First National Bank of Durango, et al v. Woods, et al

Filing

[10150360] Vacated and Remanded. Terminated on the merits after oral hearing. Written, signed, published. Judges O'Brien, Holmes, author; and Matheson. Mandate to issue. [12-1111]

Appellate Case: 12-1111

Document: 01019204356

FILED
Date Filed: 02/19/2014Court of Appeals
Page: 1
United States
Tenth Circuit

PUBLISH

February 19, 2014
Elisabeth A. Shumaker
Clerk of Court

UNITED STATES COURT OF APPEALS
TENTH CIRCUIT

In re: RESON LEE WOODS, a/k/a
Lee Woods, d/b/a Bar LS Farms,
f/d/b/a Bar LS Properties Inc.;
SHAUN K. WOODS, a/k/a Shaun
Woods, d/b/a Bar LS Farms, f/d/b/a
Bar LS Properties Inc.,
Debtors.
FIRST NATIONAL BANK OF
DURANGO,

No. 12-1111

Appellant,
v.
RESON LEE WOODS; SHAUN K.
WOODS,
Appellees.

Appeal from the Bankruptcy Appellate Panel
for the Tenth Circuit Court of Appeals
(B.A.P. No. 11-083-CO)

Garry R. Appel, Appel & Lucas, P.C., Denver, Colorado, for Appellant.
Cheryl A. Thompson, Thompson Brownlee, Vail, Colorado (Daniel J. Lowenberg,
Mountain Law Group, L.L.C., Montrose, Colorado, with her on the brief), for
Appellees.

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Before HOLMES, O’BRIEN, and MATHESON, Circuit Judges.

HOLMES, Circuit Judge.

Appellant First National Bank of Durango (“First National Bank”) appeals
from the Bankruptcy Appellate Panel’s (“BAP’s”) decision affirming the
bankruptcy court’s confirmation of the Chapter 12 bankruptcy plan of Appellees
Reson and Shaun Woods (“Debtors”). Although First National Bank raises
several issues on appeal, we only reach the first: whether Debtors are permitted to
seek relief under Chapter 12 as “family farmers.” In deciding this issue, we are
presented with a question of first impression for our court—namely, when does a
debt “for” a principal residence “arise[] out of a farming operation”? See 11
U.S.C. § 101(18)(A). We conclude 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, we conclude 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 we conclude that the bankruptcy court did not apply the proper
legal standard and test in its analysis of Debtors’ eligibility for Chapter 12 relief,
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we deem it appropriate and prudent to remand for that court to apply the correct
law to the facts of this case. Thus, we vacate the bankruptcy court’s judgment
and remand the case to the bankruptcy court for further proceedings.
I
Debtors are a husband and wife who, in 2007, purchased farmland in
southwestern Colorado on which to run their hay-farming operation. Until they
filed for bankruptcy in November 2010, Debtors accumulated various debts, some
of which were related to their farming operation and others of which were not.
One such debt is 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 do not dispute
that this portion of the debt “arises out of” a farming operation; nor do they
dispute that the majority of the remaining loan proceeds—what we call the
“construction loan”—were used to construct Debtors’ principal residence on the
farmland.
It is the construction loan that is our primary focus. This is because
Debtors petitioned for Chapter 12 relief as family farmers. A “family farmer” is,
inter alia, an individual or individuals
not less than 50 percent of whose aggregate noncontingent,
liquidated debts (excluding a debt for the principal residence of
such individual or such individual and spouse unless such debt
arises out of a farming operation), on the date the case is filed,
arise out of a farming operation owned or operated by such
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individual or such individual and spouse . . . .
11 U.S.C. § 101(18)(A). From the outset of this case—and again on
appeal—First National Bank has maintained that, if the construction loan is
excluded from the debt total because it does not “arise out of” a farming
operation, less than fifty percent of Debtors’ aggregate noncontingent, liquidated
debts “arises out of” a farming operation, which would preclude Debtors from
qualifying as family farmers. And, if Debtors are not “family farmers,” they
cannot seek relief under Chapter 12. See id. § 109(f).
The bankruptcy court disagreed with First National Bank. It concluded that
the construction loan should not be excluded from the debt total under
§ 101(18)(A) because it “ar[ose] from farm operations.” Aplt. App. at 797 (Hr’g
Tr., dated May 10, 2011). In reaching this conclusion, the bankruptcy court found
that the residence was “an integral part of the farm operation in [the] sense that”
(1) the farming operation’s office and records were located in the residence; and
(2) the residence was located on the farmland, placing it in proximity to the
farming operation. Id.
The BAP agreed with the bankruptcy court that the construction loan arose
out of a farming operation. It recognized that “[f]ew courts have considered when
a debt ‘arises out of a farming operation.’” Id. at 1381 (B.A.P. Op., filed Feb. 27,
2012). The BAP elected to adopt the approach taken in In re Saunders, 377 B.R.
772 (Bankr. M.D. Ga. 2007). Accordingly, it applied the following test: “to ‘arise
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out of a farming operation’ the purpose of a debt must have some connection to
the debtor’s farming activity.” Aplt. App. at 1382 (emphasis added) (citation
omitted) (internal quotations marks omitted). Relying on the same two factors
that the bankruptcy court identified—that is, generally, the presence of the
farming operation’s office and records in the residence, and the residence’s
proximity to the farm—the BAP concluded that the residence was “connected to
[Debtors’] farming activities” and thus “including the construction . . . loan in the
farm debt calculation was proper.” Id. at 1383.
This appeal followed.
II
“Although this appeal is from a decision by the BAP, we review only the
Bankruptcy Court’s decision.” Miller v. Deutsche Bank Nat’l Trust Co. (In re
Miller), 666 F.3d 1255, 1260 (10th Cir. 2012) (quoting C.O.P. Coal Dev. Co. v.
C.W. Mining Co. (In re C.W. Mining Co.), 641 F.3d 1235, 1240 (10th Cir. 2011))
(internal quotation marks omitted); accord Wagers v. Lentz & Clark, P.A. (In re
Wagers), 514 F.3d 1021, 1022 (10th Cir. 2007) (per curiam). “We review matters
of law de novo, and we review factual findings made by the bankruptcy court for
clear error.” In re Miller, 666 F.3d at 1260 (internal quotation marks omitted).
“[W]e treat the BAP as a subordinate appellate tribunal whose rulings are not
entitled to any deference (although they certainly may be persuasive).” Mathai v.
Warren (In re Warren), 512 F.3d 1241, 1248 (10th Cir. 2008); accord Parks v.
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Dittmar (In re Dittmar), 618 F.3d 1199, 1204 (10th Cir. 2010).
First National Bank contends that the bankruptcy court applied the
incorrect legal test to determine whether the construction loan arose out of a
farming operation pursuant to 11 U.S.C. § 101(18)(A). It urges us to apply a test
that focuses on “whether the funds that gave rise to the debt were used in the
farming operation.” Aplt. Opening Br. at 14. First, in Part II.A, we interpret
§ 101(18)(A) and set forth the proper legal standard for determining whether a
debt “for” a principal residence “arises out of” a farming operation; that is, a
direct-and-substantial-connection standard. Then, we conclude, at least in the
loan context, that an objective “direct-use” test—akin to the one First National
Bank advances—does in fact provide the optimal means of discerning whether the
direct-and-substantial-connection standard is satisfied.
Ultimately, because the bankruptcy court (and the BAP) applied the wrong
legal test, we determine in Part II.B that neither of the factors upon which the
bankruptcy court relied can, as a matter of law, support classifying Debtors’
principal-residence debt as debt that “arises out of a farming operation.” And, we
conclude that a remand is required so that the bankruptcy court may apply our
newly fashioned test in the first instance.
A
Our task is one of statutory interpretation. The interpretation of a statute is
a legal question; thus, we review the bankruptcy court’s interpretation of the
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statute de novo. 1 See In re Stephens, 704 F.3d at 1283; Caplan v. B-Line, LLC (In
re Kirkland), 572 F.3d 838, 840 (10th Cir. 2009).
We begin by interpreting the phrase “arises out of” in the “family farmer”
definition of 11 U.S.C. § 101(18)(A). We read that provision as requiring a direct
and substantial connection between the debt and the farming operation. Next, we
1

