In re Morken
| Decision Date | 27 August 1996 |
| Docket Number | Bankruptcy No. 4-94-2954. Adv. No. 4-94-555. |
| Parties | In re John D. MORKEN and Dorothy M. Morken, Debtors. Phillip L. KUNKEL, Trustee for the Estate of John D. Morken and Dorothy M. Morken, Plaintiff, v. Charles W. RIES, Trustee for the Estate of Spring Grove Livestock Exchange, Inc.; Farm Credit Services of Southern Minnesota, ACA, a Minnesota corporation; Sprague National Bank, a United States corporation; Security State Bank of Sheldon, an Iowa corporation; Firstar Bank Milwaukee, N.A., an United States corporation; Brenton Brothers, Inc., an Iowa corporation; Bracht Feedyards, Inc., a Nebraska corporation; Busse Feedlot, Inc., an Iowa corporation; Farmers Co-op Society, an Iowa corporation; Robert Eason d/b/a Eason Feedlots; James Easton d/b/a Easton Feedlot; Jeff Anema d/b/a Floyd Feedlot; Richard Hansen d/b/a Hansen Feed Yards; Larryann Hunt, Inc., an Iowa corporation; L/B Feedlot, a Nebraska partnership; Dixon County Feedyard Co., a Nebraska corporation; Oak Ridge Feedlot, Inc., an Iowa corporation; Oshkosh Feed Yard, Inc., a Nebraska corporation; Ruser Venice Feedlots, Inc., a Nebraska corporation; Schomers Brothers, Inc., an Iowa corporation; Wayne 941*941 Schut, d/b/a Schut Feedlot; Valley View Feedlots, Inc., an Iowa corporation; Westview of Monroe, Inc., an Iowa corporation; West Central Cattle Company, an Iowa corporation; Willberg Cattle Co., an Iowa corporation, Defendants. |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — District of Minnesota |
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Thomas P. Melloy, Hall & Byers, P.A., St. Cloud, Minnesota, Jerome A. Miranowski, Oppenheimer, Wolff & Donelly, Minneapolis, Minnesota, for Plaintiff.
William S. Partridge, Farrish, Johnson & Maschka, Mankato, Minnesota, Gary W. Koch and David W. Sturges, Gislason, Dosland, Hunter & Malecki, New Ulm, Minnesota, James M. Caragher and Thomas L. Shriner, Jr., Foley & Lardner, Milwaukee, Wisconsin, Clark T. Whitmore, Maslon, Edelman, Borman & Brand, Minneapolis, Minnesota, for Defendants.
This adversary proceeding came on for trial on May 13-17, 1996. Thomas P. Melloy and Jerome A. Miranowski appeared for the plaintiff. William S. Partridge appeared for Charles W. Ries. Gary W. Koch and David W. Sturges appeared for Farm Credit Services of Southern Minnesota, ACA. Thomas L. Shriner, Jr., Clark T. Whitmore, and James M. Caragher appeared for Firstar Bank Milwaukee, N.A., and Sprague National Bank.
This court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 157(a) and 1334, and Local Rule 201. This is a core proceeding within the meaning of 28 U.S.C. §§ 157(b)(2)(A), (F), (H), (K) and (O).
I. FACTUAL BACKGROUND
Prior to June 10, 1994, John and Dorothy Morken were engaged in the business of raising, fattening and marketing cattle in the Upper Midwest. In addition, John Morken was the sole shareholder and president of Spring Grove Livestock Exchange, Inc.,1 a corporation previously owned by his father. SGLE was in the business of purchasing both fat cattle and feeder cattle. Fat cattle are bought from third parties and sold directly to packers for slaughter and feeder cattle require fattening for three to six months prior to slaughter. Customarily, SGLE purchased feeder cattle from third parties and then resold them to Morken and others for fattening.
To finance their personal business as well as SGLE's operations, the Morkens had accounts with several lending institutions, including Sprague National Bank2, Firstar Bank Milwaukee, N.A.3, and Farm Credit Services of Southern Minnesota, ACA.4
Sprague was the Morkens and SGLE's primary lender until 1992. The Morkens and SGLE's business accounts were established at Sprague. In addition, Sprague provided Morken with financing to purchase cattle. On February 28, 1993, and May 31, 1994, respectively, the Morkens and Sprague executed an Amended and Restated Term Note in the amount of $316,149.50 and an Amended and Restated Revolving Credit Note in the amount of $1,650,000.00. Sprague is a secured creditor of the Morkens.
