Revised Article 9 and Government Entitlement Program Payments A Suggested Solution to Classification Confusion

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Oct 2003

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Government payments to farmers have long represented
a major source of income for American farmers and ranchers. Lenders have
frequently attempted to take and perfect security interests in the
farmer's payments, but the results have been mixed. The courts have
developed a massive body of contradictory rulings on how the payments were to
be classified for collateral purposes under old Article 9 and whether the
payments were covered by after-acquired property clauses with the result that
frequently, the lender was found not to have a security interest in the entitlement
payments.<a href="#2" name="2a">2</a> The drafters of Revised Article 9 were apparently unable to agree on
a single classification description for government payments and as a result
kicked a masterful punt on the issue. Official Comment 5(i) to Revised
§9-102 notes:

<blockquote>
Receivables
Under Government Entitlement Programs. This
article does not contain a defined term that encompasses specifically rights to
payment or performance under the many and varied
government entitlement programs. Depending
on the nature of a right under a program, it could be an account, a payment
intangible, a general intangible other than a payment intangible, or another
type of collateral. The right also might be proceeds of collateral (e.g.,
crops) (emphasis added).

</blockquote>

As a result, Revised
Article 9 gives no help to the lender attempting to create a security interest
in a borrower's government entitlement payments or arguing that
existing documentation covers entitlement payments due the debtor—from
whatever program source. However, the comment offers a potential judicial
solution: Implicit in Official Comment 5(i) is the recognition that the wide
variety of government payments to farm debtors potentially fall into a de
facto category of personal property termed
"government entitlement programs."<a href="#3" name="3a">3</a> While the authors of Revised
Article 9 might simply have defined a new category or classification of
"government entitlement programs" or expressly stated that
government entitlement payments fit into an existing category (such as
"account"<a href="#4" name="4a">4</a>), they did not do so. The authors suggest that the
simple solution is for the courts to remedy that omission by expressly
recognizing the existence of "government entitlement payments" as a
valid classification of personal property under Article 9.<a href="#5" name="5a">5</a>

In
the absence of a specific classification for government entitlement payments,
counsel for debtors and lenders are still faced with untangling the conflicting
pre-revision case law on the issue and attempting to sort out how the Revised
Article 9 and the current federal farm legislation fit into that historical
framework. If past is indeed prologue, the task will not be easy.

<h3>The Tangled Case Law</h3>

The
depressed farm economy coupled with the periodic resuscitation of chapter 12
(which, like the family farmer, seems to be perennially endangered or expiring)
ensure that security-interest perfection issues in government entitlement
payments will remain an important source of debt repayment for embattled
farmers and their creditors. The quandary for farm lenders in Article 9 has
long been recognized.<a href="#6" name="6a">6</a> Creditors in numerous reported cases under old Article 9
found themselves divested of an apparently perfected security interest in a
farm debtor's entitlement payments—whether cash or in-kind
distributions—because the court found that the payments were not properly
described in the documents or that the entitlement payment did not fit into the
collateral description included in the documentation.<a href="#7" name="7a">7</a> The creditor's
problem under old Article 9 cases was almost always one of classification: The
creditor had described with words one kind of collateral in its security
instrument and financing statement, and when a dispute arose, the court
analyzed the government program under which the entitlement payment was
generated, and held that the payment that the lender desired to attach
didn't fit the wording classification used in the lender's filing.

Unfortunately,
the courts often declined to identify the correct classification for the entitlement payments and resorted to a
description of what it was not. The decisions in the pre-revision cases often
turn on an analysis of the timing of the grant of the security agreement,
vis-à-vis the debtor's participation in the government program
(especially when a bankruptcy ensues). At least one court correctly concluded
that, as a matter of bankruptcy law, a pre-petition dragnet clause did not
attach to an entitlement payment owed the debtor under a program that did not
exist at the time the debtor filed for bankruptcy relief. (See <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Stallings, 290 BR 777 (Bankr. D. Idaho 2003)</a>.<a href="#8" name="8a">8</a>

A
summary of the old Article 9 cases are arranged by type of government program
in the Appendix (see p. 56); the
remaining discussion relates to the pre-revision case law and the few cases
reported since the revision became effective.<a href="#9" name="9a">9</a> (The Appendix is a compilation,
by state, of the pre-revision cases.)

Farm
borrowers may also be potential recipients of government entitlement payments
for less-traditional, non-crop farming and livestock activities. The plethora
of existing government programs makes the accurate identification of the
various government entitlement payments in loan documents challenging, to say
the least, and lends support to the argument that the courts should simply
recognize that entitlement payments constitute a distinct classification of
personal property under the UCC.<a href="#10" name="10a">10</a>
Lenders have two separate challenges in drafting the documents that deal with
government entitlement program collateral: They must both "reasonably
identify" the collateral in the underlying security agreement without
using a supergeneric description,<a href="#11" name="11a">11</a> and they must sufficiently identify the
collateral on the financing statement.<a href="#12" name="12a">12</a> The latter is greatly facilitated by
Revised Article 9's authorization of "supergeneric"
collateral descriptions such as "all assets" in the financing
statements.<a href="#13" name="13a">13</a> Further, lenders are potentially faced with at least three
different scenarios in creating a valid security interest in entitlement
payments: (1) entitlement payments that are in existence at the time of the
loan transaction but have not been paid for some reason, (2) entitlement
payments payable from a known program in which the debtor is already enrolled
or plans to enroll for a current or future year(s) but that are not yet due,
and (3) entitlement payments payable from future programs that haven't
yet been legislated but to which the debtor may become entitled. For example,
at the time the Farm Security and Rural Investment Act of 2002 (2002 farm bill)
was enacted in May 2002, the Agricultural Assistance Act of 2003 ("2003
disaster assistance act") had not yet been proposed. A lender who
properly documented a security interest in August 2002 in benefits to be paid
the debtor under the 2002 farm bill in crop year 2002 might be surprised to
learn that the 2003 disaster assistance act payments, first announced by the
government in September 2002, although potentially related to that same 2002
crop, are a separate entitlement from those described in the earlier signed
loan documentation because of a change in the program entitlement. To further
complicate matters, the various government programs have differing requirements
for payment eligibility. Some require enrollment through an application made
during a designated time period, others required signed, long-term contracts,
and still others permit after-the-fact enrollment for a prior crop year upon
payment of specific fees. Adding another layer of complexity is the fact that
payments derived from a single entitlement program may be funded in multiple
tranches payable over a period of years. The complexity of the analysis
appears overwhelming and is a clear argument for recognition of
"government entitlement payments" as a distinct type of collateral.
If the lender describes the collateral as "government entitlement
payments" and then specifically adds details relating to a specific
program in the security agreement, the lender may logically claim a perfected
security interest in any payment under any applicable program, pursuant to
Revised Article 9, as against any other creditors and the trustee in
bankruptcy. The argument, of course, is founded on the assumption that the
entitlement payments are akin to accounts, general intangibles or similar
categories of collateral in which perfection is achieved by filing. However, if
there is any doubt as to either the nature of, or the conditions imposed for,
eligibility on the farm debtor's receipt of the government subsidy, then
the <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=U…;

