IN RE AHLERS, 794 F.2d 388 (8th Cir. 1986)

IN RE JAMES R. AHLERS AND MARY M. AHLERS, DEBTORS. JAMES R. AHLERS AND MARY M. AHLERS, APPELLANTS, v. NORWEST BANK WORTHINGTON AND FEDERAL LAND BANK, APPELLEES. IN RE JAMES R. AHLERS AND MARY M. AHLERS, DEBTORS. NORWEST BANK WORTHINGTON, N.A., APPELLEE, v. JAMES R. AHLERS AND MARY M. AHLERS, APPELLANTS.

Nos. 85-5396, 85-5397.United States Court of Appeals, Eighth Circuit.Submitted January 13, 1986.
Decided July 2, 1986. Opinion on Rehearing September 17, 1986. Rehearing and Rehearing En Banc Denied September 24, 1986.

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William L. Needler, James C. Truax, Frank Stepnowski, Chicago, Ill., for appellants.

Michael R. Stewart, Minneapolis, Minn., for Norwest Bank.

David A. Kastelic, St. Paul, Minn., for Federal Land Bank.

William P. Westphal, Minneapolis, Minn., U.S. Trustee.

Appeal from the United States District Court for the District of Minnesota.

Before HEANEY, JOHN R. GIBSON and WOLLMAN, Circuit Judges.

HEANEY, Circuit Judge.

[1] These appeals by James and Mary Ahlers raise important questions of bankruptcy law, particularly as that law relates to farmers who have filed petitions for reorganization under Chapter 11 of the Bankruptcy Code. We hold that the bankruptcy court may, as a condition to maintaining a stay of proceedings by creditors against the debtors’ property, require that the debtors furnish adequate protection to the secured creditors to protect against further loss to those creditors. Adequate protection is to be determined on a case-by-case basis by the bankruptcy court in accordance with the following guidelines: (1) protection is ordinarily to be given for the interim period beginning with the date that the secured creditor could, under state law, obtain possession of the collateral, sell that property, and reinvest the proceeds, and ending with the date that the plan of reorganization is confirmed or dismissed; (2) the value of the property is to be determined as of the date that adequate protection payments are required; (3) crops in the ground, to the extent that they are not otherwise encumbered, may serve in whole or in part as a basis for adequate protection; and (4) payment for such protection may be made after the crop is harvested rather than on a monthly basis. [2] The bankruptcy court should not approve a plan of reorganization unless it is feasible. In determining feasibility, the court should recognize existing realities, that is, the values of the land, the equipment, and the inventory as of the date that the plan is confirmed. Thus, the secured debt should be restructured to reflect values as of the date of confirmation. The bankruptcy court should not approve the plan unless it appears reasonably probable that the farmer can pay the restructured

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secured debt, over a reasonable period of time, at a reasonable rate of interest, in the light of farm prices and farm programs as of the date of confirmation.

[3] To insure that the plan is fair and equitable and protects the unsecured creditors, the plan should require that any cash flow from the operation of the farm in excess of that anticipated in the plan be paid to the unsecured creditors on a pro rata basis, until such time as the unsecured creditors are paid in full without interest. Moreover, the plan should require that if the land is sold during the pendency of the plan, and if the unsecured creditors have not been paid in full before that date, any proceeds exceeding those necessary to pay the secured debt be shared on an equitable basis between the debtor and the unsecured creditors. Finally, the court should not permit the prejudgment seizure of equipment and machinery necessary to carry out the plan even if the creditors offer to post a bond. [4] We recognize that, under a plan of reorganization, secured creditors become unsecured to the extent that their allowed claim exceeds the value of their interest in the collateral. We hold, however, that neither these nor other unsecured creditors can prevent the plan from being approved on the basis of the absolute priority rule if the plan meets the requirements outlined herein and if the debtor agrees to contribute his experience, knowledge, and labor to the successful implementation of the plan. [5] I. BACKGROUND.
[6] James and Mary Ahlers farm approximately 840 acres of land in Nobles County, Minnesota. They own 560 acres, and rent the remaining 280 acres. To finance their operation, they entered into four separate financing agreements with the Federal Land Bank between December, 1965, and January, 1982. To secure these loans, the Ahlers gave the Federal Land Bank a first mortgage on four separate parcels of their farmland. These parcels of land, and the principal balances of the loans they secured as of November 30, 1984, are as follows: Parcels Principal Balance
Parcel A (240 acres) $335,403
Parcel B (160 acres) $152,168
Parcel C (80 acres) $ 31,500
Parcel D (80 acres) $ 6,783
[7] The Federal Land Bank’s security interests are not cross-collateralized. [8] The Ahlers also entered into several financing agreements with the Norwest Bank of Worthington, Minnesota (“Norwest”) between May, 1982, and April, 1984. To secure these loans, the Ahlers gave Norwest a second mortgage on their farmland, and a first mortgage on their machinery and equipment, crops, livestock, and other farm proceeds. As of November 30, 1984, the Ahlers owed Norwest $450,468 in principal and accrued interest. Norwest’s security interests are all cross-collateralized. The Ahlers also owe John Deere Credit Corporation $35,791, secured by a combine, the Commodity Credit Corporation $3,337, secured by a grain bin, and General Motors $2,900, secured by an automobile. The value of land in southwest Minnesota[1] and the value of used farm machinery have both declined markedly since the Ahlers entered into the financing agreements outlined above. Moreover, commodity prices have declined, and inclement weather has frequently played havoc with yields. Thus, the Ahlers have been unable to make payments on interest and principal, and the secured creditors are substantially undersecured. [9] On November 16, 1984, Norwest commenced a replevin action against the Ahlers in state court to recover possession of the Ahlers’ equipment and machinery pursuant

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to Minn.Stat.Ann. § 565.23 (West Cum. Supp. 1985). Fourteen days later, the Ahlers filed a petition for reorganization under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 101 et seq.,
thereby staying the state court replevin proceedings. See 11 U.S.C. § 362(a). Norwest and the Federal Land Bank filed motions for relief from the automatic stay and for adequate protection. On February 27, 1985, the bankruptcy court held an evidentiary hearing on these motions.

[10] In an order issued March 15, 1985, the bankruptcy court stated that Norwest and the Federal Land Bank, as undersecured creditors, were

entitled to compensation as adequate protection for the delay of enforcing contractual repossession and foreclosure rights during the interim between the filing of the petition and confirmation of the plan. It is the present value of that interest, the opportunity lost, that must be protected.

[11] In re Ahlers, No. 3-84-2206, slip op. at 5 (Bankr.Minn. March 15, 1985). [12] It then held that the Ahlers would be required to make monthly payments of interest on the current value of the collateral in order to maintain the section 362 stay. It decided that the Ahlers’ offer of a lien on the following year’s crops did not constitute adequate protection, and that the Ahlers did not otherwise have sufficient funds to provide Norwest and the Federal Land Bank with adequate protection in the form of monthly interest payments on the value of the collateral. For these reasons, it granted the motions for relief from the automatic stay.[2] The Ahlers appealed this order to the district court. It affirmed on October 22, 1985. In addition, pursuant to this Court’s August 8, 1985, order, the district court reviewed the feasibility of the Ahlers’ reorganization plan and found that the plan had no reasonable prospect of success. [13] Eleven days after the bankruptcy court had entered its March 15, 1985, order granting Norwest’s and the Federal Land Bank’s motions for relief from the section 362 stay, the Ahlers removed Norwest’s replevin action from state court to the bankruptcy court. The bankruptcy court, concerned that the state replevin action was not a core proceeding, indicated that it might abstain and remand the replevin action to the state district court unless the parties consented to the bankruptcy court’s jurisdiction over the matter. On May 24, 1985, the Ahlers and Norwest stipulated that the replevin action was a core proceeding, which could be heard and determined by the bankruptcy court. See 28 U.S.C. § 157(c)(2). Thereafter, Norwest filed a motion in the bankruptcy court for prejudgment seizure of the property, together with an offer of bond, pursuant to Minn.Stat.Ann. §§ 565.23 and 565.25
(West Cum. Supp. 1985). On June 25, 1985, the bankruptcy court held a hearing on Norwest’s motion, and on July 8, 1985, entered an order granting this motion. The Ahlers appealed this order, and on October 28, 1985, the district court affirmed. [14] The Ahlers now appeal from the district court’s October 22 and October 28 orders. They contend that the bankruptcy court erred in granting Norwest and the Federal Land Bank relief from the section 362 stay. They also appeal the October 28 order, contending that the Minnesota replevin statute is unconstitutional, and that the bankruptcy court did not have jurisdiction to rule on Norwest’s motion for prejudgment seizure pursuant to that statute. [15] II. DISCUSSION.[16] A. The district court erred in defining the elements ofadequate protection.
[17] The filing of a Chapter 11 bankruptcy petition results in an automatic stay of all acts by creditors to enforce their liens against the debtor’s property. 11 U.S.C. § 362(a). The purpose is twofold: first, to give the debtor a “breathing spell” from his creditors;[3] and second, to prevent one

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creditor from rushing to enforce its lien to the detriment of the other creditors.[4] The impact of the automatic stay is tempered by certain creditor safeguards, one of which is the secured creditor’s right to adequate protection of its interest during the bankruptcy proceedings. 11 U.S.C. § 362(d).

