Schmitz, Orell D

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North Dakota Law Review Volume 48 Number 3 Article 5 1971 Corporations - Farming Ban - Reasonably Necessary Exceptions Orell D. Schmitz Follow this and additional works at: https://commons.und.edu/ndlr  Part of the Law Commons Recommended Citation Schmitz, Orell D. (1971) "Corporations - Farming Ban - Reasonably Necessary Exceptions," North Dakota Law Review: Vol. 48 : No. 3 , Article 5. Available at: https://commons.und.edu/ndlr/vol48/iss3/5 This Case Comment is brought to you for free and open access by the School of Law at UND Scholarly Commons. It has been accepted for inclusion in North Dakota Law Review by an authorized editor of UND Scholarly Commons. For more information, please contact und.commons@library.und.edu. RECENT CASESCORPORATIONS - FARMING BAN - REASONABLY NECESSARY Ex-CEPTIONS-The Secretary of State refused to approve the plaintiff'sarticles of incorporation because they were in conflict with chapter10-06 of the North Dakota Century Code. The corporation was beingexpressly incorporated to conduct the business of farming, andthe articles were refused on the ground that the purpose of theproposed corporation was prohibited by law.'The plaintiff brought an action in the district court to compelthe Secretary of State to approve the proposed articles. In grantinga summary judgment for the plaintiff, the court held that thepurpose of the corporation was a valid and legal purpose withinthe express exception contained in the statute.2 The district court'sdecision stated that chapter 10-06 of the North Dakota CenturyCode prohibits a corporation from holding and farming rural realestate only when such real estate is not reasonably necessary forthe conduct of its business.' The court reasoned that the owningof rural real estate is not only reasonably necessary, but is anindispensable prerequisite to a corporation engaging in farming. 4The North Dakota Supreme Court, in reversing the judgmentsaid, "the prohibition contained in section 10-06-01 [North DakotaCentury Code] enjoins the business of farming or agriculture bycorporations. Thus, . . . all corporations, . . . except co-operativecorporations, 75% of whose members or stockholders are actualfarmers residing on farms or depending principally on farmingfor their livelihood, are prohibited from engaging in the businessof farming. '" Coal Harbor Stock Farm, Inc. v. Meier, 191 N.W.2d583 (N.D. 1971).Three basic approaches have been utililized by states enactinglaws limiting corporate ownership of rural realty. Briefly stated,the three types are: (1) An absolute prohibition; 6 (2) limiting1. N.D. CENT. CODE §§ 10-06-01 and 10-19-54 (1960).Section 10-19-54 provides that matters set forth in the articles of incorporationshall be in conformity with law, and section 10-06-01 prohibits corporate farmingsubject to the exceptions provided for in chapter 10-06.2. Coal Harbor Stock Farm Inc. v. Meier, 191 N.W.2d 583, 586 (N.D. 1971).3. Id.4. Id.5. Id. at 587.6. KAN. GEN. STAT. ANN. § 17-202(a) (1949), provides that no corporation shallbe formed to raise wheat, corn, barley, oats, rye, potatoes, or to milk cows for dairypurposes.496 NORTH DAKOTA LAW REVIEWthe acreage a corporation may hold; 7 and (3) limiting the cor-porate holding to an amount necessary to accomplish the corporatepurposes .8It is this third approach that North Dakota has adopted intheir attempt to limit corporate farming. Statutes falling into thisthird group, allow corporations to hold rural realty which is neces-sary and proper9 or reasonably necessary 0 to the corporate pur-pose. Oklahoma, which allows a corporation to hold realty whichis necessary and proper,1 was recently faced with a situationsimilar to that presented in Coal Harbor. The Oklahoma SupremeCourt, in approving corporate farming12 predicated their decisionon a finding that the legislative intent was to prohibit real estatecorporations, not corporate farms.1The ambiguity of the "reasonably necessary exception' 4 clausein chapter 10-06 of the North Dakota Century Code, can be readilyobserved by a look at the provisions of the chapter. 5 An obviousreaction, prior to Coal Harbor, was one of uncertainty. 0In upholding the corporate farming ban, the court clarifiedinferences made in the two prior cases that reached the NorthDakota Supreme Court involving the Corporate Farming Act. The7. MINN. STAT. ANN. § 500.22(3) (1961):"[N]o corporation organized for and engaged in any farming operations, shallacquire more than 5000 acres of land."8. N.D. CENT. CODE ch. 10-06 (1960).OKLA. STAT. ANN. tit. 18, §§ 1.20(a), (b)(1) (1961).(a) No corporation of any sort . . . shall, except as herein provided,own, hold, or take any real estate located in this State outside of anyincorporated city or town or any addition thereto.