agricultural finance case law update (2013) · pdf fileagricultural finance case law update...

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AGRICULTURAL FINANCE

Case Law Update

Jeffrey A. Peterson

GRAY PLANT MOOTY

www.gpmlaw.com

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Table of Contents

I. Revised Article 9 ………………………………………………. A-3

A. Attachment

B. Perfection

C. Priority

D. Enforcement

II. Article 2 ………………………………………………….……. A-13

A. General

B. Formation

C. Construction

D. Title

E. Performance

F. Breach

G. Remedies

H. Miscellaneous

III. Bankruptcy ……………………………………………………. A-15

A. General

B. Case Administration

C. Bankruptcy Estate

D. Chapter 7

E. Chapter 11

F. Chapter 12

G. Chapter 13

H. Avoidance Actions

IV. State Law ………………………………………………..……. A-24

A. Fraudulent Transfers

B. Exemptions

C. Miscellaneous

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I. REVISED ARTICLE 9.

A. Attachment.

1. Value Given to Debtor.

a. Extrinsic evidence may be used to show value given by secured

creditor. Debtor David Duckworth had a farming operation with an

operating loan with the State Bank of Toulon. The loan was secured by a

blanket security interest in the farm equipment of the Debtor. The security

agreement misidentified the date of the promissory note. The Debtor filed

bankruptcy and the trustee argued that under its judgment creditor

avoidance powers that the secured creditor’s security interest did not

attach to the farm equipment because of the error in the security

agreement. The Court disagreed and held that the extrinsic evidence

showed that value was provided by the Secured creditor to the debtor in

conjunction with the operating loan and, therefore, even though the

security agreement misidentifies the promissory note, the security interest

is still enforceable and cannot be avoided by the trustee under its

avoidance powers. State Bank of Toulon v. Covey (In re Duckworth),

2013 Bankr. LEXIS 223, 79 U.C.C. Rep. Serv. 2d (Callaghan) 533, 2013

WL 211231 (Bankr. C.D. Ill. 2013).

2. Debtor has Sufficient Rights in the Collateral.

No relevant cases since October 2012.

3. Sufficient Description in Security Agreement.


B. Perfection.


C. Priority.

1. Competing Article 9 secured creditors.


2. Purchase Money Security Interests (PMSI).

a. The security agreement does not need to identify the financing

as a purchase money security interest to be effective. The secured

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creditor extended credit to the debtor to buy certain equipment, including a

skid steer loader. Although the loan proceeds were used to buy the skid

steer, no separate security agreement was executed by the debtor as to the

skid steer. The bankruptcy trustee moved to avoid the lien because of the

failure to have a separate security agreement. The Court disagreed and

held that under UCC § 9-103 the security agreement did not have to

identify the financing as a purchase money security interest. In re Saxe,

2013 Bankr. LEXIS 1224 (Bankr. W.D. Wis. 2013).

b. No separate UCC-1 finance statement is required to establish a

purchase money security interest. The secured creditor extended credit

to the debtor to buy certain equipment, including a skid steer loader.

Although the loan proceeds were used to buy the skid steer, no separate

UCC-1 filing was filed that identified the purchase money security

interest. The bankruptcy trustee moved to avoid the lien because of the

failure to have a separate UCC-1 filing. The Court disagreed and held that

under UCC § 9-103 the secured creditor was not required to file a separate

UCC-1 financing statement that identifies the equipment as a PMSI. In re

Saxe, 2013 Bankr. LEXIS 1224 (Bankr. W.D. Wis. 2013).

c. The refinancing of debt secured by a purchase money security

interest does not destroy its PMSI status. The secured creditor extended

credit to the debtor to buy certain equipment, including a skid steer loader.

The secured creditor and debtor restructured the debt obligations by

having the debtor execute a new note to renew the debt obligation secured

by the PMSI. The bankruptcy trustee argued that the new debt obligation

was a novation and the new debt obligation extinguished the old debt

obligation and the PMSI. The Court disagreed and held that the trustee

failed to establish that the parties intended the old note to be extinguished

and, instead, the refinancing was a renewal of the original PMSI

obligation. In re Saxe, 2013 Bankr. LEXIS 1224 (Bankr. W.D. Wis.

2013).

Comment Note. The secured creditor should be careful to clarify, when

using a new promissory note to restructure a debt obligation, that the new

debt is a renewal of the existing debt obligation and does not extinguish

the existing debt obligation when the existing debt obligation is secured by

specific collateral like a purchase money security interest.

3. Statutory Liens.

a. Agricultural Supplier/Service Provider Lien.

i. Supplier of feed and other related services is limited to a

livestock production lien under Minnesota law, and is also not

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entitled to the higher priority feeder’s lien. The feed supplier

Wilmont-Adrian Cooperative supplied feed and provided

nutritional analysis and custom nutrition plans to the hog producer

Profit Pork. New Vision Coop only supplied feed to the hog

producer. The hog producer went insolvent and the feed suppliers

asserted various statutory liens against certain proceeds from the

sale of hogs. Wilmont-Adrian Cooperative argued that it was

entitled to a higher priority feeder’s lien under Minnesota law

because the Minnesota feeder’s lien included any one that “stores,

cares for, or contributed to the keeping, feeding… or other care of

livestock.” The Court held implied that a lien claimant may only

be entitled to one lien category and to be eligible for the feeder’s

lien the supplier must directly care for or contribute to the feeding

of the livestock. Because the livestock input lien was more

applicable to the goods and services provided by Wilmont-Adrian

Cooperative, the Court held that it was not also entitled to the high

priority feeder’s lien. First Nat'l Bank v. Profit Pork, LLC, 820

N.W.2d 592, 2012 Minn. App. LEXIS 96 (Minn. Ct. App. 2012).

ii. Failure to properly identify the hogs in the UCC-1 filing

under the Iowa agricultural supply dealer’s lien causes the lien

to be unperfected. The supply dealer filed a UCC-1 that stated

“All livestock located at [certain barn location].” The Bankruptcy

Court ruled that for any hogs not located at the barn locations listed

in the UCC-1, the lien was unperfected. First Nat'l Bank v.

Farmers Coop Soc’y (In re Coastal Plains Pork, LLC) 2012 WL

6571102 (E.D. N.C. Bankr. 2012).

