Opinion
Bankruptcy No. 03-00316
April 14, 2003
ORDER RE MAYNARD SAVINGS BANK'S MOTION FOR TURNOVER OF RENT FROM SHOOKY'S BAR; DEBTOR'S MOTION TO EXTEND TIME TO FILE TAX RETURNS;
On April 2, 2003, the above-captioned matter came on for hearing on multiple motions filed by various parties-in-interest. Debtor appeared in person with Attorney Thomas Fiegen. Maynard Savings Bank appeared by Attorney John Hofmeyer III. The respective motions were argued after which the Court ruled on all motions except the issue of Debtor's eligibility under Chapter 12 if Debtor was not actively involved in the farming operation. The Court reserved this issue for ruling and now enters its order on all matters raised.
MAYNARD SAVINGS BANK'S MOTION FOR TURNOVER OF RENT
At the time of hearing, the Bank sought an order that rent from the tenant from Shooky's Bar be turned over directly to the Bank. It asserts that Debtor pledged the rent by a mortgage document. Debtor filed a resistance asserting that the rents do not constitute cash collateral and are not part of the Bank's security interest.
The Court considered the arguments of counsel and considered the legal authority on this issue. At the time of hearing, the Court cited its authority and determined that rents and profits are subject to a lien and that the lien attaches when the mortgage documents were executed. Under the uncontested facts presented in this case, the mortgage documents are properly executed and contain a clause that rents and profits are subject to that lien. Therefore, the Bank and any other party-in-interest so protected are entitled rents and profits from Shooky's Bar.
DEBTOR'S MOTION TO EXTEND TIME TO FILE TAX RETURNS
Debtor asserts that he recently hired an accountant to prepare the 2001 and 2002 income tax returns. Debtor is in violation of Local Rules requiring that tax returns be filed no later than 30 days after the filing of the petition. Debtor seeks an extension until May 6, 2003 within which to file delinquent State and Federal income tax returns.
The Court considered this issue after comments by counsel. At the time of hearing, the Court noted that Debtor has historically been delinquent with filing tax returns throughout his involvement with the Court. However, the Court indicated that it would grant one extension only to allow Debtor to complete all State and Federal income tax returns to be filed no later than May 6, 2003. If all income tax returns are not properly filed by said date, the Court indicated that it would dismiss this case without further notice or hearing.
In addition, the Court directed that Debtor's plan shall be on file no later than May 6, 2003 or this case will be dismissed.
DEBTOR'S MOTION TO APPROVE FARM CROP LAND AND PASTURE LEASE
Debtor, as landlord, seeks approval of leases of crop land and pasture. He asserts that the rent from these leases will provide distributions for the estate. The proposed tenants are relatives of Debtor, Cary J. Michels and John T. Michels. The nature of the leases and the extent of the leases was dictated into the record. The Court finds, under the circumstances presented, that Debtor's Motion to Approve Farm Crop Land and Pasture Lease Agreements to the extent dictated into the record are approved.
MAYNARD SAVINGS BANK'S MOTION TO DISMISS
The Motion to Dismiss was filed by Maynard Savings Bank seeking to dismiss this Chapter 12 case as abuse of the bankruptcy process. The Bank alleges that Debtor lost $65,000 in farming in the last five years and that this case was filed in bad faith to delay creditors. Debtor resists asserting that he is engaged in the farming operation and satisfies the requirements of Chapter 12. He asserts that he will be able to file a confirmable plan in good faith.
The Court, on the record at the time of hearing, asserted that it is intimately familiar with Debtor's background, as a Chapter 13 case was filed and went through the confirmation process. However, the Court cannot state at this time that Debtor cannot satisfy the requirements of Chapter 12 or propose in good faith a plan which could be confirmed. As such, the Maynard Savings Bank's Motion to Dismiss on this ground is denied at this time.
