Summary of a Recent
Judicial Development in
Bankruptcy

Debtors' Pre-petition Right to LDP
Payments May Be Setoff

Alfred N. Milam
National AgLaw Center Graduate Assistant

Summary of Decision

In In re Gibson, 308 B.R. 763 (Bankr. N.D. TX. 2002), the United States Bankruptcy Court for the Northern District of Texas held that where debtor-farmers satisfied all requirements for payment under the loan deficiency payment program before filing a bankruptcy petition, the payments that would have accrued pre-petition could be set setoff by the federal government against debtor's own loan liability to government.

Background

Debtors John and Linda Gibson stored their cotton during November and December of 2001, prior to their filing for bankruptcy. See id. at 768. During these months they met all of the requirements of the loan deficiency payment program (LDP), with the exception of filing the application. See id. Because the debtors met all the requirements for the LDP program, their right to funds from this program accrued pre-petition, and all the debtors had to do was exercise their right to these funds. See id. at 769. The government therefore wanted to offset the debtors' loan deficiency payments in the amount of $18,000, which were applied for by the debtors post petition. See id. at 765.

Arguments

The debtors argued that the LDP program is unlike other programs because in other programs the farmers and the government enter into prepetition contracts, which creates mutual contact obligations between the parties. See id. The debtors further argued that they were under no contractual obligation to put their cotton in the LDP program because they had the option to sell their cotton on the open market. See id. They asserted that their right to the LDP was based on the average world price of cotton and could not be fixed until the day they actually filed their application because only then would the average price of cotton be known. See id.

Analysis and Holding

The court explained that "the critical factor is whether the Debtors' right to an LDP accrued prepetition." Id. It also explained that when the government enacted the LDP program, it became liable to all eligible producers. See id. Therefore, the court determined that the government was under a pre-petition obligation to the debtors and that it did not matter that the debt was contingent on a post-petition event as long as the liability arose pre-petition. See id. at 770. The court concluded that the LDPs did satisfy the requirement of establishing a pre-petition debt owed by the government to the debtors and that the government's right to setoff should be preserved. See id. at 771.

The case was decided on November 8, 2002; this summary was posted Feb. 16, 2005.