COLLEEN A. BROWN, Bankruptcy Judge.
Two secured creditors, People's United Bank and the USDA Farm Service Agency (together, the "Creditors") have filed motions to dismiss these jointly administered cases, based upon the Debtors' default in their obligations under a stipulation and their default under the terms of the confirmed Chapter 12 plan. The Debtors oppose dismissal and assert they should be given an opportunity to modify their confirmed plan to reflect their operational transition away from use of their assets as a full-time dairy farm to a much reduced dairy operation supplemented by income from non-farm employment and lease of the farm homestead through Airbnb. While the facts are generally undisputed — and the Debtors admit they have defaulted on their obligations under the confirmed Chapter 12 plan and stipulation — this contested matter nonetheless presents a close call which requires the Court to balance the rights of family farmers to reorganize under Chapter 12 against the rights of secured creditors to enforce their bargained-for remedies when the terms of the reorganization are breached.
For the reasons set forth below, the Court finds the Creditors have established cause to dismiss these jointly administered Chapter 12 cases and grants their motions. In light of this ruling, the Court does not address the merits of the Debtors' proposed modified plan and denies the Debtors' motion to modify their plan as moot.
This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334, and the Amended Order of Reference entered in this District on June 22, 2012. The Court declares the issues raised by the motions to dismiss and the motion to modify are core matters under 28 U.S.C. §§ 157(b)(2)(A), (L) and (O), over which this Court has constitutional authority to enter a final judgment.
In order to put this contested matter in context, it is essential to set out the entire procedural history of these jointly administered cases.
The cases began in the fall of 2012 when Milky Way Organic Farm, LLC ("Milky Way") and Robert H. Clark, Jr. ("Mr. Clark" and together, the "Debtors") filed petitions for relief under Chapter 12 of the Bankruptcy Code. Promptly after the filing of the two cases, the Court granted the Debtors' request for joint administration (doc. # 23). At that time, Milky Way was managed and operated by Robert Clark, Sr. and Mary Saceric Clark; their son, Robert Clark, Jr., worked on the farm with them. From the outset, the primary creditors in the case were the United States Department of Agriculture Farm Service Agency ("FSA"), People's United Bank ("People's"), and the Vermont Agricultural Credit Corporation ("VACC") (together, "the Secured Creditors").
After approximately one year of good faith and intense negotiations, the Debtors, the Secured Creditors, and the Chapter 12 trustee entered into "The Stipulation for Confirmation of Chapter 12 Plan and for Liquidation of Personal Property and Stipulation for Relief from Stay and Foreclosure as to Real Property in the Event of Default" (doc. # 98, the "Stipulation"), and on October 17, 2013, this Court entered an Order (doc. # 100) approving that Stipulation. Five days later, the Court entered an Order (doc. # 103) confirming a Chapter 12 plan (doc. # 90) which, by its terms, incorporated all of the rights, obligations, remedies, and provisions set forth in the Stipulation (doc. # 103, ¶ 25).
On July 25, 2014, the Debtors filed a motion to modify the confirmed plan, along with a proposed modified Chapter 12 plan (docs. ## 125, 126), asserting that modification was necessary to cure an arrearage which arose due to a delay in the commencement of payments. People's filed an objection to this motion to modify, based upon the modified plan's failure to include a reference to the Stipulation, failure to specify a date by which the Trustee would distribute certain funds to creditors, and failure to clearly articulate certain crucial numbers (doc. # 128). Thereafter, the Debtors filed a new modified plan (doc. # 131) which specifically referenced and incorporated the Stipulation; the Secured Creditors consented to that modified plan; and the Court entered an order confirming the modified plan on October 2, 2014 (doc. # 135, the "Confirmed Plan").
Unfortunately, about a year later, Mr. Clark, Sr. passed away (doc. # 180). His death caused Mrs. Clark and Robert Clark, Jr. extreme emotional distress, and left Mrs. Clark and Robert Clark, Jr. to manage and operate the farm by themselves. This, in turn, had a significant economic impact on the farm's operations, and the Debtors fell behind in the payments due under the Confirmed Plan shortly thereafter.
On September 14, 2016, the Trustee filed a Motion to Dismiss the cases (docs. ## 166, 167), alleging plan payment arrears of approximately $20,000.
