In re Comeau

632 B.R. 707

IN RE: Roger Leon COMEAU, Debtor.

Case No. 20-41029-12

United States Bankruptcy Court, D. Kansas.

Signed October 21, 2021

Tom R. Barnes, II, Topeka, KS, for Debtor.

Memorandum Opinion and Order Denying Motion to Dismiss

Dale L. Somers, United States Chief Bankruptcy Judge

Debtor Roger Leon Comeau filed a Chapter 12 bankruptcy petition to address significant tax liability from capital gains taxes due to the prepetition sale of farm assets. One of Debtor's creditors—the Mortgage Investment Trust Corporation, or MITC—has moved to dismiss the Chapter 12 petition. MITC argues Debtor abandoned farming operations in 2019 and does not now qualify as a "family farmer" as defined by 11 U.S.C. § 101(18) because most of his current farm operations are done through separate limited liability companies.

After trial on the matter,¹ the Court concludes Debtor met his burden of proof to show he is a family farmer and eligible for Chapter 12 relief. The Court denies the motion to dismiss.²

I. Findings of Fact

Debtor has been engaged in agricultural activities since 1978. Debtor started out farming with his father, who was a farmer and oil and gas producer. Beginning in 1982, Debtor began farming individually, starting with a few hundred acres and a few cows. By 2018, Debtor himself (or through his entities, described more fully below) farmed over 15,000 acres, had a little over 1800 head of cattle, employed five people, and had more than twenty vehicles.

Beginning in 2014 and continuing through 2016, Debtor had difficult farm years. Debtor agreed to undergo an orderly liquidation of the greater portion of his farm assets. In 2018 and 2019, Debtor dramatically scaled back his farming operations, which has triggered a significant tax liability. The agricultural assets that triggered that tax liability were owned by Debtor's LLCs but passed to him individually.

Debtor filed a Chapter 12 bankruptcy petition on December 28, 2020. In his petition and Schedules at filing, Debtor disclosed ownership interest in multiple pieces and portions of real estate as follows: (1) twenty-five fractional mineral interests in Rooks County and three fractional mineral interests in Ellis County, Kansas, (2) four whole or partial interests in undeveloped lots in Plainville, Kansas, (3) Debtor's home at 602 SW 10th Street, in Plainville, Kansas, (4) a lot with an office building in Plainville, Kansas, and (5) a one-third interest in 6.6 acres of agricultural land in Rooks County, Kansas. The agricultural land is valued at $1760. Debtor also notes six leases for minerals for oil and gas production.

The only vehicle Debtor disclosed is a sedan valued at $5000. Debtor confirms he individually owns no tractors or other farm implements, although some of his LLCs own tractors and equipment. Debtor answered "no" to the question of whether he owned or had any legal or equitable interest in any farm property.

In his petition, Debtor disclosed his 100% interest in the following business entities:

Liberty Buildings, LLC

Rempe's Plumbing, Heating & AC LLC

TREVO LLC

LR Comeau Ranch, LLC

Liberty Ranch, LLC

RAVASON, LLC

Liberty Operations & Completions, Inc.

Liberty II, Inc.

Liberty Enterprises, Inc.

Liberty Ranch Meat Co., LLC

Debtor listed a value "unknown" for all. None of the LLCs are debtors in bankruptcy.

Debtor's Schedules listed two secured debts: one for $1,013,455.21 to Bennington State Bank, secured by "oil and gas royalties derived from various oil and gas leases in production and real estate," and one for $439,910.15 to Mortgage Investment Trust Corp., although collateral was not listed. Debtor noted two large income tax claims: one to the IRS for $253,488 and one to the Kansas Department of Revenue for $66,692, both for income taxes triggered by the sale of Debtor's farm income producing real estate and personal property.

Debtor's Schedules I states his employment as "farm/ranch/oil & gas production," with a net monthly income of $7600 from "rental property and from operating a business, profession, or farm," and $1665 in monthly social security income. Debtor's monthly expenses are $5242.65.

Debtor's Statement of Financial Affairs indicates certain agricultural real estate was deeded in lieu of foreclosure to Bennington State Bank in March or April 2019, and livestock and personal property was liquidated beginning in 2017 with farm equipment and machinery sold in October 2018. Proceeds from those sales were distributed to Bennington State Bank and Almena State Bank.

A few weeks after filing his petition, on January 19, 2021, Debtor amended his Schedules. The Amendment was apparently to disclose an additional lease of minerals for Debtor's oil and gas production, and a contract for sale for $1,100,000 for those royalties. Debtor again amended his Schedules on January 27, 2021, this time to indicate the 100% ownership of another business entity, called Prairie Post Rock, Inc.

