Corporation’s Acquisition of Farmland To Protect Waterfowl Runs Afoul of State Anti-Corporate Farming Law

May 17, 2010 | Erin Herbold

 

Some states still have laws on the books that prohibit corporate involvement in agriculture.  The statutes vary among the states, but usually prohibiting is some combination of ownership of farmland and engaging in agricultural activities other than by related persons.  Since 1935, North Dakota has had a statutory prohibition against corporations engaging in farming. However, in 1981, the North Dakota legislature created an exception for family-held farm and ranch operations with 15 or fewer shareholders to incorporate if:

  • Each shareholder is related to every other shareholder,
  • At least 65 % of the corporation’s gross income over the previous five years originated from farming or ranching and not more than 20 % from passive investment income, and
  • The officers and directors are all shareholders and at least one of the shareholders resides on or operates the farm or ranch.

“Farming and ranching” for purposes of the North Dakota statute is defined broadly. It includes, “cultivating land for production of agricultural crops or livestock, or the raising or producing of livestock or livestock products, poultry or poultry products, milk or dairy products, or fruit or horticultural products.” It does not include, “production of timber or forest products, nor does it include a contract whereby a processor or distributor of farm products or supplies provides grain, harvesting, or other farm services.” There is also a “business purposes” exception to the North Dakota corporate farming law that allows corporate ownership of farm or ranch land “for uses supportive of or ancillary to adjacent nonagricultural land for the benefit of both land parcels.”  In addition, there are some other exceptions for non-profit corporations.

Attempts to pass legislation that would allow nonfamily members to own shares in farm corporations and require the principal shareholder to be actively engaged in operating the farm or ranch, but not necessarily reside on the farm or ranch, have been introduced periodically in North Dakota but have been unsuccessful. Though private entities have challenged the anti-corporate farming law, in 2009, a state trial court upheld the state’s anti-corporate farming law against a constitutional challenge.  Presently, the North Dakota law is being reworked to make it easier for limited liability companies and limited liability partnerships to engage in farming in the state.  A bill along those lines will likely be introduced in the next legislative session.

In this case, a Minnesota non-profit corporation, in late 2003, purchased 949 acres of North Dakota land in an attempt to preserve and protect the migratory waterfowl habitat in North Dakota.  The company didn’t get the governor’s approval before buying the land, which is required by anti-corporate farming law. When the state learned of the corporation’s acquisition they notified the company of the violation.  In July of 2004, the corporation submitted a retroactive petition to acquire the land. After a public hearing of the advisory committee authorized to make recommendations to the Governor on proposed acquisitions of agricultural land by non-profits, the advisory committee recommended that the Governor disapprove the acquisition. The Governor agreed and did not approve the purchase. When the non-profit did not divest itself of the property, the state Attorney General filed sued, alleging a violation of the state’s anti-corporate farming law. 

At trial, the non-profit argued that while some of the land was agricultural and subject to divesture, they should be allowed to keep the tracts of land in the parcel that were not farm or ranch land. Therefore, the non-profit asserted that under the “business purpose exception” they should not be required to divest the wetlands, drained wetlands, and highly erodible lands. The trial court agreed and sided with the non-profit’s “piecemeal” analysis, determining that 267 acres of land in the 949-acre tract were not farm or ranch land and thus not subject to divesture. Also, under the “business purposes” exception, the court concluded that the corporation could keep an additional 260 acres of farm and ranchland, because it was immediately adjacent to the non-agricultural wetlands and highly erodible lands.

The state appealed, arguing that the corporation did not properly seek to obtain the governor’s approval to purchase farm or ranch land for the “purpose of conserving natural areas and habitats for biota” (which is an allowable purchase for non-profit corporations) and that they did not fit into the business purpose exception. The state essentially argued that the entire tract should be divested and that the “piecemeal” analysis of the trial court was inappropriate. In other words, the state argued that “the entire purchase must be considered as a whole and be declared farmland or ranchland if the predominant use and purpose of the land is for farming or ranching.”

The Supreme Court agreed with the State and found nothing in the statute that authorized the piecemeal analysis adopted by the trial court. The appellate court went so far as to say that the legislature did not intend “to create an unwieldy procedure allowing a nonprofit corporation to purchase large tracts of rural land, much of it admittedly agricultural, and then placing the burden upon the district court to engage in an acre-by-acre, after the fact assessment to determine the agricultural status of small portions of the tract.” It was not until the advisory committee denied their retroactive application that the corporation began the piecemeal line of argument. At all times prior to litigation, the corporation treated the entire tract as a single unit. Therefore, the “business purpose” exception was a non-issue because the entire tract was deemed agricultural. The court ordered the corporation to divest itself of the entire 949-acre tract by May 13, 2010 – one year from the date of the opinion (the statutory requirement). Stenehjem v. Crossland, Inc., No. 20090199, 2010 N.D. LEXIS 92 (N.D. Sup. Ct., May 13, 2010).