In rе: RESON LEE WOODS, a/k/a Lee Woods, d/b/a Bar LS Farms, f/d/b/a Bar LS Properties Inc.; SHAUN K. WOODS, a/k/a Shaun Woods, d/b/a Bar LS Farms, f/d/b/a Bar LS Properties Inc., Debtors. FIRST NATIONAL BANK OF DURANGO, Appellant, v. RESON LEE WOODS; SHAUN K. WOODS, Appellees.
No. 12-1111
United States Court of Appeals, Tenth Circuit
February 19, 2014
PUBLISH
Garry R. Appel, Appel & Lucas, P.C., Denver, Colorado, for Appellant.
Cheryl A. Thompson, Thompson Brownlee, Vail, Colorado (Daniel J. Lowenberg, Mountain Law Group, L.L.C., Montrose, Colorado, with her on the brief), for Appellees.
HOLMES, Circuit Judge.
Appellant First National Bank of Durango (“First National Bank“) appeals from the Bankruptcy Appellate Panel‘s (“BAP‘s“) decision affirming the bankruptcy court‘s confirmation of the Chapter 12 bankruptcy plan of Appellees Reson and Shaun Woods (“Debtors“). Although First National Bank raises several issues on appeal, we only reach the first: whether Debtors are permitted to seek relief under Chapter 12 as “family farmers.” In deciding this issue, we are presented with a question of first impression for our court—namely, when does a debt “for” a principal residence “arise[] out of a farming operation“? See
Because we conclude that the bankruptcy court did not apply the proper legal standard and test in its analysis of Debtors’ eligibility for Chapter 12 relief, we deem it appropriate and prudent to remand for that court to apply the correct
I
Debtors are a husband and wife who, in 2007, purchased farmland in southwestern Colorado on which to run their hay-farming operation. Until they filed for bankruptcy in November 2010, Debtors accumulated various debts, some of which were related to their farming operation and others of which were not. One such debt is a $480,000 loan Debtors obtained from First National Bank. Approximately $284,000 of this loan was used to pаy off a loan from another bank that was obtained to purchase Debtors’ farmland. The parties do not dispute that this portion of the debt “arises out of” a farming operation; nor do they dispute that the majority of the remaining loan proceeds—what we call the “construction loan“—were used to construct Debtors’ principal residence on the farmland.
It is the construction loan that is our primary focus. This is because Debtors petitioned for Chapter 12 relief as family farmers. A “family farmer” is, inter alia, an individual or individuals
not less than 50 percent of whose aggregate noncontingent, liquidated debts (excluding a debt for the principal residence of such individual or such individual and spouse unless such debt arises out of a farming operation), on the date the case is filed, arise out of a farming operation owned or operated by such individual or such individual and spouse . . . .
The bankruptcy court disagreed with First National Bank. It concluded that the construction loan should not be excluded from the debt total under
The BAP agreed with the bankruptcy court that the construction loan arose out of a farming operation. It recognized that “[f]ew courts have considered when a debt ‘arises out of a farming operation.‘” Id. at 1381 (B.A.P. Op., filed Feb. 27, 2012). The BAP elected to adopt the approach taken in In re Saunders, 377 B.R. 772 (Bankr. M.D. Ga. 2007). Accordingly, it applied the following test: “to ‘arise
This appeal followed.
II
“Although this appeal is from a decision by the BAP, we review only the Bankruptcy Court‘s decision.” Miller v. Deutsche Bank Nat‘l Trust Co. (In re Miller), 666 F.3d 1255, 1260 (10th Cir. 2012) (quoting C.O.P. Coal Dev. Co. v. C.W. Mining Co. (In re C.W. Mining Co.), 641 F.3d 1235, 1240 (10th Cir. 2011)) (internal quotation marks omitted); accord Wagers v. Lentz & Clark, P.A. (In re Wagers), 514 F.3d 1021, 1022 (10th Cir. 2007) (per curiam). “We review matters of law de novo, and we review factual findings made by the bankruptcy court for clear error.” In re Miller, 666 F.3d at 1260 (internal quotation marks omitted). “[W]e treat the BAP as a subordinate appellate tribunal whose rulings are not entitled to any deference (although they certainly may be persuasive).” Mathai v. Warren (In re Warren), 512 F.3d 1241, 1248 (10th Cir. 2008); accord Parks v. Dittmar (In re Dittmar), 618 F.3d 1199, 1204 (10th Cir. 2010).
