In Re: Mark Hudson
| Decision Date | 15 March 2011 |
| Docket Number | Case No. 208-09480 |
| Parties | In re: MARK HUDSON, AND RACHEL SCARLETT HUDSON, Debtors. |
| Court | U.S. Bankruptcy Court — Middle District of Tennessee |
MEMORANDUM OPINION
This matter came before the Court upon the debtors' motion to utilize funds, the debtors' motion to incur credit, and Wells Fargo Financial Leasing, Inc.'s (hereinafter "Wells Fargo") objection to confirmation of the debtors' amended plan. The Court finds that the debtors' amended plan should be confirmed and that the motions to utilize funds and incur credit should be granted. The following represents the Court's findings of fact and conclusions of law, pursuant to Fed. R. Civ. P. 52(a)(1) as incorporated by Fed. R. Bankr. P. 7052, and made applicable by Fed. R. Bankr. P. 9014(c).
The debtors operate a poultry farm located in Red Boiling Springs, Tennessee. The operation started in June 2004 with the construction of four Cagel-Keystone broiler houseson 40 acres of the debtors' 137-acre farm. Prior to the construction of the broiler houses, Wells Fargo had a first deed of trust on the debtors' 137 acres, including their house, in the amount of $250,000.
The addition of the broiler houses, including the equipment located inside, cost $749,259.74. Wells Fargo financed the construction of the broiler houses and assumed the outstanding home and farm loans for a total of $980,000. The project was finalized with the execution of a document entitled "Building Lease," dated June 29, 2004. The Building Lease provided for payments of $15,631, which were due August, November, February, and April of each succeeding year for a period of 15 years. These payment dates coincided with the maturity and sale of flocks.
The debtors presented the testimony and report of David M. Mainord, an appraiser located in Cookeville, Tennessee, who appraises farm properties in the area. He testified, as in his report, that the chicken farm's market value is $700,000. Wells Fargo presented the testimony and report of Lee E. Stringfellow, from Farmington, Arkansas. He valued the collateral at $945,000.
At the first confirmation hearing, Mr. Hudson testified that Equity Group Kentucky (hereinafter "Equity Group"), who supplied chickens to the debtors, had agreed to reinstate their contract. Thereafter, in May 2010, a Wells Fargo representative contacted EquityGroup regarding its contract with the debtors. Subsequently, Equity Group added the condition that a litter shed be constructed before the debtors would receive any flocks after the first flock. The litter shed will cost $27,500 to build, and without the litter shed, the debtors will not be able to continue as chicken farmers.
In order to build this litter shed, the debtors are able to secure financing, assuming the amended plan is confirmed, through Citizens Bank of Hartsville (hereinafter "Citizens Bank") in the amount of $27,500. As a condition of the loan, Citizens Bank requires a first lien on the farm to secure the indebtedness. The note is renewable up to 30 years.
Mr. Hudson testified that he will repay the litter shed loan through the money saved from installation of a water purification system that uses creek water in an amount up to 50% of total water consumption. This will result in an estimated savings of $1,250 per flock in the winter time and $2,250 per flock during the summer time.
Mr. Hudson explained that a flash flood in 2007 destroyed his water purification system, which he utilized for only two flocks. The flood re-routed the creek to an unuseable location. In May 2010, a second flood re-routed the creek to its original location. This new location gives the debtors the opportunity to reinstall a water purification system.
The debtors' amended plan provides for Wells Fargo to be paid monthly payments from the debtors' employment as a Tennessee Department of Soil and Water Conservation employee and a Macon County school teacher, respectively, in the amount of $1,022.30 for 30 years toward a principal indebtedness on the house and farm of $190,340 with 5% interest per annum. As to the poultry facility, the amended plan provides for payments from each flock, averaging five flocks per year, for the next 20 years in the amount of $8,086.13 towards a principal amount of $509,660 with 5% interest per year.
At the end of 12 years, the principal indebtedness due Wells Fargo on the poultry operation will be $265,506.03, and at the end of 15 years, the principal will be $178,082.68. The indebtedness on the house and farm will be $145,338.86 in 12 years and $129,209.26 in 15 years. At some point between 12 and 15 years, the debtors anticipate that the chicken houses will need to be updated, which is normal in the poultry farming industry. The debtors predict that the cost of upgrades to their poultry operation will be approximately $150,000. One of the debtors' experts, Mike Long, testified at his deposition that generally, he would estimate that upgrades to 15 to 20-year-old poultry houses would cost around $200,000. However, Mr. Long never visited the debtors' farm and had no opinion as to the current condition of the debtors' poultry houses.
