M & M Independent Farms, Inc. v. Rural Community Insurance Agency, Inc.

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
FAYETTEVILLE DIVISION
IN RE:
M&M INDEPENDENT FARMS, INC.,
DEBTOR
CASE NO.
09-03514-8-SWH
M&M INDEPENDENT FARMS, INC.,
Plaintiff,
v.
RURAL COMMUNITY INSURANCE AGENCY,
INC., d/b/a RURAL COMMUNITY INSURANCE
SERVICES,
Defendants.
ADVERSARY PROCEEDING NO.
10-00277-8-SWH-AP
ORDER DENYING MOTION TO DISMISS OR COMPEL ARBITRATION
The matter before the court in this adversary proceeding is the motion of the defendant, Rural
Community Insurance Agency d/b/a Rural Community Insurance Services (RCIS”), to dismiss this
proceeding or, in the alternative, to compel arbitration and stay this proceeding. The motion was
heard in Raleigh, North Carolina, on March 30, 2011. The motion will be denied.
SO ORDERED.
SIGNED this 07 day of July, 2011.
________________________________________
Stephani W. Humrickhouse
United States Bankruptcy Judge
____________________________________________________________
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The chapter 12 debtor, M&M Independent Farms, Inc. (“M&M”), is a family-owned farming
operation growing tobacco, soybeans, and other crops in eastern North Carolina. In 2008, RCIS
issued a crop insurance policy to M&M covering its tobacco crop in Sampson and Cumberland
counties. Later that year, M&M submitted a claim under the policy for the loss of a portion of its
2008 tobacco crop in Cumberland County due to adverse weather conditions. 	By M&M’s
calculations, it should have been indemnified by RCIS in the amount of at least $49,027.20.
M&M alleges that it “made its claim at the conclusion of the 2008 crop year. The Defendant
appraised the Plaintiff’s loss on October 7, 2008, and the Plaintiff submitted a written production
and yield report work sheet signed April 6, 2009.” Complaint ¶ 22(e). On April 30, 2009, M&M
filed a petition for relief under chapter 12 of the Bankruptcy Code. A chapter 12 plan was confirmed
on September 18, 2009.
On May 27, 2010, RCIS denied coverage for M&M’s loss. 	M&M contends that RCIS
ignored it for over a year and finally responded to M&M’s claim “only after having been contacted
by Plaintiff’s counsel on April 29, 2010.” 	Complaint ¶ 22(e). 	M&M initiated this adversary
proceeding on October 26, 2010, alleging, among other things, that RCIS’s refusal to pay M&M for
its claimed loss constituted a breach of contract. M&M also sets out North Carolina state law claims
for unfair and deceptive claims handling practices and, separately, unfair and deceptive trade
practices.
In its answer, by way of affirmative defense, RCIS asserted that the dispute should be
arbitrated pursuant to the policy’s arbitration clause. On January 20, 2011, RCIS filed the instant
motion requesting that the adversary proceeding be dismissed or, in the alternative, that the court
compel M&M to arbitrate its claim and stay this proceeding pending resolution of the arbitration.
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According to RCIS, M&M’s disagreement with RCIS’s refusal to indemnify M&M is within
the scope of an arbitration provision contained in the insurance policy and, as such, must be
arbitrated. RCIS explains that the policy at issue is a federal crop insurance policy, which typically
consists of three separate documents which “form a pyramid of coverage terms, criteria and
exclusions.” RCIS Mem. in Support of Mot. to Dismiss at p. 8. The “Basic Provisions” document,
which contains the dispute resolution language at issue, and the Tobacco Crop Provisions document,
which constitutes a “second tier” that serves to narrow the provisions on a crop by crop basis, are
codified within the Code of Federal Regulations. 7 C.F.R. §§ 457.8, 457.136. The third tier sets out
Special Provisions of Insurance, which focuses on both the particular crop and the county in which
it is grown. RCIS Mem. at p. 8. RCIS represents that the Basic Provisions at issue in this matter
provide as follows:
20. 	Mediation, Arbitration, Appeal, Reconsideration, and Administrative and
Judicial Review.
(a) If you and we fail to agree on any determination made by us except those
specified in 20(d), the disagreement may be resolved through mediation in
accordance with section 20(g). If resolution cannot be reached through mediation,
or you and we do not agree to mediation, the disagreement must be resolved through
arbitration in accordance with the rules of the American Arbitration Association
(AAA) except as provided [in certain sections] . . . .
(b) Regardless of whether mediation is elected:
(1) The initiation of arbitration proceedings must occur within one year of the
date we denied your claim or rendered the determination with which you disagree,
whichever is later;
(2) If you fail to initiate arbitration in accordance with section 20(b)(1) and
complete the process, you will not be able to resolve the dispute through judicial
review;
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(3) If arbitration has been initiated in accordance with section 20(b)(1) and
completed, and judicial review is sought, suit must be filed not later than one year
after the date the arbitration decision was rendered; and
(4) In any suit, if the dispute in any way involves a policy or procedure
interpretation, . . . an interpretation must be obtained from FCIC in accordance with
7 CFR part 400, subpart X or such other procedures as established by FCIC. Such
interpretation will be binding.