First National Bank contends that the bankruptcy court applied the incorrect legal test to determine whether the construction loan arose out of a farming operation pursuant to
Ultimately, because the bankruptcy court (and the BAP) applied the wrong legal test, we determine in Part II.B that neither of the factors upon which the bankruptcy court relied can, as a matter of law, support classifying Debtors’ principal-residence debt as debt that “arises out of a farming operation.” And, we conclude that a remand is required so that the bankruptcy court may apply our newly fashioned test in the first instance.
A
Our task is one of statutory interpretation. The interpretation of a statute is a legal question; thus, we review the bankruptcy court‘s interpretation of the
We bеgin by interpreting the phrase “arises out of” in the “family farmer” definition of
1
“[I]nterpretation of the Bankruptcy Code starts ‘where all such inquiries must begin: with the language of the statute itself.‘” Ransom v. FIA Card Servs., N.A., --- U.S. ----, 131 S. Ct. 716, 723 (2011) (quoting United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241 (1989)); see United States v. West, 671 F.3d 1195, 1199 (10th Cir. 2012) (“[W]e first and foremost look to the statute‘s language to ascertain Congressional intent.“). “[T]he Bankruptcy Code must be construed liberally in favor of the debtor and strictly against the creditor.” In re Warren, 512 F.3d at 1248 (quoting Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1292 (10th Cir. 1997)) (internal quotation marks omitted).
“It is well established that ‘when the statute‘s language is plain, the sole function of the courts—at least where the disposition required by the text is not absurd—is to enforce it according to its terms.‘” Lamie v. U.S. Tr., 540 U.S. 526, 534 (2004) (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 6 (2000)); see United States v. Sprenger, 625 F.3d 1305, 1307
As noted, a “family farmer” is, in relevant part, an individual or an individual and spouse “not less than 50 percent of whose aggregate noncontingent, liquidated debts (excluding a debt for the principal residence of such individual or such individual and spouse unless such debt arises out of a farming operation), on the date the case is filed, arise out of a farming operation.”
We begin our analysis by examining the subsection‘s structure, as “the meaning of statutory language, plain or not, depends on context.” United States v. Villa, 589 F.3d 1334, 1343 (10th Cir. 2009) (quoting Bailey v. United States, 516 U.S. 137, 145 (1995)) (internal quotation marks omitted); see Salazar v. Butterball, LLC, 644 F.3d 1130, 1137 (10th Cir. 2011) (“The plainness or ambiguity of statutory language is determined by reference to the language itself, the specific context in which that language is used, and the broader context of the statute as a whole.” (quoting Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997))
With that objective in mind, in Chapter 12, Congress provided “specialized
But “‘[r]ural’ and ‘farm’ are not synonymous[,]” Porter, supra, at 730, and Congress sought to ensure that Chapter 12‘s more generous remedial provisions were only available to those who could be said to be true family farmers. See In re Watford, 898 F.2d at 1528 (“Congress was also concerned that family farmers only . . . benefit from the provisions of Chapter 12.” (emphasis added)); In re Vernon, 101 B.R. 87, 89 (Bankr. E.D. Mo. 1989) (“The provisions ensure that only family farmers—not tax shelters or large corporate entities—will benefit. Consequently, Congress has identified precisely whom Chapter 12 was intended to help.” (citation omitted)); see also Resnick & Sommer, supra, ¶ 1200.01[3][a][i], at 1200-5 (“The definition [of ‘family farmer‘] has been drafted narrowly so as to limit chapter 12 eligibility to true ‘family’ farmers and to exclude investors or speculators who use farm losses to shelter non-farm
Part and parcel of the rule is an exclusion that applies in the ordinary course: it excludes from the aggregate debt (of which one-half or more must be farm debt) the debt “for” one‘s “principal residence.” In other words, one is a family farmer if at least one-half of one‘s non-principal-residence debt arises out of a fаrming operation. See, e.g., In re Quillian, No. 07-20199, 2007 WL 3046348, at *2 (Bankr. S.D. Tex. Oct. 15, 2007) (“The exclusion provision in
Finally, we turn to the exception. Under the rule, ordinarily the debt for one‘s principal residence is not included in the aggregate debt; on the other hand, the exception provides that if such debt “arises out of” a farming operation, then it is included in the aggregate-debt calculation and also constitutes farm debt for purposes of the rule (because the debt “arises out of” a farming operation). In other words, if the exception applies, the aggregate debt and farm-debt portion of the aggregate debt increase by the same amount, which necessarily increases the proportion of one‘s debt that “arises out of” a farming operation.
