Case Name: In re George Roger EASTON and Elsie M. Easton, Debtors. OTOE COUNTY NATIONAL BANK, Appellant, v. George Roger EASTON and Elsie M. Easton, Appellees
Court: United States Court of Appeals for the Eighth Circuit
Jurisdiction: United States
Decision Date: 1989-08-23
Citations: 883 F.2d 630
Docket Number: No. 88-2052
Parties: In re George Roger EASTON and Elsie M. Easton, Debtors. OTOE COUNTY NATIONAL BANK, Appellant, v. George Roger EASTON and Elsie M. Easton, Appellees.
Judges: Before BOWMAN and MAGILL, Circuit Judges, and HANSON, Senior District Judge.
Reporter: Federal Reporter 2d Series
Volume: 883
Pages: 630–640

Head Matter:
In re George Roger EASTON and Elsie M. Easton, Debtors. OTOE COUNTY NATIONAL BANK, Appellant, v. George Roger EASTON and Elsie M. Easton, Appellees.
No. 88-2052.
United States Court of Appeals, Eighth Circuit.
Submitted Dec. 15, 1988.
Decided Aug. 23, 1989.
Karen M. McCarthy, Sioux City, Iowa, for appellant.
Wanda Howey-Fox, Yankton, S.D., for appellees.
Before BOWMAN and MAGILL, Circuit Judges, and HANSON, Senior District Judge.
The HONORABLE WILLIAM C. HANSON, Senior United States District Judge for the Northern and Southern Districts of Iowa, sitting by designation.

Opinion:
BOWMAN, Circuit Judge.
In this case we must decide whether the courts below erred in conferring statutory "family farmer" status upon appellees pursuant to 11 U.S.C. § 101(17)(A) (Supp. V 1987). Otoe County National Bank (creditor) appeals from a final judgment of the District Court affirming both the Bankruptcy Court's determination that George Roger Easton and Elsie M. Easton (debtors) meet the statutory definition of "family farmer" and hence are eligible for relief under Chapter 12 of the Bankruptcy Code (Code), 11 U.S.C. § 1201-1281 (Supp. V 1987), and its confirmation of debtors' fifth amended plan of reorganization. Each of the courts below stayed its judgment pending appeal. We vacate the judgment of the District Court, and remand for further proceedings.
Debtors own approximately 520 acres of land in Plymouth County, Iowa. They filed their Chapter 12 petition in the Bankruptcy Court on February 13, 1987. In 1986 debtors leased 60 acres of cultivable land to Rick Easton (their grandson) and 290 acres of cultivable land to Larry Ritz (a neighbor) for $85 per acre; George Easton raised cattle on the remaining 170 acres of pastureland. In 1983 Rick Easton obtained a $370,000 loan from creditor for the purpose of constructing a hog-raising facility on a two-acre parcel he had purchased from debtors, who co-signed the note and pledged 150 acres as security for the loan. Rick Easton's hog-raising enterprise proved unable to generate sufficient income to service the loan, and debtors ultimately elected to seek Chapter 12 protection when pressed by creditor for repayment.
The Bankruptcy Court found that debtors "derived a minimal income from the sale of cattle in 1986," and that "[t]he vast majority of [debtors'] income [in 1986] was derived from the cash rent of their real estate and social security." While the Bankruptcy Court found that "not more than 50 percent of [debtors'] income arose from the rental payments received from Rick [Easton], together with the cattle income," it ruled that "all the rental income [ie. rent payments debtors received in 1986 from both Rick Easton and Larry Ritz] . are [sic] considered farm income for purposes of meeting the farm eligibility test," Transcript of November 30, 1987 Hearing at 29, and the District Court agreed. Creditor challenges this ruling on appeal.
The Code provides that "[o]nly a family farmer with regular annual income may be a debtor under chapter 12." 11 U.S.C. § 109(f) (Supp. V 1987). The Code defines "family farmer," in relevant part, as follows:
[An] . individual and spouse engaged in a farming operation whose aggregate debts do not exceed $1,500,000 and not less than 80 percent of whose aggregate noncontingent,' liquidated debts . on the date the case is filed, arise out of a farming operation owned or operated by . such individual and spouse, and . such individual and spouse receive from such farming operation more than 50 percent of . such individual and spouse's gross income for the taxable year preceding the taxable year in which the ease concerning . sucb individual and spouse was filed.
11 U.S.C. § 101(17)(A) (Supp. V 1987) (emphasis added). As mentioned, the courts below found that debtors do not meet the income requirement of § 101(17)(A) for the test year (1986) unless the rent they received from Larry Ritz is treated as income legally capable of satisfying that requirement. We hold that in so treating the rent debtors received from Larry Ritz the courts below applied an erroneous standard of law.
