Ag Acceptance Corp. v. Nelson

• Decision Date: 17 March 2000
• Docket Number: Civ.No. 99-1026 (DFW/RL).
• Citation: 103 F.Supp.2d 1129
• Parties: AG ACCEPTANCE CORPORATION, as assignee of Ag Services of America, Inc., Plaintiff, v. Lowell F. NELSON and Sandra J. Nelson, Defendants.
• Court: U.S. District Court — District of Minnesota

103 F.Supp.2d 1129

AG ACCEPTANCE CORPORATION, as assignee of Ag Services of America, Inc., Plaintiff, v. Lowell F. NELSON and Sandra J. Nelson, Defendants.

Civ.No. 99-1026 (DFW/RL).

United States District Court, D. Minnesota.

March 17, 2000.

Jon Richard Brakke, Vogel Weir Hunke & McCormick, Fargo, ND, for plaintiff.

Robert Lorne Russell, Arverson Lundeen & Hoff, Fergus Falls, MN, for defendants.

FRANK, District Judge.

After review and absent objection, the recommended ruling is hereby affirmed.

REPORT AND RECOMMENDATION

ERICKSON, United States Magistrate Judge.

I. Introduction

This matter came before the undersigned United States Magistrate Judge pursuant to a general assignment, made in accordance with the provisions of Title 28 U.S.C. § 636(b)(1)(B), upon the Plaintiff's Motion to Remand this action to the District Court for the County of Clay, Minnesota, where the action was originally commenced. A Hearing on the Motion was conducted on January 12, 2000, at which time the Plaintiff appeared by Jon R. Brakke, Esq., and the Defendant appeared by Robert L. Russell, Esq. For reasons which follow, we recommend that the Motion to Remand be granted.¹

II. Discussion

The facts are not seriously in dispute. For the crop year of 1997, the Plaintiff extended a loan to the Defendants, in the principal sum of $300,000.00, which was memorialized in a Master Promissory Note of May 6, 1997, and in a Supplement Master Promissory Note, which increased the original principal balance to $340,000.00. In order to collateralize the Plaintiff's debt, the Plaintiff took a security interest in the Defendants' crops, and in all agricultural program payments, from the Federal Government, to which the Defendants might be entitled. In the pertinent Promissory Notes, the Defendants agreed that they would "immediately execute, deliver and assign to [the Plaintiff] all documents under applicable state and federal laws, rules and regulations necessary to perfect, assign, and complete [the Plaintiff's] interest in any entitlement or payments (whether in cash or in kind) arising under Government agricultural subsidy, deficiency, diversion, disaster, conservation or similar programs."

Although the Master Promissory Note required that the Defendants pay all principal amounts, and accrued interest, by January 15, 1998, they failed to satisfy their obligations to the Plaintiff and, currently, a debt in excess of $240,000.00 remains unpaid. In an effort to recover on the debt owed, the Plaintiff requested the Defendants to assign to the Plaintiff their crop loss disaster assistance payments. The Defendants refused to execute the documents that would allow a direct payment of the disaster assistance payments to the Plaintiff and, fearing that the Defendants might expend those funds upon their receipt, the Plaintiff filed an action for injunctive relief in the State District Court for the County of Clay, Minnesota. In due course, the District Court issued a Temporary Restraining Order ("TRO") which provided, in part, as follows:

[P]ending further order of this Court, any agricultural disaster program payments to which the Defendants are entitled shall not be assigned to any other entity nor with respect to any Disaster Program Payments which Defendants receive, shall Defendants cash any check for representing said payments or spend, dissipate, or otherwise dispose of said payments. In all respects, Defendants shall retain all Disaster Program Payments as to which Plaintiff claims a security interest.

The State Court scheduled a Hearing, so as to determine whether the TRO should continue as a Temporary Injunction, for June 21, 1999, but, before the Court issued its ruling, the Defendants removed this action, on July 2, 1999, to this Court.

The Plaintiff now seeks to remand this matter to the State District Court, arguing that this Court is without the requisite subject matter jurisdiction to consider the parties' claims.

III. Discussion

In their Notice of Removal, the Defendants asserted that removal was permissible because the action presented a Federal Question, and because of complete diversity between the parties. The Plaintiff notes, however, and the Defendants do not disagree, that "they cannot base removal of this action to federal court on diversity of citizenship, since the defendants are both citizens of the state in which the action is brought."² Defendants' Brief in Opposition to Motion for Remand, at 2; see also, Title 28 U.S.C. § 1441(b). Accordingly, our analysis turns to whether the parties' claims present a Federal Question.