The language of the phrase “arise out of” is of course essentially identical as it appears in the rule and the exception.3 And, in that regard, we recognize that “[t]he normal rule of statutory construction assumes that identical words used in different parts of the same act are intended to have the same meaning.” Sorenson v. Sec‘y of Treasury, 475 U.S. 851, 860 (1986) (internal quotation marks
However, we also are cognizant of the fact that the phrase as found in the exception has a different—in some respects more narrow—point of focus than the phrase as found in the rule. Notably, the former (that is, the exception) focuses entirely on the debt associated with the putative family farmer‘s principal residence, whereas the latter (that is, the phrase “arises out of” as found in the rule) relates to all “aggregate noncontingent, liquidated debts.”
In the end, we conclude that a debt “for” a principal residence “arises out of” a farming operation only if the debt is directly and substantially connected to the farming operation. Then, we proceed to determine what test is optimal in this factual context—which involves loan debt—for discerning whether this direct-
2
With the statute‘s structure outlined, we now turn to its plain language. The term “farming operation” is defined to “include[] 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.”
The phrase “arises out of” is left undefined. “When a statute does not define a term, we typically give the phrase its ordinary meaning.” FCC v. AT & T Inc., --- U.S. ----, 131 S. Ct. 1177, 1182 (2011) (internal quotation marks omitted); see Sandifer v. U.S. Steel Corp., --- U.S. ----, 134 S. Ct. 870, 876 (2014) (“It is a ‘fundamental canon of statutory construction’ that, ‘unless otherwise defined, words will be interpreted as taking their ordinary, contemporary, common meaning.‘” (quoting Perrin v. United States, 444 U.S. 37, 42 (1979))); State Bank of S. Utah v. Gledhill (In re Gledhill), 76 F.3d 1070, 1077 (10th Cir. 1996) (“Courts properly assume, absent sufficient indication to the contrary, that Congress intends the words in its enactments to carry their ordinary, contemporary, common meaning.” (internal quotation marks omitted)).
To “arise” means “[t]o originate; to stem (from)” or “[t]o result (from).” Black‘s Law Dictionary 122 (9th ed. 2009); see Webster‘s Third New International Dictionary 117 (2002) [hereinafter “Webster‘s“] (defining “arise” as “to originate from a specified source“). These definitions all connote at least some connection between the object and its source—that is, at least some connection between the debt at issue and a farming operation. Further analysis, however, sheds light on the nature of that connection.
The statute‘s structure—setting forth a baseline rule and an exception—leads us to believe that the exception must be construed narrowly. Recall, under the rule, that ordinarily the debt for an individual‘s principal residence is not included in the aggregate debt; it is not considered to “arise out of” a farming operation. In other words, in the normal course—reflecting the
Congress, however, created an exception: in the ordinary course, the rule functions to exclude debt for a principal residence “unless” the exception applies—that is, “unless such debt [for a principal residence] arises out of a farming operation.”
Because this is a scheme whereby a default rule is subject to an exception, we are guided by the interpretive principle that exceptions to a general proposition should be construed narrowly. See Comm‘r of Internal Revenue v. Clark, 489 U.S. 726, 739 (1989) (“In construing [statutes] in which a general statement of policy is qualified by an exception, we usually read the exception narrowly in order to preserve the primary operation of the provision.“); City of New York v. Beretta U.S.A. Corp., 524 F.3d 384, 403 (2d Cir. 2008) (following the “interpretive principle that statutory exceptions are to be construed narrowly in order to preserve the primary operation of the [general provision]” (quoting Nussle v. Willette, 224 F.3d 95, 99 (2d Cir. 2000)) (internal quotation marks omitted)); see also United States v. Fort, 472 F.3d 1106, 1123 (9th Cir. 2007)
Flowing from this interpretive principle—that we must construe exceptions narrowly—is the related concept that exceptions must not be interpreted so broadly as to swallow the rule. See Cuomo v. Clearing House Ass‘n, L.L.C., 557 U.S. 519, 530 (2009) (avoiding interpreting an exception in a manner that “would swallow the rule“); cf. Minter v. Prime Equip. Co., 451 F.3d 1196, 1212 (10th Cir. 2006) (interpreting the impeachment exception to
total debt must “arise out of” a farming operation, excluding from the debt total any debt for a principal residence that does not arise out of a farming operation. Were that the definition of “family farmer,” it would be clear that, in Congress‘s view, family farmers’ principal residences ordinarily “arise out of” their farming operations.
