UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
_____________________
No. 98-10039
_____________________
In the Matter of: DAVID WAYNE COOK;
In the Matter of: ANGELYN STACY COOK,
Debtors,
ROLLING PLAINS PRODUCTION
CREDIT ASSOCIATION,
Appellant/Cross-Appellee,
versus
DAVID WAYNE COOK; ANGELYN STACY COOK,
Appellees/Cross-Appellants.
_________________________________________________________________
Appeals from the United States District Court
for the Northern District of Texas
_________________________________________________________________
March 9, 1999
Before GARWOOD, BARKSDALE, and STEWART, Circuit Judges.
RHESA HAWKINS BARKSDALE, Circuit Judge:
The district court having affirmed the bankruptcy court’s
rejection of the objections by Rolling Plains Production Credit
Association (PCA) to the discharge of David W. and Angelyn S. Cook,
and the dischargeability of their debt to PCA, primarily at issue
is whether, for federal crop insurance proceeds, Texas secured
transaction law is preempted by federal law. We AFFIRM in Part;
REVERSE in Part; VACATE in Part; and REMAND.
I.
The Cooks’ indebtedness to PCA under promissory notes, which
matured in March 1996, was secured through a security agreement.
Among other things, the agreement covered crops. As a result, it
provided that the Cooks granted to PCA a
security interest not only to that described
above but also to all crops planted or grown
on the hereinafter described land and the
products thereof and proceeds thereof, and to
all crops planted or grown upon the
hereinafter described land within five years
from the date hereof....
(Emphasis added.) And, the agreement required the Cooks to
insure the collateral with companies
acceptable to [PCA] against such casualties
and in such amounts as [PCA] shall require
with a standard mortgage clause in favor of
[PCA], and [PCA] is hereby authorized to
collect such sums which may become due under
any of said policies and apply same to the
obligations hereby secured.
Thereafter, PCA perfected its security interest.
For their 1995 cotton crop, the Cooks purchased crop insurance
from PCA’s in-house agency, which was reinsured pursuant to the
Federal Crop Insurance Act (FCIA). Concerning the preemption issue
at hand, the insurance policy stated:
You may assign to another party your right to
an indemnity for the crop year. The
assignment must be on our form and will not be
effective until approved in writing by us.
The assignee will have the right to submit all
loss notices and forms as required by the
policy.
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(Emphasis added.) PCA did not, however, take such an assignment of
the insurance proceeds. This was because, as two PCA employees
testified at trial, PCA did not take an assignment unless either it
questioned the character of the debtor or the loan was in trouble.
In March 1996, the Cooks received crop insurance proceeds of
approximately $55,000 for 1995 cotton crop losses. But, instead of
using those proceeds to reduce the PCA debt, David Cook satisfied
loans to another creditor, secured by two vehicles which were
exempt property; paid annual land lease payments (including $10,000
to his father-in-law); and used the balance for expenses. (In that
this opinion turns on the preemption issue, it is not necessary to
present other facts relevant to the discharge and dischargeability
issues, such as claimed representations by David Cook, including
upon his receiving the check for the crop insurance proceeds,
regarding payment of those proceeds to PCA, or his sale of
equipment that was PCA’s collateral, including sales to his father-
in-law. Of course, those matters will be at issue on remand.)
In mid-1996, the Cooks filed a Chapter 7 bankruptcy petition.
Later that year, PCA filed an adversary proceeding in bankruptcy
court, objecting to discharge under 11 U.S.C. § 727, and to
dischargeability of the Cooks’ debt, pursuant to 11 U.S.C. § 523.
Following a trial in early 1997, the bankruptcy court held that PCA
did not have a lien on the crop insurance proceeds, and denied its
objections to discharge and dischargeability. Late that year, the
district court affirmed.
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II.
