In re Martin

• Decision Date: 11 May 1987
• Docket Number: Bankruptcy No. 86-20742.
• Citation: 78 BR 593
• Court: U.S. Bankruptcy Court — District of Montana
• Parties: In re John H. MARTIN, Peggy Martin, Debtors.

78 B.R. 593 (1987)

In re John H. MARTIN, Peggy Martin, Debtors.

Bankruptcy No. 86-20742.

United States Bankruptcy Court, D. Montana.

May 11, 1987.

J. David Penwell, Bozeman, Mont., for debtors.

Doug James, Billings, Mont., for John Deere.

Ralph B. Kirscher, Missoula, Mont., for Sherick.

James M. Kommers, Bozeman, Mont., for First Sec. Bank of Bozeman.

Douglas Harris, Bozeman, Mont., for Dorn Equipment Co.

Lee Stokes, Bozeman, Mont., for New Holland Inc. a/k/a Sperry New Holland.

J. Richard Orizotti, Butte, Mont., for J.I. Case Credit Corp.

Richard C. Nellen, Bozeman, Mont., for First Sec. Bank of Idaho.

Dunlap and Caughlan, Butte, Mont., Trustee.

ORDER

JOHN L. PETERSON, Bankruptcy Judge.

Hearing on the Debtors' Amended Chapter 12 Plan was held on April 2 and 10, 1987, together with objections filed by the Trustee, John Deere Company, First Security Bank of Bozeman, Duetz-Allis Credit Corporation, New Holland, Inc., a/k/a Sperry New Holland, Rudolph M. and Sarah Sherick, J.I. Case Credit Corporation, Dorn Equipment Company and First Security Bank of Idaho, which creditor also requested relief from the automatic stay. First Security Bank of Livingston originally filed objections to the Plan, but has now reached an accord with the Debtors and has withdrawn its objections. One of the objections filed by the Trustee and certain creditors is that the Debtors are not eligible for Chapter 12 relief since their operation does not meet the definition of family farmer under 11 U.S.C. § 101(17) and (20). Due to the present posture of this proceeding which is explained in this opinion, it is only necessary to address two aspects of the case, one dealing with the status of the Debtors as family farmers, and the other, with the feasibility of the Plan.

The case was filed December 11, 1986. In order to qualify as family farmers under Chapter 12, the Debtors' income from farming operations must exceed 50% of the Debtors' gross income "for the taxable year preceding the taxable year in which the case * * * was filed". § 101(17). Thus, the gross income earned by the Debtors in 1985 is the relevant year to examine whether the Debtors meet the income test. According to the 1985 tax returns, Schedule F, the Debtors derived income from three separate sources, to-wit:

                1. Park County cattle operation  -  $25,023.00
                2. Custom combine of grain       -   31,854.00
                3. Custom hay cutting and sales  -   62,526.00
                

The objecting creditors contend that the custom combining of grain and hay is not a farm related operation, but constitutes a business or commercial enterprise, while the Debtors' contend all of their income is derived from raising of livestock, haying on a share crop basis and combining of grains for third parties. Indeed, the Chapter 12 plan shows the major portion of projected income to fund the Plan will come from haying and custom grain cutting. The creditors rely on case authorities of First National Bank v. Beach, 301 U.S. 435, 57 S.Ct. 801, 81 L.Ed. 1206 (1937); In re Middleton, 45 B.R. 744 (Bankr.Minn.1985); In re Tuxhorn, 231 F. 913 (8th Cir.1916); King v. Ohio Valley Trust Company, 286 F. 928 (6th Cir.1923); and In re Schoenburg, 279 F.2d 806 (5th Cir.1960). All of these cases except Middleton pre-date the 1978 Bankruptcy Code amendments, and the present definition of farming operation. Thus, they have little precedential value, except for some historical treatment of who may be a farmer. The Debtors do not fare much better, relying on cases such as In re Schwartz, 133 F.2d 216 (7th Cir.1943); In re Nicholson, 36 F.Supp. 308 (D.S.C. 1940); In re Beachwood, 42 F.Supp. 401 (D.N.J.1942); In re Hinrichs, 314 F.2d 384 (7th Cir.1963); Matter of Beery, 680 F.2d 705 (10th Cir.1982) a pre-Code case interpreting 11 U.S.C. § 1(17) (1976) and Smith v. White, 166 F.2d 269 (9th Cir. 1948).

The creditors concede that the income derived from the Debtors' livestock operation on their farm of 40 acres is farm related income. They dispute the remaining two items for haying and custom cutting of grain are farm related. The undisputed testimony is that the Debtors' hay production comes from share cropping, in which he cuts hay raised on other lands on a 50/50 share arrangement. In 1985, 300 tons of cut hay was used to feed the Debtors' cattle, and the other 7000 tons were sold on the open market. In the custom grain cutting operation, the Debtors own three combines which they use to cut grain raised on third party farm lands and are paid on a per acre basis. Both the haying and custom cutting operations constitute the final stage of production of growing crops.

