AUDREY R. EVANS, Bankruptcy Judge.
Three motions for summary judgment and responsive pleadings and briefs are
The Debtors, Dudley R. Webb, Jr. and Peggy J. Webb, are husband and wife who live in Lonoke County, Arkansas, and have farmed in central Arkansas for a number of years. In 2003, they formed the Dudley R. Webb, Jr. Farms Joint Venture (the
This adversary proceeding was filed by the Bank on May 18, 2012, to ascertain its interests in the Debtors' property, including the 2011 rice crop as well as other property owned by the Debtors. The Trustee counterclaimed against the Bank and crossclaimed against the USA and Carlton Farms, LLC (
The pending motions for summary judgment primarily concern the existence and perfection of security interests held by creditors Bank of England and the USA to the following assets of the bankruptcy estate which the Trustee has sold and is holding the proceeds: warehouse-stored rice, farm-stored rice, and certain vehicles and equipment. The Trustee contends the Bank's and USA's liens on this property were improperly granted or are unperfected and subject to avoidance in bankruptcy
Each of the three parties also moves for summary judgment with respect to an amount due Carlton Farms under its lease agreement with the Debtors. The Trustee seeks a ruling that he is entitled to collect $52,159.25 due Carlton Farms (which has assigned its interest to the Trustee pursuant to a settlement) as either rent due Carlton Farms subject to a superpriority landlord's lien under Arkansas law or a property interest held by Carlton Farms. The Bank and USA both assert that the amount at issue does not constitute rent. Having examined the lease agreement, the Court finds the Trustee is entitled to this amount as a matter of law because there is no question the amount due Carlton Farms is for rent and the Trustee holds the rights of Carlton Farms.
The Trustee also seeks to surcharge the Bank's and USA's security interests under 11 U.S.C. § 506(c). The Court cannot determine whether the Bank's and USA's security interests are subject to surcharge on summary judgment due to certain outstanding issues of fact.
The Trustee and the Bank also move for summary judgment with respect to a check from England Liquid Fertilizer, Inc. (
Finally, the Bank moves for summary judgment on other avoidance actions brought by the Trustee, as well as the Trustee's counterclaims for disallowance of claims, equitable subordination, and violation of the automatic stay. Summary judgment as to these issues is denied as issues of material fact remain to be decided at trial.
1. On or about January 1, 2003, Dudley R. Webb, Jr. and Peggy J. Webb entered into an agreement creating the Joint Venture with farming and other activities related thereto being the general nature of the business to be transacted by the Joint Venture and with Dudley and Peggy Webb each owning 50% in the Joint Venture. USA St. Undisputed Facts (Dkt. # 65) ¶ 1; Trustee St. Undisputed Facts (Dkt. # 109) ¶ 2; Bank St. Undisputed Facts (Dkt. # 107) ¶ 1.
2. Since the Joint Venture was created in 2003, it has engaged in farming and other farm related activities in and around central Arkansas, including Lonoke and Pulaski Counties. USA St. Undisputed Facts ¶ 2; Trustee St. Undisputed Facts ¶ 1.
3. Dudley R. Webb, Jr. and Peggy J. Webb, husband and wife, live in Lonoke County, Arkansas. USA St. Undisputed Facts ¶ 43.
4. The Joint Venture deposited 142,946.53 bushels of its 2011 crop year rice for storage at the Federal Drier and Storage Company, Inc. in England, Arkansas (the
5. The Joint Venture stored 84,339.77 bushels
6. The Debtors and the Joint Venture granted security interests in crops, including the 2011 crop year rice, as well as certain vehicles and equipment, to the USA and Bank. The USA and Bank filed various financing statements to perfect their security interests in the Debtors' and Joint Venture's 2011 crops and equipment. Bank Mt. Summ. Judg.; USA Mt. Summ. Judg.
7. On February 10, 2012, the Webbs filed a joint Chapter 7 personal bankruptcy in the Bankruptcy Court for the Eastern District of Arkansas.
8. Post-petition, after filing a motion for relief from stay in the Debtors' main bankruptcy case, the Bank attempted to
9. At the close of the April 12, 2012 hearing, the Court granted a permanent injunction enjoining the Bank from taking control over the Debtor's assets including property the Bank asserted was held by the Joint Venture. The Court orally ruled that the Trustee may immediately sell the grain at issue and hold the proceeds from sale in an estate account, with the various parties' rights to those proceeds to be determined at a later date. See Order Granting Injunction (Dkt. # 41); Rice v. Carlton Farms, LLC (In re Webb), 474 B.R. 891, 894 (Bankr.E.D.Ark.2012).
10. The Court's Order Granting Injunction entered on July 3, 2012, held that the Joint Venture was not a separate legal entity, but represented an agreement between the individual Debtors to continue their farming operations; the Court's decision was affirmed on appeal to the Eastern District of Arkansas to the Eighth Circuit Court of Appeals. See Rice v. Carlton Farms, LLC (In re Webb), 474 B.R. 891, 894 (Bankr.E.D.Ark.2012), aff'd sub nom., No. 4:12-cv-578 (DPM), 2013 WL 427919 (E.D.Ark. Feb. 4, 2013), affd, 742 F.3d 824 (8th Cir.2014). Because the Joint Venture was not a separate entity, the Court held that the Debtors individually owned the rice and equipment listed on their bankruptcy schedules. Id.
11. According to the Trustee's Amended Reports of Sale (Dkt. # 170), the rice sold for net proceeds totaling $1,375,214.40, with all liens, interests, and claims to the rice attaching to such proceeds. The Trustee paid expenses of $11,576.77 in connection with this sale.
12. According to Reports of Sale filed by the Trustee, the equipment and vehicles sold for net proceeds totaling $513,822.55, with all liens, interests, and claims to the equipment and vehicles attaching to such proceeds. See Report of Sale (Dkt. # 126); Report of Sale (Dkt. # 173); Amended Report of Sale (Dkt. # 186).
13. Of the $513,822.55 net proceeds collected, $384,322.55 was collected in a public sale of equipment, and $129,500 was collected in a private sale. Specifically, the Report of Sale for the public sale of the Webbs' equipment reported that the Trustee collected a total of $422,571.50 gross proceeds, incurred an auctioneer's fee of $29,580.01, and incurred other expenses totaling $8,668.94, for total net proceeds of $384,322.55. See Report of Sale (Dkt. # 126). On September 12, 2012, this Court entered an order approving the Trustee's application for authority to pay the commission and expenses of the auctioneer who conducted the public sale of the equipment, directing the Trustee to pay Doug Stovesand, Auctioneer, commission in the amount of $29,580.01 and expenses incurred in the amount of $8,668.94. See Order Approving Payment of Commission and Expenses To Doug Stovesand, Auctioneer (Dkt. # 154). The Reports of Sale for the private sales of the Webbs' equipment reported that the Trustee collected a total of $129,500, and stated that "[t]here were no commissions or expenses incurred or paid as a result of these
14. Part of the equipment sold by the Trustee included several vehicles owned by the Debtors, including those described in Exhibit 5 to the Trustee's Motion for Partial Summary Judgment (referred to herein as the "Vehicles") and listed here with the amount received by the Trustee for each:
Description VIN Number Amount 2 Axle Trailer—Red 5FLP18207B041041 $ 500.00 40ft Hopper Bottom Trailer 1DW1A4222DS406101 6,100.00 1954 ARM Trailer 2844918 775.00 1987 Ford CB 1FTXR82A8HVA50653 3,200.00 1968 Ford Bob Truck N60DUD04249 800.00 2009 Falcon Trailer 432SD182891018642 1,700.00 1980 Atok LB AT125979 3,300.00 1995 Spta TL 1S9GH4222SM451169 15,000.00 1975 Shop TL ARKAVTL1O175743 1,000.00 1983 Intl DS 1HTL23277DGA16105 2,500.00 _______________________________________________________________________________________________TOTAL $ 34,875.00
The Vehicles generated gross sales proceeds totaling $34,875.00 at auction. At the commencement of the Debtors' bankruptcy case, no liens were recorded on the certificates of title for the Vehicles. Trustee St. Undisputed Facts ¶ 14. The Trustee attached copies of titles for eight of the Vehicles and an Arkansas Interactive Title Registration and Lien Report Summary dated April 16, 2014 for all the Vehicles which show that titles were issued for the two trailers for which the Trustee has no title, but that no liens were recorded on those trailers. See Trustee Mt. Summ. Judg. Exh. 6.