Debtors contend that the bankruptcy court’s decision that the construction
loan arose out of a farming operation was purely a factual determination that we can only
set aside if clearly erroneous. More specifically, Debtors make the rather perplexing
argument that “[t]he bankruptcy court did not adopt any [legal] ‘test’ nor does the law
require it to do so[;] it simply evaluated the facts of the case and decided that the debt for
this particular residence does ‘arise out of’ a farming operation . . . .” Aplee. Br. at 21–22
(emphasis added). Although it is true that the bankruptcy court did not explicitly identify
the legal test it applied in reaching its conclusion, the court necessarily must have
determined that the facts on which it relied were legally sufficient to meet the statute’s
requirements. Even if it only did this tacitly, the court’s interpretation of the statute’s
requirements is subject to de novo review. Cf. Bose Corp. v. Consumers Union of U.S.,
Inc., 466 U.S. 485, 501 (1984) (“Rule 52(a) does not inhibit an appellate court’s power to
correct errors of law, including those that may infect a so-called mixed finding of law and
fact, or a finding of fact that is predicated on a misunderstanding of the governing rule of
law.”); Pahls v. Thomas, 718 F.3d 1210, 1232 (10th Cir. 2013) (noting that when a trial
“court commits legal error en route to a factual determination, that determination is
thereby deprived of any special solicitude it might otherwise be owed on appeal”). Were
this not the case, in virtually every instance in which bankruptcy courts (or, for that
matter, district courts) purported to (in Debtors’ words) “simply evaluate[] the facts,”
Aplee. Br. at 22, in determining whether the requirements of a particular statute were
satisfied, those courts’ determinations would be effectively insulated completely from de
novo review. Such an outcome would be improper, at the very least because it would not
reflect the realities of the adjudicatory process. Specifically, before deciding whether the
requirements of a statute are satisfied by certain facts, a court must—even if
tacitly—conduct a legal analysis of what the statute’s terms require. In other words, a
court must first give a statute’s language legal meaning in order for it to determine
whether a given set of facts satisfies that statute. And it cannot be gainsaid that
discerning the import of a statute is a legal process; consequently, that process is subject
to de novo review. Accordingly, we apply de novo review here to the bankruptcy court’s
tacit legal assessment of the statutory requirements of the family-farmer provision. See
Stephens v. Stephens (In re Stephens), 704 F.3d 1279, 1283 (10th Cir. 2013).
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examine the tests that courts have commonly applied in this statutory context
when determining whether debt “arises out of” a farming operation, in order to
assess what test best fits the direct-and-substantial-connection statutory standard.
And, in that regard, we conclude that an objective “direct-use” test provides the
optimal vehicle for discerning whether the direct-and-substantial-connection
standard is satisfied—at least in the loan-debt setting.
1
“[I]nterpretation of the Bankruptcy Code starts ‘where all such inquiries
must begin: with the language of the statute itself.’” Ransom v. FIA Card Servs.,
N.A., --- U.S. ----, 131 S. Ct. 716, 723 (2011) (quoting United States v. Ron Pair
Enters., Inc., 489 U.S. 235, 241 (1989)); see United States v. West, 671 F.3d
1195, 1199 (10th Cir. 2012) (“[W]e first and foremost look to the statute’s
language to ascertain Congressional intent.”). “[T]he Bankruptcy Code must be
construed liberally in favor of the debtor and strictly against the creditor.” In re
Warren, 512 F.3d at 1248 (quoting Gullickson v. Brown (In re Brown), 108 F.3d
1290, 1292 (10th Cir. 1997)) (internal quotation marks omitted).
“It is well established that ‘when the statute’s language is plain, the sole
function of the courts—at least where the disposition required by the text is not
absurd—is to enforce it according to its terms.’” Lamie v. U.S. Tr., 540 U.S. 526,
534 (2004) (quoting Hartford Underwriters Ins. Co. v. Union Planters Bank,
N.A., 530 U.S. 1, 6 (2000)); see United States v. Sprenger, 625 F.3d 1305, 1307
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(10th Cir. 2010) (“If the terms of the statute are clear and unambiguous, the
inquiry ends and we simply give effect to the plain language of the statute.”
(internal quotation marks omitted)). Further, “[i]t is a fundamental canon of
statutory construction that the words of a statute must be read in their context and
with a view to their place in the overall statutory scheme.” Davis v. Mich. Dep’t
of Treasury, 489 U.S. 803, 809 (1989); accord Kunz v. United Sec. Bank (In re
Kunz), 489 F.3d 1072, 1077 (10th Cir. 2007).
As noted, a “family farmer” is, in relevant part, an individual or an
individual and spouse “not less than 50 percent of whose aggregate
noncontingent, liquidated debts (excluding a debt for the principal residence of
such individual or such individual and spouse unless such debt arises out of a
farming operation), on the date the case is filed, arise out of a farming operation.”
11 U.S.C. § 101(18)(A).
We begin our analysis by examining the subsection’s structure, as “the
meaning of statutory language, plain or not, depends on context.” United States
v. Villa, 589 F.3d 1334, 1343 (10th Cir. 2009) (quoting Bailey v. United States,
516 U.S. 137, 145 (1995)) (internal quotation marks omitted); see Salazar v.
Butterball, LLC, 644 F.3d 1130, 1137 (10th Cir. 2011) (“The plainness or
ambiguity of statutory language is determined by reference to the language itself,
the specific context in which that language is used, and the broader context of the
statute as a whole.” (quoting Robinson v. Shell Oil Co., 519 U.S. 337, 341 (1997))
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(internal quotation marks omitted)); cf. Davis, 489 U.S. at 809 (“[S]tatutory
language cannot be construed in a vacuum.”).
Section 101(18)(A) is perhaps best understood by breaking the provision
into its two principal parts: (1) the fifty-percent-farm-debt rule, with its embedded
exclusion; and (2) the exception to the rule. The rule requires at least one-half of
a family farmer’s debt to “arise out of” a farming operation. Part and parcel of
this rule is an embedded exclusion. It excludes from the aggregate-debt
calculation any debt “for” the family farmer’s principal residence. Thus,
construed along with its embedded exclusion, the rule provides that an individual
(or an individual and his or her spouse) qualifies as a family farmer if at least
fifty percent of the individual’s aggregate debt “arises out of” a farming
operation, excluding debt “for” the individual’s principal residence. This rule is
qualified in certain instances by an exception. That exception provides that the
aggregate debt for determining whether the fifty-percent-farm-debt threshold is
met will include debt for the principal residence if the debt “arises out of” the
farming operation. 2
2

