Summary of a Recent
Judicial
Development in
Bankruptcy
Farmer Status Is an Affirmative
Defense that Might Be Waived
Gaby R. JabbourNational AgLaw Center Research Assistant
In an action brought by a debtor alleging that the bankruptcy court did not have jurisdiction over him because an involuntary bankruptcy petition cannot be brought against a farmer, the United States Court of Appeals for the Fifth Circuit has held that an individual's status as a farmer does not go to the jurisdiction of the bankruptcy court over an involuntary bankruptcy petition but instead is an affirmative defense that may be waived. In re McCloy, 296 F.3d 370, 370, 371 (5th Cir. 2002).
Willard McCloy, debtor ("McCloy"), and his wife, Beatrice McCloy, purchased "a parcel of land known as Section 20, Block 5T, T&NO RR Survey, Hansford County, Texas ("Section 20") in 1975," and "only . . . McCloy's name appeare[d] on the deed." Id. at 371. McCloy signed numerous promissory notes and deeds of trust on Section 20. See id. at 371-72.
National Loan Investors, LP ("NLI"), one of McCloy's creditors, brought an involuntary bankruptcy petition against him under Chapter 7 that was converted to a Chapter 11 and then converted back to a Chapter 7. See id. at 372. The bankruptcy court approved a settlement negotiated by the bankruptcy trustee involving Section 20, and McCloy and his wife objected to the settlement and appealed the bankruptcy court's decision to the district court. See id. at 371. They argued that "Section 20 is not an asset of the bankruptcy estate," and McCloy alleged that "the bankruptcy court did not have jurisdiction over him because an involuntary bankruptcy petition cannot be brought against a farmer." Id. The district court affirmed the bankruptcy court's ruling and McCloy and his wife appealed the district court's decision to the United States Court of Appeals for the Fifth Circuit. See id. at 372.
The Fifth Circuit stated that "[a]lthough we have not addressed this specific issue before, we hold that an individual's status as a farmer does not go to the jurisdiction of the bankruptcy court over an involuntary bankruptcy petition, but instead is an affirmative defense that may be waived." Id. at 375. It added that "the question of whether an individual is eligible to be a debtor under 11 U.S.C. § 109(g) does not go to the subject matter jurisdiction of the bankruptcy court," and that "a debtor's status as a farmer is not a question of subject matter jurisdiction, but is an affirmative defense which must be raised by the debtor or is otherwise waived." Id. (citing In re Phillips, 844 F.2d 230, 235 (5th Cir. 1988) and In re William J. Frusher, 124 B.R. 331, 333 (D. Kan. 1991)).
The court also stated that
[a]lthough 11 U.S.C. § 303(a) excepts farmers from involuntary bankruptcy petitions under chapters 7 or 11, 11 U.S.C. § 303(h) also provides that: [n]otwithstanding any other provision of this section, no individual or family farmer may be a debtor under this title who has been a debtor in a case pending under this title at any time in the preceding 180 days if (1) the case was dismissed by the court for willful failure of the debtor to abide by orders of the court, or to appear before the court in proper prosecution of the case; or (2) the debtor requested and obtained the voluntary dismissal of the case following the filing of a request for relief from the automatic stay provided by section 362 of this title.
Id.
The court explained that "[t]his provision implie[d] that the alleged debtor must controvert his 'non-farmer' status or lose any defense he has" and that "[t]he exception provided in 11 U.S.C. § 303(a) for farmers refer[ed] simply to involuntary petitions, but [did] not provide that there [was] no jurisdiction over bankruptcy proceedings involving farmers." Id. (citations and quotation omitted). It also noted that "subject matter jurisdiction over bankruptcy proceedings is provided by 28 U.S.C. §§ 157 and 1334." Id.
The court stated that "allowing a debtor to claim that he or she is a farmer at any point in a bankruptcy proceeding (as can be done with challenges to subject matter jurisdiction) would create 'unnecessary uncertainty' in the bankruptcy process" and "could interfere with the bankruptcy court's ability to reorganize debtors by allowing this question to be raised at any time, in a possibly strategic manner." Id. (citations and quotation omitted).
Next, the court noted that "no complaint objecting to the discharge of the debtor was filed within the time fixed by the [bankruptcy] court or that a complaint objecting to discharge was filed and, after due notice and hearing, was not sustained," and that "McCloy consented to the entry of an order for relief." Id. at 376. It added that "McCloy did not argue the issue of his status as a farmer on appeal to the district court." Id.
The court finally stated that "[w]e do not reach issues not raised before the district court" and concluded that "because [a] farmer status is not jurisdictional but is an affirmative defense that may be waived, we do not consider McCloy's argument that he is a farmer and therefore not subject to an involuntary bankruptcy proceeding." Id.
The court also examined McCloy's argument challenging the bankruptcy court's jurisdiction over his estate and over his wife's asserted property rights as a non-debtor spouse. See id. at 372. The decision of the court with respect to these two arguments is not included in this article.
The case was decided on July 12, 2002; this summary was posted July, 2003