Lead Opinion
This is а bankruptcy case. The issue is whether a crop-disaster-relief payment authorized by legislation enacted after the debtor filed for bankruptcy is property of the bankruptcy estate. A panel of this court held that it is not, following which the court voted to consider the case en banc. After hearing argument and considering supplemental briefing by the parties as well as law professors serving as amici curiae,
I.
The facts are short and undisputed. Farmer Edward Keith Burgess filed a Chapter 7 bankruptcy petition in August 2002. He was discharged from bankruptcy in December 2002. In February 2003, the Agricultural Assistance Act of 2003 (“the 2003 Act”) was enacted. That legislation provided for crop-disaster-relief payments to qualifying farmers for 2001 or 2002 crop losses.
Qualifying farmers could begin applying for disaster payments in June 2003. Burgess did so, and in August 2003, after Burgess’s bankruptcy case was closed, the Farm Service Agency of the Department of Agriculture mailed a check for $24,829 to the trustee of Burgess’s bankruptcy estate. The purpose of this payment was to compensate Burgess for crop losses sustained in 2001.
The bankruptcy case was reopened to determine what to do with the check. Burgess filed a Motion for Turnover, which was denied by the bankruptcy court. The district court affirmed, both courts concluding that the payment was property of the bankruptcy estate and belonged to Burgess’s creditors.
A panel of this court reversed. Burgess v. Sikes (In re Burgess),
The panel also held that the payment was not “proceeds” of property under § 541(a)(6). Id. at 787. Proceeds must derive from property of the estate, and here Burgess had none. Id. Without property, there could not be proceeds. Id. Accordingly, the panel reversed the judgment of the district court. Id.
The court ordered rehearing en banc to determine whether the disaster payment at issue in this case constitutes property within the meaning of § 541(a)(1) or proceeds within the meaning of § 541(a)(6). Holding it is neither, we again reverse the judgment of the district court.
II.
Whether money is property of the debtor or the bankruptcy estate is a question of law reviewed de novo. See State Farm Life Ins. Co. v. Swift (In re Swift),
Thus, the scope of § 541 is broad: that section brings into the estate all of the debtor’s legal and equitable interests “wherever located and by whomever held.” § 541(a)(1). However, the Code also provides a temporal limitation: property of the estate is determined at “[t]he commencement of the case.” Id.
III.
The trustee and the amici (collectively, “the Appellees”) argue that Burgess’s disaster-relief payment comes into the bankruptcy estate through a combination of § 541(a)(1) (property) and § 541(a)(6) (proceeds). Specifically, they advance the following arguments to support the inclusion of the disaster-relief payment in Burgess’s bankruptcy estate. First, they argue that Burgess’s crop loss gave him a contingent interest in the postpetition disaster-relief payment. As such, they claim that the contingent interest constitutes property of the estate, making the disaster-relief payment proceeds of that property. Second, the Appellees argue that Burgess’s crop loss, itself, is property of the estate supporting the inclusion of the pay
Because the Bankruptcy Code defines property of the estate in terms of “legal or equitable interests of the debtor” that exist “as of the commencement of the case,” id. § 541(a)(1), the question we must decide is temporal: when did Burgess acquire a legal interest in the disaster-relief payment? In other words, did the crop loss itself entitle Burgess to the money? Or was it the combination of Burgess’s crop loss and the enactment of the 2003 Act that gave him that interest? If it was the former, then Burgess acquired the interest before bankruptcy, and the payment is part of his estate. But if it was the latter combination of events that gave Burgess an interest in the payment, he did not acquire that interest until after bankruptcy; and the disaster-relief payment belongs to Burgess. For the reasons that follow, we hold it was the latter.
A.
The Appellees first argue that Burgess had a contingent interest in the payment at the time of bankruptcy pursuant to Segal v. Rochelle,
In Segal, the debtors filed for bankruptcy in September 1961. Id. at 376. “After the close of that calendar year, loss-carry-back tax refunds were sought and obtained from the United States on behalf of [the debtors] under Internal Revenue Code § 172.” Id. The losses had been suffered prior to the debtors filing for bankruptcy in September 1961; they were carried back to the years 1959 and 1960 to offset net income earned in those' years. Id. The question before the Supreme Court was whether this refund was property of the bankruptcy estаte under § 70a(5) of the Bankruptcy Act,
“Property,” as used in § 70a(5), was not defined in the Bankruptcy Act;
The Court held that in light of these considerations, the debtors’ refund was property of the bankruptcy estate. Id. at 381,
Because Burgess’s crop loss occurred before bankruptcy, the Appellees argue that the Supreme Court’s “sufficiently rooted” test supports classification of the payment as property of the estate. In other words, they claim that Burgess’s interest in the disaster payment is “sufficiently rooted in [Burgess’s] pre-bankruptcy past and so little entangled with [his] ability to make an unencumbered fresh start that it should be regarded as ‘property’ under [§ 541],” id. at 380,
First, although Congress has specifically approved of Segal’s result,
The Bankruptcy Code was intended to create a more uniform and comprehensive scope to “property of the estate” which is subject to the reach of debtors’ creditors than had previously existed under the old Bankruptcy Act. Under Section 70(a) of the earlier Act, the inclusion of an asset within the estate varied in accordance with (1) an individual examinаtion of the legal nature of the asset (2) in light of the purposes of the Bankruptcy Act. This two part test reflected the dual and often conflicting policies woven into the Act. These policies were to secure for the benefit of creditors everything of value the bankrupt might possess in alienable or levia-ble form, but to permit a bankrupt to accumulate new wealth after the date of his petition and to allow him an unen*499 cumbered fresh start. Relying upon these competing considerations, the Supreme Court developed a rule that where property “is sufficiently rooted in the pre-bankruptcy past and so little entangled with the bankrupts’ ability to make an unencumbered fresh start ... it should be regarded as ‘property’ [of the estate].”