Under section 101(17)(A), in order for an individual and spouse to qualify as a "family farmer" they among other things must have received more than fifty percent of their gross income in the relevant year from a particular source, namely, "from such farming operation." From a syntactical point of view, identification of the antecedent of the word "such" in the phrase "from such farming operation" admits of two possibilities: it may refer to the farming operation described in the immediately preceding clause of the statute ("a farming operation owned or operated by" the individual and spouse) or it may refer to the farming operation described in the opening clause of the statute (a farming operation "engaged in" by the individual and spouse). To render our disposition in this case it is not necessary that we choose between these constructions, for the courts below granted debtors "family farmer" status without regard to whether debtors satisfied either of these statutory benchmarks with respect to the crop-production enterprise underway on the 290 -acres debtors had leased to Larry Ritz. Rather, the courts below found it appropriate to treat as § 101(17)(A) income the rent debtors received from Larry Ritz in 1986 based on what the courts below refer to as the "totality of the circumstances" test articulated in Judge Cudahy's separate opinion in In re Armstrong, 812 F.2d 1024, 1030-31 (7th Cir.) (opinion concurring in part and dissenting in part), cert. denied, 484 U.S. 925, 108 S.Ct. 287, 98 L.Ed.2d 248 (1987).
In Armstrong, a divided panel of the Court of Appeals for the Seventh Circuit held that, in the context of an involuntary bankruptcy action filed against a debtor by a creditor under 11 U.S.C. § 303 (1982), cash rent a debtor receives from a tenant farmer for the lease of land is not income from a farming operation because such a lease does not expose the debtor to the risk of non-payment in the event of some natural calamity to the crops being produced on the leased acreage. Id. at 1028-29. Judge Cudahy, on the other hand, would treat cash rent as income received from a farming operation if in the totality of the circumstances it could be shown that "the land rental was an integral part of [debt- or's] farming operation." Id. at 1031. In the case at bar, the Bankruptcy Court noted that debtors have owned their acreage for forty years and in the past have themselves farmed the land, are "engage[d] in a traditional farming operation, that is, the raising of cattle," and have debts the majority of which it perceived to "arise out of a family farm operation." In re Easton, 79 B.R. at 838. Based on the totality of these circumstances, the Bankruptcy Court concluded that the rent debtors received from Larry Ritz is applicable toward satisfaction of § 101(17)(A)'s income requirement. The District Court endorsed this analysis and found it particularly significant that debtors could conceivably lose their farm if they were to insist that Rick Easton pay his rent when he is financially unable to do so and at the same time make payment on his loan to creditor, secured by 150 acres of debtors' land. Easton, 104 B.R. at 112.
The Armstrong court was called upon to determine the proper characterization of cash rent payments received by a debtor against whom an involuntary bankruptcy case is filed because under 11 U.S.C. § 303(a) an involuntary case cannot be commenced against a "farmer," defined by the Code as a "person that received more than 80 percent of such person's gross income . from a farming operation owned or operated by such person." 11 U.S.C. § 101(17) (1982) (now codified at 11 U.S.C. § 101(19) (Supp. V 1987)). Whatever the comparative merits of the "risk" versus the "totality of the circumstances" tests in the Armstrong context — and we seriously doubt whether there is any warrant for importing either concept into the construction of the Code's facially unambiguous definition of "farmer" — we do not consider either test appropriate in the determination whether money an individual receives from a given source is income "from such farming operation" within the meaning of § 101(17)(A). As we have said earlier in this opinion, this inquiry requires courts to identify those farming activities engaged in or owned or operated by someone claiming statutory "family farmer" status and then to determine whether that individual received more than fifty percent of his or her gross income in the relevant year from those activities. For example, in our view it is entirely possible that the cash rent Armstrong received from his tenant farmer could properly be characterized as § 101(17)(A) income because there was some evidence suggesting that Armstrong engaged in the cultivation of crops on the leased acreage. See Armstrong, 812 F.2d at 1027. The proper characterization of that income turns, however, not upon any risk of non-payment Armstrong might have faced, nor upon the universe of the particular circumstances surrounding Armstrong's financial situation, but rather upon the extent to which the income in question bears the relation to his farming activities prescribed by the words of the statute.