financing statement filed by the lender should describe all forms of
collateral, including proceeds of crops, general intangibles, contract rights
and accounts.

As
has been previously noted, the foregoing is subject to the crucial caveat that
government entitlement program legislation and related regulations have in the
past frequently contained restrictions on the farm debtor's ability to
grant a security interest in the entitlement payment to secure existing
indebtedness.<a href="#14" name="14a">14</a> Thus, the lender frequently will not be able to assert a
security interest in after-acquired entitlements—not because of any
problem under the UCC, but because the entitlement payment was subject to
conditions that would defeat any existing security interest. Thus, the lender
must check the applicable regulations and determine whether a security interest
in the entitlement payment is even permitted.<a href="#15" name="15a">15</a> Moreover, some of the older
programs required that the lender register a formal assignment of that payment
with a government agency, such as the Farm Service Agency, in order to receive
the payment at the appropriate time. (It is not clear whether the older
programs requiring the filing of an assignment with an agency were designed to
defeat a UCC security interest or simply protect the government from double
liability if it made the payment directly to the farmer. See, e.g, <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8…
re Harvie, 84 B.R. 197, 6 UCC Rep. Serv. 2d 841
(Bankr. D. Colo. 1988)</a>.)

<h3>Government Programs Since 2002</h3>

The
2002 farm bill, enacted May 13, 2002, and the 2003 disaster assistance act,
signed Feb. 20, 2003, are only the latest in federal legislation that extends
and substantially increases federal government assistance to farmers. Farm
politics virtually guarantee that there will be additional programs in the
future. The 2002 farm bill provides the structural framework for price supports
for six years, through fiscal year 2007. The 2003 disaster assistance act
provides substantial subsidies to farmers for qualifying losses to both
livestock herds and to 2001 and 2002 crops (for commodities other than sugar
and tobacco) caused by weather and related conditions. Both statutes provide
for substantial cash payments and other benefits to farmers under a myriad of
circumstances, continuing long-standing federal government policy of extensive
price supports and direct payments in order to bolster farm income, control
production, and promote conservation and other institutional policies.<a href="#16" name="16a">16</a>
Although the amount and type of support varies by commodity, farm and locality,
the size and scope of the programs is enormous and of substantial importance to
both farmers and lenders. The 2003 disaster assistance act alone provides
payments of up to $80,000 per producer, with a limitation on payments where the
combined total of disaster assistance act payments, crop insurance recoveries
and noninsured crop disaster assistance program (NAP) payments exceed 95
percent of the farmer's income had a successful crop been harvested.<a href="#17" name="17a">17</a>
The 2002 farm bill provides non-recourse marketing assistance, direct payments
and counter-cyclical payments that kick in when the effective price for a crop
is less than the government's targeted price.<a href="#18" name="18a">18</a> Direct payments are
capped at $40,000 per person, counter-cyclical payments at $65,000 per person and
marketing loan and loan deficiency payments at $75,000.<a href="#19" name="19a">19</a> However, a married
couple may be entitled to receive the individual capped limits for each spouse,
meaning that the couple can potentially receive up to $360,000 in a single crop
year from the 2002 farm bill support programs.<a href="#20" name="20a">20</a>

In
addition to the 2002 entitlements, the 2003 legislation provides for special
disaster payments and other crop insurance payments for which many farm debtors
become eligible. Between the two programs, the government may be the most
substantial source of a farmer's income and thus the most important
source of debt repayment. Since the payments are often tied to crop failure,
they become vital to debt repayment to a lender that previously relied on the
crops for repayment—again a cogent argument in favor of recognition of a
"government entitlement payments" classification.

<h3>Conclusion</h3>

Because
Revised Article 9 fails to provide a catch-all classification category in which
to corral farm entitlement payments, confusion will continue to reign in the
farm-lending arena unless the courts take it upon themselves to recognize
"government entitlement payments" as a valid collateral
classification and enforce descriptions using similar language. Unfortunately,
even this "solution" is imperfect, since Congress frequently
undertakes to restrict the types of debt for which an entitlement may be
pledged as security.

<h4>APPENDIX</h4>

The following summary
lists historical cases by state jurisdiction and provides a summary analysis of
each listed case. Cases are listed in ascending chronological order within the
jurisdiction.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8…; Bank of North Arkansas v. Owens, 884 F. 2d 330 (8th Cir. 1989)</a>: Contract
rights: Dairy termination program payments,
which compensated farmer for leaving the dairy business, were contract rights
and not proceeds of collateral; although the cattle that were the secured
party's collateral were sold, the payments were for the abandonment of
the milk business and for taking facilities out of production, and had nothing
to do with the cattle that were the secured party's collateral. A
competing secured creditor with perfected security interest in contract rights
and general intangibles was permitted to obtain proceeds. (See, also, prior decision at <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=7…
of North Arkansas v. Owens, 76 BR 672, 4 UCC
Rep Serv. 2d 1065, (Bankr. E.D. Ark. 1987)</a>).