[18] Although adequate protection is not specifically defined in the Bankruptcy Code, Congress intended that a debtor’s offer of adequate protection should, as nearly as possible under the circumstances of the case, provide the creditor with its bargained-for rights. In re Briggs Transportation Co., 780 F.2d 1339
(8th Cir. 1985); In re Martin, 761 F.2d 472, 476 (8th Cir. 1985); see also H.R. Rep. No. 595, 95th Cong., 1st Sess. 339 reprinted in 1978 U.S. Code Cong. Ad. News 5963, 6295 (“the purpose of [adequate protection] is to ensure that the secured creditor receives in value essentially what he bargained for”). However, Congress expressly did not state how these bargained for rights were to be valued, nor when this valuation was to occur.

The section does not specify how value is to be determined, nor does it specify when it is to be determined. These matters are left to case-by-case interpretation and development. It is expected that the courts will apply the concept in light of facts of each case and general equitable principles. It is not intended that the courts will develop a hard and fast rule that will apply in every case. The time and method of valuation is not specified precisely, in order to avoid that result. * * * The flexibility is important to permit the courts to adapt to varying circumstances and changing modes of financing.

[19] H.R. Rep. No. 595 at 339, 1978 U.S. Code Cong. Ad. News at 6295. [20] Thus, while it is agreed that a secured creditor should receive adequate protection of its interest during an automatic stay, any adequate protection determination must necessarily turn on the unique facts presented in each individual case. See, e.g., In re Briggs, 780 F.2d at 1348. These factual findings are subject to the clearly erroneous standard of review, In re Martin, 761 F.2d at 474; Bankr.R. 7052, and to this Court’s right to correct errors of law. Martin, 761 F.2d at 475 (quoting Bose Corp. v. Consumer Union of United States, Inc., 466 U.S. 485, 501, 104 S.Ct. 1949, 1960, 80 L.Ed.2d 502 (1984)).[5]

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[21] 1. The starting date for adequate-protection payments.
[22] The bankruptcy court held that the Federal Land Bank and Norwest were entitled to adequate protection payments in the form of interest on the value of the collateral securing their loans. This conclusion was based upon the premise that due to the automatic stay, the Federal Land Bank and Norwest were unable to immediately foreclose, liquidate the collateral, and reinvest the liquidation proceeds. See In re American Mariner Industries, Inc., 734 F.2d 426 (9th Cir. 1984). It held that the Federal Land Bank was entitled to monthly adequate protection interest payments as of January 1, 1985 (date of the Ahlers’ post-petition default on the Federal Land Bank loans), and that Norwest was entitled to monthly adequate protection interest payments as of February 27, 1985 (date of the evidentiary hearing). It found that the Ahlers did not have sufficient funds to make these monthly payments, and that a lien on the following year’s crops could not constitute adequate protection. Accordingly, it granted the Federal Land Bank’s and Norwest’s motions for relief from the automatic stay. [23] A secured creditor is entitled to adequate protection of its security interest. That protection may include compensation to a creditor, in the form of post-petition interest payments, for the delay in enforcing the creditor’s foreclosure rights. In re Briggs Transp. Co., 780 F.2d 1339, 1350 (8th Cir. 1985). Thus, we cannot say as a matter of law that the bankruptcy court erred in requiring post-petition interest payments. The question, then, is the timing and amount of these payments. [24] The concept of providing a secured creditor with adequate protection in the form of interest on the value of the collateral is premised on the theory that a secured creditor bargains for the right to take possession of the collateral and sell it in the event that the debtor defaults. American Mariner, 734 F.2d at 435 (this right constitutes an “interest in property” that is “created and defined by state law”). To the extent that a debtor can, by filing a bankruptcy petition, preclude or delay a secured creditor from exercising this right and reinvesting the liquidation proceeds, the creditor has been deprived of this benefit of its bargain. Thus, adequate protection payments in the form of interest are designed to insure that the secured creditor receives the benefit of its bargain by placing it in essentially the position it would have been in absent the filing of a bankruptcy petition. See H.R. Rep. No. 595 at 339, 1978 U.S. Code Cong. Ad. News at 6295. Accordingly, in fashioning adequate protection payments, the bankruptcy court must determine the date when the creditor, absent the filing of a bankruptcy petition, could have taken possession of the collateral under state law and could have sold it to a third party, the amount that the creditor would have realized at this sale, and the creditor’s expected return upon reinvestment. [25] Payments to protect the creditor’s right to reinvestment return on foreclosure proceeds should not begin until, under state law, the creditor could have taken possession of the collateral, sold it to a third party, and reinvested the proceeds. American Mariner, 734 F.2d at 435 n. 12 (“to avoid overcompensating the secured creditor, the timing of adequate protection should take account of the usual time and expense involved in repossession and sale of collateral.”); see also In re Bear Creek Ministorage, Inc., 49 B.R. 454, 458-59 (Bankr.S.D.Tex. 1985); In re South Village, Inc., 25 B.R. 987, 996 n. 14 (Bankr. Utah 1982). [26] Before the bankruptcy court considers the usual foreclosure delays associated with the particular collateral involved, it must first determine the date to which these delays will be added. If the secured creditor has commenced foreclosure proceedings prior to the filing of the bankruptcy petition, the starting date should be the date foreclosure proceedings were commenced. If, however, the secured creditor has not commenced foreclosure proceedings prior to the filing of the bankruptcy petition, the starting date should be the date that the creditor moves for adequate protection in the bankruptcy court.[6] To

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the appropriate date, the bankruptcy court should add the usual foreclosure delays associated with the particular collateral involved.

[27] With respect to the farmland, Minnesota law provides that six-weeks published notice must be given before a foreclosure sale. Minn.Stat.Ann. § 580.03 (West 1947). In addition, the mortgagor has the exclusive right to redeem the realty for twelve months following the foreclosure sale.[7] Minn.Stat.Ann. §§580.23, subd. 2, and 580.24 (West Cum.Supp. 1985). During this twelve-month redemption period, the mortgagor is entitled to possession, rents, and profits of the real estate. Johnson v. First National Bank of Montevideo, 719 F.2d 270, 276 (8th Cir. 1983), cert. denied, 465 U.S. 1012, 104 S.Ct. 1015, 79 L.Ed.2d 245 (1984). Because the purchaser at a mortgage foreclosure sale would not be entitled to possession and profits from the real estate until after the redemption period had expired, it is extremely unlikely that a third party would purchase the property at the foreclosure sale. Moreover, Minnesota law prohibits the inclusion in a mortgage instrument of any provision under which rents and profits arising from the mortgaged property after default are assigned to the mortgagee Erickson-Hellekson-Vye Co. v. A. Wells Co., 217 Minn. 361, 15 N.W.2d 162 (1944).[8] Thus, assuming that Norwest and the Federal Land Bank follow reasonable and established marketing techniques, they will purchase the realty themselves at the foreclosure sale, and then attempt to resell the property after the redemption period has expired, if the Ahlers have not exercised their redemption rights. Since their right to foreclosure and to reinvest the liquidation proceeds would give them no financial benefit until the land could be resold to a third party, which at the earliest would be one year and six weeks from the date the foreclosure proceedings were commenced, the Ahlers’ adequate protection payments to protect this right to reinvestment returns on foreclosure proceeds should not begin until that date. See, e.g., Bear Creek Ministorage, 49 B.R. at 457-58. If no foreclosure proceedings were commenced before the filing of the bankruptcy proceeding, the adequate protection payments would begin one year and six weeks after the adequate-protection motion was filed by the creditor. [28] Under Minnesota law, Norwest would be permitted to take possession of the farm machinery and equipment promptly unless the debtor is dependent on the use of the property to earn a living. In that event, the debtor is permitted to retain the property for a period of time if he insures it and makes payments essentially similar to what he would be required to make under the Bankruptcy Act. Minn.Stat.Ann. § 565.251 (West Supp. 1986). It follows that adequate protection payments for farm machinery equipment should begin promptly on application therefor. Secured collateral such as livestock and grain in storage may be readily liquidated without any significant delay, and, hence, adequate protection payments on these items should also begin on application. [29] 2. The date of valuation of collateral for adequate-protection purposes.
[30] Congress specifically left open the question of the date of valuation. See p. ___, infra. The bankruptcy court determined that values for purposes of adequate protection were to be fixed as of the date the petition was filed. While this decision is appropriate with respect to the livestock and grain in storage, which, under state law, could have been sold immediately, it is inappropriate with respect to the collateral that could not have been sold immediately. That collateral should be valued at the time it could have been sold under state law as discussed in section II.A.1 of this opinion. Even if this timing

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error were ignored, the bankruptcy court’s findings as to the values of the land and equipment were clearly erroneous. In making his decision, it failed to take into account the fact that land values had declined by at least twenty-four percent in the twelve-month period immediately preceding the filing of the petition in bankruptcy.[9] There is likewise no support in the record for the bankruptcy court’s statement that the debtor based his opinion as to value on conjecture.[10] The bankruptcy court will redetermine these values on remand.

