Chapter 12 Bankruptcy Rules of Engagement: Farming Operation or Not?

Posted on: January 31st, 2022 by Kate Langworthy, ABLS Blog Contributor

Relief for Farmers

Prior to 1986, a debtor intending to reorganize debts had two options for filing for bankruptcy: Chapter 11 or Chapter 13. Unfortunately, neither option was particularly well suited for family farmers. Chapter 11 provided a complicated and expensive route to relief, while Chapter 13 lent itself to reorganizing debt loads much lower than those often carried by farmers. Congress recognized the need for a more streamlined process for “family farmers” and “family fishermen,” and thus, Chapter 12 Bankruptcy was born, combining provisions already included in the Bankruptcy Code into a new structure that allowed farmers to continue owning and operating the farm while repaying all or part of their debts. Along with restrictions regarding the source and amounts of debt and income, the Bankruptcy Code requires that a petitioner be “engaged in a farming operation” to be eligible to file under Chapter 12. In spite of this limitation, farmers who have ceased the physical activity of farming but seek to file under this chapter may still have hope. In re Mongeau, recently decided in the United States Bankruptcy Court for the District of Kansas, provides some guidance.

Mongeau Case Study

David and Jennifer Mongeau jointly owned and operated a large farming operation where they grew crops and ran cattle. As all too often happens with farming operations, what was once a profitable endeavor became much less so. The Mongeaus made the decision to complete a structured wind-down and began liquidating their farm assets in 2020. By the end of the year, they had ceased the vast majority of their farming activities and sold or otherwise transferred most property and leases to others. Notably, the Mongeaus’ family members purchased much of the real property and equipment, and that family members used the same equipment and the leases David and Jennifer had previously held in the family members’ operations. David and Jennifer continued to provide manual labor in helping on their family members’ farms despite winding down their own operations. On February 1, 2021, the Mongeaus filed their Chapter 12 petition. An unsecured creditor, American AgCredit, moved to dismiss the bankruptcy, claiming that the Mongeaus failed to meet the Code’s definition of being “engaged in a farming operation” and therefore were not entitled to file under Chapter 12. The Bankruptcy Court disagreed.

John Deere combine harvesting wheat.

As there was no dispute over the other Chapter 12 eligibility requirements, the Court looked only at whether the debtors were engaged in a farming operation on the date of filing. After discussing tests utilized by other jurisdictions and considering factors proposed by the parties based on relevant case law, the Court weighed five factors to determine whether the Mongeaus were engaged in a farming operation: (1) whether the debtors had abandoned all farming operations at the time of filing; (2) whether there was a plan or intent to continue farming operations in some form; (3) whether the abandonment of farming was a shift to a different type of farming; (4) whether debtors own farm assets such as equipment; and (5) whether the activities are subject to the cyclical risks involved in farming. The outcome of the factor test was determined by looking at the totality of the circumstances on a case-by-case basis.

In evaluating the first factor, the Court looked beyond the narrow interpretation proposed by AgCredit and found ample evidence that the Mongeaus’ had not abandoned all farming operations. The debtors’ continued involvement in family members’ farms, care of their daughter’s cattle, and partial ownership of cattle equipment intended to be used in a future smaller scale livestock operation supported the Court’s finding. Beyond that, the Court also gave significant value to the business side of farming, noting that “managing the business elements of a farm are just as much farming as plowing the ground.” David Mongeau was still actively engaged in the business side of farming beyond the date of filing, as he continued to distribute their 2020 farm income to creditors as it came in from various sources.

The Court spent less time discussing the other four factors. It evaluated the second and third together and found that the Mongeaus’ testimony regarding their intent to start a smaller-scale cattle operation with their brother, coupled with the concrete evidence provided by their involvement in the family farms and partial ownership of cattle equipment, showed a legitimate intent to continue farming of a different type. The Court looked to the debtors’ current ownership of a pickup, cattle equipment, and funds that arose from the sale of equipment and crops to satisfy the fourth element, and finally, the fact that the Mongeaus were “winding up the results of the risks previously taken” was enough to satisfy the fifth factor. After considering all of the circumstances surrounding the Mongeaus’ situation, the Court found that the Mongeaus were engaged in a farming operation when they filed their Chapter 12 petition, and were therefore eligible to be Chapter 12 debtors.

Application

Though the Court cautions that this case should not be taken as an endorsement of the Mongeaus’ methods, it does serve as an example of how farmers who have ceased the physical activity of farming may successfully establish that they are “engaged in a farming operation” and, by extension, Chapter 12 eligibility. The Court’s focus on Congress’s intent to help family farmers to continue farming and willingness to consider all facets of farming, not just working the ground or raising animals, leaves room for debtors to prove what activities constitute farming in their operation. As the Court points out, the inclusion of the simple word “farming” in the list of activities that satisfy the definition of “farming operation” allows for consideration of modernization and the changing processes that come along with it. As with any court case, supporting evidence is crucial. To have the best chance at success, a filer attempting to meet their burden of proof in establishing Chapter 12 eligibility after ceasing some or even all physical farming activities should not only be prepared to give testimony regarding their previous operations as well as current and future plans, but also have concrete evidence to support those intentions.

If you or someone you know is struggling to maintain a farming operation, contact Ag & Business Legal Strategies. Whether it’s necessary to transition out of farming or just to a different type of operation, we can help strategize for that transition and protect farmers’ assets, including planning to maintain eligibility for Chapter 12 bankruptcy if necessary.

Sources

https://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-12-bankruptcy-basics

https://nationalaglawcenter.org/bankruptcy-on-the-farm-a-look-at-the-chapter-12-option/

11 U.S.C.S. § 101 (LexisNexis, Lexis Advance through Public Law 117-57, approved November 12, 2021)

In re Mongeau, No. 21-40055, 2021 Bankr. LEXIS 2923 (Bankr. D. Kan. Oct. 22, 2021)

Categories: Chapter 12

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