Dupree Farms, LLC v. Producers Agric. Ins. Co. (In re Dupree Farms, LLC)

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IN RE: DUPREE FARMS, LLC DEBTOR

DUPREE FARMS, LLC PLAINTIFF, v. PRODUCERS AGRICULTURE INSURANCE COMPANY, D/B/A PRO AG, DEFENDANT.

No. 18-00216-5-JNC

AP No. 19-0164-5-JNC

United States Bankruptcy Court, E.D. North Carolina, Raleigh Division

June 6, 2024

CHAPTER 11

MEMORANDUM ORDER ON MOTION TO DISMISS

Joseph N. Callaway United States Bankruptcy Judge

The matter before the court is the Motion to Dismiss for Lack of Subject Matter Jurisdiction filed by Producers Agriculture Insurance Company ("ProAg" or "Defendant") (A.P. Dkt. 151, the "Motion").^[1] ProAg filed a memorandum in support of the Motion (A.P. Dkt. 152), and Plaintiff Dupree Farms, LLC ("Dupree Farms" or "Plaintiff" or "Debtor") filed a response to the Motion (A.P. Dkt. 153, the "Response"). The court has reviewed the relevant pleadings and record in the case, and for the reasons stated herein, the Motion is denied.^[2]

BACKGROUND

This adversary proceeding involves a Whole-Farm Revenue Protection ("WFRP") Pilot Policy No. 2018-37-987-102949 (the "Policy") issued by ProAg to Dupree Farms on February 18, 2018. WFRP policies are a component of the federal crop insurance program, which is administered by the United States Department of Agriculture's Risk Management Agency ("RMA") and underwritten by the government-owned Federal Crop Insurance Corporation ("FCIC"). The policies, however, are sold by private companies such as ProAg, and the RMA partners with those private companies, known as approved insurance providers, to deliver and administer the program.

Dupree Farms commenced a voluntary Chapter 11 bankruptcy case by filing its chapter 11 petition (Dkt. 1) on January 16, 2018 (the "Petition Date"), Case No. 18-00216-5-JNC (the "Bankruptcy Case"). Its Second Amended Plan of Reorganization dated March 12, 2019 (Dkt. 292, the "Plan"),^[3] was confirmed by order dated March 18 2019 (Dkt. 297, the "Confirmation Order") following and incorporating the findings from the chapter 11 plan confirmation hearing conducted on March 7, 2019 (audio recording posted at Dkt. 288, the "Hearing Audio").

For all of crop year 2018, Dupree Farms operated under direct bankruptcy court supervision and jurisdiction. When the case was filed, the Debtor's ability to purchase crop insurance was in jeopardy because Debtor had not paid a past due premium notice of about $100,000 from a prior year. On January 26, 2018, a week after the Petition Date, the Debtor filed an Emergency Motion to Use Cash Collateral (Dkt. 41) seeking court authority to borrow up to $4,386,321.25 (the "PostPetition Loan") from Ag Resource Management/Agrifund, LLC ("ARM"), with a second lien granted to Getsco, Inc. ("Getsco"), to fund its 2018 postpetition farming operations. Specifically, the motion at paragraph 23, page 7, contemplates that 2018 crop insurance must be obtained as a condition of obtaining the ARM financing. The major prepetition secured lender, Regions Bank, objected (Dkt. 55) on the basis its prior liens on Debtor's assets were being unfairly primed. After three contested hearings (February 6 (audio at Dkt. 61), February 16 (audio at Dkt. 70), and February 23, 2018 (audio at Dkt 76)), an Order Authorizing Use of Cash Collateral was entered on February 26, 2018 (Dkt. 78).^[4] Among other things, that Order allowed payment of the $100,000 premium past due on the 2017 crop insurance policy from the borrowed funds, thereby enabling the Debtor to bind and obtain the Policy.

The Debtor farmed the entire 2018 crop year while under bankruptcy court supervision. A preliminary insurance claim was communicated to ProAg in the fall of 2018, prior to the plan confirmation hearing. A series of communications between ProAg ensued, resulting in ProAg determining that the Policy would pay an amount lower than allegedly promised by ProAg's agent at policy acquisition and as relied upon in Dupree Farm's 2018 planting decisions. It had informed the major prepetition creditors (primarily Regions Bank and Getsco) that litigation might be required, and it filed an application with the court to employ special litigation counsel (Dkt. 248). The court entered the order of January 18, 2019 (Dkt. 260), approving employment of attorney Kevin L. Sink of Raleigh, North Carolina, to act as special counsel "with respect to claims against [ProAg] in connection with . . . claims or notices of loss . . . relating to Whole Farm Revenue Protection for 2017 and 2018."^[5]

