Acee v. Oneida Sav. Bank, s. 6:14–CV–0259 LEK

• Decision Date: 31 March 2015
• Docket Number: Nos. 6:14–CV–0259 LEK,6:14–CV–0258 LEK.,s. 6:14–CV–0259 LEK
• Citation: 529 B.R. 494
• Parties: Marone ACEE, Appellant, v. ONEIDA SAVINGS BANK; Access Federal Credit Union, Appellees. Boulder Meadows, Inc., Appellant, v. Oneida Savings Bank; Access Federal Credit Union, Appellees.
• Court: U.S. District Court — Northern District of New York

529 B.R. 494

Marone ACEE, Appellant

v.ONEIDA SAVINGS BANK;

Access Federal Credit Union, Appellees.

Boulder Meadows, Inc., Appellant

v.Oneida Savings Bank;

Access Federal Credit Union, Appellees.

Nos. 6:14–CV–0259 LEK

6:14–CV–0258 LEK.

United States District Court, N.D. New York.

Signed March 31, 2015.

Peter A. Orville, Peter A. Orville, P.C., Binghampton, NY, for Debtor.

Mark W. Swimlear, Syracuse, NY, for Trustee.

MEMORANDUM–DECISION and ORDER

LAWRENCE E. KAHN, District Judge.

I. INTRODUCTION

Appellants Marone Acee (“Acee”) and Boulder Meadows, Inc. (“Boulder Meadows”) (collectively, “Appellants” or “Debtors”) appeal a decision by U.S. Bankruptcy Judge Diane Davis, finding that Appellants did not qualify as “family farmers” under 11 U.S.C. § 101(18) and were therefore ineligible for Chapter 12 protection. Dkt. Nos. 1;¹ 1–2; 1–6 (“Appellant Brief”); 9 (“Trustee Brief”). Appellee Oneida Savings Bank (“Appellee,” or “OSB”) has filed a Response, and Appellants have filed a Reply. Dkt. Nos. 12 (“Response”); 13 (“Reply”). For the following reasons, the Bankruptcy Court's decision is affirmed in part, and reversed in part.

II. BACKGROUND

A. Factual Background

Acee is the sole shareholder of three separate corporate entities: (1) Boulder Meadows, which owns approximately 300 acres in Vernon and Augusta, New York (the “Boulder Meadows Property”); (2) Vernon National Shooting, Inc. (“Vernon National”), which does not own any assets, and (3) Stop Seven Operating Corporation (“Stop Seven”), which issued stock but owns no hard assets or equipment and conducts farming operations to grow strawberries, corn, tomatoes and other fruits and vegetables. B.R. Order at 3–4.

To help generate revenue, Acee began a pheasant hunting operation on the Boulder Meadows Property. Id. at 4. Acee placed a portion of the Boulder Meadows Property into the Conservation Reserve Program (“CRP”), which is administered by the U.S. Department of Agriculture's Farm Service Agency (“FSA”), and then rented that land to Vernon National. Id. Acee purchases the pheasants from a third party because he is not a licensed breeder. Id. Acee houses the birds for two to three weeks in a former barn on the Boulder Meadows Property before he releases them. Id. In addition, Acee became licensed through Cornell to make and sell food products using crops grown by Stop Seven. Id. at 5.

B. Procedural Background

On August 31, 2012, Appellants filed for relief under Chapter 12 of the U.S. Bankruptcy Code. B.R. Order at 1. OSB and Access Federal Credit Union (“AFCU”) each filed objections to confirmation of the Chapter 12 plans. Id. at 2. On November 11, 2013, U.S. Bankruptcy Judge Diane Davis issued a Memorandum–Decision and Order finding that neither Acee nor Boulder Meadows qualified as a “family farmer” under 11 U.S.C. § 101(18), and thus both were ineligible for Chapter 12 protection. Id. at 16. Appellants filed a Motion for reconsideration of the Bankruptcy Order, which was denied in the Bankruptcy Court's Memorandum–Decision and Order dated January 10, 2014. Dkt. No. 1–2 (“Reconsideration Order”). This appeal ensued.

III. STANDARD OF REVIEW

On appeal, a district court reviews a bankruptcy court's factual findings for clear error and its legal conclusions de novo . Cnty. of Clinton v. Warehouse at Van Buren St., Inc., 496 B.R. 278, 279–80 (N.D.N.Y.2013) (citing R2 Invs., LDC v. Charter Commc'ns, Inc., 691 F.3d 476, 483 (2d Cir.2012) ). “A finding is ‘clearly erroneous' when although there is evidence to support it, the reviewing court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.” United States v. U.S. Gypsum Co., 333 U.S. 364, 395, 68 S.Ct. 525, 92 L.Ed. 746 (1948). Following review, a district court “may affirm, modify, or reverse a bankruptcy judge's judgment, order, or decree or remand with instructions for further proceedings.” Fed. R. Bankr. P. 8013.

