WASHINGTON -- Bankers are squaring off with agricultural groups over a 1986 law that gives farmers special treatment under the federal Bankruptcy Code.
Bankers say that Chapter 12, which was adopted in reaction to the farm-belt problems of the 1980s, has hurt the very people it was supposed to help work their way out of debt.
But farming interests are lining up behind a bill to extend Chapter 12 for five years beyond its scheduled expiration in October, The bill, sponsored by Rep. Mike Synar, D-Okla., and Rep. Fred Grandy, R-Iowa, passed the House on March 16.
"Chapter 12 has made many bankers very skittish in lending, particularly to marginal farm borrowers," says Joshua Tenuta, legislative representative of the American Bankers Association.
Chapter 12 modifies the traditional Chapter 11 route by permitting farmers to submit a reorganization plan directly to the bankruptcy court with no review by creditors.
The provision also allows farmers to write off the portion of secured debt represented by a loss in land value.
"It was a temporary measures," said Ron Ence, director of agricultural finance at the Independent Bankers Association of America. He said it made sense during the farm crisis, but conditions have improved.
Farm groups disagree.
"We're in total support of the extension," said Barbara Webb, assistant director legal services at the National Farmers Union. The provision, she said, "has allowed many farmers to keep on operating their farms."
Among the points of contention is a Chapter 12 rule that gives troubled family farmers 90 days to come up with a reorganization plan to pay off creditors, unless the bankruptcy court finds an extension is "substantially justified."
Bankers say courts have been too lenient in granting extensions, which has resulted in lengthy, costly procedures.
"There is always a reason" to delay, said J.R. Nunn, chairman and chief executive officer of Citizens Bank, Tucumcari, N.M. "It's an attorney's game." Mr. Nunn said he is wrestling with two Chapter 12 petitions that have been pending for a year, with debts of $300,000 to $400,000 in each.
The House bill would tighten the process by instructing the courts to grant an extension only when events beyond the farmer's control caused the delay.
"About everybody agrees that you should be able to get a plan filed within 90 days," an aide to Rep. Synar said.
But Rick Yarnall, a bankruptcy lawyer in Sioux Falls, S.D., and former president of the Association of Chapter 12 Trustees, said he doubts the bill will make much of a difference because "the judge still makes the final call."
"The only way to adhere to the time limit is to have the case automatically dismissed" if the debtor fails to file a plan within 90 days, Yarnall said. "Many people do get reorganized within the time period," he added.
Banker |Not at the Table'
Unlike Chapter 11, Chapter 12 bars creditors from filing a counterplan if they do not like the debtor's petition. In that respect, the farmer pulls the strings and can "cram down" a plan over objections of creditors.
"A banker is not at the table in Chapter 12. That takes away his ability to negotiate or to come up with a plan," said Mr. Tenuta of the ABA, who prefers to handle debt-burdened farmers under Chapter 11.
Others maintain Chapter 12 has spurred a different kind of negotiations -- those that take place outside bankruptcy court.
"Lenders faced with the possibility of Chapter 12 have been willing to make concessions," said U.S. Bankruptcy Judge A. Thomas Small on behalf of the American Bankruptcy Institute at a congressional hearing last year.
Mr. Small observed that without the provision bankers "would have less incentive to negotiate."
"We want to share in the appreciation" of the collateral that has paralleled the farm economy's recovery over the last decade, said Mr. Tenuta.
Opponents of the "shared appreciation" concept argue that it would unnecessarily complicate the debt-payment arrangement farmers agreed to with their creditors and that appraisals of property would be costly.
"It's good for a farmer to know in advance how much he has to pay," the aide to Mr. Synar said. Mr. Yarnall, the bankruptcy lawyer, said that appraisals are probably "not worth the trouble."
"The law has to reflect economic conditions," said Mr. Ence of the IBAA. "Land prices have stabilized," and farmers no longer need a provision that allows them to write off part of their secured loans, he said.
A Tiny Portion of Filings
Bankruptcy filings under Chapter 12 make up a minuscule portion of all bankruptcies: 1,608 of 971,517 filings in 1992. And Chapter 12 filings have held steady in recent years while filings under other chapters have soared.
In the Chapter 12 debate, other statistical data are hard to find. A 1992 study by the Economic Research Service of the Department of Agriculture suggested that bankruptcies under Chapter 12 are more expensive for both debtors and creditors than filings under Chapter 11. However, the study researched only cases in South Dakota and North Carolina.
The Association of Chapter 12 Trustees is gathering data for a nationwide study that will come out this summer.
Meanwhile, Rep. Synar hopes that his bill will make it through the Senate or will be incorporated into the broader bankruptcy reform package offered by Sen. Howell T. Heflin, D-Ala., and Sen. Charles E. Grassley, R-Iowa, according to an aide.