UNITED STATES COURT OF APPEALS

FOR THE FIFTH CIRCUIT

_____________________

No. 98-10039

_____________________

In the Matter of: DAVID WAYNE COOK;

In the Matter of: ANGELYN STACY COOK,

Debtors,

ROLLING PLAINS PRODUCTION

CREDIT ASSOCIATION,

Appellant/Cross-Appellee,

versus

DAVID WAYNE COOK; ANGELYN STACY COOK,

Appellees/Cross-Appellants.

_________________________________________________________________

Appeals from the United States District Court

for the Northern District of Texas

_________________________________________________________________ March 9, 1999

Before GARWOOD, BARKSDALE, and STEWART, Circuit Judges.

RHESA HAWKINS BARKSDALE, Circuit Judge:

The district court h aving affirmed the bankruptcy court’s

rejection of the objections by Rolling Plains Produ ction Credit

Association (PCA) to the discharge of David W. and Angelyn S. Cook,

and the dischargeability of their debt to PCA, primarily at issue

is whether, for federal crop insurance proceeds, Texas secured

transaction law is preempted by federal law. We A FF IRM in Part;

REVERSE in Part; VACATE in Part; and REMAND

.- 2 - I.

The Cooks’ indebtedness to PCA under promissory notes, which

matured in March 19 96, was secured through a security agreement.

Among other things, the agreement covered crops. As a result, it

provided that the Cooks granted to PCA a

security interest not only to that described

above but also to all crop s planted or grown

on the hereinafter described land and the

products thereof and proceeds thereof , and to

all crops planted or grown upon the

hereinafter described land within five years

from the date hereof....

(Emphasis added.) And, the agreement required the Cooks to

insure the co llateral with companies

acceptable to [PCA] against such casualties

and in such amounts as [PCA] shall require

with a standar d mortgage clause in favor of

[PCA], and [PCA] is hereby authorized to

collect such sums which ma y become due under

any of said p olicies and apply same to the

obligations hereby secured.

Thereafter, PCA perfected its security interest.

For their 1995 cotton crop, the Cooks purchased crop insurance

from PCA’s in-house agency, which was reinsured pursuant to the

Federal Crop Insurance Act (FCIA). Concerning the preemption issue

at hand, the insurance policy stated:

You may assign to another party your right to

an indem nity for the crop year. T he

assignment must be on our form and will not be

effective until approved in writing by us

. The assignee will have the right to submit all

loss n o tices and forms as required by the

policy.- 3 -

(Emphasis added.) PCA did not, however, take such an assignment of

the insurance proceeds. This was because, as two PCA employees

testified at trial, PCA did not take an assignment unless either it

questioned the character of the debtor or the loan was in trouble.

In March 1996, the Cooks received crop insurance proceeds of

approximately $55,000 for 1995 cotton crop losses. But, instead of

using those proceeds to reduce the PCA debt, David Cook satisfied

loans to another creditor, secured by t wo vehicles which were

exempt property; paid annual land lease payments (including $10,000

to his father-in-law); and used the balance for expenses. (In that

this opinion turns on the preemption issue, it is not necessary to

present other facts relevant to the discharge and dischargeability

issues, such as claimed representations by David Cook, including

upon his receiving the check for the crop insurance proceeds,

regarding payment of those proceeds to PCA, or his sale of

equipment that was PCA’s collateral, including sales to his fatherin-law. Of course, those matters will be at issue on remand.)

In mid-1996, the Cooks filed a Chapter 7 bankruptcy petition.

Later that year, PCA filed an adversary proceeding in bankruptcy

court, objecting to discharge under 11 U.S.C. § 727, and to

dischargeability of the Cooks’ debt, pursuant to 11 U.S.C. § 523.

Following a trial in early 1997, the bankruptcy court held that PCA

did not have a lien on the crop insurance proceeds, and denied its

objections to discharge and dischargeability. Late that year, the

district court affirmed.- 4 - II.

