Easton, In re

• Decision Date: 23 August 1989
• Docket Number: No. 88-2052,88-2052
• Parties: , 19 Bankr.Ct.Dec. 1217, Bankr. L. Rep. P 73,094 In re George Roger EASTON and Elsie M. Easton, Debtors. OTOE COUNTY NATIONAL BANK, Appellant, v. George Roger EASTON and Elsie M. Easton, Appellees.
• Court: U.S. Court of Appeals — Eighth Circuit

Page 630

883 F.2d 630

58 USLW 2149, 19 Bankr.Ct.Dec. 1217,

Bankr. L. Rep. P 73,094

In re George Roger EASTON and Elsie M. Easton, Debtors.

OTOE COUNTY NATIONAL BANK, Appellant, v. George Roger EASTON and Elsie M. Easton, Appellees.

No. 88-2052.

United States Court of Appeals,

Eighth Circuit.

Submitted Dec. 15, 1988.

Decided Aug. 23, 1989.

Karen M. McCarthy, Sioux City, Iowa, for appellant.

Wanda Howey-Fox, Yankton, S.D., for appellees.

Before BOWMAN and MAGILL, Circuit Judges, and HANSON, Senior District Judge. ^*

BOWMAN, Circuit Judge.

In this case we must decide whether the courts below erred in conferring statutory "family farmer" status upon appellees pursuant to 11 U.S.C. Sec. 101(17)(A) (Supp. V 1987). Otoe County National Bank (creditor) appeals from a final judgment of the District Court ¹ affirming both the Bankruptcy Court's ² determination that George Roger Easton and Elsie M. Easton (debtors) meet the statutory definition of "family farmer" and hence are eligible for relief under Chapter 12 of the Bankruptcy Code (Code), 11 U.S.C. Secs. 1201-1231 (Supp. V 1987), and its confirmation of debtors' fifth amended plan of reorganization. Each of the courts below stayed its judgment pending appeal. We vacate the judgment of the District Court, and remand for further proceedings.

Debtors own approximately 520 acres of land in Plymouth County, Iowa. They filed their Chapter 12 petition in the Bankruptcy Court on February 13, 1987. In 1986 debtors leased 60 acres of cultivable land to Rick Easton (their grandson) and 290 acres of cultivable land to Larry Ritz (a neighbor) for $85 per acre; George Easton raised cattle on the remaining 170 acres of pastureland. In 1983 Rick Easton obtained a $370,000 loan from creditor for the purpose of constructing a hog-raising facility on a two-acre parcel he had purchased from debtors, who co-signed the note and pledged 150 acres as security for the loan. Rick Easton's hog-raising enterprise proved unable to generate sufficient income to service the loan, and debtors ultimately elected to seek Chapter 12 protection when pressed by creditor for repayment.

The Bankruptcy Court found that debtors "derived a minimal income from the sale of cattle in 1986," and that "[t]he vast majority of [debtors'] income [in 1986] was derived from the cash rent of their real estate and social security." ³ While the Bankruptcy Court found that "not more than 50 percent of [debtors'] income arose from the rental payments received from Rick [Easton], together with the cattle income," it ruled that "all the rental income [i.e. rent payments debtors received in 1986 from both Rick Easton and Larry Ritz] ... are [sic] considered farm income for purposes of meeting the farm eligibility test," Transcript of November 30, 1987 Hearing at 29, and the District Court agreed. Creditor challenges this ruling on appeal.

The Code provides that "[o]nly a family farmer with regular annual income may be a debtor under chapter 12." 11 U.S.C. Sec. 109(f) (Supp. V 1987). The Code defines "family farmer," in relevant part, as follows:

[An] ... individual and spouse engaged in a farming operation whose aggregate debts do not exceed $1,500,000 and not less than 80 percent of whose aggregate noncontingent, liquidated debts ... on the date the case is filed, arise out of a farming operation owned or operated by ... such individual and spouse, and ... such individual and spouse receive from such farming operation more than 50 percent of ... such individual and spouse's gross income for the taxable year preceding the taxable year in which the case concerning ... sucb individual and spouse was filed.

11 U.S.C. Sec. 101(17)(A) (Supp. V 1987) (emphasis added). As mentioned, the courts below found that debtors do not meet the income requirement of Sec. 101(17)(A) for the test year (1986) unless the rent they received from Larry Ritz is treated as income legally capable of satisfying that requirement. We hold that in so treating the rent debtors received from Larry Ritz ⁴ the courts below applied an erroneous standard of law.

