Defining Family Farmer: Eligibility for Chapter 12 Bankruptcy

Defining Family Farmer: Eligibility for Chapter 12 Bankruptcy

By: Jamie L. Harris, Esq.

It may be surprising but not all farming operations may qualify as “family farmers” eligible to seek Chapter 12 bankruptcy relief. “Only a family farmer … with regular annual income may be a debtor under chapter 12″ of the Bankruptcy Code. 11 U.S.C. §109(f). A family farmer is defined as:

[an] individual or individual and spouse engaged in a farming operation whose aggregate debts do not exceed $3,792,650 and 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, and such individual or such individual and spouse receive from such farming operation more than 50 percent of such individual’s or such individual and spouse’s gross income for – (I) the taxable year preceding; or (ii) each of the 2d and 3d taxable years preceding the taxable year in which the case concerning such individual or such individual and spouse was filed. 11 U.S.C. § 101(18) (2006).

Additionally, a “‘family farmer with regular income’ means family farmer whose annual income is sufficiently stable and regular to enable such family farmer to make payments under a plan under chapter 12 of this title[,]” 11 U.S.C. § 101(19) (2006), and, under the Bankruptcy Code, “‘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.” 11 U.S.C. § 101(21) (2006).

The definition of ‘farming operation’ does not provide an exclusive list of all farming activities and is not limited to the specific activities delineated in the statute. ‘This definition is to be construed liberally in order to further Congress’ purpose of helping family farmers to continue farming.’” Rinehart v. Sharp (In re Sharp), 361 B.R. 559, 564 (B.A.P. 10th Cir. 2007) (quoting Watford v. Fed. Land Bank of Columbia (In re Watford), 898 F.2d 1525, 1527 (11th Cir. 1990)). With the enactment in 1986 of Chapter 12 of the Bankruptcy

Code, it appears that two main methods have evolved in determining whether a particular enterprise constitutes a farming operation. One view concentrates on whether the operation is subject to “traditional risks of farming,” In the Matter of Armstrong, 812 F.2d 1024, 1028 (7th Cir. 1987), while the other employs a “totality of the circumstances” test, of which risks of farming is but one factor to be considered. Watford, 898 F.2d at 1528-1529. The Armstrong approach has been criticized as being too narrowly focused, which may result in the exclusion of some debtors whom Congress intended to protect. Id.; see also In re Hettinger, 95 B.R. 110, 111-112 (Bankr. E.D. Mo. 1989.).

Under the “totality of the circumstances” test, some of the relevant factors include: (1) whether the location of the operation would be considered a traditional farm;(2) the nature of the enterprise at the location; (3) the type of produce and its eventual market; (4) the physical presence or absence of family members on the farm;(5) ownership of traditional farm assets; (6) whether the debtor is involved in the process of growing or developing crops or livestock; and (7) whether or not the practice or operation is subject to the inherent risks of farming. See In re Jones, 2011 WL 3320504, at *2-3, 2011 Bankr. LEXIS 2982 at *8-9 (Bankr. D. Or. Aug. 2, 2011) (quoting In re Sugar Pine Ranch, 100 B.R. 28, 31 (Bankr. D. Or. 1989).

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