Free Person Holding a Gavel Stock Photo

Nick Tremps

For corporate debtors that submit to the bankruptcy process, the Bankruptcy Code (the “Code”) provides significant benefits to the “honest, but unfortunate debtor” that cannot fully perform its debt obligations.[1]  In a case filed under Chapter 11 of the Code, a corporate debtor may file a plan of reorganization with the bankruptcy court that proposes how the debtor intends to restructure its debts owed to each class of creditors.[2]  Upon confirmation of a plan, the corporate debtor then receives a discharge from any debt that arose prior to the bankruptcy court’s confirmation.[3]  Included in that plan of reorganization, corporate debtors may attempt to include provisions that extend third-party releases to non-debtors that have a direct impact on the debtor’s restructuring.[4]  In other words, a plan may attempt to use the bankruptcy process to extinguish present or future claims held by various third parties against entities that are associated with the debtor.  Where the impaired class or classes of creditors affirmatively consent to the binding plan, courts typically confirm these releases.[5]  But what happens when a third-party creditor votes against the plan and instead seeks to exercise their constitutional right to have their day in court and pursue a claim directly against the non-debtor?  The United States Supreme Court may soon address whether these so-called “non-consensual third-party releases” are permitted by the Code.

While third-party releases are expressly permitted in a plan of reorganization in asbestos cases,[6] circuits have been split for decades about whether this practice is permitted by the Code outside of the asbestos context.  The majority of circuits, including the Second, Third, Fourth, Sixth, Seventh, and Eleventh permit third-party releases,[7] albeit in rare or extraordinary circumstances and when “certain factors” are met.[8]  Conversely, the Fifth and Tenth Circuits categorically bar these releases based on Section 524(e) of the Code.[9]  That provision provides that the “discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt.”[10]

Following a petition for a writ of certiorari last month, the Supreme Court has a long-awaited opportunity to resolve this circuit split.  In Highland Capital Management, L.P. v. NexPoint Advisors, L.P.,[11] the Fifth Circuit, following circuit precedent, held that Section 524(e) of the Code barred the debtor from releasing certain non-debtors from liability in its chapter 11 plan of reorganization.[12]  Thus, the debtor’s attempt to exculpate certain non-debtors from liability was precluded by the Fifth Circuit’s steadfast interpretation of Section 524(e).[13]  In its petition filed in January, the reorganized debtor, Highland Capital Management, urges the Supreme Court to adopt the majority position, contending that Section 524(e) is “simply a saving clause” and that the plain language of Section 524(e) “simply states that the discharge of a debtor’s liability on a debt does not itself affect any other creditor’s liability on that same debt.”[14]  Thus, according to the debtor, Section 524(e), by its plain language, does not preclude a bankruptcy court from confirming a plan containing non-debtor exculpations.  Notably, NexPoint Advisors, the respondent in that case, also filed a petition for a writ of certiorari last month, asking the Supreme Court to use this case as a vehicle to “restore uniformity among the circuits”[15] and put an end to this “abus[ive]” practice.[16]  While the debtor seeks review of non-debtor exculpations, NexPoint Advisors points out that “the fact that this case involves third-party exculpations that limit liability to gross negligence or willful misconduct, rather than third-party releases that eliminate liability altogether, does not diminish the importance of the issue or make this case a faulty vehicle.”[17]

NexPoint Advisor’s argument is well-founded.  While the circuits that do permit third-party releases may do so in limited or extraordinary circumstances,[18] one bankruptcy judge recently noted that “[a]lmost every proposed Chapter 11 Plan that I receive includes proposed releases.”[19]  From sexual-abuse scandals[20] to the crippling opioid epidemic,[21] it has become commonplace for a corporate debtor to file a plan of reorganization in which non-debtors receive a release from liability in exchange for a pecuniary contribution to the debtor’s reorganization.  Accordingly, this case provides the Supreme Court an opportunity to resolve a contentious issue that has meaningful practical implications.  For example, the various interpretations of Section 524(e) among the circuits increases the likelihood for corporate debtors to forum shop in search of a bankruptcy court that endorses third-party releases contained in a plan of reorganization.[22]  Moreover, the lack of clarity surrounding the permissibility of third-party releases and when they are integral to the debtor’s restructuring leads to uncertainty for all parties involved when negotiating a plan of reorganization.  Therefore, the time has come for the Supreme Court to determine what Section 524(e) actually means and this case welcomes that determination.

[1] John M. Czarnetzky, The Individual and Failure: A Theory of the Bankruptcy Discharge, 32 Ariz. St. L.J. 393, 412 (2000).

[2] Michael S. Etkin & Nicole M. Brown, Third Party Releases?–Not So Fast! Changing Trends and Heightened Scrutiny, 29 AIRA J. 22, 22 (2015).

[3] 11 U.S.C. § 1141(d)(1)(A).

[4] Dorothy Coco, Third-Party Bankruptcy Releases: An Analysis of Consent Through the Lenses of Due Process and Contract Law, 88 Fordham L. Rev. 231, 232 (2019); see also Etkin & Brown, supra note 2, at 22 (“A debtor might seek to extend third party releases to co-debtors, officers, directors, lenders, parents, guarantors, sureties, or insurance carriers where those parties could assert post-confirmation indemnification claims against the debtor, or where the non-debtor party is a potential source of funding for the plan of reorganization.”).

[5] Coco, supra note 4, at 232–33.

[6] See 11 U.S.C. § 524(g), (h).

[7] See In re Metromedia Fiber Network, Inc., 416 F.3d 136, 141 (2d Cir. 2005); In re Millennium Lab Holdings II, LLC, 945 F.3d 126, 140 (3d Cir. 2019); Menard-Sanford v. Mabey (In re A.H. Robins Co.) 880 F.2d 694, 702 (4th Cir. 1989); In re Dow Corning Corp., 280 F.3d 648, 657 (6th Cir. 2002); In re Airadigm Commc’ns, Inc., 519 F.3d 640, 656 (7th Cir. 2008); In re Seaside Eng’g & Surveying, Inc., 780 F.3d 1070, 1078 (11th Cir. 2015).

[8] Coco, supra note 4, at 240.

[9] See In re Pacific Lumber Co., 584 F.3d 229, 252–53 (5th Cir. 2009); In re W. Real Estate Fund, Inc., 922 F.2d 592, 600 (10th Cir. 1990).

[10] 11 U.S.C. § 524(e).

[11] In the Matter of Highland Capital Management, L.P., 48 F.4th 419 (5th Cir. 2022).

[12] Id. at 437–38.

[13] Id.

[14] Brief for a Writ of Certiorari at 4, Highland Capital Management, L.P. v. NexPoint Advisors, L.P., No. 22-631 (petition for cert. filed Jan. 5, 2023).

[15] Brief for Respondents at 2, Highland Capital Management, L.P. v. NexPoint Advisors, L.P., No 22-631 (petition for cert. filed Feb. 10, 2023).

[16] Id.

[17] Id. at 10.

[18] See Etkin & Brown, supra note 2, at 26.

[19] In re Aegean Marine Petroleum Network Inc., 599 B.R. 717, 726 (S.D.N.Y. 2019).

[20] In re Boys Scouts of America and Delaware BSA, LLC, 642 B.R. 504 (Bankr. D. Del. 2022).

[21] In re Purdue Pharma, L.P., 635 B.R. 26 (S.D.N.Y. 2021).

[22] Coco, supra note 4, at 265.

Photo by Ekaterina Bolovtsova via Pexels

By Sam Kiehl

Anytime you are stuck in a relationship that you want out of, it’s tough. But that’s especially so when you’re only five hundred twenty-six days into a nineteen-year contract with an embattled cryptocurrency exchange that allegedly used customer funds to make risky trades and reportedly owes creditors more than $3 billion.[1]  Fortunately for Miami-Dade County, a federal bankruptcy judge recently terminated the naming rights agreement of the Miami area arena between the county and FTX.[2]

In March 2021, the Miami-Dade County Board of County Commissioners approved a $135 million deal with FTX for naming rights of what was formerly American Airlines Arena.[3]  While $2 million a year went to the Miami Heat, the professional basketball organization that uses the twenty-one thousand capacity arena as its home venue, approximately $90 million of the agreement was allocated to the county’s anti-poverty and gun violence mitigation program, known as the Peace and Prosperity Plan.[4]

In response to the announcement that FTX would initiate Chapter 11 proceedings, however, Miami-Dade County and the Miami Heat immediately sought to terminate the business relationship between the parties and find a new naming rights partner for the arena.[5]  On November 22, 2022, the county petitioned the U.S. Bankruptcy Court for the District of Delaware to remove FTX’s name from the venue.[6]  This request came just over a month after the arena had finally replaced the aircraft associated with the arena’s original sponsor, American Airlines, with FTX’s logo on the arena’s roof.[7]

Most recently, on January 11, 2023, Judge Dorsey of the bankruptcy court approved a stipulation ending the naming rights agreement between the two parties.[8]  The order, which is retroactive to December 30, 2022, terminated all licenses and other rights granted by FTX to Miami-Dade County in accordance with the original agreement under any trademarks or trade names, including naming rights.[9]  The order does not prevent FTX and the county from asserting additional damage claims under the agreement moving forward.[10]  This means that starting soon, if not already, all FTX signage and advertising will be removed from the arena, which will proceed under the name Miami-Dade Arena until a new naming rights partner is found.[11]  Removing signage is not a small undertaking.  This will include removing FTX’s logo from the arena’s roof, the basketball court, entrances into the stadium, and even the logo from the polo shirts worn by security.[12]

While a naming rights deal of this magnitude being terminated so quickly into its term is surprising, it is not unheard of.  Remember Enron?  Several years before the Houston-based energy company’s massive collapse in the early 2000s, Enron entered a thirty-year $100 million contract with the professional baseball team, the Houston Astros, to acquire naming rights to their stadium.[13]  Less than three years into the contract, the Astros sought to terminate the deal when the Enron scandal became household news.[14]  Unlike FTX, Enron had already paid for the year ahead.[15]  So, despite Enron’s bankruptcy filing, the company refused to consent to the Astros’ seeking a third party to replace Enron in the naming rights arrangement.[16]  Enron’s main argument was that the naming rights contract did not include a provision that allowed the Astros to terminate the contract based on the company’s bankruptcy filing.[17]  Ultimately, due to public pressure and bad optics, the Astros agreed to pay Enron’s creditors $2.1 million to buy back the naming rights in an out-of-court settlement.[18]

Miami-Dade County and the Heat avoided misfortune to the extent suffered by the Astros, as FTX was already in arrears due to a $5.5 million payment going unpaid on January 1, 2023.[19]  Beyond this, the county learned from the Astros mistake and included a provision in its contract with FTX that said in the event of a default, which included an “insolvency event,” FTX would still be liable to pay “all unpaid fees for the three contract years following the date of termination” within sixty days.[20]

An overarching question following this debacle is whether it leads to concerns for another arena that houses the professional basketball team, the Los Angeles Lakers.  The Lakers, following Miami’s lead, entered into a massive $700 million twenty-year contract for the naming rights of their arena with another crypto exchange,[21]  Miami-Dade County and the Lakers both entered into these contracts worth hundreds of millions of dollars stretching across decades with FTX and during the peak of cryptocurrency in 2021.[22]  Counties and professional sports organizations may have to ask, moving forward, how much consideration should go into assessing the financial creditworthiness and long-term viability of a partner in a naming rights deal?  Or are they just going to continue to ask, who can show me the money?

