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Bankruptcy Annotations (Agricultural Law and Tax)

This page contains summaries of significant developments involving farm and ranch-related as well as commercial fishing bankruptcies and related legislation.

Posted December 12, 2017

Chapter 12 Case Dismissed For Unreasonable Delay. The debtor proposed a Chapter 12 reorganization plan under which he would avoid two secured debts. When the debtor was not able to avoid the debts, he initially wanted more time to appeal but neither appealed nor filed an amended reorganization plan. The bankruptcy trustee motioned to dismiss the case and the court agreed. The court noted that the goal of Chapter 12 was to move the case promptly through the confirmation process. The court noted that the debtor's failure to propose an amended plan after a year of Chapter 12 relief was grounds for dismissal under 11 U.S.C. §1208(c)(3). The court also noted that the debtor had unreasonably refused to cooperate with the trustee when he failed to appear for his deposition, and had fired his legal counsel (which the court viewed as a delaying tactic). In addition, the debtor had not timely filed monthly reports and the bankruptcy estate lost value during the times of delay. The court also believed that there was no reasonable likelihood of rehabilitation. The bankruptcy court’s opinion was affirmed on appeal. In re Haffey, Nos. 15-8018/8027, 2017 Bankr. LEXIS 4063 (Bankr. App. Panel 6th Cir. Nov. 28, 2017), aff’g., No. 14-50824, 2015 Bankr. LEXIS 1850 (Bankr. E.D. Ky. Jun. 5, 2015).

Taxes Not Dischargeable in Bankruptcy. The petitioner claimed that his 2009 tax liability, the return for which was due on April 15, 2010, was discharged in bankruptcy. He filed Chapter 7 on April 8, 2013. That assertion challenged whether the collection action of the IRS was appropriate. The Tax Court noted that taxes are not dischargeable in a Chapter 7 bankruptcy if they become due within three years before the date the bankruptcy was filed. Because the petitioner filed bankruptcy a week too soon, the Tax Court held that his 2009 taxes were dischargeable and could be collected. As a result, the IRS settlement officer did not abuse discretion in sustaining the IRS levy. In addition, the Tax Court, held that the IRS did not abuse the bankruptcy automatic stay provision that otherwise operates to bar creditor actions to collect on debts that arose before the bankruptcy petition was filed. Ashmore v. Comr., T.C. Memo. 2017-233.

Posted December 1, 2017

PACA Trust Does Not Prevent Chapter 11 DIP’s Use Of Cash Collateral. The debtor, as a Chapter 11 DIP, filed a motion for an order authorizing its use of cash collateral. A bank, the DIP’s principal secured creditor, supported the motion. However, a claimant asserting PACA rights opposed the motion because, in its view, such an order would violate the claimant’s PACA trust rights as well as the rights of others as beneficiaries of the PACA trust. The PACA creates a statutory trust to protect growers of perishable agricultural products against the risk of non-payment by buyers and others. A PACA claimant, as a seller of eligible produce, has a trust claim against the qualifying inventory and proceeds that is superior to the claims and liens of the buyer’s creditors with no regard to whether the creditors are secured or unsecured and without regard to the priority level of the claim. Under the facts of the case, the claimant held an equitable interest in the bankruptcy estate with respect to its $337,159.18 PACA claim, and the question before the court was whether that equitable interest was sufficient to deny the debtor’s requested (and otherwise consensual) use of its secured lender’s cash collateral, especially where a sufficient equity cushion existed to adequately protect the PACA claimant’s claim. The court held an interim hearing on the motion at which it took testimony, granted interim relief and scheduled a final hearing. At the final hearing PACA claimant argued that its PACA claim reached all of the DIP’s property, at least if the DIP could not prove otherwise. The claimant asserted that its status as PACA trust beneficiary was sufficient to bar a debtor from utilizing the cash collateral. The claimant also argued that in the absence of proof the contrary from the DIP, all income derived during the case from any of the property in the DIP’s possession, would constitute proceeds of the PACA trust, and that the DIP could not use any of the property because it belonged to the PACA claimant and not the bankruptcy estate. The court did note the power of the PACA trust. Specifically, the court pointed out that, under PACA, growers and suppliers of perishable agricultural products who have properly preserved their rights under the statute are entitled to the benefit of a broad and powerful “floating trust” in their buyer’s qualifying inventory and proceeds thereof. These trust claims are to be paid first from trust assets, even prior to any claims or interests of secured creditors in such property. Furthermore, the court noted that the commingling of trust assets is specifically contemplated under the federal regulations implementing PACA. As the court recognized, PACA is “designed to promote priority payment to the PACA claimant.” However, the court held that to conclude that the subject matter of the PACA trust is excluded from the bankruptcy estate overstated the case holdings that the PACA claimant cited. Instead, the court determined that the PACA expressly contemplates the commingling of trust and non-trust property, the creation of a “floating trust,” and the continued operation of the PACA trustee. Thus, within the context of a Chapter 11 bankruptcy, the DIP presumptively continues operating its business in accord with applicable non-bankruptcy law. In turn, the court reasoned, this meant that it made sense to think in terms of permitting the DIP to use its buildings and equipment to conduct its business as it had done for years, along with the cash and cash equivalents derived from that use, even though they may be impressed to some extent with a statutory trust, as long as the DIP provides adequate protection of the PACA claimant’s interest in the estate property. In addition, because the value of the property of the estate that the PACA claimant believed to be impressed with the PACA trust far exceeded the claimant’s claim, the court concluded that the DIP had met its burden of showing that the claimant would be adequately protected. Therefore, the court granted the DIP’s motion authorizing the use of the cash collateral in the property in which the PACA claimant had an equitable interest, in accordance with 11 U.S.C. §363 “as long as the DIP provides adequate protection of [the PACA claimant’s] interests in the estate property.” Because the DIP’s property that the PACA claimant alleged was subject to the PACA trust was much greater than the PACA claimant’s $337,159.18 claim, the court found that the PACA claimant’s interests were adequately protected. The court also disagreed with the PACA claimant’s assertion that the DIP bore the burden of proof that the property that the DIP wanted to utilize in its business operations were not property of the PACA trust. Instead, the court determined that the PACA claimant had to first prove that the claimant had an interest in the DIP’s property. After that, the DIP had to establish that adequate protection was provided to the PACA claimant. In so holding, the court distinguished a contested matter under 11 U.S.C. §363 from that involving a battle of competing property interests. In re Cherry Growers, Inc., No. 17-04127-swd, 2017 Bankr. LEXIS 3838 (W.D. Mich. Nov. 1, 2017).

Posted November 12, 2017

Tax Debt Not Discharged in Bankruptcy. The debtors, a married couple, filed Chapter 7 at a time when they had outstanding tax debt of $3.8 million. For many years preceding bankruptcy filing they had utilized an investment strategy known as “selling short against the box” that resulted in deferral of taxable income. However, a failed investment in a home improvement company in 1999 triggered significant income recognition and tax of nearly $2 million. They had insufficient funds to pay the tax and, thus, sold other investments to come up with the funds to pay the tax. However, those sales triggered gain exceeding $8 million and a tax liability of $3.2 million. They entered into an offer and compromise with the IRS where they offered to pay $1 million over five years – approximately one-half of the tax debt that they owed. The IRS rejected the offer because it believed the debtors’ collection potential exceeded their entire tax debt. A temporary agreement was later accepted, but condition on the debtors selling their home in Florida and reducing their standard of living. The debtors then proposed another offer-in-compromise at a time when their tax debt exceeded $6 million. Their offer was for $1.25 million, and they had not yet sold their FL home or reduced their living expenses. The IRS rejected the offer, again asserting that the debtors had the ability to pay their tax debt in full. The debtors then approached the IRS about utilizing an installment plan. The IRS approved the plan for the 2001 tax debt only, and conditioned it upon the payment in full of the debtors’ 1999 taxes. The debtors borrowed money and paid off their 1999 tax debt, and the IRS accepted the installment plan under which the debtor agreed to pay quarterly installments of $1.2 million. They sold their FL home in 2008 after paying $1.2 million of their tax debt. In 2008, the debtors again proposed an offer-in-compromise when their tax debt was $3.6 million and they proposed to pay $120,000. The IRS rejected the offer and the debtors defaulted on the installment agreement. From 2001-2010 the debtors had $13 million in income and spent over $8.5 million on personal and household expenses and charitable contributions. Their annual mortgage interest, property tax and homeowner association dues was $500,000 during this timeframe and their household costs were nearly $600,000. Their personal travel expenses exceeded $700,000 and they spent almost $250,000 on a rental home in Aspen, CO. They also spent $500,000 on business clothes and paid to have them personally ironed and also paid over $600,000 on a personal chef and household employees. They spent nearly $200,000 on automobiles and the monthly grocery bill exceeded $4,400 which did not include $78,000 of dine-out expenses. The debtors, in their bankruptcy proceeding, sought a determination that the balance of their tax debt was dischargeable, having arisen before the filing of the petition. The court disagreed, noting that 11 U.S.C. §523(a)(1)(C) bars the discharge of tax debts if the debtor willfully attempted to evade or defeat a tax, which the court determined that the debtors had done based on their lavish lifestyle. The court also noted that the debtors had abused the offer-in-compromise process to delay IRS collection efforts. The court also determined that it did not have any power to grant a partial discharge. In re Feshbach, No. 08:11-bk-12770-CPM, 2017 Bankr. LEXIS 3580 (Bankr. M.D. Fla. Oct. 14, 2017).