The enactment of the Bankruptcy Code undertook to obviate this analytical conundrum. Under Section 511 of the Code, all property in which the debt- or has a “legal or equitable interest” at the time of bankruptcy comes into the estate.
Second, Segal is distinguishable because the debtor did have a prepetition legal interest in that case. At the time of bankruptcy, § 172 of the Internal Revenue Code gave the debtor a claim for a tax refund if certain conditions were met. It was the combination of the law and the conditions made legally relevant by the law that conferred on the debtor a prepetition legal interest: the claim for a refund. In that way, the Segal debtors’ claim for a refund is similar to the prepetition accrual of a cause of action that results in a post-petition judgment in the debtor’s favor. In such cases, the debtor’s cause of action is a prepetition legal interest — § 541(a)(1) property — that brings the postpetition judgment into the estate as proceeds under § 541(a)(6). See, e.g., Wieburg v. GTE Southwest Inc.,
Here, by contrast, Burgess suffered the crop loss before filing for bankruptcy, but he did not have a prepetition claim to, or interest in, the disaster-relief payment because the legislation authorizing the payment had not yet been enacted. If Burgess had no right or interest that constituted property within the meaning of § 541(a)(1) at the commencement of the case, then the payment he later received cannot be proceeds of property of the estate under § 541(a)(6). Two other courts have recently reached the same conclusion in the context of federal disaster-relief payments to farmers.
In In re Vote, the Eighth Circuit distinguished Segal in holding that similar disaster-relief payments were not property of the estate under § 541(a)(1). Drewes v. Vote (In re Vote),
Vote could not plant a crop in 1999 because the soil was . saturated. Id. at 1026. In September 1999, Vote filed a Chapter 7 bankruptcy petition. Id. In
The Eighth Circuit rejected the trustee’s argument that the payments were property of the bankruptcy estate under Segal, stating,
Segal is distinguishable.... [Ujnlike the Appropriations Act in the present case, the law authorizing the tax refund predated the bankruptcy filing. Thus, the Segal debtor possessed an existing interest at the time of filing, whereas Vote had a mere hope that his losses might generate future revenue.
The trustee cites a number of cases that follow the rule in Segal. In each of those cases, however, there existed a readily discernible legal interest at the time of filing. Some arose from statutes, some from contracts, and some from lawsuits, but all conferred upon the debtors interests with some potential value, even though those interests may have been only contingent. In contrast, before Congress passed the Appropriations Act, Vote had no interest of any kind.
Id. at 1026-27.
One district court recently followed Vote in a similar case, In re Bracewell,
The Bracewell court explained that “once crop disaster legislation is enacted, legally significant facts exist upon which a farmer could base a contingent right, which is the same type of contingent right contemplated under Segal.” Id. at 706-07. However, the mere hope that the legislation will be enacted does not create a contingent interest in the debtor. Id. at 707. The court explained,
Without the crop disaster legislation, growing crops and suffering crop loss ... are of no legal significance and create no right.... Indeed it is the crop disaster legislation that makes growing and suffering certain crop losses relevant by attaching new legal consequences to events completed before the legislation’s enactment. Consequently, this is not the type of contingency contemplated by Segal ....
Id.
The necessity of a prepetition legal interest has also been reaffirmed in post-Segal cases decided in other, comparable contexts. Sliney v. Battley (In re Schmitz),
The debtor in Schmitz was an Alaskan fisherman of halibut and sablefish. Schmitz,
Pursuant to the final regulations, “the plan called for qualified fisherman to apply for and be awarded Quota Shares (‘QS’) and Individual Fishing Quotas (‘IFQ’), an annual catch limit applicable to [future] fishing, based on the total weight of a fishermen’s legal landing of sablefish and halibut during the so-called ‘qualifying years’ of 1988-1990.” Id. (citing 50 C.F.R. § 676.20(b) (1994)). Schmitz filed his QS/ IFQ application in 1994, but his QS/IFQ allotment did not become final until 1996. Id. at 1255-56. “At last, in December 1996, over four and one-half years after Schmitz filed his bankruptcy petition, he was issued two QS/IFQ certificates for 41,-478 units and 1,815 units of halibut, respectively.” Id. at 1256.
In January 1997, Schmitz “conveyed the larger QS/IFQ to Appellant William Sliney in exchange for some crab pots.” Id. Sli-ney then resold the allotment to a third party for approximately $44,000. Id. Schmitz also sold the smaller allotment to another party for approximately $2,000. Id.
