Summary of a Recent
Judicial
Development in
Bankruptcy
Debtors Not Engaged in Farming Operation
at Confirmation Eligible for Chapter 12
Gaby R. JabbourNational AgLaw Center Research Assistant
The United States Bankruptcy Court for the District of Idaho has ruled that debtors who were actively engaged in dairy farming and were eligible for Chapter 12 relief on the date their petition was filed did not lose eligibility because they no longer operated their dairy farm at the time of the confirmation hearing. In re Nelson, 291 B.R. 861 (Bankr. D. Id. 2003). The court interpreted the phrase "engaged in a farming operation" contained in 11 U.S.C. § 101(18) to require only that "a debtor be farming at the time of filing . . . where there is an indication that a debtor has temporarily ceased farming activity during the pendency of the bankruptcy case, but intends to return to active farming operations when financially able to do so." Id. at 871.
Debtors, Jeffrey and Terry Nelson, operated a small dairy farm in Idaho. See id. at 864. They obtained a loan from Cache Valley Bank (Bank), creditor, so they could satisfy a debt owed to another creditor, Ron Randall. See id. When the loan proceeds were disbursed, however, the Bank decided that the debtors' unsecured trade creditors should be paid instead of Randall. See id. The debtors' already difficult financial situation continued to worsen, and on October 18, 2002, they filed a Chapter 12 bankruptcy petition. See id.
The debtors continued to milk their cows after they filed their bankruptcy petition, even though many of their cows and equipment had been repossessed by secured creditors. See id. In December, 2002, they proposed "a Chapter 12 plan that called for them to retain the dairy operation and pay their debts primarily from its income." Id. (citation omitted). The debtors subsequently amended their plan and "agreed to allow the Bank relief from the automatic stay, and consented to the repossession and sale of their remaining cattle and equipment by the Bank." Id. The amended plan was to be funded primarily by the income Jeffrey earned as a dairy manager on another farm. See id. The debtors testified that they were committed to restarting their dairy operation as soon as they obtained the necessary funds. See id. at 864-65.
The Bank asserted that at the time of the confirmation hearing, the debtors "were not operating their farm, their cows and most of their farm equipment had been liquidated, and [that] they were generating no milk products nor farm income." Id. at 868. Thus, the Bank argued that the debtors were not eligible for Chapter 12 relief because at the time of confirmation they were not "engaged in any of the activities constituting a farming operation." Id. at 867. More specifically, the Bank argued that as a condition to having their plan confirmed, the debtors were required to demonstrate that they remained eligible for Chapter 12 relief at the time of their confirmation hearing. See id. at 868.
The Bank cited In re Buckingham, 197 B.R. 97 (Bankr. D. Mont. 1996), to support this argument, a case that held that "a Chapter 12 debtor must propose to 'engage in some farming operations over the entire duration of the plan . . .' to confirm a plan." Id. The court rejected the Bank's argument and discussed several decisions that contradicted the holding in Buckingham. See id.
In In re Clark, 288 B.R. 237 (Bank. D. Kan. 2003), the bankruptcy court determined that a Chapter 12 debtor was eligible for relief "even though the plan proposed to leave all farm land fallow under a government program that paid farmers to do so." Id. In Clark, the court held that "'[n]owhere does the Code suggest that a debtor must continue to satisfy the test for a 'family farmer' throughout the pendency of the case or through completion of the plan of reorganization. Nor does the Code suggest that a farmer's post-confirmation change in status divests him of eligibilty.'" Id. (quoting Clark, 288 B.R. at 246).
In In re Lockard, 234 B.R. 484 (Bank. W.D. Mo. 1999), the bankruptcy court considered a creditor's objection to a proposed Chapter 12 plan based in relevant part on the fact that "the debtors no longer resided on the farm property, the husband-debtor had taken up other employment, the farm operation was turned over to a hired manager, and the debtors had entered into a lease/purchase agreement with the manager for the eventual sale of the farm operation." Id. There the court ruled that "no Code provision requires a Chapter 12 debtor to continue farming, or to even represent he or she will do so, in order to remain eligible for Chapter 12 relief." Id.
