AG New Mexico v. Borges (In re Borges)

• Court: U.S. Bankruptcy Appellate Panel, Tenth Circuit
• Writing for the Court: SOMERS
• Citation: AG N.M. v. Borges (In re Borges), 510 B.R. 306 (B.A.P. 10th Cir. 2014)
• Decision Date: 08 April 2014
• Docket Number: 11–01105.,NM–13–006,Adversary Nos. 10–01170,Bankruptcy No. 10–12800.,BAP Nos. NM–13–005,NM–13–013.,11–01012,NM–13–012,NM–13–007,NM–13–011
• Parties: In re Joe Bettencourt BORGES, also known as Joe B. Borges, doing business as J & M Dairy, and Maria Rocha Borges, also known as Maria R. Borges, doing business as J & M Dairy, Debtors. AG New Mexico, FCS, ACA, AG New Mexico, FCS, FLCA, and AG New Mexico, FCS, PCA, Plaintiffs–Appellants–Cross–Appellees, v. Joe Bettencourt Borges and Maria Rocha Borges, Defendants–Appellees–Cross–Appellants, and David Borges, a married man, dealing in his sole and separate estate, Frank Borges, a single man, Atkins Engineering Associates, Inc., a New Mexico Corporation, Cliff Waide, doing business as Waide Irrigation Service and Supply, United States of America, Internal Revenue Service, Pecos Valley Pump, Inc., a New Mexico Corporation, Jordan Dairy Service, LLC, a New Mexico Corporation, CWBC, Inc., a New Mexico Corporation, and all Unknown Claimants of Interest, in the Premises Adverse to The Plaintiffs, Defendants–Appellees–Cross–Appellees, In re Joe Bettencourt Borges, also known as Joe B. Borges, doing business as J & M Dairy, and Maria Rocha Borges, also known as Maria R. Borges, doing business as J & M Dairy, Debtors. Joe Bettencourt Borges and Maria Rocha Borges, Plaintiffs–Appellees–Cross–Appellants, v. AG New Mexico, FCS, PCA, AG New Mexico, FCS, FLCA, and AG New Mexico, FCS, ACA, Defendants–Appellees–Cross–Appellees. In re Joe Bettencourt Borges, also known as Joe B. Borges, doing business as J & M Dairy, and Maria Rocha Borges, also known as Maria R. Borges, doing business as J & M Dairy, Debtors. Joe Bettencourt Borges and Maria Rocha Borges, Plaintiffs–Counter–Defendants–Appellees–Cross–Appellants, v. AG New Mexico, FCS, ACA, AG New Mexico, FCS, PCA, and AG New Mexico, FCS, FLCA, Defendants–Counter–Claimants–Appellants–Cross–Appellees, and National Milk Producers Federation, doing business as Cooperatives Working Together, Defendant.

510 B.R. 306

In re Joe Bettencourt BORGES, also known as Joe B. Borges, doing business as J & M Dairy, and Maria Rocha Borges, also known as Maria R. Borges, doing business as J & M Dairy, Debtors.

AG New Mexico, FCS, ACA, AG New Mexico, FCS, FLCA, and AG New Mexico, FCS, PCA, Plaintiffs–Appellants–Cross–Appellees,

v.Joe Bettencourt Borges and Maria Rocha Borges, Defendants–Appellees–Cross–Appellants,andDavid Borges, a married man, dealing in his sole and separate estate, Frank Borges, a single man, Atkins Engineering Associates, Inc., a New Mexico Corporation, Cliff Waide, doing business as Waide Irrigation Service and Supply, United States of America, Internal Revenue Service, Pecos Valley Pump, Inc., a New Mexico Corporation, Jordan Dairy Service, LLC, a New Mexico Corporation, CWBC, Inc., a New Mexico Corporation, and all Unknown Claimants of Interest, in the Premises Adverse to The Plaintiffs, Defendants–Appellees–Cross–Appellees,In re Joe Bettencourt Borges, also known as Joe B. Borges, doing business as J & M Dairy, and Maria Rocha Borges, also known as Maria R. Borges, doing business as J & M Dairy, Debtors.