15. At various times prior to the filing of the Chapter 7 Petition herein, for good and valuable consideration, Dudley R. Webb, Jr., Peggy Webb, individually and/or through the Joint Venture executed and delivered to the Bank various Promissory Notes and related instruments, which evidence various loans and extensions of credit from the Bank to the Debtors (collectively, the
All of the notes and instruments related to the foregoing Bank Loans are herein collectively referred to as the
16. To secure payment of the amounts owed to the Bank in connection with the Loans, the Notes, and all other debts of the Debtors existing or thereafter created, the Debtors executed and delivered to the Bank the various security agreements and extensions. All of the foregoing instruments
17. The Bank attempted
# Debtor/Borrower(s) Date Location Collateral 01386367 Dudley R. Webb, Jr. 2/12/2002 Sec. of State Various including farm and Peggy J. Webb products, but not equipment 853195 Dudley R. Webb, Jr. 2/19/2002 Lonoke Various including farm and Peggy J. Webb County products, but not equipment 41259521120 Dudley R. Webb, Jr. 3/3/2004 Sec. of State Equipment (specific list and Peggy J. Webb provided) 86782 Dudley R. Webb, Jr. 3/3/2004 Lonoke Equipment (specific list and Peggy J. Webb County provided) 7128172482 Dudley R. Webb, Jr. 2006* Sec. of State Specific items of and Peggy J. Webb equipment 7128373883* Dudley W. Webb 6/2/2006 Sec. of State Specific items of equipment 7129168740 Dudley R. Webb, Jr. 1/29/2007 Sec. of State Various including farm (cont. of and Peggy J. Webb products, but not 01386367) equipment 200800137 Dudley R. Webb, Jr. 2/15/2008 Lonoke Specific items of* Paid for Farms, Joint Venture County equipment Termination stamp 7130278140 Dudley R. Webb, Jr. 2/11/2008 Sec. of State Specific items of Farms, Joint Venture equipment 7130369048 Dudley R. Webb, Jr. 3/11/2008 Sec. of State Specific items of Farms, Joint Venture equipment 7131598221 Dudley R. Webb, Jr. 6/16/2009 Sec. of State Specific items of Farms, Joint Venture equipment 4000000819103 Dudley R. Webb, Jr. 2/25/2010 Sec. of State Specific items of equipment 40000025392358 Dudley R. Webb, Jr. 1/31/2011 Sec. of State Various including farm Farms, Joint Venture products and equipment 4000002543020 Dudley R. Webb, Jr. 2/1/2011 Sec. of State Specific items of (Cont. Of and Peggy J. Webb equipment 7128172482) 40000027029892 Dudley R. Webb, Jr. 3/2/2011 Sec. of State Various including farm Farms, Joint Venture products and equipment 4000004445056 Dudley R. Webb, Jr. 2/8/2012 Sec. of State Various including farm (cont. of 1386367) and Peggy J. Webb products, but not equipment
18. The Bank attempted to perfect and maintain its security interests in various titled vehicles of the Debtors by having the
19. Debtors have defaulted on the Bank Notes and Bank Loans, and as of February 21, 2012, the total amount of indebtedness owed to the Bank totaled $1,406,330.45, with interest accruing thereafter at the rate of $272.67. The Bank asserts a secured claim against the rice proceeds and equipment and vehicle proceeds in the amount of $1,406,330.45, as of February 21, 2012, with interest accruing thereafter at the rate of $272.67. Bank St. Undisputed Facts ¶ 9.
20. As of February 21, 2012, the Debtors owed the Bank $1,406,330.45 as reflected on the Bank's Proof of Claim filed in the Debtors' bankruptcy attached to the Bank's Motion For Summary Judgment as Exhibit F.
21. The Bank does not dispute that the USA has priority over the Bank's claim against the rice proceeds. Bank Mt. Summ. Judg. ¶ 9.
22. From September 12, 2011 through December 9, 2011, the Joint Venture made five deposits of its 2011 crop year rice for storage at the Federal Drier and Storage Company, Inc. in England, Arkansas (the
23. In order for the Joint Venture to pledge its rice as collateral for USDA-CCC loans, on December 15, 2011, the Bank executed a USDA Form CCC-679 Lien Waiver, which expressly waived— with respect to the USDA-CCC only—all of the Bank's interest in, and title to, the rice and all other commodities of the Joint Venture for crop year 2011, thereby making the Bank's lien on the rice subordinate to USDA-CCC's lien. USA St. Undisputed Facts ¶ 5.
24. On December 23, 2011, the Joint Venture, by and through Dudley R. Webb, Jr., executed and delivered to the USDA-CCC a Warehouse Storage Note and Security Agreement, representing a warehouse-stored rice marketing assistance loan made to the Joint Venture in the amount of $434,513.86, at an interest rate of 1.125% and a maturity date of September 30, 2012. (Of this amount, the USA retained a $57 service fee.) Trustee St. Undisputed Facts ¶ 6; USA St. Undisputed Facts ¶ 4, 6-8.
25. The USA perfected its security interest in the Warehouse Rice by obtaining possession of certain warehouse receipts for same. Trustee St. Undisputed Facts ¶ 6; USA St. Undisputed Facts ¶ 9-12, 14.
26. After obtaining the original endorsed warehouse receipts from the USDA-CCC under this Court's order, the Trustee had all rice stored by the Joint Venture at the warehouse sold, receiving $869,114.90 in net proceeds from the warehouse for the sale of said rice. USA St. Undisputed Facts ¶ 13; Trustee St. Undisputed Facts ¶ 7.
28. The Trustee has not paid the USDA-CCC's secured claim on the Warehouse Rice proceeds. USA St. Undisputed Facts ¶ 17.
29. The Joint Venture also stored a large quantity of crop year 2011 rice in grain bins located on land owned by Carlton Farms in Pulaski County, Arkansas (the
30. On December 28, 2011, the Joint Venture, by and through Dudley R. Webb, Jr., executed and delivered to the USDA-CCC a Farm Storage Note and Security Agreement representing a farm-stored rice marketing assistance loan made by the USDA-CCC to the Joint Venture in the amount of $293,895.00, with an interest rate of 1.125% and a maturity date of September 30, 2012. USA St. Undisputed Facts ¶ 20; Trustee St. Undisputed Facts ¶ 8.
31. The Farm-Stored Rice loan was made by the USDA-CCC to the Joint Venture after the Bank expressly waived its lien on the Joint Venture's rice with respect to the USDA-CCC. USA St. Undisputed Facts ¶ 21.
