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Bankruptcy reorganization plan not economically feasible because value of assets insufficient to meet cash flow projections.

The Meinders, owners of a dairy and crop farm in Iowa, filed for Chapter 12 bankruptcy with a plan to reorganize by selling some equipment and concentrating on milk production. Creditor State Savings Bank, the lender, objected to the reorganization plan, arguing that it would not be economically feasible.

Both parties utilized experts to assess the economic feasibility of the proposed reorganization plan, including valuations of the farmland and equipment. The bank's appraiser valued the farmstead at $230,000, taking into account a "possible encroachment situation." The bank's appraisal report noted that a driveway for the property might not be within the boundaries of the legal description. The bank's appraiser noted that the functional utility of two sheds would be severely restricted if the property were sold because the property boundaries were so close to the sheds that ingress and egress would not be possible without driving outside the boundaries of the property. The bank's appraiser consequently reduced his valuation by $10,000 as the cost for obtaining an acre of adjacent land to avoid the trespass. The court noted, however, that the bank's appraiser had valued the property with the extraordinary assumption that acquiring the neighboring land would be possible.

The Meinders' expert was a farmer who had forty-eight years of experience in farming as well as experience buying and selling farmland in the area. He valued the farmstead at $100,000, noting that potential purchasers would value the property at even less because of the encroachment issue. Mr. Meinders stated that his parents owned the surrounding land, and although they did not mind him trespassing to access the sheds, the same would not be true for a new, unrelated purchaser if the farm were sold. Both sides' experts agreed that the most important factor in valuing the property was the encroachment problem, and the encroachment would reduce the property value "significantly" if it were not remedied. Based on this testimony and the differing value opinions, the court could not determine the actual value of the property because of the uncertainty that the encroachment problem could ever be rectified.

The court also was unable to determine a precise valuation of the farm equipment, finding that both experts' value opinions were erroneous because neither included valuations of all the relevant equipment. After adjustments, the court found that the value of the farm equipment was somewhere between $191,650 and $149,450.

After considering the evidence, the court determined the reorganization plan was not economically feasible. For a plan to be feasible, it must be practical and have a "reasonable prospect of success." The reorganization plan required the Meinders to have sufficient capital to purchase more cows. But with very little equity in their farmstead or equipment, the court found that the Meinders would not be able to purchase enough cows to produce and sell enough milk to meet their cash flow projections. Rather, under the proposed plan, the Meinders would still be suffering a yearly deficit of $ 12,623. The Meinders believed that the plan would be feasible because they could sell more assets to purchase more cows. The court rejected this assertion, however, noting that they were unable to accurately appraise their assets and regardless, they lacked any equity.

In re Meinders

Northern District Iowa

April 18, 2016

WL 1599508
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Title Annotation:Recent Court Decisions on Real Estate and Valuation
Publication:Appraisal Journal
Geographic Code:1U4IA
Date:Jan 1, 2017
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