Joe Bettencourt Borges and Maria Rocha Borges, Plaintiffs–Appellees–Cross–Appellants,

v.AG New Mexico, FCS, PCA, AG New Mexico, FCS, FLCA, and AG New Mexico, FCS, ACA, Defendants–Appellees–Cross–Appellees.

In re Joe Bettencourt Borges, also known as Joe B. Borges, doing business as J & M Dairy, and Maria Rocha Borges, also known as Maria R. Borges, doing business as J & M Dairy, Debtors.

Joe Bettencourt Borges and Maria Rocha Borges, Plaintiffs–Counter–Defendants–Appellees–Cross–Appellants,

v.AG New Mexico, FCS, ACA, AG New Mexico, FCS, PCA, and AG New Mexico, FCS, FLCA, Defendants–Counter–Claimants–Appellants–Cross–Appellees,andNational Milk Producers Federation, doing business as Cooperatives Working Together, Defendant.

BAP Nos. NM–13–005, NM–13–011, NM–13–006, NM–13–012, NM–13–007, NM–13–013.

Bankruptcy No. 10–12800.

Adversary Nos. 10–01170, 11–01012, 11–01105.

United States Bankruptcy Appellate Panel of the Tenth Circuit.

Filed April 8, 2014.

Richard F. Rowley II of Rowley Law Firm, LLC, Clovis, NM, for Appellants–Cross–Appellees.

Karla K. Poe (William J. Arland III and Aletheia V.P. Allen with her on the brief), of Arland & Associates, LLC, Albuquerque, NM, for Appellees–Cross–Appellants.

Before MICHAEL, NUGENT, and SOMERS, Bankruptcy Judges.

SOMERS, Bankruptcy Judge.

This group of consolidated appeals stems from a removed foreclosure action of a dairy in New Mexico. Embedded in them are three main issues: 1) whether a lien allegedly granted by a corrected mortgage that was not signed by the debtors can be avoided under 11 U.S.C. § 544; ¹ 2) whether a lien on water rights was properly perfected under New Mexico law; and 3) whether the lender acted reasonably in enforcing the cross-collateral provision and insisting it receive all the proceeds from the proposed sale. After thoroughly reviewing the extensive record and considering the evidence as a whole, we are not persuaded by either parties' arguments on appeal and AFFIRM the bankruptcy court's decision in its entirety.

I. Factual Background²

The debtors, Maria Borges and Joe Borges (now deceased), were dairy farmersdoing business as J & M Dairy (collectively the “Borgeses”) in New Mexico. They operated the dairy with the assistance of two of their sons, Frank and David Borges.³ They owned at least 557.33 acres of farm property located in Eddy County, New Mexico, which was used in the dairy operation. AG New Mexico, FCS, ACA (“ACA”), AG New Mexico, FCS, PCA (“PCA”), and AG New Mexico, FCS, FLCA (“FLCA”) (collectively “AGNM”) are federally chartered agricultural lenders. AGNM began making loans to the Borgeses in 2006. At issue are three promissory notes: 1) the Cow Note,⁴ 2) the Equipment Note,⁵ and 3) the Facility Note.⁶ All three notes were cross-collateralized and contained cross-default provisions. The loans were secured by cattle, including any replacements, as well as by all milk and milk proceeds, all crops including hay and other feed, the farm equipment and any accounts receivable.⁷ They were also secured by a Line of Credit Mortgage dated June 6, 2006 (the “2006 Mortgage”) describing the property subject to the mortgage as 337.33 acres of Eddy County farm property, including “all riparian and water rights associated with the Property, however established.” ⁸ The 2006 Mortgage was acknowledged and properly recorded in the Eddy County, New Mexico records on June 6, 2006.

AGNM also submitted three Change of Ownership of Water Right forms to the Office of the State Engineer for filing in accord with § 72–1–2.1 of the New Mexico Statutes Annotated.⁹ The forms recited that “Ag New Mexico, FCS, ACA” was mortgagee and were acknowledged by the Borgeses, but lacked any attachments. The Change of Ownership of Water Right forms were subsequently recorded in the Eddy County Clerk's Office.

Advances on the loans were paid down by proceeds from milk production. The Borgeses sold their milk to the Dairy Farmers of America (“DFA”), who made out its checks payable jointly to the Borgeses and AGNM, twice a month. AGNM applied these “milk checks” first to the monthly mortgage payment on the Facility Note, then expenses and interests on the Cow Note, and finally to pay down the principal on the Cow Note. The milk checks usually averaged $200,000 to $400,000. These checks were the primary cash flow of the entire dairy operation and the life blood of the arrangement with AGNM.