32. Under the terms of the Farm Storage Note and Security Agreement, the Joint Venture granted the USDA-CCC a security interest in all of its 2011 rice stored in bins on a farm located at "SE Corner of HWY 161 & River Road," a total then-approximated to be 47,250 cwt. USA St. Undisputed Facts ¶ 22.
33. Also on December 28, 2011, Dudley R. Webb, Jr., on behalf of the Joint Venture, executed USDA Form CCC-666 Farm Stored Loan Quantity Certification, certifying among other things, that: the Joint Venture was the producer of the approximated 47,250 cwt of the Farm-Stored Rice stored in the designated bins; the Joint Venture owned a beneficial interest in this Farm-Stored Rice and could pledge it to the USDA-CCC as security for the Farm-Stored Rice loan requested; the Farm-Stored Rice was in storable condition which would be maintained; the bins would safely store the Farm-Stored Rice through the maturity date of the loan; and the Farm-Stored Rice was not encumbered by any other liens or other security interests, except that of the Bank (which had given the USDA-CCC a Lien Waiver). USA St. Undisputed Facts ¶ 23.
34. The USA does not have (and has not had) possession of receipts for the Farm-Stored Rice. Trustee St. Undisputed Facts ¶ 8.
35. The $293,844.00 in loan funds from the Farm-Stored Rice loan was paid by the USDA-CCC jointly to the Joint Venture and the Bank per the terms of the CCC-678 Lien Waiver with the Bank. (The total loan amount was $293,895.00 but the USDA-CCC retained a $51.00 service fee.) USA St. Undisputed Facts ¶ 24.
37. The USDA-CCC filed UCC Financing Statements in the name of "Dudley R. Webb Jr. Farms JV" with the Pulaski County Circuit Clerk's Office December 15, 2011, and with the Lonoke County Circuit Clerk's Office on December 20, 2011. USA St. Undisputed Facts ¶ 26. These financing statements listed the collateral as "all 2011 crops." USA Mt. Summ. Judg., Exhibit J (Dkt. # 63-10, p. 1-2), Exhibit G (Dkt. # 63-7, p. 22-23); Trustee Mt. Summ. Judg., Exhibit 3B (Dkt. # 104-3, p. 2-3).
38. By order of this Court, the Trustee was given authority to sell the Farm-Stored Rice pledged by the Joint Venture to the USDA-CCC as security for the Farm-Stored Rice loan the USDA-CCC made to the Joint Venture, with all liens to attach to the proceeds thereof. USA St. Undisputed Facts ¶ 27.
39. Because of the USDA-CCC's lien on the Farm-Stored Rice, the Farm-Stored Rice could not have been sold without the Marketing Authorizations from the USDA-CCC. USA St. Undisputed Facts ¶ 28.
40. After obtaining the Marketing Authorizations from the USDA-CCC, the Trustee, through a broker, sold the Farm-Stored Rice on or about May 9, 2012, for a total of approximately $506,099.50,
41. As of the February 10, 2012 date of the Chapter 7 bankruptcy filing of Dudley R. Webb, Jr. and Peggy J. Webb, the debt owed by the Joint Venture to the USDA-CCC on the Farm-Stored Rice loan totaled $294,275.44, with interest continuing to accrue at $9.0581 daily. USA St. Undisputed Facts ¶ 39.
42. The Trustee has not paid the USDA-CCC's claim on the Farm-Stored Rice proceeds.
43. On January 25, 2010, the Debtors executed a security agreement with the USA (specifically, the USDA Farm Service Agency or "USDA-FSA") as security for several separate loans totaling $379,131.77. The USA filed a proof of claim for $129,838.21, the claimed outstanding amount due on these loans. In the related security agreement, the Debtors, in their individual capacities, purported to grant the USA a security interest in over one hundred pieces of equipment, and references "all existing and future indebtedness" as its subject. USA St. Undisputed
44. At the time of the Webbs' Chapter 7 bankruptcy filing, Dudley R. Webb, Jr. and Peggy J. Webb were personally indebted to the USDA-FSA in the total amount of $129,838.21. Said sum representing $111,755.78 in unpaid principal, plus accrued interest through February 10, 2012, in the amount of $18,082.43, with interest accruing thereafter at the rate of $14.9263 per day. USA St. Undisputed Facts ¶ 52.
45. Consistent with the USDA-FSA's personal loans to the Webbs, and the Notes and Security Agreements personally executed by the Webbs, the USDA-FSA filed a UCC Financing Statement in the names of Dudley R. Webb, Jr. and Peggy J. Webb in the Office of the Lonoke County Circuit Clerk as Document No. 082011 on January 21, 2000, covering, among other things, all the Webbs' equipment, and timely continued its financing statement by filing continuations on August 5, 2004, as File No. 082011 and again on September 9, 2009 as Document No. UCCFINST200900651. USA St. Undisputed Facts ¶ 48; USA Mt. Summ. Judg., Exh. 0 (Dkt. # 63-15); Trustee St. Undisputed Facts ¶ 12; Trustee Mt. Summ. Judg., Exh. 4-C (Dkt. # 104-4, p. 80-82).
46. Any financing statement filed by the Bank on the Webbs' equipment was filed after USDA-FSA's financing statement. USA St. Undisputed Facts ¶ 49.
47. No other creditor has a valid UCC Financing Statement covering the Webbs' equipment that was filed prior to the USDA-FSA's UCC filing. USA St. Undisputed Facts ¶ 50.
4. Carlton Farms, as landlord, leased certain farmland in Pulaski County, Arkansas to the Joint Venture, as tenant, for the period of January 1, 2011 through December 31, 2011, per the terms of a Farm Lease and Security Agreement (hereinafter the
49. Carlton Farms also asserted liens against the Farm-Stored Rice and the proceeds derived therefrom, by virtue of a pre-petition lease agreement between itself and the Debtors. The terms of the lease and the basis for Carlton Farms's interest in the Farm-Stored Rice is set forth in Carlton Farms's Motion for Relief from Stay filed in the main bankruptcy case (Dkt. # 39) and its Proof of Claim (Claim # 11-1). Trustee St. Undisputed Facts ¶ 10.
50. The Trustee and Carlton Farms reached a settlement agreement, the terms of which are set forth in the Application for Approval of Proposed Compromise Settlement Between Trustee and Carlton Farms, LLC (4:12-ap-1044 Dkt. # 33), the Amended and Supplemental Application for Approval of Compromise Settlement Between Trustee and Carlton Farms, LLC (4:12-bk-10768, Dkt. # 158), and the Order granting same (4:12-ap-1044 Dkt. # 65). In short, pursuant to the terms of the Agreement and Order, Carlton Farms transferred any and all interest it had in the rice owned by the Debtors and sold by the Trustee, making the Trustee the real party in interest for all claims of Carlton Farms against the Debtors' bankruptcy estate. Trustee St. Undisputed Facts ¶ 11.
51. The Trustee, as successor to Carlton Farms, asserts that it has a "super-priority" statutory landlord's lien, under
52. Section 4, entitled "Rent", of the Farm Lease executed by Carlton Farms and the Joint Venture clearly defines five separate terms, which are each underlined in the Farm Lease for emphasis: "Base Rent", "Landlord's Share", "Additional Rent", "Rent", and "Interest Rate." USA St. Undisputed Facts ¶ 31; Bank St. Undisputed Facts ¶ 17.
