Matter of Jessen, Bankruptcy No. 87-1042-W.
| Citation | 82 BR 490 |
| Decision Date | 29 January 1988 |
| Docket Number | Bankruptcy No. 87-1042-W. |
| Parties | In the Matter of Charles J. JESSEN, Rhodetta K. Jessen, Engaged in Farming, Debtors. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Southern District of Iowa |
Charles L. Smith, Council Bluffs, Iowa, for debtors.
Steven H. Krohn, Council Bluffs, Iowa, for PCA and FLB.
Elizabeth A. Nelson, Des Moines, Iowa, Trustee.
Linda R. Reade, Asst. U.S. Atty., Des Moines, Iowa, for Government.
On July 8, 1987 the following matters came on for hearing in Council Bluffs, Iowa:
1. Motion to dismiss and/or to remove debtors as debtors in possession filed by the Production Credit Association of the Midlands (PCA) and the Federal Land Bank (FLB) on June 15, 1987;
2. Motion to segregate proceeds of CRP contract and CRP program and to prohibit debtors' use thereof filed by the PCA on June 15, 1987;
3. Motion to require trustee to investigate and initiate cause of action available to the estate and/or for order granting authority to creditor to initiate action on behalf of estate filed by the PCA and the FLB on June 19, 1987;
4. Resistances to the foregoing motions filed by the debtors on June 22, 1987; and
5. Motion to dismiss filed by the standing Chapter 12 trustee on July 2, 1987.
Charles L. Smith appeared on behalf of the debtors and Steven H. Krohn appeared on behalf of the PCA and FLB. Elizabeth A. Nelson, standing Chapter 12 trustee, was present. The case has been submitted on briefs, various documents and an investigation memorandum filed by the trustee.
1. The debtors' 1986 federal tax return shows the debtors received income from the following sources:
Source Amount
Wages $35,256.00
Interest Income 758.00
Sealing of Grain 21,936.00
Cash Payment 2,981.00
Cash Rent 22,660.00
Executor Fee 1,975.00
__________
Total $85,566.00
2. For twenty-four years prior to 1985, the debtors actively engaged in farming.
3. In order to supplement farm income, Charles Jessen obtained off-farm employment as a custodian in December of 1984.
4. Unable to obtain operating financing, the debtors leased much of their land on a cash rent basis in 1985 and 1986.
5. Approximately 280 acres remained uncultivated in 1986.
6. Earl Phippen, the uncle of Charles Jessen, died on July 10, 1985.
7. Earl Phippen's last will and testament was filed with the Iowa District Court for Audubon County on July 17, 1985.
8. In the will, Earl Phippen devised 160 acres of land located in Audubon County to Charles Jessen.
9. On April 7, 1986 Charles Jessen executed and filed a disclaimer to the 160 acres in the estate proceedings.
10. The debtors filed a petition for relief under Chapter 12 on April 17, 1987.
11. The trustee estimates that the value of the land less encumbrances is $33,880.00.
The PCA withdrew its motion concerning the CRP payments after the hearing. The remaining issues include: whether the debtors are eligible for Chapter 12 relief; whether Charles Jessen's disclaimer of the 160 acres and failure to cultivate 280 acres in 1986 are grounds for removal of the debtors as debtors in possession or for dismissal of the case; and whether Charles Jessen's disclaimer of the 160 acres is cause for the trustee or the PCA and the FLB to initiate an action on behalf of the estate to void the disclaimer pursuant to 11 U.S.C. section 544(b).
The PCA, the FLB and the trustee contend that the debtors are not eligible for Chapter 12 relief. Specifically, they argue that the cash rent is not derived from a "farming operation" and therefore the debtors do not satisfy the 50 percent income test set out in 11 U.S.C. section 101(17)(A). Further, the PCA and the FLB maintain that the income received from sealing corn should not be considered "gross income" for eligibility purposes.
11 U.S.C. section 109(f) states that "only a family farmer with regular income may be a debtor under Chapter 12 of this title." 11 U.S.C. section 101(17)(A), which defines "family farmer" in the context of an individual or individual and spouse, requires in part that:
an individual or individual and spouse engaged in a farming operation . . . receive from such farming operation more than 50 percent of such individual\'s or such individual and spouse\'s gross income for the taxable year preceding the taxable year in which the case concerning such individual or such individual and spouse was filed;
A "farming operation" is defined in 11 U.S.C. section 101(20) 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".
