Opinion
Case No. 06-21654.
February 7, 2008
OPINION REGARDING DEBTOR'S OBJECTION TO THE CLAIM OF FARM SERVICE AGENCY
Before the Court is the Objection by Debtor to the claim of the U.S.D.A. Farm Service Agency ("FSA"). The Court held a preliminary hearing on this matter on December 7, 2007, at which time it directed the parties to file supplemental briefs. The Court has determined that further oral argument is not necessary in order for it to make certain preliminary determinations regarding this claim objection.
The Debtor filed this Chapter 12 bankruptcy on September 28, 2006. The FSA originally filed its secured claim for money loaned, Claim No. 3, on January 23, 2007, in the amount of $929,278.22, such claim being secured by collateral in the amount of $1,235.000.00. On September 24, 2007, the FSA amended its claim, Claim No. 8, after a portion of the collateral was sold by the FSA. Claim No. 8 listed a debt of $256,332.56, with a collateral value of $540,000.00. This claim is secured by: a real estate mortgage dated May 6, 1998 and recorded on May 11, 1998; financing statements recorded on May 6, 1998 and November 18, 2002; and security agreements dated May 6, 1998, April 21, 1999 and February 9, 2000. The Debtor is a co-obligor on all of these loans, along with various family members and Bli Farms, a Michigan co-partnership (collectively, the "Debt").
Debtor objects to the claim of FSA, as last amended, arguing that it should be disallowed in its entirety for two reasons: (1) FSA is holding $222,649 in farm program entitlement payments ("Program Payments"), which were assigned pre-petition to FSA to secure the Debt, and which Debtor argues are thus collateral for the Debt and must be applied to reduce the Debt; and (2) FSA is holding $73,310.86 in net proceeds from an August 10, 2007 auction of equipment and real estate, which served as collateral for the Debt, and which the Debtor argues should further reduce the claim. Additionally, Debtor argues that she should be credited for two expenses charged against the net proceeds, because such were not commercially reasonable: repairs to equipment in the amount of $6,964.93, and $673.97 for advertising a sale which was ultimately cancelled due to FSA's failure to give proper notice.
Debtor also makes the argument that FSA should not only offset the debt with the Program Payments, but that she is entitled to interest from the date the payment was originally due through the date the amount is paid under the Agricultural Act of 1949, 7 U.S.C. 1421 et seq.). The parties both filed supplemental briefs on this issue, and for the reasons discussed below, the Court concludes that it is unnecessary to determine this issue.
FSA disputes both bases for Debtor's objection. As to the Program Payments, FSA argues that these funds may legitimately be applied to offset a November 15, 2006 District Court judgment under the False Claims Act entered against Bli Farms, Richard Bli and the Estate of James Bli, Sr. in the amount of $2,128,920 ("False Claims Act Judgment"). FSA further argues that these Program Payments were not collateral under any security agreement between it and the Debtor, and thus cannot be used to offset the Debt owing to it. Finally, as to any assignment of these Program Payments that Bli Farms, through Richard Bli, may have made, FSA argues such is unenforceable under applicable federal regulations and the express terms of the assignment itself. As to the auction proceeds, FSA argues that there is a dispute as to whether it or another, junior creditor, Rabo Ag Services ("Rabo") is entitled to these funds. Rabo has asserted an equitable marshaling claim against the proceeds, and FSA argues that this dispute is not procedurally proper before this Court because the Debtor must bring an adversary proceeding, naming both it and Rabo to determine the priority in these proceeds. Regarding the dispute over the $6,964.93 in equipment repair costs, FSA argues that it was authorized by federal regulation to repair machinery and equipment as necessary to put it in a reasonable condition for sale.
Opinion and Order entered by District Court Judge David M. Lawson, United States v. Bli Farms, et al., 2006 WL 3333104 (E.D. Mich. Nov. 15, 2006). The false claims at issue involved false claims for crop insurance indemnity requests for crop years 1992, 1994 and 1995. Judgment was entered against Bli Farms, Richard Bli and the estate of James Bli, Sr.
Attached as Exhibit A to FSA's Response to Debtor's Objection to Claim filed on September 24, 2007, Docket #177, is a letter dated September 13, 2007, from counsel for Rabo addressed to counsel for FSA, which demands turnover of the equipment auction proceeds under the doctrine of marshaling.
Government Program Payments
The Court will first determine whether the Program Payments may be validly offset to satisfy the False Claims Act Judgment. The parties do not dispute that the Program Payments at issue are Commodity Credit Corporation ("CCC") program payments that are owed to Bli Farms for the 1998 and 1999 crop years and that Bli Farms is a co-debtor on the Debt at issue. The parties further do not dispute that the United States Department of Justice directed that these payments be withheld pending investigation into possible false claims Bli Farms had made for crop insurance indemnities, which investigation ultimately resulted in the False Claims Act Judgment. What is disputed is whether legal authority exists for FSA to have withheld these Program Payments and to offset them against the False Claims Act Judgment.
