In re Bennett

• Decision Date: 17 March 1993
• Docket Number: Bankruptcy No. 91-03017,Adv. No. 92-60049A.
• Citation: 154 BR 140
• Parties: In re Donald R. BENNETT, Debtor. Donald R. BENNETT and Robert E. Littlefield, Jr., as Chapter 12 Trustee, Plaintiffs, v. GENOA AG CENTER, INC., Richard Sharp, Sandra Sharp, Douglas Van Benschoten, Marjorie Van Benschoten and Farm Credit of Western New York, ACA, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of New York

154 B.R. 140 (1992)

In re Donald R. BENNETT, Debtor.

Donald R. BENNETT and Robert E. Littlefield, Jr., as Chapter 12 Trustee, Plaintiffs, v. GENOA AG CENTER, INC., Richard Sharp, Sandra Sharp, Douglas Van Benschoten, Marjorie Van Benschoten and Farm Credit of Western New York, ACA, Defendants.

Bankruptcy No. 91-03017, Adv. No. 92-60049A.

United States Bankruptcy Court, N.D. New York.

November 6, 1992.

Decision on Motions to Amend, March 17, 1993.

COPYRIGHT MATERIAL OMITTED

Hinman, Howard & Kattell, Binghamton, NY (M. Elizabeth Bradley, Albert J. Millus, Amy Shapiro, of counsel), for plaintiff.

Williamson, Clune & Stevens, Ithaca, NY (Robert J. Clune, of counsel), for defendants, Genoa Ag Center, Inc., Richard Sharp, Sandra Sharp, Douglas Van Benshoten and Marjorie Van Benschoten.

Karpinski, Stapleton & Fandrich, P.C., Auburn, NY (Mark H. Fandrich, of counsel), for Farm Credit of Western New York, ACA.

MEMORANDUM-DECISION, FINDINGS OF FACT, CONCLUSIONS OF LAW, ORDER AND RECOMMENDATION PURSUANT TO 28 U.S.C. § 157(c)(1)

STEPHEN D. GERLING, Bankruptcy Judge.

Presently before the Court in this adversary proceeding are the Fifth, Eighth, Tenth, and Eleventh causes of action set forth in the Second Amended Complaint filed by Debtor Donald R. Bennett ("Bennett") and the Chapter 12 Trustee on July 13, 1992.¹ Bennett's Second Amended Complaint asserted eleven respective causes of action against Genoa Ag Center, Inc. and its principals ("Genoa Ag"), and Farm Credit of Western New York, ACA ("Farm Credit").

In its Answer filed with the Court on April 8, 1992, Genoa Ag demanded a jury trial on the eight causes of action by which it was affected. By Order dated August 17, 1992, the Court determined that Genoa Ag was entitled to a jury trial on the First, Second, and Third causes of action, all of which were determined to be core matters. However, the Court determined that neither Farm Credit nor Genoa Ag had a right to a jury trial on either the Fifth or the Tenth cause of action, which were also determined to be core matters.

By the same Order, the Court determined that the Fourth, Ninth, and Eleventh causes of action, asserted solely against Genoa Ag, were triable by a jury, but that these causes of action were non-core matters upon which the Court, pursuant to 28 U.S.C. § 157(c)(1), could not enter a final order absent the consent of all parties. All parties consented to the entry of a final order by the Court on the Fourth and Ninth causes of action. Genoa Ag, however, did not consent to the entry of a final order on the Eleventh cause of action, but did waive its right to a jury trial thereon.²

Finally, by virtue of the August 17th Order, the Sixth, Seventh, and Eighth causes of action, asserted solely against Farm Credit, were found to be core, however, Farm Credit did not demand a jury trial thereon. The Sixth and Seventh causes of action were later withdrawn by Bennett prior to trial, leaving the Eighth cause of action as the only one asserted solely against Farm Credit.

Due to the interrelated factual nature of all eleven causes of action, the Court sua sponte ordered that the Fifth, Eighth, Tenth, and Eleventh causes of action be tried by an advisory jury, pursuant to Federal Rule of Civil Procedure 39(c). Thereafter, trial of this adversary proceeding commenced on September 16, 1992 and was concluded on October 1, 1992. The jury returned final verdicts on the First, Fourth, and Ninth causes of action, and advisory verdicts on the Fifth, Eighth, Tenth, and Eleventh causes of action.³ Pursuant to Federal Rule of Civil Procedure 52(a), made applicable herein by Federal Rule of Bankruptcy Procedure 7052, the Court directs entry of final judgments on the Fifth, Eighth, and Tenth causes of action, and a proposed findings of fact, conclusions of law and recommendation on the Eleventh cause of action.

JURISDICTION

The Court has jurisdiction over the Fifth cause of action pursuant to 28 U.S.C. §§ 1334(b), 157(a), 157(b)(1) and (b)(2)(H). The Court has jurisdiction over the Eighth and Tenth causes of action pursuant to 28 U.S.C. §§ 1334(b), 157(a), 157(b)(1) and (b)(2)(A, O). The Court has jurisdiction over the Eleventh cause of action pursuant to 28 U.S.C. §§ 1334(b), 157(a) and 157(c)(1).