A number of cases have examined the meaning of "farming operation" in general and as it relates to the income test found in section 101(17)(A). This court in Matter of Burke, 81 B.R. 971 (Bankr.S.D.Iowa 1987) reviewed some of those cases and determined that the decisions generally have fallen along two lines. One line of cases, represented by Matter of Armstrong, 812 F.2d 1024 (7th Cir.1987), cert. denied, ___ U.S. ___, 108 S.Ct. 287, 98 L.Ed.2d 248 (1987), views "farming operation" narrowly. For the Armstrong majority, a critical question is whether the activity under consideration exposes the debtor to the risks inherent in agricultural production. The other line of cases interprets "farming operation" in a broader fashion. Those courts look to the "totality of the circumstances" in determining whether the debtors or the family members or relatives in the case of a corporation or partnership are engaged in farming and whether, in the case of an individual or an individual and spouse, the income test is met. This court adopted the latter approach in the Burke decision.
With respect to cash rent arrangements, this court stated:
Income received from a cash rent arrangement will be farm income in the case of an individual or individual and spouse only if the evidence reveals that past farming activities have been more than short term or sporadic and that any cessation of farming activities is temporary. Consideration will be given to the reason for the cessation (inability to obtain operating credit versus new nonfarm venture); the extent of the cessation (leasing a portion of the farm in an effort to scale back the operation versus leasing the entire farm); and the relationship to the tenant (leasing to family members as opposed to leasing to nonrelated individuals or entities).
Under the totality of the circumstances, the debtors in this case have established that the cash rent is derived from a farming operation. The debtors had been actively engaged in farming for twenty-four years prior to curtailing their farming operation in 1985. Thus, their past farming activities cannot be characterized as short term or sporadic. The debtors ceased actively farming because they were unable to obtain operating credit. The fact that these debtors leased much of their farm and sold their equipment does not obviate finding the rent was from a "farming operation". The record reveals that the PCA cut off operating credit in December of 1984 and the debtors were unable to find operating credit elsewhere. Therefore, maintaining more than a small portion of the farm was an impossibility.
Finally, the record does not address the relationship between the cash rent tenants and the debtors. However, a finding for the debtors is warranted even if it is assumed the tenants were not related to the debtors. Apparently, the debtors have access to relatives' equipment and their son farms a portion of their land on a crop share basis. They cannot be viewed as having abandoned farming on a permanent basis. Under the facts of this case, finding that the cash rent is derived from a farming operation does not abuse the Congressional intent underlying 11 U.S.C. § 101(17)(A) in particular and Chapter 12 in general.
With respect to the $21,936.00 received from sealing grain, the PCA and the FLB argue the amount is really a loan and should not be included as "gross income" for purposes of the income test. Where appropriate, this court has utilized a tax law meaning of "gross income" in determining Chapter 12 eligibility. Matter of Faber, 78 B.R. 934 (Bankr.S.D.Iowa 1984). If a tax code approach were utilized in the present case the $21,936.00 would be deemed "gross income." This term is defined in the tax code as "all income from whatever source derived. . . ." 26 U.S.C. section 61(a). Tax regulations provide that farmers using a cash method of accounting must include "all subsidy and conservation payments received which must be considered as income" in gross income for the taxable year. 26 C.F.R. section 1.61-4.
In this case the debtors reported the $21,936.00 as farm income from crop sales on Form 4835 of their 1986 tax returns. The proof of claim filed by the Commodity Credit Corporation shows only a 1987 advance deficiency in the amount of $1,539.56. There is no indication in the record that the agreement between the debtors and the CCC, which generated the proceeds in issue, matured other than before the petition date. Under the facts, the challenged amount is not a debt but rather is farm income. Cf. In re Stedman, 72 B.R. 49 (Bankr.D.N.D.1987) (); In re Carpenter, 79 B.R. 316 (Bankr. S.D.Ohio 1987) (). Accordingly, the debtors have established that more than 50% of their income is derived from a farming operation in which they are engaged.
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