THAD J. COLLINS, CHIEF BANKRUPTCY JUDGE.
This matter came before the Court for telephonic hearing on the status of objection to confirmation. Donald Molstad appeared for Debtors Mark and Machelle Pedersen ("Debtors"), Brandon Gray appeared for the Iowa Department of Revenue (the "IDR"), Carol Dunbar appeared for herself as Chapter 12 Trustee, and Martin McLaughlin appeared for the Internal Revenue Service (the "IRS"). The IRS has since withdrawn its objection. This is a core proceeding under 28 U.S.C. § 157(b)(2)(B).
The only objection to confirmation remaining is by the IDR which asserts a tax claim arising from a payout Debtors received on their crop insurance policy. The question presented is whether the IDR's claim is entitled to priority treatment under 11 U.S.C. § 507 as the IDR asserts. Although tax claims are typically given priority over other unsecured claims in bankruptcy, Chapter 12 contains an exception to this rule in 11 U.S.C. § 1232, commonly called the "priority-stripping" provision. Under this provision, a government tax claim arising "as a result of the sale, transfer, exchange, or other disposition of any property used in the debtor's farming operation — shall be treated as an unsecured claim." 11 U.S.C. § 1232. Debtors argue that § 1232 strips the IDR's claim of priority because it arose to as a result of the sale of their crops or arose as a result of the sale, transfer, or other disposition of their crop insurance policy. The Court concludes that while the IDR's claim did not arise as a result of the sale of Debtors' crops, it did arise as a result of the transfer of Debtors' crop insurance policy. The Court thus finds that the IDR's claim is not entitled to priority and that Debtors' Chapter 12 plan is therefore confirmable.
Debtors and the IDR filed a joint stipulation of undisputed facts. They also agree that the issue before the Court is purely a legal determination.
Debtors own and operate a family farm. They filed for bankruptcy under Chapter 12 in June of 2017. Debtors purchased a multi-peril crop insurance policy for the 2014 crop year. This policy protected against future revenue losses due to both decreased yields and drops in market prices. Under the policy Debtors were paid the difference between their "Guaranteed Revenue" and their "Harvested Revenue." Debtors "Guaranteed Revenue" for the 2014 crop year was $428,461. Although Debtors actually produced more bushels of grain in 2014 than guaranteed under the policy, their "Harvested Revenue" was calculated
Debtors received a $66,939 payout under the crop insurance policy. This payout was reported in tax year 2015 and resulted in a claim by the IDR in the amount of $4,376.82. The only question before the Court is whether the IDR's claim should be treated as a priority unsecured claim under Debtors' Chapter 12 plan. The IDR argues that if its claim is entitled to priority under 11 U.S.C. § 507, Debtors' proposed plan is not confirmable as it does not provide for full payment of the IDR's claim.
As noted above, governmental tax claims are normally entitled to priority treatment under 11 U.S.C. § 507, unless they arise "as a result of the sale, transfer, exchange, or other disposition of any property used in the debtor's farming operation." 11 U.S.C. § 1232. Section 1232 is commonly referred to as the "priority-stripping" provision.
11 U.S.C. § 1232.
The current version of the priority-stripping provision in § 1232 became effective on October 26, 2017. This new section replaced the previous priority striping-provision in 11 U.S.C. § 1222(a)(2)(A), which stated:
11 U.S.C. § 1222.
Congress had enacted the priority-stripping provision to help facilitate successful reorganizations under Chapter 12 of the Bankruptcy Code.
The primary impetus for Congress enacting the new priority-stripping provision in § 1232 was to resolve an issue arising under the old § 1222 provision regarding post-petition sales. This issue had divided the courts. The issue was whether the priority-stripping rule applied to government claims arising from the post-petition sale of farm property. The Eight Circuit had held that priority-stripping under § 1222
Besides the language related to post-petition sales, very little changed from the old priority-stripping provision in § 1222 to the new one in § 1232. The only change potentially relevant to the issue before this Court is that the new provision applies to the "sale, transfer, exchange, or other disposition of any
The Court finds that this change from "farm asset" to "property" has no effect on its analysis. Both this Court and the Eight Circuit have found that the term "farm asset" as used in the old priority-stripping provision under § 1222 was interchangeable with the term "property" as used elsewhere in the Code.