During the first part of the decade, milk prices steadily rose, as well as demand for dairy protein. But by 2008, J & M Dairy was losing money due to the decrease in demand for milk and rise in feed costs. The other eleven dairies AGNM funded were also losing money.

In May 2008, the Borgeses sought to renew the Cow Note, which was set to mature on June 1, 2008, and requested a commitment increase from $5,575,000 to $6,500,000.¹⁰ Funds had previously been spent to pay aged accounts payable and current operating expenses, remodel the milking barn, and purchase approximately 290 replacement cattle. The Borgeses wanted the commitment increased to pay off the majority of accounts payable and cover any unplanned shortfalls. On May 28, 2008, AGNM approved a six-month renewal of the Cow Note with a $6.1 million limit and a maturity date of December 1, 2008.¹¹

By October 2008, due to continued operating losses (approximately $200,000 as of September 2008), the decline in milk prices, rise in feed costs, and the bleak outlook for dairy farmers, the Borgeses decided to get out of the dairy business and actively pursued brokers to sell their herd and facility. Their plan was to: 1) sell the herd by the end of the year and pay off the Cow Note, 2) take the excess proceeds from the sale of the herd to pay off their outstanding dairy bills, and continue making the mortgage payments on the Facility Note and payments due on a real estate contract for the purchase of an unrelated farm, 3) refinance the Facility Note with a lower interest rate and add two, unrelated farms to the payment, and 4) sell the dairy in 2009 and pay off the remaining two notes.¹² AGNM's plan was to assist the Borgeses accomplish their goal of paying off all their debts to it by “structur[ing] [the plan] for their benefit and ours.” ¹³ At this point, everyone assumed that the proceeds from the sale of the dairy herd would be enough to pay off the Cow Note and cover the 2009 annual payment on the Facility Note.

While attempts to sell the herd were made, the Borgeses continued to request funds from AGNM to operate their dairy. On October 30, 2008, they requested a $250,000 optional advance.¹⁴ AGNM's supervising company, Farm Credit Bank of Texas (“FCBT”), approved this request and required the Borgeses' loans be downgraded to a substandard “11A” rating due to “continued operating losses and the decision to discontinue operations, liquidate the herd and sell the facility.” ¹⁵ The loans were downgraded on or about November 3, 2008. AGNM continued to advance funds to the Borgeses to maintain the collateral. ¹⁶

On November 26, 2008, the Borgeses requested a thirty-day extension on the Cow Loan (from December 1, 2008 to January 1, 2009), anticipating that they would close on the sale of the herd by December 15, 2008.¹⁷ That deal, however, failed for reasons not relevant to these appeals.

On December 9, 2008, the Borgeses requested another $250,000 optional advance, which AGNM approved.¹⁸

On December 22, 2008, the Borgeses advised AGNM that the dairy herd buyer had lowered the offer to a degree that it would barely pay off the Cow Note, they would prefer not to accept that offer (but would if they had to), and asked if AGNM would continue to stay with them and let them restructure the Facility Note to annual payments with a prime rate, possibly with interest only payments for two years, and refinance two farms being purchased under contract. ¹⁹ AGNM did not want to continue financing the Borgeses given the economy and the fact it could not find a loan participant to limit its exposure.²⁰ On December 24, 2008, Peggy Moncrief, the loan officer assigned to the Borgeses, recommended AGNM issue a 45–day distress letter to indicate that AGNM was losing patience with them.²¹ At this point, Moncrief believed Maria had not told her the truth about the offer amount and when it expired.²² She told Maria that AGNM wanted the Cow Note paid off and would not consider restructure of the Facility Note until the Cow Note was paid off. Later that day, AGNM sent the Borgeses a distress letter: 1) declaring the Cow Note loan was or may be distressed, 2) advising they had 45 days from the date of the letter to obtain restructuring, and 3) warning that AGNM might elect to begin foreclosure action.²³

On December 30, 2008, the Borgeses requested a third $250,000 optional advance, as well as an extension to February 1, 2009.²⁴ Two potential...