May 21, 2019

Tenth Circuit: Debt for Principal Residence Arises out of Farming Operation if It is Directly and Substantially Connected to Activities Constituting a “Farming Operation” Within 11 U.S.C. § 101(21)

The Tenth Circuit Court of Appeals published its opinion in First National Bank of Durango v. Woods on Wednesday, February 19, 2014.

Debtors were a husband and wife who purchased farmland in Colorado on which to ran their hay-farming operation. Until they filed for bankruptcy, they accumulated various debts, some of which were related to their farming operation and others of which were not. One such debt was a $480,000 loan Debtors obtained from First National Bank. Approximately $284,000 of this loan was used to pay off a loan from another bank that was obtained to purchase Debtors’ farmland. The parties did not dispute that this portion of the debt “arose out of” a farming operation; nor did they dispute that the majority of the remaining loan proceeds—what we called the “construction loan”—were used to construct Debtors’ principal residence on the farmland.

It was the construction loan that was the primary focus. This was because Debtors petitioned for Chapter 12 relief as family farmers. From the outset of this case—and again on appeal—First National Bank maintained that, if the construction loan was excluded from the debt total because it did not “arise out of” a farming operation, less than fifty percent of Debtors’ aggregate noncontingent, liquidated debts “arose out of” a farming operation, which would preclude Debtors from qualifying as family farmers. And, if Debtors were not “family farmers,” they could not seek relief under Chapter 12.

The bankruptcy court concluded that the construction loan should be included in the debt total under § 101(18)(A) because it arose from farm operations. The BAP agreed with the bankruptcy court that the construction loan arose out of a farming operation. The Bank appealed.

Although First National Bank raised several issues on appeal, the Tenth Circuit only reached the first: whether Debtors were permitted to seek relief under Chapter 12 as “family farmers.” In deciding this issue, the court was presented with a question of first impression for the Tenth Circuit — namely, when does a debt “for” a principal residence “arise[] out of a farming operation”? See 11 U.S.C. § 101(18)(A).

The Tenth Circuit concluded that a debt so arises if it is directly and substantially connected to any of the activities constituting a “farming operation” within the meaning of 11 U.S.C. § 101(21). More specifically, when the debt at issue is loan debt, as here, the court concluded that an objective “direct-use” test serves as the optimal vehicle for discerning when the direct-and-substantial-connection standard is satisfied. That is, if the loan proceeds were used directly for or in a farming operation, the debt “arises out of” that farming operation. This was not the test applied by the bankruptcy court (or the BAP).

Because the court concluded that the bankruptcy court did not apply the proper legal standard and test in its analysis of Debtors’ eligibility for Chapter 12 relief, the Tenth Circuit VACATED the bankruptcy court’s judgment and REMANDED the case to the bankruptcy court for further proceedings.

Tenth Circuit: Filing Lis Pendens Does not Create a Transfer of Interest in Property Under Bankruptcy Code

The Tenth Circuit Court of Appeals published its opinion in Ute Mesa Lot 1, LLC v. First-Citizens Bank & Trust on Monday, November 25, 2013.

Ute Mesa is a real estate developer in Colorado. In October 2007, it received a $12 million loan from Defendant-Appellee United Western Bank (“Bank”) to finance the construction of a single family home. First-Citizens Bank & Trust acquired United’s interest in the loan and state court claims. To secure the loan, the Bank prepared a deed of trust incorrectly identifying Ute Mesa’s sole member as the owner rather than Ute Mesa. Because the grantor under the deed of trust was not the owner of the property, the deed of trust was ineffective in giving the Bank a lien on the property.

In May 2010, the Bank filed suit in Colorado state court seeking reformation of the deed of trust and a declaration that it had a first priority lien on the property. Two days later, the Bank filed a notice of lis pendens in the Pitkin County real property records. In August 2010, Ute Mesa petitioned for Chapter 11 bankruptcy relief. Ute Mesa continued as debtor in possession of the property. In April 2011, Ute Mesa filed an adversary proceeding against the Bank seeking to avoid the lis pendens as a preferential transfer. The bankruptcy court granted the Bank’s motion to dismiss, and the federal district court affirmed.

Ute Mesa argued that under 11 U.S.C. § 547(e)(1)(A), a “transfer of an interest in property” occurs when a bona fide purchaser cannot acquire an interest superior to that of a creditor. According to Ute Mesa, because the lis pendens prevents a bona fide purchaser from acquiring an interest in the property superior to the Bank’s interest, the lis pendens qualifies as a transfer of an interest in the property. The Bank argued that the first and only step of the analysis is to determine whether an underlying property interest exists under state law. Because a lis pendens is merely a notice and does not constitute a lien, no transfer occurred. The Tenth Circuit agreed with the Bank and affirmed.

Comment Period Open for Changes to Federal Rules of Practice and Procedure

The United States Courts has opened the public comment period for several proposed changes to the Federal Rules of Practice and Procedure. Comments must be submitted in writing by February 15, 2013.

The changes affect the Federal Appellate, Bankruptcy, Criminal, and Evidence rules. They were approved for publication by the Judicial Conference Advisory Committees on the Appellate, Bankruptcy, Criminal, and Evidence Rules on June 11, 2012, and the public comment period opened August 15, 2012.

The following rules were affected by the proposed changes:

  • Federal Rules of Appellate Procedure, Rule 6;
  • Federal Rules of Bankruptcy Procedure, Rules 1014(b), 7004(e), 7008, 7012, 7016, 7054, 8001-8028, 9023, 9024, 9027, and 9033, and Offiical Forms 3A, 3B, 6I, 6J, 22A-1, 22A-2, 22B, 22C-1, and 22C-2;
  • Federal Rules of Criminal Procedure, Rules 5(d) and 58;  and
  • Federal Rules of Evidence, Rules 801(d)(1)(B) and 803(6), (7), and (8).

A PDF of the changes can be found here. Comments must be submitted to the Advisory Committees in writing, and will be reviewed then made part of the public record. All comments can be viewed through the U.S. Courts website by clicking the links to the Rules sets.