First Nat'l Bank of Durango v. Woods (In re Woods)

• Decision Date: 19 February 2014
• Docket Number: No. 12–1111.,12–1111.
• Citation: 743 F.3d 689
• Parties: In re Reson Lee WOODS, a/k/a Lee Woods, d/b/a Bar LS Farms, f/d/b/a Bar LS Properties Inc.; Shaun K. Woods, a/k/a Shaun Woods, d/b/a Bar LS Farms, f/d/b/a Bar LS Properties Inc., Debtors. First National Bank Of Durango, Appellant, v. Reson Lee Woods; Shaun K. Woods, Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

743 F.3d 689

In re Reson Lee WOODS, a/k/a Lee Woods, d/b/a Bar LS Farms, f/d/b/a Bar LS Properties Inc.; Shaun K. Woods, a/k/a Shaun Woods, d/b/a Bar LS Farms, f/d/b/a Bar LS Properties Inc., Debtors.First National Bank Of Durango, Appellant,

v.Reson Lee Woods; Shaun K. Woods, Appellees.

No. 12–1111.

United States Court of Appeals,Tenth Circuit.

Feb. 19, 2014.

Garry R. Appel, Appel & Lucas, P.C., Denver, Colorado, for Appellant.

Cheryl A. Thompson, Thompson Brownlee, Vail, Colorado (Daniel J. Lowenberg, Mountain Law Group, L.L.C., Montrose, Colorado, with her on the brief), for Appellees.

Before HOLMES, O'BRIEN, and MATHESON, Circuit Judges.

HOLMES, Circuit Judge.

Appellant First National Bank of Durango (“First National Bank”) appeals from the Bankruptcy Appellate Panel's (“BAP's”) decision affirming the bankruptcy court's confirmation of the Chapter 12 bankruptcy plan of Appellees Reson and Shaun Woods (“Debtors”). Although First National Bank raises several issues on appeal, we only reach the first: whether Debtors are permitted to seek relief under Chapter 12 as “family farmers.” In deciding this issue, we are presented with a question of first impression for our court—namely, when does a debt “for” a principal residence “arise[ ] out of a farming operation”? See11 U.S.C. § 101(18)(A). We conclude that a debt so arises if it is directly and substantially connected to any of the activities constituting a “farming operation” within the meaning of 11 U.S.C. § 101(21). More specifically, when the debt at issue is loan debt, as here, we conclude that an objective “direct-use” test serves as the optimal vehicle for discerning when the direct-and-substantial-connection standard is satisfied. That is, if the loan proceeds were used directly for or in a farming operation, the debt “arises out of” that farming operation. This was not the test applied by the bankruptcy court (or the BAP).

Because we conclude that the bankruptcy court did not apply the proper legal standard and test in its analysis of Debtors' eligibility for Chapter 12 relief, we deem it appropriate and prudent to remand for that court to apply the correct law to the facts of this case. Thus, we vacate the bankruptcy court's judgment and remand the case to the bankruptcy court for further proceedings.

I

Debtors are a husband and wife who, in 2007, purchased farmland in southwestern Colorado on which to run their hay-farming operation. Until they filed for bankruptcy in November 2010, Debtors accumulated various debts, some of which were related to their farming operation and others of which were not. One such debt is a $480,000 loan Debtors obtained from First National Bank. Approximately $284,000 of this loan was used to pay off a loan from another bank that was obtained to purchase Debtors' farmland. The parties do not dispute that this portion of the debt “arises out of” a farming operation; nor do they dispute that the majority of the remaining loan proceeds—what we call the “construction loan”—were used to construct Debtors' principal residence on the farmland.

It is the construction loan that is our primary focus. This is because Debtors petitioned for Chapter 12 relief as family farmers. A “family farmer” is, inter alia, an individual or individuals

not less than 50 percent of whose aggregate noncontingent, liquidated debts (excluding a debt for the principal residence of such individual or such individual and spouse unless such debt arises out of a farming operation), on the date the case is filed, arise out of a farming operation owned or operated by such individual or such individual and spouse....

11 U.S.C. § 101(18)(A). From the outset of this case—and again on appeal—First National Bank has maintained that, if the construction loan is excluded from the debt total because it does not “arise out of” a farming operation, less than fifty percent of Debtors' aggregate noncontingent, liquidated debts “arises out of” a farming operation, which would preclude Debtors from qualifying as family farmers. And, if Debtors are not “family farmers,” they cannot seek relief under Chapter 12. See id. § 109(f).

The bankruptcy court disagreed with First National Bank. It concluded that the construction loan should not be excluded from the debt total under § 101(18)(A) because it “ar[ose] from farm operations.” Aplt.App. at 797 (Hr'g Tr., dated May 10, 2011). In reaching this conclusion, the bankruptcy court found that the residence was “an integral part of the farm operation in [the] sense that” (1) the farming operation's office and records were located in the residence; and (2) the residence was located on the farmland, placing it in proximity to the farming operation. Id.

