Summary of a Recent
Judicial Development in
Bankruptcy

Debtor-Farmer Allowed to
Retain Disaster Payments

Harrison M. Pittman
Staff Attorney

The United States Court of Appeals for the Eighth Circuit has ruled that disaster payments received post-petition by a farmer who filed a Chapter 7 bankruptcy petition were not property of the estate and were not an after-acquired interest of the estate. In re Vote, 276 F.3d 1024 (8th Cir. 2002).

Darryl Vote was a North Dakota farmer who did not plant any crops in the 1999 crop year because the soil was too wet to do so. Id. In September of 1999 he filed a Chapter 7 bankruptcy petition. Id. Congress passed the Omnibus Consolidated Appropriations Act ("the Act"), 2000 Pub. L. No. 106-113, the following month. Id. The Act funded the Market Loss Assistance Payment Program (MLAP) and the Crop Disaster Program (CDP). Id. These programs were enacted to compensate farmers for 1999 losses attributable to crop disasters. Id. Vote received $33,238.00 in MLAP and CDP disaster payments after he filed his bankruptcy petition. Id.

The bankruptcy trustee moved to compel turnover of the disaster payments received by Vote. Id. The United States Bankruptcy Court for the District of North Dakota denied the trustee's motion, ruling that Vote could retain his $33,238.00 in disaster payments. Id. The Eighth Circuit Bankruptcy Appellate Panel affirmed the bankruptcy court's decision. Id. The trustee appealed this decision to the U.S Court of Appeals for the Eighth Circuit. Id.

The trustee argued that the disaster payments Vote received were property of the estate because Vote had a legal or equitable interest in the payments at the time he filed his bankruptcy petition. Id. Property of the estate "'is comprised of all the following property, wherever located and by whomever held: (1) [A]ll legal or equitable interests of the debtor in property as of the commencement of the case.'" Id. (quoting 11 U.S.C. Sec. 541(a)(1) (2002)). The trustee relied on Segal v. Rochelle, 382 U.S. 375 (1966), a case which held that "the debtor's interest in a loss carryback under the tax code was 'sufficiently rooted in the pre-bankruptcy past' to be included as property of the estate." Id. (quoting Segal, 382 U.S. at 380).

The Eight Circuit rejected the trustee's argument, stating that "unlike the Appropriations Act in the present case, the law authorizing the tax refund [in Segal] predated the bankruptcy filing. Thus, the Segal debtor possessed an existing interest at the time of filing, whereas Vote had a mere hope that his losses might generate revenue in the future." Id. The court added that the cases which have followed Segal involved a debtor with a "readily discernable legal interest at the time of filing," whereas "before Congress passed the Appropriations Act, Vote had no interest of any kind." Id. at 1026-27.

The trustee also argued that the disaster payments were property of the estate pursuant to Sec. 541(a)(6). Id. at 1027. Sec. 541(a)(6) states that "[p]roceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case" are considered property of the estate. Id. The Eighth Circuit declined to consider this argument because the trustee had not raised it before the bankruptcy court. Id. at 1027.

The final argument raised by the trustee was that Vote's disaster payments became property of the estate under Sec. 541(a)(7). Id. Sec. 541(a)(7) states that "'any interest in property that the estate acquires after the commencement of the case' becomes property of the estate." Id. The Eighth Circuit rejected this argument, stating that for the trustee's argument to be accepted, Vote's losses would have to be part of the estate. Id. "For the losses to come into the estate, the trustee must be able to bring them in under Sec. 541. We have found no case in which a pure loss with no attendant potential benefit was included as property of the estate. Thus, we conclude that the payments are not an after- acquired interest of the estate." Id.

This case summary was prepared in August, 2002.