In re Burgess

• Decision Date: 27 January 2006
• Docket Number: No. 04-30189.,04-30189.
• Parties: In the Matter of: Edward Keith BURGESS, Debtor. Edward Keith Burgess, Appellant, v. Lucy G. Sikes, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

438 F.3d 493

In the Matter of: Edward Keith BURGESS, Debtor Edward Keith Burgess, Appellant, v. Lucy G. Sikes, Appellee.

No. 04-30189.

United States Court of Appeals, Fifth Circuit.

January 27, 2006.

COPYRIGHT MATERIAL OMITTED

James Willis Berry (argued), Rayville, LA, George F. Fox, Jr., McIntosh, Fox & Lancaster, Lake Providence, LA, for Appellant.

Lucy G. Sikes (argued), Alexandria, LA, pro se.

Richard Lieb, St. John's University, School of Law, Jamaica, NY, Bill DeLoney Bensinger (argued), Law Offices of Bill Bensinger, Birmingham, AL, for Susan Block-Lieb, Ralph Brubaker, S. Elizabeth Gibson, Jonathan C. Lipson, Charles W. Mooney, Jr., Theresa J. Pulley Radwan, Nancy B. Rapoport, Robert K. Rasmussen and Robert M. Zinman, Amici Curiae.

Appeal from the United States District Court for the Western District of Louisiana.

Before JONES, Chief Judge, and REAVLEY, JOLLY, HIGGINBOTHAM, DAVIS, SMITH, WIENER, BARKSDALE, EMILIO M. GARZA, DeMOSS, BENAVIDES, STEWART, DENNIS, CLEMENT, PRADO, and OWEN, Circuit Judges.^*

PRADO, Circuit Judge:

This is a bankruptcy case. The issue is whether a crop-disaster-relief payment authorized by legislation enacted after the debtor filed for bankruptcy is property of the bankruptcy estate. A panel of this court held that it is not, following which the court voted to consider the case en banc. After hearing argument and considering supplemental briefing by the parties as well as law professors serving as amici curiae,¹ a majority of the court agrees with the panel decision. Accordingly, we reverse the judgment of the district court.

I.

The facts are short and undisputed. 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 ("the 2003 Act") was enacted. That legislation provided for crop-disaster-relief payments to qualifying farmers for 2001 or 2002 crop losses.

Qualifying farmers could begin applying for disaster payments in June 2003. Burgess did so, and in August 2003, after Burgess's bankruptcy case was closed, the Farm Service Agency of the Department of Agriculture mailed a check for $24,829 to the trustee of Burgess's bankruptcy estate. The purpose of this payment was to compensate Burgess for crop losses sustained in 2001.

The bankruptcy case was reopened to determine what to do with the check. Burgess filed a Motion for Turnover, which was denied by the bankruptcy court. The district court affirmed, both courts concluding that the payment was property of the bankruptcy estate and belonged to Burgess's creditors.

A panel of this court reversed. Burgess v. Sikes (In re Burgess), 392 F.3d 782, 786 (5th Cir.2004). The panel reasoned 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. Id. at 786. According to the panel, since Burgess "had no legal or equitable right to [the] payment absent such legislation," "[he] had no legal or equitable right to [the payment] at the commencement of [his] bankruptcy case." Id. at 786-87.

The panel also held that the payment was not "proceeds" of property under § 541(a)(6). Id. at 787. Proceeds must derive from property of the estate, and here Burgess had none. Id. Without property, there could not be proceeds. Id. Accordingly, the panel reversed the judgment of the district court. Id.

The court ordered rehearing en banc to determine whether the disaster payment at issue in this case constitutes property within the meaning of § 541(a)(1) or proceeds within the meaning of § 541(a)(6). Holding it is neither, we again reverse the judgment of the district court.

II.

Whether money is property of the debtor or the bankruptcy estate is a question of law reviewed de novo. See State Farm Life Ins. Co. v. Swift (In re Swift), 129 F.3d 792, 795 (5th Cir.1997) (deciding de novo whether legal causes of action belonged to the debtor or to the estate). In this case, two subsections of § 541 potentially bring Burgess's disaster-relief payment into his bankruptcy estate. Section 541 of the Bankruptcy Code broadly defines "property of the estate" as "all ... property, wherever located and by whomever held." 11 U.S.C. § 541(a) (2004). Subsection (1) specifies that property of the estate includes "[a]ll legal or equitable interests of the debtor in property as of the commencement of the case." § 541(a)(1) (emphasis added). Subsection (6) further provides that "proceeds ... of or from property of the estate" also come into the bankruptcy estate. § 541(a)(6).