But that is not the scheme Congress chose. Accordingly, we must interpret the phrase “arise out of” in a way that allows the rule‘s exception to function as just that—an exception. See Clark, 489 U.S. at 739; Beretta U.S.A. Corp., 524 F.3d at 403; see also Burrage v. United States, --- U.S. ----, 134 S. Ct. 881, 892 (2014) (“The role of this Court is to apply the statute as it is written—even if we think some other approach might accor[d] with good policy.” (alteration in original) (quoting Comm‘r of Internal Revenue v. Lundy, 516 U.S. 235, 252 (1996)) (internal quotation marks omitted)); Sandifer, 134 S. Ct. at 878 (same). We believe that construing this language to mean that there must be a direct and substantial connection between the debt for a principal residence and the farming operation serves that end. Cf. Heffley v. Comm‘r of Internal Revenue, 884 F.2d 279, 283 (7th Cir. 1989) (noting that “in order to achieve the congressional intent[, certain] exceptions must be narrowly applied and the corresponding exclusions broadly interpreted“). In other words, applying the foregoing settled principles of statutory construction, we believe that construing the phrase “arise out of” to embody a direct-and-substantial-connection standard serves to ensure
A statutory standard requiring anything less than a direct and substantial connection, in our view, could not have been envisioned by Congress because a lesser standard, in application, would present a serious and unacceptable risk of the exception consuming the rule. For example, in many cases, very little ingenuity would be needed to conjure up an indirect connection of some kind between a family farmer‘s principal residence and his farming operation. Indeed, nearly every family farmer‘s principal residence could be said to have at least an indirect connection of some kind to his or her farming operation; among other things, the connection could be as tenuous as the principal residence being the place where the farmer keeps the clothing in which he farms.
Put another way, in light of our statutory analysis supra—indicating that the default rule is premised in part upon the view that ordinarily, debt for a principal residence will not “arise out of” a farming operation—we cannot conclude that, in enacting the rule‘s exception, Congress intended to obliterate that foundational view regarding principal-residence debt and render the
We recognize that divining the appropriate standard—viz., the direct-and-substantial-connection standard—only takes us part of the way in the analysis. We next must determine what test provides the optimal vehicle for discerning when this standard is satisfied. With this objective in mind, we examine below the tests that courts have commonly applied. They have done so when construing the phrase “arise out of” as it appears in the fifty-percent-farm-debt rule. From this examination, we identify a test that will permit us to optimally disсern—at least in the loan-debt context, as here—when the direct-and-substantial-connection standard is satisfied. Specifically, we conclude that this test is an objective “direct-use” test.4
3
Courts have commonly applied at least three tests in discerning whether debt “arises out of” a farming operation: the “but-for” test, the “some-connection” test, and the “direct-use” test. After examining the but-for and some-connection
The but-for test provides that a debt “arises out of a farming operation” if but for the debt, there would be no farm. See, e.g., In re Reak, 92 B.R. 804, 805-06 (Bankr. E.D. Wis. 1988) (identifying several cases where the courts applied the but-for test); see also Kelley, supra, at 492 (“The ‘but for’ test can be expressed as: but for the indebtedness created by the family farmer, there would be no farm.“). The but-for test was at least in part derived from thе Seventh Circuit‘s decision in In re Armstrong, 812 F.2d 1024 (7th Cir. 1987), where the court had to decide what portion of the debtor‘s income was derived “from a farming operation” under an earlier version of
The bankruptcy court in In re Rinker, 75 B.R. 65 (Bankr. S.D. Iowa 1987), relied on In re Armstrong to decide whether certain debt arose from a farming
Other courts have followed suit by relying on In re Armstrong in applying the but-for test. See In re Reak, 92 B.R. at 805–06 (describing the but-for test as a “common thread” in analogous bankruptcy decisions and holding that the debt used to acquire farmland was “inescapably interwoven with farming operations” and “but for [that debt], there would be no farm” (internal quotation marks omitted)); In re Roberts, 78 B.R. 536, 537 (Bankr. C.D. Ill. 1987) (following In re Armstrong and holding that “[t]he debts in question in the instant case arose when the Debtor inherited the farm from her mother. The estate taxes have to be paid in order for the Debtor to keep the farm. But for the payment of the estate taxes, there would be no farm.“); see also In re Teolis, 419 B.R. 151, 161 (Bankr. D.R.I. 2009) (applying the but-for test set forth in In re Reak).
