In re Gerth
| Decision Date | 25 October 1991 |
| Docket Number | Bankruptcy No. 91-10002-INH. |
| Citation | 136 BR 241 |
| Parties | In re Willis R. GERTH, Debtor. |
| Court | U.S. Bankruptcy Court — District of South Dakota |
Harry A. Engberg, Sioux Falls, S.D., for debtor.
Thomas A. Lloyd, Asst. U.S. Atty., Pierre, S.D., for creditor ASCS/CCC.
The matter before the Court is the Motion for Modification of Automatic Stay and for Setoff filed by the Agricultural Stabilization and Conservation Service and the response thereto filed by Debtor. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). This ruling shall constitute Findings and Conclusions as required by F.R.Bankr.P. 7052.
Willis R. Gerth (Debtor) filed a Chapter 11 petition for reorganization on April 5, 1985. His plan of reorganization was confirmed by Order entered October 3, 1986. That plan set forth the treatment for the claim of the Agricultural Stabilization and Conservation Service (ASCS) and recognized an earlier stipulation between the parties regarding use and repayment of cash collateral.
Debtor entered into a Conservation Reserve Program (CRP)1 contract with the Agricultural Stabilization and Conservation Service (ASCS) on August 27, 1987. The first payment under the contract was made in 1987; the final payment will be made in 1996. The amount not yet paid through 1996 totals $1,956.00.
Debtor filed a Chapter 12 petition for debt adjustment on April 17, 1989. He filed a plan on July 20, 1989. That plan stated ASCS had a secured claim of $10,014.14 and an unsecured claim of $38,255.00 for unpaid cash collateral arising from Debtor's previous Chapter 11 proceeding. The Chapter 12 case was dismissed by Order entered August 2, 1989 because the Court concluded that the Chapter 12 filing was an impermissible attempt by Debtor to modify his prior Chapter 11 case. 116 B.R. 167.
Debtor entered into a second CRP contract with ASCS on July 21, 1989. Through the life of this contract, Debtor may receive a total of $24,020.00.
On Debtor's own motion, his earlier Chapter 11 case was dismissed by Order entered June 26, 1990.
Debtor filed another Chapter 12 petition on January 7, 1991. Debtor filed a Motion to Accept CRP Contract on April 2, 1991. No objections to the Motion were filed and the Court approved the Motion by Order entered June 14, 1991.
Debtor filed his Chapter 12 plan on May 14, 1991. This plan recognizes ASCS has an unsecured claim of $38,566.00 for prior, unpaid cash collateral. Debtor proposes to repay this cash collateral with disposable income.
On April 18, 1991, pursuant to an agreement of interested parties, the Court entered an Order Authorizing Use of ASCS's Cash Collateral.2 That Order provides that Debtor may use a portion of some government program payments held by ASCS, including some CRP payments, as cash collateral. The Order also sets forth how this cash collateral will be repaid, as well as how some of Debtor's prior cash collateral obligation will be repaid. The agreed Order does not apply all Debtor's future CRP payments to ASCS's claim.
On July 17, 1991, ASCS filed a Motion for Modification of Automatic Stay and for Setoff in which ASCS seeks the Court's permission to setoff Debtor's remaining annual CRP payments of approximately $17,310.00 that Debtor will receive through 1999 against, first, ASCS's cash collateral claim of $33,624.84 and, second, ASCS's repayment claim of $3,166.16 for unearned advanced deficiency payments for 1988 and 1989. ASCS further argues that Debtor's proposed plan treatment of ASCS's claims for repayment of cash collateral and unearned advanced deficiency payments as unsecured was contrary to their April 18, 1991 cash collateral agreement.3
A hearing was held on ASCS's Motion on July 22, 1991 in conjunction with several other matters in the case. The Motion was taken under advisement upon receipt of briefs from both Debtor and ASCS.4 There are no significant factual disputes.
The issue before the Court is whether ASCS should be allowed to offset its claim against post-petition CRP contract payments to Debtor arising from two CRP contracts between the parties. The issue requires the resolution of two questions. First, are the criteria for an offset as preserved for creditors in 11 U.S.C. § 553(a) met? Second, is relief from the automatic stay under 11 U.S.C. § 362 warranted to allow the offset if all other provisions of § 553(a) are met?
Section 553(a) states:
Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case. . . .
