What Happens to Market Facilitation Program Payments in Farm Bankruptcies?

The news in early November that a second round of $7.8 billion in 2019 Market Facilitation Program (MFP) payments would get underway—news that comes at a time when farm bankruptcy filings are on the rise—raises a potentially significant question for both agricultural lenders and struggling producers alike: what happens to MFP payments in bankruptcy?

The answer ultimately turns on whether the producer’s MFP entitlement is part of the secured lender’s collateral when the bankruptcy is filed: if it isn’t, it may serve as the primary (or only) source of cash to fund a Chapter 12 plan and/or working capital for operations while the bankruptcy is pending.

Of course, a secured lender who expects to capture inbound MFP entitlements should make sure that they are included in the security agreement’s collateral description—which sounds simple enough. But MFP payments—which don’t fit squarely into the time-tested categories of crop insurance, disaster relief, or margin coverage payments —present some unique and untested technical questions that make that task a bit nuanced.

The threshold question—especially for lenders with security agreements that predate the inception of the MFP—is what existing category of UCC Article 9 collateral MFP payments fall into. Are MFP payments “proceeds” of crops (as crop insurance payments and disaster relief subsidies have generally been treated under UCC 9-102(a)(64))? Or are the payments more in the nature of “general intangibles” (UCC 9-102(a)(42))? And if MFP payments are specifically described in the collateral description—either in a new loan or a loan/security agreement amendment—can a lender perfect an Article 9 security interest in a producer’s rights to future MFP payments via the usual state-law UCC Article 9 perfection process, or is it preempted by federal regulations/procedures altogether?

These questions have never been tested in the courts, which is to be expected with a program as new as the 2019 MFP. With the 2018 MFP in the rearview mirror (and, presumably, all 2018 MFP payments now long since disbursed into the ether), it’s the specific provisions of the 2019 program that matter. The 2019 MFP is controlled by the federal regulations in 7 C.F.R. 1409, which are pretty detailed in terms of producer eligibility, application procedures, and the mechanics and formula for payments. But they are silent on the questions posed above.

However, another USDA regulation, 7 C.F.R. 1404, gives guidance on the broad question of assignability of the 2019 payments: if an MFP payment to a producer has been authorized by FSA, the producer and lender need to execute an FSA-prescribed form CCC-251/252 (and file the form with the producer’s county FSA office) in order to effectuate and perfect the assignment of the payment to the lender.

But if MFP payments haven’t been officially approved for a given producer—i.e., they are still only a contingent “entitlement” or potential source of producer cash income—the federal regs don’t offer any insight on the procedure for perfecting a security interest in the payments (contrast this with security interests in federal crop insurance program payments, which, under the Federal Crop Insurance Act, can only be perfected via a form assignment accepted by the crop insurer). And in the absence of any case law specifically addressing the question, we are left to make an educated guess as to whether future MFP entitlements can be captured as “proceeds,” “general intangibles,” or otherwise.

Given this lack of clarity, the prudent path for lenders is to review and, if necessary, update their security agreements and UCC filings to ensure that the collateral descriptions capture “all proceeds [of the producer’s crop/product/herd/etc.], including without limitation any Market Facilitation Program Payments or other government payments,” as well as all “general intangibles.”

If there is any hint of a defect in the lender’s perfection in inbound MFP payments, there is a good chance they will be fair game in the producer’s bankruptcy case. This holds especially true in cases where the producer is “under water” with its senior lender(s)—i.e., it doesn’t have any unencumbered accounts receivable or other assets to fund any distributions to junior creditors (which can make confirmation of a plan difficult or impossible under the plan confirmation rules in the Bankruptcy Code). If there is a window to challenge an alleged lien on any asset of a producer’s under-water Chapter 12 estate, it is a certainty that either the trustee or a junior creditor will take advantage of it.

If recent agribusiness indicators are to be believed, these questions may present themselves in ag bankruptcies with increasing frequency in the near term. According to Farm Bureau statistics, 2019 net farm income has increased to $88 billion this year, the highest since 2014. But nearly 40% ($33 billion) of that income is derived from some form of government assistance (Market Facilitation Program payments) or insurance/disaster relief proceeds.

Sources: “MFP Payments Coming Before Thanksgiving,” Progressive Farmer/DTN, Todd Neeley, November 13, 2019; “Farm Bankruptcies Rise Again,” Farm Bureau Market Intel (fb.org), John Newton, October 30, 2019.

About the Author:

Stuart Laven is a Cleveland, Ohio-based bankruptcy and restructuring attorney who focuses his practice on representing FSA lenders, producers, and other significant stakeholders in agricultural bankruptcies, out of court restructurings, and financings across much of the Midwest, including all U.S. Bankruptcy Courts in New York, Ohio, Michigan and Wisconsin. I can be reached at slaven@cavitch.com. Read my bio here.

Published by Stuart A. Laven, Jr., Esq.

Stuart Laven is a Cleveland, Ohio-based bankruptcy and restructuring attorney who focuses a significant portion of his practice on representing FSA lenders, producers, and other significant stakeholders in agricultural bankruptcies, out of court restructurings, and ag financings across much of the Midwest, including all U.S. Bankruptcy Courts in New York, Ohio, Michigan and Wisconsin.

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