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=4…; In re Munger, 495 F 2d 511 (C.A. Cal. 1974)</a>, <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1…
UCC Rep. Serv. 790</a>: Proceeds of crops:
An interested third party could be expected to know that the crops described
were sugar beets, and that the farmer was entitled to conditional subsidy
payments from the Department of Agriculture under the Sugar Act of 1948 based
on the amount of sugar in the beets. Likewise, abandonment payments based on
acreage abandoned due to disease, although in the nature of insurance, are
integral part of sugar-beet farming; both are within a broad reading of
"proceeds," and to find otherwise would be contrary to UCC's
intent. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8…
Re Dettman, 84 BR 662 (9th Cir. B.A.P. (Cal.)
1988)</a>, Bankr. L. Rep. P 72,267: General intangibles and
proceeds: Payments received from the Raisin
Industry Diversion Program for diverting previously planted grape vineyards to
non-production, where payment is based on quantity of raisins diverted, prior
crop's yield, and rate established at present crop year end, constituted
either general intangibles or proceeds, both of which were described by secured
creditor's security agreement.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=3…; In re Preisser, 33 BR 65, 10 Bankr. Ct. Dec. 1306, 36 UCC Rep.
Serv. 1768 (Bankr. D. Colo. 1983)</a>: Rents or profits: Court held that the benefits the debtor received
from the government for non-production of grain is rents or profits of the land
and belonged to the secured creditor (United States) with a deed of trust
covering rents, issues, profits, revenues and income. The case concerned the
question of whether the debtor could assign his rights in PIK program to
attorney for payment of attorneys' fees in bankruptcy; court did not
address the classification of the PIK program rights under the UCC.
<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=5… re Mahleres, 53 BR 86, 41 UCC Rep. Serv. 1473 (Bankr. D. Colo. 1985)</a>:
Proceeds of collateral: Wool incentive
payments received by the debtor under the National Wool Act of 1954, whereby
sheep farmers are incentivized to cultivate sheep and sell wool at the best
possible price, and receive government subsidies based on the price actually
received for wool sold, were "proceeds" of wool, which was a
"product" of sheep, not general intangibles. Since the secured
party's security agreement did not cover products from sheep, the secured
party could not reach the incentive payments. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=6…
re Patsantaras Land and Livestock Co., 60 BR
24, 42 UCC Rep. Serv. 1805 (Bankr. D. Colo. 1986)</a>: Proceeds: Government-paid wool incentive payments were proceeds
from products of sheep, and were covered by the secured party's security
interest, which described products of sheep. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=7…
re Ratliff, 79 BR 930, 5 UCC Rep. Serv. 2d 788
(D. Colo. 1987)</a>: Rents, not proceeds of crops: The government paid the debtor rent on land and part
of the cost to plant grass cover-crop per a contract under which the debtor was
barred from using land for grazing or crop harvesting, the government payments
are not like PIK payments made for specific crops on specific acreage for
specific production, but are in the nature of rent. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8…
re Clark, 82 B.R. 131, 5 UCC Rep. Serv. 2d 1187
(Bankr. D. Colo. 1987)</a>: CRP contract rents, which the court says
are akin to PIK payments and were paid to debtors who diverted acreage to
conservation purposes, are rents, not proceeds, under §9-306. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8…
re Harvie, 84 B.R. 197, 6 UCC Rep. Serv. 2d 841
(Bankr. D. Colo. 1988)</a>: Rents: CRP contract payment made in form of in-kind commodity certificate is
rent; again, court did not address classification issues under Article 9.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=6…; Matter of Azalea Farms Inc., 68 B.R. 32, 3 UCC Rep. Serv. 2d 325 (Bankr. M.D.
Fla. 1986)</a>: Not proceeds:
Milk Diversion Program payments are not proceeds or substitute for collateral
within the meaning of UCC, and are not assignable as matter of law.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=4…; Matter of Hollie, 42 BR 111, 38 UCC Rep. Serv. 1772 (Bankr. M.D. Ga.
1984)</a>: Cash collateral:

Milk diversion program payments, which are government subsidies to the debtor
for reduction in his production and that do not require a reduction in size of
dairy herd for eligibility, are cash equivalents similar to actual milk
proceeds; they are substitutes for post-petition milk and proceeds, and the
secured creditor is entitled to its lien. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1…
re Ring, 169 BR 73 (Bankr. M.D. Ga. 1993), aff'g. 160 BR 692 (Bankr. M.D. Ga. 1993)</a>: Proceeds: Government disaster relief payments for
weather-destroyed crops are the substitute for proceeds of the crop and are
analogous to insurance payments for crop loss or damage.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=7…; J. Catton Farms Inc. v. First Nat. Bank of
Chicago, 779 F 2d 1242, 54 USLW
2391, Bankr. L. Rep. P 70,882, 42 UCC Rep. Serv. 1049 (7th Cir. 1985)</a>:
Account or proceeds of contract right:
The debtor's grant of security interest to the secured creditor in
receivables, accounts, inventory, equipment, fixtures and proceeds and products
thereof, in exchange for substantial multi-million dollar new loan, was
sufficient to reach payment-in-kind of corn that the debtor received for
planting cover crop to prevent erosion, in lieu of corn. Corn PIK was an
executory contract right, and falls within the definition of "
account" under §9-106. Following the bankruptcy filing, the debtor
sold his contract right for the future receipt of the PIK corn bushels to a
competing creditor for a cash payment substantially discounted over the value
of the future corn. The court held that the first lender was the secured
creditor entitled to the crop-in-kind payment, and that the debtor's
failure to follow the government's regulatory requirement that assignment
be recorded did not affect the secured creditor's right to obtain the PIK
proceeds. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=7…
re Schmaling, 783 F 2d 680, 54 USLW 2433, 42
UCC Rep. Serv. 1074 (7th Cir. 1986)</a>: General intangible or
contract right: A PIK payment of bushels of
corn is not proceeds of a crop, but rather an account payment derived from an
executory contract right because the payment was not received for the sale,
exchange, collection or other disposition of the crops, and no crop was ever
planted. Here, the bank could have acquired an interest in the PIK payment by
directly referring to the government entitlement program, or by listing general
intangibles or contract rights. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=6…
re George, 62 BR 671 (Bankr. C.D. Ill. 1986)</a>:

