Puerto Rico is known for being one of the jurisdictions with the most filings under Chapter 12 of the Bankruptcy Code (the “Code”). In fact, from January through March of 2016, the U.S. Bankruptcy Court for the District of Puerto Rico tied with the U.S. Bankruptcy Court for the Northern District of New York in the jurisdictions with the most Chapter 12 filings. In Puerto Rico, most Chapter 12 debtors are dairy farmers, who face new challenges in recent times given the Island’s precarious financial condition.
Chapter 12 was created particularly for family fishermen or family farmers due to the particular nature of their business. Most Chapter 12 Debtors would not be able to afford a reorganization case under Chapter 11 due to its extensive requirements and its complexity. Conversely, most Chapter 12 Debtors are not eligible to file a petition under Chapter 13 of the Code because the cap on the total amount of debt is too low considering the expenses of running a farm or commercial fishing operation. Thus, it was designed to merge the reorganization provisions of Chapter 11 and Chapter 13 without the limitations that either Chapter would represent to such farmers or fishermen.
To be eligible to file a petition under Chapter 12 of the Code, a debtor must be “a family farmer or family fisherman with regular annual income”. 11 U.S.C.§ 109(f). To qualify as a family farmer or family fisherman, the debtor must receive sufficient stable income to make regular payments under a Chapter 12 Plan. A Chapter 12 debtor may be an individual, and individual and spouse, a corporation, or a partnership. The main eligibility requirements are the following: (1) the debtor(s) must be involved in a farming or commercial fishing operation, which includes tillage of the soil, dairy farming, ranching, and production or raising of crops, poultry, or livestock; (2) the secured and unsecured debts of a family farmer must not exceed $4,153,150 and those of a family fisherman must not exceed $1,924,550; (3) for a family farmer, at least 50% of the debts must come from the operation of the farming business and for a family fisherman, at least 80%; and (4) in the case of a debtor corporation or partnership, at least 80% of the value of its assets must be related to the farming operation.
A Chapter 12 plan must be filed within 90 days from filing the petition and may provide payments for a period of three to five years, except for secured creditors which may be paid over longer periods of time. Priority claims such as taxes must be paid in full through the plan. Secured claims must be paid at least the value of the collateral securing the claim. By contrast, unsecured claims are usually not paid in full. The only requirement as to these claims is that the Debtor commits all of its disposable income during the duration of the plan.
Unlike other Chapter 12 jurisdictions, most secured creditors in Chapter 12 cases in Puerto Rico in which the debtor is a dairy farmer have a lien over the debtor’s milk quota as part of its collateral. This lien is possible in Puerto Rico because the milk industry is regulated through the Milk Industry Regulatory Office (“ORIL”). ORIL assigns to dairy farmers the quota that may be produced in their farms every 14 days, which fluctuates depending on the market. Creditors can secure their loans to dairy farmers by creating a lien over the milk quota produced in the debtor’s dairy farm. ORIL has to approve the lien over the quota and keeps a “Registry of Transactions of Milk Industry Production Quotas”, in which all transactions must be duly recorded in order to be valid. The transactions must be presented in a notarized document.
Thus, based on the above, and on the fact that most petitions involve livestock and crops, Chapter 12 provides unique challenges to the debtors and to creditors as compared to other chapters of the Code.