In re Black & White Cattle Co.
| Decision Date | 15 March 1983 |
| Docket Number | Bankruptcy No. LA-82-06631-CA,BAP No. CC-82-1390-KHAb,Adv. No. LA-82-3861-CA. |
| Citation | 30 BR 508 |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
| Parties | In re BLACK & WHITE CATTLE CO., a California limited partnership, Debtor. BLACK & WHITE CATTLE CO., a California limited partnership, Debtor and Debtor in Possession, Plaintiff/Counter-Defendant/Appellee, v. SHAMROCK FARMS COMPANY, an Arizona corporation, and McLod Farms Company, an Arizona corporation, Defendants/Counter - Claimants/Appellants, and Modesto Production Credit Association, Defendant. |
Gerald K. Smith, Lewis & Roca, Phoenix, Ariz., for defendants/counter-claimants, appellants.
Jeffrey H. Davidson (Argued), Jeffrey C. Krause, Stutman, Treister & Glatt, Los Angeles, Cal., for plaintiff/counter-defendant/appellee.
Before KATZ, HUGHES and ABRAHAMS, Bankruptcy Judges.
Shamrock Farms Company and McLod Farms Company (hereinafter collectively referred to as Shamrock), defendants, have appealed from a partial summary judgment in favor of Black and White Cattle Co., the debtor and debtor-in-possession. The judgment was certified as final pursuant to Fed.R.Civ.P. Rule 54(b) and entered on August 11, 1982. The judgment held as follows:
(1) Black and White, as the debtor-in-possession, by virtue of 11 U.S.C. §§ 544(a) and 1107, may avoid Shamrock's claim of ownership to cattle in the possession of the debtor on April 12, 1982 — the date of the commencement of this case — as a result of Shamrock's failure to record the feeding agreement as required by Cal.Civ.Code § 2980.5.
(2) Neither Shamrock nor McLod are entitled to a lien against the cattle in the debtor's possession on April 23, 1982.
(3) Shamrock is compelled to pay the purchase price of $2,400,000 plus 12% per annum (accruing from May 4, 1982) pursuant to the stipulated partial judgment entered by the court.
Having determined there to be no triable issues of material fact, the bankruptcy court's decision to grant partial summary judgment in favor of Black and White is hereby AFFIRMED, as required by Fed.R. Civ.P. Rule 56.
Black and White Cattle Co. was formed as a California general partnership by Steven C. Voorhies and David H. Brown in 1979. In July of that year Black and White initiated operation of a feed lot on leased property in Santa Maria, California.
Shamrock, a major Arizona dairy concern, signed a cattle feeding agreement (hereinafter "agreement") with Black and White on November 21, 1980. According to the terms of the agreement, Shamrock was to deliver at least 2,000 head of cattle to the feed lot to be fed and cared for until ready for return to the appellant's dairy herd for production. From November 21, 1980, until April 23, 1982 — the date the debtor filed its petition — Shamrock had delivered approximately 3,500 heifers and 57 bulls into the possession of the debtor. The acquisition cost of $1.4 million and subsequent feeding costs of $1.5 million were financed through loans extended by a creditor not a party to this appeal. It is agreed that the fair market value of the cattle in the possession of the debtor on the date of the commencement of this case is $2,400,000.
During the latter portion of 1981 Black and White found itself in need of additional capital. The fathers of the general partners each invested $500,000 and were added as limited partners. A certificate of limited partnership was executed in late August and recorded on September 21, 1981.
The restructured Black and White Cattle Co. filed a voluntary petition for reorganization under Chapter 11 of the Code on April 23, 1982. At the same time Black and White, as debtor-in-possession, initiated an adversary proceeding by filing a complaint, seeking to avoid Shamrock's reservation of ownership in the cattle on the feed lot for the reason that it failed to record the feeding agreement as required by Cal.Civ.Code § 2980.5.1 The complaint also alleged Shamrock's refusal to pay for feeding costs and sought authority to immediately sell the cattle free and clear of Shamrock's claim.
On May 8, 1982, the court approved a stipulated partial judgment which authorized Black and White to sell the cattle to Shamrock for $2,400,000, plus 12% per annum (to accrue from May 4, 1982 to date of payment). The purchase price was to be secured by a lien in the cattle and a bond. The funds were to be placed in an interest-bearing escrow account pending the ultimate disposition of title to the cattle.