Proceeds of crop: The "sealing
profit" created where the debtor places an existing crop in a government
program under which the government loans the debtor funds at a predetermined
price per bushel by non-recourse loan, and the debtor sells his crop through
the government at a subsidized rate if the market price drops below the loan
rate, thus "sealing" his profit at the higher rate, constitutes
proceeds of crop. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=7…
re Kruger, 78 BR 538, 4 UCC Rep Serv. 2d 1190
(Bankr. C.D. Ill. 1987)</a>: General intangible: Deficiency payment received on a corn crop, where
calculated based on the number of acres planted (not harvested), multiplied by
historical yield (not actual yield), multiplied by the difference between
national average price for the crop and the target price for the crop, is not
proceeds of a crop. To constitute proceeds, a crop must be planted and disposed
of, and the entitlement claimed by the secured creditor must have been received
in connection with the disposition. (The court applies In re
Schmaling, which by implication means that
the court finds the crop payment to be a general intangible.) <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=6…
re Settles, 69 BR 634, 3 UCC Rep Serv. 2d 345
(Bankr. C.D. Ill. 1987)</a>: Not proceeds: "Sealing profits" derived under a
government deficiency program from a substituted crop planted with money
borrowed from Commodity Credit Corp. do not constitute proceeds of crop in
which the Farmers Home Administration (FHA) has a security interest because the
FHA-liened crop would have already been sold and the proceeds therefrom
previously paid to FHA, so FHA security interest would have disappeared. This
unusual case is based on unique and hypothetical facts, where the debtor sought
advance permission from the bankruptcy court to deliver a crop to the FHA and
then borrow funds from CCC to participate in a deficiency payment program with
a substitute crop, and thereby obtain the "sealing profits" free
and clear of the FHA lien.) <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1…
County Farms v. Vandalia Farms, 118 Ill. Dec.
232, 167 Ill. App. 3d 471, 521 NE 2d 300 (Ill. App. 5 Dist. 1988)</a>:

General intangible: PIK commodity
payment received in exchange for diverting producing acreage to non-production
is not analogous to crops grown and harvested, and thus is a general
intangible. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=9…
re Blackert, 95 BR 972 (Bankr. C.D. Ill. 1989)</a>,
<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=9…
UCC Rep Serv. 2d 1342; (rev'd. on other grounds, 109 BR 857 (U.S.D.C., C.D. Ill. 1990)</a>): Not
proceeds or contract rights: Deficiency
payments under the Agricultural Conservation Program are not "growing
crops" or "stored grain" as defined in security instrument,
and are not contract rights, accounts receivable or proceeds within the meaning
of §9-306. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1…
re Ladd, 106 BR 174, 10 UCC Rep. Serv. 2d 1414
(Bankr. C.D. Ill. 1989)</a>: General intangible: Disaster Assistance Act payments, which compensate a
farmer for deficiency created by drought, hail, excessive moisture or related
conditions, are based on historical yields and not actual yields, and are paid
without a requirement that the crop be disposed of, do not constitute proceeds
of a crop. For the secured party's lien to attach, the financing
statements must describe the government disaster payments specifically, or must
cover general intangibles.

IN: <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=5…
v. Farmers Production Credit Ass'n. of Scottsburg, 521 N.E. 2d 354 (Ind. 1988)</a>: Not proceeds or
contract rights: The court overturned a
lower-court ruling that the government milk diversion program payment was a
contract right and account receivable derived from a security interest in all
dairy cattle, offspring, additions and replacements of livestock, and products
of livestock, but the court declined to categorize the collateral under the
UCC, finding instead that the debtor's property was not acquired before
the commencement of his bankruptcy case and was therefore not subject to a
pre-petition lien.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=3…; Matter of Sunberg, 35 B.R. 777 (Bankr. S.D. Iowa 1983) aff'd., 729 F 2d 561 (8th Cir. 1984)</a>, <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=3…
UCC Rep. Serv. 1700</a>): (1) General intangible: The contractual right to payment in kind constituted a general
intangible in which the creditor had a perfected security interest; (2) Non-cash
proceeds of contract right: The property
received bushels of grain, which was non-cash proceeds of the contract right
(general intangible) to receive the PIK payment; and (3) After-acquired
property: Future entitlements to payment
for bushels of corn obtained for agreement made pre-bankruptcy filing to divert
acreage from planting constitute after-acquired property that was covered by
the secured party's perfected security interest, which described crops, growing
crops, farm products, contract rights, accounts and general intangibles
"existing or hereafter acquired." <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=4…
re Fowler, 41 BR 962 (Bankr. N.D. Iowa 1984)</a>:

General intangible: PIK payments made if
debtors agreed not to create collateral are not proceeds of anything, but
rather are a general intangible. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=4…
re Liebe, 41 BR 965, 39 UCC Rep. Serv. 1025
(Bankr. D. Iowa 1984)</a>: General intangible: The PIK entitlement program creates a contract right
properly classified as a general intangible; a security agreement that asserted
interest in a specific intangible, the contract right of the debtors, would
create a security interest in the PIK program right if all other requirements
are satisfied. Here, security interest does not attach, as the secured
creditor's "now owned or hereinafter acquired" language
modified only specifically described personalty and did not extend to the PIK
contract rights acquired post-petition. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=6…
of Heims, 65 B R 112, 2 UCC Rep. Serv. 2d 275
(Bankr. N.D. Iowa, 1986)</a>: Accounts: PIK cash payment made to the debtor for limiting the
number of acres of corn grown, and devoting percentage of land to conservation
uses, is covered by a properly perfected security interest in accounts (following

