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04/05/88 DEAROLD D. SCUDDER AND DONNA SCUDDER

Filed: April 5, 1988.

DEAROLD D. SCUDDER AND DONNA SCUDDER APPELLANTS (DEFENDANTS BELOW)
v.
FARMERS PRODUCTION CREDIT ASSOCIATION OF SCOTTSBURG APPELLEE (PLAINTIFF BELOW)



APPEAL FROM THE SWITZERLAND CIRCUIT COURT, The Honorable John D. Mitchell, Judge, CAUSE NO. 82-32

Robertson, J., Neal, J. And Station, J. Concur.

Author: Robertson

ROBERTSON, J.

Dearold and Donna Scudder appeal a judgment rendered in favor of the plaintiff-appellee Production Credit Association (PCA). The trial court determined that payment received by the Scudders through the federal government's milk diversion program belonged to the PCA because the PCA had a properly perfected security interest in all of the Scudders' dairy cattle and the payment was a "contract right to such secured property and an account receivable from such secured property."

We reverse.

We glean the following facts from the record. The Scudders entered into agreements with the PCA in February, 1977 and May, 1979 by which PCA took a security interest in, among other things, all of the Scudders' dairy cattle. In March, 1980, PCA advanced the Scudders approximately $84,000.00 pursuant to the agreements. Sometime thereafter, the Scudders filed a petition in bankruptcy, assigned cause No. 82-2040-NA.[Footnote 1] Through bankruptcy proceedings, the cattle mentioned in the security agreements were returned to PCA and sold. The Scudders received a discharge[Footnote 2], and resumed farming. No other security agreements or financing statements were executed or filed by PCA.

On April 5, 1985 Donna Scudder applied for participation in the U.S. Department of Agriculture's Milk Diversion Program[Footnote 3] for the period January 1, 1984 through March 31, 1985. Her application was approved on April 29, 1985. The Scudders received a payment from the federal government of $11,380.50 for their participation in the program on that day.

PCA claimed at trial that it retained a postbankruptcy security interest in the milk diversion program payment. The Scudders responded that the payment was not covered by PCA's security agreement and also argued that federal law governing the program prohibits the creation of security interests in milk diversion program payments to secure antecedent debts. The trial court entered special findings, concluding that the payment was property properly secured by the 1977 and 1979 agreements; the trial court did not address the Scudders' argument that the security agreement amounted to an assignment barred by federal law. We also will not address that argument because we find the determinative issue to be whether the milk diversion program payment received by the Scudders constituted "proceeds" of the Scudders' prebankruptcy collateral subject to PCA's security interest.

At the heart of this controversy is the description of collateral contained in PCA's financing statements/security agreements. The agreements secured an interest in "[a]ll dairy cattle but not limited to all dairy cattle," and

7 [a]ll property similar to that listed above, which at any time may hereafter be acquired by the Debtor(s) including, but not limited to, all off-spring of livestock, additions and replacements of livestock . . . and all products of . . . livestock . . .

8 [a]ll proceeds of the sale or other Disposition of any of the property described or referred to under Items 3 to 7, inclusive above, and of any off-spring, . . . milk, . . . and contract rights derived from said property, together with all accounts receivable resulting from such sales, . . .

The trial court focused, as the appellant has, on categorizing the milk diversion payment by type of collateral. See IND. CODE 26-1-9-106. However, there is no need to characterize the milk diversion payment as one of the types of collateral created by the Uniform Commercial Code (UCC) since whatever the nature of the property interest received by virtue of the contractual relationship between the Scudders and the Department of Agriculture, under the Bankruptcy Reform Act of 1978, 11 U.S.C. § 552(a), if it was not "property of the debtor acquired before the commencement of the case," it would not be subject to a prepetition lien.

11 U.S.C. § 552(a) sets out the general rule that property acquired postpetition is not subject to a prepetition lien:

[e]xcept as provided in subsection (b) . . ., property acquired by the estate or by the debtor after the commencement of the case is not subject to any lien resulting from any security agreement entered ...


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