In re Shannon

Decision Date18 May 1989
Docket NumberNo. C-2-87-1295.,C-2-87-1295.
Citation100 BR 913
PartiesIn re Carol and Boyd SHANNON, Debtors-Appellants.
CourtU.S. District Court — Southern District of Ohio

Charles W. Ewing, Columbus, Ohio, for debtors-appellants.

William B. Logan, Jr., Luper, Wolinetz, Sheriff & Niedenthal, Columbus, Ohio, for appellee.

OPINION AND ORDER

KINNEARY, District Judge.

This matter comes before the Court to consider the appeal of Carol and Boyd Shannon from an order of the United States Bankruptcy Court for the Southern District of Ohio. District courts have jurisdiction to hear appeals from final judgments, orders, and decrees of bankruptcy judges. 28 U.S.C. § 158(a) (Supp. IV 1986); Bankr.R. 8001.

This appeal requires the court to consider the impact of Chapter 121 of the Bankruptcy Code on the Farm Credit Act of 19712 and the Agricultural Credit Act of 1987.3 The plight of family farmers merits the attention of lawmakers and Chapter 12 is an effort to afford them some relief after the hard economic times of the past years. Decreasing market prices, increasing costs of production, and natural disasters have combined to place our Nation's farmers in dire straits. It is with the desperate quandary of the family farmers in mind that this Court now considers the appeal of the debtors.

Boyd and Carol Shannon ("the debtors") purchased the Bower family homestead in November, 1975. The Shannons advanced a downpayment of $50,000 and borrowed the balance of the purchase price ($207,000) from the Federal Land Bank of Louisville ("the Land Bank") at a 9% interest rate. They successfully raised hogs and planted grain and soybeans on their 223-acre tract.

In 1979, however, the Shannons suffered flood damage from hurricane Frederick. In 1981, they faced significant crop losses from excessive rain in the Spring and a drought during the Summer. Perhaps due to these hardships, the Shannons reamortized their mortgage on March 1, 1982. The new agreement provided for a 12.75% interest rate. They sustained even harsher drought conditions in 1983.

Despite the respite of reamortization, the Shannons filed for bankruptcy under Chapter 12 on April 16, 1987. They submitted a Chapter 12 plan on July 29, 1987, to which the Land Bank objected. After two additional amended plans, the court below issued an order confirming the debtors' "Third Amended Chapter 12 Plan" ("the Plan") on September 21, 1987. The court confirmed the Plan subject to two crucial conditions, the subject of this appeal which the debtors filed on October 1, 1987.

First, the Plan would be confirmed only if the debtors retained possession of the stock in the Land Bank which they were required to purchase at the time they initiated their loan. The Plan had provided for the debtors to surrender the stock to the Land Bank and for a setoff of the $10,000 value of the stock from the amount of the Land Bank's allowed secured claim.4 The first issue on appeal, then, is whether the bankruptcy court erred in requiring the Shannons to retain this stock.

Second, the Plan would be confirmed only if the debtors agreed to repay the Land Bank's allowed secured claim in a stream of payments subject to a variable discount rate, in effect an interest rate, of 12.5%.5 The debtors now claim on appeal that this rate is excessive. As a matter of law, they claim that the proper procedure for determining a discount rate is to derive a rate based on the Land Bank's cost of funds or, in the alternative, basing a rate on that for 52-week United States Treasury obligations. As a factual matter, they contend that such a rate would, in fact, be 10.3%. The second issue on appeal, then, is whether the bankruptcy court erred in establishing a discount rate of 12.5%.

I. THE RETENTION OF FEDERAL LAND BANK STOCK

The Farm Credit Act of 1971 established a system of federal lending institutions for the purpose of financing the purchase and operation of farms.6 The Agricultural Credit Act of 1987 recodified the Farm Credit Act and established a new statutory scheme governing the extension of credit and organizing the structure of institutions to carry out this task. The Farm Credit Act regulated the creation of Federal Land Banks, now called Farm Credit Banks under the new law.7 These banks have three sources of funds to lend to farmers: the sale of bonds, the generation of retained earnings, and the sale of stock to borrowers.

The sale of stock is a crucial aspect of the private financing of the Farm Credit System institutions. "The design of a capital structure utilizing borrower capitalization and participation was intended to remedy the problems inherent in the agricultural lending practices of commercial institutions." In re Walker, 48 B.R. 668, 669 (Bankr.D.S.D.1985). The requirement that borrowers purchase and retain stock prevented crises stemming from undercapitalization seen under previous statutory schemes. Accordingly, "much of the success of the farm credit system has resulted from long-term direct borrower participation." Id. at 669-70.

