In re Kerns
| Decision Date | 08 March 1990 |
| Docket Number | No. TH 89-85-C,Bankruptcy No. TH 89-16.,TH 89-85-C |
| Citation | 111 BR 777 |
| Parties | In re James C. KERNS, Debtor-in-possession. |
| Court | U.S. District Court — Southern District of Indiana |
COPYRIGHT MATERIAL OMITTED
Wilmer E. Goering, II, Eckert Alcorn Goering & Colussi, Madison, Ind., for appellant.
Bruce A. Smith, Sturm Smith & Webster, Vincennes, Ind., for appellee.
ORDER ON APPEAL FROM DECISION OF BANKRUPTCY COURT
This cause comes before the District Court on the appeal of the Chapter 12 debtor. The central question presented is whether the Bankruptcy Court erred in lifting the automatic stay early in the bankruptcy to allow the debtor's farm land to be sold, notwithstanding the fact that the secured creditor had an equity cushion and adequate protection in the land. For the reasons set forth below, the Court REVERSES the decision of the Bankruptcy Court and REMANDS this cause for further proceedings.
James C. Kerns is a family farmer in Knox County, Indiana. He entered into a real estate purchase contract on February 22, 1977, for the 175 acre tract which is the subject of this appeal. He purchased this land from the Blooms, and the real estate is thus commonly known as the Bloom Farm. In April of 1985, Kerns executed an Agreement and Assignment of Real Estate Purchase Contract to Citizens Bank of Vincennes. Pursuant to this Agreement and Assignment, Kerns assigned all of his equity in the 175 acre tract to the Bank as security for certain debts. In July of 1988, the Bank purchased the legal interest in the real estate from the original sellers. Kerns was indebted to the Bank for approximately $126,000 on this land, plus an additional $100,000 pursuant to another loan.
Of the approximately 175 acres of land on the Bloom farm, some 130 are tillable. The land is described as rolling. The farm has several structural improvements, including a 20,000 bushel grain storage bin, a 28' by 90' frame machinery shed, and a 62' by 68' wood frame barn with metal siding and roofing. Mr. Kerns stored grain in the storage bin. The machinery shed was too small to store his tractor or combine but was used for smaller items, while the barn was used only for seed corn storage and to house a ten-wheeler truck. Kerns did not live on the farm as the house was in poor repair and uninhabitable, but instead lived some two miles away.
Kerns used the Bloom Farm to grow corn, soybeans, and alfalfa. The land became infested with Johnson grass, a weed that reduces crop yields and is difficult to eradicate. The Johnson grass problem reduced Kerns' yield, but he continued to farm the land. Kerns also used the land for cattle grazing in the winter, and the cattle used the barn for shelter. In the summer, Kerns would move the livestock to one of his other farms.
Kerns also farms another 145 acre farm in Knox County that he is purchasing on contract. Additionally, he rents additional farmland, for a total acreage of some 600 acres for all his operations. The farming operations all involve corn, soybeans, alfalfa, and livestock. The other farmland does not suffer from the same infestation of Johnson grass that is present on the Bloom farm. Kerns considers the Bloom Farm necessary to his overall farming operations.
In 1988 Kerns suffered financial difficulties and defaulted on his payments to Citizens Bank. On August 30, 1988, the Bank filed a foreclosure action in the Knox Circuit Court, seeking to foreclose on the Bloom farm.
This bankruptcy case was commenced on January 6, 1989, when Kerns filed a voluntary petition for relief under Chapter 12 of the Bankruptcy Code. At the time of filing, Kerns was indebted to the Bank on the Real Estate Purchase Contract and Agreement and Assignment of Real Estate Purchase Contract in the approximate sum of $228,000. Kerns was in default on the Purchase Contract, having not paid the 1988 or 1989 payments. Kerns listed the value of the Bloom farm on his bankruptcy schedules as $166,800. Upon the filing of the bankruptcy petition, the Bank's state court foreclosure action was automatically stayed under the provisions of 11 U.S.C. § 362(a).
On March 1, 1989, some 54 days after the Chapter 12 filing, Citizens Bank petitioned the Bankruptcy Court for relief from the automatic stay or for the alternative relief of adequate protection. In its motion, the Bank stated that the value of the real estate exceeded the amount of the Bank's claims against the Debtor. Citizens Bank asked the Bankruptcy Court to allow it to pursue its foreclosure action or to allow adequate protection payments to the Bank for the Debtor's use of the Bank's collateral and security.
