Matter of Sunberg
| Decision Date | 16 May 1983 |
| Docket Number | Bankruptcy No. 83-540-W. |
| Parties | In the Matter of Dwayne SUNBERG, Patricia Sunberg, Engaged in farming, Debtors. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Southern District of Iowa |
Dwayne Sunberg and Patricia Sunberg, in pro. per.
Charles R. Hannan, Council Bluffs, Iowa, for debtors.
Steven H. Krohn, Council Bluffs, Iowa, for PCA.
On April 12, 1983, Dwayne and Patricia Sunberg ("Debtors") filed a voluntary petition in bankruptcy pursuant to Chapter 11 of the Bankruptcy Code of 1978.
On December 24, 1982, the stay imposed by the Supreme Court forestalling the effect of its decision in Northern Pipeline Construction Co. v. Marathon Pipeline Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), expired leaving the bankruptcy court without jurisdiction.
On December 25, 1982, the Emergency Rule adopted by order of the District Court for the Southern District of Iowa became effective. This rule permits the bankruptcy court to continue to administer cases pursuant to Title 11 of the U.S.Code. The rule has been validated by the 8th Circuit. See, In re Hansen, 702 F.2d 728, 10 Bankr.Ct. Dec. 280 (8th Cir.1983). Based on the foregoing, the court finds that it has jurisdiction to enter a memorandum of decision and order in this matter.
On April 13, 1983, the Debtors filed an application to incur debt pursuant to 11 U.S.C. § 364. The purpose of the loan sought by the Debtors is for operating expenses for their farming business in 1983.
On April 25, 1983, after receiving notice of the Debtors' application, the Agricultural Production Credit Association ("PCA"), objected to the Debtors' application to incur debt.
A notice of hearing was duly issued and the matter was set for hearing on April 23, 1983.
NOW, from the evidence adduced and from the written arguments submitted by the parties, the court makes the following:
FINDINGS OF FACT
1. The Debtors have been farming in and around the Hamlin, Iowa, area since 1961. They farm approximately 895 acres, of which 495 acres are owned by the Debtors, and 400 acres are rented. The Debtors have planted corn and soybeans as their primary cash crops.
2. The Debtors also have adequate facilities to finish feeder pigs and cattle. They do not own any livestock currently.
3. The Debtors have been borrowing money regularly from the PCA since 1980. The Debtors currently owe the PCA a principal balance of $302,669.60 with interest to the date of filing of $149,823.90.
4. In order to obtain the initial loan from the PCA in 1980, the Debtors executed a security agreement giving the PCA a security interest in livestock, feed, grain on hand, farm machinery and equipment, and crops. In 1982, the PCA had the Debtors execute a new security agreement. This document gave the PCA a security interest in crops, growing crops, livestock, farm products, equipment, inventory, fixtures, contract rights, accounts and general intangibles existing or hereafter acquired. The PCA perfected its security interest with an amended financing statement filed on April 20, 1982.
5. The Debtors' financial position deteriorated further during the last half of 1982 and into 1983. The Debtors were unable to service most of their long term debt due to high overhead costs and poor commodity prices.
6. On January 11, 1983, John Block, Secretary of Agriculture, announced the details of a new program designed to reduce production, reduce government grain surpluses, and avoid increased budget outlays necessary for price support programs. The program will pay farmers in kind to take cropland out of production in 1983. The sign-up period ran from January 24, 1983, through March 11, 1983. The payment-in-kind program ("PIK") gives the farmer four options:
a. Participation in regular farm programs only.
b. Participation in regular farm programs plus the 10% to 30% PIK.
c. Participation in the PIK program by withdrawing an entire farm from production if a whole base acre bid is accepted.1
d. Not participate at all.
When the farmer signs up for PIK, a contract is signed which entitles the farmer to receive a certain number of bushels of the commodity that would have been produced on PIK acres based upon past production records. In return, the farmer agrees to not plant the diverted acres, use good soil conservation techniques, keep weeds under control, and where prudent and economical, plant a ground cover that cannot be grazed or harvested during the 6 month growing season. The farmer also agrees to abide by the terms and conditions set forth in the appendix that is attached to the contract. See Appendix to Form CCC-477.