(c) Any decision rendered in arbitration is binding on you and us unless judicial
review is sought in accordance with section 20(b)(3). Notwithstanding any provision
in the rules of the AAA, you and we have the right to judicial review of any decision
rendered in arbitration.
RCIS Mem. at pp. 8-9.
M&M responds that this court has jurisdiction over the matters asserted in the adversary
proceeding and the authority to enjoin enforcement of the arbitration provision. In this case, M&M
argues, RCIS’s post-petition denial of coverage constitutes a post-petition breach of contract and
is a “core” issue that this court has the authority to hear. Further, M&M asserts that under the facts
and circumstances of this chapter 12 case, arbitration would run counter to the fundamental goals
of the bankruptcy laws.
DISCUSSION
Arbitration provisions “generally are favored in federal courts. In bankruptcy proceedings,
however, whether a proceeding is a ‘core proceeding’ as defined by 28 U.S.C. § 157(b) generally
determines whether an arbitration clause can be enforced.” D&B Swine Farms, Inc. v. Murphy-
Brown, LLC, 430 B.R. 737, 741 (Bankr. E.D.N.C. 2010), citing White Mountain Mining Co., LLC
v. Congleton, LLC, 403 F.3d 164, 169 (4th Cir. 2005) and Blanchard Transportation, 2008 WL
619379 at *1 (Bankr. E.D.N.C. 2008). 	More particularly, in the Fourth Circuit, controlling
precedent establishes that “[a]rbitration is inconsistent with centralized decision-making because
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permitting an arbitrator to decide a core issue would make debtor-creditor rights ‘contingent upon
an arbitrator’s ruling’ rather than the ruling of the bankruptcy judge assigned to hear the debtor’s
case.” White Mountain, 403 F.3d at 169 (internal citation omitted), quoted in D&B Swine Farms,
430 B.R. at 741. In the bankruptcy context, then, “the burden is on the party opposing arbitration
to show that Congress intended to ‘limit or prohibit waiver of a judicial forum for a particular claim’
under the Federal Arbitration Act.” D&B Swine Farms, 430 B.R. at 741, construing Shearson/Am.
Express, Inc. v. McMahon, 482 U.S. 220, 226 (1987), as quoted in Blanchard Transportation, 2008
WL 619379 at *1.
In a recent decision from this district, D&B Swine Farms, the court considered a question
very similar to an issue presented in this matter, and concluded that “the question of whether a post-
petition breach of a pre-petition contract constitutes a ‘core’ matter is unsettled.” 	D&B Swine
Farms, 430 B.R. at 743. In that case, which began under chapter 12 but was converted to a case
under chapter 11, the court ultimately concluded that the alleged post-petition breaches of the
parties’ three pre-petition contracts, two of which included arbitration provisions, were “core matters
within the jurisdiction of the court.” Id. The D&B Swine Farms court agreed with a Second Circuit
decision that was oft-cited in White Mountain, and concluded that
the relevant inquiry is “the impact these contracts have on other core
bankruptcy functions.” 	Assessment of that impact can, when
assessing whether arbitration interferes with bankruptcy courts’
jurisdiction 	and 	ability 	to 	fulfill 	the 	underlying 	purposes 	of
bankruptcy law, become an extremely circular exercise because post-
petition breaches of contracts made pre-petition frequently do impact
core bankruptcy functions to the extent that the contract claims are
core.
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Id., quoting United States Lines, Inc., 197 F.3d 631, 637 (2nd Cir. 1999). There is, unfortunately,
no “bright-line” rule, thought this court agrees with other courts that it would be extremely useful
to have one. Id.
A bankruptcy court can hear all core matters as defined by 28 U.S.C. § 157(b)(2), and M&M
contends that at issue in this proceeding are matters concerning the administration of the estate and
other proceeding affecting the liquidation of the assets of the estate. 	28 U.S.C. § 157(b)(2)(A)
and (O); see White Mountain, 403 F.3d at 168-170; D&B Swine Farms, 430 B.R. at 741. 	The
dispute is a core proceeding, M&M states, “based on (1) its impact on the administration of the
estate; (2) its [e]ffect on the liquidation of assets by either recovering funds for distribution to
creditors or expending funds that could otherwise be dedicated to operations or distributions to
creditors; and (3) the conflict between arbitration and the purposes of Chapter 12.” M&M Mem.
at p. 5. The court agrees. This court also has the authority, pursuant to 11 U.S.C. § 105, to “issue
any order, process, or judgment that is necessary or appropriate to carry out the provisions of” the
Bankruptcy Code.