For clarity’s sake, then, the definition provides the following:
!

a rule for assessing whether the debt of the putative family
farmer qualifies for Chapter 12 relief—“not less than 50 percent
of [that farmer’s] aggregate noncontingent, liquidated debts . . .
on the date the case is filed, [must] arise out of a farming
operation”
(continued...)
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The rule separates those who are family farmers—and thus can file under
Chapter 12—from those who are not, by requiring, inter alia, that at least onehalf of the putative family farmer’s debt “arise out of” a farming operation. In
other words, the fifty-percent-farm-debt rule provides a means to identify true
family farmers. “Congress intended Chapter 12 to encourage family farmers to
continue farming despite the economic realities that have caused many rural
people to exit farming.” Katherine M. Porter, Phantom Farmers: Chapter 12 of
the Bankruptcy Code, 79 Am. Bankr. L.J. 729, 735 (2005); see Hall v. United
States, --- U.S. ----, 132 S. Ct. 1882, 1894 (2012) (Breyer, J., dissenting)
(“Chapter 12 of the Bankruptcy Code helps family farmers in economic difficulty
reorganize their debts without losing their farms.”); Watford v. Fed. Land Bank of
Columbia (In re Watford), 898 F.2d 1525, 1528 (11th Cir. 1990) (“Congress’
intent in passing Chapter 12 of the Bankruptcy Code was to allow farmers to keep
their land despite their financial troubles.”).
With that objective in mind, in Chapter 12, Congress provided “specialized

2

(...continued)
•
!

that contains an exclusion—“excluding a debt for the
principal residence of such individual”; and

an exception that modifies the aggregate-debt computation of
the rule by adding back into the equation debt “for” the principal
residence of the putative family farmer, if it can be shown that
this debt “arises out of a farming operation.”

See 11 U.S.C. § 101(18)(A).
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bankruptcy relief for farmers[,] . . . designed to be more generous to debtors than
generally applicable bankruptcy law.” Porter, supra, at 731; see 8 Alan N.
Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ 1200.01[2], at 1200-4 (16th
ed. 2013) (“Before the enactment of chapter 12, most farmers seeking to
reorganize under the Code filed for relief under chapter 11. The plan
confirmation requirements of chapter 11, however, often proved difficult for farm
debtors to meet, and the success rate for farm reorganizations was low. . . . In
enacting chapter 12, . . . Congress allowed farmers to confirm reorganization
plans without providing for payment in full to unsecured creditors.”).
But “‘[r]ural’ and ‘farm’ are not synonymous[,]” Porter, supra, at 730, and
Congress sought to ensure that Chapter 12’s more generous remedial provisions
were only available to those who could be said to be true family farmers. See In
re Watford, 898 F.2d at 1528 (“Congress was also concerned that family farmers
only . . . benefit from the provisions of Chapter 12.” (emphasis added)); In re
Vernon, 101 B.R. 87, 89 (Bankr. E.D. Mo. 1989) (“The provisions ensure that
only family farmers—not tax shelters or large corporate entities—will benefit.
Consequently, Congress has identified precisely whom Chapter 12 was intended
to help.” (citation omitted)); see also Resnick & Sommer, supra,
¶ 1200.01[3][a][i], at 1200-5 (“The definition [of ‘family farmer’] has been
drafted narrowly so as to limit chapter 12 eligibility to true ‘family’ farmers and
to exclude investors or speculators who use farm losses to shelter non-farm
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income.”). Thus, the fifty-percent-farm-debt rule was one means of identifying
true family farmers, who would be eligible for Chapter 12 relief.
Part and parcel of the rule is an exclusion that applies in the ordinary
course: it excludes from the aggregate debt (of which one-half or more must be
farm debt) the debt “for” one’s “principal residence.” In other words, one is a
family farmer if at least one-half of one’s non-principal-residence debt arises out
of a farming operation. See, e.g., In re Quillian, No. 07-20199, 2007 WL
3046348, at *2 (Bankr. S.D. Tex. Oct. 15, 2007) (“The exclusion provision in 11
U.S.C. § 101(18) excludes a debt such as a mortgage used for the purchase of the
principal residence.”). The exclusion prevents, for example, one from being
disqualified from Chapter 12 relief, even though all of one’s non-principalresidence debt arises out of a farming operation, simply because this debt is less
than the debt “for” one’s “principal residence.”
Finally, we turn to the exception. Under the rule, ordinarily the debt for
one’s principal residence is not included in the aggregate debt; on the other hand,
the exception provides that if such debt “arises out of” a farming operation, then
it is included in the aggregate-debt calculation and also constitutes farm debt for
purposes of the rule (because the debt “arises out of” a farming operation). In
other words, if the exception applies, the aggregate debt and farm-debt portion of
the aggregate debt increase by the same amount, which necessarily increases the
proportion of one’s debt that “arises out of” a farming operation.
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With this background in mind, we turn to our specific interpretive task of
giving meaning to the phrase “arises out of” in this exception. In particular, we
must decide how a court should determine whether a debt “for” a principal
residence “arises out of” a farming operation for purposes of applying this
exception. Significantly, the parties have not identified any cases, and we are not
aware of any, that have specifically interpreted the phrase “arise out of” as it is
found in the exception. Instead, the courts that have interpreted this phrase—and,
as the BAP noted, not many have—have done so when interpreting the fiftypercent-farm-debt rule. See, e.g., Aplt. Opening Br. at 16 (“All of the cases
interpret the language [‘arise out of a farming operation’] as it is used the second
time it appears in the statute[, i.e., immediately after the phrase “on the date the
case is filed”]. . . . [T]his matter therefore appears to be one of first
impression.”).
The language of the phrase “arise out of” is of course essentially identical
as it appears in the rule and the exception. 3 And, in that regard, we recognize that
“[t]he normal rule of statutory construction assumes that identical words used in
different parts of the same act are intended to have the same meaning.” Sorenson
v. Sec’y of Treasury, 475 U.S. 851, 860 (1986) (internal quotation marks