In June 1997, the trustee sought to reopen Schmitz’s bankruptcy proceeding, claiming that the QS/IFQ allotments were property of the estate and seeking to recover the $2,000 from Schmitz and $44,000 from Sliney. Id. The bankruptcy court agreed that the allotments were property of the estate and awarded the money to the trustee:
The bankruptcy judge ruled that in light of the “ongoing federal activity to implement” a sablefish management plan “and the advanced stage in bringing that to fruition” at the time Schmitz filed his bankruptcy petition — even though the plan had not yet been adopted — “the IFQ/QSs were tied to Schmitz’s prepetition qualifying rights from the 1988-1990 fishing seasons. The IFQ/QS rights were ‘rooted’ in Schmitz’s pre-bankruptcy past.”
Id. The Bankruptcy Appellate Panel affirmed the bankruptcy court’s grant of partial summary judgment in favor of the trustee. Id.
The Ninth Circuit reversed, holding that the QS/IFQ allotments “were not property of the bankruptcy estate because the regulations creating them were not adopted until after the bankruptcy petition was filed.” Id. The Schmitz court began its analysis as we did in this case, by looking to the Bankruptcy Code’s definition of property of the estate: “all legal or equitable interests of the debtor in property as of the commencement of the case.” Id. at 1256-57 (quoting 11 U.S.C. § 541) (emphasis in original). The court determined that Schmitz did not have a property interest in the QS/IFQs on the date of bankruptcy, explaining,
On the date that Schmitz filed his petition, he might have had a hope, a wish and a prayer that the Secretary would eventually implement the plan then under consideration. However, the fact remains that as of the date of the petition, Schmitz’s 1988-1990 catch history had no value. At most, there existed the possibility that his prior catch record might be relevant if a fishing quota pro*502 gram were ever adopted in a form favorable to him, if his application for such rights were granted, and if he could successfully defend against any competing challenge to his application. This sort of nebulous possibility is not property.
Id. The Schmitz court then discussed and approved of the Eighth Circuit’s decision in Vote, observing, “Schmitz, the fisherman, is in the same boat [as the debtor in Vote].... [Neither’s] expectation [rises] to the level of property.” Id.
The district court in Hoseman v. Weinschneider also confirmed the necessity of a prepetition legal interest. Weinschneider,
Weinschneider was never compensated by Burton, and in February 1996, he filed a state-court breach-of-contract action against the other parties to the agreement. Id. at 898. The trustee brought an action in bankruptcy court, seeking to have the breach-of-contract action declared property of the bankruptcy estate. Id. The bankruptcy court agreed. Id.
The bankruptcy court “reasoned that the deal with Burton was a continuation of [the debtor’s] pre-bankruptcy business, and so the state court suit [was] significantly related to [the debtor’s] pre-bank-ruptcy activities, i.e., the matters giving rise to the state court suit [were] rooted in [his] pre-bankruptcy past.” Id. at 899 (internal quotation marks omitted). The bankruptcy court “did not hold that the contract was formed before the petition was filed, ... only that [the debtor] participated in negotiations leading to its formation before filing.” Id.
The district court reversed. Id. at 902. The court first found that for summary judgment purposes, the contract was formed after Weinschneider filed for bankruptcy. Id. at 900. Moreover, the bankruptcy court had erred in “applying the Segal ‘rooted in the pre-bankruptcy past’ doctrine directly without consideration of whether there was a contract.” Id. Furthermore, neither “mei*e negotiations” nor “merely carrying on one’s normal business activities as if one were not going to declare bankruptcy or had not declared bankruptcy create a pre-petition right to any property.” Id. at 901. The district court further explained the role of the contract this way:
Without a contract, there would be no prospect of any interest in a breach of contract case that had to be disclosed, and without the claim that there was a contract to breach, there would be no state court action to roll into the bankruptcy estate. Without the contract, whether it was pre-petition or post-petition, the negotiations on which the bankruptcy court bases its conclusions would by themselves have no legal effect or relevance. The pre-petition existence of the contract was crucial.
Id. Because Weinschneider filed for bankruptcy before the contract was formed, then, he had no prepetition cause of action that could be part of the bankruptcy estate. Id. Consequently, the judgment of
We agree with the analyses of the Vote, Bracewell, Schmitz, and Weinschneider courts. In this case, at the time of filing, Burgess had only a mere hope that crop-disaster-relief legislation would be enacted. “This sort of nebulous possibility is not property.” Schmitz,
B.
The Appellees also argue that Burgess’s crop loss, itself, is § 541(a)(1) proрerty supporting the inclusion of the disaster-relief payment in the estate as proceeds under § 541(a)(6). We reject this argument.
Section 541(a)(1) defines property in terms of a legal or equitable interest in property that exists at the commencement of the case. § 541(a)(1). For the temporal limitation to have any meaning at all, Burgess must have had a prepetition interest in the disaster-relief payment, not the crop loss. Were Burgess’s crop loss itself enough to bring the payment into the estate — notwithstanding the postpetition enactment of the 2003 Act, creating Burgess’s right to the payment — the “as of the commencement of the case” language would have no force or effect. “[A] statute must, if possible, be construed in such fashion that every word has some operative effect.” United States v. Nordic Village Inc.,
Furthermore, as the Eighth Circuit said in Vote, “[w]e have found no case in which a pure loss with no attendant potential benefit was included as property of the estate.” Vote,
The Appellees cite Milnor v. Metz,
First, Milnor and Williams decided in 1842 and 1890, respectively predate the enactment of the current Bankruptcy Code by approximately 100 years.