All in all, while dealing with this fractured partnership has assuredly been tough on Miami-Dade County and its residents, at the very least, they may find some solace knowing that Madonna will be performing at Miami-Dade Arena later this year.[23]

[1] Ryan Browne, Collapsed Crypto Exchange FTX Owes Top 50 Creditors Over $3 Billion, New Filing Says, CNBC (Nov. 21, 2022, 9:34 AM),

[2] Dean Budnick, Miami Terminates FTX Arena Naming Rights Deal Following Crypto Exchange’s Bankruptcy, Variety (Jan. 15, 2023, 2:00 PM),; Christina Vazquez, Companies Already Inquiring with Miami-Dade County, Miami Heat Regarding Arena Naming Rights Deal, Local 10 (Jan. 17, 2023, 6:21 PM),

[3] Budnick, supra note 2.

[4] Id.; Budnick, supra note 2.

[5] Miami-Dade County and Miami Heat Statement on FTX, (Nov. 11, 2022, 6:47 PM),

[6] Budnick, supra note 2.

[7] Id.

[8] Julia Musto, FTX Bankruptcy Judge Terminates Miami Heat Arena Naming Rights Deal, Fox Bus. (Jan. 11, 2023, 2:38 PM),

[9] Id.

[10] Id.

[11] Judge Terminates FTX Naming Rights Deal for Miami Heat Arena, CBS News (Jan. 11, 2023 9:32 PM),

[12] Id.

[13] Charles Bowles & Ed Flynn, Sports Stadiums: What’s in A Name?, Am. Bankr. Inst. J., July 2015, at 38, 38 (2015).

[14] Id. at 39.

[15] Id.

[16] Id.

[17] Id.

[18] Id.

[19] Judge terminates FTX naming rights deal for Miami Heat arena, supra note 11.

[20] Sam Reynolds, FTX Owes Miami $16.5M For Arena Sponsorship Cancellation, CoinDesk (Nov. 12, 2022, 1:07 AM),

[21] Ronald D. White, FTX’s Downfall Casts a Shadow Over Other Sports-Rights Deals. What’s Up, Arena, L.A. Times (Nov. 18, 2022, 5:00 AM),

[22] Id.

[23] Madonna Announces ‘The Celebration Tour’, (Jan. 17, 2023),

By Cameron Bray

Equitable mootness is a common-law doctrine that prevents a Chapter 11 plan from being reviewed when an appellant has “failed and neglected diligently to pursue their available remedies to obtain a stay” and changes in circumstances “render it inequitable to consider the merits of the appeal.”[1]  Judges and practitioners alike tend to describe this doctrine as a limit on the jurisdiction of appellate courts to “unscramble the eggs” once substantial consummation of a plan for reorganization has occurred.[2]   Naturally, the exact contours of equitable mootness differ in every federal circuit, but typical “prudential” factors include (1) whether the plan has been “substantially consummated,” (2) whether a stay has been obtained, (3) whether the relief requested would affect the rights of third parties (i.e., other creditors), (4) whether the relief requested would affect the success of the plan, and (5) whether public policy supports finalizing judgment of the Bankruptcy Court.[3]

On January 10, 2022, the Supreme Court again denied certiorari of equitable mootness as applied to a debtor’s confirmed Chapter 11 plan for reorganization.[4]  In the case at bar, Paul C. Clark, Sr., and two other owners of a penthouse condominium in Maryland petitioned for certiorari of lower court decisions dismissing challenges to the confirmed bankruptcy plan at issue.[5]  Specifically, Clark and the petitioners appealed the Bankruptcy Court’s judgment allowing them to claim damages of only $750,552 when they had alleged more than $25 million in mold and flood damage to their seaside penthouse unit.[6]  By the time, petitioners appealed the order, the debtor-in-possession—the penthouse property manager—had already paid more than $2.8 million of its required creditor obligations under the confirmed Chapter 11 plan.[7]  Therefore, applying a four-factor balancing test, the District Court found that petitioners’ appeal was “equitably moot,” and the Court of Appeals for the Fourth Circuit affirmed shortly thereafter.[8]

With its decision in Clark v. Council of Unit Owners of the 100 Harborview Drive Condominium,[9] the Supreme Court denied challenges to the doctrine of equitable mootness for the fourth time in its current Term.[10]  Moreover, the denials encompass a wide variety of appeals across the United States.  In the first case, involving Puerto Rico and its plan to restructure $18 billion worth of bonds secured by sales tax, the Court of Appeals for the First Circuit denied review of the island’s confirmed bankruptcy plan, citing equitable mootness.[11]  In the second case, involving a so-called “critical” vendor claiming it had been unjustifiably denied payment for $2 million worth of services by the Bankruptcy Court, the Second Circuit also denied review on equitable mootness grounds.[12]  Finally, in the third case, involving an investor who claimed he and other unsecured creditors had been unfairly discriminated against in the Chapter 11 plan and received only 5% recovery on their claims, the Third Circuit dismissed the parties’ appeal as “equitably moot” after the debtor-in-possession had already issued and distributed new securities.[13] 

While equitable mootness is a widely held and applied doctrine in almost every circuit, the rule has been criticized by both practitioners and judges as an undue, insurmountable hurdle toward appellate review of a debtor’s confirmed Chapter 11 plan for reorganization.[14]  Of the doctrine’s critics, perhaps the most famous is Justice Alito, who criticized the “weaponization” of equitable mootness while serving on the Court of Appeals for the Third Circuit.[15]  Dissenting from the en banc court’s opinion in In re Continental Airlines,[16] then-Circuit Judge Alito warned that there is no clear rule for when a bankruptcy appeal is deemed “equitably moot” and that having such a rule risks slamming the courthouse door on justified litigants appealing Chapter 11 plans.[17]  While Justice Alito’s position remains a minority on the Court—which has yet to grant certiorari on the question of equitable mootness—the Court’s opinion may change if appellate review of a controversial case is denied as “equitably moot” now that the debtor has been allowed to proceed with its multimillion- or multibillion-dollar settlement.[18] 

[1] In re Popp, 323 B.R. 260, 271 (B.A.P. 9th Cir. 2005) (citation omitted).

[2] In re Castiac Partners II, LLC, 823 F.3d 966, 968 (9th Cir. 2016) (citation omitted).

[3] In re Philadelphia Newspapers, LLC, 690 F.3d 161, 168 (3d Cir. 2012) (citation omitted).

[4] 142 S. Ct. 772 (2022).

[5] Petition for Writ of Certiorari, 2021 WL 5260064 (U.S. 2021) (No. 21-697).

[6] Clark v. Unit Owners of 100 Harborview Drive Condo., 857 Fed. Appx. 729, 730–31 (4th Cir. 2021), cert. denied, 142 S. Ct. 772 (2022). 

[7] Id. at 730.

[8] Id. at 731 (noting that Clark and petitioners did not attempt to stay implementation of the confirmed plan in bankruptcy court and that there had been “substantial consummation” of the plan since its confirmation date).  Both courts also noted that petitioners’ appeal threatened to “nullify the success that ha[d] already been achieved under the Confirmed Plan” and that reversal would “harm the interests of third-party creditors and other unit owners.” Id.

[9] 142 S. Ct. 772 (2022).

[10] Alex Wolf, Supreme Court Again Skips Review of Bankruptcy Appeal Roadblock, Bloomberg L. (Jan. 10, 2022),  The other denials of certiorari were: (1) Elliott v. Fin. Oversight & Mgmt. Bd. for P.R., 142 S. Ct. 74 (Oct. 4, 2021); (2) GLM DFW, Inc. v. Windstream Holdings, Inc., 142 S. Ct. 226 (Oct. 4, 2021); and (3) Hargreaves v. Nuverra Env’t Solutions, Inc., 142 S. Ct. 337 (2021).

[11] In re Fin. Oversight & Mgmt. Bd. for P.R., 987 F.3d 173 (1st Cir. 2021).

[12] In re Windstream Holdings, Inc., 839 Fed. Appx. 634 (2d Cir. 2021).

[13] In re Nuverra Env’t Solutions, Inc., 834 Fed. Appx. 729 (3d Cir. 2021).

[14] See, e.g., Bruce A. Markell, The Needs of the Many: Equitable Mootness’ Pernicious Effects, 93 Am. Bankr. L.J. 377 (2019).

[15] Nordhoff Invs., Inc. v. Zenith Elecs. Corp., 258 F.3d 180, 192 (3d Cir. 2001) (Alito, J., concurring in judgment) (“As this case shows, our court’s equitable mootness doctrine can easily be used as a weapon to prevent any appellate review of bankruptcy court orders confirming reorganization plans.  It thus places far too much power in the hands of bankruptcy judges.”).

[16] 91 F.3d 553 (3d Cir. 1996).

[17] In re Cont’l Airlines, 91 F.3d 553, 567 (3d Cir. 1996) (Alito, J., dissenting).

[18] See Brian Mann, Federal Judge Rejects Government’s Bid to Delay Purdue Pharma’s Bankruptcy Settlement, NPR (Oct. 14, 2021), (noting concern of the U.S. Trustee that consummation of the Purdue Pharma bankruptcy plan could provide later equitable mootness grounds for the debtor upon appeal to the Second Circuit).  However, on December 16, 2021, the District Court for the Southern District of New York invalidated the debtor’s confirmed Chapter 11 plan as unconstitutional and beyond the scope of Title 11. In re Purdue Pharma, L.P., 2021 WL 5979108 (S.D.N.Y. Dec. 16, 2021) (finding the Bankruptcy Court lacked authority to approve Purdue Pharma’s proposed non-consensual third-party releases as part of the plan for reorganization).  Recently, the debtor filed with the Bankruptcy Court for the Southern District of New York a proposed settlement agreement under which the controlling Sackler family would pay between $5.5 and $6 billion to address the U.S. opioid crisis. Jan Hoffman, Sacklers and Purdue Pharma Reach New Deal with States over Opioids, N.Y. Times (March 3, 2021),

10 Wake Forest L. Rev. Online 55

Sara Kathryn Mayson*

I.  Introduction

It is no secret that many American farmers are in financial trouble, specifically small family farmers.  As a part of an effort to alleviate farmers in a struggling agriculture economy, Congress passed the Family Farmer Relief Act of 2019, an amendment to Chapter 12 of the Bankruptcy Code that expands specialized bankruptcy relief to more farmers.[1]  The bill was signed into law on August 23, 2019, and it became effective immediately.  Chapter 12 of the Bankruptcy Code allows small family farms to continue their farming operations while creating a debt repayment plan that successfully reorganizes their business through a set of provisions “created specifically to provide repayment flexibility and reorganizational advantages for family farms during poor economic times.”[2]

This amendment increases the debt limit of Chapter 12 from $4.4 million to $10 million.[3]  The change now incorporates farmers who were originally meant to be protected, as the farming industry has changed since Chapter 12 was originally enacted in 1986 and amended in 2005.  While the Family Farmer Relief Act of 2019 adjusts the definition of a family farmer to promote the underlying policy behind Chapter 12, the amendment also engages in something deeper.  The amendment directly aims to help small family farmers remain in business by restructuring their debts, but it also indirectly targets the development and maintenance of the rural communities where these farms are located.

This Article will discuss the history and purpose of Chapter 12, the continued need for Chapter 12 in the Bankruptcy Code, and the need for the 2019 amendment.  The Article will also touch on the broader implications of Chapter 12 and the importance of preserving small family farms for rural communities and society as a whole.  Chapter 12 is important beyond outside simply the bankruptcy context, because (i) reorganizing and facilitating the continued operation of small family farms strengthens the economy of the communities where they are located and provides food security, (ii) the benefits of megafarms are limited, if not outweighed, by the negative impacts they have on their surrounding communities, and (iii) a healthy rural economy creates a healthier urban economy.  The Family Farmer Relief Act of 2019 is an important amendment that realizes Chapter 12’s design by assisting small family farms to reorganize during economic hardship and continues to support the benefits of small family farms.