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=5…
of Sunberg). In re Sabelka, 57 BR 972, 42 UCC Rep. Serv. 1775 (Bankr. N.D. Iowa
1986)</a>: General intangibles:
A secured party's financing statement describing corn growing or to be
grown, and describing real estate involved in the crop, did not reach PIK
commodity payments, which were in the nature of general intangibles. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=6…
Bank and Trust Co. v. Commodity Credit Corp.,
679 F Supp. 903, 6 UCC Rep. Serv. 2d 266 (N.D. Iowa, 1987)</a>: Contract
rights: Dairy Termination Program (DTP)
payments paid to dairy farmer in exchange for his promise to get out of the
milk production business for five years, calculated based on the quantity of
milk the farmer's operation had produced and not based on the cows
slaughtered or exported as part of the contract, are covered by a security
interest in "contract rights." DTP payments are not proceeds
because they are not based on the disposition of secured property. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8…
of Hunerdosse, 85 BR 999 (Bankr. S.D. Iowa
1988)</a>: General intangibles:

Deficiency and diversion payments that the debtor received from the government
under the Feed Grain Program are not "proceeds of crop" (following In
re Kruger), but are a general intangible
(following Matter of Sunberg)
because the deficiency payments are not dependent on a sale, exchange or other
disposition of a crop, and the diversion payments are paid for not growing a
crop and are not based on a disposition of a crop. The contractual right to
future deficiency and diversion payments are general intangibles, but such was
not sufficiently described by a grant of a security interest in "all
general intangibles as follows," where no description followed that listing.
(Interestingly, in this case, a later security agreement was prepared that
followed the generic listing of "general intangibles, as follows"
with "all government payments," but the debtors never signed that
security agreement.) <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8…
of Butz, 86 BR 595 (Bankr. S.D. Iowa 1988)</a>:
Not rents or profits: The debtors
received cash and payment-in-kind payments from pre-filing participation in the
government Feed Grain Program, and diversion payments (following <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=4…
re Liebe, 41 BR 965, (Bankr. D. Iowa 1984)</a>).
<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=9…
re Waters, 90 B.R. 946, 8 UCC Rep. Serv. 2d 298
(Bankr. N.D. Iowa 1988)</a>: Rents: Annual CRP contract payments under long-term lease-like arrangement
are rents, and therefore a grant of security interest is not governed by UCC.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1… re White, 1989 WL 146417, 71 AFTR2d 93-3019, 89-2 USTC P 9622 (Bankr.
N.D. Iowa 1989)</a>: Proceeds:
The debtor's entitlements to government Disaster Credits and Emergency
Feed under the 1988 Emergency Crop Loss Assistance and Emergency Feed federal
subsidy programs qualify as crop proceeds under <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=U…
§9-306</a> because a crop was required to be planted, a disposition
of the crop occurred, and the federal entitlements were received in connection
with that disposition. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=4…
v. Hartwig, 463 N.W. 2d 2 (Iowa 1990)</a>:
Rents: CRP program payments made for
specific soil conservation practices over the long term are rents; the court
does not analyze the payments under the UCC.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=3…; In re Kruse, 35 B.R. 958, 37 UCC Rep Serv. 1303 (Bankr. D. Kan. 1983)</a>:
(1) Proceeds of planted crops: PIK
payment as to planted crops at time of bankruptcy filings is proceeds of crops
and subject to the creditor's security interest; (2) General
intangibles or contract rights: Where the
creditor did not have a security interest in intangibles or contract rights,
the creditor was not entitled to PIK payments on unplanted land where debtor had
not entered the PIK program on the unplanted land at time of filing; even had
the creditor had security interest in general intangibles, here the general
intangible was not created until after the bankruptcy filing, and so both the
general intangible and proceeds thereof are free of the security interest. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=5…
re Lions Farms Inc., 54 BR 241, 42 UCC Rep.
Serv. 302 (Bankr. D. Kan. 1985)</a> (clarifying prior In re Kruse decision): Accounts: PIK entitlements diversion payments, where the
farmer is paid by the government for leaving diverted acres unplanted, using conservation
techniques and planting a ground cover where prudent, are in the nature of
rights under an executory contract and therefore fall within the UCC definition
of "account" under §9-106, and do not constitute general
intangibles. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
National Bank v. Milford, 239 Kan. 151, 718 P
2d 1291, 3 UCC Rep. Serv. 2d 793 (1986)</a>: Proceeds of planted
crop: Agricultural entitlement payments to
the debtor constitute proceeds of planted crop and are subject to the
creditor's security interest in the crops from which the payments arise. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
Gas v. North Cent. Kansas Production Credit Corp.,