At Debtor's meeting of creditors, held January 27, 2021, Debtor testified that he was not out of the farming business. Debtor testified that he still had wheat and some ground, that he rented ground, had a few hogs, and that he had a small pasture with ten cows, plus takes care of seventeen additional cows for another person. Debtor stated he works on farming "every day." Debtor also stated that he hires out all equipment and his hired hand "farms it for me."

At trial, Debtor expounded on his farming operations. One of Debtor's LLCs—LR Comeau Ranch, LLC—leases land from landowners in Rooks County. Both pre and postpetition, Debtor, through LR Comeau Ranch, LLC, has farmed that land, and harvested crops on that land. For example, the jointly admitted exhibits show that LR Comeau Ranch in July 2021 harvested wheat and grass and received a percentage of the profits of that harvest. Debtor testified that the money goes to the LLC, but then if the LLC has a profit, the profit flows to Debtor. The LR Comeau Ranch, LLC entity also owns cattle and takes care of cattle for another individual, and while Debtor manages that enterprise, the payment for the cattle is made to the LLC. And LR Comeau Ranch, LLC also owns about 320 acres, where it has pigs and cultivated ground, plus a small area of pasture for either cattle or that can be baled. As another example, another of Debtor's LLCs—Liberty Ranch Meat Co., LLC—owns pigs. Debtor sells those pigs and payment is made to the LLC, but then any profits flow to Debtor.

Debtor also testified, however, that he does some farming in his own name, not through his LLCs. Debtor's 6.6 acres of agricultural real estate houses cattle, and he works those cattle and his hogs. Debtor owns ten head of cattle. Debtor testified he hires out "a good deal" of his farm work, due to his age and the sheer amount of work that needs done, but that he feeds animals, rounds up cattle, fixes fence, etc. Debtor's intent is to continue farming. Debtor testified he has not abandoned farming, but simply scaled back.

Debtor has not yet filed a Chapter 12 proposed plan and has requested an extension to December 1, 2021 to do so. Debtor has recently received orders permitting the sale of certain of his undeveloped lots in Plainville, Kansas and certain of his oil and gas working interests and intends to file his Chapter 12 plan once those sales are complete.

MITC filed two proofs of claim. Both claims were acquired from Almena State Bank via prepetition assignment of promissory notes. Proof of Claim No. 8 is for $193,258.63, secured by assignments in life insurance policies. Proof of Claim No. 8 notes, however, that the life insurance policies were redeemed for cash value by Almena State Bank and the cash value of the policies was reduced due to Debtor's prior redemption in alleged violation of the assignments, making the claim wholly unsecured. Proof of Claim No. 9 is for $265,791.03, secured by farm products and proceeds thereof and certain other personal property, perfected with UCC-1 statements. Again, the claim is wholly unsecured because of a zero value on the property.

II. Conclusions of Law

A. Chapter 12 Eligibility Generally

A motion to dismiss for a debtor's lack of eligibility to file under a particular chapter of Title 11 is a matter concerning administration of the estate and a core proceeding under 28 U.S.C. § 157(b)(2)(A) over which this Court may exercise subject matter jurisdiction.³ Under § 1208(c), the Court may dismiss a Chapter 12 case for "cause." Debtors bear the burden of proof to show eligibility for relief under Chapter 12.⁴ To make the determination of whether Debtors are eligible for Chapter 12, the Court focuses on the statute's structure, and the plain meaning of the words used in the Code.⁵

Chapter 12 was enacted because the other chapters of the Code did not "provide effective reorganization relief to the majority of family farmers."⁶ The Code provides, "[o]nly a family farmer ... with regular annual income may be a debtor under chapter 12" of Title 11.⁷ The phrase "family farmer" is then defined to mean an "individual ... engaged in a farming operation" whose aggregate debt and gross income satisfy statutory requirements.⁸ In this case, the challenge to eligibility is limited to whether Debtor satisfies the "engaged in a farming operation" portion of the definition of "family farmer." The Code indicates the phrase " ‘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."⁹ The word "farming" is not itself defined.

Case law establishes the test for Chapter 12 eligibility is determined at the time the case is filed.¹⁰ There are two elements to determining if a debtor is "engaged in a farming operation:" a temporal element (the debtor must be engaged in a farming operation on the date of filing); and a substantive element (whether the debtor's activities on that date constituted a farming operation).¹¹...