II.  History

In the 1980s, thousands of family farms were foreclosed because of an agricultural economic crisis that rivaled conditions during the 1930s.[4]  One contributing factor to the crisis was an agricultural boom in the 1970s which encouraged farmers and investors to expand operations and leverage their farming assets,[5] a credit option made easier under new federal law which allowed farmers to take out higher risk loans.[6]  However, the strong agriculture market of the 1970s began to crumble in the early 1980s, leaving farmers with large loans and high interest rates that they could not afford and assets that were no longer valuable enough to secure those loans.  These dire circumstances came to a head as a result of  various issues such as: economic forces outside agriculture that caused interest rates to dramatically increase; a grain embargo in 1980 that lowered commodity prices while production costs were increasing;[7] and the plummet in value of the farmland that secured most farm debt by the late 1980s.[8]  The massive dissolution of family farms indicated that the existing reorganization provisions under the Bankruptcy Code were ineffective to provide the needed debt relief to family farmers.  In response, Congress enacted the Family Farmers Bankruptcy Act of 1986 which created a new proceeding under the Bankruptcy Code titled Chapter 12, designed specifically for family farmers to help avoid farm foreclosures in favor of reorganizations and continued operation.[9]  Chapter 12 of the Bankruptcy Code was enacted to “give family farmers facing bankruptcy a fighting chance to reorganize their debts and keep their land.”[10]

III.  Chapter 12

Chapter 12 is a specific type of bankruptcy available to family farmers, a defined term under the Bankruptcy Code determined by a debtor’s farm income, farm debt, and engagement in farming.[11]  Upon filing for bankruptcy under Chapter 12, a family farmer receives judicial protections, such as an automatic stay, which prevent creditors from certain debt collections and foreclosing on property.[12]  Throughout bankruptcy, the Chapter 12 debtor will continue to operate the farm and a trustee is appointed to monitor and oversee the case.[13]

Within 90 days of filing, the debtor must submit a reorganization plan to the bankruptcy court, proposing a repayment plan which is typically over a three- to five-year period.[14]  The plan is meant to restructure a farmer’s debt through debt modification.  This is accomplished by mechanisms uniquely available to family farmers under Chapter 12, such as reducing a secured debt to the value of the collateral, lowering the interest rate on a debt, and extending a loan’s repayment term.[15]  A secured debt may be bifurcated if the debt exceeds the value of the collateral, in which case the debt amount above the value of the collateral is reclassified as unsecured debt.[16]  A Chapter 12 plan must provide for full payment of priority claims,[17] and a debtor is required to pay all secured debts in full, in addition to market rate interest if the payment occurs over time.[18]

This secured debt repayment may be extended beyond the life of the plan, providing extra flexibility in light of the sporadic income stream of farm products.[19]  Chapter 12 debtors may, however, only be required to pay a small portion of their unsecured debt.[20]  Unsecured creditors, or unsecured portions of a secured claim, are only entitled to receive at least as much as they would receive in a liquidation under Chapter 7 and, in most cases, the debtor’s projected net disposable income.[21]  Upon successful completion of the plan, the farmer receives a discharge and any debt left unpaid to unsecured creditors is forgiven.[22]

Prior to the enactment of Chapter 12, family farmers could only reorganize under Chapter 11 or Chapter 13 of the Bankruptcy Code.[23]  Chapter 11, however, is typically used for restructuring large businesses.  Under Chapter 11, the debtor must propose a plan that is supported by at least a majority of the debtor’s creditors.[24]  The unequal bargaining power between farmers and creditors made this plan requirement unrealistic for most farmers.[25]  Additionally, the absolute priority rule requires a debtor to pay unsecured creditors in full if they object to the plan in order to maintain any ownership interest in their property. [26]  Chapter 12, however, does not require creditor support and a plan may be approved over creditor objections, compelling debt adjustments while enabling a farmer to keep its property. [27]  The absolute priority rule is also replaced in Chapter 12 by the liquidation and disposable income tests to allow reorganization for the family farmer along with some security for creditors. [28]

Chapter 13 is designed for individuals with regular income seeking to reorganize their debts.  This chapter of the Bankruptcy Code is unavailable to corporate or partnership farmers, or any individual whose debt exceeds a prescribed amount.[29]  While the plan does not require creditor acquiescence, the debt ceiling for Chapter 13 prevents many family farmers from qualifying.[30]  Additionally, Chapter 13 restricts reorganization of real estate debt to residential property, which often precludes a farmer’s ability to restructure a typical family farm mortgage.[31]  Chapter 13 also requires regular payments to creditors and complete payment to secured creditors before receiving a discharge.  The unpredictable nature of farm income hinders regular payments and the ability to pay off large secured debts within three to five years, meaning that any Chapter 13 case filed by a family farmer would inevitably be dismissed for noncompliance.

These reorganization impediments under Chapter 11 and 13 would force family farmers into liquidation, while Chapter 12 successfully deals “with the special problems created by farm bankruptcies which each of the other options failed to resolve.”[32]

IV.  Impact of Chapter 12 and Adjustments

Proponents of Chapter 12 believe its enactment has brought great benefits to small family farmers.[33]  Some scholars, though, question the need for Chapter 12.[34]  They argue (i) that Chapter 12 has not had a significant impact because it has rarely been utilized and (ii) that the low filing numbers of Chapter 12 bankruptcies as compared to other chapters indicate Chapter 12’s futility in providing reorganization relief to small family farmers.[35]  These Chapter 12 filing statistics, though, are misleading.  The existence of this chapter in the Bankruptcy Code provides a uniform system of debt restructuring that facilitates negotiations outside of court.  Chapter 12 has had a shadow effect, providing farmers with a bargaining chip to get creditors to negotiate outside of court.[36]

Because Chapter 12 gives farmers more leverage to demand concessions from secured creditors than under any other reorganizational chapter,[37] creditors are encouraged to engage in out-of-court negotiations.  One study finding support for the out-of-court influence was in Iowa where attorneys reported that one-third to one-half of their clients’ farm credit disputes were negotiated after the enactment of Chapter 12.[38]  Additionally, the number of filings will naturally be higher when the population that qualifies for relief under those provisions is larger.[39]  Despite the limited number of filings, the success rate of Chapter 12 is greater than cases filed under other reorganization chapters.  Over the last ten years, Chapter 12 has enjoyed a success rate of around forty percent, while Chapter 11 has had between a ten to thirty percent reorganization success rate and Chapter 13 only has about a thirty-seven percent success rate.[40]

Lawmakers recognize the value of Chapter 12, even though it only reaches a small percentage of the population.  In 2005,[41] Congress made Chapter 12 a permanent provision of the Bankruptcy Code as a part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).[42]  Not only did BAPCPA make Chapter 12 a permanent provision of the Bankruptcy Code, it also modified the definition of family farmer to align with the realities of the farming industry.  The definition was expanded to include part-time farmers who earn at least half of their income from farm work instead of the previous eighty percent income requirement.[43]  Also, the look back period to determine whether a debtor meets the definition of family farmer was extended to cover the previous three years instead of the last year, providing greater flexibility for farmers who might have sought non-farm work temporarily to address financial problems with their farming operation.[44]  Additionally, the debt limit was raised.[45]  The revised definition of family farmers and increase in debt limits was a response to the change in how small family farmers operate and earn their income.  These changes were made to provide relief to the types of farmers that Congress intended to help when Chapter 12 was originally enacted.

V.  Why Is the Debt Limit Increase Necessary?

Although the Family Farmer Act of 2019 changed only one aspect of Chapter 12, it was critical.  The debt limit is a bright line rule that determines whether Chapter 12 relief is available to a farmer.  Debt limits in Chapter 12 are extremely important because of the debt-centric nature of farming.  Farmers are required to obtain credit and take on debt in order to operate, and a lot of debt at that.[46]  National farm debt has reached over 416 billion dollars and has increased 182 percent since 1986.[47]  The 2019 amendment allows the purpose of Chapter 12 to be fulfilled since farming has changed significantly over the last few decades.  Additionally, the current economic conditions that farmers face further punctuate the need to provide access to specialized restructuring relief. [48]

The original debt limit restrictions in Chapter 12 were set to limit relief to small family farmers only,[49] in part because large agricultural businesses could successfully reorganize under Chapter 11 without the same impediments that a small farm would face.[50]  Land prices generally indicate an appropriate debt limit for debtors.[51]  The original $1,500,000 cap was “set in 1986 when farm land values were low,”[52] and the amended debt limit in 2005 was to account for inflation.[53]  By 2017, farmland prices had almost tripled since 2005.[54]

With increased land values, family farmers were able to leverage that land for larger loans.[55]  The larger loans were needed as production costs increased.[56]  Additionally, farm equipment has changed and become more complicated, bearing a higher price.[57]  The increased debt limit reflects the increased cost of production as well as the increased value of land.

Although farmland has increased in value, other economic conditions have created an agricultural downturn in addition to more expensive production costs.  Mimicking the pattern from the 1970s and 1980s, there was an agricultural boom at the beginning of the 21st century that began to decline in 2013.[58]  Since then, net farm income has declined for the past five years[59] and is almost half of what it was in 2013,[60] as commodity prices decrease as a result of globalization.[61]  Natural disasters resulting from climate change have devastated farms,[62] and the trade war with China has displaced a large market of consumers.[63]  The result of the accumulation of these pressures resembles the conditions of the 1980s farm crisis.[64]

These pressures have manifested themselves in a variety of ways. Some small farmers are retiring or selling their farms, while others have filed for bankruptcy.[65]  More than 100,000 farms closed between 2011 and 2018,[66] and Chapter 12 farm bankruptcy filings have increased every year for the past five years with a twenty percent increase in 2019 alone, ending at an eight-year high.[67]

How many more farmers will qualify for Chapter 12 protection going forward is unclear.  One agricultural policy analyst has found that only around 5,000 farms would become newly eligible for Chapter 12 relief out of the 2.1 million existing farms.[68]  If this is true, the 2019 amendment might not yield as much assistance as lawmakers in Washington had hoped.  This study, however, based its findings on data from 1992 to 2011.  In 2011, the national farm debt was 139 billion dollars,[69] while today that debt has almost tripled to 416 billion dollars.  Only time will tell how effective the increased debt limit will be in preserving small family farms.

Raising the debt limit gives more farmers the opportunity to benefit from favorable and flexible restructuring under Chapter 12 that is needed in today’s depressed farm economy.[70]  Following the 2019 amendment, Chapter 12 is now more aligned with family farm scale and credit needs.[71]  The amendment was intended to prevent “mass liquidations and further consolidation in the largest sectors of the industry” and will enable more small family farmers to retain their assets and continue their operations.[72]

VI.  Broader Implications: Why Does Chapter 12 Matter?

The Family Farmer Relief Act of 2019 is a bill that was aimed at preserving small family farmers in America, an important societal goal.  The Supreme Court has noted that “[f]amily farmers hold a special place in our Nation’s history and folklore,”[73] but some legal scholars argue that family farmer protections are simply pursued for sentimental reasons.[74]  Small family farms, though, provide tangible benefits for our country, besides nostalgia, that support a grant of specialized legal relief.

