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Judgment Arising From Tortuously Obtained Funds Is Not Farming Debt
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In In re Quillian, 2007 Bankr. LEXIS 3677 (Bankr. S.D. Tex. 2007), the United States Bankruptcy Court for the Southern District of Texas, Corpus Christi Division, held that a judgment arising from conversion and other tortuous acts could not be considered as debt arising from a farming operation, and that a lien against the debtor's principle residence securing the judgment did not amount to "debt for the principal residence" of the debtor as provided in 11 U.S.C. § 101(18); therefore, the debtor was ineligible for Chapter 12 relief because less than 50% of his aggregate debt at the time of filing arose from a farming operation.
Background
The Debtor filed for Chapter 12 relief in April 2007. Id. at *1. His schedules indicated that he had secured claims in the amount of $1,012,000 and unsecured claims in the amount of $80,908. Id. His creditors had previously won a $1,000,000 judgment against him in an action in the county probate court arising from intentionally tortuous conduct, conversion, and breach of fiduciary duty while serving as guardian of their relative's estate. Id. The only other secured claim was $12,000 for the purchase of a boat. Id. at *2. The creditors moved to dismiss the Debtor's case, claiming that he did not meet the definition of a "family farmer," and thus was not entitled to Chapter 12 relief. Id.
Arguments
The creditors argued that the Debtor did not qualify as a family farmer because less than 50% of his debts arose from a farming operation. Id.
The Debtor argued that the funds he took from the probate estate were used to make improvements in his farming and ranching operation, and so the $1 million judgment should be included in his favor in the Chapter 12 eligibility calculation. Id. He alternatively argued that the debt was secured by his principal residence as provided in 11 U.S.C. § 101(18), and thus should not be included in the calculation. Id.
Analysis and Holdings
To qualify as a "family farmer" under 11 U.S.C. § 101(18), at least 50% of a person's aggregate noncontingent, liquidated debts on the date that the case is filed must "arise out of a farming operation," except for debt for the person's principal residence. Id. at *2-3. The court acknowledged that the creditors' judgment constituted 91% of the debt in this case, and found that he had failed to show that the debt arose from a farming operation or that it was debt for his principal residence. Id. at *3.
In response to the Debtor's contention that the converted funds were used in furtherance of his farming operation, the court stated "the Debtor cannot legitimize the funds he misappropriated by 'laundering' them through the bankruptcy court" and refused to consider the misappropriated funds in his eligibility calculation. Id. The court reasoned that "[t]o allow otherwise would violate public policy." Id. at *4. As for his argument that the debt was for his principal residence, the court held that the filing of the abstract of judgment created a lien against the property but did not convert the debt into a "debt for the principal residence" as per 11 U.S.C. § 101(18). Id. The court explained that the provision in 11 U.S.C. § 101(18) refers to debt such as a mortgage used to purchase a principal residence. Id. The judgment lien had no relation to the acquisition of the Debtor's principal residence; therefore, it could not be excluded from the calculation. Id. As a result, the court dismissed the Debtor's case because less than 50% of his debt arose from a farming operation, making him ineligible for Chapter 12 relief. Id. at *5.
The case was decided on October 15, 2007.