11 U.S.C. § 553(a) (in pertinent part). Essentially, § 553(a) recognizes any setoff right that existed before the bankruptcy filing. United States v. Rinehart, 88 B.R. 1014, 1016 (D.S.D.1988), aff'd in part, rev'd in part, 887 F.2d 165, 168 (8th Cir. 1989). The section does not create setoff rights but preserves those recognized under state or non-bankruptcy federal law. In re Cloverleaf Farmer's Cooperative, 114 B.R. 1010, 1016 (Bankr.D.S.D.1990). ASCS relies on several federal regulations promulgated by the Secretary of Agriculture pursuant to the various federal farm programs to establish this independent right to setoff under federal law. Debtor does not challenge the validity or applicability of these regulations.
Once the independent right to setoff has been established, the three elements of § 553 must be satisfied. See In re Evatt, 112 B.R. 405, 410 (Bankr.W.D.Okla.1989). First, the debtor must have a pre-petition claim against the creditor. Second, the creditor must have a pre-petition claim against the debtor. Third, the obligations must be mutual; that is, the debts in question must be in the same right and between the same parties, standing in the same capacity. United States v. Gore (In re Gore), 124 B.R. 75, 78 (Bankr.E.D.Ark. 1990). Debtor concedes that ASCS has a prepetition claim against him. Therefore, only the first and third questions must be answered here.
Pre-petition Debt Owed by Creditor to Debtor.
Several courts have addressed the issue of whether prepetition farm program contracts are executory contracts when some or all of the government payments are made post-petition. Those that specifically dealt with post-petition CRP payments provide useful guidance.
In In re Ratliff, 79 B.R. 930 (Bankr. D.Colo.1987), the court declared CRP payments were like rent and thus held the Government's obligation to make these "rent" payments arose pre-petition. Id. at 933. However, the Court also noted that the CRP contract "bears all the classic earmarks of an executory contract because under its terms both parties have ongoing obligations — the Government to pay rent and the Debtors to continue to implement the conservation programs." Id. Although the debtors had to assume the executory contract post-petition, the court still considered the payments to be pre-petition obligations; the court reasoned that the debtors had to take the burden of the contract — the government's right to setoff — along with the benefits. Id.
In In re Lundell Farms, 86 B.R. 582 (Bankr.W.D.Wisc.1988), the court followed an earlier Chapter 7 case involving setoff of deficiency program payments. See Moratzka v. United States (In re Matthieson), 63 B.R. 56 (D.Minn.1986). The Lundell Farms court found that the minimal conservation practices and reporting requirements with which the debtor had to comply in the deficiency and CRP farm programs did not render the contracts executory and that a final pre-petition determination of the deficiency amount is unnecessary to preserve the post-petition set off right. Lundell Farms, 86 B.R. at 584-85. It is important to note, however, that in Lundell Farms there were no material obligations left for either side to perform and the amount of the deficiency payment was already ascertainable. Id. at 588. The court held that the contracts were not executory "insofar as they provided the rights to receive the payments" that the Government sought to setoff and, consequently, the court concluded that the Government's debt to the debtor arose pre-petition and could be setoff. Id.
In In re Evatt, 112 B.R. 405 (Bankr. W.D.Okla.1989), the court thoroughly reviewed the competing arguments espoused in Matthieson, 63 B.R. 56, and Walat Farms, Inc. v. United States (In re Walat Farms, Inc.), 69 B.R. 529 (Bankr.E.D.Mich. 1987). Unlike Matthieson, Walat Farms was a reorganization proceeding in which the court denominated the deficiency payment program contract between the Government and the debtor to be executory because several duties required by the contract were substantially unperformed at the time that the debtor filed his petition. Walat Farms, 69 B.R. at 531. Consequently, the court determined that the debtor's right to payment arose only post-petition after proper assumption of and performance under the contract by the debtor-in-possession. The Evatt court adopted this rationale.
Where substantial performance remains due under ASCS/CCC contracts, and ASCS/CCC is obligated to make payment only upon completion of performance, such contracts are executory in nature. Upon the debtor-in-possession\'s assumption of such executory contracts, they become post-petition contracts of the estate. Payments arising under these post-petition contracts do not constitute pre-petition debts of the creditor, thus cannot be offset against a debtor\'s pre-petition debts pursuant to § 553.
In United States v. Gore (In re Gore), 124 B.R. 75 (Bankr.E.D.Ark.1990), the court recited the basic provisions of a CRP contract.
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