Comment Note. The Court implied that had the UCC-1 just stated

“[A]ll livestock” the UCC-1 would have properly identified all of

the hogs. The assumption is that that the Court deferred to the

general principles under Revised Article 9 (UCC § 9-504 and § 9-

108(2)(a)-(f)) that a UCC-1 that describes a general category of

collateral is sufficient to prefect a security interest. The take away

is that the UCC-1 filer should either not attempt to identify the

specific barn locations or, the UCC-1 should state “all livestock,

including but not limited to, the livestock located at the following

barn locations: [and then list the barn locations]”.

iii. Factual issues in the calculation of a priority lien under

the Iowa agricultural supply dealer’s lien preclude granting

summary judgment. The Iowa agricultural supply dealer’s lien

(Iowa Code § 570A.5(3)), provides that if properly perfected, the

supply dealer is entitled to a priority lien for the difference

between the acquisition price of the livestock and the fair market

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value of the livestock at the time the lien attaches or the sale of the

livestock, whichever is greater. The Bankruptcy Court ruled that

there remains factual issues as to: (1) the acquisition price of the

hogs and whether feed, transportation, shelter and supervision

expenses should be considered in the acquisition cost; (2) the value

of the hogs considering some hogs did not consume any of the

unpaid feed; and (3) whether the lien includes non-feed charges for

interest and financing. First Nat'l Bank v. Farmers Coop Soc’y (In

re Coastal Plains Pork, LLC) 2012 WL 6571102 (E.D. N.C.

Bankr. 2012).

b. Grain Handler/Storage Liens.

i. Lien enforcement and priority of allocation of proceeds

for failed agricultural commodity handlers in Ohio. Central

Erie operated a grain elevator and farm commodity related

business. Central Erie purchased grain from local grain farmers.

Central Erie was indebted to Citizens Bank and the debt was

secured by a security interested in its grain. Central Erie went

insolvent and the Ohio Department of Agricultural (ODA)

commenced a legal action, on behalf of the unpaid grain farmers,

to determine the priority claims of the farmers. The trial court held

that under applicable Ohio law Central Erie was an “agricultural

commodity handler” and, therefore, the unpaid grain farmers

would be paid first and the secured creditor second. The secured

creditor appealed. The Court of Appeals affirmed holding that the

ODA has the authority to enforce lien claims and allocate proceeds

and the first priority of proceeds lies with claimants. Importantly,

the Court also determined that the ODA’s statutory lien takes

priority over an antecedent security agreement held by creditors

giving rights to after-acquired property of the agricultural

commodity handler. Ohio Dep't of Agric. v. Cent. Erie Supply &

Elevator Ass'n, 2013 Ohio App. LEXIS 3118 (Ohio Ct. App., Erie

County July 12, 2013).

4. Buyer of Farm Products (Federal Food Security Act).

a. The Federal Food Security Act pre-empts Revised Article 9.

The Illinois Court of Appeals affirmed a trial court decision that the Food

Security Act preempts Revised Article 9. The Court adopted the

reasoning in Farm Credit Midsouth, PCA v. Farm Fresh Catfish Co., 371

F.3d 450 (8th Cir. 2004), relying on the Supremacy Clause of the

Constitution, the language of UCC § 9-109 (“This Article does not apply

to the extent that: a statute . . . of the United States preempts this Article.”)

and the language of the Food Security Act § 1631(d) (“notwithstanding

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any other provision of Federal, State, or local law[.]”) in support of its

decision. State Bank of Cherry v. CGB Enterprises, Inc., 964 N.E.2d 604

(Ill. Ct. App. 2012); (affirmed by State Bank of Cherry v. CGB Enters.,

984 N.E.2d (Ill. 2013)).

b. Direct Notice States.

i. Strict Compliance.

1. Failure to identify county where crops were

grown invalidates notice. The secured creditor failed to

include the names of certain counties where the debtor

grew crops. The secured creditor argued that it was not

required to strict comply with the notice requirements and,

that by identifying the other counties were crop were

grown, the secured creditor was in substantial compliance.

The Court disagreed and held that the Federal Food

Security Act expressly requires the secured party to provide

a description of the farm products subject to the security

interest created by the debtor and the name of each county

where the farm products are located. The Court recognized

some conflicting and non-binding state case law as to

“substantial compliance” with the notification statute.

Accordingly, the buyer purchased debtor’s crop free of the

secured creditor’s security interest despite knowing of the

secured creditor’s security interest.1 State Bank of Cherry v.

CGB Enterprises, Inc., 964 N.E.2d 604 (Ill. Ct. App. 2012)

(affirmed by State Bank of Cherry v. CGB Enters., 984

N.E.2d (Ill. 2013)).

2. Failure to identify debtor’s social security

number and proper description of crops invalidates

notice. The secured creditor failed to include the social

security number of the debtor on the CNS statement and

failed to properly identify the county were the crops were

being grown. The secured creditor argued that it was not

1 As noted in the case summary, there is conflicting case law as to whether the direct notice provisions of the FSA require strict or substantial compliance. The Illinois Court of Appeals in this case relied on the 8th Circuit decision in Farm Credit Midsouth for holding that the secured creditor must strictly comply with the statute. Alternatively, First Nat’l Bank & Trust v. Miami County Cooperative Ass’n, 897 P.2d 144 (Kan. 1995); Farm Credit Services of MidAmerica, ACA v. Rudy, Inc., 680 NE2d 637 (Ohio Ct. App. 1996); and Lisco State Bank v. McCombs Ranches, Inc., 752 F. Supp. 329, 13 UCC Rep. 2d 928 (D. Neb. 1990) have all held that the standard is substantial compliance. As for the 5th Circuit, even the majority and dissent in State Bank of Cherry disagreed whether the holding in Peoples Bank v. Bryan Brothers Cattle Co., 504 F.3d 549, 64 UCC Rep. 2d 113 (5th Cir. 2007), required strict or substantial compliance.

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required to strict comply with the notice requirements. The

Court disagreed and held that the failure of the secured

creditor to include the debtor’s social security number and

a proper description of the crops in the Food Security Act

notice invalidates the notice and allowed a grain elevator to

purchase the crops free and clear of any claims of the

secured creditor. CNH Capital v. Trainor Grain and

Supply Co. (In re Printz), 2012 LEXIS 4506 (Bankr. C.D.