PCA contends that the bankruptcy court erred by concluding
that PCA did not have a valid lien on the crop insurance proceeds
because it did not obtain an assignment in accordance with federal
law and regulations; by finding that the Cooks were not on notice
of the security interest claimed by PCA in those proceeds; and by
refusing to deny discharge under 11 U.S.C. § 727(a)(2)(A) (court
shall grant debtor discharge unless “debtor, with intent to hinder,
delay, or defraud a creditor or an officer of the estate ... has
transferred, removed, destroyed, mutilated, or concealed ...
property of the debtor, within one year before the date of the
filing of the petition”), or under § 727(a)(5) (court shall grant
debtor discharge unless “debtor has failed to explain
satisfactorily ... any loss of assets or deficiency of assets to
meet the debtor’s liabilities”), or dischargeability of the PCA
debt under 11 U.S.C. § 523(a)(6) (discharge under 11 U.S.C. § 727
does not discharge debtor from debt “for willful and malicious
injury by the debtor to another entity or to the property of
another entity”).
Alternatively, PCA claims an equitable lien in the Cooks’
exempt vehicles (they cleared the title to those vehicles by using
the crop insurance proceeds to satisfy the loans secured by the
vehicles).
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On cross-appeal, the Cooks contend that the district court
erred by holding that they failed in bankruptcy court to preserve
the preemption issue.
Because it implicates our standard of review, we consider de
novo the district court’s ruling that the preemption issue had not
been preserved. See, e.g., Southmark Corp. v. Coopers & Lybrand
(In re Southmark Corp.), 163 F.3d 925, 928 (5th Cir. 1999). And,
“[a]lthough this case has already been reviewed on appeal by the
district court, we review the bankruptcy court’s findings as if
this were an appeal from a trial in the district court”. Phoenix
Exploration, Inc. v. Yaquinto (Matter of Murexco Petroleum, Inc.),
15 F.3d 60, 62 (5th Cir. 1994). It goes without saying that we
review the bankruptcy court’s findings of fact for clear error; its
conclusions of law, de novo. E.g., Border v. McDaniel (Matter of
McDaniel), 70 F.3d 841, 842-43 (5th Cir. 1995).
A.
The bankruptcy court held that crop insurance proceeds are
contract rights; and that PCA’s security interest in “proceeds” of
crops did not constitute a lien on federal crop insurance proceeds.
The court reasoned that PCA could obtain the lien only through an
assignment under the FCIA and regulations. PCA asserts that the
bankruptcy court erred by holding that, under state law, its lien
was invalid. It also maintains that the district court held
correctly that the preemption issue was not preserved;
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alternatively, it maintains that, to the extent the bankruptcy
court relied on preemption, it erred. As stated, the Cooks cross-
appeal the district court’s ruling that preemption was not
preserved.
1.
The bankruptcy court ruled from the bench that PCA could
obtain the lien only through an assignment under the FCIA and
regulations. Interpreting this as a holding that, in this
instance, state secured transaction law was preempted by federal
law, PCA moved for a new trial, contending that Texas law was not
preempted. In denying the motion, the bankruptcy court stated that
its decision was not based on preemption; nevertheless, in that
same order, it repeated its conclusion that, for the lien, PCA was
required to obtain an assignment conforming to the federal
regulations. In the light of its holding that the preemption issue
had not been preserved in bankruptcy court, the district court did
not address it.
At the very least, the factual basis for the preemption claim
was raised in the pretrial order: that the crop insurance policy
was subject to the FCIA and to the FCIC regulations; and that PCA
did not obtain an assignment on the form specified in the insurance
policy, pursuant to those regulations. And, after the Cooks raised
the issue in their post-evidence argument to the bankruptcy court,
the parties argued the issue fully to the court at that time. The
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issue was addressed again in PCA’s new trial motion and the Cooks’
response.
Moreover, as noted, although the bankruptcy court, in denying
a new trial, stated that it did not rely on preemption in
concluding that PCA’s lien was invalid, it nevertheless repeated
its bench ruling that the FCIA regulations constitute the exclusive
method for obtaining a security interest in federal crop insurance
proceeds. It thus concluded that compliance with state secured
transaction law was insufficient to perfect a security interest in
the proceeds. True, the bankruptcy court did not use the word
“preemption”; but, its conclusion is tantamount to holding that,
for federal crop insurance proceeds, state law governing the
perfection of a security interest is preempted by federal
regulations.
In the light of the foregoing, we conclude that the district
court erred by holding that the preemption issue had not been
raised in bankruptcy court. See Butler Aviation Int’l, Inc. v.
