The Fifth Circuit, Splitting 9-7, Holds that US Crop Relief Payment, Authorized by Legislation Enacted Postpetition, Is Not Property of the Debtor's Bankruptcy Estate

Last Friday, nine of 16 judges of the 5th Circuit Court of Appeals ruled, following an en banc rehearing, that crop disaster relief payments authorized by legislation enacted postpetition are not "property of the debtor's estate." Burgess v. Sykes (In re Burgess), 2006 WL 205043 (5th Cir. 1/27/06) (pdf).

This must-read decision rests on simple facts, but raises giant questions of law, as evidenced by the 31 page majority opinion authored by Judge Edward C. Prado and a 26 page dissent authored by the Circuit's recently named Chief Judge, the Honorable Edith Hollan Jones (who makes another compelling case in dissent).

In this case, a Louisiana farmer, Keith Burgess, filed for chapter 7 relief in August 2002 and received a discharge in December 2002. In 2001, Burgess sustained significant crop losses. In February 2003, Congress enacted the Agricultural Assistance Act of 2003, which authorized the issuance of "crop-disaster-relief" payments to qualifying farmers, like Burgess, who sustained crop losses in 2001 or 2002. In August 2003, the Farm Service Agency issued a $24,829 check to Burgess for losses sustained, but sent the check to the bankruptcy trustee, who moved to reopen the case for a ruling on what to do with the check.

The bankruptcy court held that the check was property of the estate that should be made available for creditors. The district court affirmed. A panel of the 5th Circuit reversed, Burgess v. Sykes (In re Burgess), 392 F.3d 782 (5th Cir. 2004), after which the matter was reheard en banc.

Judge Prado, writing for the nine judge majority, reasoned that the disaster relief payment was not "property of the estate" because the legislation was not enacted until after Burgess filed for bankruptcy, thus depriving Burgess's estate of any "legal or equitable right to payment" at the commencement of the case. The majority also ruled that the payment did not constitute, under Code section 541(a)(6), "proceeds" derived from "property of the estate." To the majority, "Section 541's temporal limitation is the key to deciding the case."

Chief Judge Jones, writing for six other judges in dissent, argued that the payments at issue were both "property of the estate" and "proceeds" derived from "property of the estate" because "these [Code] 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." The dissent took issue with the "temporal limitation" adopted by the majority, stating:

The majority opinion focuses on the temporal limitation in § 541(a)(1), which it constructs as an iron curtain separating prebankruptcy 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.

What turns this simple case into a 57 page combined opinion for the majority and dissent is the comprehensive discussion by both of relevant case law spanning over 150 years, including such venerable classics as Segal v. Rochelle, 382 U.S. 375 (1966), Butner v. United States, 440 U.S. 48 (1979), and United States v. Whiting Pools, 462 U.S. 198 (1983), as well as others requiring a good dusting off before reading (e.g., Williams v. Heard, 140 U.S. 529 (1891) (cited only six times since WWII), Milnor v. Metz, 41 U.S. 221 (1842) (cited only seven times in the preceding 100 years), and Emerson v. Hall, 38 U.S. 409 (1839) (cited only 11 times in the past 100 years)).

In the end, Judge Jones' dissent seems to offer a better resolution to some fundamental questions regarding "property of the estate" that divide not only the 5th Circuit, but -- as amply noted throughout both opinions -- the Circuits at large. We can only hope that the trustee, having taken the case this far, will file a petition for certiorari, and that the US Supreme Court will hear this important case that has been perfectly teed up for review.

© Steve Jakubowski 2006

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