In re Paul
| Decision Date | 23 February 1988 |
| Docket Number | Bankruptcy No. 87-05759. |
| Citation | 83 BR 709 |
| Parties | In re Leo PAUL and Janice Paul, Debtors. |
| Court | U.S. Bankruptcy Court — District of North Dakota |
F.C. Rohrich, Linton, N.D., for William and Barbara Paul.
Lynn Jordheim, Bismarck, N.D., for U.S.
Phillip Armstrong, Minot, N.D., Trustee.
Ross Espeseth, Bismarck, N.D., for debtor.
A. William Lucas, Bismarck, N.D., for First Nat. Bank of Linton.
The matter before the court is to consider confirmation of the Debtors' Chapter 12 plan as filed November 20, 1987. The Debtors' Chapter 12 petition was filed on August 24, 1987, and confirmation of their plan came on for hearing on January 12, 1988. Written objections were filed by William and Barbara Paul, Farmers Homes Administration and the First National Bank of Linton (Bank). Due to agreement reached between the Debtors and FmHA, the only remaining confirmation objection yet unresolved is that of the Bank. In substance, the Bank believes the manner in which its claim is accorded treatment under the plan is violative of section 1225(a)(5) of the Code because the plan fails to recognize the full extent of its security. Subsequent to the confirmation hearing, the Bank, on January 28, 1988, filed an additional objection charging for the first time that the Debtors failed to meet the threshold qualifications for Chapter 12 relief because a substantial portion of their income will be derived from the Conservation Reserve Program and off-farm employment.
Basically the Bank's objection insofar as plan treatment is concerned is in the nature of a request to determine the nature and extent of a security interest. Generally, Bankruptcy Rule 7001 requires such actions to be postured as adversary proceedings. The court, however, believes that in order to reach the conclusions required by section 1225(a)(5) that secured claims receive value under the plan equal to the amount of the claim, the court must first determine the amount of an objecting creditor's secured claim. Thus the court will determine the extent of the Bank's secured claim within the context of confirmation. At the hearing the parties stipulated that the document attached to the Bank's objection are accurate and the court has considered those documents in reaching its decision in this case. Those documents are identified in section 2 of this opinion. The relevant facts in this case are as follows:
FINDINGS OF FACT
The Debtors have owned and operated a farm in Emmons County, North Dakota for the past twelve years. As part of their reorganization plan they propose to enroll a portion of their farmland in the Conservation Reserve Program (CRP) for the first time and to continue in their off-farm employment in addition to raising grain. The plan's future income and expense projection shows that, of a total income of $66,798.00, the Debtors anticipate receiving $23,000.00 from the CRP and $11,200.00 from off-farm employment. The Debtors' statement of affairs indicates that they had $54,225.00 of farming income and $14,588.00 of income from non-farm sources in 1986.
The Bank's § 1225(a)(5) objection stems from a transaction with the Debtors on April 10, 1980. On that date the Debtors received $65,130.00 from the Bank. The Bank received from the Debtors the following:
By the Assignment the Debtors conveyed their vendor's interest in a February 1, 1977, contract for deed by which they sold a bar located within the City of Linton to Kenneth and Leona Fischer. The contract required the Fischers to make payments of $600.00 per month and, as of January 1, 1988, had an unpaid balance of $63,112.23. The Assignment is a present conveyance of the Debtors' vendor's interest in the contract. It does not contain any type of defeasance clause, it is unconditional and irrevocable.
The Assignment does not refer to the other documents executed on the same day. The promissory note and the mortgage deed, however, refer to each other. The promissory note states It must be noted that no security agreement or financing statement was executed in connection with the April 10, 1980, transaction. The mortgage deed states that if the Debtors pay the Bank $65,130.00 in accordance with the terms of the April 10, 1980, promissory note, the mortgage deed will be null and void. The parties agree that the value of the property covered by the mortgage deed is $43,400.00.