Whyte (Matter of Fairchild Aircraft Corp.), 6 F.3d 1119, 1128 (5th
Cir. 1993) (to be preserved, “argument must be raised to such a
degree that the trial court may rule on it”).
2.
Pursuant to the FCIA, the Federal Crop Insurance Corporation
(FCIC) was established “to promote the national welfare by
improving the economic stability of agriculture through a sound
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system of crop insurance”. 7 U.S.C. § 1502. Along this line, the
FCIA provides that “[s]tate and local laws or rules shall not apply
to contracts, agreements, or regulations of the [FCIC] or the
parties thereto to the extent that such contracts, agreements, or
regulations provide that such laws or rules shall not apply, or to
the extent that such laws or rules are inconsistent with such
contracts, agreements, or regulations”. 7 U.S.C. § 1506(l).
Concerning the lien at issue, the FCIA provides:
Claims for indemnities under this chapter
shall not be liable to attachment, levy,
garnishment, or any other legal process before
payment to the insured or to deduction on
account of the indebtedness of the insured or
the estate of the insured to the United States
except claims of the United States or the
[FCIC] arising under this chapter.
7 U.S.C. § 1509 (emphasis added).
With respect to creditors, the FCIA regulations state that an
interest in an insured crop existing by virtue of a lien “shall not
entitle the holder of the interest to any benefit under the
contract”. 7 C.F.R. § 401.5 (emphasis added). Along this line,
they provide that a debtor may assign the right to indemnity; but,
that assignment “must be on [FCIC’s] form and will not be effective
until approved in writing by [FCIC]”. 7 C.F.R. § 401.8. As noted,
the Cooks’ insurance policy contained such a provision.
Regarding preemption, the regulations state:
The regulations contained in this subpart are
issued pursuant to the [FCIA] ... to prescribe
the procedures for Federal preemption of State
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laws and regulations not consistent with the
purpose, intent, or authority of the [FCIA].
These regulations are applicable to all
policies of insurance, insured or reinsured by
the [FCIC], contracts, agreements, or actions
authorized by the [FCIA] and entered into or
issued by FCIC.
7 C.F.R. § 400.351.
(a) No state or local governmental body or
non-governmental body shall have the
authority to promulgate rules or
regulations, pass laws, or issue policies
or decisions that directly or indirectly
affect or govern agreements, contracts,
or actions authorized by this part unless
such authority is specifically authorized
by this part or by the [FCIC].
(b) The following is a non-inclusive list of
examples of actions that State or local
governmental entities or non-governmental
entities are specifically prohibited from
taking against the [FCIC] or any party
that is acting pursuant to this part.
Such entities may not:
(1) Impose or enforce liens, garnish-
ments or other similar actions
against proceeds obtained or pay-
ments issued in accordance with the
[FCIA], these regulations or con-
tracts or agreements entered into
pursuant to these regulations....
7 C.F.R. § 400.352.
For the proceeds in issue, PCA agrees that these provisions
preempt state law for claims made against the FCIC or its reinsured
agents, but asserts that they do not preempt state law governing
issues arising between PCA and the Cooks, after they received the
proceeds. The Cooks counter that the proceeds are not even subject
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to a lien post-receipt, maintaining that the regulations provide
the exclusive means for a security interest in the proceeds.
“The pre-emption doctrine, which is derived from the Supremacy
Clause, U.S. Const., Art. VI, cl.2, requires us to examine
congressional intent.” Rural Utilities Serv. v. Cajun Elec. Power
Cooperative, Inc. (Matter of Cajun Elec. Power Cooperative, Inc.),
109 F.3d 248, 253 (5th Cir. 1997).
Pre-emption may be either express or implied,
and is compelled whether Congress’ command is
explicitly stated in the statute’s language or
implicitly contained in its structure and
purpose. Without explicit pre-emptive
language in the relevant statute,
congressional intent to displace state law may
be inferred because ... the scheme of federal
regulation may be so pervasive as to make
reasonable the inference that Congress left no
room for the States to supplement it, because
the Act of Congress may touch a field in which
the federal interest is so dominant that the
federal system will be assumed to preclude
enforcement of state laws on the same subject,
or because the object sought to be obtained by
federal law and the character of obligations
imposed by it may reveal the same purpose.