PCA contends that the bankruptcy court erred by c oncluding

that PCA did not have a valid lien on the crop insurance proceeds

because it did not obtain an assignment in accordance with federal

law and regulations; by finding that the Cooks were not on notice

of the security interest claimed by PCA in those proceeds; and by

refusing to deny discharge under 11 U.S.C. § 727(a)(2)(A) ( court

shall grant debtor discharge unless “debtor, with intent to hinder,

delay, or defra ud a creditor or an officer of the estate ... has

transferred, removed, destroyed, mutilated, or concealed

...

property of the debtor, w ithin one year before the date of the

filing of the petition”), or under § 727(a)(5) (court shall grant

deb tor discharge unless “debtor has failed to explain

satisfactorily

... any loss of assets or deficiency of assets to

meet the debtor’s liabilities”), or discharg eability of the PCA

debt under 11 U.S.C. § 523(a)(6) (discharge under 11 U.S.C. § 727

does not discharge debtor from debt “for willful and malicious

injury by the debtor to another entity or to the property of

another entity”).

Alternatively, PCA claims an eq uitable lien in the Cooks’

exempt vehicles (they cleared the title to those vehicles by using

the crop insurance proceeds to satisfy the loans secured by the

vehicles).- 5 -

O n cross-appeal, the Cooks contend that the district court

erred by holding that they failed in bankruptcy court to preserve

the preemption issue.

Because it implicates our standard of review, we consider de

novo the district court’s ruling that the preemption issue had not

been preserved. S ee, e.g.

, Southmark Corp. v. Coopers & Lybrand

(In re Southmark Corp.) , 163 F.3d 925, 928 (5th Cir. 1999). And,

“[a]lthough this case has already been reviewed on appeal by the

dis trict court, we review the bankruptcy court’s findings as if

this were an appeal from a trial in the district court”. Phoenix

Exploration, Inc. v. Yaquinto (Matter of Murexco Petroleum, Inc.)

,

15 F.3d 60, 62 (5th Ci r. 1994). It goes without saying that we

review the bankruptcy court’s findings of fact for clear error; its

conclusions of law, de novo

. E.g.

, Border v. McDaniel (Matter of

McDaniel) , 70 F.3d 841, 842-43 (5th Cir. 1995).

A.

The bankruptcy co urt held that crop insurance proceeds are

contract rights; and that PCA’s security interest in “proceeds” of

crops did not constitute a lien on federal crop insurance proceeds.

The court reasoned that PCA could obtain the lien only through an

assignment under the FCIA and regulations. PCA asserts that the

bankruptcy court erred by holding that, under state law, its lien

was invalid. It also maintains that the district court held

corre c tly that the preemption issue was not preserved;- 6 -

alternatively, it m aintains that, to the extent the bankruptcy

court relied on preemption, it erred. As stated, the Cooks crossappeal the district court’s ruling that preemption was not

preserved.

1.

The bankruptcy court ruled from the bench that PC A could

obtain the lien only through an assignment under the FCIA and

regulations. Interpreting this as a holding that, in this

instance, state secured transaction law was preempted by federal

law, PCA moved for a new trial, contending that Texas law was not

preempted. In denying the motion, the bankruptcy court stated that

its decision was not based on preemption; nevertheless, in that

same order, it repeated its conclusion that, for the lien, PCA was

required to obtain an assignment conforming t o the federal

regulations. In the light of its holding that the preemption issue

had not been preserved in bankruptcy court, the district court did

not address it.

At the very least, the factual basis for the preemption claim

was raised in the pretrial order: that the crop insurance policy

was subject to the FCIA and to the FCIC regulations; and that PCA

did not obtain an assignment on the form specified in the insurance

policy, pursuant to those regulations. And, after the Cooks raised

the issue in their post-evidence argument to the bankruptcy court,

the parties argued the issue fully to the court at that time. The- 7 -

issue was addressed again in PCA’s new trial motion and the Cooks’

response.

Moreover, as noted, although the bankruptcy court, in denying

a new trial, stated that it did not rely on p reemption in

concluding that PCA’s lien was invalid, it nevertheless repeated

its bench ruling that the FCIA regulations constitute the exclusive

method for obtaining a security interest in federal crop insurance

proceeds. It thus concluded that compliance with state secured

transaction law was insufficient to perfect a security interest in

the proceeds. True, the bankruptcy court did not use the word

“preemption”; but, its conclusion i s tantamount to holding that,

for f ederal crop insurance proceeds, state law governing the

perfection of a security interest is preempted by federal

regulations.

In the light of the foregoing, we conclude that the district

court erred by holding that the preemption issue had not been

raised in bankruptcy court. S ee Butler Aviation Int’l, Inc. v.

