First Sec. Bank & Trust Co. v. Herman Vander Vegt & Hendrina Vander Vegt, & Boerderij De Veldhoek, LLC

• Decision Date: 27 May 2014
• Docket Number: No. C13–3063–MWB.,C13–3063–MWB.
• Citation: 511 B.R. 567
• Parties: FIRST SECURITY BANK AND TRUST COMPANY, Appellant, v. Herman Vander VEGT and Hendrina Vander Vegt, and Boerderij De Veldhoek, LLC, Appellees.
• Court: U.S. District Court — Northern District of Iowa

511 B.R. 567

FIRST SECURITY BANK AND TRUST COMPANY, Appellant,
v.
Herman Vander VEGT and Hendrina Vander Vegt, and Boerderij De Veldhoek, LLC, Appellees.

No. C13–3063–MWB.

United States District Court,
N.D. Iowa,
Central Division.

Signed May 27, 2014.

[511 B.R. 571]

John E. Lande, Joseph Martin Borg, William B. Serangeli, Dickinson, Mackaman, Tyler & Hagen, PC, Des Moines, IA, for Appellant.

Rush M. Shortley, Rush M. Shortley, Attorney at Law, Cedar Rapids, IA, for Appellees.

MEMORANDUM OPINION AND ORDER REGARDING APPEAL OF BANKRUPTCY COURT ORDER
MARK W. BENNETT, District Judge.

TABLE OF CONTENTS

I.
INTRODUCTION AND BACKGROUND
572

A.	Factual Background	572
B.	Procedural Background	573

II.
LEGAL ANALYSIS
575

A.	Appellate Jurisdiction	575
B.	Standard Of Review	577
C.	Issues On Appeal	578
D.	Analysis	578

1.
Section 364 financing
578

a.	Inability to obtain credit	579
b.	Adequate protectionH	580

i.	Will the grants cover the costs of both construction projects?	582
ii.	Increase in the value of the Butler County Farm	583
iii.	Sufficient revenue to pay necessary finance charges	584
iv.	Conclusion	585

2.
Motion to dismiss
585

III.
CONCLUSION
585

[511 B.R. 572]

This appeal from a decision of the bankruptcy court for the Northern District of Iowa raises the question of whether family dairy farmers should be permitted to incur $300,000 in additional debt for farm improvements, pursuant to 11 U.S.C. § 364(d), from a new creditor, with the loan being secured by “priming liens.” ¹ This and other questions are raised on the appeal by the family dairy farmers' primary creditor, a bank, from the order of the bankruptcy court conditionally granting the family dairy farmers' Motion to Incur Secured Debt and denying the bank's Motion to Dismiss the family dairy farmers' Chapter 12 bankruptcy case.

I. INTRODUCTION AND BACKGROUND A. Factual Background

First Security Bank and Trust Company (“First Security”) is a community bank with its primary office in Charles City, Iowa. In 2009 and 2010, First Security made a series of loans to Boerderij De Veldhoek, L.L.C. (“the L.L.C.”), an Iowa L.L.C. These loans were for the L.L.C. to purchase an 80 acre dairy farm, livestock, and dairy farm equipment in Butler County, Iowa (“Butler County Farm”). Herman and Hendrina Vander Vegt (“the Vander Vegts”) owned and operated the L.L.C. (collectively, the Vander Vegts and the L.L.C. will be referred to as “the Debtors”). First Security owned the Butler County Farm, along with the livestock and dairy farm equipment, as a result of its foreclosure on the prior owner.

The Vander Vegts operated a dairy farm, Aver–Berkendijk Dairy Farms, Inc., in upstate New York until 2009, when they and their son, Jeremy Vander Vegt, moved to Iowa at the time of the Butler County Farm purchase. Aver–Berkendijk Dairy Farms, Inc., is a New York corporation (“the New York Farm”). The Vander Vegts also moved livestock and equipment from New York to Iowa. They continued to own real estate in New York and did not wind up the New York Farm.

First Security obtained a real estate mortgage on the Butler County Farm, and priority liens on certain personal property belonging to the Debtors. This personal property included all accounts and other rights to payment, inventory, equipment, instruments and chattel paper, general intangibles, documents, farm products and supplies, government payments, investment property, and deposit accounts. First Security perfected all of its security interests. First Security also received the Vander Vegts' unlimited personal guarantees as well as their agreement to maintain

[511 B.R. 573]

life insurance. First Security made additional loans to the Debtors in early 2010, and obtained a mortgage on the New York Farm.

During the next three years, First Security and the Debtors worked through a series of defaults and payment schedules while the Butler County Farm continually lost money. In the summer of 2012, First Security began foreclosure proceedings in the Iowa District Court for Butler County and was preparing to file foreclosure proceedings in New York.

