Pub. 13 2018-2019 Issue 4

NEBRASKA BANKERS ASSOCIATION 13 Counselor’s Corner — continued on page 14 Unfortunately for the unprepared lend- er, the answer is no, based on the Federal Crop Insurance Act (FCIA) and the regula- tions issued in connection with FCIA and on rulings by the courts. First, the FCIA specifically exempts indemnities under the federal crop insurance program from “at- tachment, levy, garnishment, or any other legal processbeforepayment to the insured . . .” (7U.S.C. § 1509.) Federal Crop Insurance Corporation (FCIC) regulations similarly provide that “[a]n interest of a person in an insured crop existing by virtue of a lien, mortgage, garnishment, levy, execution, bankruptcy, involuntary transfer or similar interest shall not entitle the holder of the interest to any benefit under the contract.” (7 CFR § 457.5.) Courts have affirmed this view, hold- ing that the FCIA pre-empts revised UCC Article 9 and the right of a lien holder to establish aUCC security interest in federal crop insurance policies and proceeds. The courts also have ruled that the pre- emption prevents the lender from giving any direction or making claims against the insurance company. 1 So, what is a lender to do? The FCIC regulations provide the answer here as well. Specifically, the regulations allow an insured to assign a right to the indemnity under the policy to a creditor. This is ac- complished by completing an assignment of indemnity using an approved form of assignment, which must be accepted by the insurer to be effective. Individual crop insurance companies have assignment forms meeting the requirements set by FCIC. With a valid assignment in place, the common crop insurance basic policy provisions established by FCIC give the as- signee the right to submit loss notices and forms required by the policy. In fact, if the insured borrower suffers a loss from an in- surable cause, but fails to file a claimwithin the required 60 days after the end of the insurance period, the assignee is granted an additional 15days tofile a claimafter the 60-day periodhas expired. (7CFR§ 457.9.) So, is the lender completely without remedy if no assignment is obtained? Here, both Congress and the courts have been more amenable. As noted above, the FCIA exempts indemnities from “attach- ment, levy . . . before payment to the in- sured . . .” Based on this, courts have ruled that after deposit, identifiable proceeds in the hands of the debtor may be subject to the claims of the lienholder as “proceeds of collateral.” However, the priority of claims on the insurance proceeds will be subjected to other creditor rights under the UCC. For instance, aNebraska court ruled in favor of a junior secured creditor apply- ing a set-off against the insurance proceeds deposited in an account inwhich the junior creditor had both a security interest and control, notwithstanding the claim to col- lateral proceeds by the senior lender. 2 Pre-emption of Revised UCC Article 9 by the FCIA is similar to the pre-emption Proudly offering group insurance to NBA members for more than 30 years. To learn about our plans, visit nbaveba.com An Independent Licensee of the Blue Cross and Blue Shield Association WALENTINE O’TOOLE, LLP When time is of the essence, experience counts. Walentine O’Toole blends confidence, experience and knowledge with the personal attention you can expect from a regional law firm. www.w alentineotoole .com 402.330.6300 11240 Davenport St . • Omaha, NE 68154-0125