Summary of a Recent
Judicial
Development in
Bankruptcy
Leasing Farmland Is Not a "Farming Operation;"
Bad-Faith Filing Forfeits Debtor's Right to Convert
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In In re Gibson, 355 B.R. 807 (Bankr. E.D. Cal. 2006), the United States Bankruptcy Court for the Eastern District of California held that because the Debtor was not a "family farmer" engaged in a "farming operation," he was ineligible for Chapter 12 relief, and because he filed in bad faith, the court terminated the automatic stay of foreclosure.
Background
Debtor purchased 84 acres of land from Herzog Company for $2 million dollars. Id. at 808. The Debtor filed a Chapter 7 petition on August 3, 2006, claiming he had no income whatsoever. Id. The Schedule 1 he filed asked him to describe any anticipated variance in income for the next year, and his response was "Debtor buys and sells real estate for a living. The last real estate sold was in January 2006." Id. at 809. The Debtor also claimed income from leasing the 84 acre farmland back to Herzog Company in 2005, but actually Herzog had discounted the lease amount from the purchase price of the property. Id. He later sought to convert his case to one under Chapter 12 and obtained an automatic stay of foreclosure, and Herzog Company objected. Id.
Arguments
Herzog Company argued that the Debtor filed his Chapter 12 petition in bad faith, that he was ineligible for Chapter 12 because he was not a family farmer, and that the court should therefore remove the automatic stay of foreclosure. Id. at 808.
Debtor argued that he was eligible for Chapter 12 relief. Id. at 809.
Analysis and Holdings
To file under Chapter 12 an individual must be a "family farmer," which is defined as a person engaged in a farming operation from which he receives more than 50% of his gross income. Id. There is a non-exhaustive list of activities under 11 U.S.C. § 101(21) that are considered farming operations, but leasing land is not one of them. Id. The court restated the principle that "to be considered a farmer a debtor must be engaged in an activity that subjects the debtor to the risks traditionally associated with farming," and using that reasoning courts have previously held that rental of farmland is not considered a "farming operation." Id. at 810. The court determined that the Debtor was not a family farmer because of his admission that he sells real estate for a living, and leasing real estate is not a "farming operation." Id. The court also noted that even if leasing farmland was considered a farming operation, 50% of the Debtor's income was not generated by it; in fact, he had not earned any income from his rental property at all. Id. at 811. Moreover, the court concluded that the Debtor's sole purpose of filing the Chapter 12 petition was to get the automatic stay of foreclosure, because had no intention or ability to actually reorganize. Id. at 813. In summary, because the Debtor was ineligible for Chapter 12 relief and because he filed in bad faith, the court terminated the automatic stay and allowed the Creditors to foreclose on the Debtor's assets. Id. at 813.
The case was decided on November 27, 2006.