In re Blehm Land and Cattle Co., Bankruptcy No. 86 F 1689.
| Decision Date | 12 February 1987 |
| Docket Number | Bankruptcy No. 86 F 1689. |
| Citation | 71 BR 818 |
| Parties | In re BLEHM LAND AND CATTLE COMPANY, Debtor. |
| Court | U.S. District Court — District of Colorado |
Gregory L. Williams, Denver, Colo., for appellant.
Jon B. Clarke, Englewood, Colo., for the trustee/appellee.
Elizabeth Greenberg, Denver, Colo., for the creditor/appellee.
Caroline Fuller, Denver, Colo., for debtor/appellee.
Travelers Insurance Company ("Travelers") brings this appeal from the United States Bankruptcy Court for the District of Colorado, challenging the bases for the court's denial of Travelers' Application for Super Priority Administrative Claim ("Application"). After examination of the briefs and appellate record, the Court has determined that oral argument would not be of material assistance in the determination of this appeal. Bankr.R. 8012.
Blehm Land and Cattle Company ("Debtor") filed a petition under Chapter 11 of the Bankruptcy Code, 11 U.S.C. § 1101 et seq., on May 23, 1983. At the time of the bankruptcy filing, Travelers held first deed of trust interests in all of the Debtor's real property and improvements located in Weld County, Colorado. The Debtor's primary business at the time of the filing was the operation of a feed lot on its Weld County property.
After the bankruptcy filing, the Debtor generated little income from its feedlot operation. During November and December of 1983, the Debtor entered into negotiations with Arvin Martensen, the President of E-VAP, Inc. ("E-VAP") to lease a portion of the Debtor's real property for the purpose of constructing an oil field waste water disposal system. Implementation of the system required construction of surface storage ponds and related equipment on the land leased from the Debtor. At some point during November or December of 1983, the Debtor entered into written agreements with E-VAP to lease the property.
During the Spring or early Summer of 1984, Travelers first learned of the Debtor's intent to permit construction of a waste water disposal system on the property, and informed E-VAP that it would not agree to the construction of the system. Travelers filed a Motion for Temporary Restraining Order and Preliminary Injunction. After hearings before United States Bankruptcy Judge Roland J. Brumbaugh and United States District Court Judge John P. Moore, a Temporary Restraining Order and Preliminary Injunction issued, precluding the Debtor and E-VAP from going forward with construction of the waste water disposal system.
On June 28, 1984, M.E. Koontz ("Trustee") was appointed as Chapter 11 Trustee for the Debtor. At the time of the Trustee's appointment, the Debtor was no longer conducting its feedlot operation. All income to the estate during the Chapter 11 proceeding was expected to be generated by the proposed E-VAP lease or, to a much lesser extent, from the lease of other portions of the real property. After his appointment, the Trustee filed a motion to withdraw assumption of the proposed lease. The motion was granted by the Bankruptcy Court on October 5, 1984.
After his rejection of the lease agreement between E-VAP and the Debtor, the Trustee entered into and successfully completed negotiations for a new lease agreement with E-VAP. However, the Trustee and E-VAP were precluded from constructing the waste water disposal system on the Weld County property because of the Temporary Restraining Order and Preliminary Injunction obtained by Travelers.
The Trustee then entered into negotiations with Travelers in order to have the Temporary Restraining Order and Preliminary Injunction lifted and to obtain Travelers' permission to use the property encumbered by Travelers' deeds of trust. On October 31, 1984, the Trustee and Travelers entered into a Memorandum of Agreement ("Agreement") allowing the Trustee to use the property in accordance with the new lease agreement executed by the Trustee and E-VAP, pursuant to certain conditional arrangements with Travelers. In the Agreement, the parties acknowledged that Travelers held senior deeds of trust encumbering all of the real property and improvements owned by the Debtor, that Travelers had previously objected to and would not approve the proposed lease between the Trustee and E-VAP, and that Travelers would withhold its consent to release the Temporary Restraining Order and Preliminary Injunction unless some compensation was paid for use of the property.
