In re Frosty Morn Meats, Inc.
| Decision Date | 25 November 1980 |
| Docket Number | 79-3322,78-3539 to 78-3542,79-3298,79-3019,78-3510 to 78-3512,Bankruptcy No. 78-3139,79-3184,79-3003,79-3198,79-3321,79-3183,80-3303 and 80-3304.,79-3199,78-3455,79-3123 to 79-3125,79-3105,79-3016,79-3657,79-3341 |
| Parties | In re FROSTY MORN MEATS, INC., Bankrupt. |
| Court | U.S. District Court — Middle District of Tennessee |
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Margaret Huff, Asst. U.S. Atty., Nashville, Tenn., for Dept. of Agriculture.
M. Taylor Harris, Jr., and G. Rhea Bucy, Nashville, Tenn., for trustee.
N. Houston Parks, Columbia, Tenn., L. Gino Marchetti, Jr., Robert H. Jennings, Jr., and Martin & Cochran, Nashville, Tenn., Representative attorneys for creditors.*
These cases involve actions taken by the Bankruptcy Judge in presiding over the remains of Frosty Morn Meats, Inc., the Bankrupt.
On November 4, 1977, Frosty Morn filed a petition for an arrangement under Chapter XI of the Bankruptcy Act, 11 U.S.C. ž 701 et seq. After an extended period of time during which no effort was made to file a plan of arrangement, Frosty Morn was declared a bankrupt under the Bankruptcy Act by order dated May 10, 1978. On May 19, 1978, Irvin A. Deutscher was appointed Trustee of the bankrupt debtor. In the period from November 4, 1977, to May 10, 1978, some pertinent actions occurred. Frosty Morn was permitted to operate the business as debtor-in-possession (Order No. 2) but was ordered to provide an accounting. The court postponed the beginning of the 15-day notice period specified in 7 U.S.C. ž 196(b) pending receipt of the accounting. The debtor was restrained from encumbering the trust assets created by 7 U.S.C. ž 196(b). By order entered later, the court fixed the inception of the 15-business-day period as November 21, 1977. On December 21, 1977 (Order No. 34), Irvin A. Deutscher was appointed Receiver of the assets and property of Frosty Morn. By order entered January 25, 1978, nunc pro tunc December 19, 1977, Samuel W. Bartholomew, Jr., was appointed escrow agent for the funds of the trust created by 7 U.S.C. ž 196. So at this time, there was a recognition of two types of assets, i.e., assets of Frosty Morn Meats, Inc., to be held by Deutscher, the receiver, and assets of the trust for the producers, etc., to be held by the escrow agent. On January 9, 1978, the Bankruptcy Judge ordered that all claimants asserting an interest in the trust fund, 7 U.S.C. ž 196(b), file a proof of claim on a prescribed form by February 13, 1978. To this point no appeals were filed to attack the orders of the court.
In an adversary proceeding, Citibank, N.A., v. Irvin A. Deutscher, Receiver, a stipulated settlement was tendered to the bankruptcy court. It was approved by the court (Order No. 75) on March 10, 1978, and became binding on all parties since no appeal was taken therefrom. In the stipulation signed by Deutscher and presented the court is the following language:
8. The Receiver acknowledges that he has previously segregated and set apart the sum of $2,743,122.00, which shall be held pending further order of this court in connection with alleged claims by livestock suppliers seeking priority under the 1976 amendments to the Packers and Stockyards Act, particularly 7 U.S.C. ž 196.
Section 9 of the amended stipulation of settlement filed March 10, 1978, contained the following:
In consideration of the establishment of the escrow funds established in paragraph 6, 7 and 8 above, Citibank agrees it will not, directly or indirectly, make payment of any sums which might be due to the possible beneficiaries of such escrow funds and seek to charge the same to the Receiver or to the account of the Debtor under this paragraph.
The reference to paragraph 8 refers to previously quoted paragraph 8 by which the Receiver set aside the sum of $2,743,122.00 to pay the trust fund (7 U.S.C. ž 196) beneficiaries. In approving the Stipulation of Settlement, supra, the court made certain findings of fact, to wit:
1. By Order No. 39 entered herein January 9, 1978, all persons claiming the benefits of 7 U.S.C. ž 196 were directed to file with this court a proof of claim on or before February 13, 1978. A notice to this effect was issued January 9, 1978, and mailed in cooperation with the Packers & Stockyards Administration, U.S.D.A., to all persons known to have such potential claims. As of February 17, 1978, some 321 such claims had been filed with this court. The notice of hearing on approval of the Stipulation of Settlement (hereinafter, "Settlement") was mailed to all persons who had filed such claims as of February 17, 1978. In addition, the notice was mailed to all attorneys who have entered appearances in this proceeding.