Even where Congress has not totally
supplanted a state law, the state law is
voided to the extent that it directly
conflicts with federal law. This type of
conflict arises when compliance with both
federal and state regulations is a physical
impossibility; or when state law stands as an
obstacle to the accomplishment and execution
of the full purposes and objectives of
Congress.
Id. at 253-54 (internal quotation marks and citations omitted).
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Of course, federal regulations have the same preemptive effect
as federal statutes. Id. at 254. In reviewing regulations which
preempt state law, we must determine whether the agency’s “choice
represents a reasonable accommodation of conflicting policies that
were committed to the agency’s care by the statute”. Id. As
discussed, toward this end, we review de novo the bankruptcy
court’s preemption ruling. See Branson v. Greyhound Lines, Inc.,
126 F.3d 747, 750 (5th Cir. 1997), cert. denied, ___ U.S. ___, 118
S. Ct. 1362 (1998).
For crop insurance proceeds that have been paid to the debtor,
neither the statute nor the regulations express an intent to
preempt state secured transaction law governing issues arising
between a debtor and a creditor. Instead, the statute provides
that claims for indemnity are not subject to attachment or other
legal process “before payment to the insured”. 7 U.S.C. § 1509
(emphasis added). Of course, in this regard, the regulations
preempt state law only to the extent that they are “not consistent
with the purpose, intent, or authority” of the FCIA. 7 C.F.R. §
400.351. And, the prohibition against the enforcement of liens
against such proceeds applies only to actions taken “against the
[FCIC] or any party that is acting pursuant to this part”. 7
C.F.R. § 400.352(b).
Had Congress intended to preempt state law governing a
lender’s enforcement of a lien against a debtor after the debtor’s
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receipt of the proceeds, it would have provided for anti-attachment
“before or after payment to the insured”. It did not. Again, the
FCIA provides only that the lien shall not attach “before payment
to the insured”. 7 U.S.C. § 1509 (emphasis added).
Therefore, we conclude that state law is preempted only when
a creditor seeks to obtain the proceeds directly from the FCIC or
one of its agents. When the creditor does so, an assignment in
accordance with 7 C.F.R. § 401.8 is necessary. But, after the
proceeds are paid to the debtor, state law applies.
Recently, in a case involving very similar facts, the
bankruptcy judge who presided earlier over the case at hand reached
the same conclusion as do we with respect to preemption. In re
Rees, 216 B.R. 551 (Bankr. N.D. Tex. 1998), concerned whether the
Farm Service Agency had a perfected security interest in the
debtors’ crop insurance proceeds. There, as here, the creditor had
not obtained an assignment of the proceeds in accordance with the
federal regulations. Id. at 552.
The debtor in Rees (represented by the same counsel as for the
Cooks) contended, as do the Cooks, that, “because federal
regulations require assignment of crop insurance proceeds to be
filed with the appropriate federal agency, such procedure preempts
state law and prevents the [creditor] from perfecting a lien on the
crop proceeds under state law”. Id. at 552. And, the creditor in
that case, like PCA here, countered that “the assignment procedure
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is a method of having the proceeds paid directly to the creditor,
but once the proceeds are received by the Debtors, they become
subject to the [creditor’s] liens under state law”. Id.
In Rees, the bankruptcy court held that the FCIA and
regulations did not prohibit the creditor from enforcing its lien
under state law against federal crop insurance proceeds in the
hands of the debtor:
A reading of the above quoted regulations
could lead one to the conclusion that the only
way to obtain a lien on the proceeds of a crop
insurance policy is by an assignment secured
in the manner described in the policy. This
is particularly true in reading the first
example under § 400.352(b) which prohibits the
imposition or enforcement of liens on the
“proceeds obtained” or the “payments issued”
under the policy. However, such a reading
would clearly conflict with the language of
the statute which prohibits liens on policy
proceeds “before payment to the insured.” 7
U.S.C. § 1509....
Id. at 554. Accordingly, the court concluded that, despite the
creditor’s failure to obtain an assignment in accordance with the
federal regulations, the creditor could “enforce its lien against
the crop insurance proceeds in the hands of the insured Debtors”.
Id. at 556 (emphasis added).
