Who Gets the Check: Determining When Federal Farm Program Payments Are Property of the Bankruptcy Estate

• Publication year: 2021

84 Nebraska L. Rev. 469. Who Gets the Check: Determining When Federal Farm Program Payments Are Property of the Bankruptcy Estate

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Susan A. Schneider*

Who Gets the Check: Determining When Federal Farm Program Payments Are Property of the Bankruptcy Estate

TABLE OF CONTENTS

I. Introduction ...................................................... 469
II. Characteristics of Federal Farm Programs ......................... 471
A. Basic Attributes of Federal Farm Programs ..................... 471
B. Distinguishing Characteristics of Different Types of Farm Programs ................................................. 474
III. Defining Property of the Estate ................................. 477
IV. Legal or Equitable Interests as of Commencement of the Case ......................................................... 479
A. Contractual Obligation ........................................ 480
B. Pre-Petition Statute as Creating "Legal or Equitable Interest" ..................................................... 487
C. Post-Petition Statute: Circuit Courts Draw the Line .......................................................... 490
V. Proceeds, Product . . . or Profits of or from Property of the Estate ........................................................ 496
VI. Comments and Conclusions ......................................... 503

I. INTRODUCTION

From 1995 through 2003, federal farm program payments to farms in the United States totaled over $131 billion.(fn1) In the year 2003

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alone, American farmers received well over $16 billion in federal farm program payments.(fn2) In recent years, these payments have accounted for eight percent of the gross cash income across all farms(fn3) and almost one-half of the aggregate net farm income,(fn4) with almost half of all farms receiving payments.(fn5)

When a farmer files for bankruptcy relief, payments from the federal government pursuant to the federal farm programs may well be the most significant or even the only liquid assets available. Therefore, it is no surprise that a dispute is likely to arise as to who has a right to these payments.

Resolution of this dispute should turn on the type of farm program payment at issue, the timing of the right to payment, the contractual rights of the parties, and a careful analysis of bankruptcy law. Different results are anticipated depending upon the nature of the farm program and the timing of the bankruptcy in relation to the right to payment. Unfortunately, however, reaching a resolution may be made more difficult by the complex web of confusing court precedents, some of which demonstrate a lack of understanding of the programs or a desire to shoehorn legal analysis into a perceived equitable result. Recently, the circuit courts have weighed into the mix, attempting to provide a clear rule with regard to one specific type of program.(fn6) However, while there have been excellent articles published on federal

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farm programs in general,(fn7) few scholars have delved into the sometimes arcane intersection of farm programs and bankruptcy.(fn8)

This Article is an attempt to address this issue by confronting the fundamental question: When is the federal farm program paymentproperty of the bankruptcy estate? This Article begins, in Part II, by identifying some of the most important characteristics of the wide array of federal farm programs necessary to form the framework for the legal analysis. It then, in Parts III, IV, and V, addresses the property of the estate inquiry, meshing existing precedent with commentary and specifically addressing the recent circuit court opinions on this issue in the context of disaster relief. Based on this analysis, the Article will conclude with comments regarding future decision making and new farm programs.

II. CHARACTERISTICS OF FEDERAL FARM PROGRAMS

Federal farm programs share a number of basic attributes that separate the payments they provide from other kinds of farm income and that are critical to assessing when the right to payment exists. Despite these similarities, there are also important distinguishing characteristics that differentiate some programs from others. These differences are also critical to a determination of when the right to a farm program payment exists.

A. Basic Attributes of Federal Farm Programs

Federal farm programs share basic attributes that are critical to an understanding of their special role as a source of farm income. First, each farm program is specifically created by statute, either as

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part of a comprehensive farm bill(fn9) or as a separate statutory enactment.(fn10) Each individual program exists only as a direct result of congressional action to create the program. Statutory provisions and the regulations promulgated through statutory authority control all aspects of the programs.(fn11)

Second, in addition to being created by federal statute, a farm program must be funded by Congress. Funding, or a lack of funding, for a program may be an issue whenever rights to a federal program payment are considered. Moreover, even if initially funded, a congressional appropriation may be less than is needed if response to the program is more than anticipated.(fn12) In this case, Congress may or may not appropriate additional funds to make up for the shortfall.(fn13) Similarly, federal government compliance with obligations under long-term farm program contracts depend upon annual appropriations from Congress.(fn14)

Third, each individual farm program is implemented by the United States Department of Agriculture ("USDA") through the promulgation of specific regulations(fn15) and the development of internal administra

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tive rules and procedures.(fn16) Each program is administered by the Farm Service Agency ("FSA"), an agency within the USDA.(fn17) Eligibility for farm programs, as proscribed by regulation, is determined by an FSA County Committee made up of local farmers.(fn18)

Fourth, each program is based on the voluntary participation of the farmer. Although economics may provide farmers a great incentive to participate, they are never required to do so. The voluntary decision to participate in a specific program will bind the farmer to specific statutory and regulatory requirements.(fn19)

Fifth, if a farmer chooses to enroll in a federal farm program, the farmer is required to sign a contract with the Commodity Credit Corporation ("CCC").(fn20) Typically, the contract recites the primary obligations of the farmer and the government and incorporates by reference the regulations governing the particular program.(fn21) The terms of the contract are not negotiated by the parties. Instead, they are dictated by the applicable statutes and regulations. The application process

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occurs when the farmer and a representative of the CCC each sign a contract that binds both parties to the terms of the contract.(fn22)

B. Distinguishing Characteristics of Different Types of Farm Programs

While certain basic attributes are shared across the spectrum of federal farm programs, the programs can be further analyzed according to a series of distinguishing characteristics that separate one program from another. The differences between the programs make it inappropriate for one uniform rule to exist for the property of the estate analysis. Whether a program payment is property of a bankruptcy estate should be determined in part based on these distinguishing characteristics.

The first distinction concerns the farm program's connection, or lack thereof, to current commodity production. Some programs, most notably the disaster assistance programs, are directly connected to production. The farmer's eligibility for the program and the amount of payment that the farmer will receive under the program is tied to what the farmer did or did not produce.(fn23)

In contrast, many current farm programs are "decoupled" from production. These programs "separate the linkage between government payments to producers and the quantity of a commodity produced or marketed"(fn24) Decoupled payments are made irrespective of any particular crop currently grown by the farmer.(fn25) Production Flexibility Contract ("PFC") payments provide an example of a recent program that was decoupled.(fn26) Although the production history of the acreage that the farmer enrolled in the program was factored into the amount of PFC payments received, the payment bore no relation to the crops

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grown during the contract period.(fn27) The Direct Payment ("DP") Program that is currently in effect is based upon the PFC, and as such also provides a decoupled payment.(fn28) Direct Payments are not tied to current production nor are they tied to market price. Payments are based on rates specified by statute and the producer's historic payment acres and payment yields.(fn29) Not only does it not matter how much the farmer grows during the program year, with very limited exceptions, it does not even matter what crop is grown, or if a commercial crop is produced at all.(fn30)

A second distinguishing factor is the underlying goal of the program. On this basis, federal farm programs can be divided into three categories--price support, conservation, and disaster assistance.(fn31) Price support programs are enacted with the goal of increasing farm income.(fn32) Conservation programs seek to minimize the negative environmental consequences of farming and encourage conservation practices.(fn33) Disaster assistance programs are created by special legislation enacted in response to crop and livestock damage caused by natural forces.(fn34) Like the price support programs, they seek to increase farm income, but only insofar as there have been offsetting losses incurred as a result of a natural disaster. These diverse underlying goals may be significant if it is...