The Court finds that sufficient legal authority does exist for FSA to offset these Program Payments against the False Claims Act Judgment. FSA cites 31 U.S.C. § 3716(a) and 7 C.F.R. § 1403.7(c)(1) in support of its position. Section 3716(a) provides:
§ 3716. Administrative offset
(a) After trying to collect a claim from a person under section 3711(a) of this title, the head of an executive, judicial, or legislative agency may collect the claim by administrative offset. The head of the agency may collect by administrative offset only after giving the debtor —
(1) written notice of the type and amount of the claim, the intention of the head of the agency to collect the claim by administrative offset, and an explanation of the rights of the debtor under this section;
(2) an opportunity to inspect and copy the records of the agency related to the claim;
(3) an opportunity for a review within the agency of the decision of the agency related to the claim; and
(4) an opportunity to make a written agreement with the head of the agency to repay the amount of the claim.
Regulation 1403.7(c)(1), entitled "Collection by administrative offset," provides:
(c) Administrative offset shall also be effected against amounts payable by CCC:
(1) When requested or approved by the Department of Justice. . . .
This statute and regulation clearly provide FSA with the legal authority to offset the Program Payments. Debtor does not dispute the facts, which gives rise to an offset under the cited statutory and regulatory authority.
The Court notes that under 7 C.F.R. § 1403.7(j), certain requirements must be met in order to effectuate a valid offset. It is unclear whether the offset has occurred, and if it has not, what steps, if any, the government has taken thus far to meet the requirements to effectuate the offset. The Court offers no opinion as to whether or not the government is able to effectuate the offset to finality, but for now concludes that it has the ability to do so.
As the Court concludes that FSA had the authority to withhold and offset the Program Payments, which is in an amount much less than the False Claims Act Judgment, Debtor's argument as to entitlement to interest is moot. This conclusion also renders it unnecessary to make further determinations as to whether the Program Payments can be considered to have been collateral under a security agreement between it and the Debtor, and whether the assignment is otherwise legally enforceable.
Equipment Auction Proceeds
The preliminary question regarding the $73,310.86 in auction proceeds is whether Debtor's objection is properly before this Court. Debtor's claim objection is simple on the surface — FSA's claim must be reduced by the proceeds from the sale of certain collateral securing the debt. Debtor however ignores the glaring issue of which creditor's claim, FSA's or Rabo's, should be reduced by these proceeds, impliedly arguing that this dispute can be settled later. The Court is satisfied that this part of the claim objection cannot proceed without first resolving this issue, and bringing Rabo, a necessary party to this dispute, formally before the Court. This requires the commencement of an adversary proceeding under both Fed.R.Bankr.P. 7001(2) and (7), with its attendant procedural safeguards. Rule 7001(2) requires an adversary proceeding be commenced, "to determine the validity, priority, or extent of a lien or other interest in property, other than a proceeding under Rule 4003(d)." The priority of the Rabo and FSA liens is clearly at issue in this claim objection. Further, resolution of the marshaling issue is a determination in equity, triggering Rule 7001(7), which subsection requires all actions to "obtain an injunction or other equitable relief" be brought as adversary proceedings. Although Debtor is not raising this doctrine affirmatively in her claim objection, it is raised as a defense to the objection by FSA and, thus, is an inextricable part of this dispute.
Rule 4003(d) addresses a debtor's right to avoid a lien or transfer of property exempt under Section 522(f), which is not applicable here.
See Meyer v. United States, 375 U.S. 233, 236, 84 S. Ct. 318, 11 L.Ed.2d 293 (1963) (holding that the doctrine of marshaling is equitable and "rests upon the principle that a creditor having two funds to satisfy his debt may not, by his application of them to his demand, defeat another creditor, who may resort to only one of the funds."); see also In re Dow Corning Corp., 280 F.3d 648, 656 (6th Cir. 2002) (quoting the case of In re A.H. Robins Co., 880 F.2d 694, 701 (4th Cir. 1989), in noting that under the doctrine of marshaling of assets, "[t]he bankruptcy court has the power to order a creditor who has two funds to satisfy his debt to resort to the fund that will not defeat other creditors.").
As to whether the repair and advertising costs were commercially reasonable under applicable standards, the Court concludes that issue requires a determination as to the extent of FSA's lien (as may or may not be impacted by the marshaling issue), which is also appropriate in the context of an adversary proceeding.
Conclusion
The Court concludes that the FSA is not required to offset the $222,649.00 in program payments the government is holding against the claim it has filed in this Debtor's bankruptcy case. Thus, Debtor's objection to the FSA claim is overruled to that extent. Further, Debtor's objection to the FSA claim relating to the August 10, 2007, auction sale proceeds, is not properly before the Court for the reasons above-stated. As to this remaining issue, the Court will schedule a status conference.