Ahlers, In re

Decision Date24 September 1986
Docket NumberNos. 85-5396,85-5397,s. 85-5396
Citation794 F.2d 388
Parties, 15 Collier Bankr.Cas.2d 111, 14 Bankr.Ct.Dec. 768, Bankr. L. Rep. P 71,227 In re James R. AHLERS and Mary M. Ahlers, Debtors. James R. AHLERS and Mary M. Ahlers, Appellants, v. NORWEST BANK WORTHINGTON and Federal Land Bank, Appellees. In re James R. AHLERS and Mary M. Ahlers, Debtors. NORWEST BANK WORTHINGTON, N.A., Appellee, v. James R. AHLERS and Mary M. Ahlers, Appellants.
CourtU.S. Court of Appeals — Eighth Circuit

William L. Needler, James C. Truax, Frank Stepnowski, Chicago, Ill., for appellants.

Michael R. Stewart, Minneapolis, Minn., for Norwest Bank.

David A. Kastelic, St. Paul, Minn., for Federal Land Bank.

William P. Westphal, Minneapolis, Minn., U.S. Trustee.

Before HEANEY, JOHN R. GIBSON and WOLLMAN, Circuit Judges.

HEANEY, Circuit Judge.

These appeals by James and Mary Ahlers raise important questions of bankruptcy law, particularly as that law relates to farmers who have filed petitions for reorganization under Chapter 11 of the Bankruptcy Code. We hold that the bankruptcy court may, as a condition to maintaining a stay of proceedings by creditors against the debtors' property, require that the debtors furnish adequate protection to the secured creditors to protect against further loss to those creditors. Adequate protection is to be determined on a case-by-case basis by the bankruptcy court in accordance with the following guidelines: (1) protection is ordinarily to be given for the interim period beginning with the date that the secured creditor could, under state law, obtain possession of the collateral, sell that property, and reinvest the proceeds, and ending with the date that the plan of reorganization is confirmed or dismissed; (2) the value of the property is to be determined as of the date that adequate protection payments are required; (3) crops in the ground, to the extent that they are not otherwise encumbered, may serve in whole or in part as a basis for adequate protection; and (4) payment for such protection may be made after the crop is harvested rather than on a monthly basis.

The bankruptcy court should not approve a plan of reorganization unless it is feasible. In determining feasibility, the court should recognize existing realities, that is, the values of the land, the equipment, and the inventory as of the date that the plan is confirmed. Thus, the secured debt should be restructured to reflect values as of the date of confirmation. The bankruptcy court should not approve the plan unless it appears reasonably probable that the farmer can pay the restructured secured debt, over a reasonable period of time, at a reasonable rate of interest, in the light of farm prices and farm programs as of the date of confirmation.

To insure that the plan is fair and equitable and protects the unsecured creditors, the plan should require that any cash flow from the operation of the farm in excess of that anticipated in the plan be paid to the unsecured creditors on a pro rata basis, until such time as the unsecured creditors are paid in full without interest. Moreover, the plan should require that if the land is sold during the pendency of the plan, and if the unsecured creditors have not been paid in full before that date, any proceeds exceeding those necessary to pay the secured debt be shared on an equitable basis between the debtor and the unsecured creditors. Finally, the court should not permit the prejudgment seizure of equipment and machinery necessary to carry out the plan even if the creditors offer to post a bond.

We recognize that, under a plan of reorganization, secured creditors become unsecured to the extent that their allowed claim exceeds the value of their interest in the collateral. We hold, however, that neither these nor other unsecured creditors can prevent the plan from being approved on the basis of the absolute priority rule if the plan meets the requirements outlined herein and if the debtor agrees to contribute his experience, knowledge, and labor to the successful implementation of the plan.


James and Mary Ahlers farm approximately 840 acres of land in Nobles County, Minnesota. They own 560 acres, and rent the remaining 280 acres. To finance their operation, they entered into four separate financing agreements with the Federal Land Bank between December, 1965, and January, 1982. To secure these loans, the Ahlers gave the Federal Land Bank a first mortgage on four separate parcels of their farmland. These parcels of land, and the principal balances of the loans they secured as of November 30, 1984, are as follows:

                Parcels               Principal Balance
                -------               ------------------
                Parcel A (240 acres)       $335,403
                Parcel B (160 acres)       $152,168
                Parcel C (80 acres)        $ 31,500
                Parcel D (80 acres)        $  6,783

The Federal Land Bank's security interests are not cross-collateralized.

