In an era where the United States agricultural industry continues to struggle to stay afloat, Walmart’s recent decision to establish its own milk processing facility has resulted in multiple milk contract cancellations throughout the country. In Pennsylvania alone, 42 farms have been affected by the Dean Foods-Walmart milk contract termination. This industry shift will likely catalyze an increase in Chapter 12 Bankruptcy filings by local farmers hoping to stay in business. In these cases, creditors can maximize their chances of getting paid with an understanding of the Chapter 12 process and the protections they are provided under the Bankruptcy Code.
Once a debtor has filed for Chapter 12 Bankruptcy, the automatic stay afforded pursuant to 11 U.S.C. § 362 requires the immediate termination of all collection efforts against the debtor. The automatic stay applies to collections efforts against the debtor’s bankruptcy estate, which comprises everything the debtor owns at the time of filing, including any legal or equitable interest.1
Once the automatic stay is in place, creditors must seek the Bankruptcy Court’s permission to obtain any remedy for debts they are owed. At this time, creditors should scrutinize the debtor’s proposed Chapter 12 Plan. The debtor’s Chapter 12 Plan plays a significant role in the treatment and payment of creditors over the life of the bankruptcy case, in addition to the creditors’ secured or unsecured classifications. Secured creditors must be paid either the full amount of the secured claim or, at minimum, the full value of the collateral that secures the debt.2 If the debtor fails to provide for secured creditors through the plan, the creditors may seek relief from stay in order to execute against the debtor and collect the collateral. Unsecured creditors, however, do not need to be paid through the Chapter 12 Plan as long as the debtor is committing all of its disposable income to the Plan. Even so, creditors may have grounds to object to the debtor’s Plan if it does not provide full payment of their claims.
While assessing the Chapter 12 Plan, creditors must simultaneously monitor any important case deadlines – one of which is the deadline to submit a proof of claim. A proof of claim must be filed by secured and unsecured creditors in order to receive payment through the Chapter 12 Plan. Filing a proof of claim does not guarantee that a creditor will receive payment, but if a creditor fails to file the proof of claim by the deadline, their claim will be disallowed and they will not be issued a payment under the debtor’s Plan.
In a Chapter 12 Bankruptcy, secured creditors should pay special attention to any request made by the debtor to use cash collateral. A motion for use of cash collateral, if granted, permits the debtor to use certain proceeds to pay essential operating expenses, thereby allowing the debtor to continue operating their business throughout the life of the bankruptcy. Such an allowance may violate the rights of secured creditors to the extent that the proceeds used to generate cash collateral for the debtor are rightfully owed to the creditors. To ensure that they are adequately protected, secured creditors should always respond to cash collateral motions.
As the U.S. agricultural industry continues to struggle, it is important that creditors take note of the challenges they may face as a result of a Chapter 12 Bankruptcy filing. Should your borrower be affected by milk contract cancellations and face Chapter 12, contact Bernstein-Burkley – our attorneys will vigorously protect your rights and maximize your chances of getting paid.
- In re Warrington, 424 B.R. 186, 189 (Bankr. E.D. Pa. 2010)
- 11 U.S. Code § 1222