In re Indreland

• Decision Date: 12 August 1987
• Docket Number: Bankruptcy No. 86-20732.
• Citation: 77 BR 268
• Parties: In re Roger E. INDRELAND, Debtor.
• Court: U.S. Bankruptcy Court — District of Montana

77 B.R. 268 (1987)

In re Roger E. INDRELAND, Debtor.

Bankruptcy No. 86-20732.

United States Bankruptcy Court, D. Montana.

August 12, 1987.

Donald MacDonald IV, Missoula, Mont., for debtor.

Christopher B. Swartley, Missoula, Mont., for First Sec. Bank.

Dunlap and Caughlan, Trustee, Butte, Mont.

ORDER

JOHN L. PETERSON, Bankruptcy Judge.

In this Chapter 12 case, hearing on the Debtor's Plan was held on June 9, 1987, together with objections filed by First Security Bank, the major secured creditor of the Debtor. The Bank challenges the eligibility of the Debtor as a family farmer in the context that even though the Debtor meets the definition of a family farmer at the petition date, under the facts developed at the confirmation hearing, the Debtor's own evidence shows that he will not meet the test throughout the term of the Plan. Under the Plan, the Debtor proposes to surrender to the Bank a portion of his collateral and then restructure the balance of the debt over a term of 30 years at 10½ % interest payable at $15,500.00 per year.¹

The Debtor in the past has worked as a full time rancher since 1979 on the 2,153 acre ranch that has been in his family for over 40 years. During that period, he borrowed money from First Security Bank of Missoula and the Western Montana Production Credit Association (PCA) to cover operating losses arising out of cattle operations. He also borrowed money from his mother. During the unprecedented low cattle prices of the late 70s and early 80s, he lost substantial sums of money and was eventually forced to liquidate the cattle herd. His present debts include First Security Bank in the sum of $340,000.00 together with accruing interest, costs and attorney's fees, PCA in the amount of $18,000.00; his mother in the amount of $65,000.00 (which sum his mother has now forgiven in a waiver and release filed with the Court); and First Bank Western for the purchase of a Caterpillar and several trucks in the sum of $12,000.00. In addition, $7,000.00 to First Interstate Bank was incurred for the purchase of a portable saw mill. The trucks encumbered to First Bank Western and the Caterpillar are all used in ranching operations, which presently are confined to raising hay and horses.

In 1986, the Debtor earned in excess of 50% of his income from non-farm sources in the form of wages. His 1985 income tax return shows the Debtor's income from farm income was $15,650.00, which, the Bank concedes, was over 50% of his total 1985 income. This Chapter 12 case was filed on December 9, 1986, and thus the 1985 tax year is the critical test year from determining eligibility to file a Chapter 12 petition. In re Pratt, 78 B.R. 277, 4 Mont.B.R. 402 (Bankr.Mont.1987) (determining eligibility under the gross income test requires a careful review of the debtor's tax and financial records for the prior tax year, by use of the term gross income as defined in the Internal Revenue Code). Considering then, that the Debtor has met the eligibility test of § 101(17), the Bank nevertheless argues that since the Debtor's principal means for execution of the Plan after confirmation is through non-farm income from earnings as an equipment operator, the Debtor thereby loses the benefits of Chapter 12 since he will not be making payments due under the Plan solely from farming operations.

It is undisputed that the Debtor during the 5 year term of the Plan will earn $30,000.00 to $35,000.00 a year as an equipment operator, while the ranch operation will produce about $15,000.00 annually. The annual payments due under the Plan require over $23,000.00 per year. The Bank thus argues that such is not the type of family operation which Congress had in mind when it passed Chapter 12. It must be noted that the Debtor does intend to continue raising hay and horses on the remaining ranch property, and thus continue on a part-time basis as a farmer. A decision addressing the issue is contained in the case of In re Tart, 73 B.R. 78, 81 (Bankr.E.D.N.C.1987), where the Court held:

"The legislative history of Chapter 12 indicates that its primary purpose is to help family farmers continue farming. A conference committee report was prepared which worked out the differences between the versions of Chapter 12 which had been passed by the Senate and the House. * * * That statement declared that Chapter 12 `is designed to give family farmers facing bankruptcy a fighting change to reorganize their debts and keep their land\'. Statements by the primary sponsors of Chapter 12 also suggest that its primary purpose is to help family farmers stay in farming * * *. Based on this legislative history and the definition of `family farmer\' as an individual `engaged in a farming operation\', this court holds that the debtors in this case who were, at most, minimally engaged in farming during the taxable year preceding the taxable year in which their petition was filed, who had sold all their farmland prior to the filing of their petition, and who did not intend to resume any farming operation, do not qualify under Chapter 12." (Emphasis in text).