3

The difference between “arise” and “arises” as found in the rule and the
exception, respectively, is only a product of references to the plural, “debts,” and singular,
“debt,” respectively; this difference, in our view, is not germane to the meaning of the
term. Thus, we view the two terms as essentially identical and use them interchangeably.
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omitted); see Nat’l Credit Union Admin. v. First Nat’l Bank & Trust Co., 522
U.S. 479, 501 (1998) (discussing “the established canon of construction that
similar language contained within the same section of a statute must be accorded
a consistent meaning”). Indeed, it is noteworthy that the phrase “arises out of” is
repeated in the same sentence; for, as the Supreme Court has recently noted, “the
presumption that a given term is used to mean the same thing throughout a statute
is at its most vigorous when a term is repeated within a given sentence.” Miss. ex
rel. Hood v. AU Optronics Corp., --- U.S. ----, 134 S. Ct. 736, 743 (2014)
(quoting Brown v. Gardner, 513 U.S. 115, 118 (1994)) (internal quotation marks
omitted). Consequently, in light of these interpretive principles, we are
comfortable looking for guidance to those cases that have construed the phrase
“arises out of” in the context of the fifty-percent-farm-debt rule. We do so below,
in seeking to determine the appropriate legal test to apply in this factual setting
for discerning when the direct-and-substantial-connection standard is satisfied.
However, we also are cognizant of the fact that the phrase as found in the
exception has a different—in some respects more narrow—point of focus than the
phrase as found in the rule. Notably, the former (that is, the exception) focuses
entirely on the debt associated with the putative family farmer’s principal
residence, whereas the latter (that is, the phrase “arises out of” as found in the
rule) relates to all “aggregate noncontingent, liquidated debts.” 11 U.S.C.
§ 101(18)(A). We are not prepared to say at this time that this difference in focus
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is wholly immaterial and, more specifically, that it has no meaningful
implications for how Congress intended the two phrases to operate in the statute.
See United States v. Cleveland Indians Baseball Co., 532 U.S. 200, 213 (2001)
(“Although we generally presume that identical words used in different parts of
the same act are intended to have the same meaning, . . . the presumption is not
rigid, and the meaning [of the same words] well may vary to meet the purposes of
the law.” (alteration in original) (citation omitted) (internal quotation marks
omitted)); Cherokee Nation v. Georgia, 30 U.S. (5 Pet.) 1, 19 (1831) (“It has been
also said, that the same words have not necessarily the same meaning attached to
them when found in different parts of the same instrument: their meaning is
controlled by the context. This is undoubtedly true.”); see also Antonin Scalia &
Bryan A. Garner, Reading Law: The Interpretation of Legal Texts 170 (2012)
(“Though one might wish it were otherwise, drafters more than rarely use the
same word to denote different concepts . . . .”). Therefore, we conduct an
independent examination of the statute and expressly underscore that our analysis
is focused on the phrase “arises out of” as it appears in the exception to the fiftypercent-farm-debt rule.
In the end, we conclude that a debt “for” a principal residence “arises out
of” a farming operation only if the debt is directly and substantially connected to
the farming operation. Then, we proceed to determine what test is optimal in this
factual context—which involves loan debt—for discerning whether this direct16

