Summary of a Recent
Judicial Development in
Farm Credit

Farmer Loses Equitable Interest in Farm After
Conveying Farm to Government

Jennifer Williams
National AgLaw Center Graduate Assistant

Summary of Decision

In Dye v. United States, 360 F.3d 744 (7th Cir. 2004), the United States Court of Appeals for the Seventh Circuit held that a debtor's conveyance of his family farm to the Farm Service Agency ("FSA") was an absolute conveyance of the debtor's interest in that property and that the debtor did not retain any interest in the property. The court also held that the debtor had entered into a five-year lease with the government that included an option to buy-back the farm, but that the debtor had failed to exercise that option by the specified time and his option lapsed. See id. at 750.

Background

Plaintiff Bart Dye obtained several mortgages on his family farm from the Farmers Home Administration (predecessor to the FSA) in 1981. See id. at 746. Due to financial problems, Dye and his wife conveyed the farm to FSA in exchange for release from liability on the mortgages and to prevent foreclosure on the property. See id. The FSA gave Dye a credit for his interest in the farm against the mortgages and forgave the rest of the loan principal and interest. See id. The FSA purchased the interest Dye's brother had in the farm and then recorded the deed. See id. at 746-47.

In 1991, Dye "entered into a five-year lease of the farm he formerly owned." Id. at 747. Part of the lease included an option to purchase the farm, if done before the lease expired. See id.

Dye filed for bankruptcy protection under Chapter 12 in 2001, in part claiming he was owner of the farm. See id. at 746. The FSA disputed this in court and asserted that Dye had exercised the option to purchase the farm but had never completed the transaction. See id. at 747. The United States Bankruptcy Court for the Southern District of Indiana determined that the farm had been fully conveyed to FSA in 1984 and that in 1991 Dye had entered into the lease with the option to purchase. See id. at 746. The court also found Dye had in fact exercised the option, was required to pay the price for the farm or lose his interest in it. See id. When Dye did not make the required payment, his bankruptcy petition was dismissed by the court. See id.

Arguments

Dye argued that the land transaction in 1984 was not a complete conveyance to the FSA. See id. at 747. Dye argued that "he never relinquished what he perceived to be his equitable interest in the property, and that the 1984 transaction resulted in him giving the FSA a deed held 'in lien of trust.'" Id. He also asserted that "he lived and worked on the farm ever since the 1984 transaction and had made payments to FSA," that he had "an equitable interest in the farm[,] and that his arrangement with the FSA constitute[d] an installment land sales contract." Id. He further contended that he had never entered into a lease with the FSA related to this farm that included an option to purchase and since he had never entered into a lease, he could not have exercised any option to purchase. See id.

The FSA countered that the government had owned the farm since 1984 and that there was proof of the lease entered into by Dye in 1991. See id. at 746-47. The FSA also contended that Dye exercised his option in a letter to the FSA in 1996 but never fulfilled its requirements, including payment for the property. See id. at 747.

Analysis and Holdings

The court held that the transfer of the farm to the government in 1984 was a complete conveyance of Dye's interest. See id. It was noted by the court that Dye had not developed or shown any evidence in the record to support his contention, but that the FSA had done so through by producing the general warranty deed, producing proof that it granted Dye a release of liability for past indebtedness, and by purchasing Dye's brother's interest in the farm. See id. at 749. It also noted that letters from FSA to Dye referred to the property as the farm he had once owned. See id. The court stated that "this evidence is adequate to uphold the district court's finding that Dye conveyed his entire interest in the farm to the FSA in 1984, particularly since we have no contradictory evidence from Dye." Id.

The court then looked to the record to determine if Dye had entered into the five-year lease with option to purchase provision. See id. It found that the copy of the lease in the record that was signed by FSA and Dye in 1991 was sufficient to support a finding that there was such an agreement. See id. The court noted that even though Dye denied entering into the agreement, he "[did] not challenge the authenticity of his signature on the lease." Id.

The issue of whether or not Dye had exercised that option posed a more significant problem for the court as it noted that the record was lacking on this question. See id. The court found much of the FSAs evidence inadmissible on this point and also did not agree with the agency's contention that Dye's administrative actions regarding the property established Dye's use of that option. See id. at 749-50. The court stated that they could "not uphold the district court's decision ordering [Dye] to exercise or forfeit the option" because of the "lack of admissible evidence concerning Dye's exercise of the option." Id. at 750. With the finding that Dye had not exercised the option to purchase, the court stated that "the lease expired in 1996, and the option to purchase arising from that lease has long since lapsed as a matter of law." Id.

The court also upheld the dismissal of Dye's Chapter 12 petition. See id. With the finding that Dye had no interest in the farm since the conveyance in 1984, the court stated that Dye was "unable to take advantage of Chapter 12 relief" because he "lacked an ownership interest in the former family farm since 1984-before the enactment of Chapter 12 in 1986-and thus has no chance to keep land with which he has already parted." Id. at 750-51.

The case was decided on March 10, 2004; this summary was posted Oct. 25, 2004.