MAYNARD SAVINGS BANK'S MOTION TO DISMISS FOR FAILURE TO MEET THE REQUIREMENTS OF CHAPTER 12
The Bank asserts that the case should be dismissed as Debtor's percentage of income from farming operations does not satisfy the requirements of Chapter 12 eligibility. One of the requirements of eligibility for Chapter 12 is that Debtor receive more than 50% of his gross income for the tax year immediately proceeding filing from farm operations. Debtor asserts that he is capable of satisfying this requirement. The Bank asserts that it does not feel that Debtor satisfies this requirement. At the time of hearing, Debtor had not filed his tax returns. It is impossible for the Court to make an accurate determination whether this requirement is indeed satisfied. As such, the Court overruled the Motion to Dismiss on this ground at the time of hearing reserving to the Bank the right to refile its Motion to Dismiss based on non-eligibility if the Bank deems its position defensible after Debtor has filed his tax returns no later than May 6, 2003.
The second ground for Maynard Savings Bank's Motion to Dismiss is premised upon its position that Debtor is not a farmer as defined in Chapter 12. It asserts that all of Debtor's farm income is rent and, as such, Debtor does not satisfy the definition of being a family farmer.
The Family Farmer Bankruptcy Act (FFBA) was passed by Congress in 1986 and is designed to give family farmers facing bankruptcy a chance to reorganize their debts and keep their land. In re Mary Freese Farms, Inc., 73 B.R. 508, 509 (Bankr.N.D.Iowa 1987) (Melloy, J.). Statutorily, only a family farmer with regular annual income may be a debtor under Chapter 12. 11 U.S.C. § 109(f). "Family farmer" is a defined term in the Code. 11 U.S.C. § 101(18)(A). The definition consists of four requisites for an individual or an individual and spouse to be a "family farmer". A Chapter 12 debtor is one: (a) who is engaged in a farming operation; (b) whose aggregate debts do not exceed $1.5 million; (c) 80 percent of whose aggregate noncontingent, liquidated debts arise out of the farming operation; and (d) more than 50 percent of whose gross income for the tax year immediately preceding filing was received from farm operations. 11 U.S.C. § 101(18)(A). A debtor filing a Chapter 12 petition bears the ultimate burden of proving eligibility for relief under that chapter. In re Tim Wargo Sons, Inc., 869 F.2d 1128, 1130 (8th Cir. 1989).
"ENGAGED IN A FARMING OPERATION"
The Court must be satisfied that all elements of § 101(18) are satisfied. In so doing, the Court must find that the Debtor is "engaged in a farming operation", the first element of § 101(18)(A). "Farming operation" is defined in § 101(21) as "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." Courts must construe this definition liberally to implement the intent of Congress to help family farmers continue farming. In re Koppes, 2000 WL 150836, *4 (Bankr.N.D.Iowa) (Kilburg, J.) (citing In re Watford, 898 F.2d 1525, 1527 (11th Cir. 1990).
To be family farmers, Debtors must be engaged in a farming operation "when they file the Chapter 12 petition." Watford, 898 F.2d at 1527. (emphasis added). The debtors in Watford had ceased cultivation of their land, stored their soybean harvest on the land and begun a crabbing operation in the Gulf of Mexico. Id. at 1526. They allowed their land to lie fallow since 1985 and filed for Chapter 12 relief in July 1987. Id. Applying 101(18) liberally, the Watford court adopted a "totality of the circumstances" test to determine if a debtor is engaged in farming if he was not physically farming at the time of the filing of the petition. Koppes, 2000 WL 150836, at *4 (adopting the Watford application of the "totality of the circumstances" test). The farmers' intent to continue is relevant, with the ultimate question being whether farmer had abandoned all farming operations or intended to farm in some form. Watford, 898 F.2d at 1528-29; Koppes, 2000 WL 150836, at *4; In re Burke, 81 B.R. 971, 976 (Bankr.S.D.Iowa 1987) (focusing on the continuation of farming endeavors and not on reviving abandoned operations).