One of the largest critiques of providing additional agricultural relief is that policymakers rely on agricultural relief as the pipeline for rural development.[75]  While this critique may have some validity, it does not follow that support for small family farms is inconsequential.  Although farms and agriculture may no longer be the backbone for rural America, small family farms still play an important role in our society.  Small family farms, the kind Chapter 12 aims to benefit, contribute to the security of our food supply chain, biodiversity, and the vitality of rural economies.

If small family farms disappeared, large megafarms would be vulnerable to food supply failure.  This is because large farms typically specialize in only a few products and monocultures.[76]  In the event of a disease or a natural disaster that destroys the product or isolates a region from the rest of the country, that region loses its entire access to that product.[77]  Additionally, small farms often produce specialized foods that bolster biodiversity.[78]  Because megafarms focus on a limited number of products, small farms offer diversification of our food supply.  And even if the small farmer grows the same crop as a large producer, that farmer will often cultivate a different variety of that product.[79]  Food chain supply security, biodiversity, and food variety all support preservation of small family farms.

Rural economies and communities also benefit from small family farms, experiencing improved qualities of life.  While megafarms might appear to create benefits for rural communities, such as jobs, more efficient farming, and lower food costs, the community suffers when a small farm is taken over.  The vertical integration of megafarms forecloses open and competitive markets at a local level.[80] 

Additionally, the perceived greater efficiency of megafarms is not realized.[81]  The local economy and consumers do not receive the monetary benefits of megafarm production and investment, as supplies are obtained outside the community and profits go to investors, often in urban areas. [82]  Just as large corporate farms are less likely to put money into the local economy, they are also less likely to care about the environmental impacts of their operations.  Because small family farms are connected to their land and the community, they are more likely to “manage their natural resources responsibly.”[83]  Some scholars have suggested that rural communities do not need small family farms because those farms actually depend on the local rural economy to continue.[84]  But studies have consistently shown that rural communities with small family farms have a higher standard of living than rural communities surrounded by industrialized farms.[85]

Small family farm success and the adjacent success of its rural economy is important because rural prosperity affects the productivity and success of our entire society.  Rural and urban areas are interdependent.  Rural communities provide many things, including food, energy, and unique experiences, while urban communities provide a market, specialized services, and resources for investment.[86]  Quality of life in rural and urban communities also in turn impact one another.[87]

Taken together, small family farms should continue to receive policy attention because of the tangible benefits they provide to rural communities, as well as their urban counterparts.  Protecting small family farms should not be labeled as the “silver bullet” solution to rural economic problems though; family farms are only one important piece of rural community success.[88]

VII.  Conclusion

The Family Farmer Relief Act of 2019’s debt limit increase for Chapter 12 qualification will help family farmers maintain their operations and potentially encourage farmers away from retiring and selling off their productions to large farm operations that are starting to dominate agriculture.  The purpose of Chapter 12 is to provide reorganization relief to small family farmers during economic difficulties and the changes in farming operations necessitated this amendment.  Chapter 12’s preservation of small family farmers in turn provides food supply security and benefits rural communities.  And while this is true, both agriculture and non-farm rural development should be integrated because agriculture alone cannot revitalize rural communities.[89]  Nevertheless, without policies supportive of family farms, rural and urban communities would suffer as small family farms disappeared.

The unique circumstances of small family farmers required a specialized provision to accomplish the reorganization goals of the Bankruptcy Code.  The need for individualized rules for particular areas in our economy is further illustrated by the special treatment for small businesses and the recent enactment of the Small Business Reorganization Act.[90]  Chapter 12 continues to provide relief to small family farmers that is unavailable under other reorganization provisions.  Protecting individual producers is not just about sentiment; it’s also about our nation’s prosperity as a whole.

*   Law clerk for the Honorable Robert L. Jones, United States Bankruptcy Judge for the Northern District of Texas. Wake Forest University School of Law, J.D. 2019. University of North Carolina at Chapel Hill, B.A. 2016. Sara Kathryn is a former Articles Editor of the Wake Forest Law Review and would like to thank her family and friends for their support and feedback during the publishing process. In particular, she thanks her mother, Ann Matthews, for inspiring and sharing her love of bankruptcy law; Angus Jackson for his assistance throughout the writing process, and to Mike Garrigan for believing in this Article and encouraging her to publish it.

       [1].   See Family Farmer Relief Act of 2019, Pub. L. No. 116-51, 133 Stat. 1075.

       [2].   165 Cong. Rec. H7439 (daily ed. July 25, 2019) (statement of Rep. Delgado).

       [3].   Revision of Certain Dollar Amounts in the Bankruptcy Code Prescribed under Section 104(a) of the Code, 84 Fed. Reg. 3488 (proposed Feb. 21, 2019) (noticing the debt limit of $4,411,400, effective April 1, 2019).

       [4].   David Ray Papke, Rhetoric and Retrenchment: Agrarian Ideology and American Bankruptcy Law, 54 Mo. L. Rev. 871, 881–82, 889–90 (1989).

       [5].   U.S. Dept. Agric.: Econ. Res. Serv., Are Farmer Bankruptcies a Good Indicator of Rural Financial Stress? 3 (1996) (“The economic climate of the 1970s encouraged farmers to expand production and benefit from export opportunities and strong commodity prices. High rates of inflation and low real interest rates further encouraged investment in farmland.  Per acre farmland values increased more than threefold from $196 in 1970 to $823, its 1982 peak.  Total farm-sector equity grew 255 percent during 1970-80.  Total farm business debt nearly quadrupled from $48.8 billion in 1970 to $193.8 billion at its peak in 1984.  A considerable number of farmers were financially extended and vulnerable to sudden shifts in economic forces.”),

       [6].   Farm Credit Act of 1971, Pub. L. No. 92-181, 85 Stat. 583 (codified as amended in scattered sections of 31 U.S.C.) (increasing the loan-to-value ratio of mortgage debt).

       [7].   Nat’l Bankr. Rev. Comm’n, Bankruptcy: The Next Twenty Years 1012 (1997),

       [8].   Susan A. Schneider, Bankruptcy Reform and Family Farmers: Correcting the Disposable Income Problem, 38 Tex. Tech L. Rev. 309, 324–25 (2006).

       [9].   Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub. L. No. 99-554, 100 Stat. 3088, 3105–16 (1986).

     [10].   H.R. Rep. No. 99-958, at 48 (1986), reprinted in 1986 U.S.C.C.A.N. 5246, 5249.

     [11].   11 U.S.C. § 101(18) (2018).  The provision also includes family fishermen as of 2005.

     [12].   § 362.

     [13].   §§ 1203, 1204, 1207; see also § 1202(a) (protecting creditors’ interests).

     [14].   § 1221.

     [15].   P. Maureen Bock-Dill, Note, Get Down and Dirty: The Eighth Circuit’s Admonition to Farmers Seeking the Protection of Chapter 12, 43 Ark. L. Rev. 701, 701 (1990).

     [16].   §§ 506(a); 1225(a)(5)(B).

     [17].   Priority claims are defined in the Code, but include things like taxes owed to the IRS and child support payments.

     [18].   § 1225(a)(5).

     [19].   § 1222(b)(9).

     [20].   Susan Schneider, Chapter 12 Bankruptcy: Family Farm Restructuring, 2015 Ark. L. Notes 1686 (2015) [hereinafter Schneider, Family Farm Restructuring].

     [21].   §§ 1225(a)(4), (b).

     [22].   § 1228.

     [23].   Of course, they may be able to still proceed under these chapters.

     [24].   § 1126.

     [25].   Mark Bromley, The Effects of the Chapter 12 Legislation on Informal Resolution of Farm Debt Problems, 37 Drake L. Rev. 197, 197 (1988); Jonathan K. Van Patten, Chapter 12 in the Courts, 38 S.D. L. Rev. 52, 97 (1993).

     [26].   § 1129(b)(2)(B)(ii).

     [27].   Schneider, Family Farm Restructuring, supra note 20.

     [28].   See In re Foster, 84 B.R. 707, 710 (Bankr. D. Mont. 1988)

     [29].   § 109(e) (unsecured debt limit of $419,275 and secured debt limit $1,257,850).

     [30].   In re Perkins, 581 B.R. 822, 833–34 (B.A.P. 6th Cir. 2018).

     [31].   Schneider, Family Farm Restructuring, supra note 20.

     [32].   Bock-Dill, supra note 15, at 703.

     [33].   Nat’l Bankr. Rev. Comm’n, supra note 7, at 1014 (citing To Extend the Period During Which Chapter 12 of Title 11 of the United States Code Remains in Effect: Hearing on H.R. 5322 Before the Subcommittee on Economic and Commercial Law of the House Committee on the Judiciary, 102d Cong., 2d Sess. 21 (1992) (“Chapter 12 has saved literally thousands of family farms, stabilized farm values, and encouraged more out-of-court negotiations and settlements between lenders and farmers.”) (testimony of A. Thomas Small, one of the principal drafters of Chapter 12, before the House Judiciary Committee)).

     [34].   These critiques were generally raised prior to 2005, when Chapter 12 became a permanent provision in the Bankruptcy Code.

     [35].   Katherine M. Porter, Phantom Farmers: Chapter 12 of the Bankruptcy Code, 79 Am. Bankr. L.J. 729, 729–30 (2005).

     [36].   Bromley, supra note 25, at 197–98; Schneider, Family Farm Restructuring, supra note 20; Van Patten, supra note 25, at 97.

     [37].   Porter, supra note 35, at 731.

     [38].   Chris Faiferlick & Neil E. Harl, The Chapter 12 Bankruptcy Experience in Iowa, 9 J. Agric. Tax’n & L. 302, 331 (1988).

     [39].   Today there are about 2 million farms, which includes farms that do not fit into the definition of family farmer under the Code; compared to 32.5 million businesses and over 327 million people in America today.

     [40].   U.S. Tr. Program, U.S. Dep’t of Justice, Chapter 12 Standing Trustee FY18 Annual Reports (2019), (278 new cases were filed in 2018 and 97 were completed with a plan); see Jamey M. Lowdermilk, A Fighting Chance? Small Family Farmers and How Little We Know, 86 Tenn. L. Rev. 177, 192 n.100 (2018) (citing U.S. Trustee Chapter 12 Standing Trustee Annual Reports for years 2009-2017 and finding that “approximately forty percent of Chapter 12 cases complete a reorganization plan measured by the number of Chapter 12 cases closed with a completed plan divided by the number of new Chapter 12 cases filed between January 1, 2009, and December 31, 2017 (the years for which data is available) ((122+137+154+119+99+88+97+118+125) / (259+259+194+221+270+347+428+421+264) = 0.40)”).   When the data from 2018 is included, the percentage goes down slightly, to a 39.3% success rate.  See sources cited supra this note.  See also Cathy Moran, Chapter 11 Bankruptcy Explained, Bankr. in Brief, (last visited Mar. 8, 2020) (“The rate of successful Chapter 11 reorganizations is depressingly low, sometimes estimated at 10% or less.”); Elizabeth Warren & Jay L. Westbrook, The Success of Chapter 11: A Challenge to the Critics, 107 Mich. L. Rev. 603, 614 (2009) (“The data show that the success rate is at least twice what conventional wisdom holds, approaching a third of the cases filed, even if a simple, naïve metric is employed.”); Jonathan Petts, Why is Chapter 13 Probably a Bad Idea?, Upsolve, (last updated Aug. 16, 2019) (“[O]nly 33% of Chapter 13 cases result in a discharge . . . .”); Ed Flynn, Chapter 13 Case Outcomes by State, 33 Am. Bankr. Inst. J., Aug. 2014, at 40, 76 (chapter 13 plan completion was about 36% between 2007 to 2013); Ed Flynn, Success Rates in Chapter 13, 36 Am. Bankr. Inst. J., Aug. 2017, at 38, 38 (showing a success rate of 38.8% between 2010 and 2016).

