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Originally published in the Commercial Restructuring & Bankruptcy Alert, March 2006, Volume II, Number 3
The U.S. Court of Appeals for the Fifth Circuit recently ruled that a farmer who received crop-disaster relief as a result of legislation that was passed after he declared bankruptcy was entitled to the payment, and the payment at issue was not part of his bankruptcy estate.
Because the law awarding the relief was passed after the farmer filed for bankruptcy, the payment did not qualify as property or proceeds of the bankruptcy estate, the Fifth Circuit concluded in Burgess v. Sikes (In re Burgess), 438 F.3d 493 (5th Cir. 2006).
The holding is one of a long line of rulings interpreting whether payments stemming from various types of legislation qualify as part of individual bankruptcy estates.
Burgess arose after Louisiana farmer Edward Keith Burgess filed a chapter 7 bankruptcy petition in August 2002. He was discharged from bankruptcy in December 2002. In February 2003, the Agricultural Assistance Act of 2003 was enacted. That legislation provided for crop-disaster-relief payments for qualifying farmers for 2001 or 2002 crop losses.
Qualifying farmers could begin applying for disaster payments in June 2003. Burgess applied for relief to compensate for crop losses sustained in 2001. In August 2003, the Farm Service Agency of the Department of Agriculture mailed a check for $24,829 to the trustee of Burgess’s bankruptcy estate. The bankruptcy estate was reopened to determine how to distribute the proceeds from the check.
Burgess filed a Motion for Turnover, which was denied by the bankruptcy court. The district court affirmed. Both courts concluded that the payment was property of the bankruptcy estate and belonged to Burgess’s creditors.
However, the Fifth Circuit panel reversed, reasoning that the disaster payment was not "property" under 11 U.S.C. §541(a)(1) because the legislation providing for the payment was not enacted until after Burgess filed for bankruptcy. The panel also held that the payment was not "proceeds" of property under section 541(a)(6).
Upon rehearing en banc, the full Fifth Circuit agreed.
The trustee made several arguments, including that Burgess’s crop loss gave him a contingent interest in the postpetition disaster-relief payment. He also argued that Burgess’s crop loss itself is property of the estate.
The trustee argued that because the crop loss happened before Burgess declared bankruptcy, his interest in the loss was "sufficiently rooted in the pre-bankruptcy past and so little entangled with the bankrupts’ ability to make an unencumbered fresh start that it should be regarded as ‘property.’" In so arguing, the trustee cited the 1966 U.S. Supreme Court case, Segal v. Rochell, 382 U.S. 275, in which a taxpayer’s right to a refund was deemed to be property of the bankruptcy estate.
However, "Segal’s ‘sufficiently rooted’ test did not survive the enactment of the Bankruptcy Code," the Fifth Circuit concluded. Under section 541 of the Code, the court stated, "all property in which the debtor has a ‘legal or equitable interest’ at the time of bankruptcy comes into the estate."
"Thus, under current law, a debtor’s interest in property may be contingent—or enjoyment of the interest may be postponed—until after bankruptcy, but the debtor must have had a prepetition legal interest nonetheless," the court concluded.
The "mere hope that legislation will be enacted" does not create such a contingent interest, the court noted.
The court cited a Ninth Circuit case that held Quota Shares and Individual Fishing Quotas were not property of the bankruptcy estate because the regulations creating them were not adopted until after the bankruptcy petition was filed. See Schmitz v. Battley (In re Schmitz), 270 F.3d 1254 (9th Cir. 2001).
"Were the law otherwise, any postpetition legislation or contract could retroactively create property of the estate," the court wrote. "That cannot be the law; § 541 clearly states that a bankruptcy estate is established at ‘[t]he commencement of [the] case.’"
The court also dismissed the trustee’s argument that the crop loss itself should be considered property of the estate, concluding that a loss in and of itself—unconnected to a payment—cannot be considered property.
Dissent
In a lengthy dissent, Chief Judge Edith H. Jones acknowledged that an approach constructing an "iron curtain" separating pre-bankruptcy property from whatever accrues to the debtor post-bankruptcy "has some force, but we respectfully reject its rigidity."
This article is presented for informational purposes only and is not intended to constitute legal advice.