[31] 3. Timing of periodic-protection payments.
[32] The bankruptcy court ruled that the Ahlers must make adequate-protection payments monthly to maintain the automatic stay. This ruling ignores the cyclical nature of agriculture. A grain farmer’s income is not dependent upon a monthly paycheck, but rather upon the harvest of his crops at the end of the growing season. Likewise, a hog farmer’s income is realized when the hogs are sold. Thus, adequate protection payments in the Ahlers’ case should not be due until they have harvested their crops and sold their hogs.[11] [33] 4. The use of growing crops as adequate protection.
[34] We next address the bankruptcy court’s ruling that the Ahlers’ offer of a lien on the following year’s crop could not constitute adequate protection. This issue was thoroughly addressed in In re Martin, 761 F.2d 472 (8th Cir. 1985), in which we held that a lien on a future crop, to the extent that the crop was otherwise not encumbered, may serve in whole or in part as a basis for providing adequate protection. We also outlined a nonexclusive list of factors the bankruptcy court should consider in making this determination. Id. at 477. Thus, the bankruptcy court’s ruling was contrary to the law of this circuit. [35] B. The district court erred in holding that reorganizationunder Chapter 11 is unfeasible.
[36] Norwest and the Federal Land Bank contend that even assuming their interests were adequately protected during the automatic stay, they were entitled to relief from the stay under 11 U.S.C. § 362(d)(2)(B) because the Ahlers’ reorganization plan was not feasible. Section 362(d) provides:

(d) On request of a party and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay —
(1) for cause, including the lack of adequate protection of an interest in property of such party in interest; or
(2) with respect to a stay of an act against property under subsection (a) of this section, if —
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization.

[37] 11 U.S.C. § 362(d). [38] Several courts have interpreted the “necessary for an effective reorganization”

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language in section 362(d)(2)(B) to require a debtor to not only show that the property in question is essential to the reorganization plan, but also that an effective reorganization is realistically possible. See, e.g., In re Albany Partners, Ltd., 749 F.2d 670, 673 n. 7 (11th Cir. 1984); In re Discount Wallpaper Center, Inc., 19 B.R. 221, 222 (Bankr.M.D.Fla. 1982); In re Dublin Properties, 12 B.R. 77, 80
(Bankr.E.D.Pa. 1981), and cases cited therein. As the court stated in Dublin Properties, “If no reorganization of the debtor is feasible, then no property of that debtor can be necessary for that end.” 12 B.R. at 80. We have no quarrel with these decisions.

[39] The district court, pursuant to this Court’s August 8, 1985, order, reviewed the feasibility of the Ahlers’ reorganization plan. It analyzed the plan on the basis of the factors outlined in United Properties, Inc. v. Emporium Department Stores, Inc., 379 F.2d 55, 66-71 (8th Cir. 1967),[12] and found that the plan was utterly unfeasible because (1) the debtor’s current liabilities exceeded his current assets by a substantial margin, and (2) the debtor could not, in the light of his past experience and current or anticipated farm programs, be expected to operate profitably with a significant cash flow. [40] Although the district court’s feasibility determination is subject to the clearly erroneous standard of review, id. at 63-64, “an appellate court has the power to correct errors of law, including `a finding of fact that is predicated on a misunderstanding of the governing rule of law.'” Martin, 761 F.2d at 475. (quoting Bose Corp. v. Consumer Union of United States, Inc., 466 U.S. 485, 501, 104 S.Ct. 1949, 1960, 80 L.Ed.2d 502 (1984). [41] The district court’s feasibility finding was predicated on a misunderstanding of the applicable law in that the district court failed to determine the value of the collateral, and therefore the amount of the secured creditors’ allowed secured claims, independent of the bankruptcy court’s adequate protection valuation. For purposes of the reorganization plan, the value of the collateral is to be determined at the time for confirmation of that plan. An initial valuation for adequate protection purposes is not res judicata for purposes of determining the value of the collateral, and thus the allowed secured claims of the creditors, under a reorganization plan. See 11 U.S.C. § 506(a).

While courts will have to determine value on a case-by-case basis [11 U.S.C. § 506(a)] makes it clear that valuation is to be determined in light of the purpose of the valuation and the proposed disposition or use of the subject property. This determination shall be made in conjunction with any hearing on such disposition or use of property or on a plan affecting the creditor’s interest. To illustrate, a valuation early in the case in a proceeding under sections 361-363 would not be binding upon the debtor or creditor at the time of confirmation of the plan. Throughout the bill, references to secured claims are only to the claim determined to be secured under this subsection, and not to the full amount of the creditor’s claim.

[42] S.Rep. No. 989 at 68, U.S. Code Cong. Ad. News at 5854. [43] This revaluation is particularly important when, as in this case, the evidence demonstrates that the collateral decreased in value after the adequate protection valuation. Accordingly, because the district court failed to revalue the collateral in determining the feasibility of the Ahlers’ reorganization plan, its feasibility finding was based on a misunderstanding of the applicable law. Under these circumstances, it is appropriate to remand the case so that findings may be made applying the correct legal standards, and we need not address the issue of whether the district court’s feasibility finding was clearly erroneous Martin, 761 F.2d at 475.[13]

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[44] We note, however, that our review of the record leads us to believe that the Ahlers may be able to propose a feasible reorganization plan. While the Ahlers’ current liabilities do exceed their current assets, it appears probable that once their secured debt is restructured to reflect present values of land and equipment as Section 506(a) requires, they can repay that debt over a reasonable period of time with interest and make substantial payments to unsecured creditors. (The banks will hold more than ninety-five percent of the unsecured debt.) The basis for this conclusion is set forth in Appendix A to this opinion. [45] In brief, the Ahlers, on the basis of the record before us and current farm prices and programs, can reasonably expect an annual income of $126,500 per year from their farming operations. This sum would be disbursed essentially as follows: to FLB as payments on secured debt
on land of $306,000 (30 years at
12.5%) ……………………….. $ 38,500
to Norwest as payments on secured
debt on land of $89,000 (30 years at
12.5%) ……………………….. $ 11,500
to Norwest, John Deere, and
Commodity Credit Corporation as
payments on secured debt on
personal property of $94,000 (6
years at 10%) …………………. $ 21,500
to GMAC on secured debt of $3,000 (3
years at 10%) …………………. $ 1,200
Ahlers’ living expenses ………….. $ 11,500
tax and priority claims ………….. $ 4,500
unsecured claims (This sum would be
increased to $29,500 per year after
6 years.) …………………….. $ 37,800
________
$126,500
[46] Our conclusion is, of course, based on the record before this Court at this time, and is not intended to bind the bankruptcy court on remand. On remand, the debtors will be permitted to amend their proposed plan, within thirty days of the receipt of this opinion, to reflect the law as stated in this opinion. If an amended plan is presented, the bankruptcy court will hold hearings on the plan and confirm or reject it on the basis of current data as to land and equipment values, interest rates, and farm prices and programs. [47] C. The absolute priority rule does not prevent thisreorganization.
[48] Norwest and the Federal Land Bank contend that they are entitled to relief from the automatic stay because any feasible reorganization plan submitted by the Ahlers could not be confirmed. They argue that because their claims are substantially undersecured, any reorganization plan would treat a portion of their claims as unsecured. 11 U.S.C. § 506(a). As a class of unsecured creditors, they insist that they would not accept a reorganization plan, because the Ahlers could not pay the unsecured claims in full. Thus, they contend that the plan could not be confirmed under 11 U.S.C. § 1129(a)(8)(A). [49] Furthermore, Norwest and the Federal Land Bank argue that the Ahlers would not be successful in having the plan confirmed over their objections under 11 U.S.C. § 1129(b). They insist that because the Ahlers could not pay their unsecured claims in full, and because the Ahlers would retain an interest in the farm under a reorganization plan, the plan would not satisfy the “fair and equitable” requirement of section 1129(b)(1). Because Norwest and the Federal Land Bank have, to this point, expressed their unwillingness to accept any plan under section 1129(a), we will examine whether a plan may be confirmed over their objections under section 1129(b). [50] Section 1129(b)(1) provides that a bankruptcy court shall, at the request of the debtor or other proponent, confirm a Chapter 11 plan over the objection of a class of creditors if the plan does not discriminate unfairly and is fair and equitable with respect to each class of creditors that has not accepted the plan. 11 U.S.C. § 1129(a)(1). Section 1129(b)(2) establishes the standards for determining whether a plan is “fair and equitable.” It adopts three different tests to determine whether a plan is fair and equitable, depending on whether the dissenting

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class is comprised of secured claims, unsecured claims, or ownership interests. See generally 11 U.S.C. § 1129(b)(2)(A)-(C).

