Boulder Meadows, Inc. v. Oneida Savings Bank

Filing 12

MEMORANDUM-DECISION and ORDERED, that Appellant Marone Acees Appeal (No. 12-cv-0259, Dkt. No. 1) is GRANTED; and it is further ORDERED, that Appellant Boulder Meadows, Inc.s Appeal (No. 12-cv-0258, Dkt. No. 1) is DENIED; and it is further ORDERED, th at the November 12, 2013, Order of the Bankruptcy Court denying Appellants Chapter 12 eligibility is AFFIRMED in part and REVERSED in part, consistent with this Memorandum-Decision and Order; and it is further ORDERED, that to the extent the November 12, 2013, Order of the Bankruptcy Court found Acee Marone not a family farmer under § 101(18), and thus ineligible for Chapter 12 protection, that decision is REVERSED. However, to the extent the November 12, 2013, Order of the Bankruptcy Court found Boulder Meadows not a family farmer under § 101(18), that decision is AFFIRMED. Signed by Senior Judge Lawrence E. Kahn on March 31, 2015. (sas)

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF NEW YORK
MARONE ACEE,
Appellant,
-against-

6:14-CV-0259 (LEK)

ONEIDA SAVINGS BANK; ACCESS
FEDERAL CREDIT UNION,
Appellees.

BOULDER MEADOWS, INC.,
Appellant,
-against-

6:14-CV-0258 (LEK)

ONEIDA SAVINGS BANK; ACCESS
FEDERAL CREDIT UNION,
Appellees.

MEMORANDUM-DECISION and ORDER
I.

INTRODUCTION
Appellants Marone Acee (“Acee”) and Boulder Meadows, Inc. (“Boulder Meadows”)

(collectively, “Appellants” or “Debtors”) appeal a decision by U.S. Bankruptcy Judge Diane Davis,
finding that Appellants did not qualify as “family farmers” under 11 U.S.C. § 101(18) and were
therefore ineligible for Chapter 12 protection. Dkt. Nos. 1;1 1-2; 1-6 (“Appellant Brief”); 9

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The Bankruptcy Court previously granted Debtors’ Motion for joint administration, and
these separate filings have therefore been consolidated. See No. 6:14-CV-0259, Dkt. No. 3-15
(“Bankruptcy Order”) at 1 n.1. All citations to the Docket refer to Case No. 6:14-CV-0259, which
has been designated as the lead case, unless otherwise noted.

(“Trustee Brief”). Appellee Oneida Savings Bank (“Appellee,” or “OSB”) has filed a Response,
and Appellants have filed a Reply. Dkt. Nos. 12 (“Response”); 13 (“Reply”). For the following
reasons, the Bankruptcy Court’s decision is affirmed in part, and reversed in part.
II.

BACKGROUND
A. Factual Background
Acee is the sole shareholder of three separate corporate entities: (1) Boulder Meadows,

which owns approximately 300 acres in Vernon and Augusta, New York (the “Boulder Meadows
Property”); (2) Vernon National Shooting, Inc. (“Vernon National”), which does not own any assets,
and (3) Stop Seven Operating Corporation (“Stop Seven”), which issued stock but owns no hard
assets or equipment and conducts farming operations to grow strawberries, corn, tomatoes and other
fruits and vegetables. B.R. Order at 3-4.
To help generate revenue, Acee began a pheasant hunting operation on the Boulder
Meadows Property. Id. at 4. Acee placed a portion of the Boulder Meadows Property into the
Conservation Reserve Program (“CRP”), which is administered by the U.S. Department of
Agriculture’s Farm Service Agency (“FSA”), and then rented that land to Vernon National. Id.
Acee purchases the pheasants from a third party because he is not a licensed breeder. Id. Acee
houses the birds for two to three weeks in a former barn on the Boulder Meadows Property before
he releases them. Id. In addition, Acee became licensed through Cornell to make and sell food
products using crops grown by Stop Seven. Id. at 5.
B. Procedural Background
On August 31, 2012, Appellants filed for relief under Chapter 12 of the U.S. Bankruptcy
Code. B.R. Order at 1. OSB and Access Federal Credit Union (“AFCU”) each filed objections to