Posted October 30, 2017

Amendment to Bankruptcy Law Gives Non-Priority Treatment To Capital Gain Taxes Arising From Sale of Post-Petition Farm Asset Sales. H.R. 2266, signed into law on October 26, 2017, contains the Family Farmer Bankruptcy Act (Act). The Act adds 11 U.S.C. §1232 which specifies that, “Any unsecured claim of a governmental unit against the debtor or the estate that arises before the filing of the petition, or that arises after the filing of the petition and before the debtor's discharge under section 1228, as a result of the sale, transfer, exchange, or other disposition of any property used in the debtor's farming operation”… is to be treated as an unsecured claim that arises before the bankruptcy petition was filed that is not entitled to priority under 11 U.S.C. §507 and is deemed to be provided for under a plan, and discharged in accordance with 11 U.S.C. §1228. The provision amends 11 U.S.C. §1222(a)(2)(A) to effectively override Hall v. United States, 132 Sup. Ct. 1882 (2012) where the U.S. Supreme Court held that tax triggered by the post-petition sale of farm assets was not discharged under 11 U.S.C. §1222(a)(2)(A). The Court held that because a Chapter 12 bankruptcy estate cannot incur taxes by virtue of 11 U.S.C. §1399, taxes were not “incurred by the estate” under 11 U.S.C. §503(b) which barred post-petition taxes from being treated as non-priority. The provision is effective for all pending Chapter 12 cases with unconfirmed plans and all new Chapter 12 cases as of October 26, 2017. H.R. 2266, Division B, Sec. 1005, signed into law on October 26, 2017.

Posted September 8, 2017

Proceeds of Auction of Leased Dairy Cows Subject to Bank's Lien. A debtor borrowed money from a lender and pledged dairy cattle as collateral. The lender secured an interest in the cattle. The debtor later borrowed additional money from the lender, pledging crops, farm products and livestock as collateral with lender's security interest containing a dragnet clause. The lender secured its interest. The debtor later entered into a "Dairy Cow Lease" with a third party to allow for expansion of the herd. The third-party lessor perfected its interest in the leased cattle. The debtor filed Chapter 12 bankruptcy and the bankruptcy court determined that the lease arrangement actually created a security interest rather than being a true lease. The court noted that the "lease" was not terminable by the debtor and the lease term was for longer than the economic life of the dairy cows. The third-party lessor also never provided any credible evidence of ownership of the cows, and the parties did not strictly adhere to the "lease" terms. The court noted that the lender filed first and had priority as to the proceeds from dairy cows. In addition, the bankruptcy court held that the lender's prior perfected security interest attached to all of the cows on the debtor's farm and to all milk produced post-petition and milk proceeds under 11 U.S.C. Sec. 552(b). In a later action in the district court, a different creditor failed to comply with court’s order requiring posting of bond as a condition to stay the effect of the court’s prior ruling. As a result, there was no stay in effect during pendency of the appeal and the lender was entitled to have the proceeds turned over to it. A feed supplier creditor did not have standing to seek surcharge of the bank’s collateral under 11 U.S.C. Sec. 506(c). The bankruptcy trustee did not file a motion for surcharge and court could not order the amount that the supplier paid for feed deliveries to be retained from funds turned over to the lender. The lender's motion for abandonment and turnover of proceeds was granted. On further review of the bankruptcy court's decision concerning the dairy cow lease, the appellate court reversed. The appellate court determined that under applicable law (AZ) as set forth in the "lease" agreement, a fact-based analysis governed the determination of the nature of the agreement. However, if the lease term is for longer than the economic life of the goods involved, the "lease" is a per se security agreement. The bankruptcy court focused on the debtor's testimony that he culled about 30 percent of the cattle annually which would cause the entire herd to turnover in 40 months. That turnover time of 40 months was less than the 50-month lease term. Thus, according to the bankruptcy court, the lease was a security agreement. The appellate court disagreed with this analysis, holding that the agreement required the focus to be on the life of the herd rather than individual cows in the herd because the debtor had a duty to return the same number of cattle originally leased rather than the same cattle. Thus, the agreement was not a per se security agreement. On the economics of the transaction, the appellate court held that the lender failed to carry its burden of establishing that the actual economics of the transaction indicated the lease was a disguised security agreement. There was no option for the debtor to buy the cows at any price, and there was no option at all. The court remanded the case to the bankruptcy court. The cattle owned outright by the debtor were sold at auction by the bankruptcy trustee subject to the security interest of the bank. The debtor had purchased the cattle with commingled funds from the bank's account which was sufficient for the bank's lien to attach and the court, on remand, determined that it was immaterial that the funds were later reimbursed by a third party under the lease. Thus, the proceeds of the auction were subject to the bank's security interest and were the bank's property. The leasing party's brand on the cows was not sufficient under state (KY) law to establish ownership of the cows because it was unregistered. After-acquired livestock were also subject to the bank's lien, as being proceeds of the pre-petitioner lien. On further review, the appellate court upheld the bankruptcy court’s decision to hold an evidentiary hearing on the issue of ownership, and also upheld the bankruptcy court’s factual findings that the debtor mass-branded all of the cattle on his farm, and that the debtor sold all of the creditor’s cattle before filing bankruptcy. The appellate court also determined that the bankruptcy court correctly decided that KY law did not apply to the creditor’s brand. In re Purdy, No. 12-11592(1)(12), 2015 Bankr. LEXIS 2938 (W.D. Ky. Sept. 2, 2015), on remand from, Sunshine Heifers, LLC v. Citizens First Bank (In re Purdy), No. 13-6412, 2014 U.S. App. LEXIS 15586 (6th Cir. Aug. 14, 2014), rev'g., 2013 Bankr. LEXIS 3813 (Bankr. W.D. Ky. Sept. 12, 2013), aff’d., No. 12-11592(1)(12), 2016 U.S. Dist. LEXIS 107565 (W.D. Ky., Aug. 15, 2016), aff’d., No. 16-6381, 2017 U.S. App. LEXIS 16735 (6th Cir. Aug. 31, 2017).

Posted September 6, 2017

Chapter 12 Plan Not Feasible. The debtors, a married couple ages 65 and 60, owned and operated a 107-acre farm. 75 percent of the acres are wooded with the only improvement being a barn in which the debtors live in a portion of as their residence. The barn also houses their equipment and calf-raising operation. A bank holds two claims that their property secures. Their farming operation consists of raising calves and timber. The debtors filed Chapter 12 in early 2017, and the bank claimed that the timber part of the debtors’ operation did not constitute a “farming operation” as Chapter 12 requires. However, the court, based on the totality of the circumstances (and rejecting the approach of In re Easton, 883 F.2d 630 (8th Cir. 1989)), determined that the debtors’ wood and timber activities constitute a farming operation because the timber enterprise was ongoing and not merely a cut of all merchantable timber at one time. The court noted that the debtors harvest mature trees, sell the timber in log form and harvest tree tops as firewood. They also monitor the reseeding process, and strategically burn brush and identify timber to harvest. The court also noted that the debtors were directly involved in the farming activities on their property, and the barn and real property were essential to their calf and timber operations. The size, nature and location of the real property all were evidence that the debtors’ operation constituted a traditional farm. Thus, the debtors were eligible to file Chapter 12 because they operated a “farm” as contemplated by 11 U.S.C. §101(21), and met the other qualification requirements (e.g., the combination of their calves and timber operations exceeded 50 percent of their gross income as required by 11 U.S.C. §101(18)(A)). However, the court determined that the debtors’ Chapter 12 reorganization plan was not feasible as 11 U.S.C. §1225(a)(6) requires. The court determined that the debtors “did not provide sufficient evidence of a realistic and workable framework for reorganization.” They did not provide a monthly budget, and their tax returns showed a downward trend for farming income over the past three years. They also would not be able to pay their routine expenses plus the anticipated payments to the Chapter 12 trustee. The debtors also could not support their assertion that income would rise in the future. They also listed no calves or partnership interests on their bankruptcy schedules as assets. Thus, the debtors’ plan was not feasible and the bank was entitled to relief from the automatic stay imposed by 11 U.S.C. §362(d)(2)(B). In re Penick, No. 17-20178, 2017 Bankr. LEXIS 2422 (E.D. Ky. Aug. 28, 2017).