2. At the meeting of creditors held herein on November 29, 1977, the court heard testimony to the effect that the maximum amount of claims which might be asserted against funds of the debtor under 7 U.S.C. ž 196 was $2,743,122.00. Transcript, pp. 7-9. At that hearing the U.S. Attorney specifically agreed that an escrow of this sum, which is approximately $10,000 greater than the estimate of the Packers and Stockyards Administration as to the maximum amount of potential claims under 7 U.S.C. ž 196, was adequate to protect the rights of unpaid livestock sellers under 7 U.S.C. ž 196. Transcript, pp. 13-14. The court further notes that the aggregate amount of claims filed pursuant to Order No. 39 and the notice of January 9, 1978, is considerably less than $2,743,122.00.
3. In July 1975, the debtor entered into a short term financing arrangement with Citibank which is evidenced by documents collected as Exhibit A to Citibank's proof of claim herein. This arrangement provided for interest to accrue on any indebtedness thereunder of the debtor to Citibank at the rate of one-thirtieth (1/30) of one percent (1%) per day. The arrangement also provides for reimbursement to Citibank of all costs of collection, including reasonable attorneys' fees. As security for the repayment of any indebtedness incurred under this arrangement, the debtor granted Citibank a first-lien security interest in inventory, accounts receivable, and the proceeds thereof. Citibank was also granted second-lien deeds of trust on certain real property of the debtor to secure this indebtedness. As of November 4, 1977, the principal balance of the indebtedness to Citibank hereunder was $4,192,189.38. In addition, the debtor was chargeable with the sum of $398.56, representing returned checks, which sum had previously been credited to the debtor's account by Citibank.
4. The Receiver testified that with the assistance of his appointed legal counsel, he had investigated the documents creating the security interests referred to hereinabove and the evidences of the perfection thereof and had found no basis upon which to question either the creation or perfection of the security interests.
5. Since the filing of the original petition herein and during the period in which the debtor remained in possession, Citibank continued to receive various funds of the debtor, including the daily collections of accounts receivable and sales of inventory. The total amount of such funds received by Citibank after November 4, 1977, is $7,711,014.47. On November 21, 1977, the amount of such funds collected and held by Citibank for the first time exceeded the principal indebtedness under the short-term financing arrangement and did so on each day thereafter.
6. By order of November 10, 1977, this court authorized the debtor as debtor-in-possession to issue a Certificate of Indebtedness (hereinafter, "Certificate") in the principal amount of $650,000 to Citibank in consideration of new advances in said amount from Citibank to the debtor-in-possession. The order provided that the property securing indebtedness under the short-term financing arrangement should stand as security for repayment of the Certificate. The Certificate provided that interest would accrue on the indebtedness thereunder at the rate of five percent (5%) above the prime interest rate charged by Citibank to substantial commercial borrowers from time to time.
In addition, the court made certain conclusions as follows:
1. All amounts which are proposed to be paid to Citibank under the terms of the settlement constitute indebtednesses, the repayment of which is secured by valid and perfected first-lien security interests in the accounts receivable and inventory of the debtor, and in the proceeds thereof, and by valid and perfected second-lien security interests in certain real property of the debtor.
2. Although in his testimony the Receiver admitted that there is a possibility that some of the funds in question, which are proposed to be applied in payment of indebtedness to Citibank as a part of this settlement, may represent proceeds of livestock purchased by the debtor in cash sales, no party who appeared in opposition to approval of the settlement made any specific showing to that effect. Since the statutory trust created by 7 U.S.C. ž 196 extends only to livestock purchased in cash sales, or the proceeds thereof, there has been no showing that any of the funds in question are actually subject to the trust provisions of 7 U.S.C. ž 196.
3. Laying aside the considerations set forth in paragraph 7 above, the court is of the opinion that the potential beneficiaries of the statutory trust are fully protected by the terms of the Stipulation in that, as a part of the settlement, the Receiver will set apart the sum of $2,743,122.00, which shall be held until all claims made under 7 U.S.C. ž 196 have been fully adjudicated and determined. As found hereinabove, the sum of $2,743,122.00, exceeds the estimate of the Packers and Stockyards Administration as to the maximum amount of all potential claims under 7 U.S.C. ž 196. In addition to the sum of $2,743,122.00, the Receiver is holding collections of accounts...
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