In re Arnold and Baker Farms
| Decision Date | 30 December 1994 |
| Docket Number | BAP No. AZ-93-1577-AsRMe. Bankruptcy No. 86-1195-PHX-RTB. |
| Citation | 177 BR 648 |
| Parties | In re ARNOLD AND BAKER FARMS, Debtor. UNITED STATES of America, on Behalf of the FARMERS HOME ADMINISTRATION, Appellant, v. ARNOLD AND BAKER FARMS and Western Cotton Services Corp., Appellees. |
| Court | U.S. Bankruptcy Appellate Panel, Ninth Circuit |
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Richard G. Patrick, Phoenix, AZ, for U.S.
Don A. Beskrone, Phoenix, AZ, for Arnold and Baker Farms.
Frederick K. Steiner, Jr., Phoenix, AZ, for Western Cotton Services Corp.
Before ASHLAND, RUSSELL and MEYERS, Bankruptcy Judges.
The debtor's plan proposed a "dirt for debt" transfer to two lienholders encumbering the primary asset of the estate. The first position lienholder objected to the plan on the grounds that: (1) the plan erroneously estimated the value of the land to be exchanged; (2) the plan was not proposed in "good faith;" (3) the plan violated the "best interests of creditors" test; and (4) the plan was not "fair and equitable." The bankruptcy court confirmed the plan over the largest secured creditor's objections. We reverse the bankruptcy court's order confirming the plan.
The debtor Arnold and Baker Farms is an Arizona general partnership. The partnership was formed in 1975 by Walter H. and Nancy E. Arnold, Maurice F. and Maurine H. Arnold, and Charles M. and Wanda J. Baker for the purpose of farming and the sale and lease of farmland. Arnold and Baker purchased 1120 acres from Philip and Dorothy Ladra in 1975 and an additional 320 acres in 1979. The Ladras were given a first deed of trust on the property. In 1977, the farm began to experience financial difficulties.
The Farmers Home Administration ("FmHA") and Western Cotton Services Corporation, a wholly owned subsidiary of the Anderson Clayton Company, financed certain crops for the years 1978 through 1981. Additionally, FmHA lent Arnold and Baker sufficient funds to make the annual payments on the installments due to the Ladras in the years 1979, 1980, and 1983. In return, FmHA held a second deed of trust on Arnold and Baker's real property, a perfected security interest in the farm equipment, and a first deed of trust on the Arnolds' personal residence. Western Cotton held a third deed of trust on Arnold and Baker's real property.
The Ladras ultimately instituted a judicial foreclosure proceeding against Arnold and Baker's real property. Subsequently, in April 1984, the Bakers individually filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. The Ladras obtained relief from the automatic stay and continued their judicial foreclosure proceedings. Arnold and Baker, the partnership, filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in April 1986.
In May 1986, the bankruptcy court approved the sale of two pieces of real property free and clear of liens: 360 acres of real property to Cardon Oil Company and 480 acres to the entity known as the Corks. From the net proceeds of the sale and the payment of annual installments, Arnold and Baker satisfied the secured claim of the Ladras in the amount of $1,650,000. FmHA thereafter held a first priority and Western Cotton held a second priority lien in the property.
Arnold and Baker subsequently formulated two plans based on the income generated from the Cardon and Cork sales which proposed to pay in full the allowed claims of all creditors. The first plan was withdrawn when the Corks defaulted on their note and the other, a revised plan, was withdrawn when Cardon Oil defaulted on its note. With respect to the Corks' default, Arnold and Baker negotiated a settlement pursuant to which the Corks tendered 360 acres to Arnold and Baker in lieu of foreclosure.1 With respect to the Cardon default, Arnold and Baker ultimately purchased the 320 acre parcel at a nonjudicial foreclosure.2
In January 1991, Arnold and Baker filed a second amended plan and disclosure statement. The second amended plan proposed to pay FmHA's $3,837,618 note and Western Cotton's $565,044 note in full. The plan proposed to transfer a proportionate fee simple interest in the 635 acre parcel of real property to FmHA and Western Cotton. FmHA was earmarked to receive 515 acres of real property and Western Cotton was earmarked to receive 77 acres. Arnold and Baker was earmarked to retain ownership of 48 of the 640 acres scheduled for distribution. Arnold and Baker proposed to sell the adjoining 360 acre parcel of real property in order to pay the administrative claims, United States Trustee's fees, attorney fees, accountant fees, postpetition taxes, the real estate commission due and owing to Walter Arnold, and use the remainder to pay the unsecured creditors. Arnold and Baker retained an interest in the property remaining after distribution and sale.
