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In re J. Catton Farms Inc.

December 11, 1985


Appeal from the United States District Court for the Central District of Illinois, Peoria Division. Nos. 84 C 1040, 84 C 1177-Michael M. Mihm, Judge.

Author: Posner

Before CUDAHY and POSNER, Circuit Judges, and SWYGERT, Senior Circuit Judge.

POSNER, Circuit Judge. The current financial crisis in the Midwestern farm states is glimpsed from afar in the bankruptcy case. J. Catton Farms, Inc., a very large farming operation undergoing reorganization in bankruptcy, appeals from a judgment of the district court affirming an order by the bankruptcy judge directing Catton to pay more than $300,000 to First National Bank of Chicago. The ground of the order is that the bank had a secured interest in the proceeds of a contract that Catton had made with the U.S. Department of Agriculture not to grow corn (or grain sorghum, but we shall omit this detail). For background see Kunkel, Farmers' Relief Under the Bankruptcy Code: Preserving the Farmers' Property, 29 S. Dak. L. Rev. 303, 330-32 (1984).

In March 1982 the bank had loaned Catton more than $6 million secured by Catton's "receivables, accounts, inventory, equipment and fixtures and the proceeds and products thereof." The loan agreement defines "receivables" to including, without limitation, all rights under installment sales contracts and lease rights with respect to rented lands, instruments, documents, chattel paper and general intangibles (including, without limitation, the accounts) in which the debtor has or hereafter acquires any right." The term "inventory" is defined to include "crops, whether harvested or growing, [and] grain." To perfect its security interest the bank filed the loan agreement in the states where Catton's farms were located. See UCC § 9-401.

A year later, in March 1983, Catton signed a "PIK" contract with the Department of Agriculture. This is a contract whereby the farmer, in exchange for not planting specified crops, is entitled to receive payment in kind, i.e., in the crops he has agreed not to plant, after the growing season. See 7 U.S.C. §§ 1348, 1444(c), 1444b-1(e); 16 U.S.C. §§ 590p(c)(1), (g)(1), (h)(1); 7 C.F.R. Part 770 (1984). (He is also required to plant a cover crop to prevent soil erosion.) The purpose is to reduce the supply of the crops and thereby drive up their prices. The payment in kind feature, which dates back to the early 1960's is designed to work off the government's large surplus holdings of these crops (stored at great expense) under other programs for keeping up farm prices, programs in which the government buys the crop instead of paying the farmer not to grow it. See H.R. Rep. No. 29, 87th Cong., 1st Sess. (1961).

On April 30, 1983, shortly after signing the "PIK" contract, Catton filed for bankruptcy under Chapter 11 of the Bankruptcy Code, which meant that it continued in business. In June, having duly planted the cover crop and refrained from planting corn, but not yet being entitled to delivery of the proceeds in kind under its contract with the Agriculture Department-for delivery was not due till October, when the crops would have been harvested if they had been planted-Catton assigned its right to the proceeds in kind to Cargill, a large grain elevator company, receiving in exchange either $200,000 or $246,000 (the record is unclear which) in cash. When delivery of the proceeds in kind (i.e., the corn) became due, it was made to Cargill. The corn is estimated to have been worth $334,666 at the time of delivery, and that is the amount in the bankruptcy judge's order.

There seems very little doubt that the loan agreement was intended to secure the type of contractual right that Cattan obtained through its deal with the Agriculture Department. The loan was very large and the bank wanted as much security as it could get. It took a security interest not only in Catton's crops, even while they were still growing, but also, lest Catton deal away those crops, in Catton's contracts (which are "receivables" as defined in the contract) and the proceeds thereof. So if Catton had agreed in March 1983 to sell its 1983 corn crop for $334,666, with delivery and payment due in October 1983, the payment when made would have been the proceeds of a contract and hence additional security for the loan. It would make no difference whether the contract called for payment in cash or contemplated a barger of crops for crops; indeed, the latter would be an even clearer case of substituted collateral. And even if the loan agreement had made no reference to contract rights or proceeds, the taking of a secured interest in the crops would automatically have given the bank a security interest in the proceeds of a sale of the crops. See UCC § 9-203(3).

The wrinkle in this case is that Cotton signed with the grain elevator was not a contract to sell a 1983 crop but a contract to sell a 1983 non-crop. Because it is national policy to keep farm prices above the competitive level, an agreement not to produce is a marketable asset and is the asset Catton sold Although the loan agreement made no specific reference to this asset, the agreement's comprehensive reference to the borrower's contracts would seem intended to include it. In any event, Catton's argument against recognition of the bank's security interest is not based on the parties' intent in signing the loan agreement; it is based on agriculture law and bankruptcy law.

