In re Hatcher, BAP No. 97-6066SI.

• Decision Date: 06 March 1998
• Docket Number: BAP No. 97-6066SI.
• Parties: In re Robert HATCHER, Ruth Ann Hatcher, Debtors. Robert HATCHER, Ruth Ann Hatcher, Debtors-Appellants, v. U.S. TRUSTEE, Trustee-Appellee, Allison Financial Corporation, Creditor-Appellee.
• Court: Bankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Eighth Circuit

218 B.R. 441 (1998)

In re Robert HATCHER, Ruth Ann Hatcher, Debtors.

Robert HATCHER, Ruth Ann Hatcher, Debtors-Appellants, v. U.S. TRUSTEE, Trustee-Appellee, Allison Financial Corporation, Creditor-Appellee.

BAP No. 97-6066SI.

United States Bankruptcy Appellate Panel of the Eighth Circuit.

Submitted February 12, 1998.

Decided March 6, 1998.

Before WILLIAM A. HILL, SCHERMER, and SCOTT, Bankruptcy Judges.

WILLIAM A. HILL, Bankruptcy Judge.

The appellants, Robert and Ruth Ann Hatcher ("Hatchers"), appeal from the order of the bankruptcy court¹ dismissing their Chapter 11 case for cause pursuant to the United States Bankruptcy Code ("Code"), 11 U.S.C. § 1112(b). For the following reasons, we affirm the order of the bankruptcy court.

I. BACKGROUND

The Hatchers are Iowa farmers. Prior to 1994, they owned farmland which was partly encumbered by a mortgage on which they fell delinquent. As a result, approximately one-half of their farmland became the subject of a mortgage foreclosure proceeding. A sheriff's sale was set for January 6, 1994. The Hatchers sought a loan in order to save their property; however, their efforts failed. They then determined to sell their entire property, which consisted of 46 acres of land on which their residence and another building were situated. In preparation for its sale, they platted the land into separate parcels with an aggregate list price of $316,000.00.

Several months prior to the sheriff's sale, the Hatchers located a buyer for their property. The parties agreed upon a sale price of $69,300.00, with an option for the Hatchers to repurchase the property within a specified period of time. The sale collapsed, however, upon the buyer's inability to obtain financing for the transaction. Nevertheless, the Hatchers were able to locate yet another buyer, Allison Financial Corporation ("Allison"), with which they entered into a similar sale agreement.

On January 3, 1994, Allison signed a purchase agreement with the Hatchers to purchase their entire property for $69,300.00.² The parties' agreement provided the Hatchers with the option to repurchase the property by March 30, 1994. On January 6, 1994, the Hatchers executed a warranty deed in favor of Allison conveying their entire real estate. The Hatchers did not exercise the repurchase option.

Subsequently, the Hatchers filed suit against Allison in Iowa state district court seeking reformation of the sale agreement by claiming the sale was intended to be a loan transaction, and also seeking damages from Allison and several other defendants for breach of fiduciary duty and for fraudulent misrepresentation. The district court entered judgment against the Hatchers in January 1995. Included among its findings were the following: the Hatchers had attempted to sell various portions of their farmland since at least 1988; Mr. Hatcher himself negotiated the terms of the sale of his property with its first potential buyer, including its sale price, a repurchase option, and the closing date; Mr. Hatcher's real estate agent reduced the sale agreement to writing, explained it to Mr. Hatcher, and also advised him against entering into it; and, when the first deal fell through, the Hatchers expressed to their real estate agent their desire to locate another buyer. Finally, concerning the Hatchers' ultimate sale of their property to Allison, the court found that:

The terms and conditions of the sale . . . were explained fully in the written real estate sales agreements. It was explained orally as well. It is without question that the Hatchers freely and of their own accord executed a warranty deed in the presence of a notary public transferring title of the real estate to Allison. . . . The real estate brokers made no material misrepresentations so as to mislead the Hatchers into selling their land.

The court additionally ruled that the Hatchers failed to prove any breach of fiduciary duties or fraudulent misrepresentation by the defendants. The court concluded by stating that:

The Hatchers\' current status is due to the elusive and unrealistic dream of Robert E. Hatcher. At all times Robert Hatcher maintained a dream or wish that someone with unlimited finances would pay an exorbitant price for his farm. Upon receiving this unreasonable sum, Robert E. Hatcher further fantasizes of paying all his debts and purchasing a different and better farm. This delusion was the reason the Hatchers attempted at any cost to purchase additional periods of time to allow Robert E. Hatcher to locate his imaginary buyer. Ultimately, the cost of this fantasy was the Hatchers\' home.

