Government Payments: When Do They Become Property of the Estate?

• Publication year: 2014

Government Payments: When do They Become Property of the Estate?

Patricia Boxold

GOVERNMENT PAYMENTS: WHEN DO THEY BECOME PROPERTY OF THE ESTATE?

Abstract

Government payments received by a debtor postpetition are often tied to prepetition events, presenting the issue of whether a legal or equitable interest existed as of the commencement of the case under § 541 of the Bankruptcy Code. The Fifth, Eighth, Ninth, and Eleventh Circuits have held that a debtor has no legal or equitable interest in a government payment until the legislation authorizing the payment is signed into law. These decisions, however, failed to articulate a clear standard, as evidenced by recent case law.

The issue of when a government payment becomes property of the estate has been particularly contentious in the crop disaster payment context. A new program, the Supplemental Revenue Assistance Program (SURE), presents a novel fact pattern. In SURE, the Secretary of Agriculture must designate the county where a crop was lost as a disaster county before a farmer can qualify for payment. Therefore, when a bankruptcy petition is filed, payment may still be contingent upon an act within the agency's discretion.

This Comment will argue that a government payment becomes property of the estate when the payment is "absolutely owed," meaning the payment is no longer contingent in any way. First, the case law reveals no clear standard as to when a government payment becomes property of the estate under § 541. The right to setoff in § 553 has a clearer rule, a contrast that can help guide analysis. Second, recent cases regard the statutory authorization date as determinative, but this approach runs contrary to the Code and relevant case law, for §§ 541 and 553 require a more nuanced factual inquiry. Third, administrative law dictates that a government payment becomes an entitlement for purposes of due process when legal sources create enforceable standards that guide an agency's discretion. This standard should control when agency discretion is an issue.

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Introduction

Once a debtor obtains a legal or equitable interest in a government payment, two sections of the Bankruptcy Code (Code) are at play. The first is § 541(a) of the Code, which governs when property becomes part of the bankruptcy estate.¹ The second is § 553, which preserves a creditor's right to offset an obligation to a debtor against the debtor's obligation to the creditor.² In deciding whether postpetition government payments were property of the estate, courts initially took an expansive view, concluding that debtors have a legal or equitable interest in a government payment as long as the loss or event to which the payment is tied to occurred prepetition. Courts reached this result even when legislation authorizing the payment was passed postpetition. In the past ten years, the Fifth, Eighth, Ninth, and Eleventh Circuits have narrowed this expansive interpretation of § 541, and have held that a debtor has no legal or equitable interest in a government payment until the legislation authorizing the payment is signed into law.³ These decisions, however, fail to articulate a clear standard.

Analysis of recent cases reveals that the lack of a clear standard has led courts to produce inconsistent holdings, often concluding that a debtor does not have a legal or equitable interest in a government payment until the statutory authorization date.⁴ This approach runs contrary to the Code, which requires a more nuanced factual inquiry.⁵ Under § 541(a) courts should analyze the government payment program and the facts of the case to determine if all the conditions necessary for the payment to be a legal or equitable interest occurred prepetition.⁶ Importing the language from the right to setoff set forth in § 553, the payment must be "owing" at the time of the petition in order for a creditor to possess the right to setoff.⁷ Using such language in the context of § 541(a) analysis is useful because it emphasizes the necessary factual inquiry courts must engage in under both provisions.

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If a court engages in the necessary factual inquiry, it may encounter unique factual wrinkles. One government payment program, the Supplemental Revenue Assistance Program (SURE), is an illustrative example. The SURE program provides assistance to farmers who have lost crops due to a natural disaster.⁸ Under SURE, the Secretary of Agriculture must designate the county where the crop was lost as a disaster county before the farmer can qualify for payment.⁹ Therefore, at the time a bankruptcy petition is filed, payment may still be contingent upon an act within the agency's discretion.¹⁰ The novel factual issue presented by this program is whether a government payment is property of the estate when a government agency has discretion over a qualification requirement at the time of the bankruptcy petition.