We believe the Bankruptcy Court's analysis admits of no readily discernible limiting principle, and would if followed lead to the evisceration of § 101(17)(A)'s income requirement. For example, so long as an individual tended some livestock or raised some crops, he would be permitted, under the Bankruptcy Court's analysis, to count as § 101(17)(A) income all rents he received from tenant farmers, however minimal his income from raising livestock or crops (indeed, perhaps without regard to whether he garnered any income from those activities at all, for in this case the Bankruptcy Court found that debtors have basically retired from farming), so long, as it could be said that the individual lived on the land and rented out acreage in an effort to generate sufficient income to service farm debt. Indeed, the Bankruptcy Court's rulings in this very case illustrate the indeterminacy of its approach, for it justified first the inclusion as § 101(17)(A) income the rent paid debtors by Rick Ea-ston and, later and more expansively, the rent paid them by Larry Ritz, on the observation that debtors "have been engaged in farming and have lived upon the farm for over 40 years." 79 B.R. at 838.
Further, we reject the proposition, apparently relied on by the Bankruptcy Court, that the renting out of land simpliciter constitutes "farming," and hence by statutory definition, a "farming operation." See 79 B.R. at 838 (citing for this proposition In re Welch, 74 B.R. 401 (Bankr.S.D. Ohio 1987), which relied in turn upon a definition of "to farm" found in Black's Law Dictionary). To say that the renting out of land is "farming" does not seem to us to square with the statute since all of its other operative terms describe active production of farm commodities or active working of the land. This suggests to us that "farming" is to be understood in its ordinary usage, and not in the strained sense suggested by Welch. If the renting of land constitutes a "farming operation" as defined by § 101(20), then an owner of land, whether or not he raises any crops or tends any livestock, would be able to claim the rent he receives from his tenant farmers as § 101(17)(A) income. We doubt that Congress erected Chapter 12 upon that premise. This construction of § 101(17)(A) would permit those who rent out farmland but who have no connection with the production of crops or livestock to conceivably gain statutory "family farmer" status, a possibility which the proponents of Chapter 12 specifically designed § 101(17)(A)'s income requirement to preclude. See 132 Cong.Reg. 9985 (1986) (remarks of Sen. McConnell). In fact, we have recently rejected such a result in the context of a corporate debtor seeking "family farmer" status under § 101(17)(B). See Tim Wargo & Sons, Inc. v. Equitable Life Assurance Society (In re Tim Wargo & Sons, Inc.), 869 F.2d 1128 (8th Cir.1989).
As we noted earlier, the District Court found it significant that debtors' lease arrangement with Rick Easton was, in theory, not risk-free, since receipt of rent from Rick Easton could result in his failing to make payment on his loan from creditor, which might then elect to exercise its rights against debtors' land. Whether this reasoning provides a sufficient basis for counting as § 101(17)(A) income the rent debtors received from Rick Easton — an issue we need not decide since the Bankruptcy Court found that debtors do not meet the more-than-fifty-percent requirement without counting the rent paid by Larry Ritz — surely it is a non sequitur to conclude that the rent debtors received from Larry Ritz is therefore also § 101(17)(A) income. Since Larry Ritz had not obtained a loan from creditor secured by land pledged by debtors or otherwise guaranteed by them in any fashion, their rental arrangement with him could not have carried within itself the same dire potentiality posited by the District Court with respect to their rental arrangement with their grandson.
While the question of the proper interpretation of § 101(17)(A) is one of first impression in this Circuit, the approach we take in this opinion is not without precedent. For example, in In re Dakota Lay'd Eggs, 57 B.R. 648 (Bankr.D.N.D.1986), the question was whether debtor was a "farmer" under the Code in the context of a creditor-filed involuntary bankruptcy action; this inquiry required the court to determine whether debtor received various items of income "from a farming operation owned or operated" by it. 11 U.S.C. § 101(17) (1982) (now codified at 11 U.S.C. § 101(19) (Supp. V 1987)). The court stated the relevant inquiry as follows: "[T]he determination must be made . whether [debtor's] income is derived from its own farming or production efforts as opposed to the farming or production efforts of others." Id. at 656. Applying this test separately to each claimed item of income, the court declined to treat as statutory income sums debtor received from the sale of eggs which came from flocks neither owned nor managed by it. In In re Guinnane, 73 B.R. 129 (Bankr.D.Mont.1987), a case decided under § 101(17)(A), the court characterized a controverted item of income as farm income because, among other things, it was "not derived from third party efforts, but from the Debtors' efforts." Id. at 132. In In re Haschke, 77 B.R. 223 (Bankr.D.Neb.1987), the court declined to treat as § 101(17)(A) income cash rent debtors had received because, among other things, the court found "no evidence of the debtors' involvement in the farming of the property." Id. at 225. And we read In re Burke, 81 B.R. 971 (Bankr.S.D.Iowa 1987), a case cited to us by both parties, to stand for the proposition that rent a debtor receives for use of land under a crop share arrangement is proper § 101(17)(A) income when the debtor plays a significant role in farming the leased acreage. Cf. In re Martin, 78 B.R. 593, 597 (Bankr.D.Mont.1987) (money debtor receives for cutting and marketing hay grown on another's land is § 101(17)(A) income). The theme common to these cases is the existence of some indicia of involvement on the part of the debtor in the farming activity which generates the income he seeks to have credited toward satisfaction of the income requirement of § 101(17)(A).