The Ahlers also entered into several financing agreements with the Norwest Bank of Worthington, Minnesota ("Norwest") between May, 1982, and April, 1984. To secure these loans, the Ahlers gave Norwest a second mortgage on their farmland, and a first mortgage on their machinery and equipment, crops, livestock, and other farm proceeds. As of November 30, 1984, the Ahlers owed Norwest $450,468 in principal and accrued interest. Norwest's security interests are all cross-collateralized. The Ahlers also owe John Deere Credit Corporation $35,791, secured by a combine, the Commodity Credit Corporation $3,337, secured by a grain bin, and General Motors $2,900, secured by an automobile. The value of land in southwest Minnesota 1 and the value of used farm machinery have both declined markedly since the Ahlers entered into the financing agreements outlined above. Moreover, commodity prices have declined, and inclement weather has frequently played havoc with yields. Thus, the Ahlers have been unable to make payments on interest and principal, and the secured creditors are substantially undersecured.

On November 16, 1984, Norwest commenced a replevin action against the Ahlers in state court to recover possession of the Ahlers' equipment and machinery pursuant to Minn.Stat.Ann. § 565.23 (West Cum.Supp.1985). Fourteen days later, the Ahlers filed a petition for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq., thereby staying the state court replevin proceedings. See 11 U.S.C. § 362(a). Norwest and the Federal Land Bank filed motions for relief from the automatic stay and for adequate protection. On February 27, 1985, the bankruptcy court held an evidentiary hearing on these motions.

In an order issued March 15, 1985, the bankruptcy court stated that Norwest and the Federal Land Bank, as undersecured creditors, were

entitled to compensation as adequate protection for the delay of enforcing contractual repossession and foreclosure rights during the interim between the filing of the petition and confirmation of the plan. It is the present value of that interest, the opportunity lost, that must be protected.

In re Ahlers, No. 3-84-2206, slip op. at 5 (Bankr.Minn. March 15, 1985).

It then held that the Ahlers would be required to make monthly payments of interest on the current value of the collateral in order to maintain the section 362 stay. It decided that the Ahlers' offer of a lien on the following year's crops did not constitute adequate protection, and that the Ahlers did not otherwise have sufficient funds to provide Norwest and the Federal Land Bank with adequate protection in the form of monthly interest payments on the value of the collateral. For these reasons, it granted the motions for relief from the automatic stay. 2 The Ahlers appealed this order to the district court. It affirmed on October 22, 1985. In addition, pursuant to this Court's August 8, 1985, order, the district court reviewed the feasibility of the Ahlers' reorganization plan and found that the plan had no reasonable prospect of success.

Eleven days after the bankruptcy court had entered its March 15, 1985, order granting Norwest's and the Federal Land Bank's motions for relief from the section 362 stay, the Ahlers removed Norwest's replevin action from state court to the bankruptcy court. The bankruptcy court, concerned that the state replevin action was not a core proceeding, indicated that it might abstain and remand the replevin action to the state district court unless the parties consented to the bankruptcy court's jurisdiction over the matter. On May 24, 1985, the Ahlers and Norwest stipulated that the replevin action was a core proceeding, which could be heard and determined by the bankruptcy court. See 28 U.S.C. § 157(c)(2). Thereafter, Norwest filed a motion in the bankruptcy court for prejudgment seizure of the property, together with an offer of bond, pursuant to Minn.Stat.Ann. §§ 565.23 and 565.25 (West Cum.Supp.1985). On June 25, 1985, the bankruptcy court held a hearing on Norwest's motion, and on July 8, 1985, entered an order granting this motion. The Ahlers appealed this order, and on October 28, 1985, the district court affirmed.

The Ahlers now appeal from the district court's October 22 and October 28 orders. They contend that the bankruptcy court erred in granting Norwest and the Federal Land Bank relief from the section 362 stay. They also appeal the October 28 order, contending that the Minnesota replevin statute is unconstitutional, and that the bankruptcy court did not have jurisdiction to rule on Norwest's motion for prejudgment seizure pursuant to that statute.

A. The district court erred in defining the elements of adequate protection.

The filing of a Chapter 11 bankruptcy petition results in an automatic stay of all acts by creditors to enforce their liens against the debtor's...

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