Matter of Burke
| Decision Date | 02 December 1987 |
| Docket Number | Bankruptcy No. 87-168-D. |
| Citation | 81 BR 971 |
| Parties | In the Matter of Stephen BURKE, Darlene Burke, Engaged in Farming, Debtors. |
| Court | U.S. Bankruptcy Court — Southern District of Iowa |
Michael W. Fay, Springville, Iowa, for debtor.
John M. Titler, Cedar Rapids, Iowa, for FLB.
Michael McDonough, Cedar Rapids, Iowa, for PCA.
Elizabeth A. Nelson, Des Moines, Iowa, Trustee.
ORDER ON MOTION TO DISMISS
On August 19, 1987 a hearing on the standing Chapter 12 trustee's motion to dismiss and the debtors' resistance thereto came on for hearing in Davenport, Iowa. The trustee filed her motion to dismiss on April 9, 1987. The debtors resisted on April 22, 1987. The Federal Land Bank (FLB) joined in the trustee's motion on May 11, 1987. The Production Credit Association of the Midlands (PCA) orally joined in the trustee's motion at the hearing. Michael W. Fay appeared on behalf of the debtors. Elizabeth A. Nelson, standing Chapter 12 trustee, was present. John M. Titler appeared on behalf of the FLB and Michael McDonough appeared on behalf of the PCA. The case has been submitted on the testimony of the debtors, documentary evidence and a transcript of the deposition of debtor Stephen Burke.
The debtors have been farming in the Clinton County area since 1960. During the past few years, their 297 acre farm has been primarily devoted to row crops. In the fall of 1985 a corporation was formed. The principals of the corporation are three of the debtors' children. The debtors are not shareholders of the corporation. The debtors leased the farm to the corporation for the 1986 crop year on a 60/40 crop share basis. Schedule E of the debtors' 1986 federal tax return shows that the debtors received rents in the amount of $22,609.00. Schedule F reveals that the debtors received farm related gross income in the amount of $15,277.00. At the hearing, some confusion arose as to the source of the $15,277.00. Review of the deposition and the debtors' testimony suggests that the $15,277.00 was part of the rental payments encompassed within the $22,609.00 figure contained in Schedule E.
The 1986 tax return also states that the debtors received $29,777.00 in wages, $624.00 in dividends and $516.00 in capital gains. The corporation employed Stephen in 1986, and he provided the corporation with most of its labor. The debtors own the machinery that was used to farm the land. During 1986 Stephen received $10,000.00 in wages from the corporation. $12,500.00 of the $29,777.00 wage figure was purportedly from wages Darlene received from the corporation. Darlene however received no wages from the corporation in 1986. The debtors amended their returns to reflect this. Darlene received approximately $7,277.00 in wages from her work at a deli.
The debtors' income for 1986 is summarized as follows:
Rental income $22,609.00
Stephen Burke's wages $10,000.00
Darlene Burke's wages $ 7,277.00
Dividends $ 624.00
Capital gains $ 516.00
DISCUSSION
Only family farmers with regular annual income are eligible for protection under Chapter 12. 11 U.S.C. section 109(f). In order for an individual or an individual and a spouse to qualify as family farmers, they must be engaged in farming and (1) have aggregate debts that do not exceed $1,500,000.00; (2) have at the date of filing at least 80% of their aggregate noncontingent, liquidated debts arising out of a farming operation owned or operated by them (excluding a debt for the principal residence unless the debt arises out of a farming operation); and (3) have received, during the taxable year preceding the one in which bankruptcy was filed, more than 50% of their gross income from the farming operation. 11 U.S.C. section 101(17)(A).
Only a challenge to the income criterion is before the court. The trustee, FLB and PCA contend that the 50% requirement is not met because Stephen's wages and the rental income are not income arising out of a farming operation.
