On an issue where the bankruptcy courts disagree, the Sixth Circuit Bankruptcy Appellate Panel held that filed proofs of claim are not added to scheduled but unfiled claims in deciding whether a family farmer has too much debt for chapter 12.
The family farmer scheduled some $3.5 million in secured and unsecured debt, well within the eligibility cap in Sections 109(f) and 101(18)(A), which is now about $4.15 million. Counting some $640,000 in claims that were not filed plus claims that were filed, however, total claims exceeded the cap.
The secured creditor, who objected to the plan, contended that the debtor was not eligible for chapter 12 because the total of filed and unfiled claims exceeded the cap. The bankruptcy court overruled the objection and confirmed the plan.
In a March 13 opinion written for the BAP by Bankruptcy Judge Guy R. Humphrey of Dayton, Ohio, the panel upheld confirmation and found the debtor eligible for chapter 12.
Although neither the Sixth Circuit nor the BAP has decided the issue in chapter 12, Judge Humphrey was not without potentially relevant precedent. In Comprehensive Accounting Corp. v. Pearson (In re Pearson), 773 F.2d 751 (6th Cir. 1985), the Sixth Circuit held that “chapter 13 eligibility should normally be determined by the debtor’s schedules checking only to see if the schedules were made in good faith.”
According to Judge Humphrey, the Sixth Circuit “provided for a simple, economical, and efficient approach to determining eligibility for chapter 13 bankruptcy cases.”
However, some bankruptcy courts in the Seventh Circuit have rejected Pearson in chapter 12 and combine filed and unfiled claims, arriving at what Judge Humphrey characterized as “the highest possible number for aggregate debts of the debtor.”
Judge Humphrey rejected the approach of these courts in the Seventh Circuit, saying that “Pearson’s holding is just as relevant for chapter 12.” As it is in chapter 13, he held that “eligibility for chapter 12 should normally be determined by the debtor’s schedules, checking only to see if the schedules were made in good faith.”
Chapter 12 eligibility standards are analogous to the amount-in-controversy requirement for diversity jurisdiction in 28 U.S.C. § 1332, where, Judge Humphrey said, eligibility “is determined at the outset of a case from the allegations of the plaintiff” absent “a showing of bad faith.” He therefore held that “Pearson should be extended to determinations of eligibility for chapter 12 cases within the Sixth Circuit.”
Judge Humphrey noted how the Ninth Circuit applied Pearson to chapter 12 in 2015.
Finally, Judge Humphrey was required to decide what Congress meant when it said in Section 101(18)(A) that a family farmer’s “aggregate debts [must] not exceed” the cap, which is now about $4.15 million. The lender contended that “aggregate debts” means the sum of filed and scheduled claims.
Judge Humphrey disagreed. He said that “aggregate debts” means the combination of “the debtor’s non-farm and farm debts.”
Judge Humphrey also liberalized chapter 12 eligibility with regard to the requirement in Section 101(18)(A) that more than 50% of the debtor’s income must come from “such farming operation.”
In the case at bar, the debtor had received farming income from partnerships and a subchapter S corporation that were not in the chapter 12 case. Judge Humphrey ruled that farming income from the debtor’s non-filed farming businesses are included in deciding whether more than half of gross income was from farming.