Whyte (Matter of Fairchild Aircraft Corp.)

, 6 F.3d 1119, 1128 (5th

Cir. 1993) (to be preserved, “argument must be raised to such a

degree that the trial court may rule on it”).

2.

Pursuant to the FCIA, the Federal Crop Insurance Corporation

(FCIC) was established “to pr omote the national welfare by

improv ing the economic stability of agriculture through a sound- 8 -

system of crop insurance”. 7 U.S.C. § 1502. Along this line, the

FCIA provides that “[s]tate and local laws or rules shall not apply

t o contracts, agreements, or regulations of the [FCIC] or the

parties thereto to the extent that such contracts, agreements, or

regulations provide that such laws or rules shall not apply, or to

the extent that such laws or rules are inconsistent with such

contracts, agreeme nts, or regulations”. 7 U.S.C. § 1506( l ).

Concerning the lien at issue, the FCIA provides:

Claims for indemnities under this chapter

shall not be liable to attachment, levy,

garnishment, or any other legal process before

payment to the insured or to de d uction on

account of the indebtedness of the insured or

the estate of the insured to the United States

except claims of the Unite d States or the

[FCIC] arising under this chapter.

7 U.S.C. § 1509 (emphasis added).

With respect to creditors, the FCIA regulations state that an

interest in an insured crop existing by virtue of a lien “shall not

entitle the holder of the interest to any benefit under the

contract ”. 7 C.F.R. § 401.5 (emphasis added). Along this line,

they provide that a debtor may assign the right to indemnity; but,

that assignment “must be on [FCIC’s] form and will not be effective

until approved in writing by [FCIC]”. 7 C.F.R. § 401.8. As noted,

the Cooks’ insurance policy contained such a provision.

Regarding preemption, the regulations state:

The regulations contained in this subpart are

issued pursuant to the [FCIA]

... to prescribe

the procedures for Federal preemption of State- 9 - laws and regulations not consistent with the

purpose, intent, or authority of the [FCIA].

These regulations are applicable to all

policies of insurance, insured or reinsured by

the [FCIC], contracts, agreements, or actions

authorized by th e [FCIA] and entered into or

issued by FCIC.

7 C.F.R. § 400.351.

(a) No state or local governmental body or

non-governmental body shall have the

authority to promulgate rules or

regulations, pass laws, or issue policies

or decisions that directly or indirectly

affect or go vern agreements, contracts,

or actions authorized by this part unless

such authority is specifically authorized

by this part or by the [FCIC].

(b) The following is a non-inclusive list of

examples of actions that State or local

governmental entities or non-governmental

entities are specifically prohibited from

taking against the [FCIC] or any party

that is acting pursuant to this part.

Such entities may not:

(1) Impose or enforce liens, garnishments or other s imilar actions

against proceeds obtained or payments issued in accordance with the

[FCIA], these regulations or contracts or agreements entered into

pursuant to these regulations....

7 C.F.R. § 400.352.

For the proceeds in issue, PCA agrees that these provisions

preempt state law for claims made against the FCIC or its reinsured

agents, but asserts that they do not preempt state law governing

issues arising between PCA and the Cooks, after they received the

proceeds. The Cooks counter that the proceeds are not even subject- 10 -

to a lien post-receipt, maintaining that the regulations provide

the exclusive means for a security interest in the proceeds.

“The pre-emption doctrine, which is derived from the Supremacy

Clause, U.S. Const., Art. VI, cl.2, requires us to examine

congressional intent.” R ural Utilities Serv. v. Cajun Elec. Power

Cooperative, Inc. (Matter of Cajun Elec. Power Cooperative, Inc.)

,

109 F.3d 248, 253 (5th Cir. 1997).

Pre-emption may be either express or implied,

and is compelled whether Congress’ command is

explicitly stated in the statute’s language or

implicitly contained in its structure and

purpose. Without explicit pre-emptive

language in the relevant statute,

congressional intent to displace state law may

be inferred because ... the scheme of federal

regulation may be so pervasive as to make

reasonable the inference that Congress left no

room for the States to supplement it, because

the Act of Congress may touch a field in which

t he federal interest is so dominant that the

federal system will be assumed to preclude

enforcement of state laws on the same subject,

or because the object sought to be obtained by

federal law and the character of obligations

imposed by it may reveal the same purpose.