53. The first sentence of the "Rent" section of the Farm Lease states that "On or before March 1, 2011, Tenant shall pay to Landlord nonrefundable `Base Rent' of $85.00 per tillable acre (a total of $211,327.00), which shall be credited toward the net share crop proceeds due to Landlord in accordance with this section." USA St. Undisputed Facts ¶ 32; Bank St. Undisputed Facts ¶ 18.
54. The Joint Venture has fully paid Carlton Farms the $211,327.00 "Base Rent" due under the Farm Lease. USA St. Undisputed Facts ¶ 33; Bank St. Undisputed Facts ¶ 24.
55. The second sentence of the "Rent" section of the Farm Lease states that the "Landlord shall have a net share interest in twenty six and one-half percent (26.5%) of all rice and twenty five percent (25%) of all other crops produced on the Premises (`Landlord's Share')." USA St. Undisputed Facts ¶ 34; Bank St. Undisputed Facts ¶ 19.
56. The second paragraph of the "Rent" section of the Farm Lease defined the term "Additional Rent" to mean "twenty-five percent (25%) of all insurance proceeds paid under Tenant's crop loss insurance policy required under Section 14," and described the "Additional Rent" as "additional consideration for Landlord's lease of the Premises to the Tenant." USA St. Undisputed Facts ¶ 35; Bank St. Undisputed Facts ¶ 20.
57. The second paragraph of the "Rent" section of the Farm Lease defined the term "Rent" by stating: "Additional Rent and Base Rent shall be collectively referred to as the `Rent'." USA St. Undisputed Facts ¶ 36; Bank St. Undisputed Facts ¶ 21.
58. On January 26, 2012, ELF issued individual Debtor Dudley R. Webb, Jr. a check in the amount of $51,422.00 (the
59. On February 13, 2012, the Bank wrote a letter to ELF claiming the rebate check was collateral on a loan it made to the Debtors, and requested the ELF Check be issued to it jointly. ELF complied, writing by hand the words "and Bank of England" in the "pay to the order of" line on the ELF Check behind the
60. No financing statement filed by the Bank listing either or both Debtors, or the Joint Venture, lists an interest in a security in or to the ELF Check. Trustee St. Undisputed Facts ¶ 17.
61. The Debtors deposited a check in the amount of $89,178.87 on January 13, 2012 (the "Settlement Check").
Rule 56 of the Federal Rules of Civil Procedure, as applied to these proceedings through Federal Rule of Bankruptcy Procedure 7056, provides that summary judgment shall be granted where the pleadings, depositions, answers to interrogatories, admissions or affidavits show that there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Burnette v. Dow Chemical Company, 849 F.2d 1269, 1273 (10th Cir.1988). "In determining whether a genuine question of material fact exists, this court is required to view the facts in [the] light most favorable to the nonmoving party...." In re Gilder, 225 B.R. 439, 448 (Bankr.E.D.Mo.1998) (citation omitted). Summary judgment is appropriate when a court can conclude that no reasonable juror could find for the nonmoving party on the basis of the evidence presented in the motion and response. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 251-52, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
The Trustee argues that the Bank and USA do not have legally enforceable liens against the Debtors' property because the Joint Venture could not grant a security interest in property owned by the individual debtors as a matter of law. Alternatively, the Trustee contends that if a security interest was properly granted, neither the Bank nor the USA have perfected liens because their financing statements were seriously misleading and were filed in the wrong location. If the liens were not perfected, the Trustee may avoid them pursuant to 11 U.S.C. § 544(a).
The Trustee argues that the Joint Venture could not encumber property owned by the Debtors individually. The Bank and USA assert that the Joint Venture may not be a separate legal entity but the Debtors could borrow money in the joint venture's name and grant a security interest in property they owned.
The Trustee maintains that the Joint Venture is not a legal entity, had no legal title to the property it attempted to encumber, and therefore could not have executed security agreements to the Bank and USA encumbering such property. The Trustee relies on Ark.Code Ann. §§ 4-9-203
According to the Arkansas Code, "a security agreement is effective according to its terms between the parties, against purchasers of the collateral, and against creditors." Ark.Code Ann. § 4-9-201 (2014). Further, "[a] security interest attaches to collateral when it becomes enforceable against the debtor with respect to the collateral, unless an agreement expressly postpones the time of attachment." Ark. Code Ann. § 4-9-203(a) (2014). In relevant part, Ark.Code Ann. § 4-9-203(b) provides that a security interest becomes enforceable against the debtor/borrower when value has been given, the debtor/borrower has rights in the collateral, and the debtor/borrower has authenticated a security agreement that provides a description of the collateral.
The question in this case is whether the Joint Venture had sufficient rights in the collateral to grant a valid security interest. The Court's research did not reveal a case directly on point; however, several Arkansas cases shed light on when a debtor/borrower who does not own property in its own name has "rights in collateral" within the meaning of Ark.Code Ann. § 4-9-203(b).
In Wawak v. Affiliated Food Stores, Inc., the Arkansas Supreme Court noted that the Arkansas Code does not define "rights in the collateral" and that the court had not yet construed the term, but quoted an Idado court, which stated: "[p]ossession of the collateral, accompanied by a contingent right of ownership, has been held sufficient for a security interest to attach.... An interest greater than naked possession has been deemed a sufficient right in the collateral to satisfy the requirements of [similar] statutes." Wawak v. Affiliated Food Stores, Inc., 306 Ark. 186, 188-90, 812 S.W.2d 679, 680-81 (1991) (quoting First Security Bank of Idaho, N.A. v. Woolf, 111 Idaho 680, 726 P.2d 792 (1986)) (internal citations omitted). In Wawak, the Wawaks operated a supermarket and made arrangements to sell it to another party, Davis. Id. at 680. Prior to completing the sale, Davis made immediate arrangements to purchase inventory for the supermarket from Affiliated Foods, with whom he executed a security agreement and financing statement covering the inventory of the supermarket. Id. Several months later, the transaction between the Wawaks and Davis was complete, and those parties entered into a security agreement and financing statement covering the inventory to secure the debt owed the Wawaks. Id. Later, Davis declared bankruptcy, and both the Wawaks and Affiliated Foods claimed priority in the inventory. Id. The court held Davis had more than "naked possession" when he executed a security agreement with Affiliated Foods as he was "effectively the buyer in possession of a going concern, fully empowered to convey title to the collateral to purchasers in the ordinary course of business," he was responsible for the profits and losses of the supermarket when he took possession and began operating it, and the final sale documents stated the sale became effective on a date prior to the date the sale was actually finalized. Id. Ultimately, the security interest of Affiliated Foods was upheld as senior to the Wawaks' interest even though Davis, as the grantor of the security
In Hubbard v. HomeBank of Arkansas, the Arkansas Court of Appeals was faced with a similar issue. In the year 2000, Simpkins made an oral contract for the sale of cattle and lease of a farm with Hubbard. 2011 Ark.App. 183, 382 S.W.3d 721, 726 (2011). Simpkins then paid a portion of the sales price and moved on the farm. Id. at 722. Later, in 2007, Simpkins borrowed money from HomeBank and granted the bank a security interest in the cattle he did not yet own, among other things. Id. In 2008, Hubbard sold the cattle and kept the proceeds, and Simpkins subsequently defaulted on the loan. Id. The lower court determined that Hubbard's unsecured interest was subordinate to that of HomeBank, and Hubbard appealed. Id. The Arkansas Court of Appeals affirmed, relying on Wawak, and held "[the facts in this case] demonstrate that Simpkins had more than mere possession of the collateral. He cared for and maintained the cattle for more than eight years pursuant to an oral sales contract, which established his `rights in the collateral' sufficient for HomeBank to enforce its perfected security interest." Id. at 726.
