FEDERMAN, Bankruptcy Judge.
Debtor Keeley and Grabanski Land Partnership appeals from the Order of the Bankruptcy Court
This appeal relates to one of two separate, but related, bankruptcy cases. The first case was a voluntary Chapter 11 case filed by Thomas and Mari Grabanski on July 22, 2010. The second case—the one particularly involved here—was an involuntary Chapter 11 case filed by John and Dawn Keeley on December 7, 2010, against the Keeley and Grabanski Land Partnership, in which the Keeleys and Grabanskis were partners. This appeal involves the appointment of a trustee in the partnership's involuntary case. However, since the decision to appoint the trustee was based in part on Thomas Grabanski's conduct in his individual case, we discuss the background of both cases here.
Thomas and Mari Grabanski are farmers living in North Dakota who own and operate several farms and other agricultural businesses. John and Dawn Keeley
On January 1, 2008, the Keeleys and Grabanskis formed G & K Farms, a partnership which would rent farmland owned by KGLP. KGLP was to use the rents paid by G & K Farms to make the payments on the notes secured by the land. In order to conduct its farming operation in 2008, G & K Farms obtained financing from Choice Financial, which required G & K Farms to provide a blanket lien on its property, including crops. In addition, in connection with an extension of this note, Choice Financial later obtained second mortgages on the Lenth and Unruh Parcels as security for G & K Farms' debt. G & K Farms also obtained credit from United Agri Products in February 2008, to pay for fertilizer for its farming operations.
The Keeleys assert that although the farms should have been profitable, Thomas Grabanski informed them in 2008 that G & K Farms had sustained a $2.5 million operating loss, despite the fact that the crops had been insured. The Keeleys assert that the Grabanskis have not accounted for this reported loss. As a result of the losses, KGLP sold its properties, except the Lenth and Unruh Parcels, in order to partially pay down G & K Farms' operating line at Choice Financial.
The Keeleys also assert that, in August 2008, Thomas Grabanski obtained $7 million in secured financing from PHI Services, Inc., on behalf of G & K Farms and other entities he was involved in. He allegedly signed the PHI agreement on behalf of G & K Farms as a co-borrower, despite a provision in the operating agreement that he could not borrow more than $1,000 without Keeley's permission. The Keeleys assert that Grabanski falsely told them that he signed this note personally, rather than for G & K Farms.
In February 2009, G & K Farms borrowed an additional $1.2 million from Crop Production Services, Inc. for the 2009 growing season. However, after planting its crop in 2009, G & K Farms discontinued operations, and the Keeleys say they have not been told where the proceeds of the crop sales or insurance proceeds from that season went.
In about May 2009, the Keeleys assert, Thomas Grabanski told them that he would pay all of G & K Farms' debt if the Keeleys would assign their partnership interest in both G & K Farms and KGLP to the Grabanskis. On September 24, 2009, the Keeleys and Grabanskis executed an Agreement to Assign Partnership Interests (the "Transfer Agreement"), wherein the Keeleys agreed to assign their partnership interests effective April 30, 2009. In the Transfer Agreement, the Grabanskis agreed to pay all of both partnerships' debts, liabilities, and expenses. The Keeleys assert that they had been led to believe that the G & K Farms' crop proceeds and insurance payments would be used to pay the Choice Financial operating line of credit. As it turned out, very little of those proceeds went to pay down the Choice line.
The Keeleys assert that, in 2010, the Grabanskis abandoned G & K Farms and created a new entity, Texas Family Farms, LLC, to rent and farm the Lenth and Unruh Parcels. Despite farming the land, Texas Family Farms allegedly did not pay rent to KGLP, which in turn failed to pay
On July 7, 2010, KGLP received a letter from the U.S. Department of Agriculture Natural Resources Conservation Services ("NRCS") which indicated that the NRCS was prepared to offer $2,563,000 for the purchase of a conservation easement on 1,972 acres of the Lenth Parcel as part of a Wetlands Reserve Program.
Five days after KGLP received the offer letter from the NRCS, the Lenths sent a notice to KGLP on July 12, 2010, stating that it was in default under its promissory note and, if not made current by August 31, 2010, the Lenths would commence foreclosure proceedings as to the Lenth Parcel.