Posted August 28, 2017

Party Arguing for Lifting of Automatic Stay Is Not a “Governmental Unit.” The debtors are hog farmers. In 2012, the plaintiff filed suit against the debtors for alleged violations of the Clean Water Act (CWA) asserting that the debtors discharged hog waste or effluent into a tributary of a river that flows into a navigable water of the United States without a CWA permit. Eight of the 11 claims alleged sought injunctive relief. In 2015, the debtors filed Chapter 11 and stayed the lawsuit, and the plaintiff filed an adversary proceeding asking the court to determine whether the injunctive relief sought amounted to a “debt” as defined by 11 U.S.C. §101(12). The court determined that it was not because the injunctive relief did not amount to a liability on a claim that gave rise to a right of payment in this case. Because the CWA does not authorize the plaintiff to recover clean-up costs, any injunctive order under the CWA requiring compliance with the CWA is not a “claim” under the Bankruptcy Code. In re Taylor, No. 15-02730-5-SWH, 2017 Bankr. LEXIS 1461 (Bankr. E.D. N.C. May 31, 2017). On another motion involving the automatic stay, the plaintiff claimed that 11 U.S.C. §362 does not apply to the district court litigation because that case falls under the governmental regulatory exclusion to the stay contained in 11 U.S.C. §362(b)(4). Thus, the plaintiff argues, the district court litigation should continue against the debtor. The court rejected that argument, noting that there was nothing in the statutory definition of “governmental unit” that made any reference to a private citizen or entity acting on behalf of the government. The same could be said, the court noted, to the legislative history of the provision. Thus, the exception from the stay for governmental units did not apply and the stay of the district court litigation would not be lifted. In re Taylor, No. 15-02730-5-SWH, 2017 Bankr. LEXIS 2392 (Bankr. E.D. N.C. Aug. 24, 2017).

Chapter 12 Case Dismissed. In this Chapter 12 case, the trustee motioned to dismiss the case for cause under 11 U.S.C. §1208. The court noted that the statutory language allowed it to decide whether to dismiss the case without first having an actual hearing in situations where it is appropriate, such as this case where many papers have been filed in response to the motion. The trustee claimed that the debtor is not a “business trust” that is eligible to be a debtor. The court noted that the statutory deadline to file a plan had already expired without a plan being filed and without a request for extension being filed with the court before the deadline expired. What was ultimately filed, however, didn’t come close to satisfying the requirements for a Chapter 12 plan. The court also noted that the debtor failed to cooperate with the trustee in many respects. The court also found that its granting of relief from the automatic stay to allow the debtor’s landlord to terminate a lease in order to evict the debtor, coupled with the absence of any allowed claims meant that the Chapter 12 case served no purpose. The court dismissed the case. In re M.P.I. Ltd., No. 16-00245, 2017 Bankr. LEXIS 2313 (Bankr. D. Haw. Aug. 17, 2017).

Posted August 5, 2017

Bankruptcy Court Uses Wrong Standard Concerning Chapter 12 Filing. The debtor appealed the bankruptcy court’s determination that she was ineligible to be a Chapter 12 debtor. The debtor had filed a Chapter 7 "no-asset" bankruptcy in 2010 and was granted a discharge. The debtor then filed a Chapter 12 case four months after receiving a discharge in the Chapter 7 case. The total amount of debt on the debtor's ranch and other property exceeded the Chapter 12 debt limits by more than $4 million. The debtor argued that only the secured portion of the debt should be counted because her personal liability had been discharged in a Chapter 7 filing. The appellate court bankruptcy panel reviewed only whether the Chapter 12 debt limit counts secured debt only up to the value of collateral. The appellate court held that obligations that are enforceable against the debtor’s property but for which there is no personal liability are still “claims” and “debts” within bankruptcy. Thus, the debtor was not eligible to file Chapter 12 bankruptcy. In re Davis, No. 12-60069, 2015 U.S. App. LEXIS 2381 (9th Cir. Feb. 17, 2015), aff'g., In re Davis, No. CC-11-1692-MkDKi, 2012 Bankr. LEXIS 3631 (Bankr. 9th Cir. Aug. 3, 2012). The debtor then filed another Chapter 12 case in 2016 and, just shy of three months later, filed a motion to extend the deadline to file the Chapter 12 plan from September 12, 2016 to October 12, 2016. The bankruptcy court granted the extension based on “cause.” The debtor then filed motion for another extension of time on October 12, 2016, which the court denied. In spite of the denial, the debtor filed the Chapter 12 plan on October 17, 2016. The bankruptcy court denied the plan as untimely filed and the debtor appealed. On review, the appellate court reversed the bankruptcy decision as clearly erroneous. The appellate court noted that 11 U.S.C. §1221 standard for a court to extend the filing of a Chapter 12 plan is to be based on circumstances for which the debtor should not be held accountable. That, the court noted, is more stringent than a “for cause shown” standard. The bankruptcy court must make a specific finding that the debtor’s delay in filing the plan was necessitated by “circumstances beyond the debtor’s control.” Because the bankruptcy court used the wrong standard to initially extend the filing deadline, the appellate court reasoned that the bankruptcy court used the same improper standard to not grant the second extension. Thus, the appellate court vacated the bankruptcy court’s denial of the second extension and remanded the case for the correct legal standard to be applied. In re Davis, No. CC-16-1390-KuLTa, 2017 Bankr. LEXIS 2169 (B.A.P. 9th Cir. Aug. 2, 2017).

Posted July 19, 2017

Chapter 12 Debtor Transitioning From Dairy To Specialty Cherry Farm Allowed to File Second Amended Plan. The debtor operated a dairy farm. In June of 2016, the debtor and Branch Botanicals entered into a contract by which Branch Botanicals (BB) agreed to finance a large portion of the start-up costs to convert the farm from a dairy into an operation that would produce products derived from a specific type of cherry plant. BB had not developed a market for the products in the debtor’s area yet, but had done so on the West Coast. The debtors (and BB) sought to reamortize matured Farm Credit loans, but failed to reach an agreement. As a consequence, the debtor filed chapter 12 of the Bankruptcy Code in November of 2016, and their reorganization plan in early 2017. Farm Credit and other creditors objected to the plan and the debtor filed amended plan in June of 2017. Farm Credit objected to the amended plan on the grounds that the debtor’s property was undervalued and, as such, failed the liquidation test of 11 U.S.C. §1225(a)(4). Farm Credit also claimed that the amended plan violated 11 U.S.C. §1225(a)(5) for having too low of an interest rate and an unreasonable term of repayment. Farm Credit also claimed that the plan was not feasible. The bankruptcy court determined that the original appraiser’s value of $2,775,000.00 for the debtor’s property was a valid starting point. However, because the property was appraised as a dairy farm, and a market did not yet exist for the products derived from the new crop proposed to be sold, the court determined that a value of $2,500,000.00 fairly represented the current value of the assets. In addition, the evidence as a whole persuaded the court that the proposed interest rate was too low and the balloon payment too long to compensate Farm Credit for the risk of funding what was essentially a start-up venture. The court determined that a 2.5% adjustment over prime was appropriate and that a seven-year balloon, instead of the debtor’s proposed nine-year balloon would be more appropriate because within seven years it will be known whether the venture with BB will either succeed or not. In addition, the court determined that the debts owed to Farm Credit and another creditor were business debts because they were incurred to finance the farming business. Thus, the stay imposed by 11 U.S.C. §1201 did not apply. Finally, the court determined that the debtors could not qualify for a preliminary injunction because they were not likely to suffer irreparable harm and they did not have a high probability of success on the merits. For these reasons, the court denied confirmation of the debtor's amended chapter 12 plan, but gave the debtor 21 days to filed a second amended plan. In re Terry Properties, L.L.C., No. 16-71449 2017 Bankr. LEXIS 1873 (Bankr. W. D. Va. Jul. 6, 2017).

