. Shepard, John A. Gose and Edith H. Jones.
Commissioner Jeffery J. Hartley concurs with the dissent; he does not, however, necessarily share all of the views and statements contained herein.

The Chapter 12 report addresses issues contained in a proposal adopted by the Commission, i.e., the issues of whether the Sunset Provision should be eliminated and whether the calculation of Chapter 12 trustee's compensation should be based upon direct payments to creditors. The report then contains language which advocates increasing the eligibility limitation for filing Chapter 12 cases from $1.5 million dollars to $2.5 million dollars. Unfortunately this proposal reflects badly upon the process by which the Commission has conducted its business.

The proposal was briefly discussed at a meeting of the Working Subgroup in Seattle, Washington, on April 18, 1997, where it didn't generate enough support to merit a vote--the discussion notes of that meeting reflect only that "Commissioners Williamson, Gose and Shepard [the members of the Subgroup] . . . agreed to investigate whether the chapter 12 eligibility cap is sufficient or whether it needs to be raised." Thereafter, without the benefit of any further discussion among the members of the Subgroup or, apparently, any other Commissioners, or further investigation of the issue as contemplated by the Subgroup, the proposal was presented to the Commission in the Mail Ballot of August 5, 1997, where it drew only four votes in favor of its adoption; four votes were cast against the proposal, the Chair declined to take the opportunity to break the tie. (2887)

The report refers to statistics and information which have not been presented to or considered by the Commissioners and appear for the first time in a draft version of the report dated October 3, 1997; this information was not contained in the only other draft of the report, dated August 25, 1997; the Commissioners have had no opportunity to consider or respond to this information, none of this information had been made available to the Commissioners prior to the ballot of August 5th, 1997. Thus the presentation of this material in this manner reflects only the work of the Commission staff and the views of whomever is advocating this change. By presenting the case for increasing the eligibility limits in the "Reporter's Notes" it is apparently intended to provide a gloss of, at least, subliminal approval by the Commission, the statements in the text are hardly neutral, when such has not been demonstrated.

Once again the process by which this Commission was forced to conduct its business is called into question--the fact of submitting a report which advances a controversial proposal in such a backhanded manner detracts from the credibility of the entire report and the integrity of the Commission process itself. Whether resort to this process is an attempt to force the defacto adoption of the proposal is not clear. What is clear is that this proposal to increase the eligibility limit is badly conceived and inadequately explored.

The Code and the proposal establish eligibility based on the debtor's aggregate debt. Yet, the principal focus of the discussion in support of the increase in the eligibility limits is inflation, principally in the value of farm land. While there generally is a direct relationship between the value of farm land and farm debt, mortgage indebtedness often being the largest single debt owed, such is not always the case, but more importantly, the Commission has heard no testimony regarding the composition of current farm debt loads, there has been no discussion or testimony of that aspect of the farm economy. Further, while the proposal would lead the reader to believe that farm values have increased substantially in comparison with historical prices, the Commission has neither sought nor received evidence or testimony in that regard. Anecdotal evidence indicates that in reality farm values are just now approaching pre-1980 levels. The information presented to the Commission prior to its vote, in the form of only one staff memorandum, is devoid of any such documentation. (2888) As noted above, the report now contains additional information not found in an earlier draft, presumably to attempt to deflect the shortcomings of the August 25, 1997, draft as expressed by the author in a critical response to that document.

Further, the cause/effect relationship between the Nation's economy and farm debt has never been examined by the Commission. The $1.5 million dollar aggregate debt limit was established shortly after the time when farm values and their encumbering debts had appreciated to their still, all time historical highs; the values may have plummeted in response to the Carter administration's grain embargo but the debts incurred in relation to the extremely high commodity prices and rapid inflation in the price of farm land were still high. (2889) The value of farm real estate may not soon exceed the levels attained in the early 1980's, absent such other factors, inasmuch as the real value of farm land is greatly dependent on the prices of the commodities it will produce. Because the farm economy in many areas is heavily dependent upon the world market for grain and the Federal price support programs the price of farm land generally reflects the state of current and anticipated farm commodity prices. (2890) Numerous other factors enter into the psychology which drives the price of farm land, farm debt levels and the farm economy, none of which have been considered by the Commission.

