In re Bucyrus Grain Co., Inc., Bankruptcy No. 84-20269.

• Decision Date: 20 November 1986
• Docket Number: Bankruptcy No. 84-20269.
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Kansas
• Parties: In re BUCYRUS GRAIN CO., INC., Debtor. STATE BANK OF SPRING HILL, Claimant, v. BUCYRUS GRAIN CO., INC., Debtor.

67 B.R. 336 (1986)

In re BUCYRUS GRAIN CO., INC., Debtor.

STATE BANK OF SPRING HILL, Claimant, v. BUCYRUS GRAIN CO., INC., Debtor.

Bankruptcy No. 84-20269.

United States Bankruptcy Court, D. Kansas.

November 20, 1986.

C. Maxwell Logan, Overland Park, Kan., for debtor.

Thomas L. Griswold, Olathe, Kan., for Claimant Bank.

Leon B. Seck of Swafford & Seck, Kansas City, Mo., for Effertz Bros.

Frederick B. Farmer of Lowe, Terry & Roberts, Olathe, Kan., for Anderson Bros.

Charles D. Sauer, Overland Park, Kan., for "multiple creditors".

James S. Willis, Kansas City, Kan., trustee.

MEMORANDUM OPINION

BENJAMIN E. FRANKLIN, Chief Judge.

This matter came on for hearing on February 27 & 28, 1986, on State Bank of Spring Hill's motion for relief from the automatic stay in order to set off the Bucyrus Grain Company's checking account. State Bank of Spring Hill appeared by and through its attorney Thomas L. Griswold. Several creditors objected and claimed the account, including: Effertz Brothers, Anderson Brothers, Don Meinhold, Vohs & Moore, Joseph Zacher, B.W.S. Investments, Evelyn Rigney, Dale Nevius, and Francis Rickman. Effertz Brothers appeared by and through its attorney Leon B. Seck. Anderson Brothers appeared by and through its attorney, Frederick B. Farmer. Meinhold, Vohs & Moore, Zacher, B.W.S. Investments, Nevius, Rigney, and Rickman appeared by and through their attorney, Charles D. Sauer. The trustee also objected to the bank's claim. The trustee, James S. Willis, appeared in person.

This Court took the matter under advisement. The Court ordered the parties to submit proposed findings of fact and conclusions of law.

FINDINGS OF FACT

1. Bucyrus Grain Company, Inc. (hereinafter "Bucyrus Grain"), is a Kansas corporation doing business as a grain elevator. Neither Bucyrus Grain nor its president, James Creamer, was registered with the Commodities Futures Trading Commission as a futures commission merchant. Carl Anderson and Emett Anderson, d/b/a Anderson Brothers, are farmers from Missouri and Kansas respectively. Don Meinhold, Joseph Zacher, Evelyn Rigney, B.W.S. Investments, Dale Nevius, Vohs & Moore, and Francis Rickman (hereinafter "multiple defendants") are Kansas customers of Bucyrus Grain Company. State Bank of Spring Hill (hereinafter "State Bank") is a Kansas bank.

2. On or about October 26, 1983, in order to take advantage of the special margin rates available to Bucyrus Grain in the futures market, the Anderson Brothers solicited the elevator to purchase five July, 1984 soybean futures contracts. On October 26, 1983, Anderson Brothers delivered $25,000 to James Creamer, president of Bucyrus Grain Company, in order to acquire five July, 1984 soybean future contracts. Creamer purchased the July bean contracts in the name of Bucyrus through the brokerage firm of Drexler, Burnham and Lambert, Inc. At the time the debtor acquired the July bean contracts, the debtor also had its own commodity futures contracts with either Drexler, Burnham and Lambert, Inc., or another brokerage firm, Cargill Investors Services. However, Bucyrus did not purchase commodities futures in July, 1984 beans.

3. In late January, 1984, the debtor closed out the Anderson Brothers' position and all of its own contracts in July beans.

4. On March 29, 1984, State Bank received a wire transfer of $27,000 from Cargill Investor's Service into the Bucyrus checking account. The transfer represented partial proceeds from the liquidation of Bucyrus positions in the Cargill account.

5. On March 30, 1984, Creamer deposited into the checking account a number of checks including a $30,026 check from Cargill Investor's Service. The check represented the remaining proceeds from the liquidation of Bucyrus positions in the Cargill account. Cargill Services stopped payment on the $30,026 check, and instead, wire transferred the amount to the checking account on April 4, 1984.

6. Bucyrus Grain Company, Inc. filed a Chapter 7 bankruptcy petition on March 30, 1984.

7. Prior to the filing of the bankruptcy petition on March 30, 1984, the multiple defendants stored grain at the Bucyrus elevator. The multiple defendants sold grain to Bucyrus Grain. Bucyrus Grain issued checks to the multiple defendants in the following amounts:

A.B.W.S. Investments — $1,172.13

B. Dale Nevius — $607.06

C. Mrs. Evelyn Rigney — $607.06

D. Don Meinhold — $2,731.19

E. Dr. Joseph Zacher — $342.96

F. Vohs & Moore — $7,295.76

G. Francis Rickman — $428.85

8. After the bankruptcy, the multiple defendants presented the checks to State Bank. State Bank refused payment and returned the checks.