Ill. Sept. 27, 2012).

c. Central Filing States.

i. Priority limited to locations specified in the CNS

statement. The secured creditor filed two CNS farm product

financing statements with Mississippi Secretary of State. Each

CNS listed sweet potatoes as the farm product, included the county

codes for two counties and listed the six parcels within those two

counties. The debtor planted crops on the six parcels, but also in

an unlisted county. A produce company bought the sweet potatoes

and did not make the check payable to the producer and the

secured creditor. The Court found that for the two counties that

the secured creditor properly listed, the produce company failed to

comply with the Food Security Act and the secured creditor took

priority. However, for the third unlisted county, the Court held

that the produce company took priority because the secured

creditor limited its CNS to the listed six parcels. In re Moore,

2013 Bankr. LEXIS 2060 (Bankr. N.D. Miss. May 17, 2013).

Comment Note. The creditor should not limit the scope of its CNS

statement but, instead the creditor should identify all crops and all

counties in the state in the CNS to avoid this outcome.

ii. The county were the crops are processed is not relevant

for purposes of the Food Security Act. The Secured Creditor

filed two CNS farm product financing statements with Mississippi

Secretary of State. Each CNS listed sweet potatoes as the farm

product, included the county codes for two counties and listed the

six parcels within those two counties. The debtor planted crops on

the six parcels, but also in an unlisted county. However, the sweet

potatoes grown in the unlisted county were processed in one of the

listed counties. A produce company bought the sweet potatoes and

did not make the check payable to the producer and the secured

creditor. The Secured creditor argued that the CNS is not limited

to the location the crop is grown but, instead, includes the location

the crop is processed. The Court disagreed and held that the

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county were the crops are processed is not relevant because the

CNS must identify the county were the crops are grown. In re

Moore, 2013 Bankr. LEXIS 2060 (Bankr. N.D. Miss. May 17,

2013).

d. Set-off by Buyer.

i. Buyer is not entitled to set-off. A buyer of farm products

is not entitled to set-off the obligation owed to the seller for the

sale of grain against the prior indebtedness owed by the seller to

the buyer. The Food Security Act allows a buyer of farm products

to purchase the farm products free and clear of any security

interests. However, the Food Security Act does not allow a buyer

of farm products to acquire the proceeds of the farms products

(through a common law set-off) free and clear of any security

interest in the sale proceeds. The FSA only defines a “security

interest” as “an interest in farm products that secured payment or

performance of an obligation.” The term does not reference or

include within its definition the proceeds of the security interest.

The Court reasoned that at the moment the grain buyer set-off

against the debt owed to the seller, the grain buyer was no longer a

buyer in the ordinary course of business but, instead, a creditor.

To allow the common law setoff would circumvent Revised

Article 9. CNH Capital v. Trainor Grain and Supply Co. (In re

Printz), 2012 LEXIS 4506 (Bankr. C.D. Ill. Sept. 27, 2012).

5. Statutory Trusts.

a. Perishable Agricultural Commodities Act (PACA).

i. A United States business address in a PACA license is

sufficient evidence that the PACA dealer has a place of

business in the United States for purposes of jurisdiction under

the Uniform Commercial Code and PACA. VLM Food

Trading, a Canadian business operating in the United States, sold

wholesale produce to Illinois Trading. Illinois Trading ordered,

and VLM Food delivered, frozen potatoes to Illinois Trading.

Illinois Trading failed to make payment and VLM Food asserted a

PACA claim. Illinois Trading asserted that VLM was not

operating in the United States and, therefore, was not entitled to

relief under the Uniform Commercial Code and PACA, but

instead, the UN Convention on Contracts for the International Sale

of Goods was applicable. The Court disagreed and held that

VLM’s PACA license which stated in had an office in New Jersey

was sufficient evidence that VLM had a place of business in the

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United States. VLM Food Trading Int'l, Inc. v. Ill. Trading Co.,

2013 U.S. Dist. LEXIS 29791 (N.D. Ill. Mar. 5, 2013).

ii. Legal fees and interest can be asserted under a PACA

claim if contractually agreed to. VLM Food Trading sold

wholesale produce to Illinois Trading. Illinois Trading ordered,

and VLM Food delivered, frozen potatoes to Illinois Trading.

Illinois Trading failed to make payment and VLM Food asserted a

PACA claim. Illinois Trading asserted that the master contract did

not provide for legal fees and interest and, therefore, the PACA

claim should not include fees and interest terms provided for in

later invoice. The Court disagreed and held that the parties

contemplated the payment of legal fees and interest and, therefore,

the PACA claim should be expanded to include these expenses.

VLM Food Trading Int'l, Inc. v. Ill. Trading Co., 2013 U.S. Dist.

LEXIS 29791 (N.D. Ill. Mar. 5, 2013).

iii. Special counsel not entitled to be paid from PACA trust

funds. Delta Produce was a broker of produce. Delta failed to

make payment for produce and the claimants asserted their various

PACA claims in a subsequent bankruptcy of Delta Produce. In

conjunction with the bankruptcy, a special counsel was appointed

to administer the PACA claims. The special counsel made a claim

against the PACA funds for its legal fees arguing that the fees were

incurred in connection with the various transactions; the same

standard that other courts have allowed the legal fees of claimants

counsel to be paid from PACA funds. On appeal, the District

Court disagreed and held that special counsel, acting as a trustee

for a PACA trust, is not counsel for the claimants and, therefore, is

not entitled to its legal fees paid out of the PACA trust. The fees

would only be awarded if all trust beneficiaries are paid in full.

Kingdom Fresh Produce v. Bexar Cnty (In re Delta Produce, LP),

2013 WL 5441971 (W.D. Tex. Sept. 27, 2013)

iv. Sufficient inconsistencies of evidence exists that the

produce was not received by a commission merchant, dealer or

broker to deny summary judgment as to a PACA trust claim.

The producer sold blueberries and raspberries to the buyer on

credit. A material issue of fact existed as to whether all of the

produce alleged by the producer was actually received by the buyer

to allow for a PACA trust claim. The Court denied summary

judgment and allowed for additional discovery to determine

whether documentation existed as to the produce actually

delivered. Or. Potato Co. v. Seven Stars Fruit Co., LLC, 2013

U.S. Dist. LEXIS 8601 (W.D. Wash. Jan. 18, 2013).

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v. Sufficient inconsistencies of evidence exists that the

purchaser paid for the produce to deny summary judgment as

to a PACA trust claim. The producer sold blueberries and

raspberries to the buyer on credit. A material issue of fact existed

as to whether all of the produce alleged by the producer was

actually paid for by the buyer to allow for a PACA trust claim.

The Court denied summary judgment and allowed for additional

discovery to determine whether documentation existed as to what

payments were actually made and applied against the delivered

produce. Or. Potato Co. v. Seven Stars Fruit Co., LLC, 2013 U.S.

Dist. LEXIS 8601 (W.D. Wash. Jan. 18, 2013).

vi. Supplier’s custom of sending invoices to buyer more

than 30 days after the shipment did not constitute a waiver of

the supplier’s PACA rights. Pacific Tomato sold produce to the

buyer TDI. The seller invoiced the buyer more than 30 days after

the shipment. The buyer argued that the seller waived its PACA

trust rights because it agreed to be paid outside the 30 day window.