The Arkansas Supreme Court's interpretation of the words "interest in collateral" in Wawak, supra, was partially derived from a Supreme Court of Oklahoma case Morton Booth Co. v. Tiara Furniture, Inc., 1977 OK 45, 564 P.2d 210, 214 (1977). In that case, Tiara had a contract with Booth for the manufacture and sale of gun cabinets, where Booth supplied most of the materials for making the cabinets, and Tiara supplied the lumber and labor to construct the cabinets. Id. at 211. Tiara would complete the cabinets and mail them to Booth at a reduced price. Id. The trial court found that the legal effect of the shipment of goods to Tiara was a sale, but the appellate court reversed. Id. at 212. The Supreme Court affirmed the trial court, holding:
Morton Booth Co. v. Tiara Furniture, Inc., 1977 OK 45, 564 P.2d 210, 214 (1977) (citations omitted).
The Eighth Circuit of Appeals distinguished Morton from a case where a true bailment occurred in Rohweder v. Aberdeen Production Credit Ass'n, 765 F.2d 109, 112 (1985). A bailment is "[a] delivery of goods by one person (the bailor) to another (the bailee) who holds the property for a certain purpose under an express or implied-in-fact contract ... a bailment involves a change in possession but not title." Black's Law Dictionary, 8th Ed.,
The U.S. Bankruptcy Court in North Dakota considered both Morton and Rohweder when determining whether a debtor/borrower had sufficient rights in collateral owned by his brother. The court found that intent was a crucial element in determining whether the holder of another's property had sufficient rights and that the debtor/borrower in that case only had authority to sell and not buy collateral for his brother. In re Cook, 63 B.R. 789, 797-798 (1986). The bankruptcy court stated that Rohweder did not give clear guidelines as to what constitutes "sufficient rights," and it believed "a debtor possesses sufficient rights ... if the true owner agrees to the debtor's use of the property as security or if the true owner is estopped to deny creation of the security interest." Id. at 798 (citations omitted). Ultimately, the court did not find that the debtor/borrower had sufficient rights to encumber the property. Id.
In this case, several of the security agreements designate some form of "Dudley R. Webb, Joint Venture" as the debtor/borrower, and they are signed either by some combination of Dudley and Peggy Webb, or something similar to "Dudley Webb, Partner." See Dkt. # 63, Ex. E, H, K, N; Dkt. # 106, Ex. C; Dkt. # 118 p. 17. Previously, the Court found that the Joint Venture was not a partnership but was simply an agreement between the parties on how they would conduct business with each other. The Trustee argues that the Joint Venture should not have been the debtor/borrower listed on these agreements, did not have sufficient "rights in the collateral" to encumber the property, and thus, these agreements should be ineffective or invalid.
While much of the caselaw described above involved facts with a "contingent right of ownership," this is not that type of case. There is not a separate entity here pledging the assets of another; it is simply two individuals conducting their business as a joint venture and pledging their own assets to obtain funds to conduct that business. Because this case does not involve a contingent right of ownership as in the Arkansas cases discussed herein, the Court looks to Wawak's emphasis on the debtor/borrower having more than "naked possession" of the collateral as well as the other factors relied on by Arkansas courts such as: who had possession of the collateral, who cared for and maintained the collateral, and who was entitled to profit and loss relative to the collateral. There is little distinction between the Joint Venture and the individual Debtors in this case, but as the Debtors' farming operation was conducted in the name of the Joint Venture, the Court finds that the Joint Venture had more than naked possession of the equipment serving as collateral for the Bank's and USA's loans, and the Joint Venture utilized the equipment for the benefit of the farming
Furthermore, Dudley and Peggy Webb directly benefitted from the activities of the Joint Venture (which this Court found are one and the same). This is similar to the Morton case in that the Webbs provided equipment to the Joint Venture and reaped profit from the joint venture's activities. While Rohweder makes it clear that a bailment does not qualify as sufficient rights in collateral, In re Cook went further than Rohweder, and the court there found that if the true owner agrees to the property being used as security, the debtor/borrower would possess sufficient "rights in the collateral." In this case, one or both of the Debtors signed all of the security agreements and agreed to the Joint Venture encumbering the property. Additionally, this Court specifically found that the Joint Venture is not a separate legal entity but a contractual relationship between the Debtors. See also Newsom v. Rabo Agrifinance, Inc., 2013 Ark.App. 259, 427 S.W.3d 688, 691 (2013) (although not specifically addressing "rights in collateral", the Court held that a lender's lien was not invalid even though an entity with no express title to the crops was able to encumber the crops based on another borrower's interest in the crops).
In conclusion, the Court finds that the Joint Venture had more than naked possession of the encumbered property listed in the security agreements with the Bank and USA, that the Debtors consented to the Joint Venture encumbering the property, and that accordingly, the Joint Venture had sufficient "rights in the collateral" within the meaning of Ark.Code Ann. § 4-9-203 to grant valid security interests to the Bank and USA. Accordingly, the Bank and the USA have legally enforceable security interests and the next question is whether those security interests were perfected under state law. The Trustee raises two perfection issues: whether the name used was seriously misleading and whether the financing statements were filed in the proper location.
The Court has determined the security agreements executed by the Debtors on behalf of the Joint Venture are not invalid solely because they were executed by the Debtors on behalf of the Joint Venture. The Court must next determine whether the financing statements filed by the USA and the Bank which listed the debtor/borrower as the Joint Venture are effective to perfect the USA's and Bank's security interests. Both the Bank and the USA filed financing statements in either the individual Debtors' names or in the Joint Venture's name. The Trustee challenges those financing statements which list the Joint Venture as the debtor/borrower as being seriously misleading and therefore ineffective under Ark.Code Ann. § 4-9-506(a)-(b).
When executing a security agreement, a debtor authorizes the filing of a financing statement against him covering the collateral described in the agreement. See Ark. Code Ann. § 4-9-509(b). With respect to the sufficiency of a financing statement filed to perfect a secured debt, Ark.Code Ann. § 4-9-502(a) provides that:
A financing statement sufficiently provides the name of the debtor "if the debtor is a registered organization, only if the financing statement provides the name of the debtor indicated on the public record of the debtor's jurisdiction of organization which shows the debtor to have been organized", Ark.Code Ann. § 4-9-503(a)(1) (2001), or if the debtor is not a registered organization but has a name, the financing statement must provide the individual or organizational name of the debtor. Ark. Code Ann. § 4-9-503(a)(4)(A) (2001).
The UCC defines a "registered organization" as "an organization organized solely under the law of a single State or the United States and as to which the State or the United States must maintain a public record showing the organization to have been organized." Ark.Code Ann. § 4-9-102(a)(71) (2001). If the debtor does not have a name, then it must provide "the names of the partners, members, associates, or other persons comprising the debtor." See Ark.Code Ann. § 4-9-503(a)(4)(B). Further, "[a] financing statement that provides only the debtor's trade name does not sufficiently provide the name of the debtor." Ark.Code Ann. § 4-9-503(c).
