Summary of a Recent
Judicial
Development in
Bankruptcy
11 U.S.C § 552 Severs Post-Petition
Security Interest in Payments
Jeffrey A. PetersonNational AgLaw Center Graduate Assistant
In Regions Bank v. Clifton L. Mills, No. 06-0565, 2006 WL 2193202 (W.D. La. Aug. 1, 2006) Clifton and Kimberly Mills ("Debtors") entered into an agreement with Regions Bank ("Bank") whereby the Debtors pledged their direct and counter-cyclical payments for the 2002 through 2006 crop years to the Bank to secure the credit. See id. at *1. In April of 2003 the Debtors filed a Chapter 7 bankruptcy petition and in February of 2004 received their discharge. See id. In 2004, the Debtors applied for and received their 2004 subsidy ("2004 payments"). See id. The Bank asserted an interest in the 2004 payments. See id. In February of 2006, the bankruptcy court held that the Bank's security interest in the 2004 payments was invalid. See id. at *2. The federal district court affirmed. See id. at *6.
Relying on In re Kruse, 35 B.R. 958 (Bankr. D. Kan. 1983, which invalidated a security interest in post-petition Payment in Kind (PIK) proceeds, the district court held that 11 U.S.C. § 552 severed the Bank's security interest in the crops. See id. at *3. In the present case, the court held that because the Bank did not have a security interest in the Debtors' post-petition crops it did not have a security interest in the post-petition proceeds of the crop, which were the FSA subsidy payments. See id. at *6.
The case was decided on August 1, 2006; this summary was posted Nov. 6, 2006.