While the cause and effect of debts and appreciation in land values may be debated, one fact is inescapable, the Commission has heard no testimony regarding the farm economy and there has been no attempt to draw conclusions and apply them to current conditions. The proposal to increase the Chapter 12 eligibility was advanced solely upon a brief discussion in the April 18th meeting of the Working Subgroup in Seattle, mentioned above, and four letters to the Commission, one from a Chapter 12 trustee who would presumably profit by the change he advocates.

Further, there has there been no attempt to determine the characteristics of the "family farm" that deserves the additional rights provided by Chapter 12. Indeed, many in the farming community agree that much of what used to be considered "family farming" is now being conducted by agri-businesses. Additionally, the views and suggestions of those who would be most negatively impacted have neither been sought nor heard. The Commission has not had the benefit of testimony from such parties as the Farm Service Agency (formerly Farmer's Home Administration), Metropolitan Life Insurance Company or the Federal Land Bank Association, institutions which finance most of the farm lending on real estate in the United States. Nor have the views been heard of the United States Department of Agriculture, Commodity Credit Corporation, the Production Credit Association or local banks and other creditors who extend operating loans to farmers and who would suffer the most by the adoption of this proposal. Before considering such a proposal the Commission should have the benefit of farm economists who could provide the "big picture" analysis of the effect of a 67% increase in the eligibility limit. The failure to analyze the factors which generated the "farm crisis" of the 1980's, factors which may or may not arise again, is a major shortcoming of the proposed report; these factors have neither been explored or discussed.

The shortcomings and defects in the report and the deceptive process by which the proposal is being advanced lead to the conclusion that this is simply a rush to enlarge the ambit of the use of "sweat equity"at the expense of farm lenders and the vast number of farmers who will never file bankruptcy(2891) but who must pay the bill for those who do not pay. There may be valid reasons for enlarging the group for whom the benefits of Chapter 12 should apply but because the consequences of such action are far ranging it cannot be done hastily.



2887  This is but one of numerous issues and proposals which have been advanced under the supposed auspices of the Commission, but without any indication of who is advancing the proposal or why it is being considered, contrary to the established procedures under which the Commission has functioned. The language in the report advocating the increase in the Chapter 12 eligibility limitation is found in the body of the report as if it had been adopted by the Commission in a regular fashion. Prior to the October 3, 1997, draft of the report, however, there was no indication that it had, in fact, been adopted been by the Commission. The inclusion of the proposal on the August 5th mail ballot and in an earlier draft of the report, in brackets, see Chapter 12: Bankruptcy Relief for Family Farmers, draft of August 25, 1997, on file with the Commission, was entirely without attribution. There was no indication of who was responsible for causing the proposal to appear on the mail ballot or in the August 25, 1997, draft of the report, nor was there any explanation as to why it was placed in the body of the of the August 25th draft of the report and not in a dissent authored by the person or persons who are advancing the proposal. During a telephone conversation on Sunday, October 5, 1997, a member of the Commission's staff indicated that Chairman Williamson has now determined to cast his vote in favor of the proposal to increase the eligibility cap; the fact of this belated vote has not been communicated, as of Wednesday, October 8, 1997, to the Commissioners, other than the appearance of the proposal in the report. Presumably, Chairman Williamson has now chosen to break the tie; he has not, however, as yet, acknowledged responsibility for the proposal. Return to text

2888  As the owner of interests in farms in North Dakota and Iowa and living and practicing in Fresno County, California, where agriculture is the dominant industry, the author is aware of the market value of farm land across the country. The value of farm land in Iowa, in some locations, is now approaching the levels attained in the early 1980's; some North Dakota farmland is now worth less than it was in the early 1980's. Return to text

2889  In reality, a study of the farm crisis of the 1980's may likely reveal that it was caused more by high interest rates, rates which were more than double present rates and at their peak in the early 1980's nearly triple present rates, than by high debt levels. The interest charged on an adjustable rate farm loan, on which the author was personally obligated, nearly doubled during this period of time, necessitating the liquidation of other assets to service the debt; debt service which was manageable before the dramatic increase in rates. Return to text

2890  Because the USDA price support programs have recently been substantially restricted for some commodities the price of farm products will not likely increase to the level as was experienced in the 1970's during the Hunt Brothers/Cook family soy bean war. Return to text

2891  In preparing land title abstracts during the peak of the farm crisis in Iowa, the Butler County Abstract Company learned that only approximately one in four tracts of farm real estate was encumbered. Return to text

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