Summary of a Recent
Judicial
Development in
Bankruptcy
MLAP Payment Property of Estate But Not
Subject to Bank's Security Interest
Joshua Thomas CrainNational AgLaw Center Graduate Assistant
Summary of Decisions
In In re Klenke, No. 01-13051, 02-5016, 2004 WL 2192517 (Bankr. D. Kan. Feb. 3, 2004) (unreported decision), the United States Bankruptcy Court for the District of Kansas held that Klenke's 2001 Marketing Loss Assistance Program (MLAP) payment received after the filing of a Chapter 12 bankruptcy petition was property of the bankruptcy estate pursuant to 11 U.S.C. § 1207(a)(1) but was not subject to a bank's security interest pursuant to 11 U.S.C. § 522(a).
Background
Debtors Gary and Sheila Klenke filed a Chapter 12 bankruptcy petition on June 26, 2001. See id. On that day - and prior thereto - the First National Bank of Spearville, Kansas (Bank) held a security interest in the debtors' "inventory, equipment, crops, farm products, accounts, documents, general intangibles, and government payments and programs." Id. at *1. The security agreement covering the Bank's interest contained an after-acquired property clause that subjected any after-acquired property or proceeds of currently held property of the debtor to the bank's security interest. See id. On August 13, 2001, Congress enacted and appropriated funds for the 2001 MLAP and without any action by debtors they received $25,074 under the program. See id. On January 14, 2002, the Bank sought to have the debtors turn over the program payment to them pursuant to the security interest. See id.
Analysis and Holdings
The court explained that the Agriculture Market Transition Act (AMTA) authorized the government to enter into 7-year production flexibility contracts (PFC) with producers of covered crops and that the AMTA "provided a predetermined level of income support." Id. at *2. It also explained that the MLAP, enacted in 1998, was a supplement to the PFC payments made under the AMTA. See id. The court further explained that a farmer was automatically eligible for a MLAP payment if the farmer was qualified for a PFC payment under the AMTA and that the debtors were therefore automatically eligible for the MLAP payment. See id.
The court next considered whether the debtors had an interest in the MLAP payment when they filed for bankruptcy; and if so, whether the Bank's security interest attach. See id. The court explained that the MLAP payment was property of the bankruptcy estate because 11 U.S.C. § 1207(a) provides that the estate includes "all property of the kind specified in § 541 that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7." Id. at *3. It also explained that to determine whether the Bank's security interest attached to the MLAP payment it had to examine 11 U.S.C. § 552, which provides that property acquired after the commencement of the case is not subject to any liens entered into by the debtor before the commencement of the case. See id. It also explained, however, that § 552(b) provides for an exception concerning property acquired before the commencement of the case and to its proceeds and that the Bank therefore would have to show that its security interest attached to "some collateral prepetition of which the MLAP payment was a proceed." Id. at *4.
The court stated that the debtors' "expectation that 2001 MLAP legislation would be passed and funds appropriated was nothing more than a 'nebulous possibility.'" Id. at *5. It therefore held that the MLAP payment received by the debtors was property of the bankruptcy estate, but was not subject to the Bank's security interest. See id.
The case was decided on February 3, 2004; this summary was posted Jan. 6, 2005.