Summary of a Recent
Judicial Development in
Bankruptcy

In-Depth Analysis of Conversion and Definitions
of Farming and Farming Operations

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Jayo, Case No. 06-20051-TLM, 2006 Bankr. LEXIS 1996 (Bankr. D. Idaho July 28, 2006), the United States Bankruptcy Court for the District of Idaho held that the movants/creditors had established sufficient cause to convert the debtor's case to a case under Chapter 7, and that the debtor was not a "farmer" protected from involuntary conversion.

Background

Debtor filed a Chapter 7 petition on March 28, 2006, the day before a scheduled foreclosure sale by Maynard, Inc. Id. at *2. She converted her case to Chapter 11 in May 2006. Id. Her plan proposed the liquidation of 600 acres of real estate to pay her creditors, and stated that if the sale was not completed in six months she would voluntarily convert back to Chapter 7. Id. at *3. Her creditors sought conversion to Chapter 7 immediately after she converted to Chapter 11. Id. She had previously pled guilty to fraudulently disposing/converting property, but sentencing was pending at the time of this hearing. Id. at *11. She had also admitted to making numerous false statements in her testimony and inaccurately listing her assets. Id. at *11-17.

Arguments

Creditors argued that there was "cause" for conversion under § 1112(b) of the Bankruptcy Code, including that, by reason of admitted criminal conduct, Debtor was ineligible to be a debtor in possession. Id. They also claimed that she falsely testified at her § 341(a) examination and alleged that she falsely responded to questions on her statement of financial affairs and made numerous false statements in her schedules. Id.

Debtor argued that no "cause" for conversion existed, and that she was eligible to be a debtor in possession. Id. Alternatively, she claimed that if cause did exist, her case should be dismissed and not converted because she was a farmer protected from involuntary conversion by § 1112(c).

Analysis and Holdings

Cause for conversion
The court looked at § 1112(b) of the Bankruptcy Code, which provides that the court may convert a case to Chapter 7 if the movant establishes cause. Id. at *18. In defining "cause," § 1112(b)(4) provides a list of sixteen possible circumstances. Id. at *20. The language of the provision seemed to suggest that each element needed to be met to have "cause," but the court reasoned that a movant does not need to show every element, but rather any of the elements provided, because some of the elements were mutually exclusive. Id. at *21. The court further determined the list of factors was non-exclusive. Id. at *25. The court concluded that the movants had established cause since the Debtor's conviction involved fraud and dishonesty, and also because of her false testimony and inaccurate accountings. Id. at *32.

To convert or dismiss
The second issue before the court was whether to convert or dismiss the case. Id. at *35. Debtor's argument was that conversion was prohibited by § 1112(c) which prohibits converting a farmer's case without his consent. Id. To be a "farmer" under this section, a person must receive more than 80% of their income from farming operations. Id. Farming operations include "farming, tillage of the soil, dairy farming, ranching, production or raising of crops, poultry, or livestock, and production of poultry or livestock products in an unmanufactured state." Id. at *36. The Debtor received a significant amount of income from selling timber (more than 20% of her income from non-farming operations), so she was not protected by § 1112(c). Id. at *45. The court then found it to be in the best interest of the estate to convert the case to Chapter 7. Id. at *45-46.

The case was decided on July 28, 2006.