Thus, the scope of § 541 is broad: that section brings into the estate all of the debtor's legal and equitable interests "wherever located and by whomever held." § 541(a)(1). However, the Code also provides a temporal limitation: property of the estate is determined at "[t]he commencement of the case." Id.² The case is commenced, and the estate created, when the bankruptcy petition is filed. See In re Swift, 129 F.3d 792, 795 (5th Cir. 1997); 5 COLLIER ON BANKRUPTCY 541.02 (15th ed. rev.2005). Section 541's temporal limitation is the key to deciding this case.

III.

The trustee and the amici (collectively, "the Appellees") argue that Burgess's disaster-relief payment comes into the bankruptcy estate through a combination of § 541(a)(1) (property) and § 541(a)(6) (proceeds). Specifically, they advance the following arguments to support the inclusion of the disaster-relief payment in Burgess's bankruptcy estate. First, they argue that Burgess's crop loss gave him a contingent interest in the postpetition disaster-relief payment. As such, they claim that the contingent interest constitutes property of the estate, making the disaster-relief payment proceeds of that property. Second, the Appellees argue that Burgess's crop loss, itself, is property of the estate supporting the inclusion of the payment as proceeds under a straightforward application of § 541(a)(1) and (a)(6).

Because the Bankruptcy Code defines property of the estate in terms of "legal or equitable interests of the debtor" that exist "as of the commencement of the case," id. § 541(a)(1), the question we must decide is temporal: when did Burgess acquire a legal interest in the disaster-relief payment? In other words, did the crop loss itself entitle Burgess to the money? Or was it the combination of Burgess's crop loss and the enactment of the 2003 Act that gave him that interest? If it was the former, then Burgess acquired the interest before bankruptcy, and the payment is part of his estate. But if it was the latter combination of events that gave Burgess an interest in the payment, he did not acquire that interest until after bankruptcy; and the disaster-relief payment belongs to Burgess. For the reasons that follow, we hold it was the latter.

A.

The Appellees first argue that Burgess had a contingent interest in the payment at the time of bankruptcy pursuant to Segal v. Rochelle, 382 U.S. 375, 86 S.Ct. 511, 15 L.Ed.2d 428 (1966). They claim that this interest is property of the estate, bringing the postpetition payment into the estate as proceeds.

In Segal, the debtors filed for bankruptcy in September 1961. Id. at 376. "After the close of that calendar year, loss-carry-back tax refunds were sought and obtained from the United States on behalf of [the debtors] under Internal Revenue Code § 172." Id. The losses had been suffered prior to the debtors filing for bankruptcy in September 1961; they were carried back to the years 1959 and 1960 to offset net income earned in those years. Id. The question before the Supreme Court was whether this refund was property of the bankruptcy estate under § 70a(5) of the Bankruptcy Act,³ the predecessor to § 541(a)(1) of the Bankruptcy Code. Id.

"Property," as used in § 70a(5), was not defined in the Bankruptcy Act;⁴ therefore, according to Segal, the dual purposes of the Bankruptcy Act governed the definition of property under pre-Code law. See id. at 379, 86 S.Ct. 511. The first goal of the Bankruptcy Act was "to secure for creditors everything the bankrupt may possess ... when he files his petition." Id. To achieve that goal, property was construed to include interests that are novel, contingent, or the enjoyment of which must be postponed. Id. The second goal of the Act was to "leave the bankrupt free after the date of his petition to accumulate new wealth in the future." Id. The inquiry under this prong was whether the interest 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' under § 70a(5)." Id. at 379-80, 86 S.Ct. 511.

The Court held that in light of these considerations, the debtors' refund was property of the bankruptcy estate. Id. at 381, 86 S.Ct. 511. According to the Court, the first question was whether "on the date the bankruptcy petitions were filed, the potential claims for loss-carryback refunds constituted `property.'" Id. at 379, 86 S.Ct. 511. The Court answered this question in the affirmative by examining the circumstances that existed "at the time [the] bankruptcy petitions were filed." Id. at 380, 86 S.Ct. 511. Two circumstances that "point[ed] towards realization of a refund" were that "taxes had been paid on net income within the past three years[] and the year of bankruptcy at that point exhibited a net operating loss." Id. In addition, the tax law that provided for the refund was enacted before the debtor filed for bankruptcy.⁵ Thus, at the time of filing, the debtors had a claim for a refund— a legal interest—regardless of when the money was actually paid. See id. at 380, 86 S.Ct. 511. Next, turning to the second prong of the property inquiry, the Court concluded that the debtors' claim for a refund was indeed rooted in the prebankruptcy past and not entangled with...