Second, Milnor and Williams stand for the proposition that a prepetition loss is property of the estate if it gives rise to a prepetition legal claim or interest. In this case, Burgess’s crop loss, in and оf itself, did not give him a legal claim to, or interest in, the disaster-relief payment.
Milnor v. Metz involved a debtor who was an employee of the U.S. government and whose compensation was fixed by statute. Milnor,
The Supreme Court contrasted Milnor’s situation with that in Emerson’s v. Hall,
Hall, a creditor of Emerson, sued the heirs’ guardian for repayment of the debt out of the money awarded by Congress. Id. The Supreme Court ruled in favor of the heirs, holding that the “act of congress gave the money to Emerson’s heirs[ ] as a gratuity[ ] because of the meritorious conduct of their father.” Id. at 226. The Court explained that Emerson had “acted under no law, nor by virtue of any authority; his acts imposed no obligation, either in law or in equity, on the government.” Id. (internal quotation marks omitted).
By contrast, the Milnor Court stated, “[t]he services performed by Milnor were at the instance of the government....” Id. The government was therefore Mil-nor’s debtor. Id. Although the repayment of the debt was within Congress’s discretion, the debt existed nonetheless. See id. at 226-27. The Court explained that “[h]ad a similar claim on the part of Milnor existed against an individual, instead of the government, then there can be no doubt, he could have recovered by suit.” Id. at 227. “As the government was equally bound to do its debtor justice, in a different mode, with an individual, we think no sound distinction exists in the two cases.” Id. In other words, even though Milnor could not sue the government for the amount of the debt, the debt still existed.
Because Milnor was a creditor of the government, his case is distinguishable from Burgess’s. In Milnor, the government was legally obligated to repay its debt to the bankrupt, even if actual payment was ultimately within Congress’s discretion because the government could not be sued. In other words, sovereign immunity is not a bar to the existence of a prepetition cause of action for bankruptcy purposes. But unlike Milnor, whose claim for services was against the government, Burgess did not have a prepetition claim against the government for his crop loss. Burgess was not a creditor of the government, and Congress had no obligation to pass crop-disaster-relief legislation. Rather, the disaster-relief payments were gratuitous; thus, this case is like Emerson’s, not Milnor.
The other Supreme Court case discussed by the Appellees, Williams v. Heard,
In 1871, an arbitration tribunal in Geneva awarded the United States $15,500,000 as indemnity for property damage sustained by U.S. citizens during the war. Id. at 536-37,
The Court held that the claim existed before bankruptcy and was therefore property of the estate, noting,
[T]hese war premiums of insurance were recognized by the government of the United States as valid claims for which satisfaction should be guarantied [sic]. There were thus at all times a possibility that the government would see that they were paid. There was a possibility of their being at some time valuable. They were rights growing out of property; rights, it is true, that were not enforceable until after the passage of the act of congress for the distribution of the fund. But the act of congress did not create the rights. They had existed at all times since the losses occurred. They were created by reason of losses having been suffered. All that the act of congress did was to provide a remedy for the enforcement of the right.
Id. at 541,
This interpretation is buttressed by the Williams Court’s reliance on Comegys v. Vasse,
In 1819, the United States and Spain entered into a treaty, pursuant to which Spain paid the United States $5,000,000 “in full discharge of the unlawful seizures which she had made.” Id. at 542,
It is not universally, though it may ordinarily be, one test of a right, that it may be enforced in a court of justice. Claims and debts due from a sovereign are not ordinarily capable of being so enforced. Neither the king of Grant [sic] Britain nor the government of the United States is suable in the ordinary courts of justice for debts due by either; yet who will doubt that such debts are rights?
Williams,
Milnor, Williams, and Vasse, then, all involved debtors who were creditors of the government or who suffered property loss that gave rise to a legal claim. Their claims were contingent in the sense that they depended on the goodwill of the governments involved for satisfaction, but they were cognizable legal claims nonetheless. By contrast, Burgess had no legal claim arising from his dаmaged crops when he filed his petition. Unlike the debtors in Milnor and Basse, he was not a creditor of the government. And unlike the debtor in Williams, his property was not damaged at the hands of an individual
IV.
We are likewise unpersuaded by those bankruptcy and district-court cases cited by the Appellees holding that erop-disas-ter-relief payments are property of the bankruptcy estate. The Appellees principally rely on four such cases: Kelley v. Ring (In re Ring),
In both Ring and Boyett, for example, the statute authorizing the disaster-relief payments was enacted before the debtor filed for bankruptcy.
