In re GVF Cannery, Inc.

• Decision Date: 29 September 1995
• Docket Number: Bankruptcy No. 91-57000-ASW. Adv. No. 92-5059.
• Citation: 188 BR 651
• Parties: In re GVF CANNERY, INC., dba Garden Valley Foods, a California corporation, Debtor. Ed SILVA, dba Ed Silva Farms, Plaintiff, v. GVF CANNERY, INC., dba Garden Valley Foods; and Wells Fargo Bank, N.A., Defendants.
• Court: U.S. Bankruptcy Court — Northern District of California

188 B.R. 651 (1995)

In re GVF CANNERY, INC., dba Garden Valley Foods, a California corporation, Debtor.

Ed SILVA, dba Ed Silva Farms, Plaintiff, v. GVF CANNERY, INC., dba Garden Valley Foods; and Wells Fargo Bank, N.A., Defendants.

Bankruptcy No. 91-57000-ASW. Adv. No. 92-5059.

United States Bankruptcy Court, N.D. California.

September 29, 1995.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

William J. Bush (argued), Hanson, Bridgett, Marcus, Vlahos & Rudy, San Francisco, CA, for Plaintiff Ed Silva.

Paul R. Bessette (argued), Brobeck, Phleger & Harrison, San Francisco, CA, for Defendant Wells Fargo Bank, N.A.

Defendant GVF Cannery, Inc., the Debtor in the Chapter 7 case herein did not appear at trial.

MEMORANDUM DECISION

ARTHUR S. WEISSBRODT, Bankruptcy Judge.

Trial in this matter was held before the undersigned on October 3, 4, 5, and 6, 1994, and November 9, 1994. William J. Bush, Esq. of Hanson, Bridgett, Marcus, Vlahos & Rudy appeared for Plaintiff Ed Silva ("Silva"). Paul R. Bessette, Esq. of Brobeck, Phleger & Harrison appeared for Defendant Wells Fargo Bank ("Bank"). Defendant GVF Cannery, Inc. ("GVF"), the Debtor in the Chapter 7 case herein, did not appear at trial.¹

Silva called as witnesses: Edward Silva, Jr., the Plaintiff; James A. Peasley, former President of GVF; and John R. Skelton, a Certified Public Accountant, who was qualified as an expert witness to interpret the books and records of GVF.

Bank called as witnesses: Roland Tucker, a Vice President of Bank; and David A. Morisoli, Silva's brother-in-law and employee. Bank offered Frederick D. Holden, Jr., an attorney, as an expert witness regarding standard commercial practice in the use of subordination agreements in real property and personal property secured transactions, but did not establish a sufficient foundation and the Court did not qualify the witness as an expert; Mr. Holden did not testify.

Fred Avalli (an officer, director, and shareholder of GVF) did not testify, but a transcript of his deposition taken on April 6, 1992 was admitted into evidence as Defendant's Exhibit BE.

The following represents the Court's findings of fact and conclusions of law, pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.

I. BACKGROUND

GVF operated a cannery, processing produce that it bought from growers. GVF obtained its financing from Bank in several forms, all of which were cross-collateralized, such that Bank held security interests in virtually all of GVF's assets.

Silva contracted to sell tomatoes to GVF during the 1989 season; in connection with that contract, Silva signed a document that provided for subordination of his producer's lien upon GVF's inventory to any security interest held by Bank upon the same assets. Silva was paid in full for his 1989 crop. Silva then contracted to sell more tomatoes to GVF during the 1990 season, and signed two other documents purporting to provide for subordination of his producer's lien to the security interest of Bank. Silva was not paid in full for sale of his 1990 crop to GVF; when GVF filed its Chapter 11 petition in November 1990, the unpaid balance owed to Silva was $1,107,001.45.

Pursuant to orders of this Court and a stipulation with Silva (see footnote 1 above), Bank has liquidated its collateral, including such inventory as was subject to Silva's lien. The proceeds were insufficient to cover fully the amount secured by Bank's security interest so that, if Silva's lien is subordinated, Silva will receive nothing. Silva's complaint seeks a determination that his lien is not subordinated to Bank's security interest.

