In re Reak, Bankruptcy No. 88-01792.

• Decision Date: 30 September 1988
• Docket Number: Bankruptcy No. 88-01792.
• Parties: In re Eugene REAK, Debtor.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Eastern District of Wisconsin

92 B.R. 804 (1988)

In re Eugene REAK, Debtor.

Bankruptcy No. 88-01792.

United States Bankruptcy Court, E.D. Wisconsin.

September 30, 1988.

Jeffrey P. White, Chicago, Ill., for debtor.

Thomas A. Schuessler, Beaver Dam, Wis., for Mary Jean Reak.

Thomas J. King, Oshkosh, Wis., trustee.

DECISION

JAMES E. SHAPIRO, Bankruptcy Judge.

Mary Jean Reak, former wife of the debtor, has filed a motion to dismiss the debtor's chapter 12 petition on the basis that the debtor is ineligible for chapter 12 relief. Mrs. Reak contends that the debtor is not a family farmer because he is unable to meet the 80% farm debt criteria set forth in 11 U.S.C. § 101(17)(A).¹ She maintains that there is a debt owing to her from the debtor pursuant to a divorce decree directing the debtor to make the land contract payments to the Estate of Adeline Warmka ("land contract vendor"), which did not arise out of the farming operation. If Mrs. Reak is correct, because the balance due under the land contract exceeds $363,000, the debtor cannot meet the 80% farm debt requirement.

The debtor submits the following two arguments in response:

1. There is no debt from the debtor to Mrs. Reak; and

2. Even if there is a debt, it is "farm related."

The key inquiry deals with that portion of the divorce judgment under which the debtor assumed full responsibility for the joint obligation from the debtor and Mrs. Reak, as land contract vendees, to the land contract vendor. Under the divorce judgment, the debtor:

". . . is responsible for all the liabilities . . . which specifically includes the current land contract payment to Mrs. Adeline Warmka in the sum of $364,445.39 upon the terms and conditions contained within said land contract."

On April 2, 1979, both the debtor and Mrs. Reak, then husband and wife, signed a land contract as land contract vendees with Andrew and Adeline Warmka, parents of Mrs. Reak, as land contract vendors.² The divorce judgment did not replace this debt created under the land contract. That is clear from the following language contained in the divorce judgment:

"The petitioner realizes that this mortgage is not a reflection of additional debt between the parties. This mortgage is in no way intended to, nor shall it, change the terms of the underlying land contract payable by the respondent to Adeline Warmka."

The divorce judgment merely altered the relationship between the debtor and Mrs. Reak by requiring the debtor to assume full responsibility for future land contract payments. It created a contingent liability from the debtor to Mrs. Reak in the event the debtor defaulted on the payments.

The court, therefore, rejects the debtor's initial argument of no debt from the debtor to Mrs. Reak. However, for purposes of the 80% farm debt requirement, the original joint obligation from both parties to the land contract vendor remained a noncontingent debt.

There is authority to support the debtor's second contention that the debt was farm related. In In re Roberts, 78 B.R. 536 (Bankr.C.D.Ill.1987), a creditor sought to dismiss a chapter 12 case, claiming that estate taxes due from the debtor did not constitute a debt arising out of a farm operation, and the debtor therefore could not meet the 80% farm debt requirement. The court rejected that argument declaring:

"But for the payment of the estate taxes, there would be no farm. The payment of estate taxes is clearly `inescapably interwoven\' with the farming operation."

Id. at 537. In In re Armstrong, 812 F.2d 1024 (7th Cir.1987), the Seventh Circuit also concluded that a sale of the debtor's farm machinery was "inescapably interwoven with his farming operation." As a result, it was held that the money which the debtor received from that sale constituted farm income within the meaning of §§ 101(17) and (18) of the Code. In the same vein, in Matter of Rinker, 75 B.R. 65 (Bankr.S.D. Iowa 1987), an obligation arising out of a will settlement was held to be farm-related, thereby qualifying the debtor for chapter 12 relief. The court declared, 75 B.R. at 68:

"At the heart of the lawsuit and resultant settlement was the land. . . . It was the land over which the litigants fought and it was the land that was the subject of the settlement. Land is also the sine qua non of a crop production enterprise. . . . Without the land, the Rinkers would have no farm. It is this direct link between the basis of the lawsuit and settlement and the farming activity that leads this court to conclude that the debts in question arise out of a `farming operation\'."

There is a common thread running throughout these decisions. In Roberts, the court asserted that "but for" the payment of the estate taxes, there would be no farm. In Armstrong, it was held that "but for" the farm machinery, there would be no farm. In Rinker, the court, applying similar reasoning, stated that "but for" the land, there would be no farm. Adopting this logic in the case at bar, "but for" the land acquired by the debtor and Mrs. Reak under the land contract in 1979 for farming, there would be no farm; and "but for" the land contract, there would be no hold harmless agreement in the divorce judgment.

The debts in Roberts, Rinker and the case at bar are all "inescapably interwoven" with farming operations. This differs from the example contained in dicta in Rinker and relied upon by Mrs. Reak of a mortgage given on a farm for the purpose of securing settlement payments resulting from a car accident. Rinker correctly stated that the facts under that example presented a debt unrelated to farming. The debt in In re Van Fossan, 82 B.R. 77 (Bankr.W.D.Ark.1987), is also dissimilar from the instant case because it involves a new debt created pursuant to a divorce settlement in order to provide an equalization of property rights between the parties. It is unnecessary to decide whether that presents a substantive distinction from the instant case; even if it is not, this court is persuaded to adopt the reasoning of Armstrong, Roberts and Rinker.

To interpret § 101(17)(A) in the manner requested by Mrs. Reak would be unduly restrictive. It would, under the facts herein involving a debtor who has been a farmer all of his life and who has been farming on this particular land since 1963, be contrary to the philosophy which led to the enactment of chapter 12. Anderson and Morris, Chapter 12 Farm Reorganizations § 2.10 (1988) at p. 2-48 states:

". . . the legislative history points out that Chapter 12 `offers family farmers the important protection from creditors that bankruptcy provides.\' Given the fact that . . . chapter 12 embod(ies) the same spirit of relief for family farmers, and given the prior mandate of the Supreme Court in interpreting a comprehensive farmer bankruptcy reorganization statute, it would appear that any ambiguities in Chapter 12 and other provisions of the Bankruptcy Code which might appear to limit the eligibility of farmers for relief should be resolved liberally in the farmer\'s favor to provide such relief to as many family farmers as possible."

See also, In re Tart, 73 B.R. 78 (Bankr.E. D.N.C.1987), where Judge Small stated that chapter 12 must be interpreted reasonably and in a manner to give effect to the overall purposes of that legislation.

Based upon the foregoing, the 80% farm debt requirement has been met by the debtor,...