DLB II, LLC, 654 B.R. 777

Background:

In 2018 Doug Bell formed two LLCs: DLB II (3590 Heather Lane) and DLB III (2492 Indigo Road) to separate two parcels and activities.
DLB II’s sworn biennial reports and loan discussions with Moana described DLB II as a non‑agricultural business (equipment repair/resale); Moana made a business loan in March 2021 secured by properties and a personal guaranty.
Moana foreclosed after default; an Iowa consent decree (June 15, 2022) concluded Heather Lane was not agricultural land nor a residence; foreclosure sale set for Jan. 2023; DLB II filed Chapter 12 on Dec. 29, 2022.
DLB II listed cattle/farm assets, but Moana presented credible evidence the cattle were kept at DLB III and were sold to Dylan Mueller in March 2022; the court found Moana’s witnesses credible and Bell/other witnesses not credible.
Moana moved to dismiss for Chapter 12 ineligibility under 11 U.S.C. §101(18)(B) and for fraud under §1208(d); after hearing Moana sought conversion to Chapter 7; the Chapter 12 Trustee withdrew support.
Court granted Moana’s motion to amend, converted the case to Chapter 7, and denied DLB II’s sanctions motion for an alleged automatic‑stay violation.

Issues:

Issue	Moana's Argument	DLB II/Bell's Argument	Held
Whether DLB II qualifies as a Chapter 12 "family farming" corporation under §101(18)(B) (farming operation; 80% assets; ≥50% farm debt)	DLB II is not a farming operation; assets/debt do not meet percentages; biennial reports and loan purpose show non‑farm business	DLB II raises livestock and has farm assets (cattle) supporting Chapter 12 eligibility	DLB II does not qualify: no farming at Heather Lane; livestock were at DLB III and sold pre‑petition; asset and debt thresholds not met
Whether dismissal or conversion is warranted under §1208(d) for fraud in connection with the case	Debtor misrepresented farm status to obtain Chapter 12 relief and in filings; fraud supports dismissal or conversion	Denies fraud; asserts farm operations/assets support Chapter 12 filing	Court finds fraud proven by overwhelming evidence and authorizes conversion to Chapter 7 under §1208(d)
Whether Moana may amend its motion after trial to seek conversion to Chapter 7	Conversion was tried by implied consent and arises from the same factual record; amendment should be allowed under Rule 15(b)	Objected on procedural grounds distinguishing contested matters from adversary proceedings	Court allows amendment and considers conversion; grant to convert case to Chapter 7
Whether Moana willfully violated the automatic stay and is liable for sanctions	Any rescheduling of sheriff’s sale was inadvertent/clerical; Moana promptly acted to cancel; inspection trespassers were third parties	Moana knowingly caused a post‑petition reschedule and property inspections causing emotional harm; seeks damages/sanctions	Court finds no willful violation (technical/clerical error), no actual injury shown; sanctions denied

Key Cases Cited

Marino v. Seeley (In re Marino), 437 B.R. 676 (B.A.P. 8th Cir. 2010) (elements for recovery for automatic‑stay violation)
Knaus v. Concordia Lumber Co., Inc., 889 F.2d 773 (8th Cir. 1989) (willful violation standard for stay violations)
In re Dencklau, 158 B.R. 796 (Bankr. N.D. Iowa 1993) (stay violations can be non‑specific‑intent technical errors)
In re Ketelson, 880 F.2d 990 (8th Cir. 1989) (punitive damages under §362 require egregious, intentional misconduct)
In re Carter, 502 B.R. 333 (B.A.P. 8th Cir. 2013) (technical stay violations may not be willful)
Lovett v. Honeywell, 930 F.2d 625 (8th Cir. 1991) (attorneys’ fees under §362(k) require actual damages)