IN RE FARMERS'CO-OP OF ARK. AND OKL., INC.
| Decision Date | 23 October 1984 |
| Docket Number | Bankruptcy No. FS 84-046M. |
| Citation | 43 BR 619 |
| Parties | In re FARMERS' CO-OP OF ARKANSAS AND OKLAHOMA, INC., Debtor-in-Possession. |
| Court | U.S. Bankruptcy Court — Western District of Arkansas |
Diane S. Mackey, Little Rock, Ark., for debtor-in-possession.
Farmers' Co-Op of Arkansas and Oklahoma, Inc. (co-op) filed a voluntary petition for bankruptcy on the 23rd day of February, 1984 under the provisions of Chapter 11. On March 2, 1984 Citizens Bank and Trust Company of Van Buren (bank) filed a claim as a general unsecured creditor for $369,980.03, principal, and $43,940.19, interest as of February 29, 1983. On April 23, 1984 the debtor-in-possession filed an objection to this claim and on September 14, 1984 filed an amended objection to the claim.
The claim is based on a purported guaranty of the co-op executed in 1980 by Jack White, who was then general manager of the debtor-in-possession. Mr. White was also the chairman of the board of the bank. The guaranty purported to guarantee the repayment of all indebtedness owed to the bank by one Wayman Calavan, later a member of the board of directors of the co-op.
The objection and amended objection allege specific defenses of failure of consideration and ultra vires acts of Jack White, as well as general allegations that the guaranty is without legal validity, and, therefore, the claim should not be allowed. At the trial the debtor sought to introduce evidence to the effect that the guaranty had been revoked. The bank objected claiming that revocation was not pleaded. The Court received the evidence over the objection of the bank pending an opportunity for the parties to research the question and present authorities to the Court.
11 U.S.C. § 502(a) provides as follows:
(a) A claim or interest, proof of which is filed under section 501 of this title, is deemed allowed, unless a party in interest, including a creditor of a partner in a partnership that is a debtor in a case under chapter 7 of this title, objects.
Rule 3007 of the Bankruptcy Rules provides as follows:
An objection to the allowance of a claim shall be in writing and filed with the court. A copy of the objection with notice of the hearing thereon shall be mailed or otherwise delivered to the claimant, the debtor or debtor-in-possession and the trustee at least 30 days prior to the hearing. If an objection to a claim is joined with a demand for relief of the kind specified in Rule 7001, it becomes an adversary proceeding.
These two provisions construed together mean that a claim properly filed is presumptively allowed as filed unless objected to by a party in interest, who then has the burden of going forward with the evidence to rebut the presumption of validity. However, the burden of proving the validity of the claim ultimately rests with the creditor. 3 Collier on Bankruptcy § 502.01 3 (15th Ed.); In Re Trending Cycles for Commodities, Inc., 26 B.R. 350 (1982); In Re Kontaratos, 35 B.R. 135 (1983); In Re Central Rubber Products, Inc., 31 B.R. 865 (Bky.1983).
An objection to a claim is a contested matter and the proceedings regarding contested matters are governed by Rule 9014 of the Bankruptcy Rules. Rule 9014 does not make applicable Rule 7007 or Rule 7008 to contested matters; hence, the rules of pleadings generally applicable to adversary proceedings are absent here. For instance, no response or answer to an objection is necessary under this rule. All that is required is that the creditor be afforded notice and an opportunity to proceed to prove its claim. The objections to the evidence regarding revocation are, therefore, overruled.
Furthermore, Citizens Bank's claim of surprise was not evident in the trial that proceeded. Counsel on both sides were well prepared for the trial and obviously knew through pre-trial discovery of the existence of all the evidence pertaining to the issue of revocation of the guaranty. Both sides presented documentary as well as oral testimony on this issue.
I.
The Farmers' Co-Op of Arkansas and Oklahoma, Inc. is a farm co-operative which was first organized in 1946. Its principal place of business is Van Buren, Arkansas, although it has facilities located elsewhere in Arkansas and Oklahoma. In August of 1980 Jack White was the general manager of the co-op and had general authority over the day-to-day operations, including the authority to draw checks, to borrow money, as well as authority to execute contracts of guaranty on behalf of the co-op. This authority was granted by the board of directors of the co-op and memorialized by formal resolutions which were furnished to the bank. Jack White was in August of 1980 also chairman of the board of Citizens Bank & Trust Company of Van Buren. During all relevant times connected with this controversy the business affairs of the co-op and the bank were close, interrelated, and interdependent. The bank, under Mr. White's leadership, and, thereafter, under the leadership of Mr. Bob Hammerschmidt, its present chief executive officer, wanted to establish itself as the leading agri-business oriented bank in the two state area. To accomplish this goal, the bank worked closely with the co-op whereby customers of the co-op would receive preferred treatment at the bank in regard to their financial needs whether related to customer accounts at the co-op or to the customers' general credit needs. Generally, these customers were farmers. There was even testimony that customers of the co-op could, and did, obtain loans from the bank which were prepared by co-op employees and executed at the co-op premises. During one period of time, the credit manager of the co-op would spend at least one day a week "working on loans" in bank facilities and was compensated sometimes directly by the bank and other times the bank would simply reimburse the co-op which would pay the employee. Under Mr. White's management the co-op engaged in the practice of executing contracts of guaranty for loans of co-op customers, especially board members.
In August 1980 Wayman Calavan, who lived in nearby Oklahoma, was neither a customer of the bank nor the co-op, but was known to Mr. White to be a prominent farmer who should be recruited by the bank, and presumably by the co-op, as a customer. Mr. White discussed this possibility with Mr. Hammerschmidt, and, in anticipation of landing Mr. Calavan as a customer of the bank, Mr. White, exercising his co-op authority, executed an unlimited contract of guaranty on behalf of the co-op in favor of the bank covering Mr. Calavan's debts to the bank. No one else witnessed the execution of this guaranty. This highly unusual arrangement was made without the slightest indication that Mr. Calavan's credit needs and credit worthiness warranted a guaranty and was done, according to Mr. Hammerschmidt, as a marketing technique, whereby Mr. Calavan might be made to feel more welcome at the bank, and his loan needs administered to more expeditiously. There was no evidence that Mr. Calavan requested a guaranty from the co-op or even knew of its execution. Mr. Calavan was successfully recruited as both a customer of the bank and the co-op, although his first loan from the bank did not occur until 1982, some eighteen months after the guaranty was executed by Mr. White on behalf of the co-op. By then, Mr. Calavan was on the board of the co-op and by March of 1983 indebted to the bank in excess of $300,000. His financial statement which was furnished to the bank showed a net worth as of February 1982 of $2.7 Million, and the bank's loan documents indicated cattle and the borrower's financial statement as security. Subsequently, in the latter part of 1983, Mr. Calavan filed a Chapter 7 bankruptcy petition in the Eastern District of Oklahoma, and testimony was that his case was generally regarded by the bank as a no asset case from which the bank could expect to recover nothing. The cattle, it turned out, were encumbered by several liens prior to the bank's, were infected with brucellosis, and were starving. They had to be sold by the trustee, and none of the proceeds were available to the bank. Needless to say, the financial statement turned out to be overstated.
Meanwhile, in the latter part of 1981, Jack White experienced difficulties with the authorities arising in...
To continue reading
Request your trial