Posted June 7, 2017

Alleged Clean Water Act Violations Are not “Debts.” The debtors are hog farmers. In 2012, the plaintiff filed suit against the debtors for alleged violations of the Clean Water Act (CWA) asserting that the debtors discharged hog waste or effluent into a tributary of a river that flows into a navigable water of the United States without a CWA permit. Eight of the 11 claims alleged sought injunctive relief. In 2015, the debtors filed Chapter 11 and stayed the lawsuit, and the plaintiff filed an adversary proceeding asking the court to determine whether the injunctive relief sought amounted to a “debt” as defined by 11 U.S.C. §101(12). The court determined that it was not because the injunctive relief did not amount to a liability on a claim that gave rise to a right of payment in this case. Because the CWA does not authorize the plaintiff to recover clean-up costs, any injunctive order under the CWA requiring compliance with the CWA is not a “claim” under the Bankruptcy Code. In re Taylor, No. 15-02730-5-SWH, 2017 Bankr. LEXIS 1461 (Bankr. E.D. N.C. May 31, 2017).

Posted May 28, 2017

Bare Replacement Lien on Future Crops Deemed Sufficient To Provide Adequate Protection. The debtors filed Chapter 12 in late 2016. They farm about 550 acres and raise cattle. The majority of their farm ground is leased on a cash rent basis. They borrowed money from a bank and granted the bank a lien in their crops and proceeds. They motioned to use cash collateral of the bank to fund about $180,000 of crop input costs for the 2017 crop year and the payment of about $85,000 of cash rent for 2017. At the time, the debtors had cash collateral of the bank of $50,935.99 from 2015 crop proceeds and about $220,000 of 2016 crop proceeds, and $52,117 of USDA government payments. They proposed to grant a security interest post-petition to the bank in the 2017 crop, crop insurance and government payments in which they had an interest or may subsequently acquire. They proposed to grant the bank a priority administrative expense claim to the extent the proceeds from the 2017 crop and related collateral were insufficient to repay the expended cash collateral plus interest. The bank objected, claiming that the debtors had consistently lost money on farming since 2007 and that the proposed replacement lien in the crop and related collateral and proposed administrative expense claim in the bank’s favor did not provide adequate protection of the bank’s interest in the cash collateral. The court noted that 11 U.S.C. §363 governs the use of cash collateral and that a bare replacement lien in non-existent crops is generally not enough to provide adequate protection under 11 U.S.C. §1205. However, the court noted that the debtors submitted detailed cash flow projections as well as expense projections and how the cash collateral would be repaid. The debtors also submitted crop input cost analysis and showed how their reorganization plan payments can be made in 2017. The bank held that the debtors had carried their burden to establish that adequate protection was provided and that additional security in the form of government payments and crop insurance proceeds was also available to the bank. The court granted the debtors’ motion upon them granting the bank a first replacement lien on their 2017 crop and related collateral; purchasing multi-peril crop insurance on all of their 2017 crops and maintain it until the crop is harvested and sold with the bank named as beneficiary or loss-payee on the policy; executing the necessary documents to secure the bank’s interest in government payments of any nature; provide the bank with an administrative expense priority claim for any collateral deficiency; and provide the bank with a monthly operating report concerning the status of the collateral, income, expense and cash flow and the manner in which the cash collateral is used; and provide the bank with the right to inspect the debtors’ business premises and records at reasonable times and upon reasonable notice. In re Blake, No. 16-60425, 2017 Bankr. LEXIS 1278 (Bankr. S.D. Ill. 2017).

Posted May 27, 2017

Chapter 12 Debtor’s Counsel Can Get Paid For Post-Confirmation Services. The debtor filed a Chapter 12 petition and received confirmation of the Chapter 12 plan. The debtor sought to modify the confirmed plan and the debtor’s legal counsel sought to be paid by the debtor and/or the bankruptcy estate for post-confirmation services. The court held that the legal counsel was entitled to compensation because the debtor’s counsel was retained as a legal professional via 11 U.S.C. §327, and the bankruptcy estate continued to exist post-confirmation via 11 U.S.C. §1207. The court reasoned that as long as the legal counsel met the requirements of 11 U.S.C. §330 and could show that the services benefited the Chapter 12 estate, then payment could be awarded. The court also determined that 11 U.S.C. §1229(a)(2) allowed the debtor to modify the Chapter 12 plan post-confirmation because of a drafting issue that allowed differing interpretations of the Confirmation Order, a problem with the plan’s implementation and payment timing. In re LaRosa Greenhouse, LLP, 565 B.R. 304 (Bankr. D. N.J. 2017).

Posted May 21, 2017

Selling Gravel Did Not Constitute a “Farming Operation” For Purposes of Chapter 12 Eligibility. The debtor filed a Chapter 12 bankruptcy petition and several creditors motioned to dismiss the case on the basis that the debtor was ineligible for Chapter 12 because the debtor was not a family farmer and, as a result, the case was filed in bad faith as a dilatory tactic to forestall foreclosure. The debtor objected to the motions, claiming that she was a family farmer entitled to file Chapter 12. The court, citing 11 U.S.C. §101(18)(A), noted that Chapter 12 eligibility required five requirements to be satisfied: (1) the debtor must be an individual; (2) the debtor must be engaged in farming; (3) the debtor must have aggregate debts not exceeding $4,153,150; (4) the debtor’s aggregate, non-contingent debts must be at least 50 percent related to a farming operation that the debtor owns, and; (5) the debtor’s income from farming must exceed 50 percent of the debtor’s gross income for either the most recent prepetition full taxable year or each of the second or third preceding taxable years. The court found that the debtor is an individual. However, the court determined that the debtor was not engaged in a farming operation based on the totality of the circumstances. Crushing rock into aggregate and gravel, the court opined, is not characteristic of a farming operation. Rather, it is more like a mining operation and is not renewable like crops or livestock. It is also not subject to the inherent risks of farming, and the statutory definition of farming operation makes specific reference to the growing and cultivation of farm commodities in their unmanufactured state. Thus, while the debtor was engaged in some farming operations in addition to the gravel operation, the business associated with the gravel business cannot count as farming. The court went on to find that the debtor’s aggregate debt was within the debt limit, and that the debts arising from farming operations were less than 50 percent of the debtor’s total debts. However, the debtor’s farming income was found to be less than 50 percent of the debtor’s total income. Thus, the debtor did not qualify for Chapter 12. The court also determined that the debtor’s Chapter 12 petition had been filed in bad faith based on numerous factors – prior abusive bankruptcy filings; concerted efforts to forestall completion of multiple foreclosure sales, and; lack of honesty and candor in addressing the court. The Chapter 12 case was dismissed. In re Carter, No. 17-50262, 2017 Bankr. LEXIS 1286 (Banrk. M.D. N.C. May 11, 2017).

Creditor Can’t Get Bankruptcy Case Dismissed To Collect on Debt. The debtor borrowed $3.5 million from a creditor, with the debt reduced to a promissory note via which the debtor granted the creditor a deed of trust on tracts of real estate and a lien on all of the debtor’s personal property. Two years later, the creditor held a non-judicial foreclosure sale of the debtor’s real property. However, the creditor did not seek a deficiency judgment against the debtor within 90 days as required under state (NE) law (Neb. Rev. Stat. §76-1013). The debtor later filed Chapter 11 bankruptcy, and the creditor motioned to dismiss the bankruptcy case as a bad-faith filing and relief from the automatic stay in order to enforce its lien in other collateral. The court noted that Neb. Rev. Stat. §76-1013 allowed only non-judicial efforts to collect and bars “an action” to recover the balance due under an obligation for which a trust deed has been given as security. The court determined that “an action” meant “legal suit” and not nonjudicial foreclosure. The court held that the creditor was seeking a judicial remedy (dismissal of the debtor’s bankruptcy) as a way of preventing the debtor from reorganizing in an attempt to collect on the debt. That action is barred by Neb. Rev. Stat. §76-1013. In addition, the debtor’s acknowledgement of the debt did not eliminate the statutory provision. The motion to dismiss the bankruptcy case was denied, and the matter was set for trial on the issue of relief from the automatic stay. In re JN Medical Corporation, No. BK17-80174, 2017 Bankr. LEXIS 1372 (Bankr. D. Neb. May 17, 2017).