The court also examined In re Tart, 73 B.R. 78 (Bankr. E.D.N.C. 1987), a decision relied on in Buckingham. See id. In Tart, the bankruptcy court ruled that
[s]ection 101[18] states that a "family farmer" means an individual "engaged in a farming operation;" no such language is found in the section 101[(20)] definition of "farmer." The inclusion of this language in § 101 [(18)] suggests that Congress intended to require more than that a "family farmer" be engaged in a farming operation during the taxable year preceding the year in which the petition was filed. If Congress intended to focus only on this time period, the "engaged in a farming operation" language would be superfluous since it would appear that an individual who, for the taxable year preceding the year in which the petition is filed, incurred at least 80% of his debt and received at least 50% of his income from a farming operation he owned or operated, as required by § 101[(18)], would necessarily have been engaged in a farming operation during that same time period. A statute should not be interpreted so as to render one part inoperative, superfluous, or insignificant.
Id. (quoting Tart, 73 B.R. at 81).
In the present case, the court explained that the "troubling aspect of the court's analysis in Tart as applied in Buckingham is that it goes too far." Id. It stated that in Tart the bankruptcy court correctly determined that the phrase "'engaged in a farming operation' in § 101(18) requires an examination of more than the debtor's tax returns for the taxable year preceding the year of a debtor's filing." Id. "That said, however," the court added, "the statutory language is ambiguous in that it can also be logically interpreted to require merely that the debtor, in addition to farming in the preceding year, also be actively farming at the time of filing." Id.
The court concluded that
[r]ead in this fashion, a debtor who engaged in farming last tax year, but who sold the farm assets and permanently discontinued the operation before filing for bankruptcy this year would, justifiably, not be eligible for relief under Chapter 12 to reorganize any remaining debt." Such were the facts in Tart. The Court agrees this is the result intended by Congress. Under such facts, the phrase . . . "engaged in a farming operation" bridges the gap between a potential Chapter 12 debtor's activities at the end of the prior year and the time of filing in the current year. While such a reading gives meaning to all the language contained in § 101(18) and prevents the use of Chapter 12 by debtors who have permanently abandoned the business and lifestyle of family farming, it stops short of imposing the additional requirement advanced by Buckingham-a policy not expressed by Congress-that a debtor must continue farming operations over the entire course of the plan to qualify for the protections of Chapter 12.
Id. (citation omitted).
It also stated that "[a] debtor who temporarily discontinues operation of the family farm, who would otherwise qualify, would also seem worthy of relief under the provisions of Chapter 12." Id. It added that "a close reading of the cases relied upon in Buckingham further supports interpreting § 101(18) as requiring only that the debtor be engaged in farming at the time of filing in order to be eligible for Chapter 12 relief." Id. (citation omitted).
Finally, the court stated that "depending upon the facts of each case, the better-reasoned case law supports interpreting the phrase 'engaged in a farming operation' in § 101(18) as requiring only that a debtor be farming at the time of filing." Id. at 871. It added that "[t]his approach is certainly preferable . . . where there is an indication that a debtor has temporarily ceased farming activity during the pendency of the bankruptcy case, but intends to return to active farming operations when financially able to do so." Id.
The court concluded that it "declines to adopt a broad, and potentially unnecessarily harsh, interpretation of the Buckingham decision, [but] [r]ather views that decision as limited to situations in which the debtor, after filing for bankruptcy, intends to permanently abandon active family farming." Id. It overruled the Bank's objection because the debtors "were obviously qualified for Chapter 12 relief on the date they filed their petition" and that they intend to recommence active farming "as soon as possible." Id.
The Bank also objected to the debtors' plan because it did not contain clear lien retention language and was not submitted in good faith. See id. at 863-67. The court's discussion of these objections is not included in this summary.
The case was decided on April 17, 2003; this summary was posted August, 2003