Lemos is weak authority for the Appel-lees’ position. In that case, the bankruptcy court held that disaster-relief payments were property of the estate under both § 541(a)(1) and § 541(a)(6) even though the statute authоrizing the payments was not enacted until after the debtor filed for bankruptcy. Lemos,
First, Lemos relied heavily on the bankruptcy court’s decision in In re Schmitz,
Second, the Lemos court’s reasoning is not persuasive. In holding that the debtor had a contingent interest in the disaster payments, the court reasoned as follows:
[I]n this case Plaintiff became entitled to the [disaster-relief] payments only as a result of qualifying events (i.e., growing and suffering qualifying losses as to certain crops) occurring before bankruptcy, rather than any significant event taking place after filing his bankruptcy petition. The scenario is a common one. Congress frequently and regularly enacts a variety of farm subsidy programs, including price supports, set-asides, and disaster relief, which change from year to year. The prospect of a federal program being adopted to compensate for farm losses in any given year may therefore be properly characterized as a contingent interest, which, though it may never vest if the program does not encompass a particular crop or a particular year, is property of the bankruptcy estate when it relates to prepetition crops.
Lemos,
Lemos’s contingent-interest analysis is problematic for another reason not discussed by the Bracewell court. Lemos discusses two contingent-interest cases before concluding that the debtor’s right to relief payments constituted a contingent interest: In re Ryerson, 739 F.2d 1423 (9th Cir.1984), and In re Shaw Construction, Inc., 92 I.B.C.R. 90 (Bankr.D.Idaho 1991). Lemos,
Lastly, the Appellees rely on FarmPro Services, Inc. v. Brown (In re FarmPro Services, Inc.),
Instead, we follow the lead of the Eighth Circuit in Vote and hold that Burgess did not obtain a legal interest in the disaster-relief payment until the 2003 Act was passed. At the commencement of his bankruptcy case, Burgess had only a mere hope that the legislation would be enacted. A hope will not suffice under § 541.
V.
Finally, the Appellees contend that using the effective date of the 2003 Act,
We decline the Appellees’ invitation to rewrite bankruptcy law. It is Congress who is charged with articulating bankruptcy policy through the Bankruptcy Code; Congress has done so, and we are bound to follow it.
REVERSED and REMANDED.
Notes
. The amici are professors Susan Block-Lieb; Ralph Brubaker; S. Elizabeth Gibson; Jonathan C. Lipson; Charles W. Mooney, Jr.; Theresa J. Pulley Radwan; Nancy B. Rapo-port; Robert K. Rasmussen; and Robert M. Zinman. The amici's brief was prepared as a class project in the Bankruptcy LL.M. Program at St. John's University School of Law.
. See also Ohio v. Kovacs,
. Section 70a(5) of the Bankruptcy Act read in pertinent part,
(a) The trustee of the estate of a bankrupt ... shall ... be vested by operation of law with the title of the bankrupt as of the date of the filing of the petition initiating a proceeding under this title, except insofar as it is property which is held to be exempt, to all of the following kinds of property wherever located ... (5) property, including rights of action, which prior to the filing of the petition he could by any means have transferred or which might have been levied upon or sold under judicial process against him, or otherwise seized, impounded, or sequestered....
11 U.S.C. § 110(a)(5) (1964), quoted in Segal,
. See Segal,
. See Drewes v. Vote (In re Vote),
. See 11 U.S.C. § 541 (West 2004) (Historical and Statutory Notes) (Revision Notes and Legislative Reports 1978 Acts) ("The result of [Segal v. Rochelle], is followed, and the right to a refund is property of the estate.”).
. The trustee in Vote did not raise its § 541(a)(6) argument in the district court, and thus the court of appeals refused to consider it. Vote,
. Bracewell v. Kelley (In re Bracewell),
. The timing of the conversion from Chapter 12 to Chapter 7 was significant in Bracewell because in a Chapter 12 case, § 1207 expands the definition of property of the estate to include § 541-type property that the debtor acquires after the commencement of the case but before the case is closed or converted to a Chapter 7 case. 11 U.S.C. § 1207(a)(1). In this case, Burgess filed his petition under Chapter 7. Chapter 7 contains no comparable provision to § 1207. See 11 U.S.C. §§ 701-900. Thus, here, the critical time remains the date of filing.
. The current Bankruptcy Code was enacted by the Bankruptcy Reform Act of 1978. Bankruptcy Reform Act of 1978, Pub.L. No. 95-598.
. See Ring,
. In Ryerson, for example, the debtor entered into an employment contract in January 1977. Ryerson,
Similarly, in Shaw Construction, "a worker’s compensation insurance dividend which was declared and received postpetition was found to be a contingent interest properly characterized as the property of the bankruptcy estate.” Lemos,
. In addition, as the Bracewell court pointed out, FarmPro reached the right result for the wrong reason. Bracewell,
. The Bracewell court responded to a similar argument, stating,
[Any] unfairness is largely due to the nature of federally created crop disaster payments, which are in the form of congressionally created retrospective relief. Since this relief — and the possibility of a concomitant windfall to debtors — is a creation of Congress, it should be Congress who must remedy the situation, not the courts by judicial fiat. Congress was well aware of what it was creating when it enacted the crop disaster relief legislation. Congress could have crafted the crop disaster legislation in such a way that encompassed the rights of creditors. It did not. Congress could have added a provision to the Code that specifically classified retrospective government entitlements with regard to property of the estate. It did not. Perhaps it should.
Bracewell,
Dissenting Opinion
dissenting from the majority opinion:
The issue posed in this case is whether federal agriculture disaster payments, enacted by Congress to compensate farmers for crops planted but destroyed by drought or flood, are included within a farmer’s Chapter 7 bankruptcy estate when the federal law was enacted after the bankruptcy filing. Because we disagree with the majority’s resolution of this issue, we respectfully dissent.