7. At the end of the growing season, the operator will have 5 months to claim the PIK entitlements either from CCC stored corn on his property or from an elevator. Then, the operator is free to use the grain in any manner consistent with the individual operator's own financial situation. The PIK entitlement will be made out in the name of the producer or operator or the assignee of the producer or operator. See 7 CFR § 770.6(e); (f).
8. On January 12, 1983, the Agricultural Stabilization and Conservation Service ("ASCS") issued interim rules governing the PIK program. 48 Fed.Reg. 1477 (1983) (). The rules describe how the program will operate, its purpose, the obligations of the operator and producer and the obligations of the U.S. Department of Agriculture ("USDA") and its administering agencies, the Commodity Credit Corporation ("CCC") and the ASCS. The rules were adopted in final form on March 4, 1983. 48 Fed.Reg. 9232 (1983) ().
The rules of March 4, 1983, were amended in six different places to reflect public comments and other matters considered relevant by the USDA and the ASCS. The most significant amendments for purposes of this matter are found at 7 CFR § 770.6(e) which provides for the assignment of the PIK rights and § 770.6(f) which protects the USDA from becoming embroiled in disputes over the ownership rights of the entitlement after the terms and conditions of the contract are fulfilled.
9. On February 9, 1983, Dwayne Sunberg ("Debtor") signed an application form and contract indicating his intent to participate in the PIK program with crop share producer Billy Twist. The Debtor agreed to divert 57 acres in corn base acreage and take a payment in corn equal to 2212 bushels. (This amount equals a 50% share.) The CCC representative approved the contract on March 16, 1983.
10. On March 9, 1983, the Debtor agreed to divert other acres that he is farming. He executed two PIK contracts which, if complied with would divert 34.5 acres of rented land and 107 acres of land owned by the Debtors to non-crop use. Each of these parcels has a corn base acreage. The Debtor is to receive 9,940 bushels of corn for his efforts. These contracts were approved by the CCC on March 16, 1983.
11. The Debtors filed their petition on April 12, 1983, and made application to incur secured debt pursuant to 11 USC § 364 on April 13.
12. The Debtors have obtained a loan commitment totalling $92,000 from the Farmer's Home Administration. This loan is to be secured with the PIK entitlements, livestock and 1983 crops.
MEMORANDUMAt issue in this adversary proceeding is a security interest in after acquired property of the Debtors.
The PCA duly filed with the proper office a financing statement describing its collateral as, among other property, "all existing or hereafter acquired: . . . general intangibles." The security agreement contains a like reference. The perfection of the security interest took place prior to the commencement of the bankruptcy case.
Thereafter and also prior to bankruptcy, the Debtors contracted with the CCC to withhold some of their corn acreage from production in exchange for a payment-in-kind from government-owned surplus grain to be delivered at the end of the 1983 growing season. This is the so called "PIK" program of the United States Department of Agriculture designed to reduce farm surplus and government subsidies, and boost the farm economy.
The Debtors wish to use their PIK "entitlements" as collateral to secure a loan of operating capital for the 1983 crop year. The PCA claims a consensual lien by way of a security interest in the entitlements based on the after acquired property clause of its security agreement covering general intangibles.
There are really two questions to be answered here: 1) was it the intent of the parties, as expressed in the security agreement, that PCA could look to future governmental subsidies as collateral for its loans to the Debtors; 2) if that was the intent, is the PIK contract with the government a general intangible adequately described in the security agreement and financing statement so as to establish a security interest under Iowa's Uniform Commercial Code.
Before the court can consider whether the description of collateral meets the requirements of the UCC, it must examine Section 554.9204. That section requires that the parties "agree" that an interest attach.
The very breadth of the omnibus clause of the security agreement is indicative of an intent to include all of the Debtors' farm property interests. There are two economic features that have dominated modern farming, the farm credit system as a lender and government sponsored farm subsidies in one form or another.2
The PCA is a part of the farm credit system and the Debtors, farmers. Both would have to be conscious of the impact of the various farm programs in existence or that might come into existence on the farmer borrower's ability to meet his financial obligations. In the absence of any evidence to the contrary, the court must conclude that the omnibus clause in the parties' security agreement was intended to cover possible future property interests arising from the government's farm programs and in the last instance,...
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