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confirmation of the Chapter 12 plans. Id. at 2. On November 11, 2013, U.S. Bankruptcy Judge
Diane Davis issued a Memorandum-Decision and Order finding that neither Acee nor Boulder
Meadows qualified as a “family farmer” under 11 U.S.C. § 101(18), and thus both were ineligible
for Chapter 12 protection. Id. at 16. Appellants filed a Motion for reconsideration of the
Bankruptcy Order, which was denied in the Bankruptcy Court’s Memorandum-Decision and Order
dated January 10, 2014. Dkt. No. 1-2 (“Reconsideration Order”). This appeal ensued.
III.

STANDARD OF REVIEW
On appeal, a district court reviews a bankruptcy court’s factual findings for clear error and

its legal conclusions de novo. Cnty. of Clinton v. Warehouse at Van Buren St., Inc., No. 12-CV1636, 2013 WL 2145656, at *1 (N.D.N.Y. May 15, 2013) (citing R2 Invs., LDC v. Charter
Commc’ns, Inc., 691 F.3d 476, 483 (2d Cir. 2012)). “A finding is ‘clearly erroneous’ when
although there is evidence to support it, the reviewing court on the entire evidence is left with the
definite and firm conviction that a mistake has been committed.” United States v. U.S. Gypsum
Co., 333 U.S. 364, 395 (1948). Following review, a district court “may affirm, modify, or reverse a
bankruptcy judge’s judgment, order, or decree or remand with instructions for further proceedings.”
FED. R. BANKR. P. 8013.
IV.

DISCUSSION
Appellants argue that the Bankruptcy Court erred in the following ways: (1) improperly

calculating the “farm-debt test” under § 101(18)(A) with respect to Acee; (2) finding that the debt
associated with Acee’s principal residence did not arise out of a farming operation; (3) finding that
Boulder Meadows was not engaged in a “farming operation”; and (4) assessing Boulder Meadows’
eligibility under Chapter 12 even though no objection to its eligibility was filed. App. Br. at 4-5.

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A. Farm-Debt Test
To qualify as a “family farmer” under the Bankruptcy Code, the individual must satisfy, in
relevant part, the “farm-debt test,” meaning that the individual’s:
aggregate debts do not exceed $4,031,5751 and not less than 50 percent of whose
aggregate noncontingent, liquidated debts (excluding a debt for the principal residence
of such individual or such individual and spouse unless such debt arises out of a farming
operation), on the date the case is filed, arise out of a farming operation owned or
operated by such individual or such individual and spouse.
18 U.S.C. § 101(18)(A). The issue raised on appeal is the proper construction and application of the
principal residence debt when computing the farm-debt test. See App. Br.
Noting that “[t]here are no reported decision that address in detail the debt calculation
itself,” the Bankruptcy Court interpreted the statute as follows: (1) if the principal residence debt
arises from a farming operation, then that amount is included in both the numerator and
denominator; (2) however, if the principal residence debt does not arise from a farming operation,
then that amount is excluded from the numerator but still included in the denominator. See Recons.
Order. at 7. After finding that Acee’s principal residence debt did not arise from a farming
operation, the Bankruptcy Court therefore excluded that amount from the numerator, but included it
in the denominator, which resulted in finding that only 43% of Acee’s aggregate debt constituted
farm-related debt. Id.
Appellants argue that the Bankruptcy Court’s interpretation of this provision constituted
legal error. Specifically, Appellants assert that if the principal residence debt does not arise from a
farming operation, then it should be excluded from both the numerator and denominator. App. Br.
at 11-13. Thus, Appellants argue that the Bankruptcy Court committed legal error, after finding that
the principal residence debt was not farm related, by including that amount in the denominator. Id.