The changes between the old priority-stripping language in § 1222 and the new version in § 1232 have no impact on the issue before the Court. All prior case law interpreting § 1222 is equally relevant in interpreting § 1232. Importantly, the Court notes, as it has previously, that
The issue before the Court is whether the IDR's tax claim on the payout from Debtors' crop insurance policy is subject to priority-stripping under § 1232. A tax claim is subject to priority-stripping if it arose "as a result of the sale, transfer, exchange, or other disposition of any property used in the debtor's farming operation." 11 U.S.C. § 1232. Courts have applied the priority-stripping provision to tax claims arising from a wide array of property dispositions.
The Eighth Circuit and this Court have previously broken the language "as a result of the sale, transfer, exchange, or other disposition of any property used in the debtor's farming operation" into a three-part test: (1) any property, (2) used in, (3) the debtor's farming operation.
Debtors put forward two arguments for why § 1232 priority-stripping applies to the IDR's claim. First, they argue that § 1232 is applicable because the IDR's claim arose as a result of the sale of
Debtors first argue that the IDR's claim is subject to priority-stripping because it arose as a result of the sale of crops used in their farming operation. Elements three and five of the five-part test appear to be readily met. Element three asks whether the crops are property. The Eighth Circuit held in
Element four, the "used in" requirement of the priority-stripping test, has previously been a point of contention among the circuits. In
The dissent in
The IDR argues that that the second element, that the claim arise as a result of "the sale, transfer, exchange, or other disposition" is not met because the stipulated facts do not contain evidence about the sale of Debtors' crops. While the record does not include direct evidence about Debtors' crop sale, the fact that the crops were sold is implied in the facts and arguments. A portion of the IDR's total claim in this case is for taxes arising from the
This leaves only the first element-whether the IDR's tax claim arose "as a result of" the sale of the crops. The IDR argues that since Debtors were not required to sell their crops to receive a payout under their crop insurance policy, the payout, and accompanying tax on it, did not arise "as a result of" the sale of Debtors' crops.
No court has previously defined the phrase "as a result of" in § 1232. The phrase is also not defined anywhere else in the Code. Black's Law Dictionary defines "result" as "[a] consequence, effect, or conclusion." Black's Law Dictionary (10th ed. 2014). The phrase is so common as to almost defy definition. At a basic level if event B happens "as a result of" event A, then there is some causal connection between event A and event B. This Court adopts this "some causal connection" test as the method for determining whether the IDR's claim arose "as a result" of the crop sale. In short, there must be a causal chain linking the crop sale to the tax claim.
The IDR does not dispute that there is a causal link between the crop insurance payout and its claim. The tax liability clearly arose as a result of the insurance payout. The IDR argues that there is not, however, a causal link between the crop sale and the insurance payout. The IDR admits that the corps and the insurance policy are related but argues there is no causal connection between the crop sale and the insurance payout. The IDR basis this argument on the terms of the crop insurance policy.
Under Debtors' crop insurance policy, like all crop insurance policies of this type, the amount of the payout is calculated by taking the "Guaranteed Revenue" and subtracting the "Harvested Revenue." The "Guaranteed Revenue" is set at the time the policy is purchased. The "Guaranteed Revenue" is calculated by taking the projected number of bushels to be harvested, based on production data from previous years, and multiplying it by the projected market price. The "Harvested Revenue" is calculated by multiplying the actual number of bushels harvested by the "market price," which is an average based on the price of crop futures at the time of harvest.
