Summary of a Recent
Judicial
Development in
Bankruptcy
Disaster Payment Not Considered
Property of the Estate
Gaby R. JabbourNational AgLaw Center Research Assistant
The United States Bankruptcy Court for the District of Idaho has ruled that a postpetition disaster relief payment received by two Chapter 12 debtors was not property of the bankruptcy estate because the program authorizing the disaster payment did not exist at the time the debtors filed their bankruptcy petition. In re Stallings, 290 B.R. 777 (Bankr. D. Id. 2003).
Debtors, Kent and Tonya Stallings, grew grain and sugar beets in Idaho. See id. at 780. They borrowed money from Ag Services of America, Inc./Ag Acceptance Corporation ("Ag Acceptance") to finance their farming operation. See id. As security for the loans, the debtors granted Ag Acceptance a lien and security interest in "most of their assets." Id.
In 2000 and 2001, the debtors suffered "significant reductions in their sugar beet crop because . . . ashes and soil containing an herbicide called 'OUST,' a chemical that had been sprayed by the U.S. Bureau of Land Management ("BLM") on lands near their farm properties in 2000, blew onto their ground and contaminated their crops." Id. Consequently, they were unable to make their loan payments to Ag Acceptance. Id.
In 2001, the debtors filed a Chapter 11 bankruptcy petition that was subsequently voluntarily dismissed after an agreement was negotiated with their creditors. See id. at 779 (citation omitted). In the spring of 2002, however, the debtors filed a Chapter 12 bankruptcy petition. See id. After filing the Chapter 12 bankruptcy petition, "Congress appropriated . . . $5 million 'for reimbursement for crop damage resulting from the [BLM's] use of herbicides [OUST] in the state of Idaho.'" Id. (citation omitted). While their bankruptcy case was pending, the debtors submitted applications to the Department of Agriculture so that they could receive a disaster payment. See id. at 780. The debtors later received a $326,000.00 disaster payment from the Department of Agriculture. See id. at 780-81.
Ag Acceptance argued that the disaster payment was property of the bankruptcy estate and "constitute[d] security for the balance due on its claims against [the] [d]ebtors, which total[ed] about $880,000." Id. at 781. The debtors argued that the disaster payment was not property of the bankruptcy estate because the program authorizing the payment did not exist at the time they filed their bankruptcy petition. See id. They also argued that Ag Acceptance did not have a lien on the disaster payment. See id.
The bankruptcy court explained that Bankruptcy Code § 541(a) provides that "a bankruptcy estate includes 'all legal or equitable interests of the debtor in property as of the commencement of the case.'" Id. (quoting 11 U.S.C. § 541(a)(1)). It also explained that Bankruptcy Code § 552(a) "dictates that, subject to an important exception, 'property acquired by the [bankruptcy] estate or by the debtor after the commencement of the case is not subject to any lien resulting from a security agreement entered into by the debtor before the commencement of the case.'" Id. (quoting 11 U.S.C. § 552(a)). The court further explained that Bankruptcy Code § 552(b) "specifies that if a security interest arising under a prebankruptcy security agreement 'extends to property of the debtor acquired before the commencement of the case and to proceeds, product, offspring, or profits of such property, then such security interest extends to such proceeds, product, offspring, or profit acquired by the estate after the commencement of the case . . . .'" Id. (quoting 11 U.S.C. § 552(b)(1)).
The court noted that "[s]ome courts have held, through what this Court regards as persuasive analysis, that a prepetition security interest in a farmer's crops is effective as to federal disaster program benefits established, and corresponding payments made to the farmer, after bankruptcy." Id. (citing FarmPro Servs., Inc. v. Brown, 276 B.R. 620, 623-24 (D.N.D. 2002)). It stated that in In re Lemos, 243 B.R. 96 (Bankr. D. Id. 1999), "[t]his court reached the same conclusion on similar facts." Id. (citing Lemos, 243 B.R. at 101). It noted, however, that since its decision in Lemos the legal landscape had significantly changed due to the Ninth Circuit's decision in In re Schmitz, 270 F.3d 1254 (9th Cir. 2001).