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Although this issue was only briefly reached in the Bankruptcy Order, Appellants argued it
in their Motion for Reconsideration and Judge Davis addressed it thoroughly in the Reconsideration
Order. The Bankruptcy Court noted that, while no court has yet to provide a specific formulation or
meaningful discussion of the provision at issue, it found support for its interpretation of the statute
in the legislative intent behind the enactment of Chapter 12. See Recons. Order at 10-12.
Moreover, Judge Davis found that, although not binding, she was persuaded by In re Saunders, 377
B.R. 772, 776 (Bankr. M.D. Ga. 2007), where the court found that “[b]ecause the business debt
secured by the farm cannot be treated as farm-related debt, Debtor’s farm-related debt consists of
less than half of his total debt.” (emphasis added).
Although mindful of the lack of legal authority on this issue, the Court respectfully disagrees
with Judge Davis’s reliance on In re Saunders, as that case did not involve the precise issue raised
by Appellants. Indeed, in In re Saunders, the court began its analysis by stating that “[t]he key
question in this case is whether loans secured by farmland used to operate a car dealership
constitute debt “aris[ing] out of a farming operation.” Id. at 774 (emphasis added). Thus, In re
Saunders did not concern principal residence debt, nor did it provide any reasoning or analysis as to
how the relevant provision should be applied.
The Court is persuaded, however, by In re Woods, 743 F.3d 689, 696 (10th Cir. 2014). In a
lengthy discussion on application of the farm-debt test, the Tenth Circuit stated:
Under the rule, ordinarily the debt for one’s principal residence is not included in the
aggregate debt;2 on the other hand, the exception provides that if such debt “arises out
of” a farming operation, then it is included in the aggregate-debt calculation and also

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For clarification purposes, the “aggregate debt” constitutes the denominator and the “farm
debt” constitutes the numerator. In other words, Farm-Debt Test = Farm Debt/Aggregate
Noncontingent, liquidated debt.
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constitutes farm debt for purposes of the rule (because the debt “arises out of” a farming
operation). In other words, if the exception applies, the aggregate debt and farm-debt
portion of the aggregate debt increase by the same amount, which necessarily increases
the proportion of one’s debt that “arises out of” a farming operation.
Id. The Court reads this language to unambiguously provide that under the general rule, where
principal residence debt is not farm related—as Judge Davis found here—“it is not included in the
aggregate debt [i.e. denominator.”]. Id. (emphasis added). Thus, the Court is persuaded that
Appellants are correct—if the principal residence debt is not farm related, then it should be excluded
from both the numerator and denominator—and finds that the Bankruptcy Court erred in its
construction of the farm-debt test under § 101(18)(A).
B. Acee’s Principal Residence Debt
The next issue before the Court is whether the Bankruptcy Court erred in its determination
that Acee’s principal residence debt did not arise out of a farming operation under § 101(18)(A).
Judge Davis found that Acee’s principal residence debt did not arise out of a farming operation
because:
Acee has done no more than testify that he utilizes his personal residence as a home
office from which he conducts certain business functions, including, but not limited to,
the payment of bills. No testimony was elicited from Acee regarding the use of the
home equity or mortgage proceeds, and no evidence was presented to prove that the
mortgages secure farm debt.
B.R. Order at 15. Appellants argue that they have demonstrated “some connection” between the
principal residence debt and the farming activity, and thus that debt should have been included in
computing the farm-debt test. App. Br. at 13-14 (citing In re Saunders, 377 B.R. 776 and In re
Marlatt, 116 B.R. 703, 705 (Bankr. D. Neb. 1990)). However, as Judge Davis correctly found, it is
the purpose of the debt which determines whether it arises out of a farm operation. See Recons.
Order at 13 (listing cases). Appellants have not provided any additional facts or legal authority to
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support their argument, and thus the Court finds that the Bankruptcy Court did not err in concluding
that Acee’s principal residence debt did not arise out of a farming operation.
C. Application of Farm Debt Test to Acee
With that framework in mind, the Court now turns to computing the farm debt test as
construed in this Memorandum-Decision and Order. Because the Court agrees with Judge Davis
that Acee’s principal residence debt does not arise from a farming operation, it is excluded from
both the numerator and denominator. Judge Davis found—and Appellants do not dispute—that,
excluding the principal residence debt (because it did not arise out of a farming operation), the farm
debt (the numerator) totaled $236,438.82. B.R. Order at 15. Judge Davis found the aggregate
noncontingent, liquidated debt (the denominator) totaled $545,827.89. Id. However, because the
amount of principal residence debt should also be subtracted from the denominator, the Court finds
the appropriate aggregate debt amount is $253,437.89.3 As a result, the Court finds that 93% of
Acee’s debt arises from a farming operation, which exceeds the 50% threshold for Chapter 12
eligibility. Therefore, the Court finds that the Bankruptcy Court erred in concluding that Acee did
not satisfy the farm-debt test for purposes of Chapter 12 protection.
D. Boulder Meadows - Farming Operation
Appellants offer two arguments in support of their contention that Boulder Meadows is a
“family farmer” under § 101(18). First, Appellants argue that the Bankruptcy Court erred in finding
Boulder Meadows’ collection of rent from Vernon National, which is engaged in farming,
insufficient to qualify Boulder Meadows as a farming operation. App. Br. at 14-15. Second,