On April 3, 1984, the Debtors refinanced the April 10, 1980, note by executing a new note in the amount of $70,759.10. This second note, # 2523, states, "Security: I am giving a security interest in: a tract in N.E. ¼ or sic 7-132-76." This tract of land is the homestead land covered by the April 10, 1980, mortgage deed. Attached to the 1984 note is an addendum which states, "It is understood that we will accept the monthly payments of $600.00 from the Fischers on their contract, with the difference to be brought up to date on or before April 3, 1985." Beginning on May 14, 1984, the Bank received payments directly from the contract for deed vendees and applied them as payments on the Debtors' 1984 note. There is no indication within the documents stipulated to by the parties as to the disposition of the contract payments between the time of the execution of the Assignment in 1980 and when the Bank began applying the payments to the Debtors' 1984 note.
The Bank, by its post-hearing objection contends that the Debtors propose to receive more than 20% of their income from the CRP and off-farm employment, they do not qualify as a "farmer" under section 101(19) and are therefore not eligible for relief under Chapter 12.
Section 109(f) provides that "only a family farmer with regular income may be a debtor under Chapter 12." Thus, relief under Chapter 12 is not restricted to a "farmer" as defined by section 101(19), but rather is limited to a "family farmer." See In re Rott, 73 B.R. 366, 371 (Bankr.D.N.D. 1987). Section 101(17)(A) defines a "family farmer" as an:
"Individual or individual and spouse engaged in a farming operation who receive from such farming operation more than 50% of such individual\'s or individual and spouse\'s gross income for the taxable year preceding the taxable year in which the case concerning such an individual or such individual and spouse was filed. . . ." (emphasis added).
In part, section 101(17)(A) directs the court to examine the Debtor's income in the year preceding the year in which the Debtors filed their petition. The appropriate year for the case at bar is 1986. In 1986 the Debtors were not enrolled in the CRP and had $14,588.00 of non-farm income. Comparing the $14,588.00 to the Debtors' total 1986 income of $68,813.00 plainly demonstrates that the Debtors received more than 50% of their income from farming. This is not the end of the inquiry, however. Section 101(17)(A) also states, in the present tense, that a debtor must be "engaged in a farming operation." Thus the Debtors must be currently engaged in a farming operation. The question becomes whether the Debtors' operation in which roughly one-third of the income is derived from participation in the CRP constitutes a farming operation.
Section 101(20) provides that a farming operation:
Includes farming, tillage of the soil, dairy farming, ranching, production or raising of crops, poultry, or livestock, and production of poultry or livestock products in an unmanufactured state.
While this definition at first impression appears to be precise, it is, in fact, very broad due to the inclusion of the term "farming". Also the term "includes" makes the definition non-exhaustive. See In re Armstrong, 812 F.2d 1024, 1047 (7th Cir.1987); Rott, 73 B.R. at 372. The courts deciding whether an activity constitutes farming have divided into two groups. One group tests to see whether income generated from the questioned activity is subject to the risks traditionally associated with agricultural production such as inclimate weather and disease. See, e.g., Armstrong, 812 F.2d at 1028. The dissenting judge in Armstrong disagreed with the "risk" test promulgated by the majority and instead proposed that the court evaluate the factual context surrounding an activity to determine whether it is an integral part of the debtor's farming operation. Id. at 1031. The majority of courts to consider the question have adopted this "totality of the circumstances" test. See In re Burke, 81 B.R. 971 (Bankr. S.D.Iowa Dec. 2, 1987); In re Guinnane, 73 B.R. 129 (Bankr.Mont.1987); In re Wolline, 74 B.R. 208 (Bankr.E.D.Wisc.1987); In re Welch, 74 B.R. 401 (Bankr.S.D.Ohio 1987); In re Mikkelsen, 74 B.R. 280 (Bankr.D.Or.1987).
In Rott this court also rejected the application of a mechanical test to determine whether a questioned activity constituted a farming operation, stating:
The court does not believe that farmers forced to partially liquidate assets or temporarily rent out machinery or farm-land, in an effort to salvage their farm operation, should be foreclosed from seeking relief under Chapter 12, if such actions caused the 50% farm income test not to be met. Clearly Congress did not intend that farmers who make sound business...
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