In removing the action from State Court, and in opposing the Plaintiff's Motion to Remand, the Defendants rely exclusively on that portion of the Regulations, which govern the administration of the Federal Crop Loss Disaster Assistance Program, and which provide, in pertinent part, as follows:

(j) Any payment or portion thereof to any person shall be made without regard to questions of title under States law and without regard to any claim or lien against the crop, or proceeds thereof.

(k) Disaster benefits under this part will be made without taking any applicable offsets. The regulations governing offsets found at part 792 of this title and 1403 of this chapter shall not apply to payments made under this part.

(l) Payments which are earned under this part may be assigned in accordance with the provisions of part 1404 of this chapter upon filling out the applicable assignment form.

7 C.F.R. § 1477.109(j), (k) and (l).

Given the language of these provisions, the Defendants urge that, whether the Plaintiff can prioritize its security interest, as recognized under State law, over the Regulation's assurance that the crop disaster payments are unaffected by State laws which allow the assertion of claims, or liens, on other instruments of value, presents a Federal Question. As phrased by the Defendants:

The critical issue is whether the federal act and regulations preempts the plaintiff's claim and that rests squarely on the construction and interpretation of The Agriculture Rural Development Food and Drug Administration and Related Agencies Appropriation Act of 1999 and the regulations thereunder.

Defendants' Brief in Opposition to Remand, at p. 5.

The Plaintiff disagrees, and argues that the referenced Regulations "are solely for the administrative convenience of the government and provide a mechanism whereby a producer eligible for disaster payments can have the same remitted directly to a creditor by filling our a CCC-36 assignment form." Plaintiff's Brief in Support of Motion for Remand, at p. 3.

The Plaintiff maintains that the question presented here "is whether said disaster program payments are subject to the security interest of the Plaintiff' and, since "Minnesota Statutes § 336.9-201 sets forth the requirements for a security agreement," the "resolution of the Plaintiff's claims does not turn on a right arising under the Constitution, treaties or laws of the United States," and "jurisdiction for purposes of removal may not be based on the existence of a federal question." Id. at 4-5. According to the Plaintiff, the same argument, that the Defendants raise here, was rejected by our Court of Appeals in In re Sunberg, 729 F.2d 561, 563 (8th Cir. 1984). In Sunberg, the Court confronted an issue involving the Federal Payment-In-Kind ("PIK") subsidy program, and the effort, on the part of the recipients of those benefits, to exclude those proceeds from the security interests of a creditor.

There, the pertinent Federal Regulations closely parroted the language we here confront. Specifically, the Regulations stated as follows:

(e) Assignments with respect to quantities of a commodity which can be received by a producer as payment in kind will be recognized by the Department [of Agriculture] only if such assignment is made on Form CCC-479, Assignment of Payment-In-Kind, executed by the assignor and assignee, and filed with the county committee.

(f) Except as provided in paragraph (e) of this section, any payment in kind or portion thereof which is due any person shall be made without regard to questions of title under State law, and without regard to any claim of lien against the commodity, or proceeds thereof, which may be asserted by any creditor.

Id. at 563, quoting 48 Fed.Reg. 9235 (1983) [then to be codified at 7 C.F.R. § 770.6(e)-(f)].

As here, the debtors in Sunberg argued that these provisions evinced an administrative intent to exempt PIK benefits from liens imposed by State law. The Court soundly rejected that argument as follows:

These provisions merely govern the rights of parties claiming PIK benefits directly from the federal government. They do not prevent one who is entitled to the benefits from pledging the benefits as security on loans properly made under state law. Simply because the government will refuse to deliver the benefits to an assignee not appearing on the proper federal forms does not mean that an assignor can totally disregard legal obligations to the assignee. Such "anti-assignment" provisions are intended to insulate the government as benefit provider from conflicting claims over payments, not to preempt state commercial law as between third parties. See Segal v. Rochelle, 382 U.S. 375, 384, 86 S.Ct. 511, 517, 15 L.Ed.2d 428 (1966); In re Nivens, supra, 22 B.R. [287] at 291 [(N.D.Bkrtcy.Tex.1982)]. Neither do we read anything in other PIK regulations to restrict program beneficiaries from voluntarily encumbering their PIK benefits.

Id.

The Defendants draw nothing to the Court's attention, here, which would counsel a different result, from that obtained in Sunberg.

While the Defendant's point to In re Bechtold, 54 B.R. 318 (Bktcy.D.Minn.1985), and Grunzke v. Security State Bank of Wells, 68 B.R. 446 (D.Minn.1987), these decisions relate to different issues than did either Sunberg, or the instant action. Indeed in Bechtold, the Court tooks pain...