[51] 1. Secured claims.
[52] With respect to a class of secured claims, a plan may provide

(i)(I) that the holders of such claims retain the liens securing such claims, whether the property subject to such liens is retained by the debtor or transferred to another entity, to the extent of the allowed amount of such claims; and
(II) that each holder of a claim of such class receive on account of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the value of such holder’s interest in the estate’s interest in such property;
(ii) for the sale, subject to section 363(k) of this title, of any property that is subject to the liens securing such claims, free and clear of such liens, with such liens to attach to the proceeds of such sale, and the treatment of such liens on proceeds under clause (i) or (iii) of this subparagraph; or
(iii) for the realization by such holders of the indubitable equivalent of such claims.

[53] 11 U.S.C. § 1129(b)(2)(A). [54] Under subparagraph (i) the plan may be confirmed if the secured creditors retain a lien securing the amount of their allowed secured claims[14] and they receive deferred cash payments having a present value, as of the effective date of the plan, equal to the present value of the collateral.[15]
Alternatively, the plan may be confirmed under subparagraph (ii) if the plan proposes to sell the collateral free and clear of the secured parties’ liens, as long as the lien will attach to the sale proceeds and will receive treatment under subparagraph (i) or (iii). Finally, subparagraph (iii) permits confirmation if the plan provides for the realization by the dissenting class of secured creditors of the indubitable equivalent of their claims. The legislative history to this subparagraph states that abandonment of the collateral to the secured creditor would clearly satisfy indubitable equivalence, as would a lien in similar collateral. 124 Cong.Rec. H32,407 (daily ed. Sept. 28, 1978) (statement by Rep. Don Edwards). [55] Assuming that the Ahlers’ reorganization plan proposes that they remain on the farm and continue to use the secured collateral in their farming operation, the plan must, to be confirmed over the dissent of the secured creditors, propose that the secured creditors retain a lien in the collateral securing the amount of their allowed secured claims, and that they receive deferred cash payments having a present value equal to the value of the collateral securing their claims as of the effective date of the plan. 11 U.S.C. § 1129(b)(2)(A)(i). If the plan also proposes to pay the secured creditors a reasonable rate of interest on their allowed secured claims, the present value and face future value will be identical. See H.R. Rep. No. 595 at 414-15, 1978 U.S. Code Cong. Ad. News at 6370-71. [56] 2. Unsecured claims.
[57] With respect to a class of dissenting unsecured creditors, a plan will be “fair and equitable” if one of two tests is satisfied. First, the plan may provide that each unsecured creditor in the class receive or retain property having a value, as of the effective date of the plan, equal to the allowed amount of its claim.

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11 U.S.C. § 1129(b)(2)(B)(i). Norwest and the Federal Land Bank contend, and we agree, that any realistic reorganization plan proposed by the Ahlers could not provide the unsecured creditors with property equal to the amount of their allowed claims. Thus, any feasible plan would not meet the “fair and equitable” standard of section 1129(b)(2)(B)(i).

[58] Alternatively, the plan may provide any treatment for the class of unsecured creditors, including no participation at all,[16]
as long as no junior claims or interests participate in the plan or retain an interest in the debtor’s property. 11 U.S.C. § 1129(b)(2)(B)(ii). Norwest and the Federal Land Bank contend that because the Ahlers could not provide the unsecured creditors with property equal to the allowed amount of their claims, any non-liquidation plan would not satisfy the “fair and equitable” standard of section 1129(b)(2)(B)(ii). They argue that under any reorganization plan, the Ahlers would retain an equitable ownership interest, which is junior to the unsecured creditors’ claims, without providing for the unsecured creditors in full. We do not agree that retention of this equitable ownership interest is fatal to the Ahlers’ plan being “fair and equitable” under section 1129(b)(2)(B)(ii). [59] Section 1129(b)(2)(B) essentially applies a modified version of the traditional absolute priority rule, which was initially established in Northern Pacific Railway v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931 (1913). See 3 Norton, Bankruptcy Law Practice § 63.21 (1985). Simply stated, the absolute priority rule provides that a dissenting class of unsecured creditors must be provided for in full before any junior class can receive or retain any property under the plan. However, in cases decided after Boyd, the Supreme Court specifically recognized that there may be circumstances in which the absolute priority rule could be modified to allow a junior ownership interest to participate in the reorganization plan even though dissenting senior creditors may receive less than their allowed claims. [60] In Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110 (1939), the Court stated:

It is, of course, clear that there are circumstances under which stockholders may participate in a plan of reorganization of an insolvent debtor. This Court, as we have seen, indicated as much in Northern Pacific Railway Co. v. Boyd, supra [228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931] and Kansas City Terminal Ry. Co. v. Central Union Trust Co., supra [271 U.S. 445, 46 S.Ct. 549, 70 L.Ed. 1028]. Especially in the latter case did this Court stress the necessity, at times, of seeking new money “essential to the success of the undertaking” from the old stockholders. Where that necessity exists and the old stockholders make a fresh contribution and receive in return a participation reasonably equivalent to their contribution, no objection can be made.

[61] Id. at 121, 60 S.Ct. at 10 (footnote omitted). The Court continued by stating that if these conditions were satisfied,

the creditor cannot complain that he is not accorded “his full right of priority against the corporate assets.”
In view of these considerations we believe that to accord “the creditor his full right of priority against the corporate assets” where the debtor is insolvent, the stockholder’s participation must be based on a contribution in money or in money’s worth, reasonably equivalent in view of all the circumstances to the participation of the stockholder.

Page 402

[62] Id. at 122, 60 S.Ct. at 10 (footnotes omitted) (emphasis added). [63] In the Kansas City Terminal Railway case cited by the Court in Case, the Supreme Court stated:

Generally, additional funds will be essential to the success of the undertaking, and it may be impossible to obtain them unless stockholders are permitted to contribute and retain an interest sufficiently valuable to move them. In such or similar cases the chancellor may exercise an informed discretion concerning the practical adjustment of the several rights.

[64] Kansas City Terminal Railway, 271 U.S. at 455, 46 S.Ct. at 551-52. [65] See also Sophian v. Congress Realty Co., 98 F.2d 499, 502 (8th Cir. 1938) (“to justify retention of stock interests by stockholders of debtor it must appear that they have furnished some compensatory additional consideration or have an equity interest in the estate of the debtor after the rights of creditors are fully provided for”); In re U.S. Truck Co., 47 B.R. 932, 940-41 (E.D.Mich. 1985): In re Marston Enterprises, Inc., 13 B.R. 514, 517-18 (Bankr.E.D.N.Y. 1981) (contribution of new capital necessary to fund reorganization plan in return for participation in reorganization plan did not violate “fair and equitable” rule, even though intervening classes of creditors received nothing under the plan). [66] Thus, a more accurate summation of the absolute priority rule would be that a dissenting class of unsecured creditors must be provided for in full before any junior class may receive or retain any property under the plan, unless the junior class contributes to the reorganization enterprise something that is reasonably compensatory and is measurable. [67] Certainly, a farmer’s efforts in operating and managing his farm is essential to any successful farm reorganization, and this yearly contribution is measurable in money or money’s worth. Moreover, the reorganization value of the Ahlers’ farm exceeds its liquidation value — if the plan is rejected, the unsecured creditors will get nothing, whereas they will receive annual payments if the plan is approved and is successful. The Ahlers’ farm operation and management skills are something of a value which would disappear if their farm was liquidated. Because that value cannot be captured for creditors in the event of liquidation, fairness is not violated if their Chapter 11 plan leaves that value in their hands. This view also recognizes the broad rehabilitative purposes of the Bankruptcy Act — to give a debtor with a reasonable chance of success an opportunity for a fresh start. Any other view would deny to most farmers the opportunity to take advantage of the reorganization provisions of the Bankruptcy Act. Accordingly, the farmer should be entitled to participate in the plan to the extent of this contribution, even though more senior claims are not provided for in full under the plan. The only remaining question, therefore, is whether the farmer’s new contribution is reasonably equivalent to the equitable ownership interest the farmer would retain under the plan. [68] We recognize that there is no mathematical formula which the bankruptcy court can apply to make this determination, and that this determination must necessarily depend on the facts in each case. However, the value of the farmer’s labor, including the value of his experience and expertise in farming the land, should not be overly difficult to determine. Valuing the retained equitable ownership interest, however, is a more difficult problem. [69] In In re U.S. Truck the court stated that in determining the general worth of the retained interest, a court must necessarily make determinations regarding the future of the debtor as reorganized, and its possible profits. 47 B.R. at 941-42 (citin In re Landau Boat Co., 13 B.R. 788 (Bankr.W.D.Mo. 1981)). I Landau Boat the creditors argued that the shareholders were retaining equity value without consideration because the debtor corporation, as an ongoing business, was worth more than the shareholders’ new contribution. The court in Landau Boat
stated:

The commercial value of property consists in the expectation of income from it * * *. Such criterion is the appropriate one here, since we are dealing with the issue of solvency arising in connection with reorganization plans involving productive

Page 403

properties * * *. The criterion of earning capacity is the essential one * * * if the allocation of securities among the various claimants is to be fair and equitable * * *. Since its application requires a prediction as to what will occur in the future, an estimate, as distinguished from mathematical certitude, is all that can be made. But that estimate must be based on an informed judgment which embraces all facts relevant to future earnings capacity and hence to present worth, including, of course, the nature and condition of the properties, the past earnings record, and all circumstances which indicate whether or not that record is a reliable criterion of future performance.