A. Textual Analysis

To determine the merits of this issue, the Court must turn first to the language of the relevant statutes.8 The Shannons purchased their farm in November, 1975 and granted a mortgage to the Federal Land Bank of Louisville. As a condition to borrowing the purchase price of the farm, the Farm Credit Act required the Shannons to purchase stock in a Federal land bank association in "an amount not less than 5 per centum . . . of the face amount of the loan as determined by the bank." 12 U.S.C. § 2034(a) (1982) (omitted 1988).9

Under the Agricultural Credit Act, when a lending institution grants a new loan to a borrower, he or she must then purchase stock in the institution in the amount of at least 2% of the face amount of the loan or $1,000, whichever is less. 12 U.S.C.A. § 2021(c) (West Supp.1989) (loans directly through Farm Credit Banks require stock participation in accordance with bank bylaws); 12 U.S.C.A. § 2094 (West Supp. 1989) (stock participation relating to loans through land bank associations governed by association bylaws); 12 U.S.C.A. § 2154a(c)(1)(E)(i) (West Supp.1989)10 (bylaws must provide for a minimum of 2% or $1,000 stock participation, whichever is less).

The provision governing the retirement of stock provides that the lending institution has the right to cancel a borrower's stock, but the borrower has no such right. It states that lending institution bylaws "shall permit the retirement of stock at the discretion of the institution if the institution meets the capital adequacy standards issued under section 2154(a) of this title." 12 U.S.C.A. § 2154a(c)(1)(I) (West Supp. 1989) (emphasis added); 12 C.F.R. § 615.5255(a) (1988).11 Under old law, land banks had the same exclusive right.12 Thus, the Land Bank claims that the farm credit statutes do not permit the bankruptcy court to order it to retire the stock pursuant to a Chapter 12 plan.

The debtors argue, however, that Chapter 12 alters the result reached under the farm credit laws. Specifically, Chapter 12 permits bankruptcy courts to confirm plans which provide for the surrender of land bank stock and a set off of the stock's value against the allowed secured claim. To counter the thrust of the apparent statutory support for the Land Bank's position, the debtors interpose three provisions of the Bankruptcy Code.

First, a Chapter 12 plan may "modify the rights of holders of secured claims." 11 U.S.C. § 1222(b)(2) (Supp. IV 1986). Second, the Shannons note that a bankruptcy court may order cancellation under section 1222(b)(8), which provides that a plan may "provide for the sale of all or any part of the property of the estate or the distribution of all or any part of the property of the estate among those having an interest in the property." Id. § 1222(b)(8). Third, a bankruptcy court "shall confirm a plan" under Chapter 12 if, among other things, "with respect to each allowed secured claim provided for by the plan . . . the debtor surrenders the property securing such claim to such holder." Id. § 1225(a)(5)(C).

These provisions arguably authorize or require a court to order the retirement of Land Bank stock, despite the specific farm credit statutes which apparently preclude such an action. The debtors point to a significant body of legislative history surrounding the enactment of Chapter 12 indicating a Congressional intent to aid farmers in these desperate years and to overcome some of the shortcomings in prior bankruptcy law.13 The debtors conclude by stating that equity requires the court to order the retirement of the stock in order to implement the spirit of Chapter 12.

In general, the Court must strive to construe these two statutory schemes so as to be consistent with each other. See, e.g., United States v. Stauffer Chem. Co., 684 F.2d 1174, 1184 (6th Cir.1982), aff'd on other grounds, 464 U.S. 165, 104 S.Ct. 575, 78 L.Ed.2d 388 (1984). It must attempt to give effect to each statute, if it is possible to do so while preserving their sense and purpose. Watt v. Alaska, 451 U.S. 259, 267, 101 S.Ct. 1673, 1678, 68 L.Ed.2d 80 (1981). Unfortunately, after examining the statutes cited by counsel, the Court cannot reconcile the plain text of Chapter 12 with the farm credit laws. The three relevant general sections of Chapter 12 seem to permit that which the Agricultural Credit Act prohibits: forcing the Land Bank to retire the stock.

Given this apparent conflict, the Court must turn to other means in order to render a proper construction of these statutes and to give effect to both statutory schemes insofar as possible. Specifically, the legislative intent behind the relevant bankruptcy and farm credit laws is relevant to determine how these two statutory schemes interact. Such an intention, if discoverable, would be critical in the interpretation of the relevant statutes.

B. Congressional Intent

In divining what Congress intended when it passed the farm credit laws...

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