In our view, the but-for test does not comport with the phrase “arises out of” as found in the exception. If a court were applying a but-for test, it would ask, but for the debt “for the principal residence,” would there be a “farming operation“? See In re Reak, 92 B.R. at 806 (“[B]ut for the land acquired by the debtor [through the debt at issue], there would be no farm . . . .” (internal quotation marks omitted)); In re Roberts, 78 B.R. at 537 (“But for the payment of the estate taxes, there would be no farm.“); In re Rinker, 75 B.R. at 68 (“Without the [debt for the] land, the [debtor] would have no farm.“). Common sense and logic tell us that the answer to this question with respect to debt for a principal residence almost always wоuld be yes—that is, there almost always would still be a farming operation, regardless of any debt obtained for a principal residence. In other words, the incurring of debt for family farmers’ principal residences would seldom be dispositive of the existence vel non of the farming operations at which they work. Indeed, in this case, Debtors’ farming operation preexisted the construction of their residence. The consequence of this situation—of the debt “for” the principal residence, in almost every instance, not being a but-for cause of the existence of the farming operation—would be that the exception would almost never apply.
Although we must narrowly construe an exception, see Clark, 489 U.S. at 739, employing the but-for test in this context would have a limiting effect that we are hard-pressed to conclude that Congress intended. In other words,
As noted, other courts have applied what we have labeled a “some-connection” test. This test focuses on whether the purpose (and sometimes the use) of the debt has “some connection” to farming operations. See In re Saunders, 377 B.R. at 774–76 (collecting cases and concluding that “to arise out of a farming operation the purpose of a debt must have some connection to the debtor‘s farming activity” (emphasis added) (internal quotation marks omitted)); In re Marlatt, 116 B.R. 703, 705 (Bankr. D. Neb. 1990) (“[F]or a debt to arise out of a farming operation, there must be a connection between the debt and the debtor‘s farming activity.” (emphasis added)).
Notably, in the instant case, the BAP adopted the some-connection test
However, we decline to adopt the some-connection test here. This test is inconsistent with our interpretation of the statutory phrase “arises out of.” As we understand it, that phrase contemplates a direct and substantial connection between the debt “for” the principal residence and the farming operation. It follows perforce that a test requiring only some connection—no matter how tenuous and insubstantial, or indirect—between the principal-residence debt and the farming operation would dilute and conflict with this direct-and-substantial-connection standard. Moreover, we are reinforced in our view that the some-connection test is not the one that Congress envisioned because applying it in the context of the exception would almost certainly result in the exception swallowing the rule. For example, in many cases, it would not be difficult to envision a connection—however remote—between a family farmer‘s principal
Ultimately, we conclude that—at least in the loan-debt context, as here—an objective “direct-use” test optimally fits with our direct-and-substantial-connection statutory standard. Such a test is singularly focused on whether the loan proceeds were directly applied to or used in a farming operation. This test appears to have begun with In re Douglass, 77 B.R. 714 (Bankr. W.D. Mo. 1987), where the court held that “the reason or purpose for which the debt was incurred coupled with the use to which the borrowed funds were put . . . should be the criteria to determine whether the debt ‘arises out of a farming operation[.]‘” 77 B.R. at 715. But the test was subsequently modified in important ways by the bankruptcy court in In re Kan Corp., 101 B.R. 726 (Bankr. W.D. Okla. 1988); it is the version of the test found there that we ultimately adopt.