[70] 13 B.R. at 792-93 (quoting Consolidated Rock Products v. DuBois, 312 U.S. 510, 526, 61 S.Ct. 675, 685, 85 L.Ed. 982
(1941)). The court found that the debtors’ corporation had the potential to be profitable. Landau Boat, 13 B.R. at 793. However, after considering the debtor’s financial needs, including debt service, the state of the economy, and the fact that the debtor was in a highly competitive business, the court concluded that the probability of the debtor making a real profit in the next few years was unlikely. Id. Thus, the court found that the new investors were making a substantial investment which exceeded any value that could be realized from the business in the near future. Id. [71] Applying these principles to the present case, the Ahlers would not realize any real profit or benefit from their retained equitable ownership interest until the reorganization plan was completed and the secured creditors had been paid the full amount of their allowed secured claims. At this time, the equitable ownership interest would mature. Thus, if the bankruptcy court determines that the value of the Ahlers’ yearly contributions of labor, experience, and expertise over the life of the plan will equal or exceed the value of the retained ownership interest at maturity, the dissenting unsecured creditors cannot complain that they have not been accorded their full right of priority against the debtors’ assets.[17] [72] We recognize, of course, that because the profitability of any reorganization plan cannot be determined with mathematical certitude, the possibility exists that the plan may be more profitable than anticipated. If so, and if the equitable ownership interest receives this excess profit, the equitable ownership interest may receive more than the value of its contribution. To avoid this result, the bankruptcy court should require that any cash flow from the operation of the farm in excess of that anticipated in the plan should be paid to the unsecured creditors on a pro rata basis until such time as the unsecured creditors are paid in full without interest. Similarly, if any secured property is sold during the life of the plan, and if the unsecured creditors have not been paid in full, excluding interest, before that date, the bankruptcy court should require that any amount received in excess of that necessary to pay the secured creditors be shared equitably among the unsecured creditors and the ownership interest, based on its contribution at the time the property is sold.[18] [73] This matter is remanded to the district court with directions that the bankruptcy court take prompt action to comply with this opinion.[19] Each party to this appeal is to bear its own costs.

Page 404

[74] JOHN R. GIBSON, Circuit Judge, dissenting. [75] The district court found that Ahlers’ liabilities exceed his assets by “a substantial margin,” that he “could not * * * be expected to operate profitably,” and that his reorganization plan was “utterly unfeasible.” Ante, at 399. Despite these findings of fact, the court today devises a plan of its own to save Ahlers from liquidation. To do so, the court ignores factual and equitable considerations properly relied upon by the bankruptcy judge in ordering the commencement of adequate protection payments, evades its duty to review expert valuations under the clearly erroneous standard and to refrain from finding facts nowhere in the record, and adopts a view of the absolute priority rule contrary to precedent, logic, and fairness. Understandably sympathetic in the face of admittedly acute difficulties gripping the nation’s entire farm economy, the court unabashedly legislates a result which undermines reasonable commercial expectations, and substantially reorders the risks of insolvency borne by farm debtors and their bankers. I respectfully dissent.

I.
[76] I first take issue with the court’s conclusion that the bankruptcy court erred in not granting Ahlers a one year and six week delay in commencing adequate protection payments. 11 U.S.C. § 362(d) (1982) requires the bankruptcy court to grant secured creditors relief from the automatic stay for cause, including the lack of adequate protection. Congress intended that the bankruptcy court, in determining the scope of adequate protection payments, should as nearly as possible provide the secured creditor with its bargained-for rights. In re Briggs Transportation Co., 780 F.2d 1339, 1346 (8th Cir. 1985). We have recognized that the bankruptcy court may order adequate protection payments for reinvestment value lost during post-petition foreclosure delay. Id. at 1350.

[77] Congress intended that the bankruptcy court exercise considerable discretion in arriving at adequate protection findings. See In re Martin, 761 F.2d 472, 476 (8th Cir. 1985). As has been long and repeatedly recognized, the bankruptcy court is a court of equity. Pepper v. Litton, 308 U.S. 295, 303-04, 60 S.Ct. 238, 243-44, 84 L.Ed. 281 (1939); In re Stevenson Associates, Inc., 777 F.2d 415, 419 (8th Cir. 1985). To achieve an equitable result, the bankruptcy court must be left free to take a case-by-case approach to varying fact situations. See In re Briggs, 780 F.2d at 1346-47. Therefore, “final reconstruction of the creditor’s bargain to determine just what interests of the creditor should be afforded protection during the pendency of the automatic stay is a balancing act best left to the discretion of the bankruptcy judge.” Id. at 1349. [78] Despite the congressional mandate to defer to the bankruptcy court’s discretionary authority, and without making any effort to assess the equitable concerns which the bankruptcy court may have weighed in ordering the commencement of adequate protection payments, the court today renders nugatory, as a matter of law, the banks’ bargained-for right to investment return on foreclosure proceeds during the one year and six week period following imposition of the automatic stay. The court achieves this reversal of the bankruptcy court’s adequate protection finding by taking judicial notice of “reasonable and established marketing techniques,” ante, at 397, which it asserts Minnesota lenders employ to accommodate the state notice and redemption provisions. The court, however, fails to acknowledge the host of other equitable concerns that the bankruptcy court was required to consider in reaching its determination. Similarly, it fails to review the bankruptcy court’s findings under the clearly erroneous standard. Rather, the court simply disregards these constraints essential to the proper exercise of appellate jurisdiction in an effort to bolster Ahlers’ chances of forging a feasible plan for reorganization. [80] Recognizing the special fact-finding and equitable powers of the bankruptcy court, this court held in both In re Briggs an In

Page 405

re Martin that adequate protection is a case-by-case inquiry subject to clearly erroneous review. Under these cases, and under the circumstances presented by this case, I cannot say that the bankruptcy court, in its proper exercise of fact-finding and equitable jurisdiction, was clearly erroneous in finding the banks entitled, without delay, to protective payments on the reinvestment value of the foreclosure proceeds.

II.
[81] The court today also concludes that the district court erred in holding that Ahlers’ reorganization is unfeasible. The court reaches this result by replacing the district court’s findings as to the values of Ahlers’ land and equipment with findings of its own. I differ with the court’s method and with its implicit conclusion that the district court’s valuations were clearly erroneous.

[82] Fed.R.Civ.P. 52(a) orders that findings of fact shall not be set aside unless clearly erroneous. As the Supreme Court explained in Anderson v. City of Bessemer City, 470 U.S. 564, 105 S.Ct. 1504, 84 L.Ed.2d 518 (1985), if a finding of fact is based on the testimony of one of two or more witnesses, each of whom has told a plausible and coherent story not contradicted by extrinsic evidence, that finding can virtually never be clear error. Id., 105 S.Ct. at 1513. Similarly, where there are two permissible views of the evidence, the trial court’s choice between them cannot be clearly erroneous. Id. at 1512. In light of the teaching of Anderson v. City of Bessemer City, I cannot conclude that the bankruptcy court’s findings on the values of Ahlers’ land and equipment, confirmed by the district court, were clearly erroneous. [83] Dennis Christensen, a farm manager and real estate appraiser, testified that his assessments were based on land values as of January 15, 1985, approximately six weeks after Ahlers filed under Chapter 11. He testified that he considered land sales in the county immediately west of Nobles County which had taken place within the previous three weeks. He testified that his soil comparisons indicated close similarity between those parcels and Ahlers’ parcels. He also based his assessments on conversations with the local assessment official, and with local bankers and lawyers familiar with the local real estate market. He stated that his valuations took into account the reported approximately 24 percent decline in 1984 in the value of good corn and soybean ground in southern Minnesota. Similarly, Arden Harberts, a professional auctioneer who stated that he holds about 60 farm auction sales a year, testified to the value of Ahlers’ farm machinery and equipment. Harberts testified that his valuation was based on his experience and knowledge of the current market. [84] It is true that Christensen’s and Harberts’ valuations differed widely from those offered by Ahlers. However, the bankruptcy court accepted the testimony of the banks’ witnesses. As the bankruptcy court stated: “Mr. Ahlers provided testimony regarding the valuation of the machinery and equipment, candidly stating that his valuation was based on conjecture. Norwest’s evidence was by expert testimony based on substantial foundation.” Slip op. at 8. The bankruptcy court offered a similar assessment of the land valuation testimony. Slip op. at 6 n. 6. In my judgment, the evidence was sufficient to support the findings made by the bankruptcy court. I could not, under the standard articulated i Anderson v. City of Bessemer City, hold these findings clearly erroneous. [85] The district court accepted the bankruptcy court’s findings that the valuations offered by the banks’ experts were accurate. The majority quarrels with the district court’s adoption of these findings, contending that because land prices had fallen since the adequate protection hearing, section 506(a) of the Bankruptcy Code, 11 U.S.C. § 506(a) (1982), requires the district court to revalue Ahlers’ parcels. The logic of this argument escapes me. First, nowhere in the record made before the district court is there evidence of a precipitous decline in land values during the period between the adequate protection and confirmation hearings. Second, even if such a decline occurred, the consequences of the court’s determination that the land must be revalued are nonetheless dramatic. Under section 506(a), the banks’ claims are secured only to the extent of the value of the collateral at the time the plan is confirmed.

