FCX, Inc., In re

• Decision Date: 11 August 1988
• Docket Number: No. 560220040,No. 88-1525,D,560220040,88-1525
• Citation: 853 F.2d 1149
• Parties: , Bankr. L. Rep. P 72,396 In re FCX, INC., Employer's Identificationebtor. UNIVERSAL COOPERATIVES, INC., Creditor-Appellant, v. FCX, INC., Debtor-Appellee, The National Council of Farmer Cooperatives ("National Council"), Amicus Curiae.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 1149

853 F.2d 1149

18 Bankr.Ct.Dec. 342, Bankr. L. Rep. P 72,396

In re FCX, INC., Employer's Identification No. 560220040, Debtor UNIVERSAL COOPERATIVES, INC., Creditor-Appellant, v. FCX, INC., Debtor-Appellee The National Council of Farmer Cooperatives ("National Council"), Amicus Curiae.

No. 88-1525.

United States Court of Appeals, Fourth Circuit.

Argued June 22, 1988.

Decided Aug. 11, 1988.

James R. Crassweller (Eugene M. Warlich, Doherty, Rumble & Butler, P.A., on brief), Gregory Byrd Crampton (Merriman, Nicholls & Crampton, P.A., on brief), for creditor-appellant.

William Henry McCullough, Douglas Quinn Wickham (Adams, McCullough & Beard, on brief), for debtor-appellee.

Leslie S. Mead, Associate Gen. Counsel Nat. Council of Farmer Cooperatives, on brief for amicus curiae.

Before PHILLIPS and ERVIN, Circuit Judges, and BUTZNER, Senior Circuit Judge.

JAMES DICKSON PHILLIPS, Circuit Judge:

Universal Cooperatives, Inc. (Universal) here challenges an order of the bankruptcy court, affirmed by the district court on direct appeal, allowing the modification of a confirmed Chapter 11 plan under which FCX, Inc., a debtor of Universal's, was operating. That order authorized FCX to release collateral securing its indebtedness to Universal in satisfaction of Universal's claim. Universal raises three issues: that (1) FCX was not, as a matter of substantive bankruptcy law, entitled to the relief granted by the bankruptcy court, (2) the bankruptcy court did not follow the procedures required for plan modification under the Bankruptcy Code, and (3) even were FCX entitled to release the collateral in satisfaction of Universal's claim, the bankruptcy court should not have valued the collateral at face value. We affirm.

I

Universal is a non-profit agricultural cooperative association organized under Minnesota law. Minn.Stat.Ann. Sec. 308.05 et seq. (West Supp.1988). Universal's members, called patrons, are also cooperatives. FCX, which was organized under the North Carolina Cooperative Marketing Act, has been a patron of Universal since Universal's formation in 1980 through the merger of two other cooperatives. In addition to marketing the products of its own members, FCX purchased farm supplies from Universal, as well as other sources, for resale to those members.

In order to maintain its tax favored status under federal and state law, Universal is required to distribute its annual net income to its members. Universal's by-laws authorize its board of directors to make these distributions, commonly called "patronage refunds" or "patronage dividends," in the form of cash, qualified or non-qualified written notices of allocation, or any combination thereof. A written notice of allocation includes:

[A]ny capital stock, revolving fund certificate, retain certificate, certificate of indebtedness, letter of advice or other written notice which discloses to the recipient the stated dollar amount allocated to him by the organization and the portion thereof, if any, which constitutes the patronage refund or dividend.

Joint Appendix at 67 (quoting from Universal's by-laws).

Universal historically has made patronage refunds in a combination of cash and certificates of participation ("patronage certificates"). The total amount of the patronage refund to a given member is based on that member's proportionate share of Universal's total business for the year. Pursuant to the tax scheme, Universal takes a deduction against income for the total amount of the patronage distribution, while each member reports as income, and pays taxes on, its individual share of the total. Patronage certificates are valued at face value for both purposes. ¹

Universal's by-laws authorize the redemption of the patronage certificates "on an equitable basis in whole or in part at such time, in such manner and in such order as shall be determined by the Board of Directors." Joint Appendix at 68. Its Articles of Incorporation also grant Universal a first lien on a member's patronage certificates as security for any indebtedness of the member to Universal and, in accordance with this security scheme, vest Universal's board with the discretionary right to set off a member's indebtedness against a member's patronage certificates. The Articles, however, reject any right of a member to have such a setoff made.

Since its formation, Universal has periodically redeemed patronage certificates on a first-issued, first-redeemed basis--meaning that the oldest outstanding certificates are redeemed first. To date under this method, only certificates from the pre-merger period, essentially pre-1980, have been redeemed. FCX holds unredeemed certificates in the face value amount of $1,116,129, some of which date back to the pre-merger period.