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and-substantial-connection standard is satisfied. We conclude that an objective
“direct-use” test is the best fit.
2
With the statute’s structure outlined, we now turn to its plain language.
The term “farming operation” is defined to “include[] farming, tillage of the soil,
dairy farming, ranching, production or raising of crops, poultry, or livestock, and
production of poultry or livestock products in an unmanufactured state.” 11
U.S.C. § 101(21) (emphasis added). This definition is not exhaustive. See 2
Nancy C. Dreher et al., Bankruptcy Law Manual § 12:4, at 928–29 (5th ed. 2013)
(“The definition of ‘farming operation,’ which has been in the Code since its
original enactment in 1978, is broad in scope . . . . Thus, the primary business of
the family farmer . . . need not be the actual tillage of the soil and may be a
related agricultural business that fits within this broad definition.”); Barnes Gunn
Kelley, Note, Chapter 12: Entrepreneur Punishment and Family Favorites, 15
Drake J. Agric. L. 485, 487–88 (2010) (noting that the statute provides “a nonexhaustive list of possibilities” of what constitutes a farming operation and that
“[t]his open-ended wording of the statute has left bankruptcy judges with the
case-by-case task of determining whose operations are included and whose are
excluded”).
The phrase “arises out of” is left undefined. “When a statute does not
define a term, we typically give the phrase its ordinary meaning.” FCC v. AT & T
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Inc., --- U.S. ----, 131 S. Ct. 1177, 1182 (2011) (internal quotation marks
omitted); see Sandifer v. U.S. Steel Corp., --- U.S. ----, 134 S. Ct. 870, 876 (2014)
(“It is a ‘fundamental canon of statutory construction’ that, ‘unless otherwise
defined, words will be interpreted as taking their ordinary, contemporary,
common meaning.’” (quoting Perrin v. United States, 444 U.S. 37, 42 (1979)));
State Bank of S. Utah v. Gledhill (In re Gledhill), 76 F.3d 1070, 1077 (10th Cir.
1996) (“Courts properly assume, absent sufficient indication to the contrary, that
Congress intends the words in its enactments to carry their ordinary,
contemporary, common meaning.” (internal quotation marks omitted)).
To “arise” means “[t]o originate; to stem (from)” or “[t]o result (from).”
Black’s Law Dictionary 122 (9th ed. 2009); see Webster’s Third New
International Dictionary 117 (2002) [hereinafter “Webster’s”] (defining “arise” as
“to originate from a specified source”). These definitions all connote at least
some connection between the object and its source—that is, at least some
connection between the debt at issue and a farming operation. Further analysis,
however, sheds light on the nature of that connection.
The statute’s structure—setting forth a baseline rule and an
exception—leads us to believe that the exception must be construed narrowly.
Recall, under the rule, that ordinarily the debt for an individual’s principal
residence is not included in the aggregate debt; it is not considered to “arise out
of” a farming operation. In other words, in the normal course—reflecting the
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statute’s default—a debt “for” a principal residence does not “arise out of” any
farming operations described in § 101(21). Rather, the debt “for” the principal
residence—at least most frequently—would arise out of the need for a farmer,
like anyone else, to have a place to live.
Congress, however, created an exception: in the ordinary course, the rule
functions to exclude debt for a principal residence “unless” the exception
applies—that is, “unless such debt [for a principal residence] arises out of a
farming operation.” 11 U.S.C. § 101(18)(A); see also Webster’s, supra, at 2503
(defining “unless” as “except on the condition that” or “except”). In other words,
the rule normally applies “unless” the exception is triggered.
Because this is a scheme whereby a default rule is subject to an exception,
we are guided by the interpretive principle that exceptions to a general
proposition should be construed narrowly. See Comm’r of Internal Revenue v.
Clark, 489 U.S. 726, 739 (1989) (“In construing [statutes] in which a general
statement of policy is qualified by an exception, we usually read the exception
narrowly in order to preserve the primary operation of the provision.”); City of
New York v. Beretta U.S.A. Corp., 524 F.3d 384, 403 (2d Cir. 2008) (following
the “interpretive principle that statutory exceptions are to be construed narrowly
in order to preserve the primary operation of the [general provision]” (quoting
Nussle v. Willette, 224 F.3d 95, 99 (2d Cir. 2000)) (internal quotation marks
omitted)); see also United States v. Fort, 472 F.3d 1106, 1123 (9th Cir. 2007)
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(Fletcher, J., dissenting) (“[An] exception must be construed ‘narrowly in order to
preserve the primary operation of the provision.’” (quoting Clark, 489 U.S. at
739)); 2A Norman J. Singer, Statutes and Statutory Construction § 47:11, at
246–47 (6th ed. 2000) (“Subsidiary clauses which limit the generality of a rule
are narrowly construed, as they are considered exceptions.”); cf. Singer, supra,
§ 47:11, at 250–51 (“[W]here a general provision in a statute has certain limited
exceptions, all doubts should be resolved in favor of the general provision rather
than the exceptions.”).
Flowing from this interpretive principle—that we must construe exceptions
narrowly—is the related concept that exceptions must not be interpreted so
broadly as to swallow the rule. See Cuomo v. Clearing House Ass’n, L.L.C., 557
U.S. 519, 530 (2009) (avoiding interpreting an exception in a manner that “would
swallow the rule”); cf. Minter v. Prime Equip. Co., 451 F.3d 1196, 1212 (10th
Cir. 2006) (interpreting the impeachment exception to Fed. R. Evid. 407
“narrowly, lest it swallow the rule”); Manchester v. Annis (In re Annis), 232 F.3d
749, 753 (10th Cir. 2000) (rejecting a proposed interpretation of a statutory
exemption because it “would swallow the rule”). If Congress were of the view
that most or all principal residences of farmers “arise out of” their farming
operations, it could have quite easily reflected this view in the statute’s terms.
For instance, Congress could have simply set forth the rule with a different
embedded exclusion—e.g., that not less than fifty percent of a family farmer’s
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total debt must “arise out of” a farming operation, excluding from the debt total
any debt for a principal residence that does not arise out of a farming operation.
Were that the definition of “family farmer,” it would be clear that, in Congress’s
view, family farmers’ principal residences ordinarily “arise out of” their farming
operations.
But that is not the scheme Congress chose. Accordingly, we must interpret
the phrase “arise out of” in a way that allows the rule’s exception to function as
just that—an exception. See Clark, 489 U.S. at 739; Beretta U.S.A. Corp., 524
F.3d at 403; see also Burrage v. United States, --- U.S. ----, 134 S. Ct. 881, 892
(2014) (“The role of this Court is to apply the statute as it is written—even if we
think some other approach might accor[d] with good policy.” (alteration in
original) (quoting Comm’r of Internal Revenue v. Lundy, 516 U.S. 235, 252
(1996)) (internal quotation marks omitted)); Sandifer, 134 S. Ct. at 878 (same).
We believe that construing this language to mean that there must be a direct and
substantial connection between the debt for a principal residence and the farming
operation serves that end. Cf. Heffley v. Comm’r of Internal Revenue, 884 F.2d
279, 283 (7th Cir. 1989) (noting that “in order to achieve the congressional
intent[, certain] exceptions must be narrowly applied and the corresponding
exclusions broadly interpreted”). In other words, applying the foregoing settled
principles of statutory construction, we believe that construing the phrase “arise
out of” to embody a direct-and-substantial-connection standard serves to ensure
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that the exception operates narrowly, for this standard only permits limited play
in the joints between the debt for the principal residence and the farming
operation. See Webster’s, supra, at 640 (defining “direct,” inter alia, as meaning
“marked by absence of an intervening agency, instrumentality, or influence:
IMMEDIATE”); id. at 2280 (defining “substantial,” inter alia, as meaning
“considerable in amount” and “something of moment”).
A statutory standard requiring anything less than a direct and substantial
connection, in our view, could not have been envisioned by Congress because a
lesser standard, in application, would present a serious and unacceptable risk of
the exception consuming the rule. For example, in many cases, very little
ingenuity would be needed to conjure up an indirect connection of some kind
between a family farmer’s principal residence and his farming operation. Indeed,
nearly every family farmer’s principal residence could be said to have at least an
indirect connection of some kind to his or her farming operation; among other
things, the connection could be as tenuous as the principal residence being the
place where the farmer keeps the clothing in which he farms.
Put another way, in light of our statutory analysis supra—indicating that
the default rule is premised in part upon the view that ordinarily, debt for a
principal residence will not “arise out of” a farming operation—we cannot
conclude that, in enacting the rule’s exception, Congress intended to obliterate
that foundational view regarding principal-residence debt and render the
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exception more akin to the rule. Yet, interpreting the phrase “arise out of” as
embodying anything less than a direct-and-substantial-connection standard would
present an unacceptable risk of precisely that outcome.
We recognize that divining the appropriate standard—viz., the direct-andsubstantial-connection standard—only takes us part of the way in the analysis.
We next must determine what test provides the optimal vehicle for discerning
when this standard is satisfied. With this objective in mind, we examine below
the tests that courts have commonly applied. They have done so when construing
the phrase “arise out of” as it appears in the fifty-percent-farm-debt rule. From
this examination, we identify a test that will permit us to optimally discern—at
least in the loan-debt context, as here—when the direct-and-substantialconnection standard is satisfied. Specifically, we conclude that this test is an
objective “direct-use” test. 4
3
Courts have commonly applied at least three tests in discerning whether
debt “arises out of” a farming operation: the “but-for” test, the “some-connection”
test, and the “direct-use” test. After examining the but-for and some-connection
4