Debtors place principal reliance on In re Jessen, 82 B.R. 490 (S.D.Iowa 1988), and In re Welch, 74 B.R. 401 (Bankr.S.D.Ohio 1987), in support of the result reached below. We have explained why we believe the Welch court's treatment of cash rent does not square with the statute. Jessen is but an application of the Burke case and thus is, as we have just discussed, not helpful to debtors' position. Debtors also cite In re Paul, 83 B.R. 709 (Bankr.D.N.D.1988), and In re Rott, 73 B.R. 366 (Bank.D.N.D.1987), in support of their eligibility for Chapter 12 relief. Again, we are not persuaded that either is helpful to debtors' case. In Paul the evidence "plainly demonstrate^]" that the debtors' grain production operation generated sufficient income to satisfy § 101(17)(A) in the relevant year. 83 B.R. at 712. In Rott, as in Burke and Jessen, the court credited cash rent received by debtors toward satisfaction of the statutory income requirement because it perceived the rental arrangement to be temporary. 73 B.R. at 373. As we have just noted, whether this consideration is relevant, debtors' renting out of their cultivable acreage here cannot be characterized, on the record before us, as temporary.
Debtors in the present case, as the lower courts recognized, engaged in the raising of livestock in 1986. The raising of livestock is plainly a "farming operation," see 11 U.S.C. § 101(20) (Supp. V 1987), and any money they received from that activity qualifies as § 101(17)(A) income. On the present state of the record, however, we cannot determine whether debtors bear any § 101(17)(A) relation to the "farming operation," that is, to the "production or raising of crops" taking place on the 290 acres rented by Larry Ritz. Although the Bankruptcy Court characterized the money debt ors received from Larry Ritz in 1986 as "cash rent" — thereby perhaps by implication permitting us to conclude that debtors had no involvement in the production of crops on that parcel beyond that of a lessor of land — this financial arrangement does not necessarily preclude the possibility that debtors played a statutorily significant role vis-a-vis the production of crops on that acreage. We vacate and remand so that debtors may have the opportunity to demonstrate that the money they received from Larry Ritz is in fact proper § 101(17)(A) income under the legal standard we have set forth in this opinion. Those sums cannot be counted as § 101(17)(A) income unless debtors show that they had some significant degree of engagement in, played some significant operational role in, or had an ownership interest in the crop production which took place on the acreage they rented to Larry Ritz.
We find the result reached below troubling in a further respect. The Bankruptcy Court ruled that "[t]he majority of the debts owed by the Debtors arise out of a family farm operation, that is the debts represent the grandfather's guarantee of his grandson's debts for the hog confinement facility and hog raising operation." 79 B.R. at 838. The Bankruptcy Court accordingly counted toward satisfaction of § 101(17)(A)'s eighty percent debt requirement the $370,000 debtors owe creditor because "[t]he debt arose out of a farming operation. It's their land that was pledged as a mortgage." Transcript of November 30, 1987 Hearing at 29.
We believe that in evaluating debtors' $370,000 debt to creditor the Bankruptcy Court applied an erroneous legal standard. Certainly this debt arose out of a farming operation, but the inquiry does not end there. Under § 101(17)(A) at least eighty percent of debtors' liquidated, noncontin-gent debt must arise out of a farming operation owned or operated by debtors. Debtors became liable to creditor in the amount of $370,000 because their grandson's hog-raising enterprise failed. On the present state of the record, it does not appear that this debt arises from a farming operation that the debtors either own or operate.