Black and White subsequently filed a motion for partial summary judgment on June 7, 1982, seeking judgment on its claim to set aside Shamrock's claim to the cattle under Cal.Civ.Code § 2980.5, 11 U.S.C. §§ 544(a) and 1107. The motion also sought dismissal of Shamrock's counterclaim for the imposition of a lien against the cattle to compensate for the lesser of feed costs or the appreciation of the cattle in the event Black and White was successful in avoiding Shamrock's claim of ownership.
Following the submission of supporting documents and oral argument, the court entered its findings of fact, conclusions of law and partial summary judgment in favor of Black and White certified as final as provided by Fed.R.Civ.P. Rule 54(b).
Shamrock has asserted the following arguments on appeal:
(1) California Civil Code § 2980.5 defines and limits the avoidance powers granted to Black and White as the debtor-in-possession under 11 U.S.C. §§ 544(a) and 1107 to the rights of a creditor obtaining a lien in good faith and without knowledge of Shamrock's prior reservation of ownership in the cattle. Since the cattle bore Shamrock's brand, no good-faith creditor is even hypothetically possible here because branding gives constructive notice of ownership under California law.
(2) The debtor was not a party to the unrecorded feeding agreement. No creditors of Black and White Ltd. may claim the benefits of Cal.Civ.Code § 2980.5. Thus, there is no occasion for a hypothetical creditor of the debtor to avoid Shamrock's claim of ownership to the cattle.
(3) Alternatively, should Shamrock's interest be set aside, the appellant seeks an equitable lien against the cattle as provided by 11 U.S.C. § 550 to compensate for the lesser of feeding expenses or the appreciation in value of the herd from the date of delivery to the feed lot.
(4) If Shamrock's claim is avoided and vested in the debtor-in-possession, the appellant contends that it should not be compelled to pay the purchase price as required by the stipulated partial judgment entered below until a contribution is first sought from the general partners to cover any deficiencies in the estate.
(5) The appellant contends that Cal.Civ. Code § 2980.5 is unconstitutional because it irrationally imposes a burden to record exclusively on owners of dairy cattle subject to a feeding agreement, and not on owners of other cattle.
(6) The bankruptcy court is without jurisdiction to hear this matter.
The disposition of title in the cattle and the major issue in this appeal rest upon the application of Cal.Civ.Code § 2980.5. We, accordingly, address this matter at the outset.
By enacting § 2980.5 the California Legislature created a system to protect purchasers and creditors dealing with feed lot operators who are in possession of cattle belonging to another. The principle which deems the separation of ownership and possession to be presumptively fraudulent is deeply engrained in our jurisprudence. See e.g., Twyne's Case, 3 Co.Rep. 80b (1601). See gen. 37 C.J.S. Fraudulent Conveyances §§ 1-7. Accordingly, § 2980.5 requires the owner of dairy cattle which are delivered into the possession of a feed lot operator to record the feeding agreement so that others will be on notice of the owner's claim to the cattle. Calva Products v. Security Pacific Nat'l Bank, 111 Cal.App.3d 409; 168 Cal. Rptr. 582 (1980).
(1) Should the owner of the cattle fail to record the feeding agreement within 10 days of its execution, all terms reserving title in the bailed cattle after delivery to the feed lot are void as against any purchaser, creditor or encumbrancer who purchases, acquires a security interest, or seeks to enforce a lien upon the cattle in good faith and without knowledge prior to the recording of the agreement. In addition, the statute also protects a gap creditor who in good faith and without actual knowledge extends credit after delivery of the bailed cattle pursuant to an unrecorded feeding agreement despite the fact that the creditor obtains a lien after the agreement is recorded. As to the above-mentioned protected classes title in the cattle is "conclusively presumed" to have been transferred to the feed lot operator.2
Shamrock concedes the application of Cal. Civ.Code § 2980.5 to the parties' feeding agreement. Nor is there an issue concerning the authority of a debtor-in-possession to avoid the ownership interests reserved in an unrecorded feeding agreement under § 2980.5, as a general principle of law, by virtue of 11 U.S.C. §§ 544(a) and 1107. Rather, the appellant contends that the presence of its registered brand and other identification on the cattle negates the possibility for any creditor, even one hypothetically created under 11 U.S.C. § 544(a), to obtain a lien in good faith and without actual knowledge of Shamrock's claim of ownership.
The appellant supports this reasoning upon two premises. First it is argued that § 2980.5 can benefit only those who could possibly rely on the misleading appearances created by the separation of ownership from possession; e.g., feed suppliers and other trade creditors directly aware of the cattle in Black and White's feed lot. Given the prevailing trade practice of brand inspection, any creditor refusing to acknowledge the presence of Shamrock's brand would not be extending credit in good faith as required by the...
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