Page 406

The court’s ruling thus places the loss resulting from the asserted drop in farm land values during the pendency of the automatic stay entirely on the banks. The House Report which the court cites falls far short of supporting its assertion that Congress intended such a dramatic shift in the risk of loss. Nor do I believe such a shift is either reasonable or fair. For during the stay period, the banks were utterly without recourse. Thus, I cannot say that the district court acted improperly in adopting the bankruptcy court’s findings.

[86] In selecting valuation figures even lower than the estimates given by Ahlers, as is suggested in the Appendix, the court today ignores the plausible and coherent testimony in the record that would support the bankruptcy court’s findings, which the district court adopted. Instead, the court simply substitutes wholesale findings of fact of its own. It makes no effort to analyze the accepted testimony, as required by Anderson v. City of Bessemer City. The court’s action is especially ironic in light of the bankruptcy court’s findings that even were it to accept Ahlers’ valuations, it still would conclude that the banks would be substantially undersecured. The irony is heightened when the court orders that should the farming operation produce profits above those projected, these should be distributed to the unsecured creditors. This is little more than contemplating the distribution of a mirage. [87] Under the principles of Anderson v. City of Bessemer City, I would conclude that the findings made by the bankruptcy court and confirmed by the district court were not clearly erroneous.

III.
[88] The court also decides today that “experience, knowledge, and labor,” ante, at 392, is the equivalent of capital. It thus would allow Ahlers to force upon the impaired unsecured creditors a reorganization plan which would permit Ahlers to participate in the plan on the strength of his promise to later contribute his expertise and efforts to the plan. This reasoning works an expansion of the rule of absolute priority that is unprecedented, illogical, and unfair.

[89] The absolute priority rule, established in Northern Pacific Railway Co. v. Boyd, 228 U.S. 482, 33 S.Ct. 554, 57 L.Ed. 931
(1913), and codified at 11 U.S.C. § 1129(b)(2)(B)(ii) (West Supp. 1986), prohibits a debtor from participating in a reorganization plan unless unsecured creditors’ claims are fully satisfied. The rule assures that the plan is fair and equitable by protecting unsecured creditors from suffering losses greater than they reasonably could have foreseen. Case law has developed a narrow corollary to the absolute priority rule. Where substantial fresh capital, or its equivalent, is essential to the success of a plan, the debtor may, over the objection of impaired unsecured creditors, make such fresh contributions and participate in the plan to the extent of the contributions. This corollary recognizes that a reorganized going concern generally is worth more than its liquidated assets. If reorganization requires debtor participation, and if the impaired creditors suffer no net loss by virtue of the debtor’s concomitant contribution, otherwise lost value is captured without violating the fair and equitable requirement. [90] The Supreme Court recognized this corollary to the absolute priority rule in Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110 (1939). There, however, the Court held that a reorganization plan of an insolvent corporation was not “fair and equitable” because it preserved shareholders’ interests without any fresh contribution of capital by such shareholders and without full satisfaction of creditors’ claims. Despite this holding, the court seizes upon dicta in Los Angeles Lumber, that “the stockholder’s participation must be based on money or money’s worth,” id. at 122, 60 S.Ct. at 10, to conclude that “[c]ertainly a farmer’s efforts * * * [are] measurable in money or money’s worth,” and thus may be used to override the dissent of legitimate creditors to Ahlers’ retention of an interest in the reorganization plan. Indeed, even the observation in Los Angeles Lumber dealt not with an exchange of a promise to make future contributions of labor and skill for equity participation in a reorganization plan, but with an offer by shareholders in a corporation to make immediate and substantial contributions of new and needed capital. These distinctions, I believe, render the Court’s reliance on the “money’s worth” dicta unsound.

Page 407

[91] The Court in Los Angeles Lumber suggested that when a cash contribution is impossible, “`a [creditor’s] interest can be preserved by the issuance, on equitable terms, of income bonds or preferred stock,'” id. at 117, 60 S.Ct. at 8 (quoting Boyd, 228 U.S. at 508, 33 S.Ct. at 561), or “`through other arrangements which distinctly recognize their equitable right to be preferred to stockholders against the full value of all property belonging to the debtor corporation,'” id. (quotin Kansas City Terminal Railway Co. v. Central Union Trust Co., 271 U.S. 445, 454-55, 46 S.Ct. 549, 551-52, 70 L.Ed. 1028
(1926)). These examples of permissible cash substitutes, undoubtedly what was intended by the “money’s worth” phrase, are distinctly capital in nature. But in rejecting a plan similar to that hypothesized today, the Court made clear that non-capital contributions, such as

financial standing and influence in the community [which] can provide a continuity of management constitute[s] no legal justification for issuance of new stock to [the debtor]. Such items are illustrative of a host of intangibles which, if recognized as adequate consideration for issuance of stock to valueless junior interests, would serve as easy evasions of the principle of full or absolute priority * *.

[92] Id., 308 U.S. at 122, 60 S.Ct. at 10. The Court continued:

Such items * * * have no place in the assets column of the balance sheet of the new company. They reflect merely vague hopes or possibilities. As such, they cannot be the basis for issuance of stock to otherwise valueless interests.

[93] Id. at 122-23, 60 S.Ct. at 10-11 (footnotes omitted). Like Los Angeles Lumber, every case the court cites to support the exchange of labor for equity participation deals with a proposed capital contribution. To my knowledge, the court today writes the first labor contribution case. The court’s expansion of the narrow corollary to the rule of absolute priority, therefore, is supported neither by Los Angeles Lumber nor by any other precedent. [94] The analysis in Los Angeles Lumber also highlights the extreme illogic of the analogy from capital contributions to contributions of labor and expertise. First, capital, not labor, is the means of exchange in our economy. Labor cannot easily be turned to another use; it is not liquid. Therefore, a contribution of labor does not provide the same certain protection to the unsecured creditor as does one of capital. Second, while the value of capital is fixed, the value of a farmer’s experience, knowledge, and labor to a failing farm, like the value of “financial standing and influence in the community,”Los Angeles Lumber, 308 U.S. at 122, 60 S.Ct. at 10, is a matter of grave speculation, again injecting uncertainty into the bargain. Finally, the capital contribution is executed prior to plan approval. Here, it is only upon the promise of future contributions of labor that creditors must rely for protection. How are we to bind the debtor to an agreement to contribute labor? Surely the court does not suggest that we are empowered to order specific performance of labor obligations. See Karrick v. Hannaman, 168 U.S. 328, 335-36, 18 S.Ct. 135, 138-39, 42 L.Ed. 484 (1897). Does not a plan involving a contribution hypothesized by the court “reflect purely vague hopes or possibilities,”id., 308 U.S. at 123, 60 S.Ct. at 11, rather than the certainty a finding of feasibility requires? [95] These distinctions render expansion of the capital contribution corollary to the absolute priority rule not only illogical, but also violative of the “fair and equitable” requirement. Just as an unsecured creditor obviously must foresee the possibility of the debtor’s insolvency and subsequent reorganization, so too may he fairly expect that if insolvency occurs, his recovery will not be impaired by the debtor’s retention of an interest in the plan. Because an agreement to contribute labor cannot be sufficient to justify participation, a plan including such a contribution is not “fair and equitable.” [96] I do not believe the section 1129(b)(2)(B)(ii) rule of absolute priority would permit Ahlers to participate in the reorganization plan on the strength of his promise to contribute his “experience, knowledge, and labor” to the plan. Therefore, I would affirm the district court’s ruling that the plan was unfeasible.

Page 408

IV.
[97] The motivation behind the court’s decision is commendable. Farm bankruptcies have reached epidemic proportions and farmers are being torn from their livelihood. Nonetheless, I cannot abide the solution the court today proposes. As the court acknowledges, the district court found that Ahlers’ plan for reorganization was “utterly unfeasible” because his “current liabilities exceeded current assets by a substantial margin” and because he “could not * * * be expected to operate profitably.” Ante, at 18. It is only through the court’s disregard of its proper role that it can coax from the record, and from sources outside the record, its conclusion that a razor thin margin might exist by which Ahlers could feasibly reorganize. If there is to be an adjustment to the relationship between the farmer and the farmer’s bank, serious policy questions are presented which can best be considered by the Congress. We, however, are advised to confine our efforts to deciding cases on the law as written and on the facts as found.