Meanwhile, after the Grabanskis and their entities defaulted on their loans from another lender, AgCountry Farm Credit Services, AgCountry obtained state court orders directing the Grabanskis to surrender AgCountry's collateral, which included the Grabanskis' and the related entities' crops and equipment. The Grabanskis allegedly disobeyed those orders, so the state court scheduled a contempt hearing for July 22, 2010, at 11:00 a.m. The Grabanskis filed a voluntary Chapter 11 bankruptcy petition in their own names at 10:59 a.m. that day,
As to the partnership which is the debtor here, KGLP, the Keeleys claim to be creditors because of their joint liability with the Grabanskis on various partnership debts. As stated, under the Transfer Agreement, the Grabanskis had agreed to satisfy all partnership debts. Nevertheless, several creditors of those partnerships sued the Keeleys to recover debts which had allegedly not been paid by the partnership. One of those creditors is PHI Financial, Inc., which asserts a debt of over $7.2 million on the loan Thomas Grabanski allegedly took on behalf of G & K Farms without Keeley's authorization. In that lawsuit, the Keeleys filed cross claims against the Grabanskis for, inter alia, fraud. Crop Production Services has also sued the Keeleys for nearly $800,000. Further, the Keeleys allege that despite cash flow projections which showed that Texas Family Farms would be able to raise $2.3 million from crop sales to pay off some of the debt owed to Choice, the Grabanskis only applied $100,000 to that debt, with the rest of the proceeds allegedly used for the benefit of Thomas Grabanski and Texas Family Farms. Choice has begun liquidating equipment assets on the Unruh Parcel, and has asserted that the Keeleys are liable for nearly $2 million in unpaid obligations from G & K Farms.
In October 2010, the Grabanskis' attorney informed the Keeleys of the pending foreclosure on the Lenth Parcel. Thomas Grabanski allegedly took no action on behalf of KGLP in response to the notice of intent to foreclose or notice of sale scheduled for December 7, 2010. So, in order to stay that foreclosure sale, the Keeleys, as creditors, initiated this case by filing an
As stated, the Grabanskis filed a voluntary Chapter 11 Petition on July 22, 2010. After the Grabanskis requested three extensions for filing schedules and statements in their individual case, alleging they needed more time to respond to motions and harvest crops, the deadline was ultimately extended to September 1, 2010. On that day, the Grabanskis filed some of the schedules, but did not file Schedules C and D or a Statement of Financial Affairs until a week later. According to the Keeleys, the schedules contained significant inaccuracies, and were amended on October 20. At that time, the Grabanskis disclosed an additional eleven personal vehicles, $831,818.56 in secured debt, and $17 million in unsecured debt. Parties have alleged that the schedules are still not accurate.
Meanwhile, at least five creditors, including PHI, Crop Production Services, and AgCountry, have filed adversary actions against the Grabanskis for, inter alia, providing false financial statements in connection with their loans. The Keeleys have also filed an adversary proceeding alleging that Thomas Grabanski fraudulently transferred partnership assets, crop proceeds, and crop insurance for his own benefit and the benefit of his other farming operations. The Keeleys also assert that Grabanski misrepresented the true financial picture of the two partnerships in order to deprive the Keeleys of their partnership interests.
On August 2, 2010, AgCountry moved to appoint a trustee in the individual case, pointing to fraud in connection with its collateral, as well as dishonesty, incompetence, and gross mismanagement on the part of Thomas Grabanski.
In response to the formal requests for extension, the Bankruptcy Court continued the Rule 2004 exams of Thomas Grabanski and Ms. Tibert for 14-day periods, but refused to permit further continuances without evidence from health care professionals that they were unable to competently
On November 22, 2010, the Grabanskis moved to extend the exclusivity period for filing a plan and soliciting its acceptance. The Grabanskis alleged, among other things, that they were working on a settlement with AgCountry that would free up money for the unsecured creditors and that they intended to file a plan and disclosure statement "on or before January 7, 2011." AgCountry objected, stating the Grabanskis' request was not in good faith because they had made no attempt to negotiate or file a plan; had failed to produce fundamental facts and information; had refused to testify in good faith at the Rule 2004 examination; had not shown that they were paying bills when they come due; and had failed to file required monthly accounting reports. The Keeleys also objected on the ground that the Grabanskis were withholding documents and information and had asked the Keeleys to preferentially transfer partnership property to Thomas Grabanski's father, Merlin Grabanski. On December 21, 2011, the Bankruptcy Court granted the Grabanskis' motion and extended the exclusivity period for filing a plan and disclosure statement until January 7, and for soliciting acceptances until March 6, 2011.
The January 7 deadline passed without a plan or disclosure statement being filed. At a hearing on January 12, the Bankruptcy Court ordered the Grabanskis to file a plan and disclosure statement no later than January 26 as a condition for continuing AgCountry's stay relief motion. On January 25, 2001, rather than filing a plan and disclosure statement, the Grabanskis filed a "Plan of Debtors-in-Possession Regarding Motion of AgCountry Farm Credit Services PCA for Relief from Automatic Stay." That "plan" stated only why the court should leave the automatic stay in place—it contained none of the elements of a plan required under 11 U.S.C. § 1123, nor was it accompanied by a disclosure statement as required under 11 U.S.C. § 1125.
