Summary of a Recent
Judicial Development in
Bankruptcy

Farmer Not Forced to Convert to Chapter 7

Joshua T. Crain
National AgLaw Center Graduate Assistant

Summary of Decision

In In re Fonke, 310 B.R. 809 (S.D. Tex. 2004), the United States Bankruptcy Court for the Southern District of Texas held that a debtor was not a farmer for purposes of 11 U.S.C. § 1307(e) because at least 80% of his gross income did not derive from farming.

Background

On August 7, 2003, Debtor Ronald Fonke filed a Chapter 13 bankruptcy petition. See id. On December 14, 2003, AAR Incorporated (AAR), a party-plaintiff in a civil action pending against the debtor, filed a motion to convert the Chapter 13 case to a Chapter 7 case. See id. AAR alleged that the debtor had acted in bad faith and that under 11 U.S.C. § 1307(e) the case should be converted to a Chapter 7. See id. AAR argued that the debtor's testimony at his § 341 meeting provided that the debtor's schedules and statement of financial affairs were false and misleading and that the debtor filed Chapter 13 because of pre-petition transfers that would otherwise be pursued by a Chapter 7 trustee. See id. The debtor argued that pursuant to 11 U.S.C. § 1307(e) his case could not be converted to a Chapter 7 unless requested by him because he was a farmer. See id.

Analysis and Holdings

The court explained that 11 U.S.C. § 1307(e) provides that a case under Chapter 13 cannot be converted to a Chapter 7, 11, or 12 if the debtor is a farmer unless the farmer makes the request to convert. See id. The court then explained that a farmer, under § 101(20) of the bankruptcy code, was a

Person that received more than 80 percent of such person's gross income during the taxable year of such person immediately preceding the taxable year of such person during which the case under this title concerning such person was commenced from a farming operation or operated by such person.

See id.

The court explained that using this definition, it would consider the debtor's 2002 federal income tax return in determining whether the 80% income from farming requirement was satisfied. See id. The court also explained that it would apply the definition of "gross income" from the Internal Revenue Code because that term is not defined in the Bankruptcy Code. See id. The court then explained that when examining the debtor's 2002 federal income tax return using the definition of farmer from the Bankruptcy Code and the definition of gross income from the Internal Revenue Code, the debtor did not meet the requirements to be considered a farmer under the Bankruptcy Code. See id. The court explained that regardless of whether it took into consideration a $38,000 capital gain realized by the debtor from the sale of a service station, the debtor's farm income was not at least 80% of his gross income. See id. Therefore, the court held that the debtor was not a farmer for purposes of the bankruptcy code and was therefore unable to prevent the conversion of his case from a Chapter 13 to Chapter 7 under the provisions of 11 U.S.C. § 1307(e). See id.

The case was decided on June 17, 2004; this summary was posted Dec. 15, 2004.