In Schmitz, the Ninth Circuit "examined government regulations that gave fishing quota rights to fisherman as part of a fishery management plan aimed at limiting the quantity of specific kinds of fish that could be taken from Alaskan waters during certain seasons." Id. The bankruptcy trustee asserted that the fisherman should be denied discharge "because the fisherman had sold his quota rights, but refused to turn over the proceeds to the bankruptcy estate." Id. Since the regulations under which the fishing quotas were issued did not exist when the debtor filed his bankruptcy petition, the Ninth Circuit held that "the bankruptcy estate could not reach the proceeds from the sale of the quota rights, which were created under the government program after bankruptcy, even though those rights were premised in part on the debtor's catch levels during prepetition fishing seasons." Id. The Ninth Circuit therefore ruled that the debtors were entitled to a discharge. See id. (citing Schmitz, 270 F.3d at1258-59 (9th Cir. 2001)).
In Schmitz, the Ninth Circuit relied on In re Vote, 261 B.R. 439 (8th Cir. BAP 2001), aff'd, 276 F.3d 1024 (8th Cir. 2002), to support its decision. See id. (citation omitted). In Vote, the Eighth Circuit bankruptcy appellate panel "examined a bankruptcy estate's right to payments under a federal farm disaster payment program, which paid qualified farmers, including the debtor, compensation for crop losses due to adverse weather conditions." Id. at 781-82 (citation omitted). When the debtor in Vote filed for bankruptcy the disaster payment program did not exist. See id. at 782 (citation omitted). The panel therefore ruled that "at most, [the] debtor held an 'expectation' that payments may later be available to him." Id. (citation omitted). The panel concluded that "the expectation that such a program might be established in the future to cover a debtor's losses did not rise to the level necessary to constitute a 'legal or equitable interest' in property." Id. (citation omitted). The panel therefore held that "any subsequent payments made to the debtor under such a program did not constitute property of his bankruptcy estate." Id. at 782 (citation omitted). In the present case the bankruptcy court noted that the Eighth Circuit opinion in Vote, which affirmed the bankruptcy appellate panel's decision, cited Schmitz to support its decision. See id.
The court added that
[i]n this case, the record is scant, but it appears that while legislation appropriating the funds for the federal disaster payment program for Idaho farmers was passed by Congress sometime in early 2002, . . . the existence and availability of the "Idaho OUST Program" was not announced by the USDA until June 14, 2002, and the period for enrolling for that program did not commence until July 15, 2002. While the Court would have appreciated better quality evidence concerning when this particular farm program was "established," based on this record, the Court concluded, as required by Schmitz, that the payment made to Debtors under this disaster program is not property of the bankruptcy estate.
Id. (citations omitted).
The court also considered Ag Acceptance's argument that "it can enforce its security interest as to the disaster payment because that payment constitute[d] 'proceeds' of [the] [d]ebtors' prepetition crops for purposes of the savings provision found in § 552(b)(1)." Id. at 782-83. The court noted that "'[i]t must be emphasized that . . . [§ 552(b)(1)] create[d] an exception for proceeds, product, offspring or profits generated by prepetition collateral, and not for 'after-acquired' property obtained by the debtor or the estate postpetition.'" Id. at 783 (citation omitted). It also noted that "[t]he OUST payment [was] not something [the] Debtors acquired, or became entitled to acquire, upon or in exchange for the sale or disposition of their 2000 or 2001 crops." Id. (citations omitted). It added that although Ag Acceptance's argument
was persuasive enough to at one time convince this Court to agree, binding Ninth Circuit authority dictates that Debtors had no legal or equitable right to the government payment at the time they filed for bankruptcy. In effect, the government payment to Debtors was intended by Congress to partially reimburse them for crops not produced because of the OUST problem. Seen this way, the disaster payment cannot be characterized as the "proceeds" of Debtor's prepetition crops . . . . In short, the Court concludes that the OUST payment is not property of the Debtors' bankruptcy estate, and that . . . [Ag Acceptance's] prepetition security interest is not enforceable as to that payment.
Id. at 783, 784.
The court also attempted to fix the total amount of Ag Acceptance's allowed secured claim pursuant to Bankruptcy Code § 506(a), considered the debtors' treatment of Ag Acceptance's claim in the debtors' proposed plan, and examined the feasibility of the debtors' plan. See id. at 786-92. The court's decisions with respect to these issues are not included in this summary.
The case was decided on March 24, 2003; this summary was posted August, 2003