We use the phrase “loan debt” broadly to encompass any type of debt that
provides funds to spend on other goods or services. We only hold that an objective
“direct-use” test is optimal for determining whether the direct-and-substantial-connection
statutory standard is satisfied in the loan-debt context. We are only charged with
deciding the case before us, which involves loan debt; so, we do not opine on whether an
objective “direct-use” test would be similarly optimal in other contexts.
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tests and rejecting them because they are not congruent with the direct-andsubstantial-connection standard we believe Congress contemplated when it
selected the phrase “arise out of,” we discuss and endorse the “direct-use” test.
At least in the loan-debt context, we consider that test an optimal fit for the
direct-and-substantial-connection standard.
The but-for test provides that a debt “arises out of a farming operation” if
but for the debt, there would be no farm. See, e.g., In re Reak, 92 B.R. 804,
805–06 (Bankr. E.D. Wis. 1988) (identifying several cases where the courts
applied the but-for test); see also Kelley, supra, at 492 (“The ‘but for’ test can be
expressed as: but for the indebtedness created by the family farmer, there would
be no farm.”). The but-for test was at least in part derived from the Seventh
Circuit’s decision in In re Armstrong, 812 F.2d 1024 (7th Cir. 1987), where the
court had to decide what portion of the debtor’s income was derived “from a
farming operation” under an earlier version of 11 U.S.C. § 101. See 812 F.2d at
1026. Specifically, the Seventh Circuit held that the money earned from the
debtor’s sale of his farm machinery was income from his farming operation
because the “farm machinery was inescapably interwoven with his farming
operation”—that is, “[h]e bought the machinery so the farm could exist and
prosper. But for the machinery, there would be no farm.” Id.
The bankruptcy court in In re Rinker, 75 B.R. 65 (Bankr. S.D. Iowa 1987),
relied on In re Armstrong to decide whether certain debt arose from a farming
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operation. See 75 B.R. at 67–68. The debtor in In re Rinker had entered into a
settlement with his three siblings to purchase their respective shares of their
parents’ farmland. See id. at 66. Approximately six years later, the debtor filed
for Chapter 12 protection as a “family farmer” because he was unable to pay his
siblings the outstanding amount of the settlement agreement. See id. at 66–67.
The court looked to the “subject of the settlement”—the farmland—in holding
that the debt arose out of a farming operation. Id. at 68. After recognizing that
the debtor’s “purpose in settling the case was to preserve the[ ] farming
operation,” the court applied the but-for test, reasoning that “[w]ithout the land,
the [debtor] would have no farm.” Id.
Other courts have followed suit by relying on In re Armstrong in applying
the but-for test. See In re Reak, 92 B.R. at 805–06 (describing the but-for test as
a “common thread” in analogous bankruptcy decisions and holding that the debt
used to acquire farmland was “inescapably interwoven with farming operations”
and “but for [that debt], there would be no farm” (internal quotation marks
omitted)); In re Roberts, 78 B.R. 536, 537 (Bankr. C.D. Ill. 1987) (following In re
Armstrong and holding that “[t]he debts in question in the instant case arose when
the Debtor inherited the farm from her mother. The estate taxes have to be paid
in order for the Debtor to keep the farm. But for the payment of the estate taxes,
there would be no farm.”); see also In re Teolis, 419 B.R. 151, 161 (Bankr. D.R.I.
2009) (applying the but-for test set forth in In re Reak).
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In our view, the but-for test does not comport with the phrase “arises out
of” as found in the exception. If a court were applying a but-for test, it would
ask, but for the debt “for the principal residence,” would there be a “farming
operation”? See In re Reak, 92 B.R. at 806 (“[B]ut for the land acquired by the
debtor [through the debt at issue], there would be no farm . . . .” (internal
quotation marks omitted)); In re Roberts, 78 B.R. at 537 (“But for the payment of
the estate taxes, there would be no farm.”); In re Rinker, 75 B.R. at 68 (“Without
the [debt for the] land, the [debtor] would have no farm.”). Common sense and
logic tell us that the answer to this question with respect to debt for a principal
residence almost always would be yes—that is, there almost always would still be
a farming operation, regardless of any debt obtained for a principal residence. In
other words, the incurring of debt for family farmers’ principal residences would
seldom be dispositive of the existence vel non of the farming operations at which
they work. Indeed, in this case, Debtors’ farming operation preexisted the
construction of their residence. The consequence of this situation—of the debt
“for” the principal residence, in almost every instance, not being a but-for cause
of the existence of the farming operation—would be that the exception would
almost never apply.
Although we must narrowly construe an exception, see Clark, 489 U.S. at
739, employing the but-for test in this context would have a limiting effect that
we are hard-pressed to conclude that Congress intended. In other words,
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application of the test would almost entirely eviscerate the exception; were we to
adopt the but-for test, the exception would rarely, if ever, apply. Given its patent
interest in assisting genuine family farmers, we cannot conclude that Congress
contemplated a test that would virtually negate a statutory exception that it
carefully crafted to help true family farmers satisfy the fifty-percent-farm-debt
threshold. See Sandifer, 134 S. Ct. at 877 (rejecting petitioner’s interpretation of
a statutory “exception” because it “runs the risk of reducing [the statutory
exception] to near nothingness”); see also Duncan v. Walker, 533 U.S. 167, 174
(2001) (“It is our duty ‘to give effect, if possible, to every clause and word of a
statute.’” (quoting United States v. Menasche, 348 U.S. 528, 538–39 (1955))).
Thus, in this context we decline to endorse the but-for test.
As noted, other courts have applied what we have labeled a “someconnection” test. This test focuses on whether the purpose (and sometimes the
use) of the debt has “some connection” to farming operations. See In re
Saunders, 377 B.R. at 774–76 (collecting cases and concluding that “to arise out
of a farming operation the purpose of a debt must have some connection to the
debtor’s farming activity” (emphasis added) (internal quotation marks omitted));
In re Marlatt, 116 B.R. 703, 705 (Bankr. D. Neb. 1990) (“[F]or a debt to arise out
of a farming operation, there must be a connection between the debt and the
debtor’s farming activity.” (emphasis added)).
Notably, in the instant case, the BAP adopted the some-connection test
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from In re Saunders, holding that “to arise out of a farming operation the purpose
of a debt must have some connection to the debtor’s farming activity.” Aplt.
App. at 1382 (internal quotation marks omitted); see also In re Hemann, No. 1100261, 2013 WL 1385404, at *7–8 (Bankr. N.D. Iowa Apr. 3, 2013) (relying on
the BAP’s decision here and applying the some-connection test). The BAP
concluded that this test was met because the evidence supported the bankruptcy
court’s determination that the purpose of the construction loan was to construct a
farmhouse and that purpose was “connected to the [Debtors’] farming activities.”
Aplt. App. at 1382–83.
However, we decline to adopt the some-connection test here. This test is
inconsistent with our interpretation of the statutory phrase “arises out of.” As we
understand it, that phrase contemplates a direct and substantial connection
between the debt “for” the principal residence and the farming operation. It
follows perforce that a test requiring only some connection—no matter how
tenuous and insubstantial, or indirect—between the principal-residence debt and
the farming operation would dilute and conflict with this direct-and-substantialconnection standard. Moreover, we are reinforced in our view that the someconnection test is not the one that Congress envisioned because applying it in the
context of the exception would almost certainly result in the exception
swallowing the rule. For example, in many cases, it would not be difficult to
envision a connection—however remote—between a family farmer’s principal
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residence and his farming operation. In other words, nearly every family farmer’s
principal residence could be said to have some connection to his or her farming
operation; indeed, the connection could be as tenuous and insubstantial as the
principal residence being the place where the farmer keeps the clothing in which
he farms or the computer or telephone through which he places orders or sells his
goods. Thus, were the some-connection test the operative one, the exception
would almost certainly swallow the rule; this is not a result that we are prepared
to conclude that Congress contemplated. See Cuomo, 557 U.S. at 530.
Accordingly, we decline to endorse the some-connection test.
Ultimately, we conclude that—at least in the loan-debt context, as here—an
objective “direct-use” test optimally fits with our direct-and-substantialconnection statutory standard. Such a test is singularly focused on whether the
loan proceeds were directly applied to or used in a farming operation. This test
appears to have begun with In re Douglass, 77 B.R. 714 (Bankr. W.D. Mo. 1987),
where the court held that “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[.’]” 77
B.R. at 715. But the test was subsequently modified in important ways by the
bankruptcy court in In re Kan Corp., 101 B.R. 726 (Bankr. W.D. Okla. 1988); it
is the version of the test found there that we ultimately adopt.
The court in In re Kan Corp. focused solely on whether the loan proceeds
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stemming from the debt were directly used in a farming operation. In that case,
the debtor obtained a bank loan secured by his farmland to purchase a beer
distributorship and obtained a second loan to pay off the first. See In re Kan
Corp., 101 B.R. at 726. The court reasoned:
While it may be true that the purpose of [obtaining the second
loan] was to save Debtor’s farmland and that the proceeds of the
farming operation were used to meet the payments on the loan,
those facts are not material to the issue. Whether a debt incurred
from a loan “arises out of farming operations” is determined by
the use made of the loan proceeds. In this case, the [second]
loan . . . went to pay off Debtor’s obligation to [the first bank],
and the proceeds of the [first] loan . . . were invested in a beer
distributorship.
Id. at 727 (emphasis added). The court held that this debt did not “arise out of a
farming operation” because the loan proceeds were used to purchase a beer
distributorship—a business venture completely unrelated to farming operations.
Id.
Significantly, in In re Kan Corp., the court refused to consider “the motive
of the debtor” to answer whether a debt arose out of a farming operation because
looking to “the use made of the loan proceeds” provides “more objective criteria.”
Id.; see also Otoe Cnty. Nat’l Bank v. Easton (In re Easton), 883 F.2d 630, 636
(8th Cir. 1989) (rejecting the idea that “any loan secured by farmland” can be
characterized as “arising out of a farming operation” “regardless of the purpose to