     [41].   Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 23.

     [42].   See Jerome M. Stam & Bruce L. Dixon, U.S. Dept. Agric.: Econ. Res. Serv., Farmer Bankruptcies and Farm Exits in the United States, 1899-2002, at 31–32 (2004),
; see also Susan A. Schneider, History of Chapter 12 Bankruptcy: On Again, Off Again, 18 Agric. L. Update 1, 1–2 (2001) (seven-year sunset provision that was renewed by Congress several times maintaining its temporary nature),

     [43].   Porter, supra note 35, at 734.

     [44].   See Pub. L. No. 109-8, § 1005 (codified as amended at 11 U.S.C. § 101(18)(A)(ii) (2018)).

     [45].   See What is Chapter 12 Family Farmer Bankruptcy?, Am. Farm Bureau Fed’n (Apr. 11, 2019),

     [46].   Nat’l Bankr. Rev. Comm’n, supra note 7, at 1018 (“Even at the family farm level, farming is a debt-intensive business. Farm debt does not only include land and equipment financing, but the cyclical nature of farming requires farmers to finance their working capital on a year-to-year basis.”).

     [47].   Robert J. Keach, ABI Testifies on Family Farmers and Small Business Reorganizations, 38 Am. Bankr. Inst. J., Aug. 2019, at 8, 8.

     [48].   P.J. Huffstutter, U.S. Bill Raising Debt Ceiling for Farm Bankruptcies Heads to White House, NASDAQ (Aug. 2, 2019, 6:18 PM), (“With what’s going on in farmland today – as net income has continued to decrease, all the market uncertainty and the natural disasters – this is a very timely change.”).

     [49].   Nat’l Bankr. Rev. Comm’n, supra note 7, at 1017.

     [50].   Id.

     [51].   Alexandria C. Quinn, The Next Generation of Chapter 12 Bankruptcy: Revising the Remedy, 22 Drake J. Agric. L. 245, 261–62 (2017).

     [52].   Nat’l Bankr. Rev. Comm’n, supra note 7, at 1017.

     [53].   Porter, supra note 35, at 734.

     [54].   Quinn, supra note 51, at 262.

     [55].   See Nat’l Bankr. Review Comm’n, supra note 7, at 1017, discussing how the $1.5 million set in 1986 had not changed at the time of the report in 1997.

     [56].   Keach, supra note 47, at 8 (“Relative to 1986, and in nominal dollars, production expenses in agriculture have increased by 198 percent and farm debt has increased by 182 percent, while net cash income has experienced only half of that growth . . . .”).

     [57].   Not Fake News: Congress Enacts New, Sensible Bankruptcy Reform, 38 Am. Bankr. Inst. J., Oct. 2019, at 10, 76 (“It had gone from two-wheel drive tractors to monster machines pulling wide, wide swaths of equipment with GPS precision.  So today’s $10 million limit is basically today’s equivalent of $1.5 million back in 1986.”). 

     [58].   Alana Semuels, ‘They’re Trying to Wipe Us Off the Map.’ Small American Farmers Are Nearing Extinction, Time (Nov. 27, 2019),

     [59].   165 Cong. Rec. H7439 (daily ed. July 25, 2019) (statement of Rep. Delgado).

     [60].   Semuels, supra note 58.

     [61].   P.J. Huffstutter & Jason Lange, Wall Street Banks Bailing on Troubled U.S. Farm Sector, Reuters (July 11, 2019),

     [62].   165 Cong. Rec. H7438 (daily ed. July 25, 2019) (statement of Rep. Cicilline).

     [63].   Humeyra Pamuk & Julie Ingwersen, Farm Real Estate Prices Holding Up, But USDA Worried About a Fall, Reuters (Feb. 21, 2019),

     [64].   Huffstutter & Lange, supra note 61 (quoting Michelle Bowman, a governor at the U.S. Federal Reserve, that farm decline was a “troubling echo” of the 1980s farm crisis).

     [65].   U.S. Farm Bankruptcies Hit an Eight-Year High, Am. Bankr. Inst. (Jan. 31, 2020),

     [66].   Semuels, supra note 58.

     [67].   Admin. Office of U.S. Courts, U.S. Bankruptcy Courts – Business and Nonbusiness Cases Filed, by Chapter of Bankruptcy Code, During the 12-Month Period Ending Dec. 31, 2019; Admin. Office of U.S. Courts, U.S. Bankruptcy Courts – Business and Nonbusiness Cases Filed, by Chapter of Bankruptcy Code, During the 12-Month Period Ending Dec. 31, 2018; Admin. Office of U.S. Courts, U.S. Bankruptcy Courts – Business and Nonbusiness Cases Filed, by Chapter of Bankruptcy Code, During the 12-Month Period Ending Dec. 31, 2017 (counting 498 Chapter 12 cases filed in 2018, while 595 were filed in 2019).

     [68].   Jim Monke, Farm Debt and Chapter 12 Bankruptcy Eligibility, CRS Insight (Mar. 15, 2019),

     [69].   Jennifer Ifft et al., U.S. Dept. Agric.: Econ. Res. Serv., Debt Use by U.S. Farm Businesses, 1992-2011, at 6 (2014),

     [70].   165 Cong. Rec. H7439, supra note 59.

     [71].   Keach, supra note 47, at 8.

     [72].   P.J. Huffstutter, U.S. Bill Raising Debt Ceiling for Farm Bankruptcies Heads to White House, Reuters (Aug. 2, 2019),
(quoting Sen. Grassley).

     [73].   Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 209 (1987).

     [74].   See Porter, supra note 35, at 736–37.

     [75].   See, e.g., Karl N. Stauber, Why Invest in Rural America – And How? A Critical Public Policy Question for the 21st Century, Econ. Rev., 2d Q. 2001, at 34­–35.

     [76].   Mario Hereto et al., Farming and the Geography of Nutrient Production for Human Use: A Transdisciplinary Analysis, 1 Lancet Planetary Health e33, e37–e38 (2017) (shifts to larger-scale industrial farming are associated with declines in the diversity of nutritional diversity because they are primarily monocultures).

     [77].   See, e.g., Semuels, supra note 58; Kelsey Nowakowski, Why We Need Small Farms, Nat’l Geographic (Oct. 12, 2018),

     [78].   Nowakowski, supra note 77.

     [79].   James K. Boyce, A Future for Small Farms? Biodiversity and Sustainable Agriculture 6 (Univ. of Mass. Amherst Political Econ. Research Inst., Working Paper No. 86, 2004).

     [80].   Nat’l Comm’n on Small Farms, U.S. Dep’t. of Agric., A Time to Act 18 (1998); Food & Water Watch, The Economic Cost of Food Monopolies 11 (2012) (“Rural communities often bear the brunt of agribusiness consolidation. For nearly 80 years, academic studies have documented the negative impact of agriculture’s consolidation and industrialization, which aligns farms more closely with food manufacturers than their local communities.”).

     [81].   See generally Willis L. Peterson, Are Large Farms More Efficient? (Univ. of Minn. Dep’t of Applied Economics, Staff Paper No. P97-2, 1997).

     [82].   See, e.g., Alicia Harvie & Hilde Steffey, Rebuilding America’s Economy with Family Farm-Centered Food Systems 12–13 (2010).

     [83].   Christy Anderson Brekken, South Dakota Farm Bureau, Inc. v. Hazeltine: The Eighth Circuit Abandons Federalism, Precedent, and Family Farmers, 22 L. & Ineq. 347, 354 (2004).

     [84].   Stephen R. Miller, Three Legal Approaches to Rural Economic Development, 23 Kan. J.L. & Pub. Pol’y 345, 348 (2014)

     [85].   S. Special Comm. to Study Problems of Am. Small Bus., 79th Cong., Small Business and the Community: A Study of the Central Valley of California on Effects of Scale of Farm Operations 13 (Comm. Print. 1946) (authored by Dr. Walter R. Goldschmidt, Assistant Professor of Anthropology and Sociology, UCLA); see also David J. Peters, Revisiting the Goldschmidt Hypothesis: The Effect of Economic Structure on Socioeconomic Conditions in the Rural Midwest 20 (2002); Linda Lobao & Curtis W. Stofferahn, The Community Effects of Industrialized Farming: Social Science Research and Challenges to Corporate Farming Laws, 25 Agric. & Hum. Values 219, 223 (2008).

     [86].   Brian Dabson, Rural-Urban Interdependence: Why Metropolitan and Rural America Need Each Other 2 (The Blueprint for Am. Prosperity Metro. Plc’y Program at Brookings, 2007).

     [87].   Robert D. Atkinson, Reversing Rural America’s Economic Decline: The Case for a National Balance Growth Strategy (2004).

     [88].   See Katherine Porter, Going Broke the Hard Way: The Economics of Rural Failure, 2005 Wis. L. Rev. 969, 1027 (2005).

     [89].   See Strategies to Revitalize Rural America, Ctr. Rural Affairs, (last visited Mar. 10, 2020).

     [90].   Small Business Reorganization Act of 2019, Pub. L. No. 116-54 (addressing issues small businesses faced in reorganization under Chapter 11 by creating specialized provisions for business with a prescribed debt limit); see also Andrew D. Simmons, Comment, Expanding Bankruptcy Protection to the Individual Businessman: Taking Chapter 12 One Step Further, 24 San Diego L. Rev. 1201, 1219–20 (1987).

By Cole Tipton

SummitBridge National v. Faison

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In this criminal action, Willie Johnson (“Johnson”) appealed a district court’s order to resentence him for bank robbery under the sentencing recommendation in his original plea agreement.  Johnson argued that the government’s original agreement not to seek a mandatory life sentence under the federal three-strikes law was not beneficial because his prior state crimes should not be counted for federal three-strikes treatment.  The Fourth Circuit held that state crimes are encompassed by the three-strikes program and the district court’s decision to honor the original sentencing recommendation was affirmed.

Mountain Valley Pipeline, LLC v. 6.56 Acres of Land

In this civil action, owners of 6.56 acres of land appealed a district court judgement granted Mountain Valley Pipeline, LLC (“Pipeline”) a preliminary injunction for access and possession of property it was acquiring through eminent domain.  The Fourth Circuit reviewed the district court’s application of the test set forth in Winter v. Natural Resources Defense Council, Inc., 555 U.S. 7, 20 (2008) for preliminary injunctions.  In doing so, the Court found that Pipeline had established it was likely to succeed on the merits, would suffer irreparable harm, the balance of equities was in its favor, and that an injunction served the public interest.  Accordingly, the district court was affirmed. B.V. v. US Patent & Trademark

In this civil action, and the U.S. Patent and Trademark Office (“USPTO”) appeal the district court’s grant of summary judgment protecting the trademark BOOKING.COM. appeals the district court’s grant of attorney’s fees to the USPTO, and the USPTO appeals the court’s decision that BOOKING.COM is protectable.  The Fourth Circuit held that BOOKING.COM is not generic and can be registered as a descriptive mark with secondary meaning.  Moreover, the Court upheld the grant of USPTO’s expenses because the Lanham Act requires a party to pay “all the expenses of the proceeding” when a USPTO decision is appealed to the district court.  Thus, the district court’s judgment was affirmed.

