Summary of a Recent
Judicial Development in
Bankruptcy

Farmer's Rental Income Does Not
Affect Status as "Family Farmer"

Harrison M. Pittman
Staff Attorney

Summary of Decision

In In re Maynard, 295 B.R. 437 (Bank. S.D.N.Y. 2003), the United States District Court for the Southern District of New York held that a debtor qualified as a "family farmer" because he was engaged in a farming operation and the rental income he received from a corporate entity constituted farm income. See id. at 440-41.

Background

A Chapter 12 debtor created a legal entity known as Maynard Farms, Inc. ("MFI") to farm 104 acres of farmland he owned. See id. at 438. MFI made monthly rental payments to the debtor, but after he filed for bankruptcy, MFI was dissolved and the debtor began operating the farm as a sole proprietor. See id. The debtor's only source of income at the time of his bankruptcy filing was the rental payments paid to him by MFI. See id.

Arguments

The trustee challenged confirmation of the debtor's bankruptcy plan, asserting that the debtor was not a "family farmer" for purposes of Chapter 12. See id. at 438. The trustee argued that the debtor was not a family farmer because his farm was operated by MFI in the taxable year preceding the filing of the bankruptcy petition and therefore the debtor was not "engaged in a farming operation." See id. The trustee also argued that the debtor was not a family farmer because his only source of income in the taxable year preceding the bankruptcy filing was the rental income received from MFI. See id. Rental income, according to the trustee, did not constitute farm income. See id. The debtor disputed the trustee's arguments, asserting that he qualified as a "family farmer." See id.

Analysis and Holdings

The court explained that to qualify as a "family farmer," "an individual farmer must both be 'engaged in a farming operation' and fulfill a 'farm income' test in which at least fifty percent of the individual's gross income during the taxable year immediately preceding that in which the petition was filed must have been received from the individual's farming income." Id. at 439 (citing 11 U.S.C. § 101(18)). It also explained that courts have developed three tests- the "Armstrong test," the "totality of the circumstances" test, and the "hybrid" test-to determine whether rental income constituted farm income. See id. at 439-40. See also In re Armstrong, 812 F.2d 1024 (7th Cir. 1987) (setting forth "Armstrong test"); Matter of Burke, 81 B.R. 971 (Bankr. S.D. Iowa 1987) (adopting "totality of the circumstances" test, as set forth in Armstrong dissent); and In re Creviston, 157 B.R. 380 (Bank. S.D. Ohio 1993) (setting forth "hybrid test").

The court held that the debtor was "engaged in a farming operation" because his assertion that "he was responsible for all aspects of MFI's crop cultivation and production," was not disputed by the trustee. See id. at 439. The court also held that the debtor satisfied the "Armstrong," "totality of the circumstances," and "hybrid" tests, regardless of which test was applied to the debtor's circumstances. See id. at 440-41. See also id. at 440 ("This court need not choose one test over another, as all three tests are satisfied by the circumstances of the present case.").

The case was decided on July 21, 2003; this summary was posted Dec. 23, 2003.