This intent to continue farming must entail realistic or concrete prospects to continue farming over the duration of the Chapter 12 plan. In re Buckingham, 197 B.R. 97, 106-07 (Bankr.D.Mont. 1996). Some factors that courts consider are; 1) physical presence of family members on the farm, 2) ownership of traditional farm assets, 3) whether leasing land is a form of scaling down of previous farm operations, and 4) whether the debtor had permanently ceased all of its investment of assets and labor related to farming. In re Mikkelsen Farms, Inc., 74 B.R. 280, 285 (Bankr.D.Or. 1987) (finding that a debtor that owned and had harvested crops on its land, owned farm machinery and farm products, and lived on the land was engaged in farming operations despite short-term leases on some of its land); In re Morgan Strawberry Farms, 98 B.R. 584, 586 (Bankr.M.D.Fla. 1989) (finding that debtors did not qualify for Chapter 12 where they did not have a family member farming the land, had not farmed for three years, and provided no proof that they intended to return to farming); In re Burke, 81 B.R. 971, 976-977 (Bankr.S.D.Iowa 1987) (using the cited factors in setting forth general guidelines regarding leasing of farm land, cash rents, sale of farm machinery, and wages, in determining what constitutes a farming operation).
INCOME FROM A FARM OPERATION
If there is a continuing farming operation, more than 50 percent of a farmer's gross income for the tax year immediately preceding filing must be received from farm operations. 11 U.S.C. § 101(18)(A). The true nature of the income rests upon the extent to which the income in question bears a relation to the debtor's farming activities prescribed by the words of the statute. In re Easton, 883 F.2d 630, 633 (8th Cir. 1989). There must be some indicia of involvement on the part of the debtors in the farming activity which generates the income they seek to have credited toward satisfaction of the income requirement of § 101(18)(A). Id. at 635. Debtors must have some significant degree of engagement in, play some significant operational role in, or have an ownership interest in the farming operation. Id. at 636.
A landlord who solely rents land for cash does not qualify under Chapter 12. In re Mary Freese Farms, Inc., 73 B.R. 508, 510 (Bankr.N.D.Iowa 1987). At the heart of this prohibition is the lack of risk that is inherent in farming. Id. at 510. This is not to say that cash rents are per se excluded from farm income. Income received from a cash rent arrangement will be farm income if the evidence reveals that past farming activities have been more than short term or sporadic and that any cessation of farming activities is temporary. In re Jessen, 82 B.R. 490, 492, (Bankr.S.D.Iowa 1988). Consideration will be given to the reason for the cessation (inability to obtain operating credit versus new nonfarm venture); the extent of the cessation (leasing a portion of the farm in an effort to scale back the operation versus leasing the entire farm); and the relationship to the tenant (leasing to family members as opposed to leasing to nonrelated individuals or entities). Id.
CONCLUSION
It is the conclusion of this Court that the term "family farmer" and the question of who qualifies under Chapter 12 are to be liberally construed to achieve the goals of the Family Farmer Bankruptcy Act. The law is clear that the intent of a debtor is a substantial component in determining whether a farming operation continues to exist. There are numerous criteria which have been used to evaluate and give substance to whether a debtor is involved in the farming operation. In this case, Debtor retains ownership of the land. The land is apparently being leased and rented to extended family members. Debtor indicated that he continues to possess farm machinery with which to continue farming operations in his own right in the future. Debtor indicated that he has not permanently ceased farming but rather intends to again actively and personally pursue the farming operation once his financial situation is stabilized. Applying the mandatory liberal construction to farming operation, this Court cannot conclude, at this time, that Debtor is not engaged in a farming operation. As such, the Motion to Dismiss on this ground is denied.
WHEREFORE, Maynard Savings Bank's Motion for Turnover of Rent from Shooky's Bar is GRANTED.
FURTHER, Debtor's Motion to Extend Time to File Tax returns is GRANTED.
FURTHER, Debtor is ordered to file all State and Federal tax returns no later than May 6, 2003.
FURTHER, Debtor is ordered to file his Chapter 12 Plan no later than May 6, 2003.
FURTHER, Debtor's Motion to Approve Farm Crop Land and Pasture Lease Agreements is GRANTED.
FURTHER, Maynard Savings Bank's Motion to Dismiss is DENIED without prejudice.
SO ORDERED.