Summary of a Recent
Judicial Development in
Bankruptcy

Funding for Chapter 12 Plans Not Required to
Come from Farming Operations

Jennifer Williams
National AgLaw Center Graduate Assistant

Summary of Decision

In In re Sorrell, 286 B.R. 798 (Bankr. D. Utah 2002), the United States Bankruptcy Court for the District of Utah held that debtors qualified for Chapter 12 relief as "family farmers" even though their bankruptcy plan was not "substantially funded from farming operations."

Background

Debtors Larry and Carla Sorrell were farmers who filed for bankruptcy protection under Chapter 12. See id. at 800. Mr. Sorrell had been farming for "the better part of the last twenty years," while Mrs. Sorrell worked both on the farm and for the Farm Service Agency. See id. Most of the funds used to fulfill the debtors' payment obligations under the plan would be provided by Mrs. Sorrell's off-farm salary. See id. One secured creditor ("Bank") continually objected to the debtors' proposed plan. See id. at 802-03.

Arguments

The Bank's main objection to the proposed plan was that the debtors did not qualify as "family farmers" under Chapter 12 because the debtors' plan was not financed from farm income." See id. at 804. The Bank centered its argument on the idea that

[t]he balance of funds needed to live and pay the obligations under the Plan must come from income generated from other sources [than Debtors' farm operations]. . . . Congress implicitly intended that Chapter 12 farm plans should be funded by reorganizing the farm operations, not from other sources and that farms kept as "hobbies" should be discouraged where they can not [sic] pay for themselves.

Id.

The debtors countered that they met the requirements necessary to qualify as a "family farmer," that they met the requirement of a "reasonably stable and regular income," and that there was not a requirement as to where that income came from. See id.

Analysis and Holdings

The bankruptcy court held that the debtors met all requirements to qualify as a "family farmer" under Chapter 12. See id. The court explained that according to 11 U.S.C. § 109(f), "[o]nly a family farmer with regular annual income may be a debtor under Chapter 12." Id. It further explained that "family farmer" is defined in 11 U.S.C. § 101(18) as "an individual or individual and spouse engaged in a farming operation whose aggregate debts do not exceed $1,500,000 and . . . [who] receive from such farming operation more than 50 percent . . . gross income for the taxable year preceding the taxable year in which the case . . . was filed." Id. The court recognized that based upon the debtors' 2001 tax forms "the requisite 50% of the Debtors' gross income for 2001 came from farming operations." Id.

The court also held that the debtors "carried their burden to establish that they have reasonably stable and regular income," which is defined in 11 U.S.C. § 101(19) as a "family farmer whose annual income is sufficiently stable and regular to enable such family farmer to make payments under a plan under Chapter 12 of this title." Id.

The court stated that the only question was whether such income needed to come from the debtors' farm operations. See id. It recognized that there was a lack of case law on the matter, and looked to legislative history for Chapter 12 to determine that "Congress intended the word farmer to have the broadest application." Id. The court also examined other sections of the Bankruptcy Code and found favorable treatment for farmers throughout. See id. It concluded that "[w]ith this overlay of intent, coupled with the plain reading and meaning of § 101(19), the Court cannot conclude that Congress intended that Chapter 12 plans must be primarily or substantially funded from farming operations." Id. As such, the court held that the debtors were "Family Farmers with regular income and qualif[ied] in every way for Chapter 12 relief." Id. at 804-05.

The case was decided on November 6, 2002; this summary was posted Sept. 14, 2004.