Fortney, Matter of, 94-1208
| Decision Date | 29 September 1994 |
| Docket Number | No. 94-1208,94-1208 |
| Parties | In the Matter of Thomas FORTNEY and LaVonna Fortney, Debtors-Appellees, Appeal of Daniel R. FREUND, Chapter 12 Trustee. |
| Court | U.S. Court of Appeals — Seventh Circuit |
Daniel R. Freund, pro se.
Robert E. Krambs, Viroqua, WI, for Vernon County.
Galen W. Pittman (argued), Jeffrey C. Mochalski, Johns & Flaherty, La Crosse, WI, for Thomas Fortney and LaVonna Fortney.
Before ENGEL, * BAUER and KANNE, Circuit Judges.
In this farm bankruptcy case, we must determine if Chapter 12 of the Bankruptcy Code, 11 U.S.C. Secs. 1201-1231, compels a bankruptcy judge to extend the repayment of a secured tax debt beyond the three year duration of the debtors' reorganization plan. The bankruptcy judge below determined that the debtors, Thomas and LaVonna Fortney, should satisfy their $18,569.76 tax obligation to Vernon County within three years. The Chapter 12 Trustee, Daniel Freund, objects to confirmation of the Fortneys' plan, arguing that the taxes should be repaid at a much slower pace, so that more farm income will be available to satisfy the claims of unsecured creditors. The district court approved the plan over the Trustee's objections, concluding that Chapter 12 vests the bankruptcy court with discretion to structure an appropriate repayment schedule for secured debts. For the following reasons, we AFFIRM the judgment of the district court.
Chapter 12 of the bankruptcy code governs reorganization of family farms. "Congress created Chapter 12 in 1986 in order to give family farmers facing bankruptcy a fighting chance to reorganize their debts and keep their land." In re Kerns, 111 B.R. 777, 788 (S.D.Ind.1990) (citation omitted); In re Bowlby, 113 B.R. 983, 988 (Bankr.S.D.Ill.1990).
The Fortneys own a farm in Viroqua, Wisconsin, near La Crosse. The Fortneys filed for bankruptcy relief on September 4, 1992, and the bankruptcy court for the Western District of Wisconsin approved their reorganization plan on June 2, 1993. On January 11, 1994, the district court affirmed the decision of the bankruptcy court over the objections of the Chapter 12 Trustee.
The Fortneys have two secured real estate obligations: a tax lien of $18,569.76 held by Vernon County, and a mortgage of $140,430.24 held by AgriBank. Their plan provides for repayment of their tax debt over a span of three years, while the mortgage is scheduled for repayment over a twenty year period.
The Fortneys have more than $90,000 in unsecured debt. During the three years that the plan will be in effect, the unsecured creditors are to receive: (1) a minimum payment of $7,200, and (2) 40% of the Fortneys' gross annual farm income in excess of $150,000. If the Fortneys successfully complete the payments scheduled under the plan, the remaining unsecured debts will be discharged.
Chapter 12 contains two confirmation requirements designed to protect unsecured creditors. Section 1225(a)(4) sets out the well-known "best interests of the creditors" test, which denies confirmation to any plan which provides unsecured creditors with less compensation than they would receive upon liquidation of the farm. See 5 COLLIER ON BANKRUPTCY p 1225.02 (15th ed. 1993). Liquidation of the Fortneys' farm would provide their unsecured creditors with a total of $6,584.42. By offering the unsecured creditors a minimum payment of $7,200, the Fortneys' plan satisfies the best interests test.
Chapter 12 contains a second protection for those unsecured farm creditors who object to confirmation of a reorganization plan: the "disposable income" test. Under this test, unsecured creditors who object to confirmation of the debtors' plan are guaranteed to receive at a minimum all of the disposable income earned by the farm while the plan is in effect:
If the trustee or the holder of an allowed unsecured claim objects to the confirmation of the plan, then the court may not approve the plan unless ... the plan provides that all of the debtor's projected disposable income to be received [during the pendency of the plan] ... will be applied to make payments under the plan.
11 U.S.C. Sec. 1225(b)(1)(B). See, e.g., In re Fleshman, 123 B.R. 842, 843-44 (Bankr.W.D.Mo.1990); In re Wobig, 73 B.R. 292, 293 (Bankr.D.Neb.1987); In re Citrowske, 72 B.R. 613, 616 (Bankr.D.Minn.1987).