In its brief, RCIS outlines the many important goals embodied in the Federal Crop Insurance
Act (“FCIA”), and points out that the FCIA’s policy directives promote “a uniform and accessible
system of farm protection.” See, e.g., In re 2000 Sugar Beet Crop Ins. Litigation, 228 F. Supp. 2d
992 (D. Minn. 2002). RCIS also offered a detailed explanation of the history behind the FCIA
directives, including the FCIA goal of ensuring that “all claims for losses are adjusted . . . in a
uniform and timely manner,” 7 U.S.C. § 1508(j)(l). RCIS emphasized that the FCIA preempts state
law to the extent that state law itself purports to preempt the FCIA, or is inconsistent with the
contracts, agreements or regulations within the FCIA’s ambit. 	7 U.S.C. § 1506(l). 	The court
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respects these objectives. It is important to note, however, that they neither conflict with nor control
this court’s determination of whether there exists, in this proceeding, a core matter over which this
court should appropriately exercise its jurisdiction.
Through the Bankruptcy Code, “Congress intended to centralize disputes about a debtor’s
assets and legal obligations in the bankruptcy courts.” White Mountain, 403 F.3d at 169; citing
Grady v. A.H. Robins Co., 839 F.2d 198, 201-02 (4th Cir. 1988). The unique purpose of chapter 12
of the Bankruptcy Code is “to give family farmers facing bankruptcy a fighting chance to reorganize
their debts and to keep their land.” In re Massengill, 73 B.R. 1008, 1012 (Bankr. E.D.N.C. 1987)
(quoting H.R. Rep. No. 99-958, 99th Cong., 2d Sess. 48 (1986), reprinted in 1986 U.S. Code.
Cong. & Admin. News pp. 5227, 5249), rev’d in part on other grounds, 100 B.R. 276 (E.D.N.C.
1988). Chapter 12 was specifically designed primarily to “provide family farmers with a faster,
simpler, and cheaper alternative to Chapter 11 and Chapter 13 procedures, while preserving the fair
treatment of creditors under those chapters.” Knudsen v. IRS, 581 F.3d 696, 716 (8th Cir. 2009),
quoting Rowley v. Yarnall, 22 F.3d 190, 193 (8th Cir. 1994). Accordingly, this court takes to heart
the White Mountain court’s emphasis on how “[c]entralization of disputes concerning a debtor’s
legal obligations is especially critical in chapter 11 cases, . . . [where] [t]he ‘fundamental purpose’
of chapter 11 is the rehabilitation of the debtor.” White Mountain, 403 F.3d at 170; quoting NLRB
v. Bildisco & Bildisco, 465 U.S. 513, 528 (1983) (emphasis added). These critical concerns in a
chapter 11 case are every bit as applicable in a chapter 12 case. They are, perhaps, even more so
in light of the increased emphasis in chapter 12 on speed, simplicity, economy and the continuing
nature of funding obligations.
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In this case, it is apparent that the debtor’s claim is a post-petition claim arising out of
RCIS’s denial, more than a year after the bankruptcy petition was filed, of M&M’s effort to recover
indemnity for a lost crop. 	After full review, the court concludes that the breach of contract claim,
as well as the related claims based on unfair and deceptive practices, are core matters arising in a
case under title 11 and are within the court’s jurisdiction. The court does not conclude that the
matter is “core” based only on the fact that the alleged breach of contract occurred post-petition. Of
great significance to the court is its certainty that an arbitration would take far more time to complete
than would an adversary proceeding in this court,1 thus impeding this court’s efficient administration
of the estate and potentially disrupting the successful completion of the chapter 12 plan. This is
entirely inconsistent with the underlying purpose of the bankruptcy laws. Diverting the attention
of the debtor’s management (the debtor is family-owned and operated) to an entirely separate
proceeding likewise is inapposite to the goal of centralization. White Mountain, 403 F.3d at 169.
The arbitration provision in the parties’ insurance contract will not be enforced. 	It also is
significant in this case, as it was in D&B Swine Farms, that any monies M&M ultimately might
recover would be assets of the estate (which, because the debtor is in chapter 12, remains under the
supervision of the trustee for the duration of the plan). 	The arbitration process would impose
additional, unnecessary litigation costs on the estate and, again as in D&B Swine Farms, the
amounts M&M “seeks to recover for post-petition breaches were not available before the petition
was filed, and as such are an integral part of this proceeding.” D&B Swine Farms, 430 B.R. at 743-
1 The crop insurance agreement allows either party to seek judicial review of the
determination reached in arbitration, and provides up to one year after issuance of the determination
in which to do so. Thus, even after incurring the costs (in time and dollars) of arbitration, the parties
could find themselves at exactly the same point at which they are today.
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44. The court concludes that “[o]rdering arbitration and staying the adversary proceeding would
substantially interfere with [the debtor’s] efforts to reorganize, which evidences an inherent conflict
between arbitration and the underlying purpose of the bankruptcy laws.” Id. at 744.
For the foregoing reasons, RCIS’s motion to dismiss or in the alternative to compel
arbitration and stay this adversary proceeding is DENIED.
SO ORDERED.
END OF DOCUMENT
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