[98] I respectfully dissent. APPENDIX I
The values of the land, equipment, and production costs
represented in this Appendix were derived by this Court from the
best available evidence in the record presented to it, and from
published studies by the University of Minnesota. The commodity
prices were based upon recent cash grain prices at the Fulda,
Minnesota, Independent Cooperative grain elevator. The sole
purpose of this Appendix is to illustrate that, based upon the
record before this Court, the Ahlers may be able to present a
feasible reorganization plan. We emphasize, however, that this
plan, as well as the values contained therein, is merely
illustrative, and is not binding on the parties or the bankruptcy
court. On remand, the bankruptcy court is free to determine these
values as of the date of the confirmation hearing in light of the
reorganization plan submitted by the Ahlers to determine if that
plan is feasible.

I. AHLERS’ INCOME

A. 830 Tillable Acres
550 owned by Ahlers
280 rented by Ahlers
Rental agreement is a standard 40%/60% share crop payable
before expenses.

B. By participating in the recently enacted federal farm program,
the Ahlers’ projected income for 1986 would be as follows:

1. Corn (332 acres)

a. 415 acre base
20% removed from production
110 bu./acre yield and base
415 acres x (80%) = 332 acres
332 acres x 110 bu./acre = 36,520 bu.
36,520 bu. x $3.50/bu.[1] = $ 127,820

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b. Expenses

(1) Share Crop (60/40)
95 rented acres in corn
95 acres x 110 bu./acre = 10,450 bu.
10,450 bu. x (40%) = 4,180 bu.
4,180 bu. x $3.50 = $( 14,630)

(2) Production
(a) Seed = $( 8,250)
(b) Fertilizer = $( 9,000)
(c) Herbicide = $( 3,306)

(3) Insurance
(a) Federal Crop
332 acres x
$10.75/acres = $( 3,570)

c. Total Subnet on Corn = $ 89,064
———–
2. Soybeans (375 acres)

a. Anticipated Yield = 35 bu./acre
375 acres x 35 bu./acre = 13,125 bu.

b. Present Price = $5.07/bu.
13,125 bu. x $5.07/bu. = $ 66,544

c. Expenses

(1) Share Crop (60/40)
135 rented acres in soybeans
135 acres x 35 bu./acre = 4,725 bu.
4,725 bu. x (40%) = 1,890 bu.
1,890 bu. x $5.07 = $( 9,582)

(2) Production
(a) Seed = $( 3,000)
(b) Herbicide = $( 2,520)

(3) Insurance
(a) Federal Crop
375 acres x
$5.80/acre = $( 2,175)

d. Total Subnet on Soybeans = $ 49,267
———–
3. Oats (30 acres)

a. Anticipated yield = 80 bu./acre
30 acres x 80 bu./acre = 2400 bu.

b. Present Price = $0.98/bu.
2400 bu. x $0.98/bu. = $ 2,352

c. Expenses

(1) Production
(a) Seed = $ (363)
(b) Fertilizer = $ (490)
(c) Herbicide = $ (60)

d. Total Subnet on Oats = $ 1,439
———–

Page 410

4. Total Subnet on Grains = $ 139,770
———–
5. Other Income

a. 700 Feeder Pigs = $ 73,500

6. Total Subnet Farm Income = $ 213,270
———–
7. Other Expenses

a. Fuel = $( 11,900)
b. LP for Grain Dryer = $( 5,000)
c. Repairs and Maintenance = $( 7,500)
d. Fertilizer for Set Aside = $( 395)
e. Alfalfa Seed = $( 768)
f. Feeder Pig Expenses = $( 61,250)

8. Total Net Farm Income = $ 126,457
———–

II. CREDITOR CLAIMS

A. Parcel “A” (FLB Claim “F”)
FLB first mortgage in 240 acres
Loan balance = $ 343,252
Allowed secured claim
240 acres = $ 163,300[2]
Total unsecured claim = $ 179,952

1. Plan = issue a new note for the amount of the allowed
secured claim with interest at 12.5% and principal payable
annually based upon a 30 year amortization.[3]

The Ahlers’ yearly payments to the FLB on this secured
claim would be $21,026 as compared to $27,252 under the
present mortgage.

2. Norwest Bank has a second mortgage in this parcel of
land, but no equity; it would receive nothing from this
land under either reorganization or liquidation.

B. Parcel “B” (FLB claim “E”)
FLB first mortgage in 160 acres
Loan balance = $ 160,668
Allowed secured claim
160 acres = $ 106,500
Total unsecured claim = $ 54,168

Page 411

1. Plan = issue a new note for the amount of the allowed
secured claim with interest at 12.5% and principal payable
annually based upon a 30-year amortization.

The Ahlers’ yearly payments to FLB on this secured claim
would be $13,713 as compared to $18,173 under the present
mortgage.

2. Norwest Bank has a second mortgage in this parcel of
land, but no equity; it would receive nothing from this
land under either reorganization or liquidation.

C. Parcel “C” (FLB claim “G” — Norwest Claim “C”
FLB first mortgage in 80 acres
Norwest second mortgage in same
FLB loan balance = $ 30,184
Value of land = $ 62,480
Equity remaining for Norwest = $ 32,296

1. Plan for FLB = The Ahlers would affirm the original note
and mortgage and would make payments pursuant to them.
There is one principal and interest payment in default, and
this payment, if it has not already been made, would be
deferred to the end of the loan period.

Under this plan, the Ahlers’ yearly payments to the FLB
would continue to be $2,849.25.

2. Plan for Norwest discussed supra in section F.

D. Parcel “D” (FLB Claim “D” — Norwest Claim “C”)
FLB first mortgage in 80 acres
Norwest second mortgage in same
FLB loan balance = $ 6,014
Value of land = $ 62,480
Equity remaining for Norwest = $ 56,466

1. Plan for FLB = The Ahlers would affirm the original note
and mortgage and would make payments pursuant to them.
There is no payment in default. Under the plan, the
Ahlers’ yearly payments to the FLB would continue to be
$855.

2. Plan for Norwest discussed supra in section F.

E. Summary of FLB claims
1. Loan balances
a. $343,252
b. $160,668
c. $ 30,184
d. $ 6,014
——–
Total $ 540,118

2. Amount repaid under plan

a. $163,300
b. $106,500
c. $ 30,184
d. $ 6,014
——–
Total $ 305,998
———–
Total unsecured debt to FLB $ 234,120
———–

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F. Norwest land claims
Allowed secured claims in land

1. Parcel A = $ 0
2. Parcel B = $ 0
3. Parcel C = $ 32,296
4. Parcel D = $ 56,466
——–
Total $ 88,762

Plan = Norwest would retain a second mortgage in this land,
and would be issued a new note for the amount of the allowed
secured claim with 12.5% interest and principal payable
annually based on a 30-year amortization.

Under this plan, yearly payments to Norwest on this secured
claim would be $11,429.

G. Norwest machinery claim
Allowed secured claim of machinery and farm
equipment based on estimate of Vander Grift
which most closely reflects estimates of farm
machinery “Bluebook” and “Iowa Hotline” auction
guide = $ 66,300

Plan = Norwest would retain a lien on the machinery and
would be issued a new note for the amount of the allowed
secured claim with 10% interest and principal payable on a
6-year amortization.

Under the plan, the Ahlers’ yearly payments to Norwest on
this allowed secured claim would be $15,241.

H. Summary of Norwest Bank claims

1. Loan balance = $ 450,468

2. Amount of secured claims repaid under the Plan:
a. Parcel C = $ 32,296
b. Parcel D = $ 56,466
c. 1984 crop proceeds = $ 43,000
d. Cattle proceeds = $ 12,000
e. Farm machinery = $ 66,300
———–
Total = $ 210,062

Total unsecured debt to Norwest Bank = $ 240,406
———–

I. John Deere Credit claim
Balance due on JD 7720 combine with corn and
flax head = $ 35,791

Value/allowed secured claim = $ 26,000
———–
Unsecured claim = $ 9,791
———–
Plan = John Deere would retain a first lien on the combine
and would be issued a new note for the amount of the allowed
secured claim with 10% interest and principal payments based
on a 6-year amortization.

Under this plan, the Ahlers’ yearly payments to John Deere
Credit would be $5,977.

J. CCC Claim
Balance due on steel bin = $ 3,337
Value/allowed secured claim = $ 1,500
———–
Unsecured claim = $ 1,837
———–
Plan = CCC would retain a first lien in the steel bin and
would be issued a new note for the amount of the allowed

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secured claim with 10% interest and principal payments based
on a 6-year amortization.

Under this plan, the Ahlers’ yearly payments to CCC would be
$344.82.

K. GMAC Claim
Balance due on 1981 Pontiac Bonneville diesel
automobile = $ 2,900

Plan = Ahlers would pay the full amount of the debt over
three years at 10% interest.

Yearly payment to GMAC $1,169.