The court in In re Kan Corp. focused solely on whether the loan proceeds
While it may be true that the purpose of [obtaining the second loan] was to save Debtor‘s farmland and that the proceeds of the farming operation were used to meet the payments on the loan, those facts are not material to the issue. Whether a debt incurred from a loan “arises out of farming operations” is determined by the use made of the loan proceeds. In this case, the [second] loan . . . went to pay off Debtor‘s obligation to [the first bank], and the proceeds of the [first] loan . . . were invested in a beer distributorship.
Id. at 727 (emphasis added). The court held that this debt did not “arise out of a farming operation” because the loan proceeds were used to purchase a beer distributorship—a business venture completely unrelated to farming operations. Id.
Significantly, in In re Kan Corp., the court refused to consider “the motive of the debtor” to answer whether a debt arose out of a farming operation because looking to “the use made of the loan proceeds” provides “more objective criteria.” Id.; see also Otoe Cnty. Nat‘l Bank v. Easton (In re Easton), 883 F.2d 630, 636 (8th Cir. 1989) (rejecting the idea that “any loan secured by farmland” can be characterized as “arising out of a farming operation” “regardless of the purpose to
Thus, we conclude that the version of the use test аpplied in In re Kan Corp.—an objective direct-use test—is the one that fully comports with the direct-and-substantial-connection standard, at least in the loan-debt context. Succinctly stated, a loan debt has a direct and substantial connection to a farming operation, and thus “arises out of” that operation, if “the proceeds of the loan” are “directly applied to or utilized in the farming operation.” Id. For the reasons suggested in In re Kan Corp., we reject a version of this test that would focus in part on the “motive of the debtor,” id.; such a test would be less certain in its application because of the ultimately unfathomable nature of another‘s thoughts. The objective direct-use test that we adopt reflects an appropriately narrow construction of the exception; however, it leaves open plausible circumstances in which the exception could apply.
As the rule clearly envisions, in many instances, the proceeds of a debt “for” a principal residence will not be directly used in a farming operation,
One can easily imagine, however, instances when the proceeds of a loan “for” a principal residence would be applied to such activities. For example, a soybean farmer could obtain a second mortgage on his principal residence in order to buy soybean seeds for planting—and then in fact buy the seeds. The mortgage would certainly amount to a debt “for” his principal residence. Furthermore, it is no less patent that the purchase of the seeds with the proceeds of that loan debt would constitute a “farming operation” within the meaning of
We need not fully explicate here the various situations in which the
In sum, we have interpreted the statutory term “arises out of” in the exception to the fifty-percent-farm-debt rule of
B
Debtors had the burden of establishing their eligibility for Chapter 12 relief. See Ames v. Sundance State Bank (In re Ames), 973 F.2d 849, 851 (10th Cir. 1992) (“Debtors [under Chapter 12] bear the burden of establishing all elements necessary for confirmation of a plan, including the feasibility of the plan.“); see also Tim Wargo & Sons, Inc. v. Equitable Life Assurance Soc‘y (In re Tim Wargo & Sons, Inc.), 869 F.2d 1128, 1130 (8th Cir. 1989) (noting in a Chapter 12 proceeding that “the burden was debtor‘s to elicit the relevant facts“); cf. Hamilton Creek Metro. Dist. v. Bondholders Colo. Bondshares (In re Hamilton Creek Metro. Dist.), 143 F.3d 1381, 1384–85 (10th Cir. 1998) (“The tests of insolvency are applied as of the time of filing, and the petitioner bears the burden
The bankruptcy court concluded that the construction loan arose out of a farming operation. In support of this conclusion, the court stated that the residence was “an integral part of the farm operation in [the] sense that,” first, “the farm‘s office, books, and records . . . are maintained at the farmhouse,” and second, “that the proximity of these debtors to their hands-on, day-to-day, farming operation in terms of care of livestock and irrigation, that [the residence] isn‘t just incidental . . . [it] is where they live.”6 Aplt. App. at 797 (emphasis added).
We begin by assessing whether the bankruptcy court‘s findings are sufficient to support its conclusion under our newly fashioned test. To do so, we6
ask whether either of the two factors upon which the court relied allows us to conclude that the construction loan is directly and substantially connected to Debtors’ farming operation. We answer in the negative, recognizing that in the loan-debt context, our true focus must be on whether the loan proceeds from the construction loan were directly used in the farming operation.
