In re Kingsley, Bankruptcy No. 86-05944

Decision Date29 April 1987
Docket NumberBankruptcy No. 86-05944,Adv. No. 86-7155.
Citation73 BR 767
PartiesIn re Truman KINGSLEY and Connie Kingsley, Debtors, Truman KINGSLEY and Connie Kingsley, Plaintiffs, v. FIRST AMERICAN BANK OF CASSELTON, Defendant.
CourtU.S. Bankruptcy Court — District of North Dakota

Daniel L. Wentz, Fargo, N.D., for plaintiffs.

John Irby, Casselton, N.D., Brad Sinclair, Fargo, N.D., co-counsel for First American Bank of Casselton.

William P. Westphal, Minneapolis, Minn., U.S. trustee.

Joseph Vogel, Mandan, N.D., for plaintiffs.


WILLIAM A. HILL, Bankruptcy Judge.

The debtors, Truman and Connie Kingsley (Debtors), by their third amended complaint filed February 18, 1987, seek to have invalidated or voided certain security interests claimed by the defendant, First American Bank of Casselton (Bank), in crops, government payments and feed. The Bank concedes that to the extent the Debtors have feed in addition to the crops grown by the Debtors as described on the security agreement, a security interest in the additional feed is not validly perfected and is thus avoidable. The issues before the court have been submitted by the parties for resolution on the pleadings, stipulated facts, and documents of record as stipulated to. The facts as material are as follows:

Findings of Fact

The Debtors, on April 23, 1986, granted the Bank a security interest per a pre-printed security agreement entitled, "State of North Dakota, Security Agreement UCC-6."

This preprinted form security agreement is typical of those used by many lenders in North Dakota. The security agreement contains six general categories of described collateral, each preceded by an open box to be checked if a security interest in that particular collateral is to be granted. The security agreement on which the Bank relies in asserting its security interest in crops and government payments provides, in pertinent part, as follows:

X Crops: The following described crops which have been or may hereafter be harvested (describe crops) All crops of every type and description grown and/or harvested together with all other crops harvested from the date hereof on the premises described as follows The legal description of the Kingsleys' crop land is typed in at this point. * * * X All Proceeds and Products of all the foregoing.1

The security agreement was signed by both Debtors. A financing statement covering "all other crops harvested from the date hereof on the premises described as follows" with a description of property as listed on the security agreement inserted thereafter was signed by the Debtors and the Bank, and was filed with the Cass County Register of Deeds on April 28, 1986. The financing statement is a "STANDARD FORM-FORM UCC-1." Section 7 of the financing statement, which contains a description of real estate, contains in pre-printed language "X Proceeds ___", with the box being checked. Section 10 of the financing statement contains in pre-printed language: "X Proceeds of collateral are also covered", with this box also checked. A "North Dakota Central Notice Form" was filed on April 28, 1986, with the Secretary of State for inclusion in the North Dakota Central Notice System.

On April 23, Truman Kingsley signed a U.S. Department of Agriculture, Agriculture Stabilization and Conservation Service (ASCS) standard "ASSIGNMENT of PAYMENT" form assigning $20,000.00 of the Debtors' 1986 deficiency and diversion payments to the Bank. This assignment form was filed with the Cass County ASCS Office, but a financing statement regarding this assignment has not been filed.

Pursuant to a stipulation between the parties dated January 18, 1987, the Debtors agreed to make available to the Bank 1986 soybeans on hand in the approximate amount of 6,000 bushels, 1986 corn on hand in the approximate amount of 10,000 bushels, $8,468.70 of proceeds from 1986 wheat sales, and an $18,782.27 check for 1986 barley grown by the Debtors. The proceeds from sale of the soybeans and corn, along with the wheat and barley sale proceeds were to be deposited in an interest bearing account at the Bank, pending resolution of the matter at bar. As of January 18, 1987, the parties stipulated that the Bank has a valid security interest in cattle valued at $86,000.00, and in equipment, machinery and vehicles valued at $118,000.00 as of October 31, 1986, with no depreciation occurring on the machinery through April, 1987.

Conclusions of Law

Resolution of a portion of this complaint rests upon section 544(a) of the Bankruptcy Code. Section 544(a), commonly termed the "strong-arm clause", gives a trustee or a debtor in possession the rights and powers of a lien creditor at the time the case is commenced; the trustee or debtor in possession has a superior right to any unperfected security interest existing in the debtor's property. In re Armstrong, 56 B.R. 781, 785 (W.D.Tenn.1986); In re Galvin, 46 B.R. 12, 14 (Bankr.D.N.D.1986). Section 544(a) allows the trustee or debtor-in-possession to avoid an unperfected security interest.

