511 B.R. 422
Bankr. S.D. Tex.2014Background
- McLawchlin filed a chapter 12 petition on December 30, 2013; the Trustee moved to dismiss or convert under 11 U.S.C. § 109(f).
- Court must determine eligibility for chapter 12 relief and potential conversion to chapter 13 if not eligible.
- At hearing, McLawchlin testified he is a former rice farmer disabled since 2010; his 2011 and 2013 income is Social Security; 2012 income includes a $30,668.04 Bayer CropScience settlement.
- McLawchlin’s current farming activity is limited to baling hay given away for free; he has no demonstrated interest in farming activities going forward; sole income is Social Security.
- Debts total at least $192,844 (farm-related) and schedules show total debts of $368,851; the court must determine what portion is farm-related for § 101(18).
- Court considers whether McLawchlin is a ‘family farmer’ with regular income and whether he is engaged in a farming operation under § 101(18)-(21).
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether McLawchlin meets §101(18) debt and income requirements | McLawchlin’s farm debts meet the threshold; more than 50% of gross income in 2012 came from farming activity through the settlement. | Trustee contends income test not satisfied due to timing and treatment of settlement as farm income. | McLawchlin satisfies both debt and income requirements under §101(18). |
| Whether McLawchlin was engaged in a farming operation at filing | Farming history and assets show engagement and intent to farm in the future. | McLawchlin’s current activity is minimal hay baling with no farming plans, lacking ongoing farming engagement. | Under totality of circumstances, McLawchlin is not engaged in a farming operation. |
| Whether McLawchlin’s income is sufficiently stable and regular for Chapter 12 | Income sources include farming-related receipts; 2012 settlement qualifies as farming income. | Reliance on a settlement from past farming years undermines regularity. | McLawchlin’s income is sufficiently stable and regular under §101(19) as interpreted with farming income. |
| Whether conversion from Chapter 12 to Chapter 13 is permissible | Court should allow conversion to Chapter 13 if in good faith and not prejudicial. | Question of whether conversion to a non-Chapter 7 path is allowed and appropriate. | Court may convert Chapter 12 to Chapter 13 by motion; will permit McLawchlin to file a conversion motion meeting specific standards. |
| What conditions govern McLawchlin's proposed conversion to Chapter 13 | McLawchlin would proceed with a conversion motion to Chapter 13. | Conversion should be conditioned on good faith, no prejudice to creditors, and equity. | If the motion showing good faith, no creditor prejudice, and equity is not filed by June 26, 2014, case will be dismissed without prejudice to other chapters. |
Key Cases Cited
- In re Wagner, 808 F.2d 542 (7th Cir. 1986) (imports tax-definition of gross income for farm income test)
- Espinoza v. C.I.R., 636 F.3d 747 (5th Cir. 2011) (taxable income includes all income from any source unless code provides otherwise)
- In re Watford, 898 F.2d 1525 (11th Cir. 1990) (totality of circumstances test for engaging in farming operation; intent to salvage farming operation)
- In re Orr, 71 B.R. 639 (Bankr.E.D.N.C. 1987) (court may permit conversion to Chapter 11 from Chapter 12 where in good faith and creditors not prejudiced)
- In re Vaughan, 100 B.R. 423 (Bankr.S.D.Ill. 1989) (supports Orr rationale on conversion pathways)
- Marrama v. Citizens Bank of Massachusetts, 549 U.S. 365 (U.S. 2007) (pre-petition bad-faith conduct can bar conversion rights; supports flexibility in conversion decisions)
- In re Gregerson, 269 B.R. 36 (Bankr.N.D. Iowa 2001) (courts may allow conversion from Chapter 12 to non-Chapter 7 under appropriate conditions)
- In re Maike, 77 B.R. 832 (Bankr.D. Kan. 1987) (liberal interpretation of farming operation and farm history)