In re Kuper
| Decision Date | 29 March 2018 |
| Docket Number | Bankruptcy No. 17–00267 |
| Citation | 586 B.R. 309 |
| Parties | IN RE: Ross Michael KUPER, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Iowa |
Judith O'Donohoe, Charles City, IA, for Debtor.
RULING ON MOTION FOR RELIEF FROM STAY AND MOTION TO DETERMINE SECURED STATUS OF CLAIM
These matters came on for hearing in Mason City, Iowa. Mark Walk appeared for Osage Cooperative Elevator ("the Coop"). Judith O'Donohoe appeared for Debtor Ross Michael Kuper ("Debtor"). The Court heard testimony and received evidence. The Court took the matter under advisement. This is a core proceeding under 28 U.S.C. § 157(b)(2).
The Coop has a claim against Debtor for unpaid expenses. Debtor also has a claim against the Coop based on a membership interest and patronage dividends. The Coop asks the Court to lift the stay so it can set off its claim against Debtor's ownership interest and patronage dividends. Debtor asks the Court to determine the Coop's secured status. Debtor argues that the Coop is unsecured because it did not file a financing statement. He also argues that setoff is improper because the debts are not mutual. The Coop argues that it may deem the debt it owes to Debtor "due" under its bylaws. The Court agrees with the Coop.
Debtor has been a member of the Coop since 2003. He has done business with the Coop for at least 10 years. He applied for membership and was admitted under the name Reed Kuper. The Coop's records have no entries for a Ross Kuper (Debtor's name). It is unclear why this is so. This is irrelevant to the decision however, as the parties make no arguments based on this factual curiosity.
Debtor has received a patronage dividend check (his share of the Coop's income) from the Coop for the last 10 years. Debtor's membership interests in the Coop is worth $250.00. In addition, the Coop owes him deferred patronage dividends of $60,732.83 in the form of local preferred stock and regional preferred stock for each year from 2005–2015. The Court will occasionally refer to these interests collectively as "the assets."
On November 3, 2016, the Coop sued Debtor. The Coop sought repayment for product that Debtor had purchased from the Coop, for which he had not yet paid. In the lawsuit, the Coop requested a judgment of $72,794.38, which it claimed was Debtor's unpaid balance. (On Debtor's bankruptcy petition, he listed the Coop's unsecured claim as $71,764.00.) Around this time, and in response to the lawsuit, Debtor offered to assign his patronage dividends to the Coop to pay this claim but the Coop refused. The Coop was unwilling at that time to accelerate payment of the patronage dividends, which were not due and payable to him.
On March 20, 2017, Kuper filed this Chapter 7 bankruptcy, staying the lawsuit. On his bankruptcy petition, Debtor listed his Coop membership interests and the deferred patronage dividends as assets, but did not claim them as exempt. On June 29, 2017, the Court entered an order discharging Debtor.
On July 10, 2017, the Coop filed a motion for relief from automatic stay. It sought permission to set off its claim against the assets based on its bylaws. Debtor resisted, arguing that the Coop had no setoff right because its claim was unsecured. The Coop did not file a UCC statement to perfect any security interest in the assets. The Coop filed a motion to strike Debtor's resistance, arguing that Debtor did not have standing because he did not claim the assets as exempt. The Court denied the motion to strike.
On August 15, 2017, the Chapter 7 Trustee filed a report of abandonment that included the membership interests and patronage dividends: "All of Debtor's right, title and interest in and to stock, deferred patronage dividends or other financial interests in Osage Cooperative Elevator and AgVantage FS." Trustee stated that this property was "burdensome or of inconsequential value to the estate because: Secured debt exceeds value of property and/or no value to bankruptcy estate...." No one objected to abandonment.
On September 19, 2017, Debtor filed a motion to determine the secured status of the Coop's claim. Debtor admits that the Trustee abandoned the assets, but argues that the Coop was either unsecured or not fully secured.