On September 17, 1985, FCX filed for protection under Chapter 11 of the Bankruptcy Code. On November 1, 1985, Universal filed a proof of secured claim in the amount of $658,887.14 ² reflecting the account receivable due from FCX to Universal for products purchased by FCX prior to the date of bankruptcy. This indebtedness was secured by FCX's unredeemed patronage certificates.

FCX filed its Disclosure Statement and proposed Plan of Reorganization on June 6, 1986. Neither document listed Universal as an impaired creditor, nor specifically described the proposed disposition of FCX's patronage certificates in Universal. The Plan did indicate that FCX intended to liquidate its investments in the cooperatives of which it was a member and hold the proceeds in a liquidating trust, primarily for the benefit of unsecured creditors and subordinated debenture holders. ³ The Plan also indicated FCX's intent to satisfy "priority claims" from the liquidation of non-operating assets, which included tangible personal property, real estate, inventory items, and FCX's interests in other cooperatives. FCX's Plan was confirmed in August 1986.

Some 8 months later, FCX filed a notice of its intent to abandon a portion of its Universal patronage certificates in full satisfaction of Universal's secured claim. Universal objected to the abandonment primarily on the grounds that Universal's by-laws vested its board with sole and absolute discretion to redeem, or set off a member's indebtedness against, outstanding patronage certificates. The parties thereafter filed a stipulation of the facts underlying the issue with the bankruptcy court.

The bankruptcy court then held a hearing on the abandonment issue on June 1, 1987. A question was apparently raised at the hearing as to the appropriateness of abandonment in the circumstances and the court, by letter dated June 5, 1987, informed the parties that it indeed considered "abandonment" an inappropriate remedy. Instead, the court proposed to "decide the issue of whether FCX, through plan modification, may surrender a portion of the Universal patronage certificates to Universal in satisfaction of Universal's secured claim." Counsel for FCX later notified the court that FCX and Universal agreed to request that the court decide the stated issue. ⁴

By memorandum opinion and order dated June 23, 1987, the bankruptcy court authorized FCX to turn over to Universal that amount of the patronage certificates, valued at face value, as was necessary to satisfy fully Universal's claim. The bankruptcy court's order was upheld by the district court which found that (1) the modification granted was supported by substantive bankruptcy law, (2) the certificates were properly valued at face value, and (3) while the modification procedure did not strictly comply with the bankruptcy code's requirements, "there was substantial compliance and a waiver by the parties of strict compliance...."

This appeal followed.

II

Universal first contends that the Bankruptcy Code provides no authority for the bankruptcy court essentially to order Universal's board to exercise its discretion to set off FCX's indebtedness to Universal against FCX's patronage certificates. Resolution of this issue requires a two-step analysis involving both state and federal law.

The filing of a debtor's petition in bankruptcy creates an estate comprised of the property listed in 11 U.S.C. Sec. 541(a), including "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. Sec. 541(a)(1). Despite its broad definition of those interests of the debtor that become property of the estate, see In re Ryan, 15 B.R. 514, 517 (Bkrtcy.D.Md.1981) (noting that Sec. 541(a) is "broad and all-embracing"); see also McLean v. Central States, Southeast and Southwest Areas Pension Fund, 762 F.2d 1204 (4th Cir.1985) (same as to Sec. 541(a)(1)), neither Sec. 541(a), nor any other Bankruptcy Code provision, answers the threshold questions of whether a debtor has an interest in a particular item of property and, if so, what the nature of that interest is. In re Farmers Markets, Inc., 792 F.2d 1400, 1402 (9th Cir.1986); 4 Collier on Bankruptcy p 541.02, at 541-11 (15th ed. 1985) (The Bankruptcy Code does not "provide[ ] any rules for determining whether the debtor has an interest in property...."). The estate under Sec. 541(a) succeeds only to those interests that the debtor had in property prior to commencement of the bankruptcy case. Creasy v. Coleman Furniture Corp., 763 F.2d 656, 662 (4th Cir.1985); see also Moody v. Amoco Oil Co., 734 F.2d 1200, 1213 (7th Cir.1984) ("[W]hatever rights a debtor has in property at the commencement of the case continue in bankruptcy--no more, no less."). The existence and nature of a debtor's, and hence the estate's, interest in property must be determined by resort to nonbankruptcy law, In re Polycorp Assoc., Inc., 47 B.R. 671, 673 (Bkrtcy.N.D.Cal.1985); see generally 4 Collier on Bankruptcy p 541.01, at 541-10, 10-13 (The "existence and nature of the debtor's interest in property ... are determined by nonbankruptcy law," usually state law.)--either federal law, see, e.g., In re Massengill...