By Leisa Boley Hellwarth
I enjoy reading legal thrillers and watching courtroom dramas. They are wonderful forms of entertainment, but have little to nothing to do with the real world. I just read a case from the U.S. Bankruptcy Court for the Northern District of Iowa that illustrates what lawyers most often spell out and discuss: definitions.
In the case of Iowa Regarding DLB IIIt all started when Doug Bell formed a limited liability company to protect his real estate from a tax lien. He was the sole owner and member of DLB, II, LLC. The land and buildings at 3590 Heather Lane, near Thornton, Iowa, were the properties protected by the LLC. Property within an LLC is more difficult for the tax authority to seize and sell for the amount due.
Then Doug Bell went to Moana Management, LLC and got a DLB II loan for a business that bought, restored and sold used farm equipment. He also submitted plans to improve the buildings on the property. He made one loan payment before defaulting on the contract. He did not pay the taxes or purchase the required insurance.
Moana filed for foreclosure. Just days before the foreclosure, DLB II filed for Chapter 12 bankruptcy protection. Once a bankruptcy is filed, all collection actions against the debtor are stayed while the bankruptcy is pending.
Moana filed a motion to dismiss, claiming that DLB II did not meet the definition of a debtor under Chapter 12 of the Bankruptcy Code. Moano also claimed that DLB II committed fraud by posing as a farm business. Finally, Moano moved to convert the Chapter 12 (which allows the debtor to reorganize and continue operations) to a Chapter 7 (which is a liquidation).
Many pages have laid out the arguments regarding DLB II’s status as a farm operation in detail. I read the numerous pages so you don’t have to. In short, for purposes of federal bankruptcy law, a farm operation includes crop farming, tillage, dairy farming, livestock farming, production and raising of crops, poultry and livestock farming, and the production of poultry or livestock products in an unprocessed state.
This definition was the crucial point in the bankruptcy. Mamoa argued that DLB II did not carry out any of the activities listed in the definition of an agricultural holding.
DLB II claimed that they were raising cattle. The court found that Bell and another LLC, DLB III, had previously owned cattle, but found no evidence that DLB II was raising cattle.
Bell, the sole owner of DLB II, could have potentially faced fraud charges. The bankruptcy court does not take misrepresentations lightly.
Mamoa asked the court to find that DLB acted fraudulently. Fraud occurs when one party knowingly and intentionally engages in fraudulent practices with the express purpose of defrauding the other party. The court agreed. The court then converted the case to a Chapter 7 liquidation. Had the court not found that the debtor acted in bad faith, it may have been possible to convert the case to a Chapter 11 proceeding. This is a more complex restructuring for non-agricultural debtors.
There were other things going on in this case, including starving cattle and a previous felony conviction, but none of them had any bearing on the big problem of being a Chapter 12 debtor.
Even with the other drama involved, this would never be a compelling story for the big screen. At most, it could be a Hallmark movie where you root for the small-town banker.