Trustee filed a response, noting that no one objected to his report of abandonment, and that there are other competing security interests besides the Coop. Trustee noted that these secured interests far exceed the value of the assets, and those secured parties include "Farm Credit Services of America, PCA which is owed in excess of $136,000.00 and AgVantage FS which is owed in excess of $93,693.00." Trustee notes that, although Debtor listed these claims as unsecured, the UCC 1 financing statements filed on these assets indicate otherwise.
The Coop also filed a response. The Coop notes that Trustee has abandoned the assets and that Debtor had not claimed the assets as exempt. The Coop concludes that the assets must go to secured creditors and that it has the right to those assets for the purposes of setoff.
As an initial matter, the Court finds that the Coop's Motion for Relief from Stay is moot because the discharge has entered and there is now no automatic stay. See Mitchell v. Bigelow (In re Bigelow ), 393 B.R. 667, 670 (8th Cir. BAP 2008) ().
11 U.S.C. § 362(c) provides:
11 U.S.C. § 362. This section "provides for termination of the automatic stay when the property is no longer property of the estate and after the discharge is granted or denied." In re Cureton, 38 B.R. 279, 279 (Bankr. D. Minn. 1984). After the discharge enters, the discharge "will extinguish the § 362 automatic stay and substitute a § 524(a) permanent injunction." In re Daniels, 493 B.R. 740, 744 (Bankr. N.D. Miss. 2013) (internal quotation marks omitted) ).
Here, discharge entered on June 29, 2017. Accordingly, there is no automatic stay and the Coop's Motion for Relief from Stay is moot.
Debtor asks the Court to determine the Coop's secured status because he believes it effects the Coop's ability to assert setoff. Debtor argues that he listed the Coop as unsecured and that the Coop has not filed a proof of claim asserting that it is secured. Debtor also argues that the Coop's debt is not secured because the Coop did not file a UCC financing statement. Debtor concludes that Trustee's strong-arm power now trumps the Coop's alleged secured claim and any right to setoff because of that secured position. Debtor cites Sherman v. Eugene Farmers Coop. (In re Cosner ), 3 B.R. 445 (Bankr. D. Or. 1980), where the court rejected the defendant's argument that their bylaws created a security interest in debtor's capital reserve account because "a security interest may be said to have been available against the bankrupt, [but] none is available against the trustee without perfection." Id. at 448. Debtor does not address Trustee's position that other secured creditors would be entitled to the property if the Coop is not. Debtor appears to be asserting only that the Coop would be unsecured and thus behind other secured creditors that are not a party to this proceeding.
The Coop responds on two fronts. First, it believes it is secured by a first lien and entitled to the proceeds on that basis. Second, it asserts that it has a right to setoff—which functionally makes it secured even without a lien. The Coop argues that it has a security interest in the assets according to Iowa law and the Coop's bylaws. The Coop argues that Debtor cannot assert the Trustee's strong-arm interest because he is not the Trustee and further notes that the Trustee has abandoned the assets. The Coop argues further that it is secured because it has a right of setoff. In particular, the Coop believes that section 8.5 of the cooperative's bylaws entitles them to a right of setoff:
8.5. Setoffs. The Association shall have a first lien and right of setoff against stocks and other equities in the Association of each member or patron for all indebtedness to the Association whether then due or to become due, as shown by the books of the Association, of the holder of any such stocks, or to whom such equities are created; and the Association may also deduct any such indebtedness,. In [sic] whole or in part, from such member's or patron's equities in the Association or from any funds payable by the Association to such member or patron and nothing shall prejudice the setoff rights of the Association hereby conferred.
The Coop argues that, under Iowa law, the cooperative board has broad discretion, subject to these cooperative bylaws, on whether to consider patronage dividends presently due and payable. Mitchellville Coop. v. Indian Creek Corp., 469 N.W.2d 258, 260 (Iowa Ct. App. 1991) (). The Coop concludes that it has a valid setoff against the assets.
In response, Debtor admits that, if the Coop has a right to setoff, then the Trustee's strong-arm...
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