Under section 101(17)(A), in order for an individual and spouse to qualify as a "family farmer" they among other things must have received more than fifty percent of their gross income in the relevant year from a particular source, namely, "from such farming operation." From a syntactical point of view, identification of the antecedent of the word "such" in the phrase "from such farming operation" admits of two possibilities: it may refer to the farming operation described in the immediately preceding clause of the statute ("a farming operation owned or operated by" the individual and spouse) or it may refer to the farming operation described in the opening clause of the statute (a farming operation "engaged in" by the individual and spouse). To render our disposition in this case it is not necessary that we choose between these constructions, ⁵ for the courts below granted debtors "family farmer" status without regard to whether debtors satisfied either of these statutory benchmarks with respect to the crop-production enterprise underway on the 290 acres debtors had leased to Larry Ritz. Rather, the courts below found it appropriate to treat as Sec. 101(17)(A) income the rent debtors received from Larry Ritz in 1986 based on what the courts below refer to as the "totality of the circumstances" test articulated in Judge Cudahy's separate opinion in In re Armstrong, 812 F.2d 1024, 1030-31 (7th Cir.) (opinion concurring in part and dissenting in part), cert. denied, 484 U.S. 925, 108 S.Ct. 287, 98 L.Ed.2d 248 (1987). ⁶

In Armstrong, a divided panel of the Court of Appeals for the Seventh Circuit held that, in the context of an involuntary bankruptcy action filed against a debtor by a creditor under 11 U.S.C. Sec. 303 (1982), cash rent a debtor receives from a tenant farmer for the lease of land is not income from a farming operation because such a lease does not expose the debtor to the risk of non-payment in the event of some natural calamity to the crops being produced on the leased acreage. Id. at 1028-29. Judge Cudahy, on the other hand, would treat cash rent as income received from a farming operation if in the totality of the circumstances it could be shown that "the land rental was an integral part of [debtor's] farming operation." Id. at 1031. In the case at bar, the Bankruptcy Court noted that debtors have owned their acreage for forty years and in the past have themselves farmed the land, ⁷ are "engage[d] in a traditional farming operation, that is, the raising of cattle," and have debts the majority of which it perceived to "arise out of a family farm operation." In re Easton, 79 B.R. at 838. Based on the totality of these circumstances, the Bankruptcy Court concluded that the rent debtors received from Larry Ritz is applicable toward satisfaction of Sec. 101(17)(A)'s income requirement. The District Court endorsed this analysis and found it particularly significant that debtors could conceivably lose their farm if they were to insist that Rick Easton pay his rent when he is financially unable to do so and at the same time make payment on his loan to creditor, secured by 150 acres of debtors' land. Easton, 104 B.R. at 112.

The Armstrong court was called upon to determine the proper characterization of cash rent payments received by a debtor against whom an involuntary bankruptcy case is filed because under 11 U.S.C. Sec. 303(a) an involuntary case cannot be commenced against a "farmer," defined by the Code as a "person that received more than 80 percent of such person's gross income ... from a farming operation owned or operated by such person." 11 U.S.C. Sec. 101(17) (1982) (now codified at 11 U.S.C. Sec. 101(19) (Supp. V 1987)). Whatever the comparative merits of the "risk" versus the "totality of the circumstances" tests in the Armstrong context--and we seriously doubt whether there is any warrant for importing either concept into the construction of the Code's facially unambiguous definition of "farmer" ⁸--we do not consider either test appropriate in the determination whether money an individual receives from a given source is income "from such farming operation" within the meaning of Sec. 101(17)(A). As we have said earlier in this opinion, this inquiry requires courts to identify those farming activities engaged in or owned or operated by someone claiming statutory "family farmer" status and then to determine whether that individual received more than fifty percent of his or her gross income in the relevant year from those activities. For example, in our view it is entirely possible that the cash rent Armstrong received from his tenant farmer could properly be characterized as Sec. 101(17)(A) income because there was some evidence suggesting that Armstrong engaged in the cultivation of crops on the leased acreage. See Armstrong, 812 F.2d at 1027. The proper characterization of that income turns, however, not upon any risk of non-payment Armstrong might have faced, nor upon the universe of the particular circumstances surrounding Armstrong's financial situation, but rather upon the extent to which the income in question bears the relation to his farming activities prescribed by the words of the statute.

We believe the Bankruptcy Court's analysis admits of no readily discernible limiting principle, and would if followed lead to the evisceration of Sec. 101(17)(A)'s income requirement. For example, so long as an individual tended some livestock or raised some crops, he would be permitted, under the Bankruptcy Court's analysis, to count as Sec. 101(17)(A) income all rents he received from tenant farmers, however minimal his income from raising livestock or crops (indeed, perhaps without regard to whether he garnered any income from those activities at all, for in this case the Bankruptcy Court found that debtors have basically retired from farming), so long as it could...