The Debtors argue that, to the extent the Bank relies on its assignment of the 1986 government payments in asserting a security interest thereto, the security interest is avoidable because it is not properly perfected. Section 41-09-23 (U.C.C. § 9-302) of the North Dakota Century Code, in pertinent part, provides as follows:

1. A financing statement must be filed to perfect all security interests except the following:
a. A security interest in collateral in possession of the secured party under section 41-09-26.
b. A security interest temporarily perfected in instruments or documents without delivery under section 41-09-25 or in proceeds for a ten-day period under section 41-09-27.
c. A security interest created by an assignment of a beneficial interest in a trust or a decedent\'s estate.
d. A purchase money security interest in consumer goods; but filing is required for a motor vehicle required to be registered and fixture filing is required for priority over a conflicting real estate interest in a fixture to the extent provided in section 41-09-34.
e. An assignment of accounts which does not alone or in conjunction with other assignments to the same assignee transfer a significant part of the outstanding accounts of the assignor.
f. A security interest of a collecting bank (section 41-04-18) or in securities (section 41-08-36.1) or arising under the chapter on sales (see section 41-09-13) or covered in subsection 3.
g. An assignment for the benefit of all the creditors of the transferor, and subsequent transfers by the assignee thereunder.
* * * * * *

N.D.Cent.Code § 41-09-23 (Supp.1985). The ASCS forms for assignment of government payments are internal documents used by ASCS to "insulate the government as benefit provider from conflicting claims over payments, not to preempt state commercial law as between third parties". In re Sunberg, 729 F.2d 561, 563 (8th Cir. 1984). The assignment does not fall within one of the exceptions of section 41-09-23, thereby eliminating the need for a filed financing statement to perfect the assignment. Thus, the security interest, to the extent claimed via the assignment, is not perfected and is subject to avoidance pursuant to section 544 of the Code.

Although the security interest as claimed by virtue of the assignment is avoided, the Bank argues that the Debtors' grant of a security interest in the "Crops" and "Proceeds" also attaches to government farm payments. This court has previously held that a security interest in "crops . . . and the products thereof" does not attach to government farm PIK payments. In re Osteroos, Adv. No. 83-7354 (Bankr. D.N.D. Aug. 8, 1984). On appeal, the district court reversed this court's decision and held that a security interest in "all crops . . . and the products thereof" is sufficient to attach to government farm program payments. Osteroos v. Norwest Bank, 604 F.Supp. 848, 849 (D.N.D.1984). The district court appeared to treat a security interest in products as being synonymous with a security interest in proceeds, at least within the context of crops and government farm program payments. The district court's analysis also stated that PIK payments are analogous to government farm payments such as deficiency and disaster payments. Id. The district court's opinion in Osteroos is controlling on this court and resolves one of the issues before the court. Thus the Bank does hold a valid security interest in the Debtors' government payments to the extent they are derived in consequence of the 1986 crop.


A far more novel issue is whether the security agreement on which the Bank relies in asserting a security interest in the 1986 crops and government payments violates section 35-05-04 of the North Dakota Century Code. Section 35-05-04 provides as follows:

35-05-04. Security Agreement not to include other personal property. A security agreement covering specific crops is not valid to create a security interest therein, nor entitled to be filed in the office of the register of deeds, if the security agreement contains any provision by which a security interest is claimed in any other personal property.

N.D.Cent.Code § 35-05-04 (1980). Only two reported cases exist in which courts has discussed this statute: In re Yagow, 62 B.R. 73 (Bankr.D.N.D.1986) aff'd Civil No. A3-86-51 (D.N.D. Oct. 10, 1986) and Production Credit Ass'n. v. Foss, 391 N.W.2d 622 (N.D.1986). A security interest in ""all crops growing or to be grown"" on described real estate does constitute a security interest in specific crops in North Dakota, and if listed on a security agreement with other personal property is invalid as violative of section 35-05-04. In re Yagow, 62 B.R. at 80-81. However, neither of the above-mentioned cases have addressed the precise issue before the court: whether a security interest in crops and proceeds is invalid under section 35-05-04 because the inclusion...

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