Grogan v. Harvest Capital Co. (In re Grogan), Bankruptcy No. 11–65409–tmr11.

Decision Date26 July 2012
Docket NumberAdversary No. 11–6276–tmr.,Bankruptcy No. 11–65409–tmr11.
Citation476 B.R. 270
PartiesIn re Charles A. GROGAN and Sarah A. Grogan, dba Silver Bells Tree Farm, Debtors. Charles A. Grogan and Sarah A. Grogan, dba Silver Bells Tree Farm, Plaintiffs, v. Harvest Capital Company, an Oregon Corporation and Demeter AG, LLC, an Oregon Limited Liability Company, Defendants.
CourtU.S. Bankruptcy Court — District of Oregon

OPINION TEXT STARTS HERE

Chad M. Stokes, Laura J. Walker, Portland, OR, for Plaintiffs.

Christine A. Kosydar, Oren B. Haker, Todd L. Friedman, Portland, OR, for Defendants.

Aaron J. Bell, Wilsonville, OR, for Demeter Ag, LLC.

MEMORANDUM OPINION

THOMAS M. RENN, Bankruptcy Judge.

On October 31, 2011, Plaintiffs Charles and Sarah Grogan (Plaintiffs) filed a voluntary Chapter 11 petition. On December 15, 2011, they filed the instant adversary proceeding. Their second amended complaint filed April 3, 2012 (the Complaint) contains two claims. The first is for a declaration that Defendants Harvest Capital Company (Harvest) and Demeter Ag, LLC (Demeter) do not have liens consisting of valid perfected security interests in Plaintiffs' Christmas trees and other crops or their proceeds; alternatively, assuming such [liens] exist, the second claim seeks to avoid the liens under 11 U.S.C. § 544.1 The Complaint also seeks an award of attorney's fees and costs. Defendants have counterclaimed for their own attorney's fees and costs. Harvest also filed a third party action against Plaintiffs' counsel. By stipulated order entered on February 15, 2012, that third party claim has been bifurcated from the original claims and counterclaims, and abated pending judgment on those claims.

Before the Court are cross motions for summary judgment. The motions have been briefed and argued, and are ripe for decision. The Court has reviewed and considered the motions, along with all documents filed in support of or in opposition to the motions, the pleadings, applicable legal authorities, and other submissions in the file. The parties have stipulated that the Court has jurisdiction to decide the adversary proceeding under 28 USC §§ 157 and 1334, United States District Court Local Rule 2100.1 and Federal Rule of Bankruptcy Procedure (FRBP) 7001. The parties have also affirmatively agreed that this is a core proceeding under 28 USC § 157(b)(2)(K) and that the Court has appropriate Constitutional authority to rule on this matter.

Facts:

Plaintiffs own and operate, as a sole proprietorship, Silver Bells Tree Farm, located in Marion County, Oregon, where they plant and grow Christmas trees. Silver Bells Tree Farms consists of numerous parcels of real property, some owned and some leased by Plaintiffs. Within twelve years of being planted, generally, the Christmas trees are harvested for sale. As set forth below, at various times Plaintiffs took out secured loans with Harvest and Demeter. Demeter also took an assignment of a secured loan. The particulars of the security interests given for those loans are referenced in the “Discussion” section.

Harvest Loans:

In September 2006, Plaintiffs borrowed $7,000,000 from Harvest as evidenced by two (2) promissory notes-one for $5,500,000 (Note A,) the other for $1,500,000 (Note B.) Note A and Note B are secured by a combined mortgage/security agreement (the Harvest Security Agreement,) which was duly recorded in the real property records of Marion County. In addition, on September 20, 2006, and September 2, 2009, respectively, Harvest filed an original and amended Uniform Commercial Code (UCC) financing statement with the Oregon Secretary of State (the Harvest Financing Statements.) The Harvest Financing Statements were timely continued by a continuation statement filed on August 4, 2011.Demeter Loans:

Direct Loan:

In March 2008, Plaintiffs borrowed $225,000 from Demeter evidenced by a promissory note, secured by a combined mortgage, assignment of rents and security agreement and fixture filing. In February 2010, the original note was replaced by a $400,000 note (the Demeter Note.) The original mortgage/security agreement was also replaced by an amended and restated agreement (the Demeter Security Agreement.) The Demeter Security Agreement was duly recorded in the Marion County real property records on February 19, 2010. In addition, Demeter filed a UCC financing statement with the Oregon Secretary of State on March 18, 2008 (the Demeter Financing Statement).

