Bankruptcy Code Definition: Family Farmer

The definition of “family farmer” under Bankruptcy Code § 101(21) (not to be confused with “farmer” which is defined in the Code at § 101(20)) includes, somewhat counter intuitively, not just an individual (and spouse) but also a corporation or partnership (provided the business entity is majority owned by family members) and “(1) engaged in farming; (2) [have] aggregate debt less than [currently, $4,031.575]; (3) [where] 50% of the aggregate debt arose ‘out of a farming operation;’ and (4) 50% of gross income was received from a farming operation in the taxable year before bankruptcy or each of the 2nd and 3nd taxable years before bankruptcy.”  In re Hemann, No. 11-00261, 2013 Bankr. LEXIS 1385 (N.D. Iowa 2013).

In order to be eligible to file a chapter 12 petition, a family farmer must be a “family farmer with regular annual income” meaning that such “income is sufficiently stable and regular to enable such family farmer to make payments under a plan . . .”  § 101(19).  In turn, “farming operation” is defined to include “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.”  Code § 101(21).

As you might imagine, a good deal of the case law focusing on this definition includes disputes over these various specifics.  A smattering of these issues include:  (i) despite the list of activities constituting a “farming operation” being non-exclusive, together with the fact that the property on which the debtor maintained its operations was zoned exclusively for farm use and her employees were treated as agricultural workers for tax purposes, the debtor who maintained a horse boarding and training operation was not deemed to have engaged in a farming operating because she did not raise or produce horses but merely provided services (In re Jones, No. 10 65478, 2011 Bankr. LEXIS 2982 (D. Ore. 2011); (ii) a person engaged in “agrotourism” is not engaged in farming operations (In re Vecchione, No. 13-42201, 2013 Bankr. LEXIS 4978 (N.D.N.Y. 2013)); (iii) an individual whose principal income was derived from a pheasant raising operation which qualified as a farming operation was nonetheless not deemed a family farmer because less than 50% of the aggregate, non-contingent, liquidated debt, when taking the mortgage debt on the debtor’s principal residence into account, arose out of a farming operation (In re Acee, No. 12-61631, 2013 Bankr. LEXIS 4789 (D. Mass. 2013)); (iv) but debtor was permitted to include their mortgage indebtedness in calculating the income derived from farming operations where debtors established the residence was integral to the operations because the house served as the headquarters of and provided an office for the farming operations and because of its proximity to the operations which required much personal attention (First Bank of Durango v. Woods, (In re Woods), 465 B.R. 196 (10th Cir. BAP, 2012)); (v) the failure to have reported any income derived from farming operations on prior years’ tax returns dooms putative debtor’s efforts in seeking chapter 12 relief despite testimony to the contrary (In re Myrstol-Snyder, 530 B.R. 850 (Bankr. D. Mont. 2015)); and (vi) the fact the debtor downsized his farming operations from a partnership with his brother to a smaller sole proprietorship within 3 years of the bankruptcy filing did not disqualify the farmer from being deemed a family farmer (In re Hemann).

Michael B. Watkins
Barnes & Thornburg LLP