A debtor’s bankruptcy estate comprises, inter alia, “all legal or equitable interests of the debtor in property as of the commencement of the case,” and “proceeds, product, offspring, rents, or profits of or from property of the estate, except such as are earnings from services performed by an individual debtor after the commencement of the case.” 11 U.S.C. § 541(a)(1),(6). We would hold that these definitions, whether interpreted in light of venerable bankruptcy case law or state commercial law, are sufficiently broad to encompass the disaster payments made to Burgess. Further, excluding the payments from the bankruptcy estate creates irreconcilable tension with other Bankruptcy Code provisions and goals.
I. Background
Edward Keith Burgess is a Louisiana farmer who filed for Chapter 7 bankruptcy on August 2, 2002. He received a discharge on December 5, but entered into a reaffirmation agreement covering a debt of $59,392.32 owed to Farm Service Agency (FSA), which held a secured mortgage on Burgess’s home.
On February 20, 2003, federal legislation known as the Agricultural Assistance Act of 2003 (the Act) was signed into law. The Act provided for assistance to farmers who suffered losses due to weather-related disasters or other emergency conditions which affected their 2001 or 2002 crops. Farmers became eligible to apply for disaster payments on June 21, 2003. Sometime in July, 2003, Burgess filed an application for payment of a 2001 crop loss with
The bankruptcy court denied Burgess’s motion, and the district court, on appeal, affirmed. A panel of this Circuit then reversed, Burgess v. Sikes,
II. Discussion
11 U.S.C. § 541, entitled “property of the estate,” embodies the essence of the Bankruptcy Code. Sweeping all of the debtor’s property into the bankruptcy estate created at filing is the means by which the Code achieves effective and equitable bankruptcy administration. Only through a comprehensive administration of the debtor’s property, wherever located and by whomever controlled, can the court shield the property from creditors’ unauthorized grasp; prevent harassment of debtors; and ultimately ensure equal distribution among creditors. See generally 5 CollieR on BaNKRuptCY § 541.01(a)(1) (15th Ed. Rev.2002).
Section 541 accordingly describes property of the estate in the broadest possible terms: “all legal or equitable interests of the debtor as of the commencement of the case.” 11 U.S.C. § 541(a)(1) “By including all legal interests, without exception, Congress indicated its intention to include all legally recognizable interests although they may be contingent and not subject to possession until some future time.” Rau v. Ryerson (In re Ryerson),
Taken as a whole, § 541 is far more conspicuous for what it includes as the estate’s property than for what it explicitly excludes. Section 541(a)(6) excludes wages earned postpetition, and § 541(a)(7) excludes divorce settlements, inheritances, and life insurance proceeds received more than one hundred eighty days postpetition. Because there is no specific reference to the debtor’s after-acquired payments from federal agriculture disaster programs, and Congress has not specified in this instance
The Supreme Court has recognized that what is included in property of the debt- or’s estate may represent federal policy implementing the Bankruptcy Code, Segal v. Rochelle,
A. The Bankruptcy Policy Approach.
The Supreme Court has routinely concluded that, to fulfill the purposes of bankruptcy law, the definition of property of the debtor’s estate must be broadly interpreted. See United States v. Whiting Pools,
although [this provision] could be read to limit the estate to those “interests of the debtor in property” at the time of the filing of the petition, we view [it] as a definition of what is included in the estate, rather than as a limitation.
Id. at 203,
The first such case, Segal v. Rochelle, is explicitly mentioned in the legislative history of the Bankruptcy Code. See S.Rep. No. 95-989, at 82 (1978), as reprinted in 1978 U.S.C.C.A.N. 5787, 5868; H.R.Rep. No. 95-595, at 367 (1977), as reprinted in 1978 U.S.C.C.A.N. 5963, 6323. Segal holds that an income tax refund claim based on events that predated bankruptcy but as-
everything of value the bankrupt may possess in alienable or leviable form when he files his petition. To this end the term “property” has been construed most generously and an interest is not outside its reach because it is novel or contingent or because enjoyment must be postponed.
Segal,
Segal affirms that a loss extant on the date of bankruptcy can later yield property includable in the debtor’s estate, as it disavowed the lower courts’ reasoning to the contrary:
[B]oth the First and Third Circuits reasoned that prior to the year’s end a loss-carryback refund claim was too tenuous to be classed as “property” which would pass under § 70a(5).... Both circuits felt the result to be unfortunate, not least because the very losses generating the refunds often help to precipitate the bankruptcy and injury to the creditors, but both believed the statutory language left no option.
Id. at 378,
An earlier Supreme Court case presages Segal and is factually similar to the case at bar. In Williams v. Heard,
... [Wjhile the claimant was remediless with respect to any proceedings by which he might be able to retrench his losses, nevertheless there was at all times a moral obligation on the part of the government to do justice to those who had suffered in property.... There was thus at all times a possibility that the government would see that [the claims] were paid. There was a possibility of their being at some time valuable.*512 They were rights growing out of property; rights it is true, that were not enforceable until after the passage of the act of congress for the distribution of the fund. But the act of congress did not create the rights. They had existed at all times since the losses occurred. They were created by reason of losses having been suffered. All that the Act of Congress did was to provide a remedy for the enforcement of the right.
