In re Mclawchlin

511 B.R. 422

In re David McLAWCHLIN; dba McLawchlin Farms, Debtor(s).

No. 13–37887.

United States Bankruptcy Court,

S.D. Texas,

Houston Division.

Signed June 5, 2014.

Richard W. Aurich, Jr., Office of David G. Peake, Ch. 13 Trustee, Houston, TX, for David G. Peake, Trustee.

Alexander B. Wathen, Wathen & Associates, Houston, TX, for Debtor.

MEMORANDUM OPINION

MARVIN ISGUR, Bankruptcy Judge.

On December 30, 2013, David McLawchlin filed a chapter 12 bankruptcy petition. (ECF No. 1). On January 28, 2014, the Trustee filed a motion to dismiss or convert on the basis that Mr. McLawchlin is ineligible for chapter 12 relief under 11 U.S.C. § 109(f). (ECF No. 11).

For the reasons set forth in this Opinion, the Court finds that Mr. McLawchlin is not eligible for chapter 12 relief. Mr. McLawchlin will be given the opportunity to convert his case to one under chapter 13. If he does not do so, the case will be dismissed.

Background

The Court held a hearing on March 20, 2014. Mr. McLawchlin testified that he was a rice farmer from 1976 until 2010, when he became disabled. In his Statement of Financial Affairs, Mr. McLawchlin listed that his sole income for tax years 2011 and 2013 was from Social Security benefits ($19,654.89 in 2011 and $20,710.80 in 2013). (ECF No. 8 at 24). In 2012, he listed that his income consisted of $20,362.80 from Social Security benefits and $30,668.04 from “Rice Farmer Litigation Settlement.” (ECF No. 8 at 24). This is consistent with Mr. McLawchlin's 2012 tax return.

At the hearing, Mr. McLawchlin explained that he was a plaintiff in a class action lawsuit against Bayer CropScience. In 2012, he received settlement proceeds from Bayer CropScience in the amount of $30,668.04. This amount was to compensate Mr. McLawchlin for crop losses he sustained during 2006, 2007, and 2008.

Mr. McLawchlin testified that his present farming activity is limited to baling hay. He stated that he does not sell any of the hay—he gives it away to his sister and friends for free. Mr. McLawchlin has not expressed any interest in pursuing farming activities on his land. His sole source of income is his social security benefits.

Chapter 12 Eligibility

Pursuant to 11 U.S.C. § 109(f), “Only a family farmer or family fisherman with regular annual income may be a debtor under chapter 12 of this title.” Chapter 12 of the Bankruptcy Code provides for the adjustment of debts of a “family farmer” or a “family fisherman” as those terms are defined in the Bankruptcy Code. The relevant parts of Section 101(18) state:

The term “family farmer” means—“individual ... engaged in a farming operation whose aggregate debts do not exceed $4,031,575 and not less than 50 percent of whose aggregate noncontingent, liquidated debts ... on the date the case is filed, arise out of a farming operation ... 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 [the date the case was filed], 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). Section 101(19) states that “[t]he term ‘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). Section 101(21) states that “the term ‘farming operation’ includes farming, tillage of 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).

Accordingly, to be a “family farmer” eligible to file a chapter 12 petition, a debtor must be: (1) an individual; (2) with aggregate debts of $4,031,575 or less; (3) engaged in a “farming operation;” (4) have at least 50% of his aggregate, noncontingent liquidated debts arising out of a farming operation; (5) receive more than 50% of his gross income from such operation; and (6) have annual income sufficiently stable and regular to make payments under a Chapter 12 plan. See In re Poe, 2009 WL 2357160 (Bankr.N.D.W.Va.2009).

Analysis

In determining whether Mr. McLawchlin qualifies for relief under chapter 12, the Court must address several questions: (i) Does Mr. McLawchlin satisfy the debt and income requirements under § 101(18)? (ii) Is Mr. McLawchlin “engaged in a farming operation”? (iii) Is Mr. McLawchlin's Social Security income “sufficiently stable and regular to enable such family farmer to make payments under a plan under chapter 12 of this title?”

Debt and Income Requirements Under § 101(18)

At the hearing, Mr. McLawchlin established that his farm debts totaled at least $192,844.00.¹ The testimony is uncontroverted. Accordingly, he satisfies the debt requirement under § 101(18).

To be eligible for relief under chapter 12, Mr. McLawchlin must establish that “not less than 50 percent of [his] aggregate noncontingent, liquidated debts ... arise out of a farming operation.” 11 U.S.C. § 101(18). Mr. McLawchlin's schedules indicate that his debt totals $363,851.00. Therefore, he must show that at least $181,925.50 of that amount arises out of his previous farming operation.