FACTS

Bennett has been engaged in farming in Cayuga County, New York for approximately thirty years. During this period he has steadily expanded his operations by acquiring various parcels of farmland and modernizing his equipment and machinery. To facilitate this expansion, Bennett obtained more than $140,000 in loans from Farm Credit. In the mid-1980's Bennett consolidated his Farm Credit loans, and Farm Credit took a mortgage on two parcels of Bennett's farmland. By 1990, Bennett began to experience difficulty in making payments on his mortgage obligation to Farm Credit. He failed to make an interest payment due March 1, 1990, and subsequently failed to make other payments of interest and principal. On October 12, 1990, Farm Credit commenced a foreclosure action on the mortgage, which at that time secured an outstanding balance of approximately $161,312.

During the 1980's, Bennett purchased his farm supplies from Genoa Ag, usually on credit terms. By 1990, Bennett was having trouble making payments not only to Farm Credit, but also on his credit account with Genoa Ag, which had an outstanding balance of more than $50,000. Thus, on July 11, 1990, Genoa Ag obtained a default judgment ("judgment") against Bennett in the amount of $51,307.39. Bennett made a partial payment on the judgment in September, 1990. On October 1, 1990, however, Genoa Ag placed a restraint on Bennett's checking account. Thus, on October 5, 1990, Bennett entered into an agreement with Genoa Ag, whereby Genoa Ag agreed to release the restraint on Bennett's checking account in exchange for inter alia, a promissory note, mortgage and security agreement giving Genoa Ag a lien against Bennett's real and personal property.

As previously indicated, Farm Credit commenced a foreclosure action on October 12, 1990. In an effort to avert foreclosure, Bennett entered into two separate contracts to sell two respective tracts of farmland. Neither sale could proceed, however, unless both Farm Credit and Genoa Ag released their respective liens on the properties. Both Farm Credit and Genoa Ag released their liens on one tract of land, and Bennett sold that tract for $31,805, which amount he thereafter paid to Farm Credit.

Bennett had also arranged for the sale of the second tract of land to Peter and Julia Phillips for $85,000. Farm Credit agreed to release its lien on this piece of land on the condition that it receive all of the sale proceeds. Initially, Genoa Ag also agreed to release its lien on this property. However, when Bennett refused to pay it for approximately $3,700 of fertilizer which he had previously purchased, Genoa Ag reneged on its agreement to release its lien. Bennett thereafter asked Farm Credit to accept $3,700 less than the entire amount of proceeds from the sale, which he would pay Genoa Ag for the release of its lien. Farm Credit refused to accept less than the full amount of the sale proceeds. As a result, Bennett was unable to pay $3,700 to Genoa Ag and Genoa Ag refused to release its lien, thus thwarting the sale to the Phillipses, and allowing the foreclosure sale to proceed.⁴

The foreclosure sale took place on September 18, 1991, and Genoa Ag successfully bid in the property in question for $138,500 plus approximately $7,000 in unpaid taxes. To finance this purchase, Genoa Ag drew approximately $140,000 upon an existing line of credit with Farm Credit, and Farm Credit took back a mortgage on the property. On October 12, 1991, Bennett filed a voluntary petition for relief under Chapter 12 of the Bankruptcy Code (11 U.S.C. §§ 101-1330) ("Code"). As previously indicated, Bennett commenced the instant adversary proceeding on March 6, 1992. The Fifth, Eighth, Tenth and Eleventh causes of action asserted in Bennett's Second Amended Complaint are presently before the Court.

Fifth Cause of Action

ARGUMENTS

Under the Fifth cause of action, Bennett seeks to set aside the foreclosure sale of his property as a fraudulent transfer, pursuant to Code § 548(a)(2). Bennett thus argues that the price of $138,500 (plus unpaid taxes) obtained by Farm Credit at the sale is not "reasonably equivalent value" for the property because 1) the price is insufficiently low in relation to the property's appraised fair market value; 2) the foreclosure sale was collusive; and 3) the sale was not conducted in a commercially reasonable manner. Additionally, Bennett contends that he was rendered insolvent and/or left with unreasonably small capital as a result of the sale.

In response to special interrogatories, the jury found that the sale was collusive and not conducted in a commercially reasonable manner, and that as a result of one or both of these factors, the sale price was unreasonably low. The jury also found that Bennett was either insolvent at the time of the sale or rendered insolvent as a result of the sale, and thus did not reach the issue of whether Bennett was left with unreasonably small capital as a result of the sale. Not surprisingly, Bennett urges the Court to accept the jury's advisory findings as its own on these questions.

Both Genoa Ag and Farm Credit assert that the jury's advisory findings on this cause of action are unsupported by the evidence. Thus, they each contend that the sale price constitutes reasonably equivalent value for the property because the sale was non-collusive and procedurally proper under state law.

DISCUSSION

Initially, the Court notes that it "`is not bound by the advisory jury's findings and is free to adopt them in whole or in part or totally disregard them.'" Cities Service Co. v. Ocean Drilling and Exploration Co., 813 F.2d 679, 686 (5th Cir.1987) (quoting Cities Service Co. v. Ocean Drilling and...