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Government Crop Insurance Payments Subject to UCC Rules Regarding Crop Proceeds
Description Michigan appeals court held that government disaster payments to a farmer for lost crops were crop proceeds under the UCC security interest in the crop. As such, the order of payment to creditors was established and the farmer could not change the payment order.
Topic Negotiable Instruments/Commercial Paper
Key Words Security Interest; Crop Insurance
C A S E   S U M M A R Y
Facts Conagra and Farmers State Bank made loans to Brennan Farms and both took a security interest in the farm's crops. Farmers and Conagra had a subordination agreement in which Farmers gave Conagra priority interest in 294 acres of the 1994 bean crop that was then destroyed by bad weather. The federal government paid disaster relief money to Brennan for the loss. The Brennans used that money to pay Farmers, which was then sued by Conagra, which claimed its security interest in the beans included an interest in the government payments as proceeds for the beans. The trial court held for Farmers; Conagra appealed.
Decision Reversed. "Government disaster relief payments for destroyed crops are proceeds within the meaning of UCC 9-306 and ... the subordination agreement covered proceeds." Although the Brennans also lost beets and cucumbers, for which payment was received, the government "checks did not have to differentiate what amount of money was attributable to which lost crop in order for the proceeds to be identifiable." Conagra need only show that a specific amount of the total government payment corresponded to the bean crop. The fact that the payments were "commingled" as a lump sum from the government does not affect the fact that part of the payment was for beans. The subordination agreement clearly shows that the parties intended for Conagra to take a superior interest in the proceeds.
Citation Conagra, Inc. v. Farmers State Bank, 602 NW2d 390 (Ct. App., Mich., 1999)

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