The Court disagreed and held that although the seller issued its

invoices outside the 30 day window, the parties not agree to this

practice and, therefore, the seller did not waive its PACA rights.

Pac. Tomato Growers, Ltd. v. Tanimura Distrib., Inc., 2012 U.S.

Dist. LEXIS 171189 (C.D. Cal. Nov. 13, 2012).

6. Buyers in the Ordinary Course of Business.

a. Buyer purchased coal free of security interest because coal

purchased in the ordinary course of business. Constellation Energy

bought coal on contract from Black Diamond Mining. CIT Group had a

security interest in the coal inventory of Black Diamond as collateral for a

loan. Back Diamond filed bankruptcy and the secured creditor asserted a

security interest in the coal purchase by the buyer. The general rule under

UCC § 9-320 is that a security interest continues in the collateral and is

effective as to any purchasers of the collateral. The buyer relied on an

exception under UCC § 9-320; that a buyer in the ordinary course takes

free of any security interest created by the seller even if the buyer knows

of the existence of the security interest and the security interest is

perfected. The secured creditor argued that the buyer lacked good faith

because the buyer was aware of the secured creditor’s inventory lien, but

more importantly, that the buyer was aware that the sale violated the term

of the loan agreement and intentionally structured the sale to circumvent

the secured creditor’s security interest. The Court ruled that the buyer had

no knowledge of the terms of the loan agreement, nor was there any

intention to circumvent the security interest. In addition, the Court held

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that the security interest was extinguished because the secured creditor

implicitly authorized the sale free of the security interest because of its

knowledge of the relationship. CIT Group/Commercial Servs., Inc. v.

Constellation Energy Commodities Group, 2012 U.S. Dist. LEXIS 146673

(E.D. Ky. 2012).

7. Miscellaneous.

a. Jurisdiction. A United States business address in a PACA

license is sufficient evidence that the PACA dealer has a place of

business in the United States for purposes of jurisdiction under the

Uniform Commercial Code and PACA. VLM Food Trading, a

Canadian business operating in the United States, sold wholesale produce

to Illinois Trading. Illinois Trading ordered, and VLM Food delivered,

frozen potatoes to Illinois Trading. Illinois Trading failed to make

payment and VLM Food asserted a PACA claim. Illinois Trading asserted

that VLM was not operating in the United States and, therefore, was not

entitled to relief under the Uniform Commercial Code and PACA, but

instead, the UN Convention on Contracts for the International Sale of

Goods was applicable. The Court disagreed and held that VLM’s PACA

license which stated in had an office in New Jersey was sufficient

evidence that VLM had a place of business in the United States. VLM

Food Trading Int'l, Inc. v. Ill. Trading Co., 2013 U.S. Dist. LEXIS 29791

(N.D. Ill. Mar. 5, 2013).

D. Enforcement.

1. Defenses.

i. The failure of account buyer to properly notice an account

debtor before payments are made to the debtor discharges the

obligation of the account debtor. Mossy Creek was indebted to

Southwest Iowa Cattle Feeders on five promissory notes. Southwest Iowa

Feeders assigned the notes to Rolling Hills Bank. The secured creditor

failed to give notice of the assignment to the account debtor Mossy Creek.

Mossy Creek continued to make payments to Southwest Iowa Feeders.

The secured creditor made demand for the debt. The account debtor

Mossy Creek argued that the debt was discharge because of the payments

made to the debtor and the secured creditor’s failure to give notice under

UCC § 9-406(1). The Court agreed and held that the debt was discharged

prior to the notice given to Mossy Creek. Rolling Hills Bank & Trust v.

Mossy Creek Farms Ltd. P’ship, 828 N.W.2d 325 (Iowa Ct. App. 2013).

2. Commercially Reasonable Sale.

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i. A conflicting affidavit of borrower as to value of equipment

constitutes a genuine issue of material fact to not justify summary

judgment. The equipment purchaser of two pieces of heavy logging

equipment defaulted and the finance company repossessed and sought to

recover the deficiency. The finance moved for summary judgment. The

borrower submitted an affidavit of its principal that attested to a

conflicting value of the equipment. The Court held that the conflicting

affidavit was enough to deny the motion for summary judgment. Mason

Logging Co. v. GE Capital Corp., 2013 Ga. App. LEXIS 594 (Ga. Ct.

App. July 8, 2013).

E. Liabilities.


II. ARTICLE 2.

A. General.


B. Formation.

1. Written confirmation of sale constitutes a contract between

merchants. Brooks Peanut purchased certain peanuts from Great S. Peanut, a

competitor, though a broker. No written contract was signed or acknowledged by

the parties. The broker only faxed a written confirmation of the sale to both

parties. The seller objected to the sale upon realizing the identity of the buyer,

arguing that the sale failed to satisfy the Statute of Frauds under UCC § 2-201.

The Court disagreed and held that the parties were merchants and, therefore,

because the seller did not timely object under UCC § 2-201(2), the parties had a

valid and enforceable contract. Brooks Peanut Co. v. Great S. Peanut, LLC, 2013

Ga. App. LEXIS 618 (Ga. Ct. App. July 11, 2013).

2. Subsequent written agreements with arbitration clause are binding. Sheeder verbally agreed to sell certain corn to Bartlett Grain. Bartlett Grain

subsequently mailed and Sheeder signed a written confirmation of the sale. The

written confirmation included an arbitration clause. Sheeder argued that because

he did not verbally agree to arbitrate, the subsequent written concession was not

enforceable. The Court disagreed and held that under UCC § 2-202 the

subsequent written confirmation and arbitration clause are enforceable as a final

expression of their agreement. Bartlett Grain Co., LP v. Sheeder, 829 N.W.2d 18

(Iowa 2013).

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3. Oral agreement for sale of corn followed by modification by written

agreement containing arbitration clause controlled. Both parties signed the

confirmations of the oral agreements for the sale of corn. The confirmations

contained an arbitration clause. The Court held that the modification of the oral

agreements by later signed writings was not unconscionable and the arbitration

clause was valid. Bartlett Grain Co., LP v. Sheeder, 829 N.W.2d 18 (Iowa 2013).

C. Construction.

1. Arbitration clause is not unconscionable. Sheeder verbally agreed to

sell certain corn to Bartlett Grain. Bartlett Grain subsequently mailed and

Sheeder signed a written confirmation of the sale. The written confirmation

included an arbitration clause. Sheeder argued that the arbitration clause was

unconscionable because the terms were unfair. The Court disagreed and held that

under UCC § 2-302 the buyer was aware of or should have been aware of the

terms and was free to negotiate the sale of corn to other buyers. Bartlett Grain

Co., LP v. Sheeder, 829 N.W.2d 18 (Iowa 2013).