II. THE CALIFORNIA PRODUCER'S LIEN

California law provides for a producer's lien upon farm products sold by a grower or producer such as Silva to a processor such as GVF, pursuant to the California Food and Agricultural Code ("Food & Ag.Code"), Article 9, §§ 55631-53. The lien arises, and attaches automatically, when the products are delivered to the processor, to the extent of the agreed price to be paid for the product by the processor to the grower (or, if no price has been agreed upon, to the extent of the value of the product at the time of delivery). The lien extends to all of the product's subsequent processed or manufactured forms. The lien is prior in preference (to the extent of the value of the specific product delivered) to all other liens and encumbrances with the exception of specific claims for unpaid wages or salaries, or a warehouseman's lien under Division 7 of the Uniform Commercial Code. "The producer's lien is central to an extensive California statutory scheme giving farm producers a lien on all farm products they sell. . . . The sense underlying the statutory scheme is that other creditors should not be allowed to benefit from the pockets of laborers and suppliers who have increased the estate's value, or, indeed, have created it." In re Loretto Winery, 898 F.2d 715, 720-21 (9th Cir.1990) ("Loretto Winery"). The California producer's lien is recognized and upheld in bankruptcy cases, Loretto Winery, In re T.H. Richards Processing Co., 910 F.2d 639 (9th Cir.1990) ("T.H. Richards"). It is undisputed that Silva acquired a California producer's lien upon the tomatoes that he delivered to GVF in 1990.

III. RELEASE OF A PRODUCER'S LIEN

The California producer's lien continues in effect until such time as it is released. The Food & Ag.Code provides for release under two sections of Article 9: § 55639, which enables the processor to secure a release; and § 55637, which pertains to voluntary release by the grower.

Under § 55639, a processor may obtain release of a producer's lien in one of five specified ways:

(a) By paying the agreed or actual value of any farm product which is purchased within 20 days from the date of delivery of the farm product unless the date of payment is otherwise agreed upon in writing or such payment is secured other than by lien.

(b) By depositing with the director a surety bond which is executed by such processor as principal and by a surety company which is qualified and authorized to do business in this state as surety in an amount which equals the current market value of the product or processed product which is intended by the processor to be sold or otherwise disposed of, as such value may appear by the sworn statement of such processor in accordance with quotations from the federal-state market news service or other evidence which is satisfactory to the director. The bond shall be conditioned that if the processor fails to pay up to the amount of such bond the lawful claims of all producers whose liens have been released by the bond, within 35 days after date of the bond, the surety shall be liable to and shall pay to the state on behalf of such claimants all such lawful claims as may be covered by the amount of the bond, together with costs of suit if an action is filed on the bond.

(c) By depositing with the director a cash sum in lawful money of the United States which is expressly set apart by an instrument in writing that is signed by the processor for the purpose of guaranteeing to the extent of such sum, payment of all existing claims of producers whose liens are released by the deposit, within 35 days from the date of the deposit. The director shall be named in such instrument as trustee to carry out the purpose and intent of the instrument.

(d) By designating, setting apart, and depositing in a public warehouse a quantity of any processed farm products and endorsing over to the director and delivering to him the warehouse receipt for such products for the purpose of guaranteeing to the extent of the value of such deposit, payment within 35 days from the date of such deposit, all existing claims of producers and labor claimants whose liens are released by it.

(e) By securing a release from the director after payment in full for such farm product.

These five procedures are the only means by which a processor can effect a release of a producer's lien by operation of law, T.H. Richards. Bank does not contend that any of these methods was employed here, so it follows that Silva's lien was not released pursuant to § 55639.

Under § 55637, the grower may voluntarily release the lien upon the occurrence of certain events:

Any lien on any product or processed product may, however, be released, to the extent the value of the claim upon such product is secured, by a surety bond or a cash deposit or other security given as provided in this article. Any producer may also release any lien which is possessed by him upon payment being made to him for the agreed or reasonable value of the product which is so sold and delivered, or upon arrangements being made for such payment which are satisfactory to the producer.

The first sentence of this section reiterates that a lien may be released upon the provision of alternate security in accordance with § 55639, which event did not take place in this case. The second sentence of this section provides for release of a lien by a grower who has either been paid, or with whom satisfactory arrangements for payment have been made. It is undisputed that Silva was not paid in full, so the first clause of the sentence does not apply here. As to the second clause of the sentence, Bank at one time contended (in a footnote in a supplemental brief prior to trial) that Silva's lien could be viewed as having been released through satisfactory payment arrangements having been made, by virtue of Silva entering into the 1990 contract and subordination agreement with GVF. However, the Ninth Circuit has held that release under § 55637 is permissive on the part of a grower, not mandatory, and that this section does not provide that, by merely agreeing to a deferred-payment plan, a grower releases its producer's lien as a matter of law, T.H. Richards. The same rationale applies with equal force to a grower entering into a contract that calls for...