Most sources treat the name of a joint venture as any other unregistered "organizational name" under § 4-9-503(a)(3)(A) such that the individual names of the persons comprising the debtor under § 4-9-503(a)(3)(B) are not required. See, e.g., Terry M. Anderson et al., Attachment and Perfection of Security Interests under Revised Article 9: A "Nuts and Bolts" Primer, 9 AM. BANKR. INST. L. REV. 179, 211 (2001) ("If the debtor is an organization but is not registered, the general rule of section 9-307(b) will locate the debtor for filing purposes at the debtor's place of business, or its chief executive office if it has more than one place of business. This rule will govern filings against general partnerships and joint ventures, for example."); Charles Cheatham, Changes in Filing Procedures under Revised Article 9, 25 OKLA. CITY U.L. REV. 235, 243 (2000) ("General partnerships and joint ventures, which are formed under common law and require no formal approval from a state, are `organizations.'"). But see William E. Carroll & Alvin C. Harrell, Article 9 Filings: Russian Roulette-UCC Style, 52
The filing and maintenance of a public record is not required to form a joint venture in Arkansas because "a joint venture is a relationship founded entirely upon contract....'" Webb, 742 F.3d at 828 (quoting Slaton v. Jones, 88 Ark.App. 140, 195 S.W.3d 392, 397 (2004)). Consequently, the UCC name rules governing unregistered organizations apply, and accordingly, the financing statement sufficiently provides the name of the debtor if it provides either the debtor's individual name or organizational name. See Ark.Code Ann. § 4-9-503(a)(4)(A). The Court concludes that a joint venture is considered an unregistered organization and the "organizational name" is sufficient under § 4-9-503(a)(3)(A) and the use of the name "Dudley R. Webb, Jr. Farms Joint Venture" as opposed to the individual names of the Debtors, Dudley and Peggy Webb, is not seriously misleading.
The Court next considers whether the financing statements covering crops and/or equipment (excluding the Vehicles which required perfection by notation of a lien on the title) were filed in the proper location. The USA's financing statements were all filed between 2000 and 2011 in Lonoke County where the Debtors engaged in farming activities. The Bank filed many financing statements with both the Secretary of State and Lonoke
Given the facts of this case, determining whether the creditors' financing statements were filed in the proper location is complex. The statutes have been amended during the course of the creditors' relationship with the Debtors; accordingly, various versions of the UCC control whether a financing statement was filed in the proper location at a given time. The appropriate filing location also depends on the type of creditor and the type of collateral. Under the current version of Ark. Code Ann. § 4-9-501, to perfect a security interest or agricultural lien, a financing statement must be filed with the Secretary
In this case, the 2011 financing statements were filed by the USDA-CCC in both Pulaski and Lonoke counties and covered all 2011 crops. Because the USDA-CCC had until midnight, December 31, 2012, to file its financing statements in the counties where the Debtors/Joint Venture farmed, and that is where the USA filed, its security interests in the 2011 crops were properly perfected. Additionally, the USA's financing statement filed in Lonoke County in 2000 and continued in 2004 and 2009 in the Debtors' individual names covered all crops and equipment. In the related security agreement, the Debtors, in their individual capacities, granted the USA a security interest in over one hundred pieces of equipment to secure "all existing and future indebtedness." USA Mt. Summ. Judg. Exh. N. (Dkt. # 63-14, p. 1). Accordingly, because the USA filed its financing statement covering the Debtors' equipment in Lonoke County where they lived and farmed, and that was the appropriate place for the USA to file both in 2000 and when the continuations were filed, the USA is properly perfected in the equipment sold by the Trustee (excluding the Vehicles discussed below).
The Bank's security interest in the rice is also properly perfected. Through January 1, 2010, the Bank's financing statements should have been filed in the appropriate county. In 2002, the Bank filed a financing statement covering farm products in Lonoke County. See Exhibit 1-D
The perfection of the Bank's security interests in the equipment is more difficult to determine but the Court concludes the Bank is also perfected as to the equipment (excluding the Vehicles discussed below). With one exception, all the Bank's security agreements secured all existing and future debts. The Bank filed numerous financing statements covering equipment between 2002 and 2012 with the Secretary of State's office; however, between 2001 and 2010, the Bank should have filed financing statements in the appropriate county, not the Secretary of State's office. The Bank's 2002 financing statement filed in Lonoke County did not cover equipment. In 2004, the Bank filed a financing statement covering equipment, including a specific list of items, in Lonoke County. In 2008, the Bank filed a financing statement in Lonoke County covering specific items of equipment.
Although the USA and Bank have perfected security interests in the equipment sold by the Trustee, the Trustee identified ten vehicles with no lien appearing on a certificate of title as required for perfection pursuant to Ark.Code Ann. § 27-14-801 et seq. The Vehicles sold for $34,875. The USA concedes its liens are not on these certificates of title, and that it is not perfected as to the Vehicles. The Bank concedes its liens are not on the certificates of title which the Trustee has produced but asserts that the Trustee should not be granted summary judgment as to the two trailers for which a title has not been produced. The Bank further asserts that there could be an issue of fact as to whether these are vehicles required to be registered as motor vehicles, and that without the certificates of title, the Trustee has failed to establish that there are no liens on the two trailers and that he is therefore entitled to avoid the liens on these Vehicles and keep the proceeds for the benefit of the Debtors' bankruptcy estate.
Liens on registered vehicles must be recorded on the vehicle's certificate of title in order for a creditor to have a perfected security interest in a vehicle. See Ark. Code Ann. § 27-14-807 ("The methods provided in this subchapter of giving constructive notice of a lien or encumbrance upon a registered vehicle shall be exclusive except as to liens dependent upon possession and manufactured homes or mobile homes for which the certificate of title has been cancelled under § 27-14-1603."); Ark.Code Ann. § 4-9-311(a) ("Except as otherwise provided in subsection (d), the filing of a financing statement is not necessary or effective to perfect a security interest in property subject to: ... (2) any other laws of this State which provide for central filing of security interests or which require indication on a certificate of title to property of such interest, including but not limited to §§ 27-14-801-27-14-807 ...".) See also In re Renaud, 308 B.R. 347 (8th Cir. BAP 2004).
Again, the USA and Bank both concede they do not have perfected security interests in those Vehicles with titles that do not list their liens. The Bank, however, asserts that the Trustee has not shown that the two trailers for which the title has not been produced are vehicles required to be registered under Arkansas law. The Trustee responds that there can be no dispute that the trailers are vehicles pursuant to Ark.Code Ann. § 27-14-207(8) which provides that "`Vehicle' means every device in, upon, or by which any person or property is, or may be, transported or drawn upon a highway, excepting devices moved by human power or used exclusively upon stationary rails or tracks." The Court finds there is no material issue of fact with respect to whether these two trailers are vehicles for which a lien must have been recorded on a title to perfect a security interest. The parties do not dispute that these were in fact trailers or that trailers can transport property on a highway. Further, the Trustee submitted reports showing that titles had been issued for these items. The Bank's argument that the Trustee failed to meet his burden of proof because he did not produce titles to the two trailers in question is without merit. The Bank is arguing that the Trustee
Because the USA and Bank have no recorded liens on certificates of title to the Vehicles sold by the Trustee, summary judgment is granted in favor of the Trustee; the Trustee may avoid the USA's and Bank's liens on the proceeds from the sale of the Vehicles in the amount of $34,875.
Pursuant to a settlement between the Trustee and Carlton Farms, the Trustee stands in Carlton Farms's shoes with respect to Carlton Farms's rights under a lease agreement with the Debtors. At issue is the Landlord's Share in the amount of $52,159.25 provided for under section 4 of the Lease Agreement under the heading "rent". The Trustee argues the Landlord's Share is rent entitled to priority under Ark.Code Ann. § 18-41-101 which provides for a super-priority landlord's lien "upon the crop grown upon the demised premises in any year for rent that shall accrue for the year." The Trustee also points out that he may avoid the fixing of the statutory lien pursuant to 11 U.S.C. § 545. Alternatively, in the event the Court finds the Landlord's Share is not rent, the Trustee argues that the Landlord's Share belonged to Carlton Farms as its share of the Debtor's crop, and is accordingly, not property of the Debtor's estate. The Bank and USA argue that there is no landlord's lien because the Landlord's Share is not rent under the definition of rent in the Lease Agreement, and all rent due Carlton Farms was already paid.
