In re Cloverleaf Farmer's Co-op., Bankruptcy No. 89-40531-PKE.

CourtUnited States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of South Dakota
Writing for the CourtPEDER K. ECKER
Citation114 BR 1010
Decision Date24 May 1990
Docket NumberBankruptcy No. 89-40531-PKE.
PartiesIn re CLOVERLEAF FARMER'S CO-OPERATIVE, a/k/a Cloverleaf Colony, Debtor.

114 B.R. 1010 (1990)

In re CLOVERLEAF FARMER'S CO-OPERATIVE, a/k/a Cloverleaf Colony, Debtor.

Bankruptcy No. 89-40531-PKE.

United States Bankruptcy Court, D. South Dakota.

May 31, 1990.

Nunc Pro Tunc May 24, 1990.


114 BR 1011

Jon Haverly, Sioux Falls, S.D., for movant U.S., acting through the Small Business Admin.

J. Bruce Blake, Sioux Falls, S.D., for respondent Debtor Cloverleaf Farmer's Co-op., d/b/a Cloverleaf Colony.

R.P. Murley, Asst. U.S. Atty., Sioux Falls, S.D., for the U.S.

Kay Cee Hodson, Office of the U.S. Trustee, Sioux Falls, S.D., for the U.S. Trustee.

Rick A. Yarnall, Sioux Falls, S.D., Chapter 12 Trustee.

MEMORANDUM DECISION

PEDER K. ECKER, Bankruptcy Judge.

ACTION

The Small Business Administration (SBA) filed motions to: 1) dismiss the Chapter 12 petition of Cloverleaf Farmer's Co-operative (Cloverleaf or debtor) on grounds the debtor fails to qualify as a family farmer; 2) obtain relief from the automatic stay so the SBA may offset government crop payments due the debtor; and to 3) sequester rents. Debtor resisted, and, after a hearing which included other matters, these three motions were taken under advisement. The Court holds: 1) the debtor qualifies as a Chapter 12 family farmer pursuant to 11 U.S.C. § 109 (hereafter, the "11 U.S.C." is omitted where a section to 11 U.S.C. is referenced); 2) the SBA may not administratively offset; and

114 BR 1012
3) the rent sequestration motion is denied. The instant matters are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(B), (G), and (O). This Court has jurisdiction over the parties and subject matters of this action under 28 U.S.C. § 1334. This memorandum constitutes findings of fact and conclusions of law pursuant to Fed.R.Civ.P. 52 and Bankr.R. 7052

FINDINGS OF FACT

Cloverleaf consists of seven families, a Hutterite colony of seventy-six individuals, living under a co-operative organization formally incorporated June 14, 1977. Cloverleaf's principal officers include: Vice President Herman J. Wipf, Secretary/Treasurer Don J. Hofer, Director Henry Wipf, and Director Phillip Tschetter. Cloverleaf's fourteen equity owners, all of which own a 7.14 percent interest, include Don Hofer, Herb Wipf, John Wipf, Paul Tschetter, Johnny Wipf, Jr., Val Tschetter, Walter Wipf, Phillip Tschetter, Henry Wipf, Josh Hofer, Jake Hofer, Mike Hofer, Johnny Hofer, and Jimmy Wipf. Don Hofer's family tree, depicted in Appendix A, notes Don's family relationship to some stockholders.

Cloverleaf maintains about 1,350 tillable acres. Donald Hofer credibly testified the co-operative actively farms the land. Its members exclusively farmed until the past two difficult years forced some of Cloverleaf's members to work off the farm. Farmed crops include corn, barley, wheat, and beans. Farming equipment is borrowed from a third party because Valley National Bank, in 1989, foreclosed on a delinquent loan, thereby taking collateralized farming equipment and livestock.

Farmers Home Administration's 1977 first mortgage of about $645,000 on debtor's real estate exceeds the collateral's value. The SBA recorded a second mortgage it took on the realty in the county where the property is located when it loaned about $155,100 to Cloverleaf during 1981 and 1982. No financing statement was filed with South Dakota's Secretary of State. The SBA stipulated that, as a junior lienholder, the SBA is fully undersecured as to any equity in the real estate. The SBA's security interest includes rents and profits of the land. SBA Exhibit 6.

Cloverleaf participates in the Agricultural Stabilization and Conservation Service's (ASCS's) Conservation Reserve Program, a government project to conserve and improve farmland. The debtor earned $7,100 under the 1989 ASCS program. By letters in the summer of 1989, the SBA advised Cloverleaf of the SBA's intent to offset the ASCS amount. Apparently, the administrative offset was postponed because, as of the November 9, 1989, Chapter 12 filing date, the offset was inchoate. Post-petition, the debtor received the 1989 ASCS payment. The payment bore no express conditions or reservations. The SBA seeks to administratively offset the ASCS payment received by the debtor. The SBA also claims a security interest in the 1989 ASCS payment and future ASCS amounts by classifying the ASCS payments as rent or profit subject to SBA's filed mortgage which includes rent and profit. SBA's claims are reduced to three issues, addressed seriatim.

ISSUES

I. Who is included in the family of a Section 101(17) "family farmer" when Section 101(39) defines a relative to include all those related by affinity or consanguinity within the third degree as determined by the common law.