Even where Congress has not totally

s upplanted a state law, the state law is

voided to the extent that it directly

conflicts with federal law. This type of

conflict arises when compliance with both

federal and state regulations is a physical

impossibility; or when state law stands as an

obstacle to the accomplishment and execution

of the full purposes and objectives of

Congress.

Id . at 253-54 (internal quotation marks and citations omitted).- 11 -

Of course, federal regulations have the same preemptive effect

as federal statutes. Id . at 254. In reviewing regulations which

preempt state law, we must determine whether the agency’s “choice

represents a reasonable accommodation of conflicting policies that

were committed to the agency’s care by the statute”. I d

. As

discussed, toward this end, we review de novo th e bankruptcy

court’s preemption ruling. See Branson v. Greyhound Lines, Inc.

,

126 F.3d 747, 750 (5th Cir. 1997), cert. denied

,

___ U.S.

___, 118

S. Ct. 1362 (1998).

For crop insurance proceeds that have been paid to the debtor,

neither the statute nor the regulations express an intent to

preempt state secured transaction law gover ning issues arising

between a debtor and a creditor. Instead, the statute provides

that claims for indemnity are not subject to attachment or other

legal process “ befor e payment to the insured”. 7 U.S.C. § 1509

(emphasis adde d). Of course, in this regard, the regulations

preempt state law only to the extent that they are “not consistent

with the purpose, intent, or authority” of the FCIA . 7 C.F.R. §

400.35 1. And, the prohibition against the enforcement of liens

against such proceeds applies only to actions taken “against the

[FCIC] or any party that is acting pursuant to this part”. 7

C.F.R. § 400.352(b).

Had Congress intended to preempt state law governing a

lender’s enforcement of a lien against a debtor after the debtor’s- 12 -

receipt of the proceeds, it would have provided for anti-attachment

“before or after payment to the insured”. It did not. Again, the

FCIA provides only that the lien shall not attach “ before payment

to the insured”. 7 U.S.C. § 1509 (emphasis added).

Therefore, we conclude that state law is preempted only when

a creditor seeks to obtain the proceeds directly from the FCIC or

one of its agents. When the creditor does so, an assignment in

accordance with 7 C.F.R. § 40 1.8 is necessary. But, after the

proceeds are paid to the debtor, state law applies.

Recently, in a case involving very similar facts, the

bankruptcy judge who presided earlier over the case at hand reached

the same conclusion as do we with respect to preemption. I n re

Rees , 216 B.R. 551 (Bankr. N.D. Tex. 1998), concerned whether the

FarmService Agency had a perfected security interest in the

debtors’ crop insurance proceeds. There, as here, the creditor had

not obtained an assignment of the proceeds in accordance with the

federal regulations. Id . at 552.

The debtor in Rees (represented by the same counsel as for the

Cooks) contended, as do the Cooks, that, “because federal

regulations require assignment of crop insurance pr oceeds to be

filed with the appropriate federal agency, such procedure preempts

state law and prevents the [creditor] from perfecting a lien on the

crop proceeds under state law”. I d

. at 552. And, the creditor in

that case, like PCA here, countered that “the assignment procedure- 13 -

is a method of having the proceeds paid directly to the creditor,

but once the proceeds are received by the Debtors, they become

subject to the [creditor’s] liens under state law”. Id

.

In Rees

, the bankruptcy court he ld that the FCIA and

regulations did not prohibit the creditor from enforcing its lien

under state law against federal crop insurance proceeds in the

hands of the debtor:

A reading of the above quoted regulations

could lead one to the conclusion that the only

way to obtain a lien on the proceeds of a crop

insurance policy is by an assignment secured

in the manner des cribed in the policy. This

is particularly true in reading the first

example under § 400.352(b) which prohibits the

imposition or enforcement of liens on the

“proceeds obtained” or the “payments issued”

under the policy. However, such a reading

would clearly conflict with the language of

the statute which prohibits liens on policy

p roceeds “before payment to the insured.” 7

U.S.C. § 1509....

Id

. at 554. Accordingly, the court concluded that, despite the

creditor’s failure to obtain an assignment in accordance with the

federal regulations, the creditor could “enforce its lien against

the crop insurance proceeds in the hands of the insured Debtors”.

Id . at 556 (emphasis added).

