In re Knight

• Decision Date: 27 January 2016
• Docket Number: Case No. 4:14–bk–15194
• Parties: In re: Matthew Knight and Susan E. Knight, Debtors.
• Court: United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Eastern District of Arkansas

544 B.R. 141

In re: Matthew Knight and Susan E. Knight, Debtors.

Case No. 4:14–bk–15194

United States Bankruptcy Court, E.D. Arkansas, Little Rock Division .

Signed January 27, 2016

Jeremy Bueker, G. Gregory Niblock, Niblock & Bueker, Stuttgart, AR, for Debtors.

Fletcher C. Lewis, McCrory, AR, for Bank of McCrory.

Roger McNeil, Womack Law Firm, Jonesboro, AR, for Crop Production Services, Inc.

ORDER OVERRULING OBJECTIONS TO CLAIMS

Phyllis M. Jones, United States Bankruptcy Judge

Before the Court are the objections of Matthew and Susan E. Knight (collectively, "Debtors ") to Claims 3, 4, 5, and 6 filed by the Bank of McCrory ("Bank ") in this Chapter 13 case. (Debtors' Objections to Claims 3, 4, 5 & 6, Doc. No. 75). The basis of the Debtors' objections is that a sale of their collateral by the Bank was not commercially reasonable.

The Debtors have filed multiple objections to the Bank's claims in this bankruptcy case. On March 31, 2015, the Court conducted a hearing on the Debtors' initial objections to the Bank's claims and the Debtors' amended objections to the Bank's claims to determine whether the claims were properly classified as unsecured. (Debtors' Objections to Proof of Claim Nos. 3, 4, 5 & 6, Doc. Nos. 19, 21, 23, & 25; Debtors' Am. Objections to Claims 3, 4, 5 & 6, Doc. No. 33).

At the March 31, 2015 hearing the Debtors reserved their right to object to the claims on the additional basis of whether the sale of the collateral was conducted in a commercially reasonable manner. At the close of the hearing, the Court took the matter under advisement.

On April 21, 2015, the Court orally ruled on the matters heard March 31, 2015, overruling the Debtors' objections to Claims 3, 5, and 6 and ruling that the claims were properly characterized as unsecured. (Tr. of Court's Oral Ruling at 12–13, Apr. 21, 2015, Doc. No. 97). Further, the Court orally ruled that Claim 4 was partially secured in the amount of $80,368.00 and unsecured for the $54,048.44 balance of the claim. (Tr. of Court's Oral Ruling at 13, Apr. 21, 2015, Doc. No. 97). Also, the Court ruled that Farm Service Agency's ("FSA ") guarantees of certain of the Bank's loans to the Debtors could not be considered collateral for the loans. (Tr. of Court's Oral Ruling at 10–12, Apr. 21, 2015, Doc. No. 97). The Court ordered that Claims 3, 4, 5, and 6 would be allowed, subject to the Debtors' right to object to the claims on the basis that the sale of the Bank's collateral was not conducted in a commercially reasonable manner. (Tr. of Court's Oral Ruling at 13, Apr. 21, 2015, Doc. No. 97).

On May 4, 2015, pursuant to their reservation of rights, the Debtors filed their third objection to the Bank's claims, arguing that the sale of the Debtors' farm equipment to satisfy the indebtedness to FSA and the Bank was not commercially reasonable in light of the fact that the Debtors were not given written notice of the sale and did not waive notice of the sale. (Debtors' Objections to Claims 3, 4, 5 & 6 at 2, Doc. No. 75). The Bank argues that the sale of the farm equipment was a voluntary liquidation by the Debtors, the Bank did not take possession of the equipment nor conduct the sale, and, therefore, notice of the sale was unnecessary.

A hearing was held on this issue on June 24, 2015, at which time the Debtors also argued that Mrs. Knight had no knowledge of and did not participate in the sale. Therefore, even if Mr. Knight were estopped from contending that the sale was not commercially reasonable because of his knowledge of the sale, the same estoppel argument could not be applied to Mrs. Knight. After a hearing on the merits on June 24, 2015, the Court took the matter under advisement.

JURISDICTION

The Court has jurisdiction of this case under 28 U.S.C. § 1334 and § 157. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (B) & (O). The following are the Court's findings of fact and conclusions of law in accordance with Federal Rules of Bankruptcy Procedure 7052 and 9014.

FACTS

In the April 21, 2015 ruling, the Court announced a number of findings of fact and conclusions of law, all of which are incorporated herein by reference. (See Tr. of Court's Oral Ruling, Apr. 21, 2015, Doc. No. 97). Some of the previous findings of fact will be repeated here to provide continuity between the two rulings.

The Debtors engaged in a farming operation under the name M & E Knight Farms prior to filing their Chapter 13 case on September 26, 2014. Mr. Knight stated that he farmed for a continuous period of five years, first under his individual name and later as M & E Knight Farms. (Tr. at 60).¹ Mrs. Knight described the M & E Knight Farms operation as a "joint venture" between the spouses. (Tr. at 78). The Bank made non-consumer agricultural crop loans to the Debtors over a period of years, and FSA also provided financing to the Debtors and guaranteed three loans to the Debtors from the Bank. (Tr. at 19).