Thereafter, on March 20, 1989, the Bankruptcy Court held a hearing on these issues, as well as on the valuation of the property. Then, on March 29, 1989, the Bankruptcy Court issued its ruling from which this appeal was taken.
In its Order on Motion for Relief From Stay, the Bankruptcy Court ruled that Citizens Bank was entitled to relief from the automatic stay provision of § 362. The Bankruptcy Court found that the Bloom Farm had a value of at least $255,000, and that a buyer was ready, willing, and able to pay for the property. The court further ruled that the farm was not necessary to an effective reorganization of the Debtor's estate.
Although the lower court specifically decided that Citizens Bank had an equity cushion and adequate protection in the subject property such that relief from the stay was not available under § 362(d)(2), the court found that "cause" existed under § 362(d)(1) for allowing relief from the stay. The Bankruptcy Court described the "cause" it found in this case as follows:
The `other cause\' shown under the particular facts presented in this case is that the subject property, which is not necessary to debtor\'s reorganization, may be sold forthwith for an amount of at least Two Hundred Fifty-five Thousand Dollars ($255,000), less reasonable sale expenses, and possibly Two Hundred Sixty-two Thousand Five Hundred Dollars ($262,500), which amount is sufficient to completely pay off the secured obligations of debtor to Citizens and provide surplus funds to the estate. In addition, the debtor will probably be able to negotiate a contract whereby the subject property may be custom farmed on favorable terms providing further income to the estate.
See Order of March 27, 1989, at 4. The Bankruptcy Court, however, did not cite any case law for its conclusion that these facts constituted "cause" under § 362(d)(1).
Accordingly, the lower court lifted the automatic stay. However, rather than allow the state foreclosure action to proceed as requested by Citizens Bank, the Bankruptcy Court, without explanation, allowed Citizens Bank "to sell the subject property . . . for at least . . . $262,500. . . ."
Thereafter, the Debtor sought leave to appeal and asked the Bankruptcy Court to stay its Order pending the appeal. The Bankruptcy Court denied the request to stay the Order. On May 5, 1989, the Debtor then asked the District Court to stay the Bankruptcy Court's Order pending appeal, arguing that the appeal would become moot and Debtor would be deprived of the right to reorganize his family farm if the sale of Bloom farm proceeded. This Court never ruled on the motion.1
On May 26, 1989, Citizens Bank reported to the Bankruptcy Court that it had sold the Bloom Farm at a private sale to Ridgeview Homes, Inc., for the sum of $263,000. The Agreement for Sale of Real Estate entered into by Citizens Bank and Ridgeview Homes contained the following provision:
4. The parties hereto acknowledge notice of the fact that subsequent to the entry of the bankruptcy court\'s Order granting relief from stay . . ., the Debtor filed a Motion for Stay of said Order Pending Appeal, which was denied by the U.S. Bankruptcy Court . . ., and that the Debtor has filed with the U.S. District Court a Motion for Stay of Order Pending Appeal. In the event the sale of the real estate is stayed . . ., the seller shall not be liable to Buyer for damages for any delay occasioned in the sale of the real estate. It is further agreed that if the sale of the aforesaid real estate is ultimately disapproved as a result of the aforesaid appeal, the Seller\'s sole obligation to the Buyer shall be a complete return of the purchase price for the real estate, together with any interest which may have accrued upon the escrowed purchase price, upon the final order setting aside the bankruptcy court\'s Order on Motion for Relief from Stay.
See Agreement for Sale of Real Estate, ¶ 4.
Citizens Bank subsequently moved to dismiss the appeal, arguing that the automatic stay issue had become moot because of the sale of the real estate. The Debtor responded that the sale was not protected under the Code and that the parties to the sale of the Bloom Farm had expressly provided for return of the purchase price upon culmination of the appeal in the Debtor's favor.
The parties then briefed the merits of the appeal. The Debtor asserts that the Bankruptcy Court erred in finding cause under § 362(d)(1) for modifying the automatic stay, and that the private sale ordered by the Bankruptcy Court was contrary to law in that the foreclosure action should have simply been allowed to proceed. Before reaching these issues, it is necessary to set forth the appropriate standards of review.
In reviewing a decision of the bankruptcy court, this District Court acts as an appellate tribunal and is governed by traditional standards of appellate review. Specifically, the Court "is constrained to accept the bankruptcy court's findings of facts unless they are clearly erroneous." In Re Excalibur Auto Corp., 859 F.2d 454, 457, n. 3 (7th Cir.1988); In Re Longardner & Associates, Inc., 855 F.2d 455, 459 (7th Cir.1988). "A finding is clearly erroneous if upon...
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