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Although not stated explicitly, it is clear from Judge Davis’s analysis that she found
$292,390.00 to constitute principal residence debt. See B.R. Order at 15. Thus, the Court may
subtract this amount to determine the aggregate debt here.
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Appellants argue that Boulder Meadows’ placement of some of its acreage into the CRP is also
sufficient to qualify it as a farming operation. Id.
As to Appellants’ first argument, the Bankruptcy Court found that “[w]here, as here, a
corporation is paid by farmers or lessees for services but does not derive income from its own
farming operation or production efforts and therefore does not play an active role in the process or
take any direct risk, the corporation does not meet the ‘farming operation’ requirement.” B.R. Order
at 12-13 (citing In re Van Air Flying Serv., Inc., 146 B.R. 816, 818 (Bankr. E.D. Ark. 1992)) (listing
cases). In support of their contention that collecting rent from a farming operation is sufficient to
qualify the landlord as a farming operation, Appellants rely on In re Lamb, 209 B.R. at 762, where
the court stated that “[i]f the lessee uses the rented land for farming operations, some of the risks of
farming are indirectly imparted to the lessor, thereby supporting a conclusion that the rental income
from such property should itself be considered income from a ‘farming operation.’” However,
Appellants’ reliance on this language is misplaced. In In re Lamb, the debtor was indisputably a
farmer, and the issue was only whether a portion of the debtor’s farm, which it had leased to other
farmers, could be included in the debtor’s income as arising out of a farming operation. See id. In
other words, in In re Lamb, the court had already decided that the debtor was engaged in a “farming
operation,” see id. (“Debtor was, himself, engaged in farming operations through his partnership
interest in DO–MY Dairy.”), and was only addressing whether additional revenue streams could be
considered in computing its farm-related income. Here, Appellants have not argued that Boulder
Meadows itself was engaged in farming operations, and therefore In re Lamb is distinguishable.
As to Appellants’ argument concerning its involvement in the CRP, the Bankruptcy Court
found that Boulder Meadows did not face the risk associated with family farming operations