Assigned Loan:

In September 2008, Plaintiffs borrowed $500,000 from Heinze Investments, LLC (Heinze) by executing a promissory note (the Heinze Note). The Heinze Note was secured by two combined mortgage/security agreements which were recorded in the Marion County real property records on September 25, 2008. One of the mortgages created a lien on two parcels of real property identified as “Canyon Barn” and “North Livingston” (the Livingston Mortgage). The Canyon Barn parcel was later released from the mortgage, leaving the Livingston parcel as the only security thereunder. At no relevant time did the Livingston parcel contain Christmas trees. The other mortgage granted a lien on nine (9) separate tracts of real property, which comprised the whole of Plaintiffs' farm (the Blanket Mortgage).

In September 2008, and September 2009, respectively, Heinze filed with the Oregon Secretary of State an original and amended UCC financing statement for the personal property described in both mortgages (the Heinze Financing Statements). In February 2011, Heinze assigned its interest in the Heinze Note, both mortgages and the Heinze Financing Statements to Demeter.

Summary Judgment Standards:

On a motion for summary judgment, the moving party has the burden to show there is no genuine dispute as to any material fact and that it is entitled to judgment as a matter of law. Federal Rule of Civil Procedure (FRCP) 56(a) (made applicable by FRBP 7056). Material facts are such facts as may affect the outcome of the case. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). “A dispute about a material fact is genuine ‘if the evidence is such that a reasonable jury could return a verdict for the non-moving party.’ FreecycleSunnyvale v. Freecycle Network, 626 F.3d 509, 514 (9th Cir.2010) ( quoting Anderson, 477 U.S. at 248, 106 S.Ct. 2505).

All reasonable doubts as to the existence of genuine disputes as to material facts should be resolved against the moving party, Crosswhite v. Jumpking, Inc., 411 F.Supp.2d 1228, 1230 (D.Or.2006), and all rational or reasonable inferences drawn from the underlying facts must be viewed in the light most favorable to the non-moving party. T.W. Electrical Service, Inc. v. Pacific Elec. Contractors Ass'n., 809 F.2d 626, 630 (9th Cir.1987).

The parties all confirm that the Court can resolve the issues by looking to the referenced documents and that no factual dispute exists.

Discussion:

Defendants argue their security agreements and financing statements are sufficient to render their rights in the Christmas trees superior to Plaintiffs' under Oregon's version of the Uniform Commercial Code (UCC). Alternatively Defendants argue their interests are superiorbased on certain recorded mortgages.2 The Court will address the alternative argument first.

Defendants' Rights in Christmas trees as real property:

For purposes of its analysis, the Court will assume for argument's sake that the “mortgage” portions of the Harvest and Demeter Security Agreements 3 also cover growing crops thereon, including the Christmas trees. Put another way, the Court assumes Oregon law would consider the Christmas trees part of the real property given as security. See, e.g., Jones v. Adams, 37 Or. 473, 476, 59 P. 811, 811 (1900) (recognizing that unless the crops belong to a tenant, [a] real-estate mortgage [given by the landowner] is not only a lien upon the land, but also upon the annual crops growing thereon”); Falk v. Amsberry, 53 Or.App. 735, 739, 633 P.2d 799, 802 (1981) (recognizing that depending on the relationship of the parties to each other, in some situations growing crops may be considered real property while in others they are considered personalty). The issue is whether perfected real estate liens in the Christmas trees trump a bankruptcy trustee's strong-arm powers.

A Chapter 11 debtor in possession has the rights and powers of a trustee. § 1107(a). Section 544(a)(1) gives a trustee, as of the commencement of the case, the rights and powers, including the power to avoid transfers, of a creditor that extends credit and obtains as of the commencement of the case, “a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien.” (emphasis added). No such creditor need actually exist. Id. Further, actual notice of a competing interest will not defeat the trustee's rights. Id. A “judicial lien” is a “lien obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” § 101(36) (emphasis added).4 While bankruptcy law gives the trustee the rights and powers of a hypothetical judicial lien creditor, those rights and powers are usually determined under state law. Bullock v. Roost (In re Gold Key Properties, Inc.), 119 B.R. 787, 789 (Bankr.D.Or.1990).

Under Oregon law, entry of a judgment creates a lien on all of the judgment debtor's real property located in the county in which the judgment is entered. ORS 18.150(2). However, the judgment's entry does not create a lien on personal property in the judgment debtor's possession. Such a lien is only created when the sheriff, pursuant to a writ of execution obtained by the judgment creditor, actually levies on the personal property, as a predicate to the property's sale to satisfy the judgment. See U.S. v. $319,603.42 in U.S. Currency, 829 F.Supp. 1223, 1225 (1992) (construing ORS 23.410, Oregon's predecessor “lien by levy” statute). ORS 18.878(1) provides the methods by which a sheriff may levy on...

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