243 Kan. 109, 755 P. 2d 529, 6 UCC Rep. Serv. 2d 827 (Kan. 1988)</a>:
A security interest granted in "contract rights and receivables in all
government farm program payments," which was intended to reach wheat and
grain deficiency payments, is expressly excluded under Article 9-104 from the
scope of <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=U…
Article 9</a> because of the federal statutory prohibition on assignment of
payments. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8…
re Schneider, 864 F 2d 683 (10th Cir. 1988)</a>,
<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1…
Bankr. Ct. Dec. 1481, Bankr. L. Rep. P 72,561, 7 UCC Rep. Serv. 2d 1681</a>:
(1) Proceeds of crops: Agricultural
entitlement payments resulting from disposition of a planted crop are proceeds
of that crop; (2) Accounts:
Unpaid PIK diversion payments are rights under an executory contract, and are
to be classified as accounts. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1…
re George, 119 BR 800, 13 UCC Rep. Serv. 2d 570
(D. Kan 1990)</a>: (1) Proceeds of growing crops: PIK certificates already issued or that are to be
issued as crop subsidy payments are proceeds of crops where the debtors were
enrolled in a deficiency program pre-petition and had substantially completed
the performance necessary to earn the PIK payments, such payments are part of
the bankruptcy estate and secured creditor with security interest in crop
proceeds is entitled to such proceeds; (2) General
intangibles/contract rights: PIK
certificates issued for participation in acreage reduction programs are general
intangibles. (See, also, prior
decision at <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8…
re George, 85 BR 133, 5 UCC Rep. Serv. 2d 1117
(Bankr. D. Kan. 1988)</a>). <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1…
re Zweygardt, 149 B.R. 673, 20 UCC Rep. Serv.
2d 271 (D. Kan. 1992)</a>: Rents: CRP contract payments that require diversion of property to another
use are "rents" in the nature of lease payments, and are therefore
not subject to <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
UCC Article 9. In re Isenbart, 255 B.R. 62, 36 Bankr. Ct. Dec. 278
(Bankr. D. Kan. 2000)</a>: Not rents: CRP payments are not rents, but are instead contract rights, general
intangibles or accounts.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=6…; FMB-First Michigan Bank v. Van Rhee, 681 F. Supp. 1264, 6 UCC Rep. Serv. 2d 271 (W.D.
Mich. 1987)</a>: Contract rights, general intangibles or
proceeds: Dairy Termination Program
payments, where the debtor forgoes dairy production for five years in exchange
for the government's payment based on a bid amount per hundred weight of
milk plus the debtor's base amount of marketed milk, fall under security
interest definition which listed proceeds, contract rights or general
intangibles. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=6…
v. Farmers State Bank, 602 N.W. 2d 390, 39 UCC
Rep. Serv. 2d 552 (Mich. 1999)</a>: Proceeds: Government disaster relief payments for destroyed
bean crops are proceeds within the meaning of <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=U…
9-306</a>, based on a Schmaling analysis that a crop was planted, there
was a disposition of the crop, and the payment was received in connection with
that disposition.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=5…; In re Bechtold, 54 BR 318, 4 UCC Rep. Serv. 2d 1214 (Bankr. D.
Minn. 1985)</a>: Not Products or Proceeds: The debtor sold cattle for slaughter and received
payments from participation in the Milk Diversion Program in exchange for an
agreement not to produce milk; the diversion payments are not proceeds or
products of dead cows, and are also not a substitute for milk the cows would
have produced but for the program. Proceeds of the dead cows was the cash
received from their sale, which the secured party received. The security
agreement did not grant security interest in accounts or general intangibles. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=4…
re Mattick, 45 BR 615, 40 UCC Rep. Serv. 704
(Bankr. D. Minn. 1985)</a>: General intangible: The PIK Diversion Program grain entitlement here is
a general intangible, paid in exchange for the debtor's agreement to
forego planting a crop on a portion of land. The PIK payment was not a subsidy
for a failed, lost or damaged crop, and was not proceeds of anything, and was
not covered by a security interest in growing crops and proceeds of crops. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=3…
Credit Ass'n. of Fairmont v. Martin County Nat. Bank of Fairmont, 384 NW 2d 529, 42 UCC Rep Serv. 1799 (Minn. App.
1986)</a>: Proceeds of crops:

PIK entitlements are proceeds of crops under a broad reading of <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=U…
9-306</a>, and are therefore reached by a secured creditor's
security interest in all crops, the products of all such crops and all proceeds.
<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=6…
v. Security State Bank of Wells, 68 BR 446,
(Bankr. D. Minn. 1987)</a>: Not products, or proceeds of
products: Dairy Termination Program
payments are not payments for either cattle or proceeds or offspring of them;
the purpose of the payments is to compensate the debtor for loss of future
income in exchange for agreement to leave the milk production business for five
years. Payments are based on the debtor's business expertise. The court
held that the bank did not have a conclusive lien against such payments, even
in the face of a comprehensive security agreement that covered equipment,
products, accounts, contract rights, general intangibles, all substitutes and
replacements now owed or hereafter acquired because it did not have a security
interest in the debtor's "farming expertise," and the
bank's lien is only good to the extent that the bank can show it was
prejudiced by having collected the slaughter value of the herd, as opposed to
its market value as a dairy herd.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=3…; In re Schmidt, 38 BR 380, 38 UCC Rep. Serv. 589 (Bankr. D. N.D. 1984)</a>:
General intangible: Corn that the debtor
may claim under a PIK contract in exchange for his conservation and diversion
of land during the growing season is an executory contract characterized as a
general intangible under <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=6…
9-106. Osteroos v. Norwest Bank Minot N.A., 604 F. Supp. 848, 40 UCC
Rep. Serv. 1460 (D. N.D. 1984)</a>: Proceeds of crop: PIK payment of corn that was received in exchange
for the debtor's agreement not to raise corn during a specific season was
a substitute for corn the debtors would have otherwise grown during that same
season, and thus constituted proceeds; this type of payment is analogous to a
cash payment under federal deficiency and disaster programs. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8…
re Kingsley, 865 F 2d 975 (8th Cir. 1989)</a>,

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=5…
USLW 2437, 7 UCC Rep. Serv. 2d 1252</a>: Not proceeds of crops: Diversion payments paid in exchange for agreement to
divert land from wheat, corn and barley crops, and based on historical yield
and target price for crop, were not received upon sale, exchange, collection or
other disposition of crops, and are therefore not "proceeds" within
meaning of <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=U…
9-306</a>. Further, deficiency payments that were paid as part of a
complex federal price support system that took into account a target price, the
national average loan rate for the crop, national supply, crop perishability,
ability to dispose of stock of crop and the need to offset temporary losses of
export markets were also not crop proceeds derived from disposition of a crop,
but rather contract rights (<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=7…
In re Schmaling, 783 F 2d 680 (7th Cir. 1986)</a>;
reverses lower court decision that had relied on <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
v. Norwest Bank Minot N.A.). In re
Farmpro Services Inc., 276 B.R. 620 (U.S.D.C.
D. N.D. 2002)</a>, <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=4…
UCC Rep. Serv. 2d 1142</a>: Not proceeds of crop: Year 2000 crop disaster program payments are proceeds
in the broadest sense for purposes of the Bankruptcy Code, but are not
"proceeds" under the narrower Article 9 definition because the
payments "were not received as a result of the sale, exchange, collection
or disposition of the crops."