Posted May 3, 2017

Vehicles Are Not Exempt From Creditors and Debtors Allowed to Identify Portion of Farmland That is Homestead. The debtors, a married couple, claimed three pickup trucks and an all-terrain vehicle as farming/ranching vehicles/implements as part of their bankruptcy case. They also claimed 170.44 acres (which included their home) as an exempt homestead. The tract was part of a 315.58 tract. The farmland, pickups and ATV were all leased to their farming entities – a farm partnership and an LLC. A creditor (bank) objected to the exemptions due to the leases. The debtors elected to use state (TX) exemption provisions. Under TX law, the debtors bore the burden to establish their homestead rights, and the court determined that the debtors did establish the homestead character of up to 200 acres of the farm as having been used for farming purposes. On the creditor’s claim that the debtors’ homestead rights had been terminated, the court noted that the lease of the farmland was pursuant to an oral year-to-year lease with stated plans to continue the arrangement for at least the next three years which meant that the debtors had given up possession of the property to the partnership. However, the court determined that the lease was only temporary based on credible testimony that once the senior generation retired from farming, the partnership would be terminated and the debtors would regain personal control and possession of the land. Accordingly, the homestead associated with the farmland was allowed. While the creditor argued that the debtor had reduced the size of the homestead exemption to 100 acres due to his divorce and single status, but the court held that the creditor was unable to prove abandonment of the homestead to the acreage exceeding 100 due to the divorce based on the lack of evidence. As for the pickups and ATV, the court sustained the creditor’s objection to the debtors’ claiming them as exempt. The debtors did not use the vehicles for farming purposes. The court denied the creditor’s objection to the debtors’ homestead exemption claim, but directed the debtors to amend their claim to specifically identify what part of 315.58 acres constitutes their 170.44-acre exemption. In re Pearson, No. 16-50248-rlj12, 2017 Bankr. LEXIS 1151 (Bankr. N.D. Tex. Apr. 26, 2017).

Posted February 18, 2017

Creditors Establish Cause to Dismiss Chapter 12 Case. In 2012, the debtors filed Chapter 12 bankruptcy for their dairy operation. After a year of negotiations, the debtors, creditors and bankruptcy trustee entered into a stipulation concerning the terms of the Chapter 12 plan, and the court subsequently approved the reorganization plan. A few months later, the debtors motioned to modify the confirmed plan to cure an arrearage. A modified plan was subsequently confirmed by the court. The death of the primary operator of the dairy had a significant impact on the dairy’s operation and the debtors became delinquent in their plan payments. The trustee motioned to dismiss the case and the creditors filed motions to enforce their rights under the stipulation. The court granted the debtors additional time to file a modified plan under which the debtors would reduce the size of the milking herd, pay the sale proceeds directly to one creditor and cure the delinquent payments over the balance of the plan. The issue before the court was whether the creditors established cause for dismissal of the case and, if not, whether the modified plan could be confirmed. The court noted that the debtors had breached the terms of the stipulation on several counts including the sale of cows without a creditor’s permission and failure to pay over sale proceeds to a creditor. In addition, the court noted the patience and flexibility of the creditors to work with the debtors and that the stipulation was a key element of the approval of the bankruptcy plan. Accordingly, the court determined that the creditors had established cause to dismiss the cases in accordance with 11 U.S.C. §1208(c)(6) based on the breach of the stipulation agreement. In re Milky Way Organic Farm, No. 12-10742, 2017 Bankr. LEXIS 417 (Bankr. D. Vt. Feb. 14, 2017).

Posted February 10, 2017

State Pension Plan Is Not An Asset for Purposes of Insolvency Calculation. The petitioner was a police officer who retired and began receiving monthly distributions from his state pension plan. The plan withheld federal income tax payments, and the plan benefits could not be converted into a lump-sum cash amount, assign the interest, sell the interest or borrow against or from the plan. Under the plan, if the petitioner died his spouse would receive payments under the plan until her death. In the tax year in question, a creditor cancelled about $450,000 of debt that was secured by real estate that was not the petitioner’s principal residence. The debt discharged included $30,000 of interest. Normally, cancelled debt is included in gross income under I.R.C. §61(a)(12), but an exclusion exists for any payment of a liability that would have given rise to a deduction. Thus, the petitioner did not include the forgiveness of $30,000 of interest in gross income and did not deduct it on the return. The IRS conceded that point before trial. In addition, I.R.C. §108(a)(1)(B) excludes from gross income cancelled debt to the extent the taxpayer is insolvent at the time the debt is discharged. The petitioner calculated his insolvency to be $346,418 and included the balance of the principal debt discharged of $72,178 in gross income. The petitioner arrived at the value by not including the value of the pension in the calculation of insolvency. The IRS claimed that the full amount of the principal debt forgiveness of $418,596 was cancelled debt income on the basis that the value of the petitioner’s pension should be included in income. If the petitioner was required to include his interest in the pension plan in the calculation of insolvency, the petitioner would not be insolvent and the full principal amount discharged would be included in income. Before trial, revaluations of other assets resulted in an insolvency computation of $293,308 immediately before the discharge if the pension were not included in the insolvency computation. The court determined that the pension was not included in the insolvency computation because the pension did not give the petitioner the ability to pay an immediate tax on income from the canceled debt and, therefore, was not an asset within the meaning of I.R.C. §108(d)(3). Scheiber v. Comr., T.C. Memo. 2017-32.

Posted February 7, 2017

Creditor Can’t Deny Debtor a Homestead Exemption. The debtor sought to carve-out a one-half acre tract that he owned as his homestead after the creditor sought to have the debtor’s property sold at auction. The creditor claimed that the debtor’s ability to do so was subject to local zoning ordinances and rules with respect to property division. Because the debtor’s property could not be subdivided and be in compliance with controlling ordinances the creditor claimed that the debtor should not be entitled to the homestead exemption. The trial court allowed the exemption after accepting the debtor’s plat designation and the creditor appealed. On appeal, the court noted that Iowa Code §561.3 specifies that homestead rights are “jealously guarded” by the law and are a creature of public policy. In addition, the court determined that there was no “special declaration” that the legislature had made that anything a local government did to control the division of property would have any impact on the homestead right. The court accepted the debtor’s homestead plat as the designated homestead. First American Bank v. Urbandale Laser Wash, L.L.C., No. 16-0081, 2017 Iowa App. LEXIS 19 (Iowa Ct. App. Jan. 11, 2017).

Posted February 6, 2017

Homestead Exemption Not Limited to Debtor’s House. The debtor filed Chapter 7 and listed on his bankruptcy schedules a 19-acre rural tract as his homestead valued at $695,000. The tract included the debtor’s home a detached garage or shop building with an upstairs room, a second small home and a pole barn used for storage. The smaller house had been built for the debtor’s in-laws, but after their deaths the debtor rented it out with an intent to ultimately move his mother to it. The home and outbuildings are located closely to each other with a small pond also located nearby. All of the buildings are within walking distance of each other. The debtor does not use any of the 19 acres for farming as he owns no livestock and performs no crop farming. The debtor was in default on two mortgages on the entire tract. The creditor (bank) objected to the debtor claiming the entire tract and associated building as exempt as a homestead. The state in which the bankruptcy was filed (OK) had opted out of the federal exemptions and, under OK law the homestead must be the debtor’s principal residence and up to 160 acres of land which may be in one or more parcels. The court noted that the homestead exemption is to be liberally construed and that the property sought to be a homestead be used in some way as the debtor’s homestead. The court also noted that the homestead is not limited to a single dwelling, but “…embraces everything connected therewith which may be used and is used for the more perfect enjoyment of the home...”. Based on this standard, the entire property was exempt as the debtor’s homestead. In re Costigan, No. 16-80583-TRC, 2017 Bankr. LEXIS 223 (Bankr. E.D. Okla. Jan. 25, 2017).

Posted February 5, 2017

Secured Creditor Not Entitled to Default Rate of Interest. A secured creditor filed an application for post-petition interest and fees. The debtor had executed three notes in favor of the creditor and defaulted on all three notes. The total amount due on the notes was approximately $1.5 million. The notes were secured by the debtor’s farm which was worth $2 million. Thus, the creditor was oversecured. The notes had a contractual default rate of interest specified at 5 percent (contract rate plus 5 percent). While 11 U.S.C. §506(b), specifies that a fully secured creditor is entitled to interest on its claims, the court determined that doesn’t necessarily mean the default rate. Instead, a presumption arises that the contractual rate of interest should be used, but that presumption can be rebutted based on equitable considerations. Here, the court noted, the evidence demonstrated that the evidence showed that the debtor had rebutted the presumption. Using such interest would effectively double the interest rate on each of the three notes. The creditor’s risk of nonpayment has been low throughout the debtor’s bankruptcy case because it is oversecured, and application of the default rate would decrease and possibly eliminate payments to the unsecured creditors. Thus, the secured creditor’s application was denied. In re Perkins, No. 16-10383(1)(12), 2017 Bankr. LEXIS 276 (Bankr. W.D. Ky. Feb. 1, 2017).