US v. Jones

In this criminal action, James Eric Jones (“Jones”) appeals the district court’s denial of a motion to vacate, set aside, or correct his sentence.  Jones was originally sentenced under the Armed Career Criminal Act (“ACCA”) which requires a mandatory fifteen-year minimum sentence for defendants with at least three prior violent felony convictions.  However, Jones claims that he does not qualify for sentencing under the act because his South Carolina conviction for assaulting, beating, or wounding a police officer is not a violent conviction as defined by the ACCA.  The Fourth Circuit held that assaulting, beating, or wounding a police officer does not qualify under the ACCA because it includes conduct that does not involve violent physical force. Therefore, the district court’s judgment was vacated and remanded.

Weekly Roundup: 2/26-3/2

By: Cara Katrinak & Raquel Macgregor

Carlton & Harris Chiropractic, Inc. v. PDR Network, LLC

In this civil case, Carlton & Harris Chiropractic appealed the district court’s dismissal of its claim against PDR Network for violating the Telephone Consumer Protection Act (TCPA) by sending an unsolicited advertisement via fax. Carlton & Harris argued that the district court erred by failing to defer to a 2006 rule promulgated by the Federal Communications Commission (FCC) interpreting provisions of the TCPA–specifically, interpreting the term “unsolicited advertisement.” Carlton & Harris further argued that the Hobbs Act required the district court to defer to the FCC’s rule. The Fourth Circuit vacated and remanded the case, holding both that the Hobbs Act deprived the district court of jurisdiction to consider the validity of the FCC rule and the district court’s reading of the FCC rule conflicted with the plain meaning of the rule’s text.  

Singer v. Reali

This appeal and cross-appeal arose from the district court’s dismissal of a securities fraud class action complaint related to the healthcare provider reimbursement practices of defendant TranS1 and four of its officers in connection with TranS1’s AxiaLIF system (the “System”). Named plaintiff Phillip J. Singer alleged that TranS1 and its officers, through the System, enabled surgeons to secure fraudulent reimbursements from health insurers and government-funded healthcare programs. Singer initiated this class action against TranS1 and its officers pursuant to Section 10(b) of the Securities Exchange Act, claiming that TranS1 and its officers concealed the fraudulent reimbursement scheme from the market through false and misleading statements and omissions and that TranS1’s stock price plummeted when the scheme was revealed.

Here, Singer appealed (No. 15-2579) the district court’s dismissal of his complaint for failure to sufficiently plead the material misrepresentation element or the scienter element of his Section 10(b) claim. TranS1 and its officers cross-appealed (No. 16-1019), contending that the district court erred in dismissing their challenge to the loss causation element of Singer’s claim. In reviewing the complaint, the Fourth Circuit held that Singer sufficiently pleaded the misrepresentation and scienter elements because the complaint specified statements made by TranS1 and its officers about its reimbursement practices that support Singer’s claim. In addition, the Court held that Singer also sufficiently pleaded the loss causation element because the complaint alleged losses resulting from “the relevant truth . . . leak[ing] out” about TranS1’s previously concealed fraudulent reimbursement scheme. Accordingly, the Fourth Circuit vacated and remanded No. 15-2579 and affirmed No. 16-1019.

Norfolk Southern Railway Co. v. Sprint Communications Co. L.P.

In this civil case, Sprint Communications appealed the district court’s order granting Norfolk Southern Railway’s motion to confirm an arbitration award. The arbitration arose from a disputed license agreement between the parties. The agreement granted use of Norfolk Southern’s railroad rights of way for Sprint’s fiber optic telecommunications system. The parties disagreed over the amount Sprint owed Norfolk Southern for such continued use and, pursuant to their agreement, hired three appraisers to determine an appropriate amount. On appeal, the parties disputed whether the final decision of the appraisers constituted a “final” arbitration award under the Federal Arbitration Act (FAA). Because the text of the appraisers’ final decision reserved the right to withdraw assent in the future, the award could not be considered “final.” Accordingly, the Fourth Circuit reversed and remanded the case, holding that the arbitration award was not “mutual, final, and definite” as required by the FAA.        

U.S. v. Phillips

In this civil case, claimant Damian Phillips appealed the district court’s holding that he lacked standing to intervene in his brother Byron Phillips’ forfeiture case. Damian sought to intervene after the United States claimed that $200,000 in cash found in a storage unit leased by Byron was subject to forfeiture under 21 U.S.C. § 881(a)(6) for being connected to the “exchange [of] a controlled substance.” Damian claimed that the cash was his life savings and, therefore, was not connected with drugs in violation of the statute. The Fourth Circuit affirmed the district court, holding that–based on the record–Damian lacked the necessary colorable interest in the $200,000 to establish standing.     

Janvey v. Romero

The Fourth Circuit affirmed the District Court of Maryland’s decision denying a motion to dismiss a bankruptcy petition. Appellee, Romero, had originally filed a Chapter 7 bankruptcy petition after he was found liable for a $1.275 million Ponzi scheme. The receiver, Janvey, moved to dismiss the bankruptcy petition due to bad faith under 11 U.S.C. §707(a). The Fourth Circuit was tasked with assessing whether the district court abused its discretion in deciding that Romero’s decision to file bankruptcy had not risen to the level of “bad faith.” The Fourth Circuit emphasized that the purpose of the Bankruptcy Code is to “grant a fresh start to the honest but unfortunate debtor,” and dismissing a bankruptcy petition for cause under bad faith is only warranted “in those egregious cases that entail concealed or misrepresented assets . . . excessive and continued expenditures, [and] lavish life-style.” The Court rejected Appellant’s arguments that filing bankruptcy in response to a single debt or the debtor’s ability to pay the debt constitute bad faith per se. The Court noted that although Romero had $5.348 million in assets, most of these assets were statutorily exempt. Moreover, Romero was supporting his wife’s medical costs, which averaged $12,000 a month for a bacterial brain infection that had left her incapacitated. The Court noted that Romero filed for bankruptcy in part for legitimate reasons, such as the inability to pay his wife’s medical expenses, and Romero was unable to find work after the Ponzi scheme was made public. Thus, the Court found that the district court had not abused its discretion in finding that Romero’s bankruptcy petition had not risen to the level of bad faith.

Hickerson v. Yamaha Motor Corp.

In this case, the Fourth Circuit affirmed the District Court of South Carolina’s decision to exclude the Plaintiff’s expert testimony and enter summary judgment for the Defendant. The Plaintiff had filed suit against Yamaha for a WaveRunner’s (jet ski) inadequate warnings and defective design that resulted in serious internal injuries during a watercraft accident. The WaveRunner itself contained several warnings to wear a swimsuit bottom and to only have three passengers riding the craft at a time. When the accident occurred, a ten-year-old was driving, the Plaintiff was only wearing a bikini bottom, and she was the fourth passenger. The district court excluded the Plaintiff’s expert testimony regarding potential warnings because the expert’s proposals were scientifically untested and thus were unreliable under the Daubert standard. The Fourth Circuit offered little independent analysis regarding the expert testimony exclusion, but the Court agreed with the district court’s reasoning under the abuse of discretion standard of review. Moreover, regarding Plaintiff’s defective design claims, the Court noted that in South Carolina, design defects can be “cured” by adequate product warnings. The Court found that the warnings were adequate as a matter of law, and thus the district court did not err in granting summary judgment on the Plaintiff’s design defect claims.

Elliott v. American States Insurance Co.

This appeal arose from Plaintiff Elliott’s claim against her automobile insurer. In 2013, Elliott was in an automobile accident that left her with serious bodily injuries. As Plaintiff’s insurance coverage through the Defendant was capped at $100,000 and Plaintiff claimed more than $200,000 in damages, her recovery was insufficient to cover her expenses. The Plaintiff then initiated an action to recover damages first against Jones, the other driver in the accident, and then against her insurer. The District Court for the Middle District of North Carolina ultimately denied Plaintiff’s motion to remand the case back to the Superior Court (where she originally filed the case) and granted Defendant’s 12(b)(6) motion for failure to state a claim. On appeal to the Fourth Circuit, the Plaintiff had three claims: (1) that the Defendant’s filing for removal to the district court was untimely, (2) that the district court erred in determining parties were diverse, and thus subject matter jurisdiction did not exist in federal court; and (3) the district court erred in granting Defendant’s motion to dismiss for failure to state a claim. On the Plaintiff’s first claim, the Court concluded that the original service of process was made on a “statutory agent,” not an agent appointed by the defendant. Thus, the thirty-day time period to file the notice of removal did not start until the Defendant actually received a copy of the complaint, not when the service of process was actually delivered. Consequently, the Defendant filed its notice of removal within the allotted time period. As to the second claim, the Court held that the “direct action” variation on diversity jurisdiction from § 1332(c)(1) does not include an insured’s suit against his or her own insurer for breach of the insurance policy terms; thus the parties were diverse. Lastly, the Court rejected the Plaintiff’s claims regarding the Defendant’s motion to dismiss on multiple grounds, including that the Defendant had no obligation to settle the Elliot’s claims until after a judgment was settled against the other motorist, Jones.

By Mickey Herman

On Thursday, March 30, 2017, the Fourth Circuit issued a published opinion in LVNV Funding, LLC v. Harling, a bankruptcy case. Creditor-appellant, LVNV Funding, LLC (“LVNV”) appealed the bankruptcy court’s decision to sustain Rhodes’ and the Harling’s (collectively “Debtors”) objections to LVNV’s unsecured claims, which were raised after the confirmation date. After rejecting LVNV’s argument that such objections were precluded by the doctrine of res judicata, the Fourth Circuit affirmed the bankruptcy’s judgments.

Facts & Procedural History

In July 2014, Jeffrey Rhodes filed for bankruptcy relief under Chapter 13. Rhodes’ Chapter 13 plan was confirmed in October 2014. In June 2015, Derek and Teresa Harling similarly filed for relief under Chapter 13. Their plan was confirmed in August 2015. The Debtors’ Chapter 13 plans both “provided for treatment of unsecured creditors as a single class,” the members of which would be paid pro rata to the extent that funds remained after payment of all other claims. They also reserved to the Debtors the right to object to claims after plan confirmation.

LVNV filed proofs of claim in each case before the plans were confirmed, and neither the Debtors, nor their trustees, acted on the claims before their plans’ respective confirmations. Following their plans’ confirmations, the Debtors—relying on the reservation of rights clauses—objected to LVNV’s proof of claims, arguing that they were barred by the statute of limitations. Although LVNV conceded that its claims would ordinarily be so barred, it characterized the confirmation orders as final judgments and argued that the Debtors’ objections were precluded under the doctrine of res judicata. The bankruptcy courts disagreed with LVNV and sustained the Debtors’ objections. LVNV appealed, and the Fourth Circuit consolidated the Debtors’ cases.


The court began by summarizing the role of res judicata in bankruptcy cases. Because “[a] debtor’s bankruptcy case ‘involves an aggregation of individual controversies,’” the court emphasized that it “may contain many ‘final decisions’ that do not necessarily fit squarely into the conventional formulation of res judicata.” Still, the court emphasized, confirmation orders “have a preclusive effect on those issues litigated at confirmation.” Resolution of the issue, therefore, required the court to consider what issues were determined by the confirmation orders and whether the courts “adjudicate[d] the merits of any individual unsecured creditor’s claim.”

The court first addressed the statutory structure of the Bankruptcy Code. After summarizing the distinctions between treatment of unsecured and secured claims, it emphasized that “[n]o provision of the . . . Code provides for the determination of the merits of an individual unsecured claim within the class of unsecured claims as part of plan confirmation.”

