Summary of a Recent
Judicial
Development in
Bankruptcy
Fifth Circuit Holds Postpetition Disaster-Relief
Payments Not Property of the Estate
Patrick RobertsNational AgLaw Center Graduate Assistant
In In re Burgess, No. 04-30189, 2006 WL 205043 (5th Cir. Jan. 27, 2006), rev'd, 392 F.3d 782 (5th Cir. 2004), the United States Court of Appeals for the Fifth Circuit held that postpetition disaster-relief payments were not property of the bankruptcy estate or proceeds of estate property.
Debtor Edward Burgess was discharged from Chapter 7 bankruptcy in December of 2002. See id. at *1. In February of 2003, the Agricultural Assistance Act of 2003 was enacted to compensate producers who suffered crop losses in 2001 and 2002. See id. A payment was made pursuant to the Act for losses the Debtor sustained in 2001. See id. The check itself was sent to the trustee of the bankruptcy estate and the Debtor's bankruptcy case was reopened in order to determine what to do with the payment. See id. Debtor filed a Motion for Turnover, asserting that he should receive the payment and that it was not property of the estate. See id. The motion was denied by the United States Bankruptcy Court for the Western District of Louisiana because that court considered the payment to be property of the bankruptcy estate. See id. The bankruptcy court's decision was subsequently affirmed by the United States District Court for the Western District of Louisiana. See id. On appeal to the Fifth Circuit, the circuit court held as an apparent matter of first impression, that the crop disaster payment was property of the estate. In re Burgess, 392 F.3d 782 (5th Cir. 2004). The Fifth Circuit subsequently granted Debtor's request for a rehearing en banc. In re Burgess, No. 04-30189, 2006 WL 205043 (5th Cir. Jan. 27, 2006).
In its rehearing en banc, the Fifth Circuit held that the payment was not property of the estate. In re Burgess, 2006 WL 205043, at *2. The court stated that under 11 U.S.C. § 541(a)(1), Debtor's bankruptcy estate included "all legal or equitable interests of the debtor in property as of the commencement of the case," which also included "proceeds . . . of or from property of the estate" under 11 U.S.C. § 541(a)(6). See id. The court reasoned that the payment was not property of the estate because Debtor did not have an interest until the post-petition enactment of the Agricultural Assistance Act. See id.
The circuit court rejected the trustee's argument that Debtor had a sufficiently rooted contingent interest at the time of bankruptcy pursuant to Segal v. Rochelle, 382 U.S. 375 (1966) because Debtor did not have a prepetition claim. See id. at *2-4. The court found that reliance on Segal was misplaced because the "sufficiently rooted" test adopted in Segal was not adopted in the current Bankruptcy Code and because Segal was distinguishable insofar as the debtor in that case collected postpetition on a prepetition cause of action. See id. at *3-4.
Next, the court addressed the argument that Debtor's crop loss was itself § 541(a)(1) property and therefore any payment for that loss was a "proceed" under § 541(a)(6). See id. at *9 The court rejected this argument because pure loss with no attendant benefit could not be considered property of the estate. See id. at *9 (citation omitted).
The court further held that a mere hope of legislation did not create an interest for inclusion in the property of the estate. See id. at *12-13 (citation omitted). The court reasoned that holding otherwise would frustrate the clear meaning of 11 U.S.C. § 541. See id. at *12-13.
The case was decided on January 27, 2006; this summary was posted February 6, 2006.