On March 6, 2011, the Grabanskis filed a "Motion to Extend Period for Debtors to Solicit Acceptance of Plan," claiming to have made significant progress toward producing a feasible plan of reorganization by agreeing to sell property. They also argued that "favorable resolutions with secured creditors are in reality a condition precedent to producing a confirmable, feasible plan."
The United States Trustee, the Keeleys, and other creditors
By Order entered March 30, 2011, the Bankruptcy Court denied the motion to extend the exclusivity period and ordered that, unless a plan and disclosure statement were filed within fifteen days, the case would be dismissed. The Grabanskis appealed that Order. The Bankruptcy Court stayed the Order in that case pending the outcome of the appeal.
As stated above, on December 6, 2010, the Keeleys filed an involuntary petition against KGLP to stop a foreclosure on the Lenth Parcel. When no Answer was filed, the Bankruptcy Court entered an Order for Relief on January 7, 2011. On January 10, 2011, KGLP moved to dismiss the case, asserting, inter alia, that the Keeleys were no longer partners in KGLP, and that any claim they may have against the Debtor was subject to bona fide dispute as to liability or amount. The Keeleys opposed the dismissal. On July 8, 2011, the Bankruptcy Court denied the motion to dismiss, on the ground that it was untimely filed.
On February 3, 2011, the Keeleys moved for the appointment of an operating trustee in the KGLP case. They alleged the Grabanskis fraudulently transferred assets out of the partnership and concealed liabilities in order to have the partnership incur additional debt for the Grabanskis' personal benefit. They further pointed out that G & K Farms had had significant operating losses under Thomas Grabanski's direction, despite guaranteed income from crop insurance, and that the Grabanskis had not demonstrated why the farms reported operating losses. They also alleged that several of the creditors in the Grabanskis' individual case had accused Thomas Grabanski of fraud and, indeed, several creditors filed adversary proceedings in that case. KGLP opposed the appointment of a trustee and, following a hearing, the Court entered an Order on February 25, 2011, denying the motion, but expressly authorizing the Keeleys to renew the motion at a later time.
On March 22, 2011, the Keeleys filed a second motion to appoint a trustee. This time, in addition to the allegations of fraud and misconduct cited before, the Keeleys asserted that circumstances surrounding an offer to purchase KGLP's land necessitated the appointment of a trustee.
Specifically, they alleged that Mr. Kalin Flournoy, who Thomas Grabanski had hired in May 2009 to sell KGLP's farms, had received an offer in March 2011, from U.S. Farming Realty Trust, L.P., to purchase the Lenth and Unruh Parcels for $3.5 million and $4.5 million, respectively. The offers included a provision that KGLP, or a lessee designated by KGLP, could option to lease the land from the buyer after the sale. The offers even allowed KGLP to retain possession of the 2011 winter wheat crop currently growing on the Unruh Parcel and provided the partnership the right to enter upon the land for harvest. On March 10, 2011, U.S. Farming allegedly revised its offer to include $250,000 in earnest money for each parcel. According to the Keeleys, U.S. Farming was a reputable company with the wherewithal to accomplish the transaction. However, on or about March 18,
The United States Trustee joined in the motion for appointment of a trustee because the Grabanskis were unduly delaying the administration of KGLP's estate.
In addition, creditors Choice Financial Group and Earl and Lenita Unruh joined the motion. The Lenths opposed the motion, essentially because there was a pending motion to dismiss the case, and they preferred to proceed with their foreclosure. The Lenths also stated that, although the Keeleys were saying there was an offer on the table, they would not disclose details and that this made their position suspect.
At the hearing held on March 30, 2011, the Bankruptcy Court considered both the Grabanskis' request for extension of the exclusivity period in their own case, and the motion to appoint a trustee in the KGLP case. As state above, the Court denied the Grabanskis' request to extend the exclusive solicitation period because they had no plan and the exclusivity period for filing a plan had lapsed on January 7.
The Bankruptcy Court then found cause to appoint a trustee in the KGLP case. The court stated, "I think it is time now to move forward with this case and either be successful in the chapter 11 reorganization or simply dismiss the case." The court concluded that the Grabanskis' history of unreasonable delay warranted the appointment. KGLP appeals.
We review the Bankruptcy Court's factual findings for clear error and its conclusions of law de novo.
Section 1104(a) of the Bankruptcy Code provides:
The appointment of a trustee in a Chapter 11 case is an extraordinary remedy.
The parties moving for the appointment of a trustee bear the burden of proof.
That being said, we conclude that the Bankruptcy Court did not clearly err in ordering the appointment of a trustee, even if the higher clear and convincing standard of proof applied.
