In re Hoel

617 B.R. 636

IN RE: Shirley HOEL and Roger Hoel, Debtors.

Case No. 20-10509-12

United States Bankruptcy Court, W.D. Wisconsin.

Signed July 20, 2020

J. David Krekeler, Krekeler Strother, S.C., Josh C. Kopp, Madison, WI, Nancy A. Thome, Ash Street Law Office, LLC, Baraboo, WI, for Debtors.

MEMORANDUM DECISION

Hon. Catherine J. Furay, U.S. Bankruptcy Judge

Shirley and Roger Hoel ("Debtors") filed a Chapter 12 petition. The Standing Chapter 12 Trustee ("Trustee") filed a Motion to Dismiss the case ("Motion"). The question presented is whether the Debtors satisfy the Chapter 12 eligibility requirements under 11 U.S.C. § 101(18)(A)(i).

BACKGROUND

Debtors' gross income in 2019, the year preceding the filing, was $47,650 excluding both social security ($30,748) and insurance sales ($4,802). Debtors claim their farm income has two components—cattle sales and breeding ($14,650) and horse boarding ($33,000). Debtors say the risks related to boarding horses are that if a horse becomes ill, they may have to transport it to a vet. Further, if the price of hay or feed rise, the Debtors' cash flow may tighten. Finally, Debtors suggest that if they have to transport a horse to a vet, they "bear the time burden when pulled away from the farming operation."

Debtors have not provided an accounting of the payments received from boarding. No boarding contracts or agreements have been supplied. It appears there are two boarded mares, five boarded geldings, and three boarded heifers.

The Debtors also hold an interest in a business called Central Wisconsin Save the Animals Group, Inc. It is a nonprofit. It provides rescue services for neglected or abused horses and other small animals. Donations are solicited and, apparently, are identified as deductible. Fundraising events may also be part of the operation of the nonprofit.

DISCUSSION

Under 11 U.S.C. § 109(f), "Only a family farmer ... with regular annual income may be a debtor under chapter 12 of this title." Chapter 12 of the Bankruptcy Code provides for the adjustment of debts of a "family farmer" as the term is defined in the Code. The relevant parts of section 101(18) state:

The term "family farmer" means—

(A) individual or individual and spouse engaged in a farming operation whose aggregate debts do not exceed $10,000,000 and not less than 50 percent of whose aggregate noncontingent, liquidated debts ... on the date the case is filed, arise out of a farming operation ... and such individual or such individual and spouse receive from such farming operation more than 50 percent of such individual's or such individual and spouse's gross income for— (i) the taxable year preceding [the date the case was filed]. ...

11 U.S.C. § 101(18) (emphasis added).

The term "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.

11 U.S.C. § 101(21). This list is not exclusive. Rather, given the remedial purposes of Chapter 12, it is to be broadly construed. See In re Watford , 898 F.2d 1525, 1527 (11th Cir. 1990) ; In re Poe , 2009 Bankr. LEXIS 2068, 2009 WL 2357160, at *3 (Bankr. N.D. W. Va. July 29, 2009) ; In re Sugar Pine Ranch, 100 B.R. 28, 31 (Bankr. D. Or. 1989). But the construction is not so broad "so as to eliminate the definition altogether by bringing in operations clearly outside the nature or practices one normally associates with farming." In re Cluck, 101 B.R. 691, 695 (Bankr. E.D. Okla. 1989) (internal quotation omitted).

The Debtors concede that in the second or third taxable years prior to filing this case, they did not receive more than 50 percent of their gross income from a farming operation. So the relevant inquiry focuses on their 2019 income and its source.

To be eligible for relief, an individual must be "engaged in a farming operation" when the Chapter 12 petition is filed. Two approaches have developed since the passage of Chapter 12 to analyze what is a farming operation. One approach focuses on whether the operation is mainly service oriented, and the income is a fee. The other approach focuses on whether the operation involves traditional farming risks—fluctuating market prices, feed prices, uncertain weather, risk to livestock from disease and injury, and upkeep of the animals.