IV. DISCUSSION

Appellants argue that the Bankruptcy Court erred in the following ways: (1) improperly calculating the “farm-debt test” under § 101(18)(A) with respect to Acee; (2) finding that the debt associated with Acee's principal residence did not arise out of a farming operation; (3) finding that Boulder Meadows was not engaged in a “farming operation”; and (4) assessing Boulder Meadows' eligibility under Chapter 12 even though no objection to its eligibility was filed. App. Br. at 4–5.

A. Farm–Debt Test

To qualify as a “family farmer” under the Bankruptcy Code, the individual must satisfy, in relevant part, the “farm-debt test,” meaning that the individual's:

aggregate debts do not exceed $4,031,5751 and 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 individual or such individual and spouse.

11 U.S.C. § 101(18)(A). The issue raised on appeal is the proper construction and application of the principal residence debt when computing the farm-debt test. See App. Br.

Noting that “[t]here are no reported decision that address in detail the debt calculation itself,” the Bankruptcy Court interpreted the statute as follows: (1) if the principal residence debt arises from a farming operation, then that amount is included in both the numerator and denominator; (2) however, if the principal residence debt does not arise from a farming operation, then that amount is excluded from the numerator but still included in the denominator. See Recons. Order. at 7. After finding that Acee's principal residence debt did not arise from a farming operation, the Bankruptcy Court therefore excluded that amount from the numerator, but included it in the denominator, which resulted in finding that only 43% of Acee's aggregate debt constituted farm-related debt. Id.

Appellants argue that the Bankruptcy Court's interpretation of this provision constituted legal error. Specifically, Appellants assert that if the principal residence debt does not arise from a farming operation, then it should be excluded from both the numerator and denominator. App. Br. at 11–13. Thus, Appellants argue that the Bankruptcy Court committed legal error, after finding that the principal residence debt was not farm related, by including that amount in the denominator. Id.

Although this issue was only briefly reached in the Bankruptcy Order, Appellants argued it in their Motion for Reconsideration and Judge Davis addressed it thoroughly in the Reconsideration Order. The Bankruptcy Court noted that, while no court has yet to provide a specific formulation or meaningful discussion of the provision at issue, it found support for its interpretation of the statute in the legislative intent behind the enactment of Chapter 12. See Recons. Order at 10–12. Moreover, Judge Davis found that, although not binding, she was persuaded by In re Saunders, 377 B.R. 772, 776 (Bankr.M.D.Ga.2007), where the court found that “[b]ecause the business debt secured by the farm cannot be treated as farm-related debt, Debtor's farm-related debt consists of less than half of his total debt .” (emphasis added).

Although mindful of the lack of legal authority on this issue, the Court respectfully disagrees with Judge Davis's reliance on In re Saunders, as that case did not involve the precise issue raised by Appellants. Indeed, in In re Saunders, the court began its analysis by stating that “[t]he key question in this case is whether loans secured by farmland used to operate a car dealership constitute debt “aris[ing] out of a farming operation.” ” Id. at 774 (emphasis added). Thus, In re Saunders did not concern principal residence debt, nor did it provide any reasoning or analysis as to how the relevant provision should be applied.

The Court is persuaded, however, by In re Woods, 743 F.3d 689, 696 (10th Cir.2014). In a lengthy discussion on application of the farm-debt test, the Tenth Circuit stated:

Under the rule, ordinarily the debt for one's principal residence is not included in the aggregate debt;² 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.

Id. The Court reads this language to unambiguously provide that under the general rule, where principal residence debt is not farm related—as Judge Davis found here—“it is not included in the aggregate debt [i.e. denominator.”]. Id. (emphasis added). Thus, the Court is persuaded that Appellants are correct—if the principal residence debt is not farm related, then it should be excluded from both the numerator and denominator—and finds that the Bankruptcy Court erred in its construction of the farm-debt test under § 101(18)(A).

B. Acee's Principal Residence Debt

The next issue before the Court is whether the Bankruptcy Court erred in its determination that Acee's principal residence debt did not arise out of a farming operation under § 101(18)(A). Judge Davis found that Acee's principal residence debt did not arise out of a farming operation because:

Acee has done no more than testify that he utilizes his personal residence as a home office from which he conducts certain business functions, including, but not limited to, the payment of bills. No testimony was elicited from Acee regarding the use of the home equity or mortgage proceeds, and no evidence was presented to prove that the mortgages secure farm debt.

B.R. Order at 15. Appellants argue that they have demonstrated “some connection” between the principal...