Angell v. Meherrin Agric. & Chem. Co. (In re Tanglewood Farms Inc. of Elizabeth City)
| Decision Date | 01 May 2013 |
| Docket Number | CASE NO. 10-06719-8-JRL,ADVERSARY PROCEEDING NO. 12-00186-8-JRL |
| Court | U.S. Bankruptcy Court — Eastern District of North Carolina |
| Parties | In re: TANGLEWOOD FARMS, INC. OF ELIZABETH CITY, DEBTOR. JAMES B. ANGELL, CHAPTER 7 TRUSTEE, PLAINTIFF, v. MEHERRIN AGRICULTURAL & CHEMICAL COMPANY AND CNH CAPITAL AMERICA LLC, DEFENDANTS. |
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J. Rich Leonard
This matter came before the court on the motion to dismiss this adversary proceeding, filed by Meherrin Agricultural & Chemical Company ("defendant"), which James B. Angell ("trustee") has opposed. A hearing on the matter was held on March 1, 2013 in Raleigh, North Carolina. Atthe conclusion of the hearing, the court took the matter under advisement.
On August 20, 2010, Tanglewood Farms, Inc. of Elizabeth City ("debtor") filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code, which was subsequently converted to one under chapter 7 on July 12, 2011. The debtor, a granary operation in Pasquotank County, North Carolina, was operated by its president and sole shareholder, James Howard Winslow ("Mr. Winslow"). As its president, Mr. Winslow oversaw the granary, facilitating the exchange of corn, wheat, and soybeans (collectively "grain") between the debtor, his personal farming operation, Winslow Farms, and third-party grain purchasers and suppliers.2 Mr. Winslow sold the majority of grain produced by Winslow Farms to the debtor for fair market value. Mr. Winslow and his wife, Billie Reid Winslow (collectively "Winslows") filed a joint voluntary petition for relief under chapter 11 of the Bankruptcy Code on August 23, 2010.
The defendant is one of several creditors that filed proofs of claim in both the debtor's case and the Winslows' individual case. Three promissory notes were executed in favor of the defendant by Mr. Winslow, individually and as the president of the debtor, and Mrs. Winslow, which providedcrop financing for the 2008, 2009 and 2010 crop years. The first promissory note, executed on February 2, 2007, had a maximum principal balance of $575,000.00, with interest accruing at 12% per annum ("first promissory note"). The second was executed on February 18, 2009, in the original principal amount of $1,920,144.15, with interest accruing at the prime rate plus 4.75% ("second promissory note"). The first and second promissory notes were subsequently modified by an agreement dated October 30, 2009 ("modification agreement"). It amended both promissory notes to reflect the change in the corporate identity of the debtor from "Tanglewood Farms, Inc." to "Tanglewood Farms, Inc. of Elizabeth City," increased the maximum principal balance under the first promissory note to $5,000,000.00, and extended the deadline upon which the balance and accrued interest were due under the second promissory note to March 31, 2010. On April 29, 2010, the parties executed a third promissory note in the original principal amount of $3,500,000.00, with interest accruing at the prime rate plus 4.75% ("third promissory note") (collectively "promissory notes").3
To secure repayment and performance of the obligations under the promissory notes, multiple security agreements, financing statements and deeds of trust (collectively "security instruments") were executed in favor of the defendant by Mr. Winslow, both individually and as the president of the debtor, and Mrs. Winslow. The promissory notes were secured by two deeds of trust executed on October 30, 2009 and May 5, 2010, as well as security agreements, executed onFebruary 2, 2007 and March 1, 2010, conveying a security interest to the defendant in the following property and all proceeds thereof:
The parties executed a third security agreement in favor of the defendant on April 29, 2010, which secured "all past, present and future liabilities and obligations" of the debtor and the Winslows. The defendant perfected its security interests under all of the security agreements by filing financing statements with the North Carolina Secretary of State on March 1, 20104 and May 6, 2010. The financing statement filed on May 6, 2010, perfected the defendant's security interest in, inter alia, the farm products, inventory and accounts of the debtor and the Winslows.
On October 30, 2009, a deed of trust was executed in favor of the defendant and encumbered approximately fifteen parcels of real property located in Pasquotank County, North Carolina and one parcel of real property located in Perquimans County, North Carolina, which were collectively referred to as the "MetLife tracts." Included in the fifteen parcels in Pasquotank County encumbered by the first deed of trust was the debtor's granary facility. The second deed of trust, dated April 29, 2010 and executed by the debtor and the Winslows on May 5, 2010, granted the defendant a security interest in twenty-two parcels of real property located in Pasquotank County,North Carolina and commonly referred to by the parties as the "AgCarolina tracts."5
The funds provided under these promissory notes were, according to the trustee, used almost exclusively by Mr. Winslow to support and fund the operations of Winslow Farms. One of the defendant's employees, Ken Miller ("Miller"), was substantially involved in the operation of Winslow Farms. Miller remained onsite daily between January and May, managing Winslow Farms' liming and fertilizer operations.
Between September 30, 2008 and August 10, 2010, the defendant received payments on account of the obligations under the promissory notes totaling approximately $5,590,946.02, $3,455,000.00 ofwhich was paid by CNH Capital America LLC ("CNH Capital"). Of the remaining balance, $2,135,946.02, only $48,496.38 was paid by the debtor and its customers by third-party checks listing the defendant as a co-payee.6 Between 2009 and 2010, the outstanding balance under the promissory notes increased approximately $3,500,000.00, from $5,000,000.00 in 2009 to $8,500,000.00 in 2010. This substantial increase in the outstanding balance was the result of hardships suffered by Winslow Farms due to unfavorable weather conditions in 2008 and 2009.
On August 26, 2010, the debtor filed a motion for private sale and motion seeking an order to sell certain parcels of real and personal property free and clear of liens. After learning of several potential purchasers for the debtor's granary facility, a motion to approve bidding procedures was filed on September 1, 2010, which was resolved by a consent order entered on September 9, 2010, that established the method by which the purchaser would be determined. A public sale of thedebtor's granary facility and related property was held on September 15, 2010 and the high bidder, Perdue AgriBusiness Incorporated ("Perdue"), offered to purchase the granary facility for $4,200,000.00. On September 16, 2010, the debtor and the Winslows filed a joint motion for distribution of the sales proceeds and this court approved Purdue's proposed purchase price as the highest bid by order entered on September 17, 2010. The order approving Perdue as the highest bidder established a forty-eight hour deadline for any party-in-interest to object to the motion for distribution. No objections were filed prior to the deadline.
On September 28, 2010, this court entered an order allowing the motion for distribution of the proceeds from the sale of the granary facility, $4,200,000.00, as follows (hereinafter "distribution order"):
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