Posted January 16, 2017

Debtor Satisfies Income and Debt Test For Chapter 12 Eligibility. The debtor operated a farming business in partnership with her spouse and her parents. The debtor was a partner in two farm partnerships. Both partnerships filed Chapter 11, and the debtor substantially liquidated all of the assets in the two partnership cases. The court then dismissed both cases. The debtor still held debts based on her partnership liabilities and individual guarantees. Because of the liquidation of the equipment and real estate, the debtor incurred significant tax liabilities for the tax year ending 2015. The debtor and he son then each filed their own individual Chapter 12 cases to handle the remaining partnership debts. The debtor put a Chapter 12 plan together and the creditor objected to the debtor’s amended plan on the basis that the debtor was not a “family farmer” and because the debtor’s aggregate debt exceeds the Chapter 12 debt limit of $4,031,575. The creditor claimed that the debtor could not include the pass-through income from the farming partnerships of which she was a partner on the basis that they were separate and distinct from her farming operation, but provided no support for that position and the court rejected it. As a result, the court determined that the debtor met the Chapter 12 eligibility requirement of 11 U.S.C. §101(18) by having more than 50 percent of the debtor’s income arise from farming operations in either 2015 or in each of 2014 and 2013. On the creditor’s excess debt level claim, the creditor claimed that the debtor’s total debt amount should include claims listed on the debtor’s schedules even though they weren’t backed-up with a proof of claim. The creditor also sought to include the federal tax liability from the sale of land and equipment by the partnerships. While the court held that federal taxes were to be included when calculating the debtor’s total debt for purposes of the statutory limit, the debtor was still beneath the aggregate debt limit because at the time the petition was filed (before the proofs of claim were filed), the aggregate debt did not include any proofs of claim filed post-petition and the debtor’s schedules were not fraudulently filed. In re Perkins, No. 16-10383(1)(12), 2016 Bankr. LEXIS 4440 (Bankr. W.D. Ky. Dec. 22, 2016).

Some Farm Debt Not Dischargeable. The debtor was a row crop farmer that had been in the farming business for all of his adult life, but started experiencing financial difficulties in later 2012 and early 2013 and became overdrawn on two bank accounts. In the spring of 2013, the debtor approached an input supplier to buy inputs for the 2013 spring planting. The debtor had an existing line of credit with the supplier which he had paid off in full from crop proceeds at harvest time. The suppler advised the debtor that he would need to obtain financing through a financial services firm and gave the debtor a loan application. The signed loan application showed that the debtor had a positive net worth and the loan was approved which allowed the debtor to buy inputs up to the amount allowed by the loan. The debtor then also bought additional inputs under the existing line of credit (open account) with the supplier, and then applied for an additional credit line for the next year’s crops. The new credit line application was denied after a complete analysis of the debtor’s finances which revealed that, at the time of the initial loan application, the debtor actually had a negative net worth. The fall 2013 crop harvest and crop prices were sub-par and the debtor defaulted on the loans and filed Chapter 7. The supplier wanted the loans to be declared non-dischargeable in accordance with 11 U.S.C. §523(a)(2)(B) due to fraud. The debtor asserted that he did not properly understand certain terms of the loan application form, but the court rejected the debtor’s explanation. The court held that the credit extended under the loan application was non-dischargeable, but that the amount under the open account was dischargeable based on the fact that the debtor made no representations to the supplier that were false. In re French, No. 15-40758, 2016 Bankr. LEXIS 4125 (Bankr. W.D. Ky. Dec. 1, 2016).

Posted January 4, 2017

State Law Mediation Inapplicable to Farm Bankruptcy. The plaintiffs bought an 80-acre tract and secured the purchase with a mortgage on the five acres containing their homestead. The tract was a single 80-acre tract due to county zoning that required each tract to be at least 10 acres. Twenty years later, the plaintiffs obtained a mortgage from the defendant that was secured by the 75 acres that didn’t include their homestead. Two years later the plaintiffs filed bankruptcy and included the defendant’s mortgage on their schedule of debts. Foreclosure proceedings later began, and the property was sold at sheriff’s sale with a one-year redemption period running from the time of sale. After the redemption period, the defendant got the county to assign separate property identification numbers to a 70-acre parcel and an additional 5-acre parcel that surrounded the homestead parcel so that the defendants could sell the 70-acre tract and have a remaining 10-acre tract to comply with county zoning. The defendant offered to give the 5-acre tract to the plaintiffs, but they refused and also refused to vacate upon receiving an eviction notice. The trial court denied the plaintiffs’ motion for a temporary injunction and dismissed the complaint. The trial court ruled that the Minnesota Farmer-Lender Mediation Act (Minn. Stat. §§583.20-.32) did not apply to the foreclosure. The appellate court affirmed because the MFLA does not apply by its terms to any debt that has been listed as a scheduled debt of a debtor in bankruptcy and the defendant filed a proof of claim in the bankruptcy proceeding. Thus, the debt was not subject to mediation and, as a result, the defendant did not need to show that the plaintiffs’ annual farm income was less than $20,000. Also, because the property securing the mortgage was agricultural land without a residential dwelling, the plaintiffs were not entitled to notice of foreclosure prevention counseling services. Grimlie v. Agstar Financial Services, No. A16-0877, 2016 Minn. App. Unpub. LEXIS 1155 (Minn. Ct. App. Dec. 27, 2016).

Posted November 25, 2016

Notice of Foreign Judgment May Not Have Created a Judicial Lien on Tenancy-by-the-Entirety Property. A creditor obtained a judgment against the debtor’s business for approximately $765,000. The debtor’s wife was not included in the judgment, but they owned another property as tenants by the entirety. The creditor tried to get a judicial lien on the tenancy by-the-entirety property. Later, the debtor filed Chapter 7 and the wife did not join. The tenancy-by-the-entirety property was listed in the debtor’s schedules and a $15,000 homestead exemption was claimed under Mo. Rev. Stat. §513.475 and 11 U.S.C. §522(b)(3)(B). The debtor moved to avoid the creditor’s lien under 11 U.S.C. §522(f)(1) on the basis that it impaired the homestead exemption. The bankruptcy court granted the motion, and the Bankruptcy Appellate Panel affirmed. The creditor argued that the lien could not be avoided because it had not yet attached to the tenancy-by-the-entirety property under Missouri law. However, 11 U.S.C. §522(f) provides that the debtor "may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption...". Based on Ferry v. Sanderfoot, 500 U.S. 291 (1991), the Bankruptcy Appellate Panel held that the term "fixing" was intended by Congress to be less restrictive than the term "attachment," and would include a lien which is not yet, and may never be, enforceable. Thus, the Bankruptcy Appellate Panel affirmed the bankruptcy court and held that the lien could be avoided. On further review, the Eighth Circuit reversed. The appellate court noted that because the property at issue was titled in the debtor and his spouse as tenants-by-the-entirety, neither spouse had a separate interest in the property subject to execution, and that a judgment against one spouse does not constitute a lien on tenancy by the entirety property. Thus, a question remained whether the creditor had a recognizable lien in the tenancy by the entirety property in the first instance, and remanded the case to the bankruptcy court to address the matter in the first instance. In re O’Sullivan, No. 16-1526, 2016 U.S. App. LEXIS 20389 (8th Cir. Nov. 14, 2016).

Posted November 13, 2016

Farm Supply Business Doesn’t Get Priority Claim for Goods Delivered to Farm Partnership Within 20-Days of Partner’s Petition. A father and son operated a farm together as a general partnership. A farm supply dealer (creditor) sold and delivered (in the ordinary course of business) $45,466.00 worth of farm supplies to the partnership within the 20-day period immediately preceding the father filed Chapter 12 bankruptcy. Thus, the creditor held an unsecured claim in the debtor’s bankruptcy case. The creditor motioned to have the claimed allowed as an administrative expense under 11 U.S.C. §503(b)(9) which would give it priority over all other unsecured claims. However, the court noted, to get that status, the creditor had to establish that the goods were sold to the debtor and received by the debtor within the 20-day period in the ordinary course of business. Here, the goods were sold and delivered to the partnership. The joint and several liability theory of partnership law did not convert the debt to a personal obligation of the debtor due to the adoption by the state (MS) of the Revised UCC and the Revised Uniform Partnership Act. Under those revisions, a partnership is a distinct entity from its members and is not a co-owner of partnership property and has no interest in partnership property. Because the parties stipulated that the supplies were delivered to the partnership, the debt did not satisfy the elements of an administrative claim and remained a general unsecured claim in the debtor’s bankruptcy case because the debtor, as a general partner, is personally, jointly and severally liable for the debt. In re Spencer, No. 16-11722-JDW, 2016 Bankr. LEXIS 3867 (Banrk. N.D. Miss. Nov. 1, 2016).