D. Title.

1. Reservation of Title/Reservation of Security Interest. The delivery of

corn under an agreement which provides that title will not transfer under the

corn is processed by the buyer (and in which the corn is not segregated by

the buyer) is only a reservation of a security interest by the seller. Perdue

BioEnergy sold corn to the debtor Clean Burn Fuels; an ethanol plant. The

agreement provided that, even after the corn had been delivered to the debtor, the

seller would retain title to the corn until the corn crossed a weighbelt for

processing at the debtor’s plant. The Chapter 7 trustee objected. The trustee

argued that, although the contract allowed for title to transfer post-delivery, the

act of delivery and the failure to identify the seller’s corn while in the possession

of the debtor caused title to pass and left the seller with only a reservation of a

security interest in the corn under UCC § 2-501 and § 2-401(1). The Court agreed

and held that the seller was only entitled to a reservation of a security interest

under UCC § 2-401(1) and because the seller failed to perfect its security interest

it failed to take priority to that of the bankruptcy trustee under its judgment

creditor avoidance powers. Clean Burn Fuels, LLC v. Perdue BioEnergy, LLC (In

re Clean Burn Fuels, LLC), 492 B.R. 445, 2013 Bankr. LEXIS 2009 (Bankr.

M.D.N.C. 2013).

E. Performance.


F. Breach.

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G. Remedies.


H. Miscellaneous.

1. International Sale of Goods Jurisdiction. A United States business

address in a PACA license is sufficient evidence that the PACA dealer has a

place of business in the United States for purposes of jurisdiction under the

Uniform Commercial Code and PACA. VLM Food Trading, a Canadian

business operating in the United States, sold wholesale produce to Illinois

Trading. Illinois Trading ordered, and VLM Food delivered, frozen potatoes to

Illinois Trading. Illinois Trading failed to make payment and VLM Food asserted

a PACA claim. Illinois Trading asserted that VLM was not operating in the

United States and, therefore, was not entitled to relief under the Uniform

Commercial Code and PACA, but instead, the UN Convention on Contracts for

the International Sale of Goods was applicable. The Court disagreed and held that

VLM’s PACA license which stated in had an office in New Jersey was sufficient

evidence that VLM had a place of business in the United States. VLM Food

Trading Int'l, Inc. v. Ill. Trading Co., 2013 U.S. Dist. LEXIS 29791 (N.D. Ill.

Mar. 5, 2013).

III. BANKRUPTCY.

A. General.


B. Case Administration.

1. The debtor failed to show substantial possibility of success to stay

foreclosure pending an appeal. The debtor filed a Chapter 12 bankruptcy to

stay a scheduled foreclosure sale. It was the debtor’s second Chapter 12 filing.

The first Chapter 12 was dismissed because the debtor was unable to demonstrate

that her plan was feasible. The second bankruptcy was also dismissed because the

debtor, again, failed to demonstrate her second bankruptcy was feasible and the

debtor appealed. The debtor motioned the Court to stay the foreclosure pending

the appeal. The Court denied the motion because the debtor failed to establish a

substantial possibility of success on the merits of the appeal. The debtor failed to

demonstrate that there were any changes in circumstances to find her plan was

feasible. Ellis v. NBT Bank, N.A., 2013 WL 140405 (N.D.N.Y Jan. 11, 2013).

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2. Automatic stay extends to post-confirmation property vested with a

debtor under his Chapter 12 plan. The debtor filed and confirmed a Chapter 12

plan that vested the property of the bankruptcy estate with the debtor at plan

confirmation. The Chapter 12 plan provided that the debtor would receive his

discharge upon completion of the payments under the plan. Post-confirmation,

but before discharge, a creditor commenced a legal action against the debtor

without obtaining stay relief. The creditor argued that the property was no longer

property of the estate and, therefore, no stay was in effect. The Court disagreed

and held that even though the property vested with the debtor in his Chapter 12

plan, under Code § 362(c)(5), the creditor was still stayed from taking legal action

against property of the debtor. In re Blankenship, 2013 Bankr. LEXIS 1767

(Bankr. S.D. Ohio April 29, 2013).

C. Bankruptcy Estate.

1. Property of the Bankruptcy Estate.

a. The delivery of corn under an agreement which provides that

title will not transfer under the corn is processed by the buyer (and in

which the corn is not segregated by the buyer) is property of the

debtor (and therefore, property of the estate). Perdue BioEnergy sold

corn to the debtor Clean Burn Fuels; an ethanol plant. The agreement

provided that, even after the corn had been delivered to the debtor, the

seller would retain title to the corn until the corn crossed a weighbelt for

processing at the debtor’s plant. The Chapter 7 trustee objected. The

trustee argued that, although the contract allowed for title to transfer post-

delivery, the act of delivery and the failure to identify the seller’s corn

while in the possession of the debtor caused title to pass and left the seller

with only a reservation of a security interest in the corn under UCC § 2-

501 and § 2-401(1). The Court agreed and held that the seller was only

entitled to a reservation of a security interest under UCC § 2-401(1) and

because the seller failed to perfect its security interest it failed to take

priority to that of the bankruptcy trustee under its judgment creditor

avoidance powers. Clean Burn Fuels, LLC v. Perdue BioEnergy, LLC (In

re Clean Burn Fuels, LLC), 492 B.R. 445, 2013 Bankr. LEXIS 2009

(Bankr. M.D.N.C. 2013).

b. Pre-petition transfers made for adequate consideration are not

property of the Estate. Debtor transferred funds from sale of grain, the

proceeds of which were deposited in non-debtor entities’ accounts

controlled by the debtor which subsequently transferred the funds to

another related limited liability company (LLC). The LLC transferred the

funds to pay the personal obligations of the debtor. The transferee argued

that the funds were not property of the estate at the time the bankruptcy

petition was filed because the non-debtor entities and the LLC were

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distinct legal entities and had dominion and control of the funds and,

therefore, neither Code § 549 nor § 550 are applicable. The Court agreed

with the transferee. The transferred funds were not property of the estate

because the trustee was unable to show that the pre-petition transfers to the

non-debtor entities were made without adequate consideration to the

debtor. Covey v. Peoria Speakeasy, Inc. (In re Duckworth), 2013 Bankr.

LEXIS 1396 (Bankr. C.D. Ill. Apr. 5, 2013).