It is undisputed that the construction loan was used to build Debtors’ principal residence. Merely because the residence contained the farming operation‘s office, books, and records does not mean, however, that the proceeds of the loan were “directly applied to or utilized in the farming operation.” In re Kan Corp., 101 B.R. at 727. In other words, the fact that the residence contains an office and the farming operation‘s books and records has not been shown by Debtors to be anything more than an incidental matter.7 Were we to hold that
such a facially tenuous connection to a farming operation was sufficient, the exception would swallow the rule—that is, virtually every family farmer‘s principal residence could be deemed to arise out of a farming operation.
The second factor that the bankruptcy court relied upon rests on an even weaker foundation. The proximity of the residence to the farming operation is irrelevant to how the proceeds of the construction loan were used. The fact that Debtors’ principal residence is located on the farm cannot reasonably lead us to conclude that the funds derived from the construction loan were directly used in the farming operation itself. Indeed, quite the opposite is true; at best, the funds derived from the construction loan were indirectly used in the farming operation because they allowed Debtors to construct a residence, which in turn provided convenient access to the farming operation.
Put most simply, the debt “for” the principal residence arose out of Debtors’ need to have a place to live, not out of the activities constituting farming operations under
In short, under the interpretation of the statutory phrase “arise out of” that we articulate here—which contemplates a direct and substantial connection between the principal-residence debt and the farming operation—and under the test that is congruent with this statutory interpretation, the objective direct-use test, the bankruptcy court committed legal error. Specifically, it did so in concluding that two attributes of Debtors’ principal residence—(1) that it contains an offiсe and the farming operation‘s books and records, and (2) that it is located in proximity to the farming operation—were legally sufficient to classify debt that was incurred for the principal residence as debt that arose out of a farming operation.
When we find legal error, we ordinarily do not “weigh the facts . . . and reach a new conclusion; instead, [we] must remand to the [trial] court for it to make a new determination under the correct law.” United States v. Hasan, 609 F.3d 1121, 1129 (10th Cir. 2010). We follow such a course here, out of an abundance of caution and in the interest of justice, because we have difficulty concluding that the record leads ineluctably to only one result. See Pullman-Standard v. Swint, 456 U.S. 273, 292 (1982) (“[W]here findings are infirm
To be sure, consistent with this opinion and its factual setting, we are confident that ordinarily the proximity of a farmer‘s principal residence to his farming operation—viewed in isolation—will be legally irrelevant to the question of whether the debt “for” that residence “arises out of” a farming operation. Furthermorе, standing alone, the mere presence of an office in a farmer‘s principal residence ordinarily will not be sufficient to establish that the debt “for” the office portion of that principal residence “arises out of” a farming operation. But as we observed above, see supra note 7, we do not categorically exclude the possibility that a debt for the construction of an office in a principal residence could be found to “arise out of” a farming operation. With the legal landscape now properly defined in this opinion, we believe that Debtors should have an opportunity in the context of a remand to try to establish facts regarding their office supportive of this legal characterization (i.e., “arises out of” a farming operation) and possibly other facts as well that may have some material bearing on their eligibility for Chapter 12 relief.8
Lest there be any doubt: we do not express any opinion on the likely outcome of the bankruptcy court‘s application to the facts of this case of the8
III
Because the bankruptcy court failed to apply the correct legal standard and test in determining whether the debt “for” Debtors’ principal residence “arises out of a farming operation,” we VACATE the bankruptcy court‘s judgment and REMAND the case to the bankruptcy court to conduct a proper legal analysis—involving notably our newly stated objective “direct-use” test—and for further proceedings consistent with this opinion.
Notes
- a rule for assessing whether the debt of the putative family farmer qualifies for Chapter 12 relief—“not less than 50 percent of [that farmer‘s] aggregate noncontingent, liquidated debts . . . on the date the case is filed, [must] arise out of a farming operation”
(continued...)
2(...continued)- that contains an exclusion—“excluding a debt for the principal residence of such individual“; and
- an exception that modifies the aggregate-debt computation of the rule by adding back into the equation debt “for” the principal residence of the putative family farmer, if it can be shown that this debt “arises out of a farming operation.”