Id. at 541,
These cases ascribe a broad, non-conventional scope to the definition of property of the estate in order to fulfill the goals of bankruptcy law. Thus, even a prepetition loss of the debtor’s property may itself constitute property when subsequent events afford a recovery for the loss. Resolution of Burgess’s case seems straightforward under Whiting Pools, Segal and Williams. Burgess invested in his crops, planted them and awaited a harvest until a weather-related disaster destroyed them. He suffered a loss. At the time of his loss there was “an expectancy of interest,” “a possibility coupled with an interest,” that the crop loss could be compensable in the future. That potential, as the Supreme Court held in Williams, is a property right, and under Segal, the right is sufficiently rooted in the prebankruptcy past as to become property of the bankruptcy estate.
The majority opinion disagrees with the foregoing interpretation of the Bankruptcy Code by the Supreme Court cases. The majority opinion focuses on the temporal limitation in § 541(a)(1), which it constructs as an iron curtain separating pre-bankruptcy property from whatever accrues to the debtor post-bankruptcy. The majority reads the cases to require that a prebankruptcy loss must have more than a mere hope or expectancy of recovery, and must in fact give rise to a prebankruptcy legal claim, in order for post-bankruptcy recovery for that loss to become part of the bankruptcy estate. This view has some force, but we respectfully reject its rigidity.
First, the majority opinion overlooks Whiting Pools, which construed the temporal limitation in § 541(a)(1) as a statement of inclusion, not limitation.
Second, the majority both minimizes and reinterprets Segal. Segal expressly holds that a prebankruptcy loss can give rise to a claim that becomes property of the debt- or’s estate. The majority opinion minimizes Segal, implying that its formulation has been superseded by the express terms of the Bankruptcy Code. There is little or no support for this conclusion.
The majority opinion also misperceives Segal to require that the debtor had an enforceable legal right prebankruptcy in order for a post-bankruptcy claim to accrue to the debtor’s estate. Segal expresses no such requirement. The Supreme Court did, however, emphasize the contingent nature of any repayment that -the debtor might ultimately receive and the origin of any tax refund in prebankruptcy events. Segal,
While it is indisputable, for instance, that a cause of action belonging to the debtor at the date of bankruptcy constitutes property of the estate, notwithstanding that its monetary realization may be subject to both legal and factual contingencies, see, e.g., La. World Exposition, Inc. v. Fed. Ins. Co. (In re La. World Exposition),
Another recent case ordered inclusion in the bankruptcy estate of a claim for bad faith refusal to defend an insured, where notice of the underlying insurance claim was given prepetition, but the debtor did not request, nor did the insurer refuse
As a final example, claims for legal malpractice rendered in connection with bankruptcy filings have been held includable in the debtor’s estate based on the Segal formulation and irrespective of whether they had technically accrued prepetition under state law. See In re Alvarez,
In all of the foregoing cases, Segal was brought to bear despite the absence of a mature legal claim at the date of bankruptcy, yet each claim was so factuаlly connected to the prepetition period as to justify its inclusion in the debtor’s estate.
One court of appeals decision supports the view that federal disaster payments authorized by legislation that post-dates a farmer’s bankruptcy do not become property of the debtor’s estate. Drewes v. Vote (In re Vote),
Both Vote and the majority opinion share the view that where a debtor has only a “mere hope” (prepetition) of reeeiv-
The disaster payments may alternatively be characterized as “proceeds” “of or from” the lost crops under § 541(a)(6). There is no temporal limitation on proceeds that accrue to the bankruptcy estate.
The majority opinion relies heavily on recent decisions that, following Vote, refused to include federal disaster payments in the bankruptcy estate. See, e.g., Bracewell v. Kelley (In re Bracewell),
Construing property of the estate and proceeds broadly under federal law accords with Whiting Pools, Segal, and Williams and yields the conclusions that Burgess’s lost crops were “property”; his
B. State Law Approach
Because property interests are ordinarily created and defined by state law, the Supreme Court has declared:
Unless some federal interest requires a different result, there is no reason why such interest should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding. Uniform treatment of property interests by both state and federal courts within a State serves to reduce uncertainty, to discourage forum shopping, and to prevent a party from receiving “a windfall merely by reason of the happenstance of bankruptcy.”
Butner v. United States,
Although there is no case law on point in Louisiana, the state’s version of the U.C.C. provides:
(64) “proceeds” means the following property:
(A) Whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral;
(D) to the extent of the value of collateral, claims arising out of the loss ... or damage to, the collateral ....
La.Rev.Stat. Ann. § 10:9-102(a)(64). Thus, in Louisiana, “proceeds” include whatever is received from a sale or other disposition of collateral, as well as claims arising out of the loss or damage to the collateral. Moreover, in Finova Capital Corp. v. IT Corp.,
An established body of case law treats the U.C.C. definition of proceeds as including federal disaster payments for lost crops.
