In Re Mann Farms, Inc., Debtor. Traders State Bank of Poplar v. Mann Farms, Inc.

Mann Farms, Inc. (debtor) filed its petition pursuant to Chapter 12 of the Bankruptcy Act. As required by the Act, debt- or filed its Plan of Reorganization (Plan I). In Plan I, it classified a debt of more than $385,000 held by the Traders State Bank of Poplar (bank) as a disputed claim. Plan I further specified that the validity of the bank’s lien status “is to be determined in a state court action in connection with the resolution of the debtor’s allegations of bad faith and related claims against Trader’s [sic] State Bank.”

The bank filed a motion to dismiss Plan I, alleging that the plan as formulated could not be confirmed under 11 U.S.C. § 1225 (a)(5). The bankruptcy court issued an order permitting the debtor to pursue its state court claim against the bank, but ruling that the debtor could not, in the state court litigation, seek to cancel or nullify the same promissory notes and mortgages that it sought to restructure through the Chapter 12 proceedings. The court reasoned that such state court relief would thwart the statutory scheme of Chapter 12.

The debtor promptly filed an amended Plan of Reorganization (Plan II). In Plan II, it listed the bank as a “class I…