In re SFW, Inc., Bankruptcy No. 87-06429-H12.

• Decision Date: 08 February 1988
• Docket Number: Bankruptcy No. 87-06429-H12.
• Citation: 83 BR 27
• Parties: In re SFW, INC., d/b/a Seafarms West, Debtor.
• Court: U.S. Bankruptcy Court — Southern District of California

83 B.R. 27 (1988)

In re SFW, INC., d/b/a Seafarms West, Debtor.

Bankruptcy No. 87-06429-H12.

United States Bankruptcy Court, S.D. California.

February 8, 1988.

George P. Mills, San Diego, Cal., for debtor.

Richard A. Solomon, Saxon, Alt, Brewer & Kincannon, La Jolla, Cal., for movant.

MEMORANDUM DECISION

JOHN J. HARGROVE, Bankruptcy Judge.

I.

At issue is whether loans extended by La Jolla Bank and Trust Company ("the Bank") to SFW, Inc., doing business as Seafarms West ("the debtor") for the business operations of the debtor, may be classified as "consumer loans" for the purpose of invoking the co-debtor automatic stay provision of 11 U.S.C. § 1201.

The Bank contends that loans for business purposes are clearly outside the scope of the co-debtor protections of 11 U.S.C. § 1201.

The debtor claims that Congress intended an expansive reading of the term "family farm" such that collection of funds obtained in the furtherance of the primary family purpose — farming — would be subject to the co-debtor stay.

This court has jurisdiction to hear this matter pursuant to 28 U.S.C. § 1334 and § 157 and General Order No. 312-D of the United States District Court, Southern District of California. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (G).

FACTS

On April 2, 1987, the debtor, a California corporation, while engaged in the business of shellfish cultivation, executed and delivered to the Bank a commercial promissory note in the original principal sum of $60,681.74. As part of that loan transaction, the debtor also executed and delivered to the Bank a document entitled "Loan Purpose Statement and Distribution Authorization" wherein debtor specifically represented and warranted to the Bank the general purpose of the transaction was for "Business Purposes (including real estate investment)."

On May 5, 1987, the debtor executed and delivered to the Bank a "Commercial Promissory Note" in the original principal sum of $10,000.00. As part of that loan transaction, the debtor also executed and delivered to the Bank a document entitled "Loan Purpose Statement and Distribution Authorization" wherein debtor specifically represented and warranted to the Bank that the general purpose for the loan transaction was for "Business Purposes (including real estate investment)."

As part of the consideration for the loan transactions, on April 2, 1987, Richard D. Glenn, director, president and 51% shareholder of the debtor, executed and delivered to the Bank a "Commercial Guaranty" wherein he guaranteed to the Bank payment of any and all obligations of the debtor to the Bank. To secure payment of the Guaranty, Richard D. Glenn executed and delivered to the Bank assignments of savings account number XXXXXXXX-XX with a balance on April 2, 1987 in the sum of $17,159.07 and hypothecation agreements whereby Richard D. Glenn assigned to the Bank a second deed of trust and note in the sum of $11,500.00.

On April 2, 1987, Elmer F. Glenn and Alice D. Glenn, executed and delivered to the Bank a "Commercial Guaranty" wherein they guaranteed to the Bank payments of any and all obligations of the debtor. To secure payment of the Guaranty, Elmer F. Glenn and Alice D. Glenn, executed and delivered to the Bank hypothecation agreements wherein they pledged to the Bank municipal bonds with a current balance on April 2, 1987 of $46,838.50.

On April 2, 1987, Pamela McBeth and James W. McBeth, holders of forty-five percent of the outstanding common shares of the debtor, executed and delivered to the Bank "Commercial Guarantees" wherein they guaranteed to the Bank payment of any and all obligations of the debtor to the Bank.

The debtor defaulted in the payments due under the commercial promissory notes, and pursuant to the terms of the notes, the entire balance in the sum of $69,255.31, plus accrued interest, late charges, and other costs and expenses became due and payable to the Bank. Pursuant to the terms of the commercial guarantees, demand was made by the Bank on the co-debtors to pay the sum of $69,255.31.

On September 1, 1987, the debtor filed its petition under Chapter 12 of the Bankruptcy Code. On September 24, 1987, the Bank sent notice to all co-debtors that the commercial promissory notes were in default and that the principal sum of $69,255.31 plus interest and other charges and expenses were due and payable to the Bank by the co-debtors. In response to the demand letters, the Bank's counsel was contacted by counsel representing the debtor and informed of his contention that the co-debtors were protected by the co-debtor stay as set forth in 11 U.S.C. § 1201, in that the debt in question was a "consumer debt." On November 13, 1987, the Bank filed motion for relief from stay to permit action against the co-debtors. Opposition to the Bank's motion was received on December 2, 1987, and a hearing was scheduled for December 16, 1987. At the hearing on the Bank's motion on December 16, 1987, this court requested supplemental briefing on the applicability of § 1201 to the co-debtors in question.