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=3…; In re Lee, 35 B.R. 663, 11 BCD 337 (Bankr. N.D. Ohio 1983)</a>: Proceeds
of crop: The debtor's receipt of
cash-advance diversion payment and subsequent PIK Diversion Program payment in
corn, in exchange for an agreement not to plant corn and to instead plant an
erosion-preventative crop, are substitutes for corn crop debtors would have
otherwise planted, and should be treated the same as corn or proceeds of corn. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=4…
of Binning, 45 BR 9, 40 UCC Rep. Serv. 707
(Bankr. D. Ohio 1984)</a>: Accounts: PIK and cash diversion payments are accounts because they flowed from
the debtors' performance pursuant to a contract. The payments are not
substitutes for crops and they are neither proceeds nor contract rights because
they were not generated from the sale, exchange, collection or other disposition
of collateral. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=3…
re Cupp, 38 BR 953, 38 UCC Rep. Serv. 592
(Bankr. N.D. Ohio 1984)</a>: Proceeds: Proceeds of PIK program, designed to compensate farmers for not
producing crops they otherwise would have raised, are proceeds of collateral
within meaning of security agreement that covered crops and proceeds of sale. (See court's policy analysis against distinguishing
between sale of crops grown, and proceeds received as though they had been
grown.) <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=6…
v. Miami Valley Prod. Cr. Assoc., 614 F Supp.
119, 41 UCC Rep. Serv. 1469 ( S.D. Ohio 1985)</a>; aff'd.
on alternative grounds, <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=8…
F.2d 917 (6th Cir. 1986)</a>: Proceeds: PIK corn entitlements received in exchange for agreement not to plant
corn constituted proceeds within meaning of creditor's security
agreement. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=7…
of Vanasdale, 71 BR 270 (Bankr. N.D. Ohio 1987)</a>:
Unpaid Grain Reserve Program diversion and deficiency payments are payable to a
secured creditor (note, however, that the court here does not make a specific
finding as to the type of collateral such payments represent under the UCC).

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1…; Farmers and Merchants Nat. Bank, Fairview v.
Sooner Co-Op Inc., 1988 OK 135, 766
P 2d 325, 79 ALR 4th 891, 7 UCC Rep Serv. 2d 321 (1988)</a>: Proceeds: In a case where the debtor planted but did not
harvest a crop, and then participated in PIK Diversion Program, the PIK
payments were "proceeds" from the sale of debtors' crops
because they are a substitute for the actual sale, and are therefore subject to
the bank's security interest in growing crops and the proceeds thereof. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1…
and Merchants Nat. Bank, Fairview v. Fairview State Bank, Fairview, 1988 OK 136, 766 P 2d 330, 7 UCC Rep. Serv. 2d 329
(1988)</a>: Proceeds: PIK
payments are proceeds of growing crops; it is not necessary for a financing
statement to predict the form in which proceeds will appear.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=3…; In re Sumner, 69 B.N.R. 758, 3 UCC Rep. Serv. 2d 282 (Bankr. D. Or. 1986)</a>:
(1) Proceeds: Deficiency Program
Payments are proceeds; (2) General intangibles, contract rights or
accounts: Diversion Program entitlements
paid for diverting acreage from wheat, even when planted in another crop such
as barley, are described as general intangibles, contract rights or accounts. A
secured party's security interest did not extend to crop-storage
payments, Conservation Reserve program set-aside payments or ACP payments that
partially compensated the debtor for costs incurred in implementing
conservation practices, because the security-interest description was limited
to "government set-aside programs," and the additional payments did
not meet that definition.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=6…; United States v. Carolina Eastern Chemical Co.
Inc., 638 F Supp. 521, 2 UCC Rep.
Serv. 2d 681 (D. S.C. 1986)</a>: Not proceeds: The government agency's security interest in
all crops grown within seven years of its agreement with the debtor, including proceeds
and products thereof, was not drafted broadly enough to reach PIK Diversion
Program commodity payments that were based on a percentage of the historical
crop yield and the number of acres set aside, because the debtor never planted
crops to which the government's interest in crop proceeds could attach.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=5…; In re Frasch, 53 BR 89, 42 UCC Rep. Serv. 309 (Bankr. D. S.D. 1985)</a>: Not
proceeds: ASC milk diversion program
payments are not proceeds of anything; they are derived from an agreement to
produce less milk, and not a subsidy for milk produced; the secured party's
words did not reasonably describe the milk diversion program payments. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1…
re Cloverleaf Farmer's Co-Operative, 114
BR 1010, 23 Collier Bankr. Cas. 2d 1143, 12 UCC Rep. Serv. 2d 517 (Bankr. D.
S.D. 1990)</a>: The SBA failed to reasonably define the CRP
commodity payments given in exchange for non-crop use of land when it used the
terms " rent" and "profit;" although <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=U…
Art. 9-104</a> is not applicable to rent and security interests subject to a
federal statute such as the CRP provisions, the SBA failed to give notice of
its security interest and properly perfect a security interest in chattels with
a central filing in the Office of Secretary of State.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=4…; In re Judkins, 41 BR 369, Bankr. L. Rep. P 69,986, 39 UCC Rep. Serv. 1018 (Bankr.
M.D. Tenn. 1984)</a>: Proceeds: PIK
Program entitlements are proceeds of crop collateral under <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=U…
9-306</a>, (in the form of a substitute for the crop) even if a crop is
never planted, because the payments are traceable to crops that are subject to
a security interest, are paid for specific crops on specific acreage and are
paid for a specific product. (See
court's policy argument that to permit any other finding would produce an
unconscionable means for a farm debtor to dissipate collateral at the expense
of his creditors).