B. Procedural Background

On August 31, 2012, the Vander Vegts and the L.L.C. each filed for bankruptcy, under Chapter 12 of the United States Bankruptcy Code, in the United States Bankruptcy Court for the Northern District of New York. The Debtors' bankruptcy filings automatically stayed, pursuant to 11 U.S.C. § 362, First Security's state court foreclosures for property located in Iowa and New York, pending resolution of the Debtors' Chapter 12 bankruptcies. First Security is the primary creditor, with claims against the Debtors' assets totaling over $2,684,040.75.

First Security obtained transfer of the cases from the Northern District of New York to the Northern District of Iowa. The two cases were transferred on October 25, 2012. The Vander Vegts' case was designated bankruptcy case no. 12–02144 and the L.L.C.'s case was designated bankruptcy case no. 12–02146. On December 7, 2012, First Security sought expedited relief from the automatic stay, or dismissal of the Debtors' Chapter 12 cases. On January 7, 2013, following a hearing and on the agreement of the parties, the bankruptcy court indefinitely continued First Security's motion.

On February 25, 2013, the Debtors filed a motion for authority to use cash collateral to purchase additional cattle and finance dairy operations. The bankruptcy court consolidated the Debtors' cash collateral motion with First Security's motion for relief from the automatic stay/motion to dismiss. On April 30, 2013, the bankruptcy court partially denied First Security's motion for relief from the automatic stay, and completely denied First Security's motion to dismiss. The bankruptcy court granted the Debtors' motion to use cash collateral. The bankruptcy court ordered the Debtors to pay First Security adequate protection payments once the Debtors reached designated revenue levels: at $47,500 per month in milk revenue, First Security is entitled to $2,500 per month; and at $50,000 per month in milk revenue, First Security is entitled to $5,000 per month. The bankruptcy court also granted First Security permission to commence foreclosure on the property located in New York.

With one exception, it is undisputed that First Security is the priority lienholder on all of the Debtors' real and personal property in both Iowa and New York.² On June 7, 2013, the Debtors filed their Motion to Incur Secured Debt in which they sought permission to grant a new creditor “priming liens” to finance the Debtors' building of a new waste storage facility and a rotational pasturing facility for the Butler County Farm. The Debtors asserted that these facilities would improve their dairy operation's efficiency and profitability. In order to build these new facilities, the Debtors requested that the bankruptcy court permit them to incur $300,000 in

[511 B.R. 574]

additional secured debt, pursuant to either 11 U.S.C. § 364(c) or 11 U.S.C. § 364(d). The Debtors proposed borrowing the money from First National Bank of Waverly (“First National”). The Debtors' proposal would permit First National to obtain a security interest senior to First Security on the Debtors' real and personal property. Thus, all of First National's $300,000 loan would be senior to First Security's $2,684,040.75 claim. First Security objected to the Debtors' proposal and filed a Motion to Dismiss. In its Motion to Dismiss, First Security contended that the Debtors' Chapter 12 case should be dismissed for failing to file a proposed plan for reorganization of their operation within 90 days of their filing for bankruptcy, pursuant to 11 U.S.C. § 1208(c)(3).³

On October 13, 2013, the bankruptcy court conditionally granted the Debtors' Motion to Incur Secured Debt, and denied First Security's Motion to Dismiss. In re Vander Vegt, 499 B.R. 631, 639–640 (Bankr.N.D.Iowa 2013). The bankruptcy court first concluded that 11 U.S.C. § 364(c) was inapplicable to the Debtors' motion to secure debt due to First National's requirement that it be given priming liens on the Debtors' property.⁴Id. at 636. The bankruptcy court next addressed whether the Debtors had met the requirements to incur secured debt under 11 U.S.C. § 364(d). First, the bankruptcy court found that the Debtors had met their burden, under § 364(d)(1)(A), of demonstrating that less burdensome financing options were unavailable. Id. This conclusion was based on Jeremy's testimony that he had unsuccessfully requested financing from 15 to 20 other lenders. Id. Next, the bankruptcy court found that the Debtors had met the requirement of providing First Security with adequate protection, as required by § 364(d)(1)(B). Id. at 637. In reaching this conclusion, the bankruptcy court found that the two projects would “more likely than not increase the value of the Debtors' property and [First Security's] collateral.” Id. at 639. This factual finding was, in turn based on several other factual determinations. Specifically, the bankruptcy court found that the Debtors' project was only anticipated to take three months to complete and that, upon completion, two grants, totaling $300,000, from the United States Department of Agriculture, Natural Resources Conservation Service (“NRCS”) would be distributed to the Debtors, enabling them to pay off the priming liens. Id. The bankruptcy court further found that the contractors on both projects would be required to carry performance bonds. As a result, the bonds not only protected First National's interests, but also provided “an additional layer of protection” for First Security because any payments to First National, from delays in the projects' completion, would be from a source other than First Security's collateral. Finally, the bankruptcy court found that another layer of protection for First Security was provided by the bankruptcy court's conditioning its approval of the Debtors' Motion to Incur Secured

[511 B.R. 575]

Debt on the Debtors meeting all of the...