Chief Bankruptcy Judge Dale L. Somers of Topeka, Kan., wrote two opinions keeping the chapter 12 door open for individuals who farm through LLCs or liquidated their farming assets but intend to continue farming.
The issues covered by Judge Somers are not unlike those where operations terminated but courts allowed debtors to complete the winding up of a small business in Subchapter V of chapter 11.
Judge Somers’ October 22 opinion dealt with a married couple who ceased growing crops and liquidated most of their farming assets in late 2020. One month later, in early 2021, the couple filed a chapter 12 petition.
A creditor filed a motion to dismiss for “cause” under Section 1208(c), contending that the debtors were no longer farming and were ineligible for chapter 12. Judge Somers denied the motion.
The Governing Definitions
Under Section 109(f), only a “family farmer” may be a debtor in chapter 12. In turn, “family farmer” is defined in Section 101(18)(A) as someone “engaged in a farming operation” who has the requisite amounts of farming debt and income.
“Farming operation” is defined in Section 101(21) to include “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.”
However, the word “farming” itself is not defined by statute.
Judge Somers parsed the facts to decide whether the debtors still were farmers. The couple were both raised in farming families. Their siblings and parents were all farmers. The couple intended to remain farmers, even though both always had non-farming jobs to supplement income.
Before financial difficulties arose, the couple grew a variety of crops and had more than a thousand head of cattle. In each of three years before filing, their income exceeded $1 million.
When farming became unprofitable, Judge Somers said they conducted an “orderly liquidation.” By the end of 2020, they had ceased raising crops, disposed of livestock, terminated leases for land, sold crops and sold “substantially all” equipment. On the filing date, neither the couple nor their LLC had any chemicals or tractors, nor did they have any growing or stored crops.
However, the couple had $6 million in agricultural debt and were actively wrapping up farming operations, Judge Somers said. Nonetheless, the couple planned on returning to farming and running a livestock operation on a smaller scale.
As a fact, Judge Somers found that the couple “had not completely abandoned all farming operations at the time of filing.” They were “very involved” in assisting their extended families’ farming operations and had part ownership in “cattle equipment.”
Judge Somers said that he could not overlook the “business side” to farming. The debtors “spent a lot of time” winding up the financial affairs of their farming operations. While in chapter 12 in 2021, they received “significant income” from their pre-bankruptcy operations, which they distributed.
Judge Somers gave weight to their avowed intent to continue farming on a limited basis and the few farming assets they still owned, like a pickup truck and a plow.
Courts also evaluate whether debtors incur the risks of farming, Judge Somers said. In that respect, he said, the couple were “winding up the results of the risks previously taken.” Furthermore, he said that debtors are allowed “to completely liquidate a farming operation” under Section 1222(b)(8).
Judge Somers said there is “much more to farming than planting a seed.” He rejected “the contention that the fact Debtors undertook an orderly liquidation process prepetition compels the conclusion that they are no longer ‘engaged in a farming operation.’”
Judge Somers denied the motion to dismiss, holding that the debtors were “engaged in farming” on the filing date. He buttressed his conclusion by citing eight decisions holding that debtors can wind down non-operating businesses in Subchapter V of chapter 11. All eight of the cases were discussed in previous editions of this column.
Regarding the analogy to Subchapter V, Judge Somers said, “No matter what farming used to be, today farming is a business. The wind down work for farming is no different than the wind down work for other businesses.”
Judge Somers ended his opinion by saying that the debtors and their counsel didn’t do things “the way they should be done from a timing viewpoint.” In the future, he admonished chapter 12 debtors’ counsel to file petitions before liquidating the assets.
The LLC Opinion
Judge Somers’ opinion on October 21 dealt with a chapter 12 debtor who conducted his farming operations through LLCs.
The debtor had been a farmer since 1978, once farmed 15,000 acres and previously had 1800 head of cattle. Financial problems prompted the debtor to “dramatically scale back” farming operations but saddled him with more than $300,000 in taxes to be handled in chapter 12.
After filing, the debtor owned an LLC that continued raising crops and livestock on 320 acres that the LLC owned. Another LLC owned pigs.
In his own name, the debtor was part owner of seven acres with cattle and hogs. Judge Somers found that the debtor himself was physically involved in farming every day, by feeding animals and mending fences.
Like the debtor in the other case, Judge Somers did not penalize the debtor “for making a reasonable financial decision to end the portion of his farming operation that was nonprofitable.”
Also like the other case, Judge Somers emphasized the debtor’s professed intent to continue farming alongside the debtor’s physical engagement in farming every day.
Conducting the bulk of his farming operations through LLCs did not bar the debtor from chapter 12 relief. “Nowhere in this definitional maze is a prohibition on farming through a business entity,” Judge Somers said. He cited other courts that have allowed individuals to include farming income from LLCs in their eligibility for chapter 12.
In denying a motion to dismiss, Judge Somers did not rely entirely on the LLCs’ farming activities. However, he characterized the LLCs as “an additional factor,” ruling that the debtor was eligible for chapter 12.
Chief Bankruptcy Judge Dale L. Somers of Topeka, Kan., wrote two opinions keeping the chapter 12 door open for individuals who farm through LLCs or liquidated their farming assets but intend to continue farming.
The issues covered by Judge Somers are not unlike those where operations terminated but courts allowed debtors to complete the winding up of a small business in Subchapter V of chapter 11.
Judge Somers’ October 22 opinion dealt with a married couple who ceased growing crops and liquidated most of their farming assets in late 2020. One month later, in early 2021, the couple filed a chapter 12 petition.
A creditor filed a motion to dismiss for “cause” under Section 1208(c), contending that the debtors were no longer farming and were ineligible for chapter 12. Judge Somers denied the motion.