The Fortneys' plan "shall run for thirty-six (36) months." During this period, unsecured creditors are entitled to receive all of the Fortneys' "disposable income"--that portion of the farm income "which is not reasonably necessary ... for the[ir] maintenance or support" or "for the continuation, preservation, and operation of the[ir] business." 11 U.S.C. Sec. 1225(b)(2).
The disposable income test allows the debtor to retain a sufficient but not extravagant level of income. As one court explained:
A fundamental purpose of the disposable income provision is to prevent large expenditures by debtors for non-essential items which ultimately reduce the sum available to pay holders of unsecured claims....
This Court ... will not permit [the debtor] to acquire goods or services not reasonably necessary for support at the expense of the unpaid, unsecured creditors. The purposes of [the disposable income test] would be ill-served if the Court were to allow the debtor in the instant case to [finance] purely recreational property not reasonably necessary for maintenance or support of the debtor ... while his general unsecured creditors are to receive, over an extended period of time, less than half of the total amount of their claims.
In re Hedges, 68 B.R. 18, 20-21 (Bankr.E.D.Va.1986).
Unfortunately, the disposable income test cannot provide all unsecured creditors with compensation, because not all debtors will be able to generate disposable income. By definition, disposable income represents "left overs"--that portion of the farm income remaining after the deduction of those payments "necessary" for the farmer's subsistence and for operation of the farm. See 11 U.S.C. Sec. 1225(b)(2), supra. If the bankruptcy court determines that all of a farmer's income is needed to satisfy secured obligations, a plan which generates no disposable income may be confirmed--despite providing little compensation to the unsecured creditors. As a result, the impact of the disposable income test in any particular case depends to a large extent upon the margin by which the debtor's income exceeds his or her expenses. A debtor whose income greatly exceeds expenses may provide unsecured creditors with a substantial amount of disposable income, while a debtor with a slim profit margin may generate hardly any disposable income at all.
The Trustee objects to the repayment of Vernon County's secured tax claim within three years. Pointing to the twenty year amortization of the Fortneys' mortgage obligation, the Trustee would have the bankruptcy court prolong the tax payments in a similar fashion. Stretching such payments out over a longer period would substantially reduce the size of the Fortneys' monthly payments to the county. The Trustee's motivation in reducing the size of the Fortneys' monthly secured debt payments is to increase the amount of disposable income available for unsecured creditors.
The Trustee argues that there is no basis in the Code for amortization of the secured tax claim over a shorter period than the mortgage claim. The Trustee concedes that the Code grants unsecured tax claims higher priority than ordinary unsecured claims, 11 U.S.C. Sec. 507(a)(7), but he insists that all secured claims (including secured tax claims) have equal priority under the Code. Furthermore, the Trustee suggests that the Code requires the bankruptcy court to amortize secured debts over the longest possible time span, in order to maximize the amount of disposable farm income available for unsecured creditors.
The district court concluded that the bankruptcy court was permitted to amortize the tax claim and the mortgage claim over different time periods. However, the district court did not--as the Trustee suggests--justify the three year repayment of the taxes on the ground that secured tax claims deserve preferential treatment. In fact, the district court explicitly rejected any such notion:
The Trustee is correct in his contention that Chapter 12 does not establish a category of secured claims requiring priority status over other secured claims. There is no provision in the Code which requires that real estate tax liens be amortized within the three to five year pendency of a plan.
In the district court's view, the Fortneys are permitted to repay the taxes over three years and the mortgage over twenty years because Chapter 12 provides the bankruptcy court with discretion to fashion appropriate secured debt repayment schedules. Given such discretion, the district court concluded that the bankruptcy court's approach sought to accommodate important differences between a tax lien and a mortgage:
[N]othing in the Code requires that all secured claims be paid within the same time period. Here the real estate tax lien is to be paid within three years and the AgriBank claim is to be paid within twenty years. There are valid reasons for differentiating between these claims. Counties unlike mortgage holders are not in the business of long term financing. Amortizing the $140,430 AgriBank claim over three years would make the payments prohibitive.
Within this framework, the question on appeal narrows to whether Chapter 12 dictates any particular amortization schedule for the repayment of secured debts. Because the Trustee challenges the district court's interpretation of the Bankruptcy Code, we review de novo the legal conclusions drawn below. In re West, 22 F.3d 775, 777 (7th Cir.1994) ().
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