The bankruptcy court has discretionary authority to determine whether cause exists for the appointment of a trustee under § 1104(a)(1).
KGLP asserts that the sole basis for the Keeleys' request for appointment of a trustee is KGLP's refusal to accept purchase offers on its land, from which, KGLP asserts, the Keeleys seek a pecuniary benefit. In other words, KGLP asserts that the Keeleys' goal here is to cash out equity from KGLP's Texas land, even though the Keeleys no longer have a partnership interest in KGLP.
To the contrary, however, the Keeleys, as well as the U.S. Trustee and other creditors, asserted several grounds for appointment. The record shows that many parties are asserting that the Grabanskis have engaged in fraud in connection with KGLP and their other entities. And, the parties allege that the Grabanskis, or entities they own or control, have been farming KGLP's land without paying rent, and that the Grabanskis are now leasing the land for less than market value,
KGLP is significantly delinquent on its obligations to the sellers of both the
Yet, despite the fact that KGLP cannot service its debts, and has in fact been marketing its property for sale, the parties allege that Thomas Grabanski, as KGLP's managing member, refused to accept what Mr. Flournoy, KGLP's own marketing agent, testified is a reasonable offer on the land.
Moreover, even putting the allegations of fraud aside, the Bankruptcy Court's and U.S. Trustee's concern that neither KGLP, nor Thomas Grabanski, has any motivation to keep this case moving is well-founded. As shown above, Thomas Grabanski has proven himself unable or unwilling to move his own individual case along in a meaningful manner. And, given the numerous lawsuits and adversary proceedings pending against the Grabanskis and their other entities, and his own contention that he is suffering from depression and stress, it was reasonable to conclude that he is unable to devote sufficient attention to KGLP. Further, the significant unexplained operating losses of G & K Farms, which was supposed to support the loan payments on KGLP's land obligations, strongly suggests mismanagement on the part of Thomas Grabanski. The appointment of a trustee allows KGLP to be operated without the distractions and other motivations plaguing Thomas Grabanski.
In light of all of the allegations and evidence in this case, the Bankruptcy Court was not clearly erroneous in finding that cause existed to appoint a trustee under § 1104(a)(1).
The Bankruptcy Court may also appoint an operating trustee under § 1104(a)(2) if that appointment "is in the interests of creditors, and equity security holders, and other interests of the estate."
For the same reasons cited above, we also conclude that interests of creditors and the estate warrant the appointment of a trustee under § 1104(a)(2). The trustworthiness of KGLP's principals has been seriously questioned; KGLP's past performance casts serious doubt on its prospects of reorganization if left under the direction of Thomas Grabanski; and the evidence suggests that the business community and creditors have lost all confidence in Thomas Grabanski's ability to manage KGLP's affairs. Indeed, the only creditor who spoke against the appointment of a trustee, the Lenths, did so because they preferred dismissal and foreclosure. KGLP's own real estate agent essentially testified that he has lost confidence in Thomas Grabanski. As the Bankruptcy Court did, we recognize that the appointment of a trustee involves costs, but the evidence suggests that the benefits from the appointment outweigh the costs in this case. Consequently, the Court did not clearly err in finding that the appointment of a trustee is in the interests of creditors and the estate under § 1104(a)(2).
We recognize that many of the allegations against the Grabanskis, particularly regarding their misconduct, had not yet been proven when the Bankruptcy Court ordered the appointment of the trustee. However, the allegations are sufficiently serious and widespread to warrant consideration by the Bankruptcy Court in appointing a trustee. Further, even if the Grabanskis were to prevail in the adversaries and other actions against them, the Grabanskis will have to focus their attention on those matters. Given the fact that they have been consistently unable to timely comply with their duties in their individual case due to having to attend to ongoing business operations and illness, and with the added pressures of the adversary proceedings, the Bankruptcy Court did not err in finding that the Grabanskis will not be able to effectively perform their duties as principals in the KGLP case.
Finally, KGLP also asserts that it is inappropriate to appoint a trustee for the purpose of liquidating a debtor's assets, pointing out that liquidation is omitted from the list of duties under § 1106. However, § 1106(a)(5) permits a trustee to file a plan, and § 1123(b)(4) states that a plan may "provide for the sale of all or substantially all of the property of the estate." And, again, Thomas Grabanski, on behalf of KGLP, already has listed its properties for sale. Consequently, we reject this argument as a basis for reversal.
Since the record supports a finding of cause under § 1104(a)(1), and that the appointment of a trustee is in the interests of creditors and the estate under § 1104(a)(2), the appointment of the trustee was mandatory. The Bankruptcy Court's Order is, therefore, AFFIRMED.