Both FmHA and Western Cotton initially objected to confirmation of Arnold and Baker's second amended plan. However, during the course of the confirmation hearing, Western Cotton reached a settlement with Arnold and Baker pursuant to which Western Cotton agreed to accept 130 acres of real property in full satisfaction of its debt. Western subsequently withdrew its objection to confirmation and voted to accept the plan.
For purposes of the confirmation hearing, the parties stipulated that the second amended plan met all the requirements of § 1129(a)(1-13) with the exception of subsections (a)(3), (7), and (8). Additionally, FmHA objected to being crammed down pursuant to § 1129(b)(2). The principal factual issue concentrated on the fair market value of Arnold and Baker's 1320 acres of land. Arnold and Baker estimated the per acre value to be $7,322 for the 640 acre lot, $8,300 for the 360 acre lot, and $8,631 for the 320 acre lot. FmHA estimated the per acre value for the entire 1320 acres at $1,381.
On May 5, 1993, the bankruptcy court confirmed the plan finding that the property had an estimated value of $7,300 per acre. However, the bankruptcy court modified the transfer to FmHA in the plan by ordering an additional 10% transfer to FmHA in order to compensate it for the costs associated with a sale.
On May 14, 1993, FmHA timely filed its notice of appeal, and on May 17, 1993, filed a motion for stay pending appeal. The bankruptcy court denied the motion for stay by minute order on September 30, 1993. FmHA then filed an emergency motion for stay pending appeal to the Bankruptcy Appellate Panel. On October 19, 1993, the panel granted the emergency motion for a stay of the plan confirmation order pending appeal.
Whether the bankruptcy court erred when estimating the per acre value of the real property.
Whether the second amended plan was proposed in "good faith" pursuant to § 1129(a)(3).
Whether the second amended plan satisfied the "best interests of creditors" test pursuant to § 1129(a)(7).
Whether the second amended plan treated the largest secured creditor's claim "fairly and equitably" pursuant to § 1129(b)(1).
Whether the second amended plan provided the largest secured creditor with the "indubitable equivalent" of its claim pursuant to § 1129(b)(2)(A)(iii).
A bankruptcy court's property valuation, the "good faith determination," and "best interests of creditors" determination are all findings of fact. In re Tuma, 916 F.2d 488, 491 (9th Cir.1990) (property value); In re Corey, 892 F.2d 829, 835 (9th Cir.1989) (good faith); Kane v. Johns-Manville Corp., 843 F.2d 636, 649 (2d Cir.1988) (); In re Stolrow's Inc., 84 B.R. 167, 172 (9th Cir. BAP 1988) (good faith). We review findings of fact under a clearly erroneous standard. Federal Rule of Bankruptcy Procedure 8013. A finding of fact is clearly erroneous when after reviewing the evidence we are left with the definite and firm conviction that a mistake has been committed. In re Contractors Equip. Supply Co., 861 F.2d 241, 243 (9th Cir.1988).
The issue of "fair and equitable" treatment pursuant to § 1129(b) is a question of fact that we review under the clearly erroneous standard. In re Acequia, Inc., 787 F.2d 1352, 1358 (9th Cir.1986); Citibank, N.A. v. Baer, 651 F.2d 1341, 1346 (10th Cir. 1980) (Bankruptcy Act Case); Stolrow's, 84 B.R. at 172. Whether a plan provides a secured creditor with the "indubitable equivalent" of its claim under § 1129(b)(2)(A)(iii) is a mixed question of law and fact. In re Pine Mountain, Ltd., 80 B.R. 171, 172 (9th Cir. BAP 1987). "Although the facts underlying such a determination are reviewed under the clearly erroneous standard, the question of whether the legal standard has been satisfied is reviewed de novo." Pine Mountain, 80 B.R. at 172.
The debtor carries the burden of proving that a Chapter 11 plan complies with the statutory requirements for confirmation under §§ 1129(a) & (b). See, e.g., In re B.W. Alpha, Inc., 100 B.R. 831 (N.D.Tex.1988); In re Rusty Jones, Inc., 110 B.R. 362 (Bankr. N.D.Ill.1990). Although the parties agree with the preceding conclusion, they disagree with the characterization of the scope of the debtor's burden of proof. Arnold and Baker maintain that the burden of proof is by a preponderance of the evidence while FmHA maintains that it is by clear and convincing evidence.
Proof by the preponderance of the evidence means that it is sufficient to persuade the finder of fact that the proposition is more likely true than not. See, e.g., In re Winship, 397 U.S. 358, 371, 90 S.Ct. 1068, 1076, 25 L.Ed.2d 368 (1970). Clear and convincing evidence is a higher standard requiring a high probability of success. See, e.g., Colorado v. New Mexico, 467 U.S. 310, 316, 104 S.Ct. 2433, 2437-38, 81 L.Ed.2d 247 (1984).
Some courts have applied the clear and convincing standard to plan confirmation. See,...
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