The Bank contends that (1) the legislative history and intent behind the enactment of Chapter 12 establishes that the indebtedness due and owing to the Bank was not meant or intended to fall within the definition of a "consumer debt," and therefore is not within the protection of 11 U.S.C. § 1201 co-debtor stay; (2) that the definition of "consumer debt" is controlled by case law and decisions analyzing and determining the co-debtor stay of 11 U.S.C. § 1301; (3) that the intent of the parties in entering into the transactions in question is a substantial factor in determining whether the indebtedness is a business or consumer debt; (4) that the debtor's definition of "consumer debt" is overly broad and goes beyond the intent of the legislature in enacting Chapter 12 bankruptcy provisions; and (5) the debtor's operation is not a farming operation which may utilize a Chapter 12 petition.

The debtor claims that since 11 U.S.C. § 101(7) defines a "consumer debt" as a debt incurred primarily for "a personal, family, or household purpose," and since the obligations with respect to which the Bank wishes to obtain relief from stay were incurred in furtherance of and for the purpose of the family farming operations of the debtor, the obligations should be deemed to be obligations incurred for "a family" purpose under § 101(7).

DISCUSSION

Chapter 12 was enacted to address the unique problems faced by family farmers seeking protection under the Bankruptcy Code. Chapter 12 is an emergency effort to relieve the traditional family farmer of the hardships which have fallen upon his shoulders due to the current economic crisis faced by the traditional family farmer. Public Law No. 99-554 contains the overview and legislative intent behind the enactment of Chapter 12:

Under current law, family farmers in need of financial rehabilitation may proceed under Chapter 11 or Chapter 13 of the Bankruptcy Code. Most family farmers have too much debt to qualify as debtors under Chapter 13 and are thus limited to relief under Chapter 11. Unfortunately, family farmers have found Chapter 11 needlessly complicated, unduly time consuming, inordinately expensive, and, in too many cases, unworkable.

Accordingly, this subtitle creates a new Chapter of the Code — Chapter 12 — to be used only by family farmers. It is designed to give family farmers facing a bankruptcy a fighting chance to reorganize their debts and keep their land. It offers family farmers important protection from creditors that bankruptcy provides while, at the same time, preventing abuse of the system and insuring that farm lenders receive a fair repayment.

This new Chapter is closely modeled after existing Chapter 13. At the same time, however, the new Chapter alters those provisions that are inappropriate for family farmers — the requirement that the plan be filed within fifteen days of the petition; the requirement that the plan\'s payments start within thirty days of the plan confirmation; and the low debt limits found in Chapter 13.

Under this new Chapter, it will be easier for a family farmer to conform a plan of reorganization (emphasis added).

Conference Report and Statement on H.R. 5316 (P.L. 99-554), App. 3, Collier on Bankruptcy, XXII-5 (15th ed. 1987) ("The Conference Report").

The legislative intent that Chapter 13 case law control interpretation of Chapter 12 provisions which are nearly identical in substance is clear. Furthermore, the above legislative history exerpt clearly states that the provisions of Chapter 13 which were deemed inappropriate for family farmers were altered in drafting Chapter 12. An in-depth discussion of 11 U.S.C. §§ 1204, 1205, 1206, 1224, 1225 and 1227 appears in the Conference Report, which thoroughly discusses the impact of these modified sections. However, nowhere in the Conference Report is there any indication that § 1201 was intended to be interpreted differently than § 1301. The text of § 1201 and § 1301 are virtually identical. Therefore, the conclusion that Congress intended the courts to apply the existing case law of § 1301 to disputes arising under § 1201 is inescapable. This conclusion is supported by all published case law considering the matter. In re Robinson Ranch, 75 B.R. 606, 611 (Bankr.D.Mont.1987); In re Bigalk, 75 B.R. 561, 565 (Bankr.D.Minn. 1987); See also, In re Circle Five, Inc., 75 B.R. 686, 16 B.C.D. 211 (Bankr.D.Idaho 1987).

In analyzing the debtor's claim that the co-debtor stay applies to the guarantees in question, a number of problems arise. Most notable among these are: (1) the guarantor's involved do not qualify as co-debtors; (2) the loans guaranteed were not consumer debt; and (3) corporations cannot incur consumer debt.

The guarantors for whom the debtor seeks protection under the § 1201 co-debtor stay are Richard D. Glenn, Elmer F. Glenn, Alice D. Glenn, Pamela McBeth and James W. McBeth. All but Elmer...