That debtors had pledged land as security for creditor's loan to Rick Easton does not permit a contrary conclusion. Land or an interest in land, without more, is plainly not a farming operation, see § 101(20). The Bankruptcy Court's analysis would permit characterization as debt arising out of a farming operation any loan secured by farmland regardless of the purpose to which the borrowed funds have been put. That approach is not faithful to the language of the statute because it would permit inclusion toward satisfaction of the minimum debt requirement debt incurred by an owner of land without regard to the connection between the debt and the debt- or's own farming activity. See Armstrong, 812 F.2d at 1030 (debtor's personal guarantee of creditor's loan to seed company is not debt arising out of farming operation); In re Douglass, 77 B.R. 714, 715 (Bankr.W.D.Mo.1987) ("[T]he reason or purpose for which the debt was incurred coupled with the use to which the borrowed funds were put . should be the criteria to determine whether the debt 'arises out of a farming operation'."; debt secured by deed of trust on debtors' service station property is debt arising out of a farming operation where debtors used the borrowed funds to keep their farming operation going); In re Roberts, 78 B.R. 536, 537-38 (Bankr.C.D.Ill.1987) (where debtor inherited farm she operates, estate taxes constitute debt arising out of farming operation because debt is incurred as result of acquisition of farming operation from decedent); In re Rinker, 75 B.R. 65, 68 (Bankr.S.D.Iowa 1987) (debt incurred by debtors in settlement of will dispute over land farmed by them is debt arising out of a farming operation).
Here, debtors incurred a debt of $370,000 not in acquiring or retaining land they farm, or in financing their own farming activity, but rather in agreeing to co-sign a loan made to finance their grandson's farming operation. The record does not reveal, however, whether debtors, in addition to their function as co-signatories on the note, had any ownership interest, or played any operational role, in the grandson's hog-raising enterprise. We vacate and remand so that debtors may have an opportunity to demonstrate such a relationship to that farming operation. The $370,-000 debt cannot be counted toward satisfaction of § 101(17)(A)'s debt requirement unless debtors show such a relationship.
The courts below evidently believed that debtors are entitled to statutory "family farmer" status since they have lived on their acreage for many years and continue to conduct traditional farming activities on a limited basis. Courts, however, are not free to confer statutory "family farmer" status upon individuals simply because they reside on a farm and carry on some farm-related tasks. That an individual may seem to be a family farmer in the colloquial sense of the term does not mean he or she is a family farmer for purposes of the Bankruptcy Code. For the reasons we have discussed in this opinion, the judgment of the District Court is vacated and the matter remanded for further proceedings consistent with this opinion.
.The Honorable Donald E. O'Brien, Chief United States District Judge for the Northern District of Iowa.
. The Honorable Michael J. Melloy, Chief United States Bankruptcy Judge for the Northern District of Iowa.
. In re Easton, 79 B.R. 836, 837 (Bankr.N.D.Iowa 1987), aff'd, 104 B.R. 111 (N.D.Iowa 1988).
. Debtors received rent in 1986 from Larry Ritz, Ed Ritz, and Triple J Farm, the latter an entity through which Larry Ritz conducts business. Appendix at 15, 18, 20, 33; Transcript of May 12, 1987 Hearing at 3. The courts below, and the parties in their briefs and at oral argument, refer to the rent debtors received from each of these sources collectively as rent received from or paid by Larry Ritz. For simplicity's sake we continue this usage here.
. No Circuit Court of Appeals has been called upon to resolve explicitly this particular question. The Court of Appeals for the Eleventh Circuit appears to have parsed § 101(17)(A) in a fashion consistent with the second possible reading we have outlined in the text, though it does not seem to us that the resolution of the case turned on that particular reading. See Federal Land Bank v. McNeal (In re McNeal), 848 F.2d 170 (11th Cir.1988).
.See In re Easton, 79 B.R. at 838 ("This Court believes, however, the better reasoned approach is represented by the minority opinion in the Armstrong case."); Easton, 104 B.R. at 112 ("[T]he court embraces the 'totality of the circumstances' approach taken by the bankruptcy court . and wholeheartedly agrees with the bankruptcy court's rejection of the approach taken by the majority in In re Armstrong.
. George Easton testified that he rented out his cultivable land on a dollar-per-acre basis in 1985 and 1986 and that he had this acreage "custom farmed" in 1984. Transcript of May 12, 1987 Hearing at 6.
. To the extent that Congress considered exposure to "risk" a relevant concept in its definition of "farmer," it articulated as much by prescribing that it is risk attendant to owning or operating a farming operation that serves to distinguish statutory from non-statutory income.
. Indeed, on this analysis there would seem little reason not to include as § 101(17)(A) income the salary an individual might earn in some other occupation, so long as he continued to do some farming and took on the non-farm employment in an effort to service farm debt.
. Burke also states: "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." 81 B.R. at 976-77. Whether this language is consonant with our explication of § 101(17)(A) today, it is of no help to debtors. Since the courts below found that debtors have substantially retired from active farming, it cannot be said that their cessation from farming the acreage leased to Larry Ritz is temporary.
. Section 101(20) reads: "'[F]arming 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 unmanufac-tured state."