More on the North Dakota Anti-Corporate Farming Law: Reifying Trusts and Estates?

After reading Stenehjem v. Crosslands, Inc., which I discussed last week, I took a look at some of the other provisions of North Dakota’s corporate farming laws. Section 10-06.1-12 of the North Dakota Century Code provides the requirements for corporations or limited liability companies the state allows to engage in the business of farming or ranching.

Overall, the law seems fairly straightforward in its intent, although the drafting of the statute isn't ideal. Laws like this one should be able to function as a statutory checklist. The attorney (?) creating the family-farm corporation or LLC should be able to go through the list to ensure they have met the requirements. Unfortunately, section 10-06.1-12 doesn’t quite operate that way.

The statute begins by providing that a corporation or LLC engaged in farming must meet the requirements of the state’s corporation or LLC laws. In addition, there are eight “requirements” that “also apply.” I will focus on the first three requirements, the third of which, as drafted, inherently violates the second requirement. Here are the provisions:

1. If a corporation, the corporation must not have more than fifteen shareholders. If a limited liability company, the limited liability company must not have more than fifteen members.

2. Each shareholder or member must be related to each of the other shareholders or members within one of the following degrees of kinship or affinity: parent, son, daughter, stepson, stepdaughter, grandparent, grandson, granddaughter, brother, sister, uncle, aunt, nephew, niece, great-grandparent, great-grandchild, first cousin, or the spouse of a person so related.

3. Each shareholder or member must be an individual or one of the following:

a. A trust for the benefit of an individual or a class of individuals who are related to every shareholder of the corporation or member of the limited liability company within the degrees of kinship or affinity specified in this section.

b. An estate of a decedent who was related to every shareholder of the corporation or member of the limited liability company within the degrees of kinship or affinity specified in this section.

Note that in item two, each corporate shareholder or LLC member must be related to the others through the described relationships. Item three then allows that a trust for the benefit of someone described in item two or an estate for a decedent who was similarly related to be a shareholder or member. However, to my knowledge, there is no way for a trust or estate to be related to anyone. Despite the fact that we often reify the corporation or LLC, such trusts and estates cannot meet the kinship or affinity requirement.

The easiest fix, if not the most elegant, would probably involve changing item two to begin with the following clause: “Unless the shareholder or member is an approved trust or estate, as described in this section, . . . .”

The intent here seems clear, so I suppose this is picking nits, but it seems to me there is value in having the statute say what it means to say. As an example, my friend, Jeff Kahn, reminded me of the S Corp rules at 26 U.S.C. 1361(b)(1). There, the Internal Revenue Code provides that S Corp must not, among other things “have as a shareholder a person (other than an estate, a trust described in subsection (c)(2), or an organization described in subsection (c)(6)) who is not an individual.” (Incidentally, I don't like that this U.S. code section operates in the negative, either.)

I haven’t come up with a parade of horribles likely to follow from this glitch, but I imagine something is out there. Regardless, until it is fixed, I have another example to use in my “careful drafting” discussions.

--Josh Fershee