## Facts

- Charles J. Jessen and Rhodetta K. Jessen, married debtors engaged in farming, filed a Chapter 12 petition on April 17, 1987.
- The debtors had farmed for roughly 24 years; Charles took off-farm employment as a custodian in December 1984.
- Due to inability to obtain operating financing, the debtors leased much of their farm land on a cash-rent basis in 1985 and 1986.
- About 280 acres were not cultivated in 1986; the debtors attempted to lease the acreage but a prospective tenant declined.
- The debtors’ 1986 return reported income from wages, interest, sealing of grain, cash payments, cash rent, and an executor fee (total $85,566).
- Creditors argued the debtors failed Chapter 12’s “family farmer” 50% gross-income test because cash rent and grain-sealing income were not income “from a farming operation,” and grain-sealing receipts were not “gross income” for the test.
- Charles Jessen’s uncle died in 1985 and devised Charles 160 acres of Iowa farmland; on April 7, 1986, Charles executed and filed a state-law disclaimer of the inheritance.
- The trustee estimated the net value of the disclaimed 160 acres (after encumbrances) at approximately $33,880.
- Creditors and the trustee sought dismissal and/or removal of the debtors as debtors-in-possession based on the disclaimer and alleged mismanagement (including leaving acreage uncultivated).
- Creditors also sought to compel the trustee to sue, or to obtain authority to sue for the estate, to avoid the disclaimer under 11 U.S.C. § 544(b) as a fraudulent transfer under Iowa law.

## Issues

1. Whether the debtors qualified as “family farmers” eligible for Chapter 12 by receiving more than 50% of their gross income from a “farming operation” in the taxable year preceding filing.
2. Whether cash-rent receipts from leasing the debtors’ farm land and income from sealing grain constituted gross income derived from a “farming operation” for the 50% test.
3. Whether the inheritance disclaimer and the 1986 farming decisions constituted cause to dismiss the case and/or remove the debtors as debtors-in-possession for mismanagement or bad faith.
4. Whether the trustee (or creditors derivatively) should be authorized under § 544(b) to avoid the state-law disclaimer as a transfer voidable under Iowa fraudulent-transfer law.

## Decision

- The court held the debtors were eligible for Chapter 12 relief as “family farmers.”
- The court treated cash-rent income from leasing the debtors’ own farm property as income derived from a “farming operation” under the statutory definition.
- The court treated income from sealing grain as part of farming-operation income and counted it toward the 50% gross-income test.
- The court denied motions to dismiss and denied requests to remove the debtors as debtors-in-possession, finding insufficient cause based on the uncultivated acreage and the prepetition disclaimer.
- The court denied the request to compel the trustee (or authorize creditors) to bring a § 544(b) avoidance action attacking the disclaimer, finding an inadequate showing that an actual unsecured creditor could avoid the disclaimer under Iowa law.

## Legal Principles

- Chapter 12 eligibility turns on whether an individual (or individual and spouse) “engaged in a farming operation” received more than 50% of gross income from that farming operation in the relevant prepetition tax year.
- “Farming operation” is construed broadly under the Code’s definition and may include commercially reasonable ways of using farm assets and farm products when tied to agricultural activity.
- Cash-rent receipts from leasing a debtor’s farm land, when connected to the debtor’s agricultural enterprise (including leasing driven by lack of operating credit), may be treated as farming-operation income for Chapter 12 eligibility.
- Receipts associated with storing/marketing grain produced from farming activity may be treated as farming-operation income and included in gross income for the eligibility calculation.
- Dismissal or removal of a Chapter 12 debtor-in-possession requires a showing of cause; financially constrained operational choices and a prepetition, state-law-compliant disclaimer do not, without more, establish gross mismanagement or bad faith.
- Under § 544(b), a trustee may avoid a transfer only if an actual unsecured creditor with an allowable claim could avoid it under applicable nonbankruptcy law; a movant seeking to force or obtain authority for such litigation must make a sufficient legal and evidentiary showing.

## Conclusion

The court allowed the case to proceed under Chapter 12, concluding the debtors met the family-farmer income test by counting cash-rent and grain-sealing income as farming-operation income, found no cause to dismiss or remove the debtors as debtors-in-possession, and declined to authorize § 544(b) litigation to avoid the inheritance disclaimer on the record presented.


In re Jessen, 82 B.R. 490 (Bankr. S.D. Iowa 1988)