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because “Boulder Meadows’ income is stabilized and guaranteed for as long as the Boulder
Meadows Property remains in the CRP.” B.R. Order at 12. In support of their challenge,
Appellants rely on In re Fenske, 96 B.R. 244, 247 (Bankr. D.N.D. 1988), where the court stated that
“[t]he fact that a portion of the land is enrolled in CRP or an ASCS set aside does not remove the
resulting income from the farm related category.” However, the In re Fenske court continues,
Those individuals who while actively engaged in farming, avail themselves of such
programs and thereby maximize the profitability of their operations are no less engaged
in a farming operation. The only exception is where the farmer . . . becomes merely a
passive recipient of investment income. In that case income derived from wholesale
cash renting of land or CRP enrollment is not derived from a farming operation. The
Debtors in the instant case are actively farming and intend on doing so for the
foreseeable future.
Id. (emphasis added). Here, it is undisputed that Boulder Meadows is not directly engaged in
farming and is merely a corporate landlord for Vernon National and Acee’s activities. Therefore, In
re Fenske is distinguishable from this case. Thus, the Court finds that the Bankruptcy Court did not
err in finding that Boulder Meadows is not a “farming operation” under § 101(20).4
E. Boulder Meadows’ Chapter 12 Eligibility
Appellants’ final argument is that the Bankruptcy Court erred in assessing Boulder
Meadows’ eligibility under Chapter 12 because no party ever objected to its eligibility. App. Br. at

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The Court notes that Appellants devote their entire Reply to a new theory, that Boulder
Meadows is a farming operation because it is owned by one family and thus all relevant
entities—Boulder Meadows, Acee, and Vernon National—should be considered in determining
Boulder Meadows’ eligibility. See generally Reply. However, “[t]o prevent unfairness to the
litigants, courts apply a general rule that ‘new arguments may not be made in a reply brief.’” DVL,
Inc. v. Gen. Elec. Co., 811 F. Supp. 2d 579, 592 (N.D.N.Y. 2010) aff’d sub nom. DVL, Inc. v.
Niagara Mohawk Power Corp., 490 F. App’x 378 (2d Cir. 2012) (quoting Ernst Haas Studio, Inc. v.
Palm Press, Inc., 164 F.3d 110, 112 (2d Cir. 1999)). Accordingly, the Court has not considered this
argument.

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15. The Bankruptcy Court stated in a footnote, “OSB’s objection in Boulder Meadows’ case does
not raise an eligibility challenge, yet the parties have proceeded as if the objection had properly done
so. Given the same and the interconnection between Acee and Boulder Meadows . . . the Court will
address the qualifications of both Debtors for eligibility under chapter 12.” B.R. Order at 2 n.3.
Appellants’ argument must be rejected because they have provided no legal authority demonstrating
that the Bankruptcy Court’s decision was erroneous. Moreover, Appellants filed a Motion for
reconsideration of the Bankruptcy Order, yet did not raise this issue; thus, the Bankruptcy Court did
not have an opportunity to address Appellants’ argument, nor does the Court have a finding to
review. Furthermore, Appellants have not presented a challenge to the joint administration of the
claims by Acee and Boulder Meadows. Therefore, the Court is not persuaded that the Bankruptcy
Court committed legal error in determining Boulder Meadows’ eligibility.
V.

CONCLUSION
Accordingly, it is hereby:
ORDERED, that Appellant Marone Acee’s Appeal (No. 12-cv-0259, Dkt. No. 1) is

GRANTED; and it is further
ORDERED, that Appellant Boulder Meadows, Inc.’s Appeal (No. 12-cv-0258, Dkt. No. 1)
in DENIED; and it is further
ORDERED, that the November 12, 2013, Order of the Bankruptcy Court denying
Appellants Chapter 12 eligibility is AFFIRMED in part and REVERSED in part, consistent with
this Memorandum-Decision and Order; and it is further
ORDERED, that to the extent the November 12, 2013, Order of the Bankruptcy Court
found Acee Marone not a “family farmer” under § 101(18), and thus ineligible for Chapter 12

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protection, that decision is REVERSED. However, to the extent the November 12, 2013, Order of
the Bankruptcy Court found Boulder Meadows not a “family farmer” under § 101(18), that decision
is AFFIRMED; and it is further
ORDERED, that the Clerk of the Court serve a copy of this Memorandum-Decision and
Order on all parties in accordance with the Local Rules.
IT IS SO ORDERED.

DATED:

March 31, 2015
Albany, NY

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