The bankruptcy court’s reasoning in Rees is sou nd; its

conclusion, correct. Therefore, that same court erred earlier in

holding that, for the case at hand, PCA could perfect its lien only

by obtaining an assignment in accordance with the FCIA regulations.- 14 - 3.

The bankruptcy court’s ruling on the validity of PCA’s lien

under Texas law is somewhat confusing. In ruling from the bench,

it stated that the lien was invalid under Texas law because

insurance proceeds are contract rights, and the security agreement

did not specify that the collateral included cro p insurance

proceeds. In its order denying PCA’s new trial motion, it repeated

that conclusion. But, it then stated that, even assuming a rguendo

that, under Texas law, PCA had an enforceable lien on the proceeds,

it still could not prevail because “[t]here was no mention of the

crop insurance proceeds in the security agreement” and “[t]hus

there was no notice to the Cooks in the documents prepared by the

PCA that the PCA was claim ing a security interest in the crop

insurance proceeds”. In short, it is unclear whether the court

held the lien invalid because the security agreement did not

mention crop insurance proceeds, or whether that omission precluded

PCA’s recovery irrespective of the lien’s validity.

In any event, the bankruptcy court erred. The Cooks

apparently concede as much; they do not challenge or otherwise

respond to PCA’s contentions regard ing the lien’s validity under

Texas law. Indeed, Texas law expressly provides that insurance

proceeds payable as the result of loss or damage to collateral

constitute “proceeds” of that collateral:

“Proceeds” includes whatever is received

upon the sale, exchange, collection or other- 15 - disposition of collateral o r proceeds.

Insurance payable by reason of loss or damage

to the collateral is proceeds

, except t o the

extent that it is payable to a person other

than a party to the security agreement....

T EX

. B US

. & C OM

. C ODE A NN . § 9.306(a) (Vernon Supp. 1999) (emphasis

added). Moreover, the Texas Supreme Court has held that, under

Texas law, payments to producers under federal farming programs are

proceeds of collateral. S ee Sweetwater Production Credit Ass’n v.

O’Briant

, 764 S.W.2d 230 (Tex. 1988) (producer’s interest in crops

credited to producer to refrain from planting under PIK Diversion

Program created pursuant to 7 U.S.C. § 1421 constituted “proceeds”

under § 9.306(a)).

Accordingly, under Texas law, the term “proceeds”, which was

included in the security agreement, encompasses insurance proceeds.

Therefore, the Cooks were on notice that PCA was claiming a

security interest in their crop insurance proceeds.

B.

PCA contends that the bankruptcy cour t erred by failing to

den y discharge under 11 U.S.C. § 727(a)(2)(A) and (a)(5), or

dischargeability of the debt pursuant to 11 U.S.C. § 523(a)(6). It

held that , because PCA did not have a lien on the proceeds, it

could not complain about the Cooks’ use of them. In denying a new

trial, the court reiterated that, because PCA did not have the

lien, the Cooks were free to spend the proceeds as they chose; and- 16 -

that, by using them to pay other creditors, the Cooks did not act

with intent to hinder, delay, or defraud PCA.

Preliminarily, the bankruptcy court hel d that there was no

evidence that Mrs. Cook participated in the activities about which

PCA complains. PCA has not challenged this ruling. Accordingly,

PCA has abandoned its objections to Mrs. Cook’s discharge. E.g.

,

F ED

. R. A PP

. P. 28(a)(9); Huckabay v. Moore

, 142 F.3d 233, 238 n.2

(5th Cir. 1998).

But, as for Mr. Cook, we conclude that the bankruptcy court’s

discharge and dischargeability d ecisions were influenced by its

erroneous co nclusions regarding PCA’s lien. Accordingly, those

issues must be reconsidered on remand.

III.

For the foregoing reasons, that portion of the district

court’s judgment affirming the bankruptcy court’s discharge of Mrs.

Cook is AFFIRMED ; that portion affirming the bankruptcy court’s

conclusion that PCA did not have a valid lien on the crop insurance

proceeds is REVERSED ; that portion affirming the bankruptcy court’s

decisions on di scharge and dischargeability is V ACATED ; and this

case is REMANDED for further proceedings consistent with this

opinion.

AFFIRMED in PART; REVERSED in PART;

VACATED in PART; and REMANDED