The terms of the lease are undisputed. The "Landlord's Share" is provided for under the section of the lease entitled "rent". The "Base Rent" is a dollar amount that is then offset against the "Landlord's Share" of the crop in determining the total compensation due the landowner for the Debtors' use of its property for farming. There is a sentence in that section which states: "`Additional Rent' and `Base rent' shall be collectively referred to as the `Rent'."
The Trustee seeks to surcharge the collateral securing the debts owed to the Bank and USA on a pro rata basis pursuant to 11 U.S.C. § 506(c) for his costs associated with the disposition of the collateral, including a broker fee, attorneys' fees related to such dispositions, and maximum compensation permitted by 11 U.S.C. § 326. Trustee Ans. and Counterclaim (Dkt. # 24), p. 17-18. The Trustee specifically seeks to surcharge the collateral for attorneys' fees and expenses, and Trustee's fees and expenses in relation to the necessity of bringing the temporary restraining order action against the Bank so that he could properly and reasonably dispose of the bankruptcy estate's property, as well as for the actual collection and disposition of the rice and the equipment, including all expenses incurred in the sale of same. Trustee Ans. and Counterclaim at ¶¶ 139-141.
The parties all agree on the applicable law which was thoroughly set forth in the USA's Brief in Support of its Motion for Summary Judgment. Section 506(c), states that:
The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim, including the payment of all ad valorem property taxes with respect to the property.
11 U.S.C. § 506(c). "It is well-settled that, in order to recover under § 506(c), the trustee must show three elements: (1) that the expenditure was necessary; (2) that the expenditure was reasonable; and (3) that the secured creditor received a benefit from the expenditure." Bankruptcy Law Manual § 6:50 (5th ed.); see also Brookfield Production Credit Ass'n v. Borron, 738 F.2d 951, 952 (8th Cir.1984) (quoting and adopting the district court's opinion, 36 B.R. 445, 448 (E.D.Mo.1983)). The Trustee has the burden of proving a relevant showing for the basis of a surcharge. See Halverson v. Estate of Cameron (In re Mathiason), 16 F.3d 234, 240 (8th Cir. 1994); see also In re Debbie Reynolds Hotel & Casino, Inc., 255 F.3d 1061, 1068 (9th Cir.2001) ("This is not an easy standard to meet. It is the party seeking the surcharge that has the burden of showing a `concrete' and `quantifiable' benefit. The § 506 recovery is limited to the amount of the benefit actually proven.").
"Where a secured creditor consents to the surcharge of collateral, the trustee need not show necessity, reasonableness, or benefit to the secured party in order to recover the expense." Bankruptcy Law Manual § 6:50 (5th ed.). A creditor's mere cooperation or agreement to allow the trustee to sell collateral is not sufficient to warrant a finding of consent. See id.; see also In re Flagstaff Foodservice Corp., 739 F.2d 73, 77 (2d Cir.1984); Hartford Fire Ins. Co. v. Norwest Bank Minnesota, N.A. (In re Lockwood Corp.), 223 B.R. 170, 175 n. 6 (8th Cir.BAP1998) ("Inferences of consent must not be hastily drawn.... `Mere cooperation with the [Chapter 11] debtor does not make the secured creditor liable for all expenses of administration.'") (quoting Central Bank of Mont. v. Cascade Hydraulics & Util. Serv., Inc. (In re Cascade Hydraulics & Util. Serv., Inc.), 815 F.2d 546 (9th Cir. 1987)). However, where a creditor causes expenses to be incurred, consent may be
The parties' arguments focus on benefit to the secured creditors and their consent. The USA argues that it did not consent to the surcharge of its claims just because it did not object to the Trustee selling its collateral. The Bank also argues it did not consent to the expenses or a surcharge, but the Trustee argues the Bank caused the expenses and therefore consented by implication. The Court finds that the Trustee's ability to surcharge collateral is fact-driven, and the Court has insufficient facts on which to rule on the surcharge issue at this time.
On January 26, 2012, ELF issued a check for $51,422 made out to Dudley Webb; the check stub indicates it is a "rebate." Trustee Mt. Summ. Judg. Exh. 7. On February 13, 2012, three days after the Debtors filed bankruptcy, the Bank wrote a letter to ELF claiming the rebate check was collateral on a loan it made to Debtor Dudley Webb and requested the ELF Check be issued to it jointly with the Debtor. ELF complied, writing by hand the words "and Bank of England" in the "pay to the order of" line on the ELF Check behind the Debtor's name, and deposited the funds with the Bank on February 13, 2012. The Bank is still holding the ELF Funds in a segregated account. These facts were testified to by a bank representative on April 11, 2012, and the
The Trustee moves for summary judgment arguing that he is entitled to the ELF Funds as a matter of law. His argument is twofold: one, the check was transferred to the Bank post-petition and is therefore avoidable as a post-petition transfer under 11 U.S.C. § 549 regardless of any security interest the Bank may hold in the ELF Funds, and two, the Bank does not have a security interest in the ELF check as it is a rebate arising from the Debtors' ownership of 100 shares in ELF and the Bank does not have a security interest in the Debtors' ELF stock. The Bank also moves for summary judgment with respect to the ELF Funds arguing that it is entitled to these funds because it holds a security interest in all of the Debtor's fertilizer and accounts and other rights to payment.
With respect to the Trustee's first argument that the transfer of the ELF Check is avoidable pursuant to § 549(a)
Although the transfer of the ELF Check is avoidable, whether the Bank has a security interest in the ELF Funds is still an issue raised in this adversary proceeding that must be decided to determine the amount of the Bank's secured and unsecured claims.
The Bank moves for summary judgment on the Trustee's Counterclaims, including the validity and perfection of its security interests in the rice and equipment/vehicles, the Carlton Farms Landlord's Share issue, and the issue of surcharge, all of which have already been decided by this Order. The Bank also seeks summary judgment on the following causes of action brought by the Trustee: (1) avoidance of pre-petition payments by the Debtors to the Bank in December 2011 (the
With respect to the December Transfers, which includes at least $1,261,320.61 in known payments, the Bank argues that there is no material issue of fact because the payments by Debtors did not enable the Bank to receive more than the Bank would have received in a Chapter 7 liquidation as required to establish an avoidable preference. See 11 U.S.C. § 547(b)(5). Specifically, the Bank argues the payments received by the Bank in December of 2011 were all proper payments against secured debts the Debtors owed the Bank, and, thus, each payment by the Debtors resulted in a reduction of the Bank's claim against such collateral. In other words, the Bank argues that there was no preferential transfer because the Debtors received equity in such collateral with each payment and these partial releases of the Bank's claim and increases in the Debtors' equity constitute the contemporaneous exchange of new value, which provides an absolute defense to the Trustee's claim pursuant to 11 U.S.C.