Subsequently, the Debtors sought, and the Court granted, an extension of time for the Debtors to file a modified plan (doc. # 173). The Debtors filed a motion to modify along with a proposed modified plan on November 4
The Court heard approximately 3 hours of testimony on January 13, 2017, and approximately 5 more hours of testimony at the continued evidentiary hearing on February 3, 2017. At the first hearing, the focus of the testimony the Debtors presented (through Robert Clark, Jr., Betsy Miller, and Mary Saceric Clark) was on a further modified plan which the Debtors had not yet filed or shared with the Creditors, and which depended significantly on income from non-farm employment and lease of the farmhouse through Airbnb. The Court directed the Debtors to file and serve that further modified plan by January 18, 2017, which they did,
The primary issue presented in this contested matter is whether the Creditors have established cause for dismissal of these two jointly administered Chapter 12 cases. If the Court finds the Creditors have not met this burden, and denies the motions to dismiss, then the Court will determine whether the modified plan before the Court meets the requirements for confirmation.
The decision of whether to dismiss a Chapter 12 case is squarely within the discretion of the Bankruptcy Court.
11 U.S.C. § 1208(c) (2016). This is an illustrative, non-exclusive list and the Court must determine whether cause has been established in each case, based upon the unique facts and circumstances presented.
The Creditors assert there is cause to dismiss these cases, under § 1208(c) generally, and particularly under § 1208(c)(6) and (9). First, the Creditors demand dismissal based upon the Debtors' failure to comply with various terms of the Stipulation, because the Stipulation was a carefully designed compromise that made Chapter 12 confirmation possible and contained built-in remedies in the event of default. Second, the Creditors argue the Debtors' breaches of particular provisions of the Stipulation, as well as their plan payment defaults, constitute cause for dismissal under § 1208(c)(6). Third, the Creditors contend the Debtors are unable to effectively reorganize under Chapter 12 within a reasonable period of time, establishing cause for dismissal under § 1208(c)(9).
The Secured Creditors' support and cooperation in this Chapter 12 case was indispensable to Plan confirmation. The record establishes that the Debtors — like many other hardworking Vermont farmers — had been struggling financially for several years prior to seeking bankruptcy relief, and the Secured Creditors supported the Debtors' efforts to reorganize under Chapter 12 by consenting to continued use of their collateral, on condition that the Debtors comply with the obligations articulated in the Stipulation. The testimony from all parties underscores the fact that but for the parties' reaching this agreement, the Chapter 12 case could not have moved forward. As FSA describes it,
Doc. # 182, ¶ 10, p. 3-4. None of the Debtors' witnesses disagreed with this rendition of the facts.
It is undisputed that the Debtors failed to meet several of their obligations under the Stipulation. On cross-examination, Mary Saceric Clark admitted the Debtors (i) failed to timely file operating reports each month,
Based upon this record, the Court finds the Stipulation was the foundation of the Debtors' reorganization, the Debtors' breach of the Stipulation gave rise to remedies the Debtors and Creditors had jointly negotiated, and based upon the particular circumstances here, the Debtors' default under the terms of the Stipulation constitutes cause for dismissal under §1208(c).
The term "material default" is not defined by the Bankruptcy Code. In construing this term in the context of Chapter 12 cases, courts must take into account the high level of unpredictability and various other exogenous factors that could have a determinative impact on a farm's success. In the context of dairy farmers, for instance, this would most notably include the weather and milk prices. Because farmers are regularly subject to circumstances beyond their control, it is just and appropriate for courts to give Chapter 12 debtors an opportunity to modify their plans, and pursue alternate approaches to financial reorganization, before dismissing their case based upon a default under the terms of their initial plan.
The Creditors presented evidence and arguments reciting the many opportunities the Debtors have already had to modify their reorganization plan. In October of 2013 and October of 2014, the Debtors proposed modified plans to cure plan payment arrears, and upon the Creditors' consent, the Court confirmed those modified plans (docs. ## 135, 148). Then, in November of 2015, the Trustee filed his first motion to dismiss (doc. # 154) based upon the Debtors' failure to make plan payments, but he subsequently withdrew that motion based upon the Debtors' assertion that they would bring payments current by January 15, 2016. Nine months after the proposed due date to become current, the Trustee filed another motion to dismiss, asserting the Debtors were once again behind on their plan payments (docs. ## 166, 167). Despite the Debtors' repeated failure to stay current in plan payments, the Creditors refrained from claiming a material default under the terms of the Confirmed Plan, until now.
It is undisputed that the Debtors are currently in default on their plan payment obligations. Although the testimony was less than clear with regard to the actual amount of the arrearage, the Trustee and Mrs. Clark both acknowledged on the record that the Debtors are behind on their plan payments. In light of this uncontroverted fact and the history of the case, the Court finds it is time to declare the Debtors' plan payment default a material default under the Plan.