D. Chapter 7.


E. Chapter 11.


F. Chapter 12.

1. Eligibility.

a. Debtor who owns farm equipment and farms 31 acres is

engaged in farming operation for purposes of eligibility under

Chapter 12. The debtor was a partner in a farming operation that

dissolved in 2010. Although the debtor retained some farm assets, the

debtor agreed to transfer substantially all of the farm assets to the other

partner. The debtor filed a Chapter 12 bankruptcy and the IRS argued that

the debtor was not eligible for Chapter 12 relief because the debtor was

not engaged in a farming operation. The Court disagreed and held that the

debtor because the retained some farm equipment and continued to farmed

31 acres, the debtor was engaged in a farming operation. In re Hemann,

2013 Bankr. LEXIS 1385 (Bankr. N.D. Iowa Apr. 3, 2013).

b. Debt incurred through a dissolved partnership may be

considering for purposes of the 50% debt eligibility requirement. The

debtor was a partner in a farming operation that dissolved in 2010.

Although the debtor retained some farm assets, the debtor agreed to

transfer substantially all of the farm assets to the other partner. The debtor

filed a Chapter 12 bankruptcy and the IRS argued that the debtor was not

eligible for Chapter 12 relief because the less than 50% of the debtor’s

debt was related to the debtor’s current farming operation being

reorganized. The Court disagreed and held that the debtor could include

the debt related to the earlier farming partnership because 101(18)(A) does

not limited the debt to the debt related to the farming operation to be

reorganized and the debt had “some connection” to the debtor’s farming

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operation. In re Hemann, 2013 Bankr. LEXIS 1385 (Bankr. N.D. Iowa

Apr. 3, 2013).

c. Income incurred through a dissolved partnership may be

considering for purposes of the 50% income eligibility requirement. The debtor was a partner in a farming operation that dissolved in 2010.

Although the debtor retained some farm assets, the debtor agreed to

transfer substantially all of the farm assets to the other partner. The debtor

filed a Chapter 12 bankruptcy and the IRS argued that the debtor was not

eligible for Chapter 12 relief because the less than 50% of the debtor’s

income was related to the debtor’s current farming operation being

reorganized. The Court disagreed and held that the debtor could include

the income related to the earlier farming partnership because 101(18)(A)

does not limited the income to the income related to the farming operation

to be reorganized and the income had “some connection” to the debtor’s

farming operation. In re Hemann, 2013 Bankr. LEXIS 1385 (Bankr. N.D.

Iowa Apr. 3, 2013).

d. Tree farming is a farming operation only if there is an

integrated operation. Debtor owned real estate and planted tree

seedlings on the property for later harvest. The Chapter 12 trustee

objected to confirmation of a debtor’s plan on the basis that, under In re

Miller, 122 B.R. 360 (Bankr. N.D. Iowa 1990), tree farming was not a

farming operation under 11 U.S.C.S. § 101(21). The debtor argued that,

under the expansive definition of a farming operation under In re Sugar

Pine Ranch, 100 B.R. 28 (Bankr. D. Or. 1989), tree farming is a farming

operation. The Court found that, unlike In re Sugar Pine Ranch, the

debtor did not have an integrated farming operation because there were no

tree management plan or ongoing income from the sale of trees and,

therefore, the debtor was not eligible for Chapter 12 relief. In re

McMahon Family L.P., 2013 Bankr. LEXIS 2771, 58 Bankr. Ct. Dec. 51

(Bankr. E.D. Wis. July 10, 2013).

2. Dismissal/Conversion.

a. Several bankruptcy filings and misrepresentation of facts is

cause to dismiss a Chapter 12. The debtor filed three Chapter 12

bankruptcies in 29 months, misrepresented of the facts for the debtor’s

scheduled debt, filed the third bankruptcy to avoid state court litigation,

and the debtors failed to comply with the Court’s orders in aid of

discovery for a motion to value collateral; all of which constitute a bar

faith filing and cause to dismiss the bankruptcy under Code § 1208(c). In

re Cabral, 2013 Bankr. LEXIS 2382 (Bankr. E.D. Cal. June 3, 2013).

3. Plan.

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a. Administration Claims.

i. Priority Stripping of Tax Claims. The claims of the IRS

and Iowa Department of Revenue were subject to the priority-

stripping effect of Code § 1222(a)(2)(A). The debtor was a

partner in a farming operation that dissolved in 2010. Although

the debtor retained some farm assets, the debtor agreed to transfer

substantially all of the farm assets to the other partner. The debtor

filed a Chapter 12 bankruptcy and the IRS argued that the debtor

was not eligible for the benefits of Code § 1222(a)(2)(A) because

the Supreme Court decision in Hall applied to the pre-petition

transfer of farm assets by the debtor through the dissolution of the

farming partnership. The Court disagreed and held that Hall was

limited to the sale of post-petition assets and, therefore, the debtor

was entitled to treat the resulting tax liability from the transfer of

the partnership assets as a unsecured claim. In re Hemann, 2013

Bankr. LEXIS 1385 (Bankr. N.D. Iowa Apr. 3, 2013).

ii. Debtor Can Not Use Estate Assets to Pay Post-Petition

Capital Gains Taxes. The debtor proposed to use the equity from

the sale of 48 acres to pay post-petition capital gains incurred by

the debtor from the earlier sale of equipment. The objecting

creditors and Chapter 12 trustee argued that, under the U.S.

Supreme Court decision in Hall, estate assets cannot be used to pay

post-petition capital gains taxes. The debtor argued that Hall was

not applicable; arguing that Hall only limited the debtor from

categorizing capital gains as a general unsecured claim for

purposes of plan confirmation. The Court disagreed and held that

Hall was more expansive than just the treatment of capital gains

taxes and prohibited to use of estate assets to pay post-petition

capital gains taxes because the tax obligations were not tax

obligations of the bankruptcy estate; and instead, are tax

obligations of the individual. Hall held that post-petition taxes are

outside Section 503(b) and, therefore, the taxes are not an allowed

claim that may be treated within a Chapter 12 plan. In re Ferguson,

2013 Bankr. LEXIS 6 (Bankr. C.D. Ill. Jan. 2, 2013).

iii. Proceeds of livestock and crops are not farm assets

“used in a farming operation” and, therefore, the debtor was

not eligible to treat the related tax liability as an unsecured

claim. The debtor raised crops and finished cattle. The debtor

filed a Chapter 12 bankruptcy and argued that the sale of crops,

cattle and the crop insurance proceeds received by the debtor were

farm assets “used in the debtor’s farming operations” and,

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therefore, under Code § 1222(a)(2)(A) the debtor was entitled to

treat the related tax liability as a general unsecured claim. The

Court disagreed and held that, although the proceeds from the sale

of farm products and crop insurance proceeds were farm assets, the

proceeds were not “used in the debtor’s farming operation” and,

therefore, the debtor was not eligible for beneficial treatment under

Code § 1222(a)(2)(A). In re Keith, 2013 Bankr. LEXIS 2802

(Bankr. D. Kan. 2013).

iv. The marginal method (as opposed to the proportional

method) is the appropriate calculation of the Code §

1222(a)(2)(A) claims. The debtor raised crops and finished cattle.