In a subsequent order entered on February 8, 1995, the district court reaffirmed its earlier findings as to the Hatchers' and Allison's agreement by ruling that, "It is clear that the purchase agreement entered between the Hatchers and Allison was intended as an absolute sale of the subject property for fair and adequate consideration. The relationship between the Hatchers and Allison was as seller and buyer only."

The Hatchers appealed the orders of the district court. In July 1996, the Court of Appeals of Iowa, after undertaking a de novo review of the complete record, affirmed the entirety of the district court's rulings in pertinent part as follows:

The Hatchers\' claim that they did not understand the consequences of the real estate transaction was not supported by the record. Robert Hatcher was experienced and knowledgeable in real estate matters. We also give weight to the finding of the trial court that Hatcher\'s expectations were not based on actions or representations of others, but his own false hope.

. . .

We have carefully reviewed the record and agree with the trial court that Allison and other defendants made no false representations to the Hatchers which would support the claim for fraudulent misrepresentation. In particular, no evidence indicated any of the defendants expressed or implied the real estate transaction was a loan. The relevant documents clearly indicate the parties entered into a sales agreement and any contrary understanding by the Hatchers was not due to any false representations made by Allison. In fact, the Hatchers had attempted to sell their farm to another person prior to the Allison sale, with terms nearly identical to the Allison transaction. Their claim they didn\'t understand the transaction was a sale was not reasonable under the circumstances.

. . .

We agree the evidence is insufficient to support reformation. Our goal is to ascertain the intent of the parties. The evidence clearly shows the parties intended the transaction to be a sales agreement.

From the inception the Hatchers knew a sales transaction was contemplated. The Hatchers and Allison never maintained a debtor-creditor, mortgagor-mortgagee relationship. In fact, it was necessary for Allison to obtain a loan to purchase the farmland from the Hatchers.

Furthermore, the purchase price was adequate considering all the circumstances and risks, associated with the farmland, as well as the buy-back provision. The Hatchers did retain possession of the farm after the agreement was executed, but only during the option period. We also observe the language of the agreement leaves little doubt the transaction was a conditional sale.

On October 4, 1996, the Supreme Court of Iowa, after an en banc consideration, denied further review of the matter.

Despite the unfavorable resolution of their appeals in the Iowa state courts, the Hatchers refused to relinquish their former real estate. Allison then commenced eviction proceedings against them. However, on October 21, 1996, just two hours before a hearing was to be held on the matter, the Hatchers filed for Chapter 11 protection under the Code.

In their Schedules and Statement of Affairs, the Hatchers claimed a joint interest in the farmland and buildings which they had sold to Allison. They listed the value as being $300,000.00, "subject to a fraudulent conveyance action," and additionally claimed a homestead exemption of $150,000.00 in up to forty acres of the property. The Hatchers scheduled Allison as a fully secured creditor in the amount of $62,900.00 with the "Debtor's land" serving as collateral.³

The Hatchers premise the viability of their proposed plan entirely upon their claim of ownership of the real estate which they previously sold to Allison. As they stated in Article VII of their proposed plan, entitled "Means and Execution of the Plan," "The Debtor proposes to continue their sic farming business and development business and pay creditors from future income from this farming business and from the development of various properties of the Debtors." Thus, if their plan is to have any chance of success, the Hatchers must in some way be found the property's owners.

Both Allison and the United States Trustee filed motions to dismiss the Hatchers' case. Allison also filed a Motion for Relief from Stay. The debtors resisted these motions, reurging the fraudulent conveyance and loan-versus-sale arguments which they had presented in the state courts. The bankruptcy court held an evidentiary hearing on these motions on December 19, 1996. On July 21, 1997, the court entered an order dismissing the Hatchers' case. In reaching this result, the court stated:

Mr. Hatcher expressed his desire that this Court find that the transaction with Allison was a loan rather than a sale of property. This Court cannot do that. The issue of the validity of the warranty deed executed by the Hatchers was litigated in state court. The district court decision was appealed and affirmed by the Court of Appeals of Iowa. The Hatchers were denied further review by the Supreme Court of Iowa. The issue of the validity of the transactions has conclusively been determined; the Hatchers\' transaction with Allison was not a loan. This Court finds no federal statute that provides an exception to the application of collateral estoppel and therefore affords full

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