A case from North Florida allows some insight into what recourse a creditor has when a Chapter 11 debtor fails to make payments as required under a reorganization plan. The 1st District Court of Appeal ruled that the creditor could use the state court system to litigate its complaint, but, since the reorganization plan had no acceleration language in it, the creditor could only recover the amount of the missed payments, not the entire outstanding amount.
The debtor, Baggett Brothers Farm, Inc., was a farm business whose suppliers included Altha Farmers Cooperative. Baggett filed for Chapter 11 bankruptcy in 1995. The next year, as part of its bankruptcy reorganization, Baggett executed a $244,000 promissory note to Altha, promising to pay the supplier in 15 equal installments. Baggett made the first six payments but then stopped.
A decade after the first bankruptcy, Baggett again filed a Chapter 11 petition. Altha submitted a claim for more than $300,000, based upon the remaining promissory note debt, along with additional new debts Baggett had incurred. The debtor challenged this claim, but the court awarded the creditor its full claim.
As part of Baggett’s 2005 reorganization, the court required Baggett to pay off the debt to Altha in 10 annual payments, starting in 2007. The debtor made the first payment but made no more. The creditor sued Baggett in state court for violating the bankruptcy reorganization plan. The trial court ruled in favor of the creditor and awarded it damages in an amount equal to the full claim, minus the amount Baggett submitted in its sole 2007 payment. Baggett appealed this outcome.
The appeals court rejected Baggett’s argument that Altha could not bring its complaint in state court. The reorganization plan functionally constituted a contract between the reorganized debtor and its creditors. Altha’s lawsuit alleging that Baggett defaulted on its obligations essentially amounted to a breach of contract claim, so the state court could rule on that matter.
However, the court ruled against Altha on the amount of damages, determining that the creditor was not entitled to receive the entire outstanding balance of the claim. A debtor’s failure to submit timely plan payments does not make it immediately obligated to pay the full amount of the claim unless the plan contained an acceleration provision dictating such an outcome on the occasion of a missed payment (or payments).
In Baggett’s case, its reorganization plan had no acceleration clause in it. This meant that Altha was not entitled to the full outstanding claim balance, but it could only receive an amount equal to the total of all the payments Baggett had missed so far.
Whether your South Florida business is considering options including bankruptcy, or you are a creditor of a business that has reorganized through Chapter 11, the assistance of an experienced bankruptcy attorney can be invaluable. The skilled and knowledgeable Florida bankruptcy law attorneys at Stok Folk + Kon can help analyze your situation and plot a strategy that best protects your interests.
Contact us online or by calling (305) 935-4440 to schedule a consultation.
More blog posts:
Employer’s Bankruptcy Filing Does Not Stop Florida Employee’s Lawsuit, Florida Business Lawyers Blog, May 15, 2015
Bank’s Failure to Contest Reorganization Plan’s Broad Release Terms on Time Dooms Claim, Florida Business Lawyers Blog, May 15, 2015