Two main standards have evolved for determining whether an individual is "engaged in a farming operation." In In re Armstrong , the Seventh Circuit interpreted section 101(18) to mean that only those farmers whose activities involved the inherent risks and cyclical uncertainties that are associated with farming were protected from involuntary Chapter 11 proceedings. 812 F.2d 1024, 1027 (7th Cir. 1987). As noted by one treatise, "A significant factor in a court's analysis of whether a particular activity constitutes a farming operation is whether the debtor bears any of the inherent risks traditionally associated with farming." 2 Collier on Bankruptcy ¶ 101.21 (16th ed. 2010). See also In re McNeal, 848 F.2d 170, 171 (11th Cir.1988) (finding that a debtor's income did not arise from a "farming operation" because his business activities were not exposed to the inherent risks and cyclical uncertainties traditionally associated with farming).

The Armstrong court clearly established that the view of what is a farming operation must be pragmatic. Armstrong, 812 F.2d at 1026. "Implicit in [the definition of farming operation] is the inclusion of general activities inherent in farming and ... the means ... necessary to perpetuate the farming operation the definition speaks of." Id .

Nearly all of the cases discussing the meaning of "farming operation" are more than two decades old. They sometimes assume a standard that fails to recognize the changes in the production practices and business arrangements used to cultivate plants or animals. As noted by a 2017 USDA publication, "Farmers [have] altered how they manage risk, relying heavily on contracting, more complex forms of legal organization, and Federal crop insurance."¹

Considering the new risk environment in agriculture, high machinery replacement costs, and aging farm owners, custom farming is an example of a viable method of accomplishing crop production. Custom farming is used extensively in the Midwest. For the custom farmer, it may provide a way to retain machinery used by that farmer by generating more revenue to service home farm debt or machinery costs. The custom farmer, for example, provides the equipment and labor in exchange for a fee. In some cases, the fee is a fixed sum, but in others there can be a base sum and a percentage of the profits from the harvest and sale of the crop.

The same factors may lead to scaling back their operation, the sale of machinery or land by a farmer, or temporary rental of some of the farmer's land to address financial trouble. As acknowledged by the Armstrong court, it would be "illogical, undesired and unnecessary" based solely on those actions for a debtor to be considered a non-farmer. Armstrong, 812 F.2d at 1027.

In Poe , the Bankruptcy Court for the Northern District of West Virginia concisely summarizes the cases discussing whether the boarding or training of horses constitutes a "farming operation." 2009 WL 2357160, at *3-5. As noted, the cases are mixed. Two cases have determined that type of operation is not a farming operation,² and two cases have concluded that such activities do constitute a farming operation.³ The Poe case decided that raising horses was farming but boarding was not. Poe, 2009 WL 2357160, at *6.

Central to all the decisions is (1) analyzing whether the activities undertaken are of the type that someone would perform in connection with the business of growing crops or raising animals, and (2) weighing the uncertainties of farming like the "vagaries and whims of weather and pestilence, yield and demand"⁴ and the cyclic and unpredictable income generated.

The Poe court thought the series of cases applied different approaches. It described the first approach as:

[focusing] on the following factors: (1) the debtors' operations were primarily service-oriented as opposed to being self-contained farming operations which produce agricultural goods for consumption; and (2) where the measure of a debtor's compensation is a fee rather than a share of the profits from some future sale, the debtor's profits are not at the mercy of the weather, the farm economy, or other uncontrollable circumstances of farming—any such effect being minute and indirect.

Poe , 2009 WL 2357160, at *4.

The second approach was described by Poe as focusing on traditional farming risks, such as "(1) fluctuating market prices, (2) feed prices, (3) uncertain weather, (4) risk to livestock from disease and injury, and (5) upkeep of the animals." Poe, 2009 WL 2357160, at *6.

Closer analysis, however, suggests that all the cases have a consistent approach merely couched in differing language. All the courts review the activities to compare them to the activities required to grow or produce crops or...