(b) Nothing in this act shall be construed as prohibiting the owning,holding, or taking of:(1) such real estate as Is necessary and proper forcarrying on the business for which any corporation has beenlawfully formed ...9. OKLA. STAT. ANN. tit. 18, § 1.20(b)(1) (1969).10. See N.D. CENT. CODE §§ 10-06-02, -03, -06 (1960).11. OKLA. STAT. ANN. tit. 18, § 1.20(b) (1) (1961).12. Leforce v. Ballard, 454 P.2d 297 (Okla. 1969).13. Id.14. N.D. CENT. CODE §§ 10-06-02, -03, -06 (1960).These sections contain "reasonably necessary exceptions."15. N.D. CENT. CODE ch. 10-06 (1960).In brief this chapter provides that:§10-06-01. All corporations, both domestic and foreign, except asotherwise provided for in this chapter are hereby prohibited from engag-ing in the business of farming or agriculture.§10-06-02. All corporations must dispose of all rural real estate, ex-cept such as is reasonably necessary in the conduct of their business beforeJuly 29, 1942.§10-06-03. All such lands acquired after July 29, 1932 shall be dis-posed of within ten years, except as is reasonably necessary in the conduct ofits business. During the ten year period such land may be used foragricultural purposes.§10-06-04. Co-operative corporations, 75 percent of whose members liveon farms or depend principally on farming are exempt.§10-06-06. Corporations not disposing of land which is not reasonablynecessary . . . shall hold such subject to escheat provisions.16. See McElroy, North Dakota's Anti-Corporate Farming Act, 36 N.D. L. REv.96 (1960). Contra, O'Keefe, The North Dakota Anti-Corporate Farming Act: A Dia-senting Opinion, 41 N.D. L. REv. 333 (1965).RECENT CASESfirst of these, Asbury Hospital v. Cass County, 1 7 involved a hospitalthat was a non-profit corporation, organized under Minnesota law.The corporation owned a quarter section of land in North Dakotathat had been acquired in 1925. Plaintiff was not in the farmingbusiness, but the property was farmed under a lease agreement.In the litigation, the plaintiff sought to establish the importanceof the fact that their charter allowed ownership of land.1 8 It con-tended that the requirement that a corporation dispose of ruralreal estate within ten years, did not apply to any real propertythat was owned by a corporation which had authority under itsarticles of incorporatin to own and hold land. The court, dismissingthis distinction, held that the corporate farming law applied tonon-farming corporations which incidentally owned and farmed ruralland. They further held:When the statute provides that there shall be excepted fromits operation such real estate 'as is reasonably necessaryin the conduct of' the business of the corporation, it meanssuch real estate as is reasonably necessary for carrying onthe business or activity which the corporation was createdto carry on.' 9 (Emphasis added)It seems implicit in the holding, that the ban would affect corpora-tions expressly organized to farm since the business they wouldbe created to carry on would be in direct contravention of theprovision prohibiting corporate farming.20The second case to interpret Chapter 10-06 was Loy v. Kessler.21This was a quiet title action with the corporate farming law involvedas a secondary issue. The defendants contended that the deed wasvoid because a corporation was prohibited from acquiring title toland. In rejecting this contention, the court found that the originalact contained a specific prohibition on acquisition of land by acorporation 22 and that this provision was deleted by a subsequentamendment.2 The court also reasoned that since escheat can applyonly to lands in which title is held, 24 the formidable escheat pro-visions of chapter 10-0625 was also evidence of the corporation17. Asbury Hospital v. Cass County, 72 N.D. 359, 7 N.W.2d 438 (1943); AsburyHospital v. Cass County, 73 N.D. 469, 16 N.W.2d 523 (1944).18. Asbury Hospital v. Cass County, 72 N.D. 359, 7 N.W.2d 438, 447 (1943).The plaintiff contended that the statute applied only in cases where the owning ofproperty was ultra vires to the corporation. The court held that the statute presupposesthat the land was acquired and held lawfully.19. Id.20. N.D. CENT. CODE § 10-06-01 (1960).21. Loy v. Kessler, 76 N.D. 738, 39 N.W.2d 260, 270 (1949).22. N.D. SEss. LAws 494 (1933).23. Id. at ch. 89, § 1.24. Loy v. Kessler, 76 N.D. 738, 39 N.W.2d 260, 272 (1949). "Escheat can applyonly to lands to which the corporation has acquired title."25. N.D. CENT. CODE 8 10-06-06 (1960).497NORTH DAKOTA LAW REVIEWright to hold title. Based on these two reasons the court in Loyheld that the act did not expressly prohibit corporations fromacquiring title to farm land.The confusion surrounding North Dakota's Corporate FarmingAct 26 after these two cases, is aptly demonstrated by the interpreta-tion given by two earlier writers on the subject. One writer, inan analysis of Asbury, indicates that the Corporate Farming Actmay not be a ban on all corporate farming. 