Posted November 5, 2016

Emotional Distress Insufficient For Award of Damages Against IRS. The plaintiffs, a married couple, filed Chapter 13 in late 2012. The filing triggered the automatic stay of 11 U.S.C. §362(a). However, on four separate occasions, the IRS sent notices to the plaintiffs demanding payment for back taxes in violation of the automatic stay. The plaintiffs claimed that the IRS notices caused them significant emotional harm. The bankruptcy court agreed, and awarded the plaintiffs emotional distress damages under 11 U.S.C. §362(k). On appeal, the court reversed. The court did not believe that the evidence was sufficient to support an award of damages for emotional distress due to a lack of causal connection. Also, the court also determined that sovereign immunity bars claims against the defendant that seek emotional distress damages (in the absence of direct economic damages) under 11 U.S.C. §362(k). Hunsaker v. United States, No. 6:16-cv-00386-MC, 2016 U.S. Dist. LEXIS 145460 (D. Ore. Oct. 20, 2016).

Posted September 11, 2016

State Law Bars Bars Court From Requiring Bankrupt Debtor To Use Inheritance To Pay Wife’s Creditors. The debtors, a married couple, filed Chapter 13 bankruptcy. The husband received a $221,510.53 inheritance 34 months into the Chapter 13 reorganization plan. They proposed to use a portion of the funds to pay off all of the husband’s debts (including the mortgage on the couple’s home) and keep the rest of the funds without paying on any of the debts of the wife. The result would be to leave about $12,000 of the wife’s debts unpaid. The bankruptcy trustee objected on the basis that all claims should be paid from the inheritance. The court noted that there was no controlling authority in the jurisdiction (MO) on the issue of whether a post-petition inheritance was property of the bankruptcy estate, but also determined that state law governs the nature of a property interest. On that point the court noted that MO. Rev. Stat. §451.250.1 specifies that an inheritance is the separate property of a spouse that receives it and cannot be taken by process of law to pay the debts of the other spouse. Thus, the question is whether a joint bankruptcy filing of the spouses alters the outcome of the state law provision. The court noted that in In re True, 285 B.R. 405 (Bankr. W.D. Mo. 2002), the court held that a farm was not available to pay the debtor-spouse’s separate debts under §451.250.1 where the farm was titled exclusively in the non-debtor spouse’s name. Thus, in the present case, the inheritance was the separate property of the husband and was included in the bankruptcy estate for payment of debts for which he alone was responsible. The court also held that the inheritance constituted a substantial change in circumstances that required an amended plan be filed. Under 11 U.S.C. §1322(a)(1), the plan must provide for the submission of all or such portion of future earnings or other future income of the debtor to the trustee’s supervision and control. The court held that the proposal to commit the inheritance to pay the husband’s creditors in full complied with that requirement, given that the inheritance is the husband’s separate property. The proposal was also not in bad faith because the wife’s creditors would not be entitled to be paid from the husband’s inheritance if the couple were not in bankruptcy. In re Portell, No. 12-44058-13, 2016 Bankr. LEXIS 3301 (Bankr. W.D. Mo. Sept. 9, 2016).

Posted July 16, 2016

Chapter 12 Case Can’t Be Converted To Chapter 11. The debtor filed a Chapter 12 petition along with schedules showing aggregate debt of almost $4.5 million. A creditor filed a motion to dismiss the debtor’s Chapter 12 petitioner because the debtor’s aggregate debt exceeded that allowed by Chapter 12 - $4,031,575. The debtor then filed a motion to convert the Chapter 12 case to a Chapter 11, which has no limit on a debtor’s aggregate debt. The debtor claimed that conversion to Chapter 11 was permissible because 11 U.S.C. §1208 doesn’t expressly bar conversion from Chapter 12 to Chapter 11, and because the Chapter 12 had been filed in good faith, conversion would not prejudice creditors, and conversion would be equitable. The creditor objected to conversion on the basis that there is no statutory authority for such conversion. The court noted that the issue had not been addressed by the First Circuit, but that other Circuits were split on the issue. The court examined the legislative history of Chapter 12 to note that early draft versions of Chapter 12 legislation contained limited authority to convert a Chapter 12 to Chapter 11 or 13, the final conference report did not contain any allowance for good faith conversion. Thus, based on a plain reading of the statute, the court denied conversion. In re Colon, No. 16-0060, 2016 Bankr. LEXIS 2344 (Bankr. D. P.R. Jun. 21, 2016).

Chapter 12 Case Converted To Chapter 7 Due to Debtor’s Fraud. The debtor leased farm property that the debtor used to raise hay. Upon lease termination, the debtor was ordered to vacate the leased premises. Immediately after doing so, the debtor filed Chapter 12 and, eight days later, entered into a contract for the sale of hay to be harvested from the formerly leased property to a buyer. The debtor received a deposit of $135,000 from the buyer, but did not notify the buyer that the debtor’s lease had been terminated or that the debtor had filed Chapter 12. The buyer moved to convert the debtor’s Chapter 12 case to Chapter 7 on the grounds of fraud, and the bankruptcy court granted the motion. On appeal, the district court affirmed on the basis that the bankruptcy court properly applied 11 U.S.C. § 1208(d) in concluding that the debtor had committed fraud “in connection to the case.” The district court also found that the bankruptcy court did not clearly err in making its factual findings insomuch as the record clearly established that the debtor failed to inform the customer about material information. On further review, the appellate court affirmed. In re Clark, No. 14-35242, 2016 U.S. App. LEXIS 10835 (9th Cir. Jun. 15, 2016), aff’g., 2014 U.S. Dist. LEXIS 28375 (D. Idaho Mar. 4, 2014), aff’g., 525 B.R. 107 (Bankr. D. Idaho 2014).

Posted April 8, 2016

Administrative Expense Claim for Maintenance and Upkeep of Property as Hunting Preserve Denied. The debtor applied for an administrative expense claim of $53,255.92 to be paid ahead of the unsecured creditors for upkeep and maintenance of real estate and animals on the bankruptcy estate property so that the property could be maintained as a hunting preserve for deer and wild hogs. The debtor submitted charts listing expenses and some invoices, but no corresponding documentation showing payment of the expenses. The debtor had time records showing time spent maintaining the property. The bankruptcy trustee also allowed the debtor to stay on the property rent-free if he maintained it. Based on this evidence, the court ruled that the debtor had failed to establish entitlement to the administrative expense claim by a preponderance of the evidence. In re Brooks, No. 13-10860, 2016 Bankr. LEXIS 1031 (Bankr. S.D. Ga. Mar. 31, 2016).

Chapter 12 Debtor Allowed To Assume Executory Leases. The debtor had farmed since 1967 on his mother’s property and later on his own property as well as property he leased from other persons. He also raised cattle and owned an auto repair business that he leased to a third party to operate a muffler shop. The debtor was also the co-personal representative of his mother’s estate. A creditor of the debtor sued him when he failed to pay for crop inputs. The creditor obtained a judgment and has a lien on his property. The debtor filed Chapter 12 and sought to assume executory contracts and leases he had with the Farm Service Agency (FSA), a farm landlord, his mother’s estate and the muffler shop. He gave uncontroverted testimony that the assumptions would benefit the bankruptcy estate, based on his business judgment. The court determined that the debtor’s judgment, based on the facts, was not manifestly unreasonable. In re Miller, No. 15-61159-12, 2016 Bankr. LEXIS 1046 (D. Mont. Apr. 1, 2016).