The bankruptcy court’s reasoning in Rees is sound; its
conclusion, correct. Therefore, that same court erred earlier in
holding that, for the case at hand, PCA could perfect its lien only
by obtaining an assignment in accordance with the FCIA regulations.
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3.
The bankruptcy court’s ruling on the validity of PCA’s lien
under Texas law is somewhat confusing. In ruling from the bench,
it stated that the lien was invalid under Texas law because
insurance proceeds are contract rights, and the security agreement
did not specify that the collateral included crop insurance
proceeds. In its order denying PCA’s new trial motion, it repeated
that conclusion. But, it then stated that, even assuming arguendo
that, under Texas law, PCA had an enforceable lien on the proceeds,
it still could not prevail because “[t]here was no mention of the
crop insurance proceeds in the security agreement” and “[t]hus
there was no notice to the Cooks in the documents prepared by the
PCA that the PCA was claiming a security interest in the crop
insurance proceeds”. In short, it is unclear whether the court
held the lien invalid because the security agreement did not
mention crop insurance proceeds, or whether that omission precluded
PCA’s recovery irrespective of the lien’s validity.
In any event, the bankruptcy court erred. The Cooks
apparently concede as much; they do not challenge or otherwise
respond to PCA’s contentions regarding the lien’s validity under
Texas law. Indeed, Texas law expressly provides that insurance
proceeds payable as the result of loss or damage to collateral
constitute “proceeds” of that collateral:
“Proceeds” includes whatever is received
upon the sale, exchange, collection or other
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disposition of collateral or proceeds.
Insurance payable by reason of loss or damage
to the collateral is proceeds, except to the
extent that it is payable to a person other
than a party to the security agreement....
TEX. BUS. & COM. CODE ANN. § 9.306(a) (Vernon Supp. 1999) (emphasis
added). Moreover, the Texas Supreme Court has held that, under
Texas law, payments to producers under federal farming programs are
proceeds of collateral. See Sweetwater Production Credit Ass’n v.
O’Briant, 764 S.W.2d 230 (Tex. 1988) (producer’s interest in crops
credited to producer to refrain from planting under PIK Diversion
Program created pursuant to 7 U.S.C. § 1421 constituted “proceeds”
under § 9.306(a)).
Accordingly, under Texas law, the term “proceeds”, which was
included in the security agreement, encompasses insurance proceeds.
Therefore, the Cooks were on notice that PCA was claiming a
security interest in their crop insurance proceeds.
B.
PCA contends that the bankruptcy court erred by failing to
deny discharge under 11 U.S.C. § 727(a)(2)(A) and (a)(5), or
dischargeability of the debt pursuant to 11 U.S.C. § 523(a)(6). It
held that, because PCA did not have a lien on the proceeds, it
could not complain about the Cooks’ use of them. In denying a new
trial, the court reiterated that, because PCA did not have the
lien, the Cooks were free to spend the proceeds as they chose; and
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that, by using them to pay other creditors, the Cooks did not act
with intent to hinder, delay, or defraud PCA.
Preliminarily, the bankruptcy court held that there was no
evidence that Mrs. Cook participated in the activities about which
PCA complains. PCA has not challenged this ruling. Accordingly,
PCA has abandoned its objections to Mrs. Cook’s discharge. E.g.,
FED. R. APP. P. 28(a)(9); Huckabay v. Moore, 142 F.3d 233, 238 n.2
(5th Cir. 1998).
But, as for Mr. Cook, we conclude that the bankruptcy court’s
discharge and dischargeability decisions were influenced by its
erroneous conclusions regarding PCA’s lien. Accordingly, those
issues must be reconsidered on remand.
III.
For the foregoing reasons, that portion of the district
court’s judgment affirming the bankruptcy court’s discharge of Mrs.
Cook is AFFIRMED; that portion affirming the bankruptcy court’s
conclusion that PCA did not have a valid lien on the crop insurance
proceeds is REVERSED; that portion affirming the bankruptcy court’s
decisions on discharge and dischargeability is VACATED; and this
case is REMANDED for further proceedings consistent with this
opinion.
AFFIRMED in PART; REVERSED in PART;
VACATED in PART; and REMANDED
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