Catton points out that the regulations under the "PIK" program provide that assignments "will be recognized by the Department [of Agriculture] only if such assignment is made on" a specified form "and filed with the county committee." 7 C.F.R. § 770.6(e) (1984). And "except as provided in paragraph (e) of this section, and payment in kind or portion thereof which is due any person shall be made without regard to ... any claim of lien against the commodity, or proceeds thereof, which may be asserted by any creditor." 7 C.F.R. § 770.6(f) (1984). Catton argues that this regulation required the bank to file its loan agreement with the county agricultural committee (just as Catton, we assume, filed the assignment of the contract to Cargill with the committee) and that having failed to do this the bank could not enforce a lien against the proceeds of the contract.

The filing of a financing statement in the places specified by the Uniform Commercial Code is indeed ineffective to protect the lender's security interest if there is a federal filing scheme, see UCC §§ 9-302(3), (4), but we do not think the regulation quoted above sets up such a scheme. Its aim seems merely to be to protect the Department of Agriculture from liability for paying over the proceeds of a "PIK" contract to an unauthorized payee. In re Sunberg, 729 F.2d 561, 563 (8th Cir. 1984). Suppose the contract is with Farmer X and the Department pays X upon proof that X lived up to his side of the bargain, but then Y comes along and brandishes an assignment from X and complains that the Department paid the proceeds to the wrong person. Naturally the Department wants to shield itself from such complaints by insisting that any assignment be filed with its representatives so that if there has been an assignment the Department will not pay the assignor rather than the assignee.

The suggestion that the regulation goes further and requires any secured creditor to file evidence of his security interest with the Department's representatives on pain of forfeiting his lien is pretty far-fetched. Nothing in the language of the regulation supports this interpretation and the filing form put out by the Department (Form CCC-479) is on its face a form for assigning "PIK" contracts, not a form for recording liens. The Department publishes no form for filing a loan agreement and it would be unreasonable to require the bank to file not merely the evidence of its security interest (that is, the loan agreement) but separate "assignments" to it of the borrower's contractual rights every time the borrower made a new contract.

This case is not like Philko Aviation, Inc. v. Shacket, 462 U.S. 406, 76 L. Ed. 2d 678, 103 S. Ct. 2476 (1983). Congress had established a central national registry for liens on aircraft; given the mobility of the collateral, the purpose of such a registry is easy to see. There is no indication that Congress has ever wanted to establish a series of county recording systems, federally administered, for "PIK" contracts, and it is hard to understand what useful purpose a federal system of county registries, duplicating the state and county systems used to record liens, would serve. The parties could not even tell us whether the files of the county committees are open to public inspection-a sine qua non of a recording system.

Catton might conceivably have gotten some mileage out of 7 U.S.C. § 1444(i), which applies to the "PIK" program the payment provisions of the Soil Conservation and Domestic Allotment Act, including a provision which forbids assigning payment rights to "secure any preexisting indebtedness." 16 U.S.C. § 590h(g). The evident purpose is to make sure that the intended beneficiary of federal largesse retains the benefit. See Barlow v. Collins, 397 U.S. 159, 162-65, 25 L. Ed. 2d 192, 90 S. Ct. 832 (1970). If there is no fresh consideration for the assignment, he does not. In this case, however, putting to one side the fact that Catton is a substantial corporation rather than a tenant farmer as in the Barlow case, the assignment-if that is what one should call the provision in the loan agreement giving the bank a security interest in any contract rights (implicitly including "PIK" contract rights) that Catton might acquire-was made not to secure a preexisting indebtedness but as part of the inducement to the bank to make the loan; so the "farmer" got value for the assignment. In any event, Catton, not having cited either of the above statutory provisions to us, has waived any reliance it might have placed on them.

Catton's other argument against the bank's lien is built on the after-acquired property provision of the Bankruptcy Code, 11 U.S.C. § 552(b), which provides that if before bankruptcy the debtor gave a creditor a security interest that includes proceeds, the security interest extends to proceeds "acquired by the estate after the commencement of the case to the extent provided by such security agreement and applicable non-bankruptcy law, except to any extent that the court, after notice and a hearing and based on the equities of the case, orders otherwise." The security interest that Catton gave the bank and the bank perfected did include proceeds-the proceeds of its contract with the Department of Agriculture-and therefore those proceeds, even if acquired after the date of bankruptcy, are part of the lender's security ...

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