By: Donald L Swanson
Some time ago, I’m discussing the role and powers of a Chapter 12 trustee.
In response to a question, I say that a Chapter 12 trustee has no authority to sell estate assets unless and until the debtor is removed from possession.
Someone promptly counters with, “No, a Chapter 12 trustee has authority to sell debtor’s assets, at all times, under § 1206.”
I’m flabbergasted by that statement. So . . . I go and look at § 1206, which says:
- “in addition to the authorization contained in section 363(f), the trustee in a case under this chapter may sell property under section 363(b) and (c) free and clear of any interest in such property of an entity other than the estate if the property is farmland, farm equipment . . . , except that the proceeds of such sale shall be subject to such interest.”
The Wrong “Trustee”
Now I see the problem. The counter position identifies the wrong “trustee”:
- it mis-construes the phrase, “the trustee in a case under this chapter,” as meaning, “the Chapter 12 trustee serving in this case.”
Instead, the correct construction of the phrase “the trustee” in § 1206 is this:
- it’s the same “trustee” that is named in “section 363(b) and (c)” and “in section 363(f)”;
- it’s the same “trustee” whose powers are delegated to the debtor in possession by § 1107(a) and § 1203;
- it’s the same “trustee” named in § 363, whose powers are expanded by § 1206 “in a case under this chapter”; and
- it’s not the Chapter 12 trustee.
Such correct construction is supported by this slight difference in language between, (i) two statutes delegating “trustee” rights to debtors in possession (which use the phrase “serving in”), and (ii) § 1206 (which omits the word “serving”):
- a Chapter 11 debtor in possession is delegated the rights and powers “of a trustee serving in a case under this chapter” (§ 1107(a));
- similarly, a Chapter 12 debtor in possession is delegated the rights and powers “of a trustee serving in a case under chapter 11” (§ 1203); but
- § 1206 says only, “the trustee in a case under this chapter”—without the word “serving.”[Fn. 1]
Look at it again (i.e., the language of § 1206). Such language is all about expanding, in Chapter 12 cases, the powers of a § 363 “trustee.”
Such “trustee” powers specifically identified in § 363 include (emphasis added):
- “The trustee . . . may use, sell, or lease” (§ 363(b);
- “the trustee may enter into transactions” (§ 363(c); and
- “The trustee may sell property” (§ 363(f).
Accordingly, the § 1206 language is not focused on giving the Chapter 12 trustee independent powers—it is focused, instead, on creating a superpower in Chapter 12 for the § 363 “trustee,” whose powers are delegated to the debtor in possession.
In re Brilyea
Here are additional grounds of support, taken from the case of In re Brilyea, 108 B.R. 444 (Bankry., D. Vt. 1989).
Congressional Intent
Congress specified that the purpose of § 1206 is “to allow family farmers to sell assets not needed for the reorganization prior to confirmation without the consent of the secured creditor subject to the approval of the court.” H.R. REP. No. 958, 99TH CONG., D SESS. 50 (1986) (emphasis added).
And Congress took a first step toward implementing that very purpose by enacting § 1203, which says:
- “a debtor in possession shall have all the rights . . . and powers, and shall perform all the functions and duties . . . of a trustee serving in a case under chapter 11,” which includes all the “trustee” powers-of-sale under § 363(b), (c) & (f).
An Awkward Result
Collier on Bankruptcy follows the counter position and declares: (i) the “trustee” in § 1206 is the Chapter 12 trustee, (ii) only Chapter 11 “trustee” powers are delegated to the Chapter 12 debtor under § 1203, and (iii) therefore, only the Chapter 12 trustee (and not the debtor in possession) can sell assets under § 1206.
That is an awkward result because it makes no practical sense. None. Collier even does a back-handed acknowledgement of the makes-no-sense problem, like this (see 108 B.R. at 447):
- “It must be presumed, in the absence of any evidence to the contrary, that Congress’ vesting of this power in the trustee rather than the debtor was an international choice and not a drafting error”;
- then, Collier speculates on what the bases might be for such an intentional choice; and
- Collier finishes with this slightly-bizarre implication—“The debtor’s plan may also provide for sale of the property, although a sale pursuant to a plan will not be free and clear of liens.”
Avoiding Surplusage
Here is how construing § 1206 as authorizing the debtor to sell assets avoids statutory surplusage (see, id.):
- §1202(b)(3)(D) requires the Chapter 12 trustee to “appear and be heard” at any hearing that concerns “the sale of property of the estate”;
- “If we were to hold” that the Chapter 12 trustee has the sole authority to sell farmland, then § 1202(b)(3)(D) “would be surplusage”; but
- “Our holding avoids” the surplusage problem and “provides meaning to all sections of the statute.”
Conclusion
The idea that § 1206 grants exclusive authority to the Chapter 12 trustee, and not to the debtor in possession, is based on a mis-construction of the word “trustee” in that statute.
The word “trustee” in § 1206 is, instead and properly construed, a reference to the “trustee” named in § 363(b), (c) & (f).
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Footnote 1. Also, the word “serve” is used in the statute authorizing the appointment of Chapter 12 trustees: “If the United States trustee has appointed an individual . . . to serve as standing trustee in cases under this chapter . . . , then such individual shall serve as trustee in any case filed under this chapter” (§ 1202(a); emphasis added).
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