Bankruptcy in the United States is governed by the Bankruptcy Code set forth in Title 11 of the United States Code, sections 101-1330. Under chapter 12, debtors propose a repayment plan of installments to creditors over three to five years. Generally, the plan must provide for payments over three years unless the court approves a longer period. Under Chapter 12, certain special provisions are offered to family farms and fishermen, to allow them to continue their ongoing operations.
Under the Bankruptcy Code (11 U.S.C. § 101(19)), a “family fishermen” may be either (1) an individual or individual and spouse, or (2) a family-owned corporation or partnership. Fishermen falling into the first category must meet each of the following four criteria as of the date the petition is filed in order to qualify for relief under chapter 12:
1. The individual or husband and wife must be engaged in a commercial fishing operation.
2. The total debts (secured and unsecured) of the operation must not exceed $1,868,200.
3. If a family fisherman, at least 80% of the total debts that are fixed in amount (exclusive of debt for the debtor’s home) must be related to the commercial fishing operation.
4. More than 50% of the gross income of the individual or the husband and wife for the preceding tax year must have come from the commercial fishing operation.
In order for a corporation or partnership to fall within the second category and be eligible to file as a family fisherman, the corporation or partnership must meet each of the following criteria as of the date of the filing of the petition:
1. More than one-half of the outstanding stock or equity in the corporation or partnership must be owned by one family or by one family and its relatives.
2. The family or the family and its relatives must conduct the commercial fishing operation.
3. More than 80% of the value of the corporation or partnership’s assets must be related to the fishing operation.
4. The total indebtedness of the corporation or partnership must not exceed $1,868,200.
5. At least 80% of the corporation or partnership’s total debts which are fixed in amount (exclusive of debt for one home occupied by a shareholder) must be related to the fishing operation.
6. If the corporation issues stock, the stock cannot be publicly traded.
What is a “family fisherman with regular annual income”?
11 U.S.C. § 101 (19B): a family fisherman whose annual income is sufficiently stable and regular to enable such individual to make payments under a plan under chapter 12 of this title.
What is a “commercial fishing operation”?
11 U.S.C. § 101(7A):
(A) the catching or harvesting of fish, shrimp, lobsters, urchins, seaweed, shellfish, or other aquatic species or products;
(B) for purposes of section 109 and chapter 12, aquaculture activities consisting of raising for market any species or product described in subparagraph (A); and
(C) the transporting by vessel of a passenger for hire (as defined in section 2101 of title 46) who is engaged in recreational fishing.
What is a “commercial vessel”?
11 U.S.C. § 101(7B): A vessel used by a fisherman to carry out a commercial fishing operation.
Issue: Stable income
The Bankruptcy Code provides that only a family farmer or fisherman with “regular annual income” may file a petition for relief under Chapter 12. 11 U.S.C. §§ 101(18), 101(19A), 109(f). This is to ensure that the debtor’s annual income is sufficiently stable and regular to permit the debtor to make payments under a Chapter 12 plan.
Although Chapter 12 allows for situations in which family fishermen have income that is seasonal in nature, suitable for aquaculture and recreational family fishermen, it might not be sufficient for fishermen engaged in catching or harvesting fish.
Fishing (catching or harvesting) in inherently unstable and so is income derived from fishing, not only because fishing depends on environmental variables beyond the fisherman’s control but also because fisheries are becoming more regulated using catch shares and quota allocations. Most quotas are allocated annually. Although the percentage of the total allowable catch (TAC) that can be caught by a quota holder is known, the TAC itself is determined annually and can vary significantly. Further, scientific methods for determining TACs are often inaccurate, and are often ignored by regulators for political reasons even when they are accurate. This can lead to significant TAC reductions or even the outright closure of a fishery. Hence a fishermen dependent on catching a particular species under a quota can find himself with no quota allocation, if the management authority determines the fishery’s sustainable yield was miscalculated or the stock needs time to rebuild.
Issue: Is the 50% minimum requirement reasonable?
Sources of income need to be described. Income driven from fish harvesting is clearly fishing income. However, what about quota leases? Fishermen often have multiple quotas for multiple species. Sometimes they catch one type for a season (or several seasons), leasing out the other quotas. Would that lease value be considered fishing income?
Quota allocations seem to allow fishermen to catch their fish any time during a season. However, in practice, other elements restrict the fishermen’s ability to spread their effort throughout an entire season. The quality of some fish varies depending on the time they are caught. Location also varies; fish can be more abundant in one geographic location than another, which incents all fishermen to compete to catch their quotas from the better location as quickly as possible. For some stocks, fish need to be caught at a specific time because the stock is migratory; if the fishermen wait, they might be forced to fish further at sea at a much higher cost. All these factors contribute to the seasonal nature of fishing. Therefore, fishermen might catch their quota allotment in a short period and cease fishing for the rest of the season.
Where the fishery is highly seasonal, restricting the income qualification to 50% could unduly limit a fisherman’s ability to seek out other sources of income. This decreases the fisherman’s freedom to use his time and effort efficiently. Fishing is becoming less profitable and more seasonal; reducing the 50% limit would encourage fishermen to diversify their income. A better policy should allow fishermen to diversify, especially when many fish stocks are declining. This would enhance economic efficiency and improve coastal communities’ livelihoods.
Issue: Is a quota part of “the property of the estate”?
In a Chapter 12 bankruptcy, the “property of the estate” includes all property acquired by the debtor during the bankruptcy case (11 U.S.C. sec. 1207). A fishing quota can have a large market value, but does it fall under the definition of “property of the estate”? Quotas are not standard property rights; they are privileges, but can they be considered estate property for the purpose of bankruptcy? This remains unclear. However, Canadian courts have found that quotas can be considered property for bankruptcy purposes. Because quotas are usually tradable, a trustee could sell the quotas to other eligible fishermen. Whether a trustee can place a lien on the quota or not, however, remains undetermined.
(Note: this post has been originally published on The Law of Food & Agriculture Blog, University of Arkansas, School of Law uagloballaw.blogspot.com )