Summary of a Recent
Judicial
Development in
Bankruptcy
To "Arise from a Farming Operation," the Purpose of the
Debt Must Have Connection to Farming Activity
Walt McCarterNational AgLaw Center Research Associate
Summary of Decision
In In re Saunders, 377 B.R. 772 (Bankr. M.D. Ga. 2007), the United States Bankruptcy Court for the Middle District of Georgia held that the mere fact that a debtor offered his farmland as collateral to secure loans to buy and run a car dealership was an insufficient basis for regarding the car dealership debts as "arising out of a farming operation" for purpose of assessing the debtor's eligibility for Chapter 12 relief.
Background
The Debtor filed a Chapter 12 petition in May 2007, and his Creditors objected. Id. at 773. The Debtor had put up his farm as collateral for business debts primarily relating to his ownership of a car dealership. Id. He had a total debt of $3,248,286, and $1,331,686 was incurred for farming purposes and $1,916,500 was incurred for non-farming purposes. Id.
Arguments
The Creditors argued that the Debtor was not eligible for Chapter 12 bankruptcy, because the majority of his debt could not be characterized as farm-related debt. Id. at 773.
The Debtor argued his debts did arise from farming operations, since he put up his farm for collateral to secure the debt. Id.
Analysis and Holdings
To qualify for Chapter 12 bankruptcy, at least 50% of the Debtor's obligations must "arise out of a farming operation." Id. at 773-774. The issue before the court was whether all loans secured by farmland constitute debt arising out of a farming operation. Id. The court concluded that for debt to "arise out of a farming operation," the purpose of the debt must have some connection to the debtor's farming activity. Id. at 776. "Merely using farmland as collateral for a debt that has no other relation to the farming activity will not suffice." Id. Therefore the court sustained the Creditors' objections and dismissed the Debtor's case. Id.
The case was decided on October 1, 2007.