It turned next to the question of whether the elements of res judicata were met in the instant case. “Res judicata applies where three conditions are met: (1) there is a prior judgment, which was final, on the merits, ‘and rendered by a court of competent jurisdiction in accordance with the requirements of due process’; (2) the parties to the second matter are identical to, or in privity with, the parties in the first action; and (3) ‘the claims in the second matter are based upon the same cause of action involved in the earlier proceeding.’” Noting that both parties agree that the confirmation orders constitute final judgments “as to their subject matter” and that the parties were before the court when such confirmations were ordered, the court concluded that the first two elements of the doctrine were met.

The court concluded its analysis by considering “whether the ‘cause of action’ in the later proceeding—the validity of the Debtors’ objections to LVNV’s claims—was any part of the cause of action in the first proceeding, plan confirmation.” Ultimately, the court determined that the causes of action differed in that while the Debtors’ objections focused on LVNV’s claims, the plan confirmations only considered unsecured creditors as a class. This result is necessitated by the structure of the Bankruptcy Code, in which “Congress had made Chapter 13 plan confirmation and claim-allowance on contested unsecured claims to be separate and distinct actions within a . . .  proceeding.”


Rejecting the contention that plan confirmation constitutes a final judgment as to an individual unsecured creditors claim, the Fourth Circuit affirmed, holding that the Debtors’ objections to LVNV’s claims were not barred by the doctrine of res judicata.

By Sophia Blair

On January 5, 2017, the Fourth Circuit published an amended opinion for the civil case, Lynch v. Jackson, originally decided on January 4, 2017.

Bankruptcy Court Decision and Appeal to the Fourth Circuit

Gabriel and Monte Jackson (“Jackson”) filed a petition for Chapter 7 bankruptcy relief. Marjorie Lynch (“Lynch”), a Bankruptcy Administrator, moved to dismiss their case as an abuse. Lynch alleged that the Jacksons over reported their expenses when filing for relief because they used the National and Local Standard amounts in their application form instead of their actual expenses, which were lower.

In filing for Chapter 7 bankruptcy, the Jacksons had to fill out a means test because they earned over the median income for a family of their size. The test is used to determine the amount of a debtor’s disposable income, which may reveal abuse if that income is above a certain level and prevent them from proceeding under Chapter 7. The Jacksons followed the instructions of form 22A-2, which says, “Deduct the expense amounts set out in lines 6-15 regardless of your actual expense. In later parts of the form, you will use some of you actual expenses if they are higher than the standards.” The Jacksons used the standard mortgage and car payment expenses, even though both were higher than their actual expenses.

Lynch argued that the official forms were incorrect and that a Chapter 7 debtor was “Limited to deducting their actual expenses or the applicable National or Local Standard, whichever [was] less.” The Jacksons countered, stating the statute was unambiguous. The Bankruptcy Court denied Lynch’s motion to dismiss on the basis that the Jackson’s interpretation comported with the plain meaning of the statute, and both parties filed a request for permission to directly appeal to the Fourth Circuit.

The Fourth Circuit held that they had jurisdiction over the appeal, and granted the appeal with respect to the question: does 11 U.S.C. § 707(b)(2) permit a debtor to take the full National and Local Standard amounts for expenses even though the debtor incurs actual expenses that are less than the standard amounts?

Was there an abuse of Bankruptcy Relief?

The Fourth Circuit held that under the plain meaning of the statute, a debtor is entitled to deduct the full National and Local Standard amounts even though their actual expenses are below the standard amounts.

In order to determine whether the Jacksons abused bankruptcy relief, the Fourth Circuit looked to the plain meaning of § 707(b)(2)(A)(ii)(I) of the statute. This section states: “the debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor’s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides . . . .”

Where the statute’s language is plain, the Fourth Circuit ends its inquiry after enforcing the statute according to its terms in the context of the overall statutory scheme. See Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000); Davis v. Mich. Dep’t of Treasury, 489 U.S. 803, 809 (1989). The court found that the language of  § 707(b)(2)(A)(ii)(I) was clear on its face because it specified that “[t]he debtor’s monthly expenses shall be the debtor’s applicable monthly expense amounts specified under the National Standards and Local Standards.” The court relied on the theory of statutory construction that where Congress uses different words in the same statute, they should have different meanings. Here the court distinguished between “applicable monthly expenses” in the first clause of the statute, and “actual monthly expenses” in the second clause. Therefore, the court understood that the”applicable monthly expenses” were the full National and Local Standard amounts.

Additionally, the Fourth Circuit opined that to construe “applicable” and “actual” to have the same meaning would have the absurd result of punishing frugal debtors. A frugal debtor would be punished to for spending less. Relying on Griffin v. Oceanic Contractors, Inc., 458 U.S. 564, 575 (1982), the court sought to read the statute in such a way as to avoid absurd results.


The Fourth Circuit affirmed the bankruptcy court’s judgment to deny Lynch’s motion to dismiss, because the Jacksons had not abused bankruptcy relief by providing the National and Local Standard amounts, instead of their actual expenses in form 22A-2.

By Amanda Whorton

On March 11, 2016, the Fourth Circuit issued a published opinion in the civil case Providence Hall Associates v. Wells Fargo Bank. The court affirmed the district court’s dismissal of Providence Hall Associates’ (“PHA”) lawsuit against Wells Fargo Bank (“Wells Fargo”), holding that it was precluded by res judicata.

The Three Agreements and Bankruptcy Proceedings

PHA, a Virginia limited partnership, entered into three agreements with Wells Fargo. These transactions were a $2.5 million loan, a $500,000 line of credit, and an interest-rate-swap agreement. PHA defaulted on its loans and filed for Chapter 11 bankruptcy in March 2011. Wells Fargo filed a proof of claim in the bankruptcy proceeding for almost $3 million. PHA objected and filed an adversary complaint, alleging that Wells Fargo falsely represented that it would refrain from collecting the principal balance of the line of credit. PHA asserts that this caused it to default and enter bankruptcy.

The U.S. Trustee obtained court approval to sell two of PHA’s properties to satisfy its debts to Wells Fargo. In the Trustee’s sale motions, it requested that the proceeds be distributed to Wells Fargo. In November 2012, after PHA’s debts to Wells Fargo had been satisfied from the proceeds of the sales, the Chapter 11 bankruptcy proceeding was dismissed.

Over a year after the dismissal, PHA filed a suit in Virginia state court repeating the claims it made in the bankruptcy adversary complaint. Wells Fargo removed the suit to federal court and filed a motion to dismiss, which the district court granted on res judicata grounds, stating that the bankruptcy court’s sale orders precluded PHA from bringing this subsequent action.

Doctrine of Res Judicata

Res judicata, or claim preclusion, bars relitigation of issues that were or could have been raised in a previous action when the previous action constituted a final judgment on the merits and was between the same parties or their privies. Three elements of res judicata have to be met in order for it to bar a subsequent action: (1) final judgment on the merits, (2) identical causes of action between the prior and subsequent suits, and (3) identical parties or their privies in the two suits. The court also took into account two practical considerations, which include (1) whether a party or its privy knew or should have known of the claims during the first action, and (2) whether the court that ruled in the first action was an effective forum to litigate the claims.

The Sale Orders Meet the Three Elements of Res Judicata and the Two Practical Considerations

The Fourth Circuit found cases from its sister circuits persuasive in holding that the first prong of the res judicata analysis was met. Bankruptcy sale orders are considered final orders on the merits in the Fifth, Sixth, and Seventh Circuits. The Fourth Circuit further reasoned that the trustee, acting as PHA’s representative, would not have moved to sell the property to satisfy the debt if PHA did not in fact owe the amount that Wells Fargo claimed it was due. These motions to sell effectively conceded the validity of Wells Fargo’s claims and the proceeds of those sales satisfied PHA’s debts. The court reasoned that it would not serve judicial economy and promote finality if PHA was allowed to challenge in a new proceeding the transactions after the sales were made, the debt was satisfied, and the bankruptcy proceeding closed. Furthermore, the fundamental purpose of a Chapter 11 bankruptcy proceeding is the rehabilitation of the debtor. This is served by holding that PHA’s bankruptcy case ended in a final judgment on the merits.

The court held that the second prong of res judicata was also met. The Fourth Circuit uses the transactional approach with this prong: res judicata will bar a new claim if it is based on the same underlying transaction involved in the earlier suit. The court reasoned that the sale orders arose out of the same nucleus of operative facts as PHA’s claims in the current case, which are the three agreements between PHA and Wells Fargo.

The third prong was met, the Fourth Circuit reasoned, because the trustee was in privity with PHA as its representative in the bankruptcy proceeding. The trustee was able to therefore effectively litigate on PHA’s behalf.

The Fourth Circuit Affirmed the District Court

The Fourth Circuit held that PHA’s claims were barred by res judicata and affirmed the district court’s dismissal of PHA’s suit.

By Sarah Saint

In the March 11 civil case Providence Hall Associates Limited Partnership v. Wells Fargo Bank, the Fourth Circuit affirmed the district court’s decision to give res judicata effect to sale orders issued during Providence Hall Associates’ (“PHA”) Chapter 11 bankruptcy and thus dismiss PHA’s lawsuit against Wells Fargo Bank.

Procedural History of the Res Judicata Effect

PHA, a Virginia-based limited partnership, entered three transactions with Wells Fargo’s predecessor-in-interest prior to bankruptcy: (1) a $2.5 million loan, (2) a $500,000 line of credit, and (3) an interest-rate-swap agreement. The loan and line of credit had a cross-default clause–a default on one is a default on both–and were secured by deeds of trust, mortgages, and assignments of rent for PHA real estate holdings. When PHA defaulted on the loans, it filed a petition for Chapter 11 bankruptcy. Shortly after, PHA defaulted on the interest-rate-swap agreement.

Wells Fargo filed a proof of claim in the Chapter 11 case, to which PHA objected, alleging that Wells Fargo falsely represented that it would forbear the collection of the principal balance of the line of credit, which caused PHA to enter bankruptcy. The United States Trustee then moved to convert the Chapter 11 case to a Chapter 7 proceeding or, alternatively, dismiss it because PHA had failed to file monthly reports. Wells Fargo filed a memorandum in support of the motion, repeating that PHA’s principals used Wells Fargo’s cash collateral to pay distributions to themselves. The bankruptcy court decided to appoint a Chapter 11 trustee instead of converting or dismissing the case.

The trustee obtained court approval to sell two of the bankruptcy estate’s properties to satisfy the debts owed to Wells Fargo and bring PHA out of bankruptcy. The sale motions recognized PHA’s obligations to Wells Fargo, and the bankruptcy court noted that PHA was in debt to Wells Fargo in granting the motions. The proceeds of the sales satisfied PHA’s debts to Wells Fargo, and a principal of PHA filed a motion to dismiss the Chapter 11 proceeding, which was granted with the trustee’s consent.

Over a year later, PHA filed suit in Virginia state court, which Wells Fargo removed to federal court, alleging the same claims in the bankruptcy adversary complaint and new theories of lender liability. PHA specifically claimed that the interest-rate-swap transaction was a sham because the rate was illegally manipulated. Wells Fargo then filed a motion to dismiss, which the district court granted on res judicata grounds. PHA subsequently appealed.

Standard of Review and Rules of Law

The Fourth Circuit reviewed de novo the district court’s dismissal based on res judicata. The doctrine of res judicata maintains that a final judgment on the merits precludes the parties from relitigating issues that were or could have been raised in that earlier action. Three elements must be satisfied for res judicata to apply: (1) a final judgment on the merits in a prior suit; (2) an identity of the claim in both the prior and present suit; and (3) an identity of parties or their privies in both the prior and present suit. Additionally, two practical considerations should be taken into account: whether the party knew or should have known of its claims at the time of the first action and whether the court that ruled in the first suit was an effective forum to litigate the other relevant claims.

