The Debtor is a Farmer, But is He a Family Farmer?

Jason Burke, Blackwell Burke & Ramsey PC

Generally, for a farmer to qualify as a “family farmer” under Chapter 12, the Bankruptcy Code requires, among other things, that not less than 50 percent of the aggregate, non-contingent liquidated debts (excluding the debt for a principal residence, unless that debt arises out of a farming operation), on the date the case is filed, arise out of the farming operation of the “family farmer.” 11 U.S.C. §101(18). In other words, a farmer’s guaranty of debt totally unrelated to that farmer’s farming operation may disqualify that farmer from Chapter 12 eligibility. For example, in a case where a farmer guarantied an obligation of a related seed company, a court held that the debtor could not meet the definition of a “family farmer” because the debt arising from his guaranty “cannot be said to arise out of a farming operation within the meaning of Section 101(18).” Matter of Armstrong, 812 F.2d 1024 (7th Cir. 1987).  

Similarly, where debtor farmers guarantied their grandson’s debts for their grandson’s hog raising operation, the court found that there was no “connection” between the guarantied debt and the debtor’s own farming activities. In re Easton, 883 F.2d 630 (8th Cir. 1989). “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.” In re Douglass, 77 B.R. 714, 715 (Bankr.W.D.Mo. 1987).

The fact that the debtor’s farm property is used as collateral for such unrelated debt is of no consequence. In re Saunders, 377 B.R. 772, 776 (Bankr.M.D.Ga. 2007) (“merely using farmland as collateral for a debt that has no other relation to the farming activity will not suffice.”) Simply put, the focus is on the nature of the debt, i.e., whether the debt was incurred or the proceeds of the debt used in the debtor’s own farming operation, and not whether the collateral securing such debt is farmland owned by a debtor trying to establish its eligibility for a Chapter 12 case.

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