The BAP agreed with the bankruptcy court that the construction loan arose out of a farming operation. It recognized that “[f]ew courts have considered when a debt ‘arises out of a farming operation.’ ” Id. at 1381 (B.A.P. Op., filed Feb. 27, 2012). The BAP elected to adopt the approach taken in In re Saunders, 377 B.R. 772 (Bankr.M.D.Ga.2007). Accordingly, it applied the following test: “to ‘arise out of a farming operation’ the purpose of a debt must have some connection to the debtor's farming activity.” Aplt.App. at 1382 (emphasis added) (citation omitted) (internal quotations marks omitted). Relying on the same two factors that the bankruptcy court identified—that is, generally, the presence of the farming operation's office and records in the residence, and the residence's proximity to the farm—the BAP concluded that the residence was “connected to [Debtors'] farming activities” and thus “including the construction ... loan in the farm debt calculation was proper.” Id. at 1383.

This appeal followed.

II

“Although this appeal is from a decision by the BAP, we review only the Bankruptcy Court's decision.” Miller v. Deutsche Bank Nat'l Trust Co. (In re Miller), 666 F.3d 1255, 1260 (10th Cir.2012) (quoting C.O.P. Coal Dev. Co. v. C.W. Mining Co. (In re C.W. Mining Co.), 641 F.3d 1235, 1240 (10th Cir.2011)) (internal quotation marks omitted); accord Wagers v. Lentz & Clark, P.A. (In re Wagers), 514 F.3d 1021, 1022 (10th Cir.2007) (per curiam). “We review matters of law de novo, and we review factual findings made by the bankruptcy court for clear error.” In re Miller, 666 F.3d at 1260 (internal quotation marks omitted). “[W]e treat the BAP as a subordinate appellate tribunal whose rulings are not entitled to any deference (although they certainly may be persuasive).” Mathai v. Warren (In re Warren), 512 F.3d 1241, 1248 (10th Cir.2008); accord Parks v. Dittmar (In re Dittmar), 618 F.3d 1199, 1204 (10th Cir.2010).

First National Bank contends that the bankruptcy court applied the incorrect legal test to determine whether the construction loan arose out of a farming operation pursuant to 11 U.S.C. § 101(18)(A). It urges us to apply a test that focuses on “whether the funds that gave rise to the debt were used in the farming operation.” Aplt. Opening Br. at 14. First, in Part II.A, we interpret § 101(18)(A) and set forth the proper legal standard for determining whether a debt “for” a principal residence “arises out of” a farming operation; that is, a direct-and-substantial-connection standard. Then, we conclude, at least in the loan context, that an objective “direct-use” test—akin to the one First National Bank advances—does in fact provide the optimal means of discerning whether the direct-and-substantial-connection standard is satisfied.

Ultimately, because the bankruptcy court (and the BAP) applied the wrong legal test, we determine in Part II.B that neither of the factors upon which the bankruptcy court relied can, as a matter of law, support classifying Debtors' principal-residence debt as debt that “arises out of a farming operation.” And, we conclude that a remand is required so that the bankruptcy court may apply our newly fashioned test in the first instance.

A

Our task is one of statutory interpretation. The interpretation of a statute is a legal question; thus, we review the bankruptcy court's interpretation of the statute de novo.¹See In re Stephens, 704 F.3d at 1283;Caplan v. B–Line, LLC (In re Kirkland), 572 F.3d 838, 840 (10th Cir.2009).

We begin by interpreting the phrase “arises out of” in the “family farmer” definition of 11 U.S.C. § 101(18)(A). We read that provision as requiring a direct and substantial connection between the debt and the farming operation. Next, we examine the tests that courts have commonly applied in this statutory context when determining whether debt “arises out of” a farming operation, in order to assess what test best fits the direct-and-substantial-connection statutory standard. And, in that regard, we conclude that an objective “direct-use” test provides the optimal vehicle for discerning whether the direct-and-substantial-connection standard is satisfied—at least in the loan-debt setting.

“[I]nterpretation of the Bankruptcy Code starts ‘where all such inquiries must begin: with the language of the statute itself.’ ” Ransom v. FIA Card Servs., N.A., ––– U.S. ––––, 131 S.Ct. 716, 723, 178 L.Ed.2d 603 (2011) (quoting United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989)); see United States v. West, 671 F.3d 1195, 1199 (10th Cir.2012) (“[W]e first and foremost look to the statute's language to ascertain Congressional intent.”). “[T]he Bankruptcy Code must be construed liberally in favor of the debtor and strictly against the creditor.” In re Warren, 512 F.3d at 1248 (quoting Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1292 (10th Cir.1997)) (internal quotation marks omitted).

“It is well established that ‘when the statute's language is plain, the sole function of the courts—at least where the disposition required by the text is not absurd—is to enforce it according to its terms.’ ” Lamie v. U.S. Tr., 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004) (quoting Hartford...