DAVID R. DUNCAN, Bankruptcy Judge.
This matter is before the Court on a Motion to Dismiss Case ("Motion") filed by AgSouth Farm Credit, ACA ("AgSouth") on March 8, 2011. An Objection to the Motion was filed on March 29, 2011 by Steven Rhett Sandifer and Cynthia M. Sandifer ("Debtors"). AgSouth filed a supplemental memorandum in support of its Motion on March 23, 2011. A hearing was held on March 30, 2011. AgSouth's Motion is denied.
Debtors filed for chapter 12 protection on January 6, 2011. Mr. Sandifer and his son Steven Jeffrey Sandifer ("the Sandifers"), who also filed a chapter 12 bankruptcy case on the same day, conduct a farming operation. Steven Jeffrey Sandifer testified at the March 30 hearing that he and Mr. Sandifer have been farming together full-time since 2002. The farming operation consists of several hundred acres of farmland, part of which is leased and part of which is owned by one or both of
In January 2008, the Sandifers formed a limited liability company for their farming operation in the name of Sandifer & Son Farms, LLC ("LLC"). Prior to the formation of this entity, the Sandifers did business under their individual names or under the name Sandifer & Son Farms. Beginning in about 2007, the Sandifers took out multiple loans with multiple creditors, including AgSouth, to finance their farming operation. All of these loans are in the individual name of either Debtors, Steven Jeffrey Sandifer, or Sandifer & Son Farms.
Following the formation of the LLC, farm income was reported by the LLC, but was held in a bank account in the Sandifers' names. In 2008, the LLC had gross income of $588,045 and deductions of $727,136. In 2009, gross income totaled $481,380 and deductions totaled $555,548. The LLC made $193,683.57 of debt payments on behalf of the Sandifers in 2008 and $94,904.57 of debt payments on the Sandifers' behalf in 2009.
In addition to his work as a farmer, Mr. Sandifer was previously employed with SCANA and earns retirement in the amount of $34,749.96.
In its Motion, AgSouth argues that Debtors do not meet the eligibility requirements for chapter 12 relief for two reasons. First, AgSouth argues that Debtors do not receive more than 50 percent of their income from farming and therefore do not meet the chapter 12 income requirement. AgSouth's second argument is that because Debtors have operated at a loss for the last three years, Debtors do not have "regular annual income," which is required for a chapter 12 debtor.
11 U.S.C. § 109(f) provides, "Only a family farmer or family fisherman with regular annual income may be a debtor under chapter 12 of this title." "Family farmer" is defined in section 101(18). That section states:
The term "family farmer" means —
There is no dispute that Debtors meet the debt requirements set forth in section 101(18) or that Debtors are "engaged in a farming operation"; as a result, the only issue is whether more than 50 percent of Debtors' gross income was "receive[d] from [a] farming operation."
Gross income is not defined in the Bankruptcy Code. Generally, when interpreting statutes, courts should adhere to the plain meaning of the statute, except in the unusual situation that "`"the literal application of a statute will produce a result demonstrably at odds with the intentions of its drafters."'" In re Lamb, 209 B.R. 759, 760 (Bankr.M.D.Ga.1997) (quoting United States v. Ron Pair Enters., Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 1031, 103 L.Ed.2d 290 (1989)). See also Hillman v. I.R.S., 263 F.3d 338, 342 (4th Cir.2001) (discussing two "extremely narrow exceptions to the Plain Meaning Rule," the first of which is "when literal application of the statutory language at issue produces an outcome that is demonstrably at odds with clearly expressed congressional intent to the contrary," and the second of which applies "when literal application of the statutory language at issue `results in an outcome that can truly be characterized as absurd, i.e., that is so gross as to shock the general moral or common sense. ...'") (alteration original); Matter of Schafroth, 81 B.R. 509, 511 (Bankr.S.D.Iowa 1987) ("[T]his court cautioned that `a strict tax code approach should be modified or abandoned in those cases in which a tax code solution would be absurdly irreconcilable with the Chapter 12 statutory provisions and legislative history.'") (quoting Matter of Faber, 78 B.R. 934, 935 (Bankr.S.D.Iowa 1987)). Many courts considering the issue have concluded that "gross income" for purposes of the Bankruptcy Code should be defined using the Internal Revenue Code definition of "gross income." One such court stated,
Lamb, 209 B.R. at 760-61 (alterations original).
