609 B.R. 339
Bankr. D. Mont.2019Background:
- Olson began farming in 2017 with an FSA "beginning farmer" operating loan secured by crops and equipment; loan documents required FSA approval before capital purchases.
- Debtor made multiple capital purchases and equipment trades without FSA approval; FSA issued notices of non-monetary default and required additional security agreements.
- In January 2019 several checks payable to Olson and secured creditors (including FSA and Pro Co-op) were mobile-deposited into Olson’s bank account; signatures purporting to be endorsements by FSA and Pro Co-op appeared on the checks but FSA and Pro Co-op employees denied endorsing them. Olson asserted the Fifth Amendment and did not testify to explain these deposits.
- Olson filed Chapter 12 on May 14, 2019. FSA moved to convert to Chapter 7 under §1208(d) for fraud or to dismiss under §1208(c) and §109(f) alleging bad faith and ineligibility as a family farmer.
- At the hearing the court admitted documentary evidence, heard testimony, and took the matter under advisement. The court found compelling evidence of pre-petition forgery/possible conversion but concluded the acts lacked the necessary nexus to the bankruptcy case.
Issues:
| Issue | FSA's Argument | Olson's Argument | Held |
|---|---|---|---|
| Whether to convert to Chapter 7 under §1208(d) for fraud | Olson committed fraud (forgery, conversion of secured-collateral proceeds) warranting involuntary conversion | No fraud "in connection with the case"; acts were pre-petition and not in furtherance of bankruptcy | Denied — FSA failed to prove fraud in connection with the Chapter 12 case by clear and convincing evidence; pre-petition acts lacked nexus to the case |
| Whether bad faith filing justifies conversion/dismissal under §1208(c) | Petition filed in bad faith to defeat creditors and avoid foreclosure | Debtor filed in good faith and has cooperated, amended schedules, and pursued plan confirmation | Conversion under §1208(d) cannot be based solely on bad faith; dismissal under §1208(c) for cause was not supported on these facts |
| Whether Olson is ineligible for Chapter 12 under §109(f) / §101(18) (not a family farmer) | Olson admitted he had not received >50% of gross income from farming in the two preceding years | 2018 tax return shows farming-related income exceeding 50% of gross income for the taxable year preceding filing | Held eligible — 2018 tax return provides sufficient evidence that >50% of income was from farming for §101(18) purposes; plan feasibility remains to be tested at confirmation |
| Whether asserting the Fifth Amendment at the §341 meeting justifies sanction/dismissal | Invocation indicates concealment and supports conversion/dismissal | Assertion is constitutionally protected and cannot be made "costly" by sanction | Held: Assertion of the Fifth Amendment alone did not establish fraud or bad faith and cannot be the basis for involuntary conversion here |
Key Cases Cited
- In re Reinbold, 110 B.R. 442 (Bankr. D. S.D. 1990) (conversion where debtor transferred collateral in violation of stipulation and attempted to conceal conduct)
- Reinbold v. Dewey County Bank, 942 F.2d 1304 (8th Cir. 1991) (affirming bankruptcy court's conversion decision)
- In re Williamson, 414 B.R. 886 (Bankr. S.D. Ga. 2008) (conversion for concealment, false statements, and omissions during Chapter 12)
- In re Nichols, 447 B.R. 97 (Bankr. N.D. NY 2010) (§1208(d) conversion is an extreme remedy reserved for dishonest, noncooperative debtors)
- Clark v. Devries (In re Clark), [citation="652 F. App'x 543"] (9th Cir. 2016) (conversion appropriate where debtor sold farm product contrary to court order and failed to disclose material restrictions)
- In re Leavitt, 171 F.3d 1219 (9th Cir. 1999) (factors for assessing good faith in consumer bankruptcy filings)
- Marsch v. Marsch (In re Marsch), 36 F.3d 825 (9th Cir. 1994) (good faith inquiry focuses on whether debtor seeks to unreasonably deter creditors or to effect a feasible reorganization)