27 Asbury was a char-tered hospital, and there was nothing in its purpose clause togive it power to own, manage or hold real estate of any kind.28Its only right to hold land was derived from the general powersgiven non-profit corporations under the laws of the State of Min-nesota. It was in no position to assert that owning rural realtywas reasonably necessary to running a hospital.21The article further pointed out that Loy expressly held that "acorporation may acquire and hold indefinitely real estate that isotherwise within the prohibited category if it is reasonably neces-sary in the conduct of its business."2 0 The implication of thisarticle is that a corporation, setting forth in its articles of incorpora-tion the purpose to engage in the business of farming, is in a positionto assert that owning rural real estate is reasonably necessary,and if so, they may hold the land indefinitely under the decisionin Loy.Another writer, after analyzing the same two cases came upwith an opposite view.2 1 In his opinion, "Corporate farming isunder no circumstances allowable." 32 He notes that if Asbury, byimplication, allowed a corporation to hold and farm rural landsthat are reasonably necessary to conduct their non-rural business,this exception applies only to lands acquired by corporations priorto 1932. 88 In Loy the court said the reason for the deletion ofthe prohibition 4 against acquiring real estate was done to permitcorporations to pass valid and marketable titles to real estate. Thusthere was nothing to indicate the legislature's intent to relax theban on corporations acquiring and using rural land.85In holding that rural real estate, which is owned by a corpora-26. N.D. CENT. CODE Ch. 10-06 (1960).27. McElroy, North Dakota'8 Anti-Corporate Farming Act, 36 N.D.L. REV. 96 (1960).28. Id. at 99.29. Id.30. Id.31. O'Keefe, The North Dakota Anti-CorpOrate Farming Act: A Dfasentngn Opinion,41 N.D. L. REV. 333 (1965).32. Id. at 335.33. N.D. CENT. CODE § 10-06-03 (1960).This section explicitly says that lands acquired after July 29, 1932 fall under its pro-visions. If Asbury allowed a corporation to farm rural lands, it is a logical inferencethat it applied only to land held prior to 1932.34. N.D. SEss. LAWS ch. 89, § 1 (1933).35. O'Keefe, aupra note 16, it 0.0,RECENT CASEStion organized for the purpose of engaging in farming or agriculture,does not qualify for the reasonably necessary exception, 6 the su-preme court after more than thirty-five years of confusion hassettled the question by their decision in Coal Harbor. It seemsclear that a prospective corporation expressly designed to engagein farming is contrary to section 10-06-01 of the North DakotaCentury Code, and as such it should not be allowed to incorporate.87By so deciding, the court impliedly found that the legislative intentwas to prohibit corporate farming. It is implicit in such a decision,that any future change in the law, relaxing the ban on corporatefarming, should come from legislative action and not judicial in-novation.It has been suggested that a corporation need only disposeof all land not reasonably necessary once every ten years, repur-chase later, and thereby avoid the escheat provisions.8 In so doing,it is contended that it is possible to effectively circumvent thecorporate farming ban.8 9 There is an obvious fault in this reasoning.Since the supreme court has determined the legislative intent toban corporate farming, a method of circumventing the law resultingin an abrogation of both the spirit and the letter of the law,is a proper place for judicial action. The courts must enforcethe spirit, as well as the letter of the law, until the legislaturedeems it proper to act.Apparently after Coal Harbor, the only way for the farmerto enjoy the basic advantages of incorporation 4 0 is to attemptto qualify for the co-operative corporation exception. 41 Since cor-porate farming is now under no circumstances allowable, this seemsthe obvious means to achieve the desired result.ORELL D. SCHMITZCONSTITUTIONAL LAW-RESIDENCY REQUIREMENTS-EQUAL PRO-TECTION FOR NONRESIDENT BAR APPLICANTS-Plaintiff brought aclass action in Federal District Court seeking an injunction againstthe enforcement of a state statute requiring bar applicants to es-36. Coal Iarbor Stock Farm, Inc. v. Meier, 191 N.W.2d 583, 588 (N.D. 1971).37. N.D. CENT. CoDs § 10-19-54 (1960) (matters set forth in articles of incorporationshall be in conformity with law).38. N.D. CENT. CODE § 10-06-06 (1960).39. Appellants Brief, at 11. Coal Harbor Stock Farm, Inc. v. Meier, 191 N.W.2d 583(N.D. 1971).40. N.D. CENT. CODE § 10-15-31 (1960). This section provides foe limited liability.For an excellent analysis of the tax benefits see Pearson, The Farm Co-operative andthe Federal Income Tax, 4.4 N.D. L. RLv. 490 (1968).41. N.D. CENT. CoDE § 10-06-04 (1960).499

Corporations - Farming Ban - Reasonably Necessary Exceptions

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Corporations - Farming Ban - Reasonably Necessary Exceptions

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