II. Whether the SBA has a right to offset its post-filing claim against ASCS farm payments under Section 553(a) in a reorganization case.

III. Whether ASCS program payments may be characterized as rent or profit.

DECISION

I. Family Farmer

Congress enacted Chapter 12 to protect the family farmer entity in which a family is engaged in farming operations while some family members may own the farm but have substantial nonfarm income to sustain themselves. A bankrupt must meet numerous tests to qualify as a Chapter

114 BR 1013
12 debtor. The burden of proof in establishing eligibility for bankruptcy relief is on the party filing the petition. Matter of Morgan Strawberry Farm, 98 B.R. 584, 585 (Bankr.M.D.Fla.1989). A Chapter 12 applicant's debt may not exceed one-and-a-half million dollars, not less than eighty percent of aggregate nonliquidated debts must arise out of the farming operation, and more than eighty percent of aggregate nonliquidated debts must arise out of the farming operation, and more than fifty percent of the farmer's previous year's income must be derived from the farm. 11 U.S.C. § 101(17)-(20). Family farm ownership limits also exist. 11 U.S.C. §§ 101(17), 109

Subsection (A) of Section 101(17) sets requirements for an individual or individual and spouse to qualify as a "family farmer" and, thus, be eligible under Section 109(f) for Chapter 12. In re Schaurer Agr. Enterprises, 82 B.R. 911, 912 (Bankr.S.D.Ohio 1988). Subsection (B) sets the needs for a corporation or partnership to qualify for Chapter 12. The pertinent Subsection (B) requirement demands one family and the relatives of the members of such family own more than fifty percent of the farming corporation. A court may not strain Bankruptcy Code definitions in order to grant statutory family farmer status to entities not squarely fitting Bankruptcy Code requirements. In re Easton, 883 F.2d 630 (8th Cir.1989).

Any family farmer, whether individual, partnership, or corporation, must play an active role in the farming operation. In re Tim Wargo & Sons, Inc., 869 F.2d 1128, 1130 (8th Cir.1989); In re Faber Trust, 113 B.R. 599 (Bankr.D.N.D.1990); In re LLL Farms, 111 B.R. 1016 (Bankr.M.D.Ga. 1990); In re Dakota Lay'd Eggs, 57 B.R. 648, 656 (Bankr.D.N.D.1986). A corporation may qualify as a farming operation pursuant to Section 101(17) where the debtor has the risk if the crop fails. In re Tobin Ranch, Inc., 80 B.R. 166, 167 (Bankr.D.Neb.1987). Where the majority of stockholders participate in farming and live on the land and derive substantial portions of their incomes therefrom, it may be considered a family farm eligible for Chapter 12. In re Garako Farms, Inc., 98 B.R. 506 (Bankr.E.D.Cal.1988) (where stockholder majority did not live on the farm and derive substantial income from a dental practice, such an entity was not a farmer). Cloverleaf meets the active role requirement because its members do one hundred percent of the farming and bear all risk of loss.

The word, "co-operative," is not expressly listed as an entity type permitted to file Chapter 12. A co-operative is defined as a corporation or association organized to render economic services without gain to itself or its members who own and control it. United Grocers, Ltd. v. United States, 186 F.Supp. 724, 733 (N.D.Cal.1960), aff'd, 308 F.2d 634 (9th Cir.1962). A co-operative, in South Dakota, is organized like and subject to rules governing a corporation. S.D.C.L. § 47-15-1, et seq. Because a co-operative is a corporate body and a corporation may qualify as a family farmer, Cloverleaf achieves the Bankruptcy Code's qualification of a corporation as a family farmer provided other prerequisites are met. The SBA's sole allegation that Cloverleaf fails to qualify as a family farmer is that Cloverleaf's majority ownership is not held by a single family and the relatives of such family as required by Section 101(17)(B).

The majority stock ownership of a "family farmer" corporation (co-operative) must be held by a family and the relatives and members of such family, not to any other entity. Tobin Ranch, 80 B.R. at 167; 11 U.S.C. § 101(17)(B). Congress requires majority ownership in a farming corporation be owned by one family and its relatives because Congress' intent is to protect the small family farm in Chapter 12. Matter of Burke, 81 B.R. 971, 976 (Bankr.S.D. Iowa 1987).

The key to family membership is that a "`relative' means individual related by affinity or consanguinity within the third degree as determined by the common law, or individual in a step or adoptive relationship within such third degree." 11 U.S.C. § 101(39). The definition's terms are not further defined in the Bankruptcy Code. Little legislative history exists as to Congress' intent with respect to the term,

114 BR 1014
"common law," at Section 101(39). In re Hydraulic Indus. Products Co., 101 B.R. 107, 108 (Bankr.E.D.Mo.1989)

"Consanguinity" means vinculum personarum ab eodem stipite descendentium, the connection or relation of persons descended from the same stock or common ancestor. Todd v. Ehresman, 132 Ind.App. 440, 442, 175 N.E.2d 425, 428 (1961); Chemical Bank & Trust Co. of N.Y. v. Godfrey, 29 N.J.Super. 226, 227, 102 A.2d 108, 109 (1953); Brown v. City of Baraboo, 90...

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