In addressing this eligibility issue, the court first turns to 11 U.S.C. section 101(20) which defines "farming operation" as including:
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.1
A number of courts have examined the "farming operation" concept both in the context of involuntary proceedings and in Chapter 12 settings. In Matter of Armstrong, 812 F.2d 1024 (7th Cir.1987), cert. denied, ___ U.S. ___, 108 S.Ct. 287, 98 L.Ed.2d 248 (1987), Bernard Armstrong challenged a creditor's attempt to place him in involuntary bankruptcy pursuant to 11 U.S.C. section 303(a). The debtor argued he was immune from involuntary bankruptcy since he qualified as a farmer under section 101(19).2 The creditor maintained that the income Mr. Armstrong received from the sale of machinery and from renting his land was not income from farming. Excluding either of these sources of income from income received from a farming operation meant that the debtor would not satisfy the 80% rule of section 101(19). In examining the nature of the income received from the sale of machinery, the court found that the means with which to farm was implicit in the section 101(20) definition of "farming operation". The Seventh Circuit concluded that money received by a farmer from the sale of machinery to scale down an operation is farm income. It noted that a contrary result would be illogical and undesired. The court explained that a farmer who harvested a crop, had no significant nonfarm income and decided to sell machinery might be considered a nonfarmer if the income from the sale was not deemed to be income received from a farming operation.
With respect to the rental income, the Seventh Circuit ruled that such income did not arise from a farming operation. The court observed that Mr. Armstrong received the rent payment in cash and up front. Finding that this type of arrangement did not expose the debtor to the risks inherent in agricultural production, the court ruled that the rental income was not derived from farming. Judge Cudahy dissented from the majority's assessment of the rental income issue. He found the essential question to be whether the land rental was an integral part of the farm operation. Prior and proposed uses of the land were relevant in answering the question. He agreed that the element of risk played an important role in the inquiry but did not accept that receiving rent at the outset of a lease necessitated finding that the rental income was not derived from a farming operation. Rather, Judge Cudahy urged examination of "the totality of the circumstances".
In re Mary Freese Farms, Inc., 73 B.R. 508 (Bankr.N.D.Iowa 1987) entailed a corporate landlord who contributed nothing more to the farm operation than negotiating the lease. Relying heavily upon Armstrong, the bankruptcy court put particular emphasis on the lack of risk involved in the debtor's relationship with its tenant and found that the corporation was not a "family farmer" as defined by section 101(17)(B).3 The court noted that the rent was due and payable despite the fact yields might be reduced because of weather or management practices. It is important to note that the shareholders had not farmed the land for several years and did not own livestock or farm equipment.
In In re Guinnane, 73 B.R. 129 (Bankr. D.Mont.1987), the question before the court was whether the income a debtor earned from trucking cattle that belonged to third parties was farm income. The court admitted that the question was a close call. Finding that the hauling of cattle for third parties was directly related to the debtors' farming operation, the court ruled that the income came from farming. The court observed that the trucking aided the ranching operation and that the income resulted from the debtors' efforts, not the efforts of others.
The concept of risk played an important role in In re McKillips, 72 B.R. 565 (Bankr. N.D.Ill.1987). The principal issue was whether the income derived from a horse breeding, training and showing operation was farm income. The court found that only the breeding and raising of horses for sale and the actual selling of horses constituted a farming operation. In contrast, the court found that raising, training and showing horses belonging to others for a fee were not activities included within the definition of "farming operation." The court reasoned that such activities were more service oriented and not directed at producing a farm product. Additionally, the debtors' profit from the training and showing enterprises was not at the mercy of the weather or the farm economy.
In In re Rott, 73 B.R. 366 (Bankr.D.N.D. 1987), the bankruptcy court declined to apply the Armstrong risk analysis in a wooden manner in considering whether cash rent the debtors received from leasing their land to their son in an effort to save the farm was farm income. The court distinguished Armstrong by noting that the cash rent arrangement was subject to risks inherent in farming — the debtors received their rent only because their son earned enough to pay them. Moreover, the court emphasized that the debtors and their son were working in an intertwined fashion as a family farm operation and, therefore, the rental income had to be characterized as income from a farming operation.
In the case of In re Wolline, 74 B.R. 208 (Bankr.E.D.Wis.1987), the debtor ran a dairy operation and maintained horses for riding and leasing. A creditor contended that the income from the latter activity did not constitute income from a farming operation. In rejecting this argument, the court opted for a broad construction of "farming operation". The court observed that the horse enterprise was closely related to ranching and the raising of livestock and that the debtor faced the same risks which apply...
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