L. Total Claims
1. FLB = $ 540,118
a. Secured = 305,998
——-
b. Unsecured = 234,120 $ 234,120

2. Norwest = $ 450,468
a. Secured = 210,062
——-
b. Unsecured = 240,406 $ 240,406

3. John Deere = $ 35,791
a. Secured = 26,000
——
b. Unsecured = 9,791 $ 9,791

4. CCC = $ 3,337
a. secured = 1,500
—–
b. Unsecured = 1,837 $ 1,837

5. GMAC = $ 2,900
a. Secured = 2,900
b. Unsecured = 0 $ 0

6. Total Debt with accumulated interest
(approx.) = $ 1,040,000

7. Total secured claims paid under plan = $ 546,460
———-
8. Total unsecured claims remaining = $ 493,540
———-
III. LIQUID ASSETS

A. 1984 grain inventory = $ 43,000
Norwest has a first lien on this amount and this
inventory would immediately be turned over to
Norwest.

B. 1984 cattle sale = $ 12,000
Norwest has a first lien on this amount and these
proceeds would immediately be turned over to
Norwest.

C. 1985 grain inventory = $ 115,345
Approximately $57,000 will be needed to plant and
harvest the 1986 crop. After the first year’s crop
is harvested, the $115,345 would be subject to
further order of the bankruptcy court.

IV. FUTURE OF PLAN
The Ahlers have approximately $37,854 per year extra which
could be paid to unsecured creditor claims. Over the 30 years
of the plan, this $37,854 would yield $1,135,620 exclusive of
interest. After six years, Ahlers would have an additional
$23,000 to be applied to the claims of the unsecured debtors
($493,540). If all payments were promptly made, these claims
would be fully retired within 10.5 years.

Thus, under this plan, the secured creditors
would be paid 100% of their allowed
secured claims, with interest, and 100% of
their unsecured claims, without interest,
and the Ahlers would remain on their farm.
If liquidated, the creditors would receive

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less than 100% of allowed secured claims
(after exemptions were deducted), none of
their unsecured claims, and the Ahlers
would be deprived of the opportunity to
work their farm.

V. BALANCE SHEET
Total Income
(Less Mary Ahlers’ income) = $ 126,457

A. Payments over 30 years

1. FLB land
Parcel A $21,026
Parcel B 13,713
Parcel C 2,849
Parcel D 855
——
$38,443 $( 38,443)
2. Norwest land
Parcels C D = $11,429 $( 11,429)
———
Total land payments = $( 49,872)[4]

B. Payments over 6 years

1. Equipment
a. Norwest Equipment = $15,241
b. JD Credit = 5,977
c. CCC = 344
d. GMAC (3 years) = 1,169
——-
C. Other payments $22,731 $( 22,731)

1. Living expenses = $14,000
(less Mary Ahlers’ $2,500 income) $( 11,500)
2. Tax and priority claims $( 4,500)
———
Total yearly expenses $( 88,603)
Total yearly net income $ 126,457
———-
Available for distribution yearly to the unsecured
creditors $ 37,854[5]

[99] ORDER DENYING PETITION FOR REHEARING EN BANC
HEANEY, Circuit Judge.

[100] This Court’s opinion recognizes that farm prices and land values have fallen dramatically since the mortgages were executed and that present farm income is simply inadequate to repay the original debt. The banks’ losses will be the same whether the debt is restructured to enable the Ahlers to continue operating the farm or the land is sold at a liquidation sale. Congress intended to permit farmers to reorganize if they have a reasonable chance of success. The panel opinion simply reflects that intent. [101] Contrary to the views expressed by the dissenters, the application of the absolute priority rule was not raised for the first time in the panel opinion. Norwest took the position before the district court and before this Court in its brief and oral argument that even if adequate protection were offered and a feasible plan presented, no plan for reorganization could be approved because the debtor proposed to retain an interest in the farm without paying Norwest the amount of its claim in full. It stated:

[D]ebtors propose to treat a large portion of Norwest’s claim as unsecured. Norwest disagrees with this assertion, but even if the Debtors successfully treat Norwest as unsecured to some degree,

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this plan is unconfirmable over the vote of a non-consenting class of unsecured creditors if the Debtors retain any interests in their property and the unsecured creditors are not paid in full on the effective day of the plan. 11 U.S.C. § 1129(a)(8) and (b). In re Pecht, 53 B.R. 768, 770 (Bankr.E.D.Va. 1985). Since Norwest as an unsecured creditor would not consent to a plan in which the Debtors retain anything, unless Norwest is paid in full, a non-liquidating plan could not be confirmed unless Norwest was outvoted within its class of unsecured creditors.

[102] Brief for Norwest at 22-23 (emphasis added, footnote omitted) see also Supplemental brief of Norwest before the district court at 4. [103] At oral argument counsel for the Federal Land Bank was asked the following question:

Q. Is it your position that, as it is your colleague’s, that unsecured creditors can prevent the confirmation of a plan which would provide for the payment to secured creditors of the value of their loan at the time the plan was filed?
A. Yes, as counsel for Norwest correctly pointed out under section 1129(b)(2), your Honor, an unsecured creditor must receive property of a value of his unsecured claim at the time of confirmation if the debtor proposes to retain any interest in the property at that time.

[104] In view of the fact that both the Federal Land Bank and Norwest took the position outlined above, one could only conclude that a plan of reorganization could not be approved for the Ahlers because they proposed to retain an interest in the property. Thus, we had no alternative but to decide whether Norwest and the Federal Land Bank could block a petition for reorganization solely on the basis of the absolute priority rule. Inasmuch as it was abundantly clear from the record that the Ahlers would be unable to infuse any new cash into the farm, the key question, implicit in the application of the absolute priority rule, was whether their work and labor could be substituted for cash. We answered that question in the affirmative. [105] Further support for this analysis is to be found in the fact that the dissenting opinion, as well as the majority opinion, saw fit to address the merits of the matter. [106] ARNOLD, Circuit Judge, dissenting from the denial of rehearing en banc. [107] I vote to grant the petition for rehearing en banc. At this stage of the case, I am inclined to agree with the view of the law expressed by my Brother Gibson on the question of the legal effect of a debtor’s promise to contribute his own labor, skill, and experience to the future of the enterprise. But because the petition for rehearing en banc has been denied, the Court en banc will not have the benefit of briefing, argument, and conference. I therefore forego any more definite statement as to this time. [108] JOHN R. GIBSON, Circuit Judge, dissenting from denial of rehearing en banc, joined by Judges Ross, Fagg and Bowman, Circuit Judges. [109] Five participating judges vote to grant rehearing en banc in this case and four vote to deny. The majority does not prevail, however, as 28 U.S.C. § 46(c) permits rehearing en banc only when “ordered by a majority of the circuit judges who are in regular active service.” With the court now at its full strength of ten judges in regular active service, a vote of six is required for en banc consideration. [110] The failure to consider this case en banc is particularly regrettable. The court has altered the relationship between debtor and creditor, invading serious policy issues properly the concern of Congress, and in doing so has substituted its own findings of fact for those made by the bankruptcy and district courts. I need not further belabor the arguments in my original dissent. [111] The court holds that experience, knowledge, and labor is the equivalent of capital. Ahlers v. Norwest Bank Worthington, 794 F.2d 388, 392, 403-04. This is directly contrary to the Supreme Court’s decision in Case v. Los Angeles Lumber Products Co., 308 U.S. 106, 60 S.Ct. 1, 84 L.Ed. 110 (1939). Furthermore, this issue was not raised in either the bankruptcy court or the district court, and the parties did not discuss this issue on appeal. The issue first appeared, suddenly and without warning, in the panel opinion and was not addressed by counsel until filing the motion for rehearing en banc. [112] This court has long recognized the principle that we will not consider, nor reverse on, an issue not presented to the court below. Spear v. Dayton’s, 771 F.2d 1140, 1144 (8th Cir. 1985) Larsen v. Erickson, 549 F.2d 1136, 1139 (8th Cir. 1977); Cato v.

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Collins, 539 F.2d 656, 662 (8th Cir. 1976); Morrow v. Greyhound Lines, Inc., 541 F.2d 713, 724 (8th Cir. 1976) Hunt v. Pan American Energy, Inc., 540 F.2d 894, 899 (8th Cir. 1976), cert. denied, 429 U.S. 1062, 97 S.Ct. 786, 50 L.Ed.2d 778 (1977). Reluctance to depart from this principle was expressed in Parker v. Corrothers, 750 F.2d 653, 658 (8th Cir. 1984), but the issue was considered because, unlike the present case, both parties at oral argument and the government in its brief addressed the question on appeal. As Justice Blackmun stated in Singleton v. Wulff, 428 U.S. 106, 121, 96 S.Ct. 2868, 49 L.Ed.2d 826 (1976), “injustice was more likely to be caused than avoided by deciding the issue without petitioners having had an opportunity to be heard.” To depart from this fundamental restraining principle without briefing and argument of counsel, and to reach a conclusion in conflict with Supreme Court authority on an issue presenting serious national policy considerations, is simply a usurpation of appellate judicial authority. Now the court refuses the opportunity to rehear and correct this excess by the slimmest of margins.

[113] Certainly, in some future case, there may be sufficient votes to enable this court to revisit the issue. This case, however, can now be resolved only in the Supreme Court. We are left to hope that, upon proper petition, it will grant certiorari.