The Agreement provided that if Travelers allowed the Trustee to enter into the E-VAP lease, the Trustee would pay Travelers no less than $500,000 in cash from the net operating revenue on or before October 31, 1985. The Agreement also provided that in the event that the E-VAP lease did not generate cash flow over a three month period sufficient to produce annual income of $400,000, the Trustee would automatically consent to entry of an order granting Travelers relief from stay with respect to all of the property securing its claim. In the event the E-VAP lease generated net income in excess of $500,000, the Agreement provided that Travelers and the Trustee would share the resulting income on a 50-50 basis. Travelers agreed to the dismissal of the Temporary Restraining Order and Preliminary Injunction after execution of the Agreement.
On March 1, 1985, the Trustee filed a motion with the bankruptcy court seeking approval of the lease negotiated with E-VAP. A hearing on the Trustee's motion for approval of the lease was held before Judge Brumbaugh on March 7, 1985. During his argument to the Court, counsel for the Trustee informed the Court that the Trustee had entered into a side agreement with Travelers and that Travelers would be paid a minimum of $500,000 from the income generated by the bankruptcy estate from the E-VAP lease and from other leases of the real property. Neither Travelers nor the Trustee, however, sought approval of the Agreement at that time, and the Agreement was not integrated into the E-VAP lease.
Between December 1, 1984, when E-VAP first began operation of the waste water disposal system, and September 1, 1985, when E-VAP defaulted in its obligations under the lease, E-VAP paid the Trustee approximately $300,000.00. The Trustee also earned an additional $100,000 from the farm lease income. In mid-November 1985, E-VAP issued a royalty check to the Trustee representing the bankruptcy estate's forty-five percent (45%) share of the royalty income generated from the E-VAP lease. The check was returned for insufficient funds. After that time, E-VAP failed to issue a replacement check for the October royalty payment and to pay the Trustee any royalty payments for November and December of 1985 or January and February of 1986. On or about November 1, 1985, the Trustee gave E-VAP written notice of his demand for possession of the property and termination of the lease.
When royalty payments terminated in mid-November 1985, Travelers filed in the Bankruptcy Court a Motion for Relief from Stay, in accordance with the terms of the Agreement, regarding all the Debtor's real property. On November 27, 1985, the Bankruptcy Court entered an Order granting Travelers relief from stay. On January 2, 1986, the Chapter 11 proceeding was converted to a proceeding under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 701 et seq. On January 13, 1986, Travelers and the Trustee stipulated that Travelers had the right to immediate possession of all the real property securing its claim. The Stipulation was approved on January 17, 1986, after a hearing, and a formal Order approving the Stipulation between the Trustee and Travelers entered on January 22, 1986.
On February 18, 1986, Travelers filed an Application for approval of a super priority administrative claim. In its Application, Travelers requested payment of all amounts received by the Trustee as a result of the E-VAP lease, and any other funds received from the use of the property securing Travelers' claim, as an administrative expense pursuant to the provisions of 11 U.S.C. § 507(b). The Application contended that the Agreement between Travelers and the Trustee was in the nature of, and was intended to be, an adequate protection agreement requiring periodic cash payments to Travelers.
At approximately the same time, American AgCredit Corporation ("AAC") filed an Application for payment of a super priority claim. AAC's Application was based on an agreement between AAC and the Debtor, concerning the Debtor's use of stored crops in which AAC held a perfected security interest. AAC did not file its Application until after the income generated from the E-VAP lease was received by the bankruptcy estate. AAC and Travelers each filed objections to each other's claim, necessitating a hearing on the Applications. No objections to either Application were filed by other creditors.
On May 9, 1986, a hearing was held before Judge Brumbaugh on the Applications. At the conclusion of the hearing, the Court ruled that AAC had a super priority administrative claim in the amount of $120,139.22, and ordered that the claim be paid. The Court rejected Travelers' Application on the grounds that allowance of a super priority administrative claim "would in effect be approving nunc pro tunc an agreement contrary to section 361(3)". See Record, Vol. II (Transcript of Hearing), at 124. Counsel for AAC was directed to provide a proposed order reflecting the substance of Judge Brumbaugh's ruling from the bench. The Order was submitted, signed, and entered on May 13, 1986. Travelers filed an Objection, which was denied on June 4, 1986.
This appeal followed. For the reasons set forth below, the decision of the Bankruptcy Court is AFFIRMED.
The district court is bound to accept the factual findings of the bankruptcy court unless they are clearly erroneous. In re Golf Course Builders Leasing, Inc., 768 F.2d 1167, 1169 (10th Cir.1985); In re Silver, 46 B.R. 772 (D.Colo.1985)....
To continue reading
Request your trial