When a chapter 11 plan of reorganization contains no provision that allows for the full debt to be collected in the event of a debtor’s nonpayment, the creditor’s obligation cannot be accelerated under Florida law absent an acceleration provision. The recent case of Baggett Bros. Farm, Inc. v. Altha Farmers Co-op., Inc., No. 1D:13-4200, 39 Fla. L. Weekly D2127, 2014 WL 5033350 (Fla. 1st DCA Oct. 9, 2014), reh’g denied (Nov. 7, 2014) highlights this point.

Baggett operated a farming business and purchased farm supplies from Altha, a farmers’ cooperative association of which Baggett was a member. In 1995, Baggett filed a petition under chapter 11 of the Bankruptcy Code.  As part of its plan of reorganization, Baggett executed a promissory note and mortgage in favor of Altha.  The note required Baggett to reimburse Altha in “15 equal annual installments of $32,011.71.”  Baggett paid six annual installments but made no further payments to Altha.  In the meantime, Baggett continued to purchase farming supplies from Altha through an open operating account that it maintained with the cooperative.  Baggett remitted payments in different amounts to Altha.

In 2005, Baggett filed a second petition for bankruptcy relief under chapter 11 of the Bankruptcy Code. Nine months later, Altha filed an amended proof of claim to satisfy the note and mortgage. Baggett objected to the claim on grounds that it had either satisfied the debt, the debt had been forgiven, or collection of the debt was barred by laches.  After a trial on Baggett’s objection to Altha’s claim, Bankruptcy Judge Lewis M. Killian awarded a secured claim to Altha of $312,083.30 and the Eleventh Circuit affirmed in all respects. See Baggett Bros. Farm, Inc. v. Altha Farmer’s Co-op., Inc., No. 5:08CV20/MCR, 2008 WL 3979493 (N.D. Fla. Aug. 21, 2008) aff’d sub nom. In re Baggett Bros. Farm Inc., 315 Fed. Appx. 840 (11th Cir. 2009).

As part of Baggett’s chapter 11 plan of reorganization, Altha’s claim, now in the amount of $386,862.44, was treated as secured and to be repaid in annual payments over 10 years. Judge Killian confirmed Baggett’s plan and closed the bankruptcy case.

Altha later brought an action in state circuit court alleging that Baggett breached the plan by making only the first annual payment in 2007, but failing to make annual payments thereafter. The circuit court ruled in favor of Altha and awarded Altha damages in the amount of the debt owed under the plan minus the single annual payment made by Baggett in 2007.

Baggett appealed to the First District Court of Appeal. The appellate court first found that although Baggett had restructured Altha’s debt in the chapter 11 bankruptcy case, the circuit court had subject matter jurisdiction because a chapter 11 bankruptcy reorganization plan is a contract that may be enforced in state court, citing Nat’l City Bank v. Troutman Enters. (In re Troutman Enters., Inc.), 253 B.R. 8, 11 (6th Cir. BAP 2000) (holding that “[t]he plan is essentially a new and binding contract between the [r]eorganized [d]ebtor and the [p]etitioning [c]reditors” and “[i]f a reorganized debtor defaults under a plan, creditors have several options, including enforcing the plan terms in any court of competent jurisdiction”) and Paul v. Monts, 906 F.2d 1468, 1476 (10th Cir. 1990) (finding a state law breach of contract action may be brought to enforce a chapter 11 bankruptcy plan “[e]xcept where state law would directly conflict with the federal bankruptcy provisions”).  However, the appellate court found that the circuit court erred in awarding Altha the full amount of debt owed under the plan, minus the single annual payment, because the plan did not contain an acceleration provision that permitted accelerating the full amount of debt in the event of nonpayment.  The court therefore reversed and remanded for the circuit court to enter a final judgment awarding damages only as to the amount of payments actually missed.

Practically, this situation presents a predicament for creditors like Altha because Altha must now either bring lawsuits every time a debtor misses a payment or wait to sue every few years. Creditors of chapter 11 debtors should therefore carefully read plans of reorganization to assure appropriate provisions are contained within the plan. Likewise, debtors should be aware that creditors may not accelerate a debt absent an acceleration provision.