The crux of the IDR's argument is that to calculate the payout the insurance company needed to know only the number of bushels Debtors harvested, not the actual revenue Debtors received from the sale of those crops. The IDR reasons that, since the crop insurance payout is not calculated based on the actual sale of the crops, the payout did not arise "as a result of" the crop sale. The IDR asserts, for example, that had Debtors' entire crop been destroyed or had they harvested the crops but stored them rather than selling them right away, the insurance company was still required to issue a payout under the policy. The IDR argues that the crop insurance payout did not arise "as a result" of the sale of the crops, because the payout would have occurred even if there had been no crop sale.
The Court finds the IDR's reasoning persuasive. There is a causal connection between Debtors
Debtors' second argument is that the IDR's claim arose "as a result of the sale, transfer, exchange, or other disposition" of the insurance policy itself. The Court will again apply the five-factor test: (1) as a result of (2) the sale, transfer, exchange, or other disposition (3) of any property (4) used in (5) the debtor's farming operation.
Only a couple elements of this test are in dispute. There is no real dispute that the insurance policy was "property," that Debtors were engaged in a "farming operation," or that the IDR's claim arose "as a result of" the insurance payout. Thus, elements one, three, and five are met.
Element four, the "used in" requirement, has previously generated dispute among courts. Farm equipment such as tractors, grain carts, and combines are clearly "used in" a farming operation because the directly aid the farmer in producing and harvesting their crops. The dissenting judge in
This Court again adopts a broad reading of the "used in" requirement. Although a crop insurance policy is not a tangible asset physically utilized in the process of growing crops in the same way as a tractor or combine, it is nonetheless "used in" a farming operation. Crop insurance is an important tool in protecting farmers from natural disaster and market instability. This Court finds that Debtors' crop insurance policy was "used in" their farming operation in the same way the slaughter hogs were in
This leaves only the second element of the § 1232 priority-stripping test, that the claim resulted from a "sale, transfer, exchange, or other disposition" of Debtors' crop insurance policy. The IDR argues that, while Debtors had a property interest in the crop insurance policy, the payout under that policy was not a "sale, transfer, exchange, or other disposition" of that property interest.
No case or specific language of the Code addresses this issue. Thus, the Court looks to the general definitions in the Code for guidance. The Code does not define "sale," "exchange," or "disposition" but it does define "transfer."
The term "transfer" means—
11 U.S.C. § 101. The Code's definition of "transfer" is quite broad. The fact that Congress chose to use this broad term in addition to "sale" "exchange" and "other disposition" indicates that Congress intended § 1232 to encompass a wide swath of transactions.
Unlike other forms of casualty insurance where a payment can be triggered at any time, crop insurance covers only one event-harvest of the insured crops. Once the crops are harvested and a payout either is or is not triggered, the policy ceases to be effective. The farmer must buy a new crop insurance policy to cover next year's crops. There are only two ways the farmer can get value out of their property interest in their crop insurance policy: (1) harvest their crops and accept any payout that is triggered under the policy, or (2) transfer their right to receive payment under the policy to another for value. Farmers may transfer their right to receive payment under their crop insurance policy to another person, usually a creditor, any time prior to accepting a payout.
Transferring rights to payment is clearly a "transfer" under the definition provided in 11 U.S.C. § 101. If the farmer choses the other route and accepts the payout, it follows logically that this too should be considered a "transfer." Once the farmer accepts a payout, the policy ceases to be effective, there is no possible way to get any additional value out of it. By accepting a payout under the policy, the farmer has "part[ed] with... an interest in property." 11 U.S.C. § 101. Since accepting a payout under a crop insurance policy is a "transfer" as defined in § 101, the second element of the five-part test is satisfied in this case.
The Court finds that by accepting a payout under their crop insurance policy, Debtors transferred their property rights in the policy under the broad definition of "transfer" provided in 11 U.S.C. § 101. As such, the IDR's tax claim arose as a result of a transfer of property used in Debtors' farming operation. The Court finds that the priority-stripping provision of 11 U.S.C. § 1232 applies to the IDR's claim.
The Court believes this result is consistent with the intent of Congress. Congress enacted the propriety-stripping provision to ensure that tax liabilities associated with selling farm property did not undermine successful family farm reorganizations under Chapter 12.
The Eighth Circuit established in