Posted April 4, 2016

Chapter 12 Plan Confirmable If It Is Amended In Accordance With Court Directions. A custom farming operation filed Chapter 12 and five months later filed an amended plan. The managers of the operation also filed Chapter 12 and an amended plan on the same dates. The operation had been custom harvesting crops in New Mexico, Texas and Colorado for approximately 20 years at various rates. The lack of recordkeeping by the managers troubled the major creditor. The managers also operated a farming business on 960 acres of tillable land in New Mexico and sharecropping arrangements with neighbors. A drought in 2012-2014 caused substantial financial problems and they increased their line of credit with the major creditor significantly at a 5 percent interest rate. The debt exceeded the value of the farm, but the major creditor remained over-secured with a loan-to-value ratio of 64 percent. Additional existing collateral could reduce that ratio to 59 percent. The managers proposed a plan under which they would sell a newer tractor, and use the funds to pay down the line of credit partially or for payment of farming expenses. All disposable income would be committed to the plan for five years and the creditor could retain all liens and receive minimum payments of $45,000 annually. If the creditor is not paid in full over five years, then the debtors would liquidate collateral including the farm. The creditor objected to the plan based on the feasibility requirement of 11 U.S.C. §1225(a)(6). The court approved the plan, subject to modification by the court – increasing the annual payment to the major creditor so that the loan could be amortized ($112,000 annually); quarterly reporting to the major creditor and the trustee with sufficient detail, and; payment to other creditors. In re Bright Harvesting, No. 15-11178 tr12, 2015 Bankr. LEXIS 4097 (Bankr. D. N.M. Dec. 4, 2015).

Posted April 1, 2016

Court Dismisses Chapter 12 Bankruptcy For Futility. The debtor filed a Chapter 12 plan and three amended plans. Two large creditors and the trustee objected to each plan, and none of the plans were confirmed. Finally, the creditors sought dismissal of the case, alleging unreasonable delay prejudicial to the creditors and the lack of a reasonable likelihood of rehabilitation. The debtor sought confirmation or, in the alternative, leave to amend to file a fifth plan. The court denied confirmation of the plan and leave to amend. Instead, the court dismissed the case, finding that a reorganization was objectively futile. The debtor could not afford to make his payments in the proposed plan, even though the terms were not commercially reasonable at the proposed interest rate. Any adjustment to the interest rate would make the payments even higher and the debtor even less able to make them. The proposed plan failed to meet the requirements of 11 U.S.C. §1225(a)(5) and (6). On appeal, the court affirmed. The appellate court upheld the denial of the debtor's third amended plan for failure the prove asset values and errors in financial projections and the statement of current conditions. The court also determined that the debtor should not be allowed to file a fourth amended plan for lack of support of current financial condition. The case was properly dismissed because a confirmable plan was not produced within a year of the petition. The debtor filed another case a month later and creditors objected to confirmation and moved to dismiss the case. The court considered the prior rulings and noted that the debtor had made some progress in leadership and bookkeeping and had liquidated some real estate with the proceeds paying down a large portion of the debt. However, the court ruled that the debtor still had not put together a viable reorganization plan that could be confirmed. The court dismissed the case without leave to amend. In re Keith's Tree Farms, No. 13-71316, 2014 Bankr. LEXIS 4243 (Bankr. W.D. Va. Oct. 3, 2014), aff'd. sub. nom., Keith's Tree Farms v. Grayson National Bank, et al., 535 B.R. 647 (W.D. Va. 2015); new case, In re Keiths’ Tree Farm, No. 15-71262, 2016 Bankr. LEXIS 851 (Bankr. W.D. Va. Mar. 18, 2016).


Commercial Fishing Business Not Eligible For Chapter 12. The debtor is an LLC that owns a fishing vessel that it uses in its commercial fishing business in Alaska. The debtor’s member entity had also filed Chapter 12, but that case was dismissed due to the debtor’s willful failure to comply with the orders of the bankruptcy court. A creditor held a secured lien against the debtor’s fishing vessel and sought dismissal of the debtor’s Chapter 12 case on the grounds that the debtor did not qualify as a “family fisherman with regular income” under 11 U.S.C. §109(f) and that cause existed for dismissal. In May of 2015, the debtor’s member and one of its members filed for Chapter 12 relief. Those cases were jointly administered and resulted in an adequate protection order. The same day that the adequate protection order was issued, the debtor filed for Chapter 12. The jointly administered cases were dismissed with prejudice and the debtors were barred from seeking bankruptcy relief for 180 days. The debtor’s case proceeded with the creditor motioning to dismiss the case on the basis that the debtor was ineligible for Chapter 12 as not being a family fisherman with regular annual income, and because the debtor unreasonably delayed providing critical information, mismanaged assets and had no reasonable prospect of financially reorganizing. The debtor claimed that it was eligible for Chapter 12 because even though its sole owner was a corporate entity, the court should attribute the ownership of the individual members of the entity directly to the debtor. The debtor also claimed that it had “regular annual income” because it’s income and expenses were reflected on the tax return of the member entity. While the court noted that the statute (11 U.S.C. 101(19A)) clearly required the debtor to be an individual or an entity with a majority of the interests owned by one family, the court noted that it could overlook the intervening corporate member entity and attribute the ownership of the members of the member entity directly to the debtor. However, the court noted that doing so would be inequitable because doing so would grant relief to the same individuals who violated the court’s orders in the previous cases. The court also noted that the debtor had failed to establish that it had regular income by not providing any tax returns showing regular income and its schedules, statements and operating reports did not establish any regular income that would allow the debtor to make plan payments. The court also held that cause existed for dismissal of the Chapter 12 case because the debtor’s reorganization plan was entirely contingent on sale of the fishing vessel for $1.2 million which was highly speculative. The creditor’s motion to dismiss the debtor’s case was granted. In re Victorious, No. 15-10386, 2016 Bankr. LEXIS 488 (Bankr. D. Vt. Feb. 17, 2016).


Farm Debtor Entitled to State Law Exemption. The debtor filed Chapter 12 bankruptcy and listed the bulk of his crop sale proceeds on his bankruptcy schedules as exempt "farm earnings" in accordance with Minn. Stat. Sec. 550.37(13)(exemption for disposable earnings). The crop sales were evidenced by checks made jointly payable to the debtor and several secured creditors. A creditor and the bankruptcy trustee objected to the claimed exemption. Disallowing the claimed exemption would mean that more funds would be available to pay unsecured creditors. A creditor later claimed that because the checks had ultimately been turned over to another creditor that the issue was moot because the debtor no longer had any interest in the funds. The bankruptcy appellate panel, reversing the bankruptcy court, disagreed. The bankruptcy appellate panel held that the turnover of the checks to a creditor did not constitute a determination of what amount would be paid to unsecured creditors. Thus, the issue of whether the state law exemption provision applied was not moot. In the later court case on the matter, the bankruptcy court held that the debtor could exempt the farm earnings under Minn. Stat. §550.37, sudb. 13. The bankruptcy court held that exemption statutes were to be applied liberally in the debtor’s favor, and that farm proceeds constituted “earnings” under the exemption statute. The allowance of the farm proceeds as exempt did not, the court determined, violate the Minnesota Constitution because Min. Stat. §571.922 provided criteria to objectively determine a limit on a reasonable amount of property that could be exempted, and the amount of farm proceeds that could be exempt required an application of that statutory procedure. In re Seifert, No. 13-60831, 2016 Bankr. LEXIS 241 (Bankr. D. Minn. Jan. 25, 2016). Prior history, In re Seifert, 533 B.R. 265 (B.A.P. 8th Cir. 2015).


Digital Photos and Website Eligible for Tools-of-the-Trade Exemption. The debtors, a married couple, operate a photography business that sells digitally manipulated landscape photographs to the public. The husband was also employed at a separate photo business. The wife handled all of the accounting, some promotional work and most purchasing decisions for the couple's business. The debtors filed a joint case, and sought to exempt their digital images and website as a tool-of-the-trade under Kan. Stat. Ann. Sec. 60-2304(e). The trustee objected on the basis that the images and website were not tangible property as contemplated by the statute. The bankruptcy court disagreed with the trustee, noting many books, documents and "tools" in today's electronic era are digital and that only the specifically listed items in the statute need be tangible property. In addition, the court noted that the debtor's wife could exempt the digital images and website herself as tools of the trade of her primary occupation. The wife had a sufficient ownership interest in the couple's business. On further review, the district court affirmed, noting that Kansas law does not limit the tools-of-the trade exemption to means of production or an otherwise narrow definition of the phrase. Rather, the court determined, the “use” of the item(s) in question is the key issue. Based on the evidence that the images served an integral purpose as a business card or portfolio to attract business for the company, the website and images were exempt as tools-of-the trade. The court also affirmed the bankruptcy court’s determination that the debtor’s wife was entitled to the exemption. In re Macmillan, No. 15-4008-KHV, 2015 U.S. Dist. LEXIS 166379 (D. Kan. Dec. 11, 2015), aff’g., In re Macmillan, No. 14-40965, 2015 Bankr. LEXIS 61 (Bankr. D. Kan. Jan. 9, 2015).