Section 101(20) provides:

"Farming operation" includes 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;"

The definition is not inclusive, but is rather representative of types of farming. Case law interpreting and applying Section 101(20), formerly 101(18), include In re Blanton Smith Corp., 7 B.R. 410 (Bankr. M.D.Tenn.1980), which gives a historical and legislative history of the Code provision; In re Cattle Complex Corp., 54 B.R. 50 (Bankr.N.M.1985) (feedlot operator is a farmer); In re Dakota Lay'd Eggs, 57 B.R. 648 (Bankr.N.D.1986); and Matter of Armstrong, 812 F.2d 1024 (7th Cir.1987), aff'd and rev'd Armstrong v. Corn Belt Bank, 55 B.R. 755 (C.D.Ill.1985). In order to digest the approach taken by the courts as to who is or is not a farmer, certain representative quotes from the above cases give clear insight into the determination and holding in this case where I conclude the debtors qualify as family farmers under Chapter 12.

Section 101(20), formerly 101(18), was discussed at length in the case of In re Dakota Lay'd Eggs, 57 B.R. at 653, where the court states after discussing In re Blanton Smith Corp., supra:

"* * * Tracking the legislative history of 101(17) and (18)20, as well as the definition of `person\' found in Section 101(33), the Bankruptcy Court in Blanton Smith concluded that the term `farmer\' could no longer be confined to small farms but rather must include in its definition farming corporations and agri business. With that conclusion, this Bankruptcy Court agrees. The Blanton Smith case, however, did not address the issue from the standpoint of income or production sources. It did not attempt to distinguish between debtor-owned or operated farming operations and nonowned or non-operated farming operations. * * *

* * * * * *

In construing Section 101(18)20, several things must be kept in mind. First, Section 101(18) is a helper. Its placement in the Code is intended to aid in defining who qualifies as a `farmer\' under Section 101(17). Secondly, although Section 101(18) may by its terms be regarded as non-exclusive with regards to the types of farming operations which may be included within the definition, it cannot be so broadly applied as to bring in operations clearly outside the nature or practices one normally associates with farming. * * * Section 101(18) suggests that the term `farming operation\' was meant to include those estimates normally done by persons engaged in the initial stages of production."

The North Dakota court cited Armstrong v. Corn Belt Bank (Matter of Armstrong), 55 B.R. 755, as a recent bankruptcy decision which holds that farming operations within the context of 101(18)20 requires a distinction be made between the nature or character of the income sources to arrive at a determination of what constitutes a "farming operation". In Armstrong, the court found income from the sale of farm machinery and rental of farm land was not derived from a farming operation.¹

The holding of the district court regarding the farm machinery income was reversed on appeal in Matter of Armstrong, 812 F.2d 1024, 1026-27 (7th Cir.1987), where the Court held in discussing 101(18):

"The definition does not provide a simple all-inclusive list of tasks and activities (i.e., tillage of the soil, dairy farming). Instead, the section starts out in general terms—`Farming operation includes farming, tillage of the soil, dairy farming . . .\' (emphasis added). Implicit in this definition is the inclusion of general activities inherent in farming and, we believe, the means (or in this case the equipment) necessary to perpetuate the farming operation the definition speaks of. When a farmer sells some of his machinery in an effort to scale down his operation (say from 200-100 acres) and save the farm, the money received is inescapably from the 50% of the farming operation dissolved. We believe this to be a pragmatic viewpoint. A contrary result would reap illogical results which we are confident Congress had no desire to create. Farmers in financial trouble could harvest their crop on a given year, decide to scale down their operation, sell machinery and be considered non-farmers under § 101(17) even though they had no significant outside employment or income. Suppose Armstrong had no income from farming rent or the seed company. After all, many legitimate farmers do not rent land or receive wages from outside companies. Given this scenario Armstrong could have made money solely from the sale of beans and corn (and inconsequential income from elsewhere) and yet still have been considered a non-farmer. This result is illogical, undesired and unnecessary. One envisions large numbers of cases where farmers, by merely pruning their operations and selling their equipment, are no longer considered farmers for purposes of the bankruptcy code. We do not believe Congress envisioned such a scenario and believe a broader interpretation is necessary.

Farmers are exempted from the commencement of involuntary cases under Title 11 `. . . because of the cyclical nature of their business. One drought year or one year of low prices, as a result of which a farmer is temporarily unable to pay his creditors, should not subject him

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