The Tart court distinguished the holding of Potmesil v. Alexandria Production Credit Association, 42 B.R. 731 (W.D.La.1984), which addressed the question of whether a debtor was a `farmer' so as to be considered for involuntary bankruptcy under 11 U.S.C. 101(19), by stating:

"The present case is distinguishable from Potmesil because of the differences between Sections 101(17) and 101(19). Section 101(17) states that a `family farmer\' means an individual `engaged in a farming operation\'; no such language is found in the Section 101(19) definition of `farmer\'. The inclusion of this language in § 101(17) suggests that Congress intended to require more than that a `family farmer\' be engaged in a farming operating during the taxable year preceding the year in which the petition was filed. If Congress intended to focus only on this time period, the `engaged in a farming operation\' language would be superfluous since it would appear that an individual who, for the taxable year preceding the year in which the petition is filed, incurred `at least 80% of his debt and received at least 50% of his income from a farming operation he owned or operated, as required by § 101(17),\' would necessarily have been engaged in a farming operation during that same time period. A statute should not be interpreted so as to render one part inoperative, superfluous or insignificant. In re Gyulafia, 65 B.R. 913 (Bankr.D.Kan.1986); In re Brooks, 51 B.R. 741 (Bankr.S.D.Fla. 1985)." Id. at 81.

I concur with the reasoning of the Tart case. However, Tart also correctly stated that each case must be decided on its own unique facts. I would further note that the Joint Explanatory Statement of the Committee of Conference on H.R. 5316 acknowledges that "family farmers who are eligible for Chapter 12 may be involved in minor businesses not directly related to the farming operation" and "the Conference intended that the term `debtor's business' in Section 1225 include such businesses." (Emphasis in text). What the Committee meant by use of the term "minor" is unexplained, except that the statement is consistent with the purpose of Chapter 12 and its definitions that the thrust of the law is to aid and assist farming operations which are plagued with inherent risks of weather, market conditions and infestations of insects, and thus require outside income to survive.

The case of In re Mikkelsen Farms, Inc., 74 B.R. 280, 285 (Bankr.Or.1987), holds in discussing § 101(18):²

"The House Committee on the Judiciary in its report on H.R. 2211, a predecessor to the bill ultimately passed into law, indicates Congress was concerned that the statute allow for the fact a farmer may not receive income on a weekly or monthly basis. H.R.Rep. No. 178, 99th Cong., 1st Sess., reported in Bankr.L. Rep. No. 152 (CCH) (June 27, 1985). It indicated the provisions of § 101(27) defining `individual with regular income\' would apply to Chapter 12 but the regularity of income for farmers should be determined on an annual basis. Id. at 6. Although the tone of the report suggests an assumption that any income to fund the plan would be from traditional farm operations based on a seasonal production, there is no statement in the history that it must be. Certainly the emphasis in the language and subsequent interpretation of § 101(27) has been on the regularity of income available to fund a plan. The source of income has been relevant only to the extent it effects its regularity." (Emphasis in text).

Mikkelsen concluded that the inclusion of the term "income from farming operations" used in § 101(17), but absent from § 101(18), was deliberate on the part of Congress and thus a family farmer who qualifies under § 101(17) may be a family farmer under § 101(18) if it can be shown that he will have regular annual income from any source.

Unlike the facts in Tart, the Debtor in this case still owns and manages the ranch, which annually produces hay for sale and on which horses are bred and raised for sale. That operation will continue with the Debtor in control of the farming operation. Forced by economics to sell his cattle operation, the Debtor has now elected to scale down the farm operation, retain just under 2,000 acres as an integrated operation for the production of income. While present plans do not contemplate resumption of a cow-calf operation, with proper farming, the land is suitable for such an operation. The fact outside earnings of the Debtor must now be used as the principal source of payment to creditors does not, in my opinion, destroy his eligibility as a family farmer engaged in a farming operation, for it is likewise true that the farm income is just as necessary to make the Plan feasible as the non-farm income. The broad purpose of Chapter 12—to keep the farmer on the land—is not served by a strict mechanical application of an income test...