## Facts

- Arville Nivens and Danny Nivens operated a farming business and, during the final year of operations, became entitled to federal farm-program payments, including deficiency payments and low-yield (disaster-type) payments.
- The First State Bank of Abernathy (the bank) financed the farming operation and took a security interest in the debtors’ crops and crop proceeds under a written security agreement.
- The bank claimed that the government payment checks were proceeds of the crop collateral (or otherwise covered by its security agreement) and therefore subject to its lien.
- The Nivenses filed a Chapter 7 bankruptcy case.
- The Chapter 7 trustee, Holder, took possession of the government checks and disputed the bank’s right to the funds.
- The trustee argued that the bank’s claim to the checks amounted to an avoidable preference under 11 U.S.C. § 547 (and related “improvement in position” concepts raised in connection with floating liens in farm collateral).
- A related dispute concerned the practical use of USDA/ASCS assignment paperwork (often handled through an ASCS-36 type form): the bank had not relied on local lender custom as a substitute for whatever steps the governing law required for enforceability/perfection.

## Issues

1. Whether federal deficiency and low-yield/disaster-related farm-program payments received by the debtors are “proceeds” of crops (or otherwise within the bank’s Article 9 collateral description) so that the bank’s security interest attaches to the payments.
2. Whether the bank’s interest in the government checks was perfected and enforceable against the Chapter 7 trustee despite the bank’s failure to use the agency assignment form commonly used for directing payment by the government.
3. Whether the trustee could avoid the bank’s interest in the payments as a preferential transfer under 11 U.S.C. § 547 (including any claimed improvement in the bank’s position shortly before bankruptcy).

## Decision

- The court held that at least certain farm-program payments at issue—especially payments functioning as substitutes for crop value lost due to low yields or disaster—constituted proceeds of the crop collateral within the meaning of Article 9 and the parties’ security agreement.
- The court rejected the argument that local lending practice could replace the legal requirements governing creation and perfection of a lien in such payment rights.
- On the record presented, the court did not treat the trustee’s § 547 preference theory as defeating the bank’s secured claim to the covered payments; the bank’s lien in the qualifying payments was recognized against the estate.

## Legal Principles

- Payments that replace the value of crops that could not be produced, harvested, or marketed because of disaster or low yield can qualify as “proceeds” of crops for Article 9 purposes when the security agreement covers crops and their proceeds.
- Not every government farm payment is crop proceeds; payments that arise primarily from contractual entitlement (such as payments tied to an agreement not to plant) are more naturally analyzed as accounts or general intangibles rather than proceeds of existing crops.
- Commercial custom among local lenders cannot supply missing statutory or Article 9 requirements for a valid or perfected security interest.
- In bankruptcy, a trustee may challenge a creditor’s asserted lien as a preference under § 547, but a secured creditor with an attached and perfected interest in the relevant collateral (and its proceeds) can defeat avoidance where the statutory preference elements are not met.

## Conclusion

In *In re Nivens*, the bankruptcy court treated the relevant deficiency and low-yield/disaster-type government payments as substitutes for crop value and therefore as proceeds covered by the bank’s crop-and-proceeds security interest, rejected reliance on local custom to excuse legal perfection requirements, and declined to let the Chapter 7 trustee avoid the bank’s lien in those payments as a preference under § 547.


In re Nivens, 22 B.R. 287 (1982)