Despite this brewing dispute, the chapter 11 case proceeded to plan confirmation on March 7, 2019 (the "Plan Hearing"). At the Plan Hearing, counsel for Dupree Farms, Richard Sparkman, announced that prepetition secured creditor Regions Bank had changed its position and accepted the plan as modified, agreeing to defer the past due balance on its prepetition loan (i) for one year or (ii) until the 2018 crop insurance dispute resolved, whichever occurred first.^[6] In response, the court inquired whether the anticipated action against ProAg had been filed. Mr. Sparkman replied that an investigation and discussions were proceeding, that ProAg adjusters were formally reviewing the claim, and a final notification had not been rendered; in other words, litigation was contemplated but not yet ripe (Hearing Audio, 11:00 to 12:15). During cross examination conducted by Regions Bank counsel, the principal officer of Dupree testified that if net proceeds were recovered from ProAg under the claim or as a result of litigation, those funds could be used to fund the plan, including the annual payments due to Regions Bank and Getsco (Hearing Audio, 48:50 to 49:40).^[7]

During the Plan Hearing, when discussing postpetition and postconfirmation financing, Mr. Sparkman reported, and a member-manager of the Debtor later confirmed in his testimony, that in the 2018 crop year (postpetition but preconfirmation), the Debtor planned to farm and then attempted to farm 3,137 acres consisting of soybeans, sweet potatoes, tobacco, watermelons, and broccoli.^[8] Dupree Farms operated throughout most of 2018 with an understanding, alleged to be based on ProAg agents' assurances, that expanded coverage under the Policy would be in effect and extended to all of its 2018 crops, including rotation on the same farm acreage of the broccoli and watermelon crops during the 2018 crop year. Dupree Farms alleges it relied on the assurance of the ProAg agent that if it planted this specific crop mix in the specific rotation then it would qualify for the 1.35 "Expanded Operations Factor" as that term is defined in the Policy.^[9]

The summer of 2018 turned out to be a notoriously tough farming year in eastern North Carolina due to a recurring cycle of drought and excessive rainfall. Dupree Farms lost virtually all of its broccoli and watermelon rotational crops. Because the estate's 2018 farming operation failed to generate the expected farm revenue guaranteed (or thought by the Debtor to be guaranteed) under the Policy, Dupree Farms submitted a claim under the Policy expecting coverage at the 1.35 Expanded Operations Factor (Hearing Audio, 11:00 to 12:15). In its letter dated November 16, 2018, (the "First Denial Letter"), ProAg first informed Dupree Farms of its position that the Policy must be read restrictively with respect to the maximum allowable Expanded Operations Factor applicable under the Policy and would be calculated at 1.17 rather than the 1.35 expected by Dupree Farms.

As of the Plan Hearing in March 2019, Dupree Farms reported that it was still communicating with ProAg concerning the coverage dispute in an effort to resolve the matter short of litigation. The formal crop year 2018 claim of loss dated April 29, 2019, was labeled by ProAg as Claim No. 18011474.25 (the "Claim"). On May 31, 2019, Dupree Farms was notified that ProAg, using the lowered 1.17 expansion factor, had made a firm determination that the "Whole Farm Approved Revenue" was $4,581,522 with a corresponding "Insured Revenue" for Dupree Farms set at $3,894,319.26, yielding a final indemnity payment of $691,557. Dupree Farms contested the ProAg conclusion, asserting coverage calculated at a 1.35 Expanded Operations Factor. It says the higher factor produces a total insurance recovery of $1,226,720, a difference of $535,163 when compared to the allowed $691,557. ProAg denies that it remains liable to Dupree Farms for 2018 crop loss claims for any additional amount.

Dupree Farms initiated this postconfirmation adversary proceeding on November 11, 2019, by filing a complaint (A.P. Dkt. 1) seeking to recover damages from ProAg for the reduced insurance coverage under four state law causes of action, being negligent misrepresentation, intentional misrepresentation, unfair and deceptive trade practices, and punitive damages. ProAg answered (A.P. Dkt. 10) on January 30, 2020, denying any further liability. Neither party sought a jury trial. On November 5, 2019, Dupree Farms commenced a parallel arbitration proceeding (A.P. Dkt. 18, Demand for Arbitration Claim No 18011474, the "Arbitration") against ProAg, as required under the Policy and implementing regulations. On April 15, 2020, Dupree Farms and ProAg jointly submitted, and the court approved, a consent order (A.P. Dkt. 19) staying this adversary proceeding pending a decision in the Arbitration.

In the Arbitration, both Dupree Farms and ProAg requested that the FCIC interpret which of the competing Expansion Factor interpretations should be utilized by the arbitrator in calculating insurance coverage under the Policy.^[10] The FCIC agreed with ProAg's position. On the basis of that interpretation, which is binding on the arbitrator under 7 C.F.R. § 400.766(b)(2), ProAg submitted a motion for summary disposition. On September 10, 2021, the arbitrator granted that...