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…; In re Nivens, 22 BR 287, 34 UCC Rep. 1711 (Bankr. N.D. Tex. 1982)</a> Proceeds
of crops: Disaster payments are a
substitute for crops, or proceeds of crops; deficiency payments, based on the
target price for a crop, are also a substitute for proceeds. The right to
disaster and deficiency payments is not separable from growing crops. Since the
secured party had a security interest in both growing crops and proceeds, and
low-yield/disaster payments to cotton farmers were a substitute for proceeds of
crops where the crop was already planted, the secured party had a security
interest in the government payments. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=7…
v. Sweetwater Production Credit Ass'n.,

764 S.W. 2d 230 (Tex. 1988)</a>, <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=7…
UCC Rep. Serv. 2d 1247, reversing 745 SW
2d 412 (Tex. App. 1988)</a>, <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=5…
UCC Rep. Serv. 2d 1201</a>: Proceeds:
PIK contract proceeds generated by the farmer's compliance with the
government contract constitute proceeds, not a non-farm general intangible.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=3…; In re Barton, 37 BR 545, 38 UCC Rep. Serv. 598 (Bankr. D. Wash. 1984)</a>:

Crop substitutes: The court concludes
that parties intentionally excluded crops and farm products from a security
agreement, and accordingly, PIK entitlements (which are intended to compensate
producers for reduced acreage) are in the nature of substitutes for crops and
products, and are also not covered by that security agreement. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=1…
Nat. Bank v. Bachmann, 111 Wash 2d. 298, 757 P.
2d 979, 57 USLW 2069, 6 UCC Rep. Serv. 2d 1338 (1988)</a>: Proceeds: Statutory definition of proceeds under <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=U…
9-306</a> is broad enough, under the phrase "or other
disposition," to reach Dairy Termination Program payments to the debtor,
by which the government paid him for disposing of his herd and leaving the
dairy business. Such payments are proceeds to which the secured party's
security interest in herd and its proceeds attached.

<a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=6…; In re Weyland, 63 BR 854, 15 Collier Bankr. Cas. 2d 308, Bankr. L. Rep. P 71,275, 2
UCC Rep. Serv. 2d 624 (Bankr. E.D. Wis. 1986)</a>: General
intangibles: Dairy Termination Program payments,
which require the dairy producer to slaughter or export his entire herd, were
general intangibles; secured party's security interest, which covered the
herd but excluded all accounts and contract rights and did not include general
intangibles, did not describe and therefore did not reach the payments.

<hr>
<h3>Footnotes</h3>

<a name="1">1</a> Hon. John K. Pearson is a retired
U.S. Bankruptcy Judge; he is Of Counsel with Hinkle Elkouri Law Firm L.L.C.,
Wichita, Kan. He received his B.A. from the University of Wisconsin, Madison,
in 1968; and his J.D. from the University of California, Hastings College of
Law, in 1973. Sally J. Fisher received her B.A. from Kansas State University in
1974 and her J.D. from Presidents College School of Law 2002. <a href="#1a">Return to article</a>

<a name="2">2</a> For the purposes of simplicity, the
authors have lumped together all of the myriad program payments to farmers,
ranchers and others in the agribusiness as "government entitlement
payments" or simply "entitlement payments." As we note below,
some care is essential in approaching an entitlement payments problem, as
Congress has frequently placed conditions on the entitlement that complicate
the creation and perfection of a security interest in the right to receive the
payment. See notes 6 and 13 below,
discussing how the problem of classification is complicated by Congress's
efforts to place some or all of the payment beyond the reach of the typical
after-acquired property or dragnet clauses in existing financing arrangements
to ensure that the payment goes to continue the debtor in farming, not repay
old debt. <a href="#2a">Return to article</a>

<a name="3">3</a> Non-agricultural entitlement
payments are beyond the scope of this article, although there are reported
decisions on other forms of entitlements. See, e.g, <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
v. Cottonport, 259 BR 125 (W.D. La. 2000)</a>,
holding that per-capita payments paid by an Indian tribe to a tribal member constituted
a general intangible in which a bank held a properly perfected security
interest, because no services were performed by the debtor in exchange for the
payments. <a href="#3a">Return to article</a>

<a name="4">4</a> "Account" is defined in
9-102(a)(2) as "...a right to payment or a monetary obligation, whether
or not earned by performance...." Since many of the entitlement payments
require some action on the part of the farmer/producer, an argument can be made
that the payments already fit into the accounts classification. <a href="#4a">Return to article</a>

<a name="5">5</a> Recognition of the specific
classification of "government entitlement payments" and the
principle that they are subject to the common dragnet or after-acquired
property clauses in most security agreements will not mitigate Congress's
occasional attempts to place new entitlement payments beyond the reach of
existing creditors. <a href="#5a">Return to article</a>

<a name="6">6</a> See Note, "Agricultural Financing Through Production Payments:
Planning for Protection of Farmer and Lender," <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=3…
Drake L.R. 515, 535 (1984-1985)</a>, making an early argument for
adoption of a specific statute within the UCC applicable to creation and
perfection of a security interest in government production payments. <a href="#6a">Return to article</a>

<a name="7">7</a> It appears from the case law that
the lender is frequently in the position of arguing that the payment falls into
a category listed when the security interest was created—because the farm
program payment did not exist at the time the documents were created. Court
recognition of a specific classification of "government entitlement
payments" would eliminate some of that confusion. <a href="#7a">Return to article</a>

<a name="8">8</a> Recent litigation in bankruptcy
courts concerning whether government disaster program payments derived from
programs not in existence at the time the debtor filed for bankruptcy are
properly included within the bankruptcy estate portend future difficulties
having Article 9 perfection implications. <a href="http://www.westlaw.com/find/default.wl?rs=CLWD3.0&vr=2.0&cite=2…
re Stallings, 290 BR 777 (Bankr. D. Idaho 2003)</a>,
held that payments derived from a federal disaster program were not property of
the bankruptcy estate, since the federal program was created after the
debtor's filing. The debtor's chapter 11 filing in April 2002 was
converted to a chapter 12 filing on July 5, 2002. Although the government made
appropriations for the program funds in late 2001 or early 2002, the USDA had
announced the program in June 2002, and the program compensated the debtor for
crop damage to a pre-petition crop caused by the government's use of
herbicides on adjacent lands, the court nevertheless determined the legally
significant and controlling factors were that the program enrollment period did
not commence until July 15, 2002, and the Federal Register notice concerning the application process was not
published until July 31, 2002. Since both those events occurred post-petition,
the court excluded the program proceeds from the bankruptcy estate. The court
cited with approval

Journal Authors

John K. Pearson

Sally J. Fisher

Journal Date

Wednesday, October 1, 2003 - 12:00

Bankruptcy Rule

2003