Automatic Stay Does Not Apply to Dispute Regarding Ownership of Debtor’s Crop Proceeds

Automatic Stay Does Not Apply to Dispute Regarding Ownership of Debtor’s Crop Proceeds

The U.S. District Court for the Eastern District of Arkansas declined to stay a case which seeks to establish the ownership of the proceeds from the sale of a bankrupt farm’s crop of soybeans.

The case was filed by the debtor’s secured lender against the debtor’s middleman in charge of selling the debtor’s soybeans to end users. The suit arose after the middleman setoff amounts owed by the debtor to the middleman with the proceeds of the sale of soybeans. The lender demanded that the middleman turn over those proceeds, based on its perfected security interest over the debtor’s crops and proceeds thereof.

The middleman refused and instead sued, claiming, among other arguments, that its contractual set off rights were superior to the lender’s security interest in the proceeds.

Afterwards, the debtor filed for bankruptcy. The lender then argued that the case was subject to the Automatic Stay, while the middleman insisted that the case should proceed. At the direction of the bankruptcy court, the debtor and its owners filed a Suggestion of Bankruptcy, asserting that the outcome of the case would affect the amount of the claims the middleman and the lender have in the pending bankruptcy case.

The district court concluded that the Automatic Stay did not apply to this case because there was no suggestion in the record that the debtor or its owners had any legal or equitable interest in the crop proceeds at the time the bankruptcy case was filed. The court noted that, although setoffs are subject to the Automatic Stay, this only applies to post petition setoffs. Additionally, the court further supported its conclusion in that the debtor was not a party to this case (nor its owners).

Finally, the court also concluded that there were no unusual circumstances that would warrant extending the automatic stay protections to claims against non-bankrupt codefendants.