26 U.S.C. § 61 defines "gross income" as "all income from whatever source derived." Thus, if Debtors receive income from the LLC, it appears that such income would be included in the computation of Debtors' total gross income. Testimony at the hearing established that upon forming the LLC, the Sandifers elected to treat it as an Subchapter S corporation for tax purposes; as a result, "the corporation's profits
At least one bankruptcy court has stated that in the event debtors farm through a subchapter S corporation, the corporation's income would be included in the calculation of the debtors' gross income. In Schafroth, the debtors were the officers, directors, and shareholders of a farm corporation and operated the corporation, "manag[ing] and provid[ing] labor for the corporation." Schafroth, 81 B.R. at 509-10. The individual debtors filed chapter 12 petitions, as did the corporation. Id. A creditor objected, claiming that the debtors did not meet the 50 percent income requirement. Id. at 510. The debtors responded that the corporation's income should be attributed to them. Id. at 510-11. The court stated:
Schafroth, 81 B.R. at 512.
The Court notes that some courts considering pass-through income have stated that the corporation's profits pass through to the shareholders, while other courts have held that the corporation's income passes through. Compare Hillman, 263 F.3d at 339, n. 1 with Schafroth, 81 B.R. at 512. AgSouth's position is that the income belongs to the LLC and only passes through by virtue of the Sandifers' interest as members. Therefore, AgSouth argues, the Sandifers can only receive a distribution of any profit the LLC earns. The better rule, for purposes of analyzing the section 101(18) 50 percent income requirement, is that the LLC's gross income should pass through to its members and be considered income of those members. This is consistent with the purpose of chapter 12 and accounts for the totality of the financial circumstances of Debtors.
The purpose of chapter 12 is to provide farmers with the chance to save their farms, restructure their debt, and continue farming. See In re Hettinger, 95 B.R. 110, 112 (Bankr.E.D.Mo.1989) (holding that what constitutes a farming operation must be decided based on the totality of the circumstances and stating, "It is clear that the one common thread in all farming legislation is the desire to save the family farmer."). This Court approaches chapter 12 eligibility issues with a view
Debtors are clearly the type of individuals that chapter 12 is designed to protect. Debtors have been engaged in farming for many years, are currently engaged in farming, and will continue to farm in the future. Much of the existing farm debt is in Debtors' names. Steven Jeffrey Sandifer testified that all of the income from the LLC was deposited into a bank account in the Sandifers' individual names. Operating expenses were paid out of that bank account. A large portion of the income was also used to make payments on the Sandifers' farm debt obligations. Clearly, after the LLC was formed the Sandifers continued to run their farming operation in exactly the same fashion as before. The Court finds that the farm income reported by the LLC is attributable to Debtors. As a result, Debtors earn at least half of their income from the farming operation and meet the definition of "family farmer" in section 101(18). To hold otherwise would merely create an impediment to adopting the limited liability company form of doing business and would deprive farmers of important tax benefits and a mechanism to reduce personal liability.
In addition to meeting the definition of "family farmer", in order to qualify under chapter 12, a debtor must have "regular annual income." Section 101(19) provides, "The term `family farmer with regular annual income' means family farmer whose annual income is sufficiently stable and regular to enable such family farmer to make payments under a plan under chapter 12 of this title." AgSouth complains that Debtors do not meet this definition because Debtors' Schedule J shows a monthly deficit and because Debtors have reported farm income losses for at least the past two years.
The Court finds that Debtors have regular annual income sufficient to make chapter 12 plan payments. Debtors have non-farm income of at least $83,000, which they will continue to earn going forward. In 2008, the LLC had gross income of $588,045 and in 2009, gross income totaled $481,380. The Sandifers project that the LLC will earn $564,019 of gross income in 2011. Although the LLC has operated at a loss for the last few years, due in large part to attempts to meet substantial debt service obligations, it appears that its financial condition will improve going forward for a number of reasons.
Steven Jeffrey Sandifer testified at the hearing on AgSouth's Motion that the Sandifers had made some poor farming choices regarding land usage and types of crops in past years and that they had made adjustments this year which would likely increase their profitability.
Debtors are eligible for chapter 12 relief. Debtors are "family farmers" and have regular annual income sufficient to make plan payments. Debtors' case may proceed under chapter 12 of the Bankruptcy Code.
AND IT IS SO ORDERED.