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which the borrowed funds have been put”). 5 In short, in order to satisfy its
objective direct-use test, the court held that “the proceeds of the loan must in
some way be directly applied to or utilized in the farming operation.” In re Kan
Corp., 101 B.R. at 727 (emphasis added).
Thus, we conclude that the version of the use test applied in In re Kan
Corp.—an objective direct-use test—is the one that fully comports with the
direct-and-substantial-connection standard, at least in the loan-debt context.
Succinctly stated, a loan debt has a direct and substantial connection to a farming
operation, and thus “arises out of” that operation, if “the proceeds of the loan” are
“directly applied to or utilized in the farming operation.” Id. For the reasons
suggested in In re Kan Corp., we reject a version of this test that would focus in
part on the “motive of the debtor,” id.; such a test would be less certain in its
application because of the ultimately unfathomable nature of another’s thoughts.
The objective direct-use test that we adopt reflects an appropriately narrow
construction of the exception; however, it leaves open plausible circumstances in
which the exception could apply.
As the rule clearly envisions, in many instances, the proceeds of a debt
“for” a principal residence will not be directly used in a farming operation,
5

Some courts, such as the Eighth Circuit in In re Easton, do not view an
inquiry into the “purpose” of the loan as being an inquiry relating to the debtor’s
subjective intent; rather, they seek to identify the purpose of the loan by inquiring into
how the loan proceeds are actually used. See 883 F.2d at 636. As applied, then, such a
purpose test is essentially indistinguishable from an objective direct-use test.
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because those proceeds would in fact be used instead to purchase or construct a
residence. Put another way, Congress surely envisioned that in many instances,
the occupants of the principal residence may be farmers or the residence may be
located on a farm, but the proceeds of the loan for the principal residence would
not have been used for the activities constituting farming operations, such as
“dairy farming, ranching, [or] production or raising of crops, poultry, or
livestock.” 11 U.S.C. § 101(21).
One can easily imagine, however, instances when the proceeds of a loan
“for” a principal residence would be applied to such activities. For example, a
soybean farmer could obtain a second mortgage on his principal residence in
order to buy soybean seeds for planting—and then in fact buy the seeds. The
mortgage would certainly amount to a debt “for” his principal residence.
Furthermore, it is no less patent that the purchase of the seeds with the proceeds
of that loan debt would constitute a “farming operation” within the meaning of 11
U.S.C. § 101(21); at the very least, it would involve “raising of crops.”
Accordingly, in this scenario, the proceeds from the principal-residence debt
would have been directly used in a farming operation and, consequently, that debt
would properly be deemed to “arise out of” the farming operation. That is, the
debt would properly be viewed as having a direct and substantial connection to
the farming operation.
We need not fully explicate here the various situations in which the
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exception could apply. For our purposes, it is sufficient to underscore that when
the debt at issue is loan debt, asking solely whether the loan proceeds were
directly used in farming operations (as statutorily defined) leaves room for the
exception to operate—but, appropriately, only in limited circumstances.
In sum, we have interpreted the statutory term “arises out of” in the
exception to the fifty-percent-farm-debt rule of 11 U.S.C. § 101(18)(A) as
embodying a direct-and-substantial-connection standard, and we have identified a
test that optimally serves—at least in the loan-debt context—as a vehicle for
discerning whether that standard is satisfied—i.e., an objective direct-use test.
We now turn to the facts of the instant case.
B
Debtors had the burden of establishing their eligibility for Chapter 12
relief. See Ames v. Sundance State Bank (In re Ames), 973 F.2d 849, 851 (10th
Cir. 1992) (“Debtors [under Chapter 12] bear the burden of establishing all
elements necessary for confirmation of a plan, including the feasibility of the
plan.”); see also Tim Wargo & Sons, Inc. v. Equitable Life Assurance Soc’y (In re
Tim Wargo & Sons, Inc.), 869 F.2d 1128, 1130 (8th Cir. 1989) (noting in a
Chapter 12 proceeding that “the burden was debtor’s to elicit the relevant facts”);
cf. Hamilton Creek Metro. Dist. v. Bondholders Colo. Bondshares (In re Hamilton
Creek Metro. Dist.), 143 F.3d 1381, 1384–85 (10th Cir. 1998) (“The tests of
insolvency are applied as of the time of filing, and the petitioner bears the burden
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of proving one of them is met . . . .” (citation omitted)).
The bankruptcy court concluded that the construction loan arose out of a
farming operation. In support of this conclusion, the court stated that the
residence was “an integral part of the farm operation in [the] sense that,” first,
“the farm’s office, books, and records . . . are maintained at the farmhouse,” and
second, “that the proximity of these debtors to their hands-on, day-to-day,
farming operation in terms of care of livestock and irrigation, that [the residence]
isn’t just incidental . . . [it] is where they live.” 6 Aplt. App. at 797 (emphasis
added).
We begin by assessing whether the bankruptcy court’s findings are
sufficient to support its conclusion under our newly fashioned test. To do so, we
6