The debtors are prepared to borrow up to $150,000 for the upgrades and if possible, refinance the chicken house portion of Wells Fargo's indebtedness and/or the house and landportion of Wells Fargo's indebtedness. Under the debtors' amended plan, the amount owed to Wells Fargo on the house and land will be significantly reduced by this time, and the debtors assert that they will have sufficient equity upon which to borrow for the improvements and possibly refinance Wells Fargo's entire indebtedness. However, even if the debtors are unable to refinance any portion of Wells Fargo's indebtedness, the debtors' amended plan provides that the poultry operation portion will be paid off at the end of 20 years and the house and land will be paid off at the end of 30 years.
The debtors filed their voluntary Chapter 12 petition on October 15, 2008, and the debtors filed their initial Chapter 12 plan on March 19, 2009. As a preliminary matter, the Court held a hearing on Wells Fargo's motion to compel the debtors to assume or reject its lease. At that hearing, the Court ruled orally that Wells Fargo's interest was a security interest rather than a lease, and therefore, there was nothing to assume or reject. The order was entered on July 2, 2010. The first confirmation hearing was held on February 23, 2010, after the hearing on Wells Fargo's motion to compel but before entry of the order. At the end of the confirmation hearing, the parties were given an opportunity to submit proposed findings of fact and conclusions of law. Wells Fargo filed an expedited motion to extend the proof, which was heard on March 9, 2010. At the hearing, both parties stated they wanted to reopen the proof for more discovery. The Court granted their requests.
On June 23, 2010, the Court entered an agreed order allowing the debtors to assume a contract with Equity Group to resume receiving flocks. As part of this agreement with Equity Group, the debtors were required to: (1) fix or replace all fans, motors, gears, and water lines; (2) construct a litter storage box; and (3) add a composter.
The debtors filed motions to utilize funds and to incur credit in order to build the litter shed now required by Equity Group. At a hearing on these matters, the Court determined that these additional motions were contingent upon confirmation of an amended plan. The Court continued these two motions and set the hearing on confirmation of the debtors' amended plan, which was filed on September 28, 2010. The following conditions for approval of the motion to utilize funds and incur credit were set by the Court: (1) confirmation of an amended plan, (2) approval of the security instrument, a copy of which was to be filed on or before September 13, 2010, and (3) approval of the note, with the inclusion of a provision making it renewable for 30 years along with the amount of annual payments, a copy of which was to be filed on or before September 13, 2010. Findings of fact and conclusions of law were filed by both parties on September 28, 2010, and Wells Fargo filed supplemental findings on September 30, 2010. The confirmation hearing on the amended plan was held on December 9, 2010. Wells Fargo is the only party objecting to confirmation of the amended plan. The Chapter 12 Trustee does not object to confirmation or to the motions to utilize funds and incur credit.
The debtors assert that Wells Fargo does not have standing to object to confirmation because it failed to file a proof of claim in this case. The Court disagrees.
Pursuant to 11 U.S.C. § 1224, a "party in interest" may object to the confirmation of a plan. The question before this Court is whether Wells Fargo's lien makes it a "party in interest" and therefore, Wells Fargo has the right to object to its treatment under the plan.
First, the Court notes that a secured creditor is not required to file a proof of claim to maintain its interest in the collateral to which its security interest attaches. See 11 U.S.C. § 506(d)(2); Talbert v. City Mortg. Servs. (In re Talbert), 344 F.3d 555, 561 (6th Cir. 2003) (). There are two exceptions to this rule. First, if the secured creditor's lien exceeds the value of the collateral, the creditor must file a proof of claim on the deficiency in order to receive distribution for the unsecured portion of its claim. PCFS Fin. v. Spragin (In re Nowak), 586 F.3d 450, 455-56 (6th Cir. 2009) (citing 11 U.S.C. § 506(a)(1); Fed. R. Bankr. P. 3002(a)). The second exception is where the creditor's lien is successfully avoided in an adversary proceeding pursuant to 11 U.S.C. § 544(a). Id. at 456. These exceptions do not apply here.
Accordingly, Wells Fargo's lien against...
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