When the mechanics of a government payment program pose an issue of agency discretion, bankruptcy courts should look to administrative law. Administrative law dictates that a government payment becomes an entitlement for purposes of due process when legal sources create enforceable standards that guide an agency's discretion.¹¹ This standard should be adopted when determining whether a government payment is property of the estate. This Comment will argue that a government payment becomes property of the estate when it is "absolutely owed," meaning all contingencies for payment are satisfied, including when enforceable standards remove an agency's discretion.

I. Background

To determine exactly when a government payment becomes "absolutely owing," a court must engage in a factual inquiry of the government payment program at issue, and apply the mechanics of the program to the facts of the case. The SURE program provides an illustrative example of how a court would conduct this analysis, including discussion of the relevant statutes and regulations. It also demonstrates how novel issues can arise when a court engages in a close factual analysis of a government payment program. In particular, SURE presents the problem of agency discretion over a condition

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necessary for payment. This issue arises when a Secretarial Disaster Designation has yet to be made at the time of the petition.

Historically, most crop disaster payment programs have been either permanently funded and immediately available through successive Farm Bills or authorized by Congress as patchwork relief after a natural disaster occurred.¹² SURE is a relatively new crop disaster payment program authorized by the 2008 Farm Bill.¹³ Eligibility is dependent upon the farmer holding the Farm Service Agency ("USDA") crop insurance for the relevant crop year as well as a documented qualifying crop loss.¹⁴ A 10% qualifying loss is required if the farmer's land is located in a Designated Secretarial Disaster County (designated by the Secretary of Agriculture), or a 50% qualifying loss if the land is located in a non-Designated Secretarial Disaster County.¹⁵

In the SURE program, an eligible producer can receive a payment equal to 60% of the difference between the targeted level of revenue and the actual total revenue received during the relevant crop year.¹⁶ To find the targeted level of revenue, USDA calculates the average market price of the crop over the course

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of the relevant crop year.¹⁷ The calculation of actual total revenue takes into account the direct and counter-cyclical USDA payments the farmer received, actual crop revenue received, and any insurance indemnities received.¹⁸ USDA's direct and counter-cyclical payments, or crop subsidies, are calculated based on a farmer's acreage and the type of crop grown.¹⁹ The exact, direct, or counter-cyclical payment due per acre varies significantly between various types of crop.²⁰ This method of calculation means that the amount a farmer is due under SURE may be zero, particularly when the type of crop lost is heavily subsidized.²¹ In summary, the SURE payment, in simplified form, looks something like this:

SURE Payment = [Targeted Revenue - Actual Revenue] x .60

Targeted Revenue = crop revenue based on average market price + crop insurance payment

Actual Revenue = actual crop revenue + direct/counter-cyclical payments + insurance indemnities.²²

The average market price of a crop over the course of a crop year, also called the crop marketing period, takes approximately seven months to calculate from the end of the crop year.²³ The crop year ends at the conclusion of a particular commodity's primary harvesting period.²⁴ Due to the time delay necessary to gather the relevant market information, the SURE application periods open up approximately one year after the close of the crop marketing period.²⁵

Eligibility for a SURE payment typically hinges on whether the applicant farmer's land and destroyed crops are located in a Secretarial Designated

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Disaster County.²⁶ As previously mentioned, the 2008 Farm Bill makes SURE relief available for farmers located in these disaster counties if they experience a 10% qualifying loss.²⁷ Because this threshold is low, it effectively makes relief available to a vast number of farmers. The process by which the Secretary of Agriculture determines which counties have experienced a natural disaster affecting a given crop year was first set forth in a USDA promulgated regulation at 7 C.F.R. § 1945.20.²⁸

The original process set out in § 1945.20 first required the request of a natural disaster designation to be made by the Governor or Tribal Council of the afflicted county.²⁹ Next, the USDA National Office notified the appropriate USDA State Director, who was responsible for investigating the physical crop losses experienced in the requested county.³⁰ The USDA State Director was then to provide a formal recommendation in the form of a written report.³¹ Upon receiving the State Director's report, the National Office added additional...