Debtors view the bankruptcy court’s statement that the residence was “an
integral part of the farm operation” as a factual finding that we should review for clear
error. We disagree. A complete reading of the bankruptcy court’s statement
demonstrates that the court concluded that the residence was “an integral part of the
farming operation in [the] sense that” (1) the farm’s office, books, and records were there,
and (2) it was in proximity to the farming operation. Aplt. App. at 797 (emphasis added).
The use of the phrase “in [the] sense that” makes clear that the bankruptcy court found
that the residence was “integral” to the farming operation because of the two specific
reasons it identified. And, it in turn tacitly rendered the legal conclusion that the debt for
this “integral” principal residence arose out of the farming operation. However, because
we conclude infra that the two reasons that the court relied upon are not sufficient to
produce the legally required nexus between the principal residence (and its associated
debt) and the farming operation—that is, they are insufficient to establish a direct and
substantial connection between the two—the legal premise for the court’s purported
factual finding on the question of nexus (i.e., its “integral-part” finding) is in error; thus,
we do not accord that finding a deferential standard of review. See Pahls, 718 F.3d at
1232 (“It follows that if the district court commits legal error en route to a factual
determination, that determination is thereby deprived of any special solicitude it might
otherwise be owed on appeal.”).
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ask whether either of the two factors upon which the court relied allows us to
conclude that the construction loan is directly and substantially connected to
Debtors’ farming operation. We answer in the negative, recognizing that in the
loan-debt context, our true focus must be on whether the loan proceeds from the
construction loan were directly used in the farming operation.
It is undisputed that the construction loan was used to build Debtors’
principal residence. Merely because the residence contained the farming
operation’s office, books, and records does not mean, however, that the proceeds
of the loan were “directly applied to or utilized in the farming operation.” In re
Kan Corp., 101 B.R. at 727. In other words, the fact that the residence contains
an office and the farming operation’s books and records has not been shown by
Debtors to be anything more than an incidental matter. 7 Were we to hold that

7

With respect to the office, we do not categorically exclude the possibility
that a debt for the construction of an office in a principal residence could be found to
“arise out of” a farming operation. Put another way, we do not categorically negate the
possibility that some of the funds stemming from a principal-residence debt actually
could be used in a farming operation—that is, “arise out of” a farming
operation—because a portion of the principal residence that was built with those loan
funds was directly and substantially connected to farming operations, as defined in
§ 101(21). However, Debtors have failed to adequately demonstrate that such a
possibility may be present here; nor have they specifically provided us with a legal or
factual basis for parsing out the portion of their principal-residence debt used to construct
the office. Here, the only evidence relied on by Debtors regarding the office is the
bankruptcy court’s finding that it was in the residence and Mr. Woods’s testimony that
“we made one bedroom [in the residence] larger specifically for an office.” Aplt. App. at
288 (Hr’g Tr., dated May 6, 2011). Such evidence is insufficient for us to conclude that a
portion of the proceeds from the construction loan was directly and substantially
connected to a farming operation—that is, directly used in a farming operation.
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such a facially tenuous connection to a farming operation was sufficient, the
exception would swallow the rule—that is, virtually every family farmer’s
principal residence could be deemed to arise out of a farming operation.
The second factor that the bankruptcy court relied upon rests on an even
weaker foundation. The proximity of the residence to the farming operation is
irrelevant to how the proceeds of the construction loan were used. The fact that
Debtors’ principal residence is located on the farm cannot reasonably lead us to
conclude that the funds derived from the construction loan were directly used in
the farming operation itself. Indeed, quite the opposite is true; at best, the funds
derived from the construction loan were indirectly used in the farming operation
because they allowed Debtors to construct a residence, which in turn provided
convenient access to the farming operation.
Put most simply, the debt “for” the principal residence arose out of
Debtors’ need to have a place to live, not out of the activities constituting farming
operations under 11 U.S.C. § 101(21). To the extent that their living in proximity
to the farming operation could be said to have facilitated Debtors’ farming
operation, that fact alone would not be legally sufficient to make the loan debt
that was incurred to construct the principal residence debt that “arises out of” the
farming operation. In other words, in such a circumstance, the proceeds from the
loan debt were not directly used in the farming operation, such that they could be
deemed to be directly and substantially connected to that operation. Once again,
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were we to hold otherwise, the exception would swallow the rule. Notably, when
asked whether “most hay farmers and horse ranchers live on their farms,” Mr.
Woods testified that, “[t]o [his] knowledge, virtually all of them do that [he]
know[s].” Aplt. App. at 289.
In short, under the interpretation of the statutory phrase “arise out of” that
we articulate here—which contemplates a direct and substantial connection
between the principal-residence debt and the farming operation—and under the
test that is congruent with this statutory interpretation, the objective direct-use
test, the bankruptcy court committed legal error. Specifically, it did so in
concluding that two attributes of Debtors’ principal residence—(1) that it contains
an office and the farming operation’s books and records, and (2) that it is located
in proximity to the farming operation—were legally sufficient to classify debt that
was incurred for the principal residence as debt that arose out of a farming
operation.
When we find legal error, we ordinarily do not “weigh the facts . . . and
reach a new conclusion; instead, [we] must remand to the [trial] court for it to
make a new determination under the correct law.” United States v. Hasan, 609
F.3d 1121, 1129 (10th Cir. 2010). We follow such a course here, out of an
abundance of caution and in the interest of justice, because we have difficulty
concluding that the record leads ineluctably to only one result. See PullmanStandard v. Swint, 456 U.S. 273, 292 (1982) (“[W]here findings are infirm
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because of an erroneous view of the law, a remand is the proper course unless the
record permits only one resolution of the factual issue.”).
To be sure, consistent with this opinion and its factual setting, we are
confident that ordinarily the proximity of a farmer’s principal residence to his
farming operation—viewed in isolation—will be legally irrelevant to the question
of whether the debt “for” that residence “arises out of” a farming operation.
Furthermore, standing alone, the mere presence of an office in a farmer’s
principal residence ordinarily will not be sufficient to establish that the debt “for”
the office portion of that principal residence “arises out of” a farming operation.
But as we observed above, see supra note 7, we do not categorically exclude the
possibility that a debt for the construction of an office in a principal residence
could be found to “arise out of” a farming operation. With the legal landscape
now properly defined in this opinion, we believe that Debtors should have an
opportunity in the context of a remand to try to establish facts regarding their
office supportive of this legal characterization (i.e., “arises out of” a farming
operation) and possibly other facts as well that may have some material bearing
on their eligibility for Chapter 12 relief. 8
Lest there be any doubt: we do not express any opinion on the likely
outcome of the bankruptcy court’s application to the facts of this case of the
8

Because we do not decide whether Debtors are eligible for Chapter 12
relief, we need not reach the other issues that First National Bank raises regarding the
confirmation of Debtors’ Chapter 12 plan.
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proper legal principles—including our newly articulated objective “direct-use”
test. Rather, as in Hasan, “we simply conclude that findings under the proper
legal standard . . . are a necessary condition for our review and, accordingly, a
remand is required.” 609 F.3d at 1131.
III
Because the bankruptcy court failed to apply the correct legal standard and
test in determining whether the debt “for” Debtors’ principal residence “arises out
of a farming operation,” we VACATE the bankruptcy court’s judgment and
REMAND the case to the bankruptcy court to conduct a proper legal
analysis—involving notably our newly stated objective “direct-use” test—and for
further proceedings consistent with this opinion.

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