The requirements of 11 U.S.C. § 547(b)(5)(A)-(C), which are collectively referred to as the "hypothetical Chapter 7 test," provides that an avoidable preference exists only if the transferred property enables the creditor to receive more than it otherwise would under a Chapter 7 liquidation of the debtor's estate. This Court explained the hypothetical Chapter 7 test in In re Frankum, 453 B.R. 352, 369 (Bankr.E.D.Ark.2011):
This analysis is often simplified by examining whether the creditor was paid on an unsecured, a secured claim, or a partially unsecured claim.... As explained [in] Auto-Train [Corp., 49 B.R. 605, 609-10 (Bankr.D.D.C.1985)]:
In re Frankum, 453 B.R. at 368 (some internal citations omitted). "Likewise, with respect to a partially secured debt, a payment to the creditor does not result in the release of an equivalent amount of collateral, and enables the creditor to receive more than he or she would have received in a Chapter 7 liquidation, and so may result in preference." Id. (citing CJS BANKRUPTCY § 680).
The Court has concluded that the Bank has perfected security interests in both the Warehouse Rice and Farm-stored Rice and in the Debtors' equipment with the exception of the Vehicles for which no lien appears on the title. The Bank still has at most a partially unsecured claim under 11 U.S.C. § 506(a). The value of the collateral securing the Bank's loan is approximately $1.8 million (including rice and equipment with deductions for the Vehicles or Carlton Farms's Landlord Share which the Court has already decided are not subject to the claims of the USA or Bank); the Bank concedes that its lien is junior to the
The Debtors deposited a check in the amount of $89,178.87 (the "Settlement Check") with the Bank on January 13, 2012, and those funds were immediately applied by the Bank towards a pre-existing debt of the Debtors to the Bank. The Bank maintains that the Settlement Check was payment for the loss or damage to the Debtors' farm crops pledged to the Bank and therefore constitutes proceeds of the Bank's collateral. The Trustee contends that the Settlement Check represents the Debtors' portion of a settlement in a class-action commercial tort claim involving genetically altered rice, and that the UCC-1 financing statement filed by the Bank does not provide with particularity that the commercial tort to which the Settlement Check relates is security for the Bank Loans. The Court finds that there is a factual dispute as to the nature of this check and whether the Bank has a security interest in it, and therefore, denies the Bank's Motion for Summary Judgment as to the Settlement Check. Additionally, even if the check does constitute proceeds of the Bank's collateral, the payment to the Bank may constitute an avoidable preference since the Bank is only partially secured, as discussed above.
The Trustee's counterclaim to disallow the Bank's claim is made under § 502(d) and (j) based, in part, on the Bank's receipt and retention of avoidable transfers. The Trustee also bases its claim to disallow the Bank's claim on the Bank's behavior in attempting to sell the Debtors' rice crop being stored at the Federal Drier post-petition, while the Bank had a Motion for Relief from Stay pending concerning the same property. Based on this same behavior, the Trustee seeks to subordinate the Bank's claim for purposes of distribution under principles of equitable subordination pursuant to 11 U.S.C. § 510(c). The Trustee also seeks damages resulting from the Bank's asserted control over the rice which the Trustee contends constituted a willful violation of the automatic stay.
The Bank argues that there is no basis for the Trustee's claims to disallow the Bank's claim, for equitable subordination, and for violation of the automatic stay because the payments made to it were proper and are not avoidable, and because the Bank took no affirmative actions to take possession of property of the estate, and in fact did not take possession of property of the estate, or otherwise interfere with the Trustee doing so. The Bank maintains it took steps to preserve the rice by ensuring that the electric bills were paid to keep the bin-stored grain from spoiling and by maintaining insurance on the Debtors' property.
The Trustee argues that the Bank's actions were an attempt to exercise control over the disposition and sale of the Warehouse Rice and the Farm-Stored Rice, which forced the Trustee to file and seek a temporary restraining order, preliminary injunction, and an emergency full-day
These issues cannot be decided on summary judgment. The Trustee's efforts to disallow the claim depend, in part, on the outcome of his avoidance actions which cannot be decided on summary judgment, as explained above. Disallowance of the Bank's claim based on its behavior, as well as equitable subordination and damages for violation of the automatic stay, must also be reserved for trial to ascertain the Bank's intent and the willfulness of its actions.
For the reasons stated herein, each of the three motions for summary judgment currently pending in this case are granted in part and denied in part, as follows:
(1) Summary judgment is granted to the USA and the Bank with respect to the validity and perfection of the security interests held by the Bank and the USA, with the exception of the Bank's and USA's security interests in the Vehicles.
(2) Summary judgment is granted to the Trustee with respect to the perfection of the Bank's and USA's security interests in the Vehicles, and those liens are avoided pursuant to 11 U.S.C. § 544(a).
(3) Summary judgment is granted to the Trustee with respect to Carlton Farms's Landlord Share, and the Trustee is entitled to reserve those funds for the benefit of the estate as the successor-in-interest to Carlton Farms.
(4) Summary judgment is denied with respect to the issue of surcharge as issues of fact remain for determination after trial.
(5) Summary judgment is granted in favor of the Trustee with respect to the ELF Check. The transfer of the ELF Proceeds to the Bank is avoided pursuant to § 549(a) as an unauthorized post-petition transfer. However, there is an issue of fact regarding the nature of the ELF Check which must be resolved before the Court can determine whether the Bank has a security interest in the ELF Funds.
(6) The Bank is denied summary judgment on the Trustee's counterclaims because these counterclaims are factual in nature and cannot be resolved on summary judgment.
A trial in this case is currently set for November 4, 2014, to resolve all pending claims in this adversary proceeding.
This section allows the Trustee to avoid prepetition liens that were not perfected under state law before the Debtors' bankruptcy petition was filed. See Shuster v. Doane, 784 F.2d 883, 884 (8th Cir.1986).
Ark.Code Ann. § 4-9-102 (both current and prior versions use this definition).
If the debtor-organization has more than one place of business, then the debtor is located at its "chief executive office." Ark.Code Ann. § 4-9-307(b)(3) (2011). "Chief executive office" is also not defined by the Code, but Official Comment 2 states that this "means the place from which the debtor manages the main part of its business operations or other affairs. This is the place where persons dealing with the debtor would normally look for credit information, and is the appropriate place for filing." Curtis, 363 at 579 (looking to comment definition). Applying this definition, Courts have looked to the address listed on the debtor's balance sheets, tax returns, loan documents, security agreements, as well as where the individuals of organization reside. See id. at 580.
In this case, the county in which creditors filed did not matter because the Bank is properly perfected with the Secretary of State based on its financing statements filed under the name of the Joint Venture, and the USA is properly perfected because it filed in both Pulaski and Lonoke Counties in the name of the Joint Venture.
Part 8 of the 2010 amendments contain a host of transitional provisions for pre-amendment security interests. The general rule is that a security interest that is properly perfected before the 2009 amendments go into effect remains perfected. See Ark.Code Ann. § 4-9-803(a) (2013). The 2010 amendments did however alter the rules for filing a continuation statement, which is required to remain perfected under the UCC. Notably, if the financing statement originally filed against debtor relates to collateral that is not "a farm-stored commodity financed by a loan through the Commodity Credit Corporation of the United States Department of Agriculture," then filing a continuation statement with the county circuit clerk is "ineffective." Ark.Code Ann. § 4-9-510(d)(1). Instead, the secured party is to file the continuation statement with the Secretary of State to remain perfected. Ark.Code Ann. § 4-9-510(d)(3).
Given the circumstances of this case, specifically the Bank's behavior, the Court will give careful consideration to the Trustee's claims for surcharge as well as for claim disallowance, equitable subordination and violation of the automatic stay discussed later in this Opinion.
Subsections (b) and (c) are not applicable to this case.