The conclusion of these courts that federal disaster payments constitute U.C.C. proceeds is not universally accepted, but it is the dominant view. See In re Ladd,
C. Other Bankruptcy Provisions.
If disaster payments legislated after bankruptcy are neither property of the debtor’s estate because of the “temporal” limitation in § 541(a)(1), nor proceeds pursuant to § 541(a)(6), but are defined in state law as proceeds, absurd consequences could ensue for both debtors and creditors. The majority’s view leads to the conclusion that the unsecured creditors would have no interest in such proceeds under the Bankruptcy Code; the trustee could not administer the recovery and division of such “proceeds;” and a secured creditor would not have to abide by the Bankruptcy Code’s automatic stay and prohibition on interference with the debt- or’s discharge.
On the debtor’s side, the lien creditor of a farmer with an interest in proceeds, which is enforceable in state law on disaster payments irrespective of when the legislation was passed, could claim that the interest is outside the bankruptcy estatе altogether and could garnish the debtor’s receipt of such payments. The garnishment would, however, run contrary to the intent of the Bankruptcy Code to free the debtor from such post-filing interferences and credit-ruining activities. See 11 U.S.C. § 362 (automatic stay); § 524 (effects of discharge). On the creditor’s side, 11 U.S.C. § 552, designed to regulate the postpetition effect of prepetition security interests, would be thrown into uncertainty by a holding that federal disaster proceeds are not within the bankruptcy estate at all. Section 552(b)(1) states that a security interest in postpetition proceeds remains en
In sum, federal disaster payments cannot be both fish and fowl for bankruptcy purposes. They are either “proceeds” for all purposes, at least in those states which have classified them as such under the U.C.C., or they are simply covered under the breadth of § 541(a)(6) as proceeds because Congress intended the definition to be at least as broad as that of the U.C.C. The majority view creates intolerable tension with other Bankruptcy Code provisions.
For these reasons, we respectfully DISSENT from the majority opinion reversing and remanding the judgment of the bankruptcy and district courts holding that the federal disaster payments designated to Burgess on account of his crop losses before bankruptcy were includable within the bankruptcy estate pursuant to 11 U.S.C. §§ 541(a)(1) and (6).
. Whiting Pools adopts the result and most of the reasoning of Judge Friendly’s Second Circuit opinion in the same case. There, Judge Friendly described as 'rigid” the government’s narrow, though literalistic, reading of § 541(a)(1). Referring to the congressional history concerning the scope of this provision, Judge Friendly stated: "this discussion indicates that § 541(a)(1) was not intended to narrow the old Act’s definition of 'property of the estate,' as the Government's reading of the statute would require, but preserve or enlarge it.” United States v. Whiting Pools, Inc.,
. The portion of Segal's formulation that inquires whether the after-acquired property is "so little entangled with the debtor’s ability to make a fresh start” is often quoted but hardly ever determinative. The better view of this phrase is that it was eliminated by the Code's express incorporation of exempt property within the debtor’s estate. See In re Ryerson,
. Williams relied on Milnor v. Metz,
. The majoi’ity opinion cites only dictum in a case from this court that the Supreme Court overruled. In re Goff,
. See, e.g., In re Alvarez,
. The majority opinion also asserts that Williams involved compensation for a pre-bankruptcy legal right or claim “against someone.” With due respect, the Supreme Court emphasized the contrary, that no legal or equitable right existed against Congress or the international fund that was earlier collected. Williams,
. In re Riccitelli,
. The majority opinion heavily relies on the district court opinion in Hoseman v. Weinschneider,
.The majority opinion also relies on Sliney v. Battley (In re Schmitz),
. The fear has been expressed that if Burgess’s federal disaster payments are "sufficiently rooted in the prebankruptcy past” to require inclusion in his bankruptcy estate, then a hypothetical post-bankruptcy gift from "Aunt Minnie” to compensate Burgess in hard times would also accrue to the estate. This analogy fails for three reasons. First, while Segal does not mandate a prepetition legally enforceable right, both Segal and its lower court progeny all exhibit an ultimatе legal right plus facts rooted in the prebank-ruptcy past. A gift from Aunt Minnie, whatever its motive, does not belong to Burgess under any claim of right. Second, § 541(a)(5) brings within the debtor’s estate property acquired within six months postpetition by bequest, devise or inheritance. Gifts are similar to bequests but, because there is no mention of gifts in § 541(a)(5), must be presumed to have been excluded from the estate. Third, there is no theory of law under which a gift can be proceeds pursuant to § 541(a)(6).
. More will be said about "proceeds” later, as some states’ laws unequivocally so classify federal disaster payments.
. Another case often cited in this connection is Matter of Munger,
. The majority asserts that the FarmPro court "reached the right result for the wrong reasons” and relies on the case's posture in bankruptcy, not discussed by the court, rather than on its own reasoning that held disaster payments includable in the debtor's estate as proceeds under § 541(a)(6) of lost crops by means of post bankruptcy legislation.
. Finova went on to conclude, however, that the U.C.C. does not create an independent cause of action for a secured party against third-party use of collateral. Finova,
. This definition formerly appeared at § 9:316 of the U.C.C. and was renumbered, without substantive change, when Article 9 was revised.
. This court in Rolling Plains Prod. Credit Ass'n v. Cook (In re Cook),
. This article comprehensively surveys state cases respecting disaster payments as proceeds. See also Boyd J. Peterson, Secured Transactions: Government Agricultural Payments as "Proceeds” of Agricultural Products under U.C.C. § 9-306,