Firstar's relationship with the Morkens and SGLE began indirectly in 1988 when Firstar purchased a participation in a secured loan Sprague had made to Morken. It was not until 1992 that Firstar established a direct loan relationship with SGLE and the Morkens. In June 1992, SGLE and Firstar, then known as First Wisconsin, executed a Demand Line of Credit Agreement and Note in the principal amount of $1.5 million. In May 1993, after First Wisconsin became Firstar, Firstar and SGLE executed a new agreement and note documenting the $1.5 million line of credit. In addition, both SGLE and the Morkens opened business accounts with Firstar. Firstar established a joint checking account for the Morkens and a control disbursement account for SGLE.5 Firstar is a secured party of SGLE.
The Morkens' relationship with FCS began in December 1991 when Farm Credit Services of Southeast Minnesota, a predecessor of FCS, entered into two promissory note agreements with the Morkens in the amounts of $189,945 and $671,668. After the merger of Farm Credit Services of Southeast Minnesota and FCS on July 1, 1993, FCS entered into a new revolving credit facility with the Morkens with a limit of $5.25 million. To fund the FCS revolver, FCS established two "payable through" draft accounts at Norwest Bank in Northfield, Minnesota. These accounts effectively acted as a single account. When drafts were written on one account, the resulting debt was repaid by deposits into the other account. FCS is a secured creditor of the Morkens.
All of the secured creditors were granted security interests in either the Morkens or SGLE's property and, in turn, made U.C.C. filings to perfect their interests in the collateral.
On August 9, 1991, the Morkens granted Sprague a security interest in all their inventory, equipment, farm products, accounts and general intangibles. Sprague filed financing statements with the Minnesota Secretary of State on November 16, 1988,6 and the Houston County Recorder, Houston County, Minnesota, on November 14, 1988.7 Sprague filed another financing statement with the Houston County Recorder on December 14, 1990.
Outside of Minnesota, Sprague filed a financing statement with the Iowa Secretary of State on December 29, 19868 and, on the eve of bankruptcy, filed security agreements as non-standard financing statements with the county clerk in four Nebraska counties:
On October 23, 1992, Sprague executed a subordination agreement in favor of Farm Credit Services of Southeast Minnesota which subordinated its security interest in all cattle financed by Farm Credit Services of Southeast Minnesota and all cattle located in Iowa to the security interest of Farm Credit Services of Southeast Minnesota.
On June 3, 1992, SGLE and Firstar executed a General Business Security Agreement and Note in the amount of $1.5 million and a Farm Security Agreement granting Firstar a security interest in all equipment, livestock, crops, livestock feed, farm supplies, inventory, documents relating to inventory, general intangibles, accounts and contract rights owned by SGLE. The Morkens also executed a Continuing Guaranty of the SGLE debt to Firstar. On May 3, 1993, the Morkens executed a Reaffirmation of Guarantee.
Pursuant to its security agreements with SGLE, Firstar filed financing statements on June 3, 1992, and June 4, 1992, with the Houston County Recorder and the Minnesota Secretary of State respectively.
Firstar did not file any financing statements outside of Minnesota until shortly before bankruptcy. On June 9, 1994, Firstar filed security agreements as non-standard financing statements with the Iowa and Nebraska Secretaries of State. Firstar also filed security agreements as non-standard financing statements with the county clerk in five Nebraska counties:
The Morkens executed four promissory notes with Farm Credit Services of Southeast Minnesota and FCS:
On October 23, 1992, the Morkens executed a security agreement granting Farm Credit Services of Southeast Minnesota a security interest in all livestock, proceeds from livestock, accounts and general intangibles owned by the Morkens.
Pursuant to the security agreement, Farm Credit Services of Southeast Minnesota filed financing statements with the Houston County Recorder on October 26, 1992, and the Minnesota Secretary of State on October 27, 1992. Outside of Minnesota, Farm Credit Services of Southeast Minnesota filed financing statements on October 27, 1992, with the Iowa and Nebraska Secretaries of State. Farm Credit Services of Southeast Minnesota and, later, FCS filed financing statements with the county clerk in four Nebraska counties:
In 1992, the Morkens and SGLE...
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