Summary of a Recent
Judicial Development in
Bankruptcy

Federal Crop Disaster Payments Deemed Part of Bankruptcy Estate

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In FarmPro Services, Inc. v. Brown, 276 B.R. 620 (D.N.D. 2002), the United States District Court for the District of North Dakota held that federal crop disaster payments were property of the bankruptcy estate, and held that the first creditor that perfected its security interest held superior interest in the payments.

Background

Debtors filed their Chapter 12 bankruptcy petition in February 1999, and then took out an operating loan from Ag Acceptance in the following month using their existing and future crops, government agricultural program payments, and their proceeds as collateral. Id. at 622. Ag Acceptance perfected its security interest by filing a financial statement in May 1999. Id. In May 2000, the Debtors took out an operating loan from FarmPro. Id. The bankruptcy court approved the loan and authorized FarmPro to take a security interest in existing and future crops, government agricultural program payments, and their proceeds, but specifically stated that "any security interest granted in favor of FarmPro Services under the terms of this Order shall be secondary to any previously granted security interest to Ag Acceptance Corporation covering the same security." Id. FarmPro perfected its security interest shortly thereafter. Id. Later that year, the Debtors filed a Chapter 13 petition, and then converted their case to Chapter 11 in December 2000, and finally they converted to Chapter 12 in June 2001. Id. at 623. In July 2001, the Debtors received $80,000 in federal crop disaster relief payments, and all parties laid claim to the payments. Id.

Arguments

The Debtors argued that the disaster payments were not part of the bankruptcy estate, and thus were not subject to the pre-petition liens of Ag Acceptance and FarmPro. Id. at 623-24.

FarmPro argued that the bankruptcy court erred when it decided the issue of priority as between it and Ag Acceptance because the issue was never before the court, and thus none of the information necessary for the court to properly determine priorities was before it. Id. at 625.

Analysis and Holdings

The issues before the court were whether the Debtors' crop disaster payments were included in the property of the bankruptcy estate within the meaning of 11 U.S.C. § 541(a)(6), and whether Ag Acceptance's security interest in the payments was first in priority. Id. at 623.

Property of the bankruptcy estate
The court noted that a bankruptcy estate includes "all legal or equitable interests of the debtor in property as of the commencement of the case," and "proceeds of the estate." Id. at 624. Section 552 provides that a creditor's lien acquired by a pre-petition security agreement may extend to post-petition proceeds of secured property if the security agreement extends to proceeds of such property. Id. After reviewing case law on the issue, the court determined the crop disaster benefits were proceeds and held that the bankruptcy filing did not defeat the security interests of the creditors in the crop disaster payments. Id.

First priority security interest
The court began by stating the general rule that "the first to file or otherwise perfect a security interest maintains a superior claim among conflicting security interests." Id. at 625. None of the state law exceptions were applicable in this situation, so the court saw no reason to overturn the bankruptcy court's ruling that Ag Acceptance had superior interest in the crop disaster payments. Id. at 626.

The case was decided on April 22, 2002.