An individual must also have received more than 50 percent of his gross income from the “farming operation” owned by that individual for either (i) the taxable year preceding; or (ii) each of the 2nd and 3rd taxable years preceding the taxable year in which the case concerning the individual was filed. Mr. McLawchlin filed his chapter 12 petition on December 30, 2013. Mr. McLawchlin's 2012 tax return indicates that he had two sources of income: (i) $20,362.80 from Social Security benefits and (ii) a $30,668.04 litigation settlement payment from Bayer CropScience.

The issue is whether the $30,668.04 settlement payment, which represents compensation for farming activities that occurred during the years 2006–2008, constitutes “gross income” received from a farming operation. The Court holds that it does.

Most courts follow the Seventh Circuit' decision in In re Wagner, which is to import the Federal Tax Code definition of “gross income” when determining whether the “farm income” test of section 101(18)(A) is met. In re Wagner, 808 F.2d 542, 549 (7th Cir.1986); See also In re Lewis, 401 B.R. 431, 441 (Bankr.C.D.Cal.2009); In re King, 272 B.R. 281, 293 (Bankr.N.D.Okla.2002); In re Gregerson, 269 B.R. 36, 40 (Bankr.N.D.Iowa 2001) (“Courts have used the tax law meaning of ‘gross income’ in making chapter 12 eligibility decisions.”); In re Lamb, 209 B.R. 759, 760–61 (Bankr.M.D.Ga.1997)(“Congress intended the term ‘gross income’ to have its ordinary Tax Code meaning.”); In re Fogle, 87 B.R. 493, 496 (Bankr.N.D.Ohio 1988); In re Pratt, 78 B.R. 277, 279 (Bankr.D.Mont.1987); In re Faber, 78 B.R. 934, 935 (Bankr.S.D.Iowa 1987); In re Schafroth, 81 B.R. 509 (Bankr.S.D.Iowa 1987).

In fact, many courts rely exclusively on the debtor's tax return to determine whether the income test is met. See In re Gregerson, 269 B.R. 36, 40 (Bankr.N.D.Iowa 2001)(“Indeed, in determining eligibility for chapter 12, some courts have refused to consider anything besides the debtor's tax return.”); see also In re Bergmann, 78 B.R. 911, 912 (Bankr.S.D.Ill.1987); In re Nelson, 73 B.R. 363, 365 (Bankr.D.Kan.1987)( “Section 101(17) is clear on its face that only income from the preceding taxable year is to be considered in determining whether debtors must meet the definition of family farmer. Under that definition, this Court has neither the power nor the inclination to delve beyond the face of debtors' income tax returns.”).

Many courts liberally apply the income test. For example, in In re Wagner, the court held that (“[t]he court does not believe that farmers forced to partially liquidate assets or temporarily rent out machinery or farmland, in an effort to salvage their farm operation, should be foreclosed from seeking relief under Chapter 12, if such actions cause the 50% farm income test not to be met.”).

Although this Court does not necessarily subscribe to these views, Mr. McLawchlin's 2012 tax return shows that more than 50% of his gross income arose from his farming operation. His tax return shows two sources of income for 2012: (i) $20,362.80 from Social Security benefits and (ii) a $30,668.04 litigation settlement payment from Bayer CropScience. Under the Tax Code, the litigation settlement proceeds became income in the year in which they were received. See Espinoza v. C.I.R., 636 F.3d 747, 749–50 (5th Cir.2011) (“Gross income includes all income ‘from whatever source derived’ except as otherwise provided by the Internal Revenue Code.”).

The settlement proceeds resulted from Mr. McLawchlin's farming operations in prior years. The Court finds that the income qualifies as farming income in 2012.

The Trustee argues that Mr. McLawchlin does not meet the income requirement because the $30,668.04 relates back to farming activities during the 2006 to 2008 time period. The Court rejects this argument. The plain language of the statute requires that the individual “receive from such farming operation for more than 50 percent” of such individual's “gross income for the taxable year preceding ...” The statute does not require that Mr. McLawchlin earn the income during the taxable year preceding. Although the settlement payment arises from the rice farming operation he ran in previous years, he received the income in 2012. Mr. McLawchlin's 2012 tax return demonstrates that this $30,668.04 payment exceeds 50 percent of his gross income ($51,030.84). Accordingly, Mr. McLawchlin satisfies the income requirement under § 101(18).

“Engaged in a Farming Operation” Requirement

To be eligible for relief, an individual must be “engaged in a farming operation” at the time the ...