Matter of Lundell Farms
| Citation | 86 BR 582 |
| Decision Date | 13 May 1988 |
| Docket Number | Bankruptcy No. MM11-87-02620. |
| Parties | In the Matter of LUNDELL FARMS, Debtor. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Western District of Wisconsin |
Sheree Gowey, Asst. U.S. Atty., Madison, Wis.
Denis P. Bartell, Steven J. Kirschner, Ross & Stevens, S.C., Madison, Wis., for debtor.
Kristi McKittrick, Madison, Wis., for creditor, John Lundell.
This matter raises the issue of whether Commodity Credit Corporation may exercise a claimed right of setoff against property of the bankruptcy estate. The debtor and various of its general partners have sought to use the disputed funds in their farming operations and have resisted the setoff.
The resolution of legal issues has been hindered by incomplete evidence. One fact that can be stated with certainty is that on October 1, 1987, Lundell Farms, a partnership, commenced a case under chapter 11 of the Bankruptcy Code. The exact composition of the partnership is not clear. No partnership agreement has been presented to the court as evidence or otherwise. However, Commodity Credit Corporation ("CCC") claims that Howard Lundell ("Howard"), John Lundell ("John"), and Dennis Lundell ("Dennis") were the general partners in 1982, when the partnership entered into a grain storage agreement. The petition filed to commence this case states Lundell Farms is now comprised of Dennis, his wife Debra Lundell ("Debra"), Howard, and his wife Elna Lundell ("Elna"). The filed statement of financial affairs explains the history of the partnership as:
In approx. 1983, debtor was briefly engaged in a business known as Terrafuel. The partners of Lundell Farms have been the above named individuals since its inception; in 1971, John and Karen Lundell joined Lundell Farms Partnership; said individuals sold their interest in the partnership in January 1983.
The "above-named individuals" are Dennis, Debra, Elna, and Howard. In light of this explanation, it is unclear why Elna and Debra were not listed as general partners on the 1982 grain storage agreement.
A central concern of the present motion is the debt Lundell Farms owes CCC arising from a grain storage loss. The exact date of the loss is unclear. CCC claims the loss arose in July, 1983, the debtor claims 1984, but they agree the debt arose well before October 1, 1987. The grain loss debt remained substantially unpaid when this case was commenced. On or about September 14, 1987, Howard, Dennis, and Lundell Farms were placed on the "debt register" for non-payment of this debt. (See U.S. exhibit 15). Both partners sought, but failed, to negotiate their removal from the register.
At the time of filing, there were five contracts existing with CCC signed by Lundell Farms partners. Those contracts include:
The following amounts were payable under the contracts to the parties identified:
Howard Elna Dennis Debra
U.S. Exh. 10 $10,901.46
U.S. Exh. 11 $10,916.44
U.S. Exh. 12 2,885.75 $2,885.75 2,885.75 $2,885.75
U.S. Exh. 13 671.75 671.75 671.75 671.75
__________ _________ __________ _________
Totals $14,473.94 $3,557.50 $14,458.96 $3,557.50
The amounts due under the contracts became ascertainable as of October 1, 1987, the date of Lundell Farm's bankruptcy filing. All amounts shown as due to Elna and Debra have been paid and CCC is not making any claim against either of them. On schedule B-3 — property not otherwise scheduled—these contracts are listed as "Government (Farm) Entitlement Programs" with a value of $30,000.00.
The matter now before the court is the debtor's motion for turnover of the farm program payments due Howard and Dennis. In response, the United States of America acting on behalf of CCC has counterclaimed that it has the right to setoff $28,932.90 owed to Dennis and Howard against the grain storage loss debt and has requested relief from the automatic stay.
Some understanding of the Price Support and Conservation Reserve Programs is necessary to analyze the issues presented. The Price Support and Adjustment Program, authorized at Title 7, United States Code, Section 1441, et seq. is part of the government effort to stabilize grain prices by providing incentives for limiting the production of certain crops. Deficiency payments are made to farmers who limit their production. In essence, a deficiency payment is a subsidy, calculated by a formula, which provides the farmer with supplemental income in exchange for the opportunity to market crops. Governing regulations for the program are found at 7 CFR § 713.1, et seq. Deficiency payments are specifically governed by section 713.108, as amended at 51 Fed.Reg. 21833 (1986).
When a farmer enters the program, she signs a contract which, along with the cited regulations, sets forth the farmer's and the government's rights and obligations. The farmer agrees to refrain from planting crops on a portion of her farm and to devote the nonproductive areas to conservation practices. The government in turn agrees to make deficiency payments. In the contract both parties agree to the specific formula by which deficiency payments will be made. Except for the national weighted average market price, all elements necessary to ascertain the deficiency payment are known and agreed. After the contract is signed the only performance required of the farmer is that she not grow the specified crops and that she carry out certain minimal conservation practices. Neither the right to the deficiency payment nor the exact amount of the payment are dependent upon any other performance by the farmer, although the farmer is required to file compliance reports by July 15. (Howard and Dennis did file their reports by July 15, 1987). The final deficiency payments are made on or after October 1 of each year of the contract.
The Conservation Reserve Program (CRP) is similar to the Price Support Program. Under CRP the farmer receives a yearly rental payment from CCC in return for implementing a ten year conservation program. The farmer is barred from harvesting any crops from the land or utilizing it for grazing purposes. She must plant cover and eradicate noxious weeds. The farmer receives annual rental payments after October 1 of each year of the contract period.
The basic question to be resolved is whether CCC can offset the debt it owes to Lundell Farms against the grain-storage claim Lundell Farms owes CCC.3 A creditor's right to setoff in bankruptcy is governed by in 11 U.S.C. § 553(a) which provides in relevant part:
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. . . .
It is not necessary that the debts and claims be of the same character for setoff to be permitted. The only requirements are (1) the debts and claims must be mutual, and (2) they must be pre-petition. In re Braniff Airways, Inc., 42 B.R. 443, 447, 12 C.B.C.2d 610 (Bankr.N.D.Texas 1984). In order to substantiate the right to setoff, the creditor must establish the following:
In re Brooks Farms, 70 B.R. 368, 371, 15 B.C.D. 674 (Bankr.E.D.Wis.1987) citing In re Fred Sanders Co., 33 B.R. 310 (Bankr. E.D.Mich.1983); In re IML Freight, 65 B.R. 788, 793 (Bankr.D.Utah 1986); In re Morristown Lincoln-Mercury, Inc., 42 B.R. 413 (Bankr.E.D.Tenn.1984). See also In re Taylor Motors, 60 B.R. 760 (Bankr.D. Nev.1986).
There is no doubt that in a general sense the debtor and CCC have claims against each other. The question then is whether those debts are "mutual." The term "mutual debt" as used in section 553(a) is not defined in the Bankruptcy Code, but has been interpreted by courts to require that the debts "must subsist or be owing between the same parties, in the same right or capacity, and must be of the same kind or quality." Braniff, 42 B.R. at 449. In a bankruptcy context, mutuality is particularly important:
Because the debtor and the debtor-in-possession are separate and distinct entities, the courts have concluded that the requisite element of mutuality of parties is lacking whenever a creditor attempts to offset pre-petition debt against a post-petition claim.
Id. This distinction is further grounded in the language of section 553 which requires claims and debts to be pre-petition.
There is no dispute that the debtor's grain storage debt owed to CCC arose pre-petition. It is less clear whether the debts from CCC to Howard and Dennis arose before or after this case was filed on October 1, 1987. Since the actual amount of the deficiency...
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