Additionally, because the terms of the Stipulation were explicitly incorporated into the Confirmed Plan, a default under the Stipulation constitutes a plan default:
Doc. # 103, p. 5, ¶ 25. There is nothing in the record to support a finding that the Debtors' defaults under the terms of the Stipulation were specifically caused by circumstances beyond the Debtors' control. As discussed above, Mrs. Clark admitted that the Debtors sold 10 cows in the summer of 2016 for $17,000, did not obtain FSA's consent prior to that sale, paid over only $14,000 of the proceeds to FSA, and to date has not paid FSA the remaining $3,000 due from the sale of FSA's collateral. Courts have long recognized that sales of collateral without secured creditor approval is an important factor to consider in ruling on motions to dismiss Chapter 12 cases.
In sum, the Debtors' plan payment default, and the Debtors' failure to comply with the Stipulation, each constitute a material default under the Confirmed Plan, and establish cause for dismissal under § 1208(c)(6).
The Creditors also seek relief under § 1208(c)(9), arguing that there is no reasonable likelihood of rehabilitation for the Debtors in Chapter 12. Although FSA introduced some exhibits in an attempt to demonstrate the Debtors will not be able to reorganize in a reasonable period of time, those exhibits were not admitted. At best, the evidence the Creditors and Debtors presented on this point was unclear. The Creditors had the burden of establishing facts to prove this argument and they failed to meet that burden. Therefore, the Court finds dismissal is not warranted under this prong of the Creditors' argument.
In addition to examining whether the evidence demonstrates the factors identified in § 1208(c), this Court also takes into account the equitable considerations in determining whether to dismiss these cases. The legislative history of Chapter 12 makes clear that it is an important national priority to protect farms:
146 Cong. Rec. H 11702 (1999) (statement by Rep. Baldwin). Chapter 12 provides crucial and extraordinary relief to farmers and fisherman who qualify for it. In order for Chapter 12 to work, however, creditors must be persuaded that the remedies set out in Chapter 12 will be available if Chapter 12 debtors fail to meet their obligations under confirmed plans. Courts must implement Chapter 12 in a manner which treats creditors fairly and ensures results that are predictable and consistent with the Bankruptcy Code.
Both the testimony and terms of the Stipulation reflect the Creditors' willingness to engage in extensive negotiations, as needed, to formulate a consensual Chapter 12 plan. By its terms, the Stipulation amended the Debtors' plan, required the Debtors to comply with numerous obligations, and memorialized the parties' collaborative endeavor to both maximize the Debtors' opportunity to successfully reorganize and provide the Creditors with prompt and effective remedies in the event the Debtors were unable to do so. As a result of the parties' agreement, the Debtors operated under Chapter 12 for over four years and made their best effort to transform their operations into a more financially viable enterprise.
The Creditors' patience, flexibility, and support have been crucial to this case and reflect the type of collaboration that is essential to success under Chapter 12. Recently, the Creditors made the objective determination to change course, declare defaults, and seek their remedies under Chapter 12, the Stipulation and the Confirmed Plan. There is no basis in equity to deny the Creditors that relief.
The Trustee and Debtors urge the Court to deny the motions to dismiss on the basis that the Debtors deserve another chance to try to reorganize. The Trustee requests that the Court allow the Debtors to explore yet another modified plan, and implores the Creditors to "wait and see" what happens with the proposed Airbnb rental and off-farm employment. This is not a legal argument, and it does not address the valid factual and legal assertions set out in the Creditors' motions to dismiss or the criteria of the governing statute. The Debtors' filing of a motion to modify a plan in response to the motions to dismiss illustrates the Debtors' indefatigable desire, commitment, and intent to do all they can to save their family farm. Unfortunately, however, this proposal is not enough to defeat well-supported and legally compelling motions to dismiss. Under § 1227, the terms of a confirmed Chapter 12 plan bind the debtor as well as all creditors.
Since the Court has found the Creditors established cause to dismiss these cases, it need not address the merits of the Debtors' motion to modify the confirmed plan, nor the Trustee's arguments in opposition to dismissal based upon the proposed modified plan.
The Court concludes FSA and People's have established cause to dismiss these cases on two grounds. First, based upon the unique circumstances of this case, and in particular, the Debtors' breach of the fundamental agreement underlying the Chapter 12 cases, there is cause to dismiss these cases pursuant to § 1208(c). Second, the Debtors' breach of several requirements of the Stipulation and the Debtors' plan payment default are each a material default under the Confirmed Plan, and warrant dismissal pursuant to § 1208(c)(6). Therefore, the Creditors' motions to dismiss are granted. In light of this determination, the Debtors' motion to modify the Confirmed Plan is denied as moot.
This constitutes the Court's findings of fact and conclusions of law.