Prong 1: A Final Judgment on the Merits

The district court used cases from the Fifth, Sixth, and Seventh Circuits to determine that the bankruptcy sale order was a final order on the merits. The Fourth Circuit found those circuit decisions persuasive and also concluded that the first prong of the res judicata test was satisfied. Despite PHA’s attempts to distinguish its suit from the Fifth, Sixth, and Seventh Circuit determinations, the Fourth Circuit found that the distinctions were misplaced, unhelpful, unmeaningful and unpersuasive.

The Court dedicated a large portion of its analysis to PHA’s attempted distinction from the Seventh Circuit decision, where the trustee alleged fraud surrounding the sale proceedings while PHA alleged fraud unrelated to the sale proceedings. The trustee in this case moved to sell PHA’s property to satisfy specific obligations arising out of PHA’s transactions with Wells Fargo, which the bankruptcy court approved. The Court reasoned that it would not make sense to allow PHA to challenge the transactions that gave rise to its now-extinguished debt. In fact, it would upend the purpose of res judicata, to promote finality and judicial economy.

Relying on the other Circuit’s decisions, as well as the purpose of Chapter 11 bankruptcy–to rehabilitate the debtor–the Court concluded that sale orders are final orders on the merit. The fact that a bankruptcy court sale order is an in rem proceeding does not remove in personam lender liability claims arising out of the same claims and involving the same parties from the reach of res judicata. PHA contended that a previous Fourth Circuit decision and a district court decision would decline to give preclusive effect to sale orders. The Fourth Circuit rejected the prior Fourth Circuit decision because the discussion about res judicata in that decision was merely dicta and because PHA’s fraud claims arose out of the same underlying transaction as the sale order. The Fourth Circuit also rejected the district court decision because it is not binding authority, because it involved a lift-stay order and not a sale order, and because it does not make sense to liquidate a bankruptcy estate and then allow claims to be brought against the creditor regarding the now-satisfied debts.

Prong 2: Identity of the Claims

Res judicata bars a second suit if it is based on the same underlying transaction that was involved in the first suit and if it could have been brought in the prior action. The Fourth Circuit concluded that the sale orders arose out of the same nucleus of facts as PHA’s prior claims: the circumstances surrounding the three agreements between PHA and Wells Fargo. Accordingly, the second prong of the res judicata test was met.

Prong 3: Identity of the Parties of their Privies

Even though PHA was not a party to the sale order–the trustee was–the trustee was in privity with PHA as a representative of the debtor’s bankruptcy case. Thus, the third prong of the res judicata test was met.

Practical Considerations

PHA argued that it, as a debtor who was no longer a debtor-in-possession, could not have effectively litigated its claims against Wells Fargo. However, in doing so, the Fourth Circuit reasoned that PHA was relying on a faulty premise because the trustee was the party to the sale order and not PHA. Thus, the question is whether the trustee could have effectively litigated in the bankruptcy court. Because PHA offered no argument that the trustee could not effectively litigate in the bankruptcy court, the Fourth Circuit concluded that the two practical considerations were met.


Because the Fourth Circuit found that the three elements of res judicata were met and the two practical considerations were also satisfied, the Fourth Circuit held that the district court properly dismissed PHA’s suit against Wells Fargo and affirmed the district court’s judgment.

By Taylor Ey

Chapter 11 Attorney vs. Bankruptcy Trustee

Today, the Fourth Circuit issued its published opinion in the civil case, In re Anderson.  In this case, the debtor, Mr. Henry L. Anderson, Jr., filed for Chapter 11 bankruptcy in February 2010 and was represented by Stubbs & Perdue, P.A.  Subsequently, Anderson’s Chapter 11 bankruptcy case converted to a Chapter 7 case.  James B. Angell was appointed as the Chapter 7 Trustee. Anderson had two outstanding debts: approximately $200,000 in legal fees related to the bankruptcy proceedings owed to Stubbs & Perdue, P.A., and nearly $1 million in secured tax claims owed to the IRS.  Anderson’s estate had insufficient funds to pay both of the outstanding debts.  Stubbs & Perdue sued the bankruptcy estate trustee, Angell, seeking the attorneys’ fees granted by order during the Chapter 11 proceedings.  Thus, the issue was whether the attorneys’ fees claim or the secured tax claims take priority in a Chapter 7 liquidation under the Bankruptcy Code.

Governing Law: Changes in the Bankruptcy Code Lead to Confusion as to Which Version Applies

Generally under the Bankruptcy Code (“the Code”), secured claims take priority over unsecured claims, such as the unsecured claim for attorneys’ fees from the bankruptcy proceedings.  There is a limited exception to this general rule under 11 U.S.C. § 724(b)(2) for “administrative expenses.”  Until 2005, the Code was relatively straightforward.  It provided that all holders of claims for administrative expenses had the right to subordinate secured tax creditors.  In 2005, Congress redrafted the language in the exception to narrow it, but this change created confusion.  Congress again amended the Code in 2010, clarifying that § 724(b)(2) did not subordinate Chapter 11 administrative expense claims to secured tax claims.

Competing Arguments

Stubbs argued that the prior version of the § 724(b)(2) exception, before 2010, should apply and thus his claims for attorneys’ fees should subordinate the secured tax claims.  Angell argued that the law in effect at the time at the time of the decision should apply, that is the 2010 revision that clearly states that Chapter 11 administrative expense claims cannot subordinate secured tax claims.

Governing Principles: The Law in Effect at the Time of the Decision Governs and Retroactivity Is Disfavored

The Fourth Circuit stated that, unless the law in effect at the time of a decision would have retroactive effect, the law in effect will govern.  Therefore, in this case, because the 2010 version of the Code would not have retroactive effect, the Court applied the 2010 law.  The Court favored this outcome because it is clear and easy to administer.  This clarity is especially important in the bankruptcy context, said the Court, because the bankruptcy trustee has a fiduciary duty to repay the debtor’s creditors in an expeditious manner.

The Court Affirmed the District Court.

The district court applied the 2010 version of the Code, deciding that the secured tax claims had priority over the Chapter 11 administrative expenses.  The Fourth Circuit affirmed this decision.


By George Kennedy

On July 1, 2015, the Fourth Circuit issued a published opinion in the civil case of Houck v. Substitute Trustee Services, Inc. The Fourth Circuit held that the district court’s dismissal of Plaintiff’s claims brought under 11 U.S.C. § 362(k) was erroneous, and consequently vacated the district court’s judgment, reversed its order, and remanded the case for further proceedings.

Plaintiff’s Foreclosure Proceedings and Petition for Bankruptcy

In 2000, Plaintiff Diana Houck secured financing from Lifestore Bank, F.S.A. to purchase a mobile home for her property. In 2007, Houck refinanced the loan so that she could make renovations to her family farmhouse. Two years later, however, Houck lost her job and began to have difficulty making loan payments. Because of this, Houck asked Lifestore for a loan modification. In response, Lifestore referred Houck to a debt collection agency, Grid Financial Services, Inc., which denied Houck’s request.

In July 2011, the Hutchens Law Firm, representing both Lifestore and Grid Financial, served Houck with a notice of foreclosure. To stop the foreclosure proceedings, Houck filed for Chapter 13 bankruptcy protection because the filing of a bankruptcy petition triggers an automatic stay for certain debt collection actions under 11 U.S.C. § 362(a). While the bankruptcy court denied this first petition , Houck again filed for Chapter 13 bankruptcy protection. After filing the second petition, Houck called the Hutchens Law Firm to notify it of the bankruptcy filing. Notwithstanding Houck’s second bankruptcy petition, however, the Substitute Trustee, also represented by Hutchens, sold Houck’s property in a foreclosure sale.

Dismissal of Plaintiff’s Claims by the District Court

To undo the sale of her property, Houck commenced an action against Lifestore, Grid Financial, and the Substitute Trustee. Houck alleged a claim against the three Defendants under 11 U.S.C. § 362(k) for violation of the automatic stay triggered by the filing of a bankruptcy petition. Houck also alleged related state law claims.

In two separate orders, one in October 2013 and the other in February 2014, the district court dismissed all of Houck’s claims. In October 2013, the district court granted the Substitute Trustee’s motion to dismiss under Federal Rule of Civil Procedure 12(b)(6). The district court held that Houck failed to allege facts that showed that the Substitute Trustee’s violation of the automatic stay was willful. Since this is a necessary element for a claim under 11 U.S.C. § 362(k), the district court held that Houck failed to state a claim for relief and granted the Substitute Trustee’s motion. In February 2014, the district court dismissed the remaining claims against Lifestore and Grid Financial on the grounds that the court lacked subject matter jurisdiction to hear Houck’s claim under 11 U.S.C. § 362(k). The district court reasoned that such claims can only properly be heard in federal bankruptcy courts, and not district courts. The district court then dismissed Houck’s related state law claims.

The District Court Reversed

Ultimately, the Fourth Circuit held that the district court erred in dismissing Houck’s claims and rejected the reasoning underlying the district court’s holding. Yet before resolving Houck’s claims on the merits, the Fourth Circuit established that it had jurisdiction to hear Houck’s appeal. At issue in terms of appellate jurisdiction was whether Houck was appealing from a final judgment as required by 28 U.S.C. § 1291(a). The Fourth Circuit held that Houck was in fact appealing from a final judgment under the doctrine of cumulative finality. In so holding, the Fourth Circuit reasoned that the district court’s initial dismissal of Houck’s claims against the Substitute Trustee and subsequent dismissal of Houck’s claims against Lifestore and Grid Financial had the cumulative effect of rendering all Houck’s claims against these defendants as decided with finality.

Next, the Fourth Circuit addressed the district court’s holding that it did not have jurisdiction to hear claims brought under 11 U.S.C. § 362(k). The district court held that such claims can only be brought in the bankruptcy courts, and therefore, district courts do not have jurisdiction to resolve them. The Fourth Circuit disagreed, however, and held that the statute provides both district courts and bankruptcy courts with original jurisdiction over claims brought under 11 U.S.C. § 362(k). Therefore, the Fourth Circuit held the district court erred in dismissing Houck’s 11 U.S.C. § 362(k) claims against Lifestore and Grid Financial for lack of subject matter jurisdiction.

Lastly, the Fourth Circuit reversed the district court’s dismissal of Houck’s claims against the Substitute Trustee under Rule 12(b)(6) of the Federal Rules of Civil Procedure. In dismissing Houck’s claim, the district court argued that Houck failed to allege facts that, if true, would have satisfied all the required elements under 11 U.S.C. § 362(k). In particular, the district court held that Houck failed to provide any facts showing that the Substitute Trustee’s violation of the automatic stay was willful. The Fourth Circuit disagreed, and argued that by notifying the Hutchens Law Firm of her bankruptcy petition, Houck provided the Substitute Trustee with notice since the Substitute Trustee was also represented by Hutchens. Therefore, the Fourth Circuit held that Houck did allege facts to show that the Substitute Trustee’s violation of the automatic stay was willful because Houck alleged that the Substitute Trustee had notice of Houck’s bankruptcy petition which triggers an automatic stay under 11 U.S.C. § 362(a).

Vacated, Reversed in Part, and Remanded

Because the district court erred in dismissing Houck’s claims against Lifestore, Grid Financial, and the Substitute Trustee, the Fourth Circuit vacated the district court’s judgment, reversed its order, and remanded the case for further proceedings.