9. The Bucyrus checking account had an overdraft balance on March 29, 1984. However, on the date of bankruptcy, March 30, 1984, the account had a positive balance of $46,421.20. As such, the positive balance was the result of deposits made on that date. On the last two days before bankruptcy, Bucyrus Grain deposited funds paid on account for the sale of inventory and the money from the Cargill Investor's Service account.

10. At the time of filing the petition, Bucyrus Grain owed State Bank $780,068.65. The indebtedness arose as follows:

A. Note dated March 31, 1980 ($400,000)

B. Note dated February 4, 1984 ($100,000)

C. Note dated March 14, 1984 ($90,000)

D. Note dated March 15, 1984 ($100,000)

E. Note dated December 2, 1983 ($30,422.42)

F. Note dated November 23, 1983 ($70,000)

G. Note dated March 19, 1984 ($20,000)

H. Note dated February 27, 1984 ($16,510)

I. Note dated March 12, 1984 ($39,512.23)

11. The bank acquired the following security for the Bucyrus Grain debts:

A. Certificates of deposit Nos. 10422 and 1043 held by the bank pursuant to a collateral deposit agreement dated July 22, 1982.

B. Miscellaneous weed control chemicals and seed soybeans by security agreement dated April 26, 1979.

C. All accounts receivable and all inventory now owned or hereafter acquired by security agreement dated April 26, 1979.

D. All machinery and equipment, furniture and fixtures, inventory and all present or future accounts receivable, proceeds arising therefrom, chattel paper, contract rights and general intangibles, however evidenced or acquired, and all additions and accessions thereto by security agreement dated March 18, 1980.

12. The bank properly perfected the security interests in the Bucyrus Grain property prior to bankruptcy.

13. In cooperation with the trustee, the bank has reclaimed part of the collateral and applied the proceeds from the sale to the outstanding debt. As such, the outstanding indebtedness owed the bank by Bucyrus Grain as of March 22, 1985, was $458,198.65.

ISSUE OF LAW

WHETHER OR NOT THE STATE BANK OF SPRING HILL CAN SET OFF THE $46,421.20 OF PROCEEDS FROM THE BUCYRUS GRAIN CHECKING ACCOUNT AGAINST BUCYRUS GRAIN'S OUTSTANDING DEBT.

CONCLUSIONS OF LAW

State Bank's claim to the $46,421.20 of proceeds from the checking account is based on two independent theories. First, State Bank claims a statutory and common law right of setoff of the account against the pre-petition debts of Bucyrus Grain. In the alternative, State Bank claims the account as proceeds from the sale of its collateral. State Bank requests this Court to either grant it relief from the automatic stay to allow setoff or to order the trustee to abandon the account.

The Anderson Brothers also claim the proceeds of the account. The claim is based upon Subchapter IV of Chapter 7 of Title 11 (Commodities Liquidation Subchapter). Under this law, the Anderson Brothers argue that Bucyrus Grain became a "futures commission merchant" and they became "customers" when Bucyrus Grain accepted the $25,000 on October 26, 1983, and acquired the five contracts for the July 1984 soybeans. As such, the $25,000 is "customer property" under the Code. The Anderson Brothers claim they are entitled to payment in full from the checking account.

The multiple defendants also claim interests in the checking account. The claims are identical, except in amount, and are based on a conversion cause of action arising under the case of Iola State Bank v. Bolan, 235 Kan. 175, 679 P.2d 720 (1984).

This Court finds that the State Bank's claim is superior to all the other claims. State Bank has a right of setoff and a perfected security interest in the funds. The Anderson Brothers failed to state a claim under the commodities subchapter of the Code. The multiple defendants failed to state a claim under the Iola State Bank.

A. State Bank's Right of Setoff and Security Interest.

A bank's right to set off mutual debts against the debtor before the commencement of the bankruptcy case is specifically preserved in 11 U.S.C. § 553(a) which states:

(a) Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case, except to the extent that —

(1) the claim of such creditor against the debtor is disallowed other than under section 502(b)(3) of this title:

(2) such claim was transferred, by an entity other than the debtor, to such creditor —

(A) after the commencement of the case; or

(B)(i) after 90 days before the date of the filing of the petition; and

(ii) while the debtor was insolvent; or

(3) the debt owed to the debtor by such creditor was incurred by such creditor —

(A) after 90 days before the date of the filing of the petition:

(B) while the debtor was insolvent: and

(C) for the purpose of obtaining a right of setoff against the debtor.

A setoff after the commencement of the case is subject to the restraints of 11 U.S.C. § 362(a)(7). The bank must obtain relief from the automatic stay. In re Nelson, 6 B.R. 248, 249 (Bankr.D.Kan.1980). State Bank applied for relief from the stay.

The major requirement of section 553(a) is...