The Bank filed four claims in the Debtors' bankruptcy case. Claim 3 was filed in the amount of $53,264.74, Claim 4 was filed in the amount of $134,416.44, Claim 5 was filed in the amount of $295,981.97, and Claim 6 was filed in the amount of $35,815.39. (Ex. 9, Claims 3, 4, 5 & 6). As stated above, the Court has previously ruled that Claims 3, 5, and 6 were properly characterized as unsecured and that Claim 4 was partially secured in the amount of $80,368.00 and unsecured for the $54,048.44 balance of the claim.

The Bank's loans to the Debtors were secured by a security interest in various types of property belonging to the Debtors, including crops and farm equipment. (Ex. 9, Claims 3, 4, 5 & 6). The promissory note and security agreement evidenced in Claim 3 named Matthew Knight as the sole borrower and bore only his signature, while the other three notes, attached to Claims 4, 5, and 6 listed M & E Knight Farms, an Arkansas General Partnership, as the borrower and bore the separate signatures of Mr. and Mrs. Knight as both "member" and "individual." (Ex. 9, Claims 3, 4, 5 & 6).

In the 2013 crop year, the Debtors suffered a difficult season in which they incurred financial losses. (Tr. of Court's Oral Ruling at 4, Apr. 21, 2015, Doc. No. 97). They notified the Bank around January 2014 that they did not intend to continue farming. (Tr. at 52).

Tim St. Clair, the former president of the Bank and the Debtors' loan officer, testified at the hearing that "Matthew came in early in the year to tell [St. Clair] that he was no longer going to farm.... At that point, [the Bank was] willing, and probably able, to keep the operation going if [Matthew] chose to do that, with some help from FSA. He was adamant about not farming." (Tr. at 39). St. Clair informed Jason Floriani, a loan officer at FSA, that "Matthew stated that their decision was final. Therefore, any restructuring scenarios or interest assistance were ruled out as a viable option." (Ex. 1, Letter from St. Clair to Floriani).

St. Clair's testimony is consistent with the testimony of Mr. Knight, who testified that around January 31, 2014, he communicated to St. Clair that he had "decided [he] wasn't going to farm anymore." (Tr. at 52). St. Clair said the Debtors voluntarily liquidated their 2013 crop and paid the proceeds to the Bank. (Tr. at 30–33). Exhibit 10 evidenced all the payments from the sale of the Debtor's 2013 crop, and Exhibit 1 reflected that of the $863,240.64 received as crop proceeds, $673,643.09 was applied to the Debtors' 2013 crop loans. (Exs.1, 10). The last payment to the Bank from crop proceeds was applied on March 7, 2014, toward the indebtedness on the loan evidenced by Claim 5. (Exs.1, 9). However, the Debtors' obligations under the various loan agreements were not completely satisfied by the crop proceeds. Exhibit 1 reflected that the Debtors still owed balances on the four loans and failed to make payments due on March 15, 2014 (Claims 5 and 6), April 1, 2014 (Claim 4), and May 1, 2014 (Claim 3). (Exs.1, 9).

The indebtedness to the Bank was also secured by liens on the Debtors' farm equipment that were subordinate in priority to the liens of FSA, except for certain equipment in which the Bank claimed a purchase money security interest. (Tr. at 20; Ex. 1, Letter to Floriani at 2). St. Clair testified that when Mr. Knight informed the Bank he was discontinuing his farm operation, the Bank "allowed him to liquidate his equipment. [The Bank] never foreclosed or never took an adversarial position. Matthew was always cooperative and.... That was the easiest ... thing to do." (Tr. at 39).

St. Clair further testified that if a farmer is in default on his loan, the Bank's procedure is to give notice of default and refer the matter to its attorney, but the Bank does not follow that procedure if the liquidation is voluntary. (Tr. at 13, 42). In this case, neither St. Clair nor Derick Reynolds, a current Bank employee who also testified, were aware of any notice of default ever being sent to the Debtors. (Tr. at 42, 49). Mr. Knight testified that, although he received a couple of statements from the Bank about payments coming due, the Bank never sent him a notice of default or anything else that could be considered "threatening," and he did not consult an attorney during the period leading up to the sale of his equipment. (Tr. at 54–55). He said the Bank has not pursued collection or taken any other legal action against him since the sale took place. (Tr. at 55).

St. Clair stated that on April 30, 2014, he and Floriani visited a location near the Debtors' farm where the Debtors had assembled the equipment subject to the liens of FSA and the Bank. (Tr. at 26, 29). St. Clair said Mr. Knight's brother Jeremy met them at the location. (Tr. at 29). A document titled "Notes" dated April 30, 2014, and included in Exhibit 7 memorializes the occasion: "An inventory of M & E equipment was completed by Tim St. Clair of the Bank of McCrory and Jason Floriani with FSA. All equipment was present and in good condition. The...