The debtor filed a Chapter 12 bankruptcy and the IRS argued, for

purposes of Code § 1222(a)(2)(A), the Court should apply the

proportional method to calculate the resulting unsecured claim of

the IRS. The Court disagreed and held that the marginal method

adopted by Knudsen and Ficken (and not overturned by the

Supreme Court in Hall) represent the proper calculation. In re

Keith, 2013 Bankr. LEXIS 2802 (Bankr. D. Kan. 2013).

b. Secured Claims.

i. 15 year amortized term loan on cropland at prime plus

2.5% is customary and provides a sufficient risk factor to the

secured creditor. The debtor proposed a 15 year amortization

term loan on cropland at prime plus 2.5%. The secured creditror

objected arguing that it is customary for loans secured by crop land

to mature within five years and that the customary interest rate

would be 6.25% to 8%. The Court disagreed and held in favor of

the debtor on the basis that to preserve the farming operation a 15

year term is required. Prime plus 2.5% provides a sufficient risk

factor under the U.S. Supreme Court decision in Till. In re Wise,

2013 Bankr. LEXIS 2299 (Bankr. D.S.C. June 3, 2013).

ii. 25 year amortized term loan on ranch property is not

reasonable. The debtors owned a 900 acre ranch. The debtors

filed a Chapter 12 bankruptcy and proposed to pay the secured

creditor over 25 years. The secured creditor objected on the basis

that the terms were not reasonable. The Court agreed and held that

a 25 year term was not reasonable under current market conditions

for purposes of Code § 1225(a)(5)(B). In re Standley, 2013 Bankr.

LEXIS 1114 (Bankr. D. Mont. Mar. 22, 2013).

iii. Prime plus 1.25% is customary and provides a

sufficient risk factor to the secured creditor. The debtors owned

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a 900 acre ranch. The debtors filed a Chapter 12 bankruptcy and

proposed to pay the secured creditor over 25 years at prime plus

1.25%. The secured creditor objected on the basis that the interest

rate was not reasonable. The Court disagreed and held that prime

plus 1.25% is reasonable for purposes of Code § 1225(a)(5)(B). In

re Standley, 2013 Bankr. LEXIS 1114 (Bankr. D. Mont. Mar. 22,

2013).

c. Unsecured Claims.

i. Priority Stripping of Tax Claims. The claims of the IRS

and Iowa Department of Revenue were subject to the priority-

stripping effect of Code § 1222(a)(2)(A). The tax claims arose

from the pre-petition dissolution of the debtor’s 50% interest in a

partnership set up for a farming operation. The disposition of

debtor’s farm partnership interest was a farm asset used in the

debtor’s farming operation. The Court held that the tax claims

were subject to priority stripping under Code § 1222(a)(2)(A)

because the tax claim arose from the result of a sale or other

disposition of a farm asset used in the debtor’s farming operation.

The tax claim was therefore treated as an unsecured claim not

entitled to priority under Code § 507. In re Hemann, 2013 Bankr.

LEXIS 1385 (Bankr. N.D. Iowa Apr. 3, 2013).

ii. Treatment of Capital Gains. Postpetition tax liabilities

from the post-confirmation sale of a farm. Debtor’s

postpetition tax liability was not an allowable administrative

expense. The Court found that a postpetition income tax liability

incurred by a debtor, personally, is not an allowable prepetition

claim under § 502 of the Bankruptcy Code. Further, the Court held

that it was settled that a debtor’s postpetition income tax liability is

not allowable as an administrative expense under either Code §

1222(a)(2)(A) or § 503(b)(1)(B). In re Ferguson, 2013 Bankr.

LEXIS 6 (Bankr. C.D. Ill. Jan. 2, 2013).

d. Feasibility.

i. Debtor filed Chapter 12 bankruptcy and proposed a

plan to repay a debt over a 15 year period. The Court

determined the plan must be confirmed if it meets the requirements

of Code § 1225. Additionally, the Court must determine the

feasibility of the plan for the ability of the debtor to make the

payments called for in the plan and to otherwise comply with the

plan. The Court noted that although feasibility is never certain, the

Debtor’s projections supported a finding that the plan was feasible.

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The Court found the extension of time for repayment of the debt

was satisfactory and met the requirements of the Code. Similarly,

the interest rate was sufficient, if not high, to compensate the

creditor. In re Wise, 2013 Bankr. LEXIS 2299 (Bankr. D.S.C.

June 3, 2013).

ii. Tree Farm Operator unable to make proposed plan

payments. Debtor owned real estate and planted tree seedlings on

the property. The tree seedlings had not matured and the debtor

had no income from the sale of trees. The Chapter 12 trustee

objected to confirmation of a debtor’s plan on the basis that the

debtor had no actual or expected income to fund its Chapter 12

plan under Code § 1225(a). The debtor argued that mature trees

were available for harvest; although the debtor was unable to prove

any market or interested buyer for the mature trees. The Court

found that the debtor had not proved that it could make the

proposed payments under the plan as required by Code §

1225(a)(6). In re McMahon Family L.P., 2013 Bankr. LEXIS

2771, 58 Bankr. Ct. Dec. 51 (Bankr. E.D. Wis. July 10, 2013).

4. Post-confirmation.


G. Chapter 13.


H. Avoidance Actions.

1. Preferential Transfers.


2. Fraudulent Transfers.2

a. Heightened pleadings requirements for constructive fraud.

The Trustee sought to avoid as fraudulent transfers payments made by the

debtor to secured creditors of a principal of the debtor on six lines of credit

secured by the debtor’s crops and livestock. The Court held that the

complaint failed to establish the heightened pleadings requirement of

constructive fraud, with the exception of payments made by the debtor for

2 Fraudulent transfers under state law are also avoidable under the Bankruptcy Code (UCC § 544(b)). A discussed

of state fraudulent transfer cases is in Section IV(A) below.

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the benefit of the principle of the debtor on the sixth line of credit. In re

Tanglewood Farms, 2013 Bankr. LEXIS 1443 (Bankr. E.D.N.C. Apr. 8,

2013).

b. The setoff or withholding of payments constitute a “transfer”

for purposes of Code § 548. The debtor was indebted to the creditor for

soybean seeds. The debtor sold soybeans to the creditor at harvest and the

creditor applied a portion of the sale proceeds against the account payable.

The Trustee sought to recover from the creditor the funds applied against

the earlier debt as a constructively fraudulent transfer. The creditor argued

the setoff was not a transfer. The Court disagreed and held that the setoff

constituted a transfer for purposes of Code § 548. Angell v. Montague

Farms, Inc. (In re Tanglewood Farms, Inc.), 2013 Bankr. LEXIS

1543(Bankr. E.D.N.C. Apr. 15, 2013).

c. Good faith defense. Debtor transferred funds from sale of grain,

the proceeds of which were deposited in non-debtor entities’ accounts

controlled by the debtor which subsequently transferred the funds to

another related limited liability company (LLC). The LLC transferred the

funds to pay the personal obligations of the debtor. The trustee argued

that the funds were avoidable as an unauthorized post-petition transfer

under Code § 549 and, therefore, the trustee was entitled to a judgment

against the transferee under Code § 550. The transferee argued that the

transfers were protected under the good faith exception to Code § 549

because the transferee gave adequate value for each transfer, in good faith,

and without knowledge of the bankruptcy and possible avoidance claims.

The Court agreed with the transferee. The transferee gave adequate value

for each transfer, in good faith, and without knowledge of the bankruptcy

and possible avoidance claims. Covey v. Peoria Speakeasy, Inc. (In re

Duckworth), 2013 Bankr. LEXIS 1396 (Bankr. C.D. Ill. Apr. 5, 2013).

3. Lien Avoidance.


4. Miscellaneous.

a. A Chapter 7 Trustee cannot avoid the transfers made by an

earlier Chapter 11 Debtor-in-Possession. The debtor operated a

granary. The debtor filed a Chapter 11 in 2010 and continued to operate

his business as the debtor-in-possession including making payments to

post-petition creditors. The bankruptcy was converted in 2011 and the

Chapter 7 trustee moved to avoid the transfers made by the debtor-in-

possession. The Court dismissed the action because the Chapter 7 Trustee

is bound by the actions the debtor took while it acted as debtor-in-

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possession, including actions approved by the Court. Angell v. Meherrin

Agric. & Chem. Co. (In re Tanglewood Farms, Inc.), 2013 Bankr. LEXIS

1849 (Bankr. E.D.N.C. May 1, 2013).

IV. STATE LAW.

A. Fraudulent Transfer.

1. Payments made by debtor for the benefit of a related entity of

the debtor are fraudulent transfers. Central Illinois Holding Company

was indebted to Oberlander Electric. The Debtor Central Illinois Energy,

a related entity of the holding company, paid $95,625 to the creditor

Oberlander Electric on the account of the Debtor. An involuntary

bankruptcy was filed and the bankruptcy trustee sought the recovery of the

payments as a fraudulent transfer under Illinois law. The trustee asserted

at summary judgment the general rule that a fraudulent transfer occurs

when a debtor pays the debts of another, when the debtor itself is not

obligated on the debt. Oberlander Electric acknowledged the transfer, but

asserted the two exceptions: (1) if a debtor may receive value in the form

of a third party’s agreement to reimburse the debtor, and (2) if the debtor

benefits indirectly from paying the debt of a related third party. The Court

held that the mere opportunity to receive an economic benefit in the future

from an unsecured promise of future payment did not constitute

reasonably equivalent value. Cox v. Oberlander Elec. Co. (In re Cent. Ill.

Energy Coop.), 2013 Bankr. LEXIS 2844 (Bankr. C.D. Ill. July 16, 2013).

B. Exemptions.

1. Chapter 7 debtor can claim hunting and fishing equipment as

exempt tools of his trade in Colorado even though hunting and fishing

was not his principal occupation. The debtor was employed by a

grocery store, but earned income as a hunting and fishing guide. The

Chapter 7 trustee objected to the debtor claiming his hunting and fishing

equipment as exempt tools of his trade. The Court disagreed and held that

under Colorado law the debtor could claim assets as exempt under the

tools of trade exemption for an occupation that was not his principal

occupation at the time of filing bankruptcy nor did the employment need

to be profitable. In re Sharp, 490 B.R. 592, 2013 Bankr. LEXIS 1059

(Bankr. D. Colo. 2013).

C. Miscellaneous

1. A custom feeding endorsement does not insure against losses

incurred in conventional custom feeding operations. The insured

operated a custom hog feeding operation; feeding and finishing hogs of a

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third party. The insured had a general property insurance policy and, in

addition, obtained a custom feeding endorsement. 535 hogs suffocated to

death in the insured building and the insured tendered a claim on their

policy. The claim was denied. The insured brought a legal action and

argued that the policy and endorsement were ambiguous as to coverage

and, as a result, the claim should be honored under the reasonable

expectations doctrine. The District Court agreed. On appeal, the Eighth

Circuit reversed. The Eighth Circuit held that the there was no factual

evidence that the insured expected the endorsement to provide coverage

for the hogs in their care, custody or control and, therefore, the damages

were outside the scope of both the policy and the custom feeding

endorsement. Boelman v. Grinnell Mut. Reinsurance Co., 826 N.W.2d

494, (Iowa 2013).

2. A custom feeding endorsement does not preempt the care,

custody or control exclusions in a property damage policy. The

insured operated a custom cattle feeding operation in which he fed cattle

owned by others. The insured had a general property insurance policy

and, in addition, obtained a custom feeding endorsement. The insured

tendered a claim because of unusual death losses of the cattle located in

the feed lot. The insurance company denied coverage for the cattle losses,

pointing to an exclusion contained in the policy for damage to property in

the “care, custody, or control” of the feed lot operator and arguing that the

custom care endorsement only provided limited coverage and did not

preempt the policy endorsement. The Federal District Court agreed with

the feedlot operator and held that the loss was covered by the custom

feeding endorsement. The insurance provider appealed and the Eighth

Circuit reversed the District Court. The Eighth Circuit held that the policy

provisions were not inconsistent since the custom feeding endorsement

applied to only the custom farming exclusion contained in the policy.

None of the other policy exclusions was affected by the endorsement.

Grinnell Mutual Reins. Co. v. Schwieger, 685 F.3d 697 (8th Cir. 2012)

Comment Note. Considering the Boelman and Schwieger cases, livestock

and poultry growers should obtain, and lenders should require, a custom

feeding endorsement which specifically addresses the policy exclusion.

Although not addressed in the case, many custom feeding contracts shift

legal liability from one party to another through risk of loss,

indemnification, or other provisions. Some standard liability policies

contain exclusions from coverage which also exclude losses incurred as a

result of these contractual agreements. Contract growers should carefully

review their policies to evaluate these exclusions as well.

GPM 3457114

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