In re Purdy

• Decision Date: 01 March 2013
• Docket Number: No. 12–11592.,12–11592.
• Citation: 490 B.R. 530
• Parties: In re Lee H. PURDY, Debtor(s).
• Court: U.S. Bankruptcy Court — Western District of Kentucky

490 B.R. 530

In re Lee H. PURDY, Debtor(s).

No. 12–11592.

United States Bankruptcy Court,

W.D. Kentucky,

Bowling Green Division.

March 1, 2013.

Mark H. Flener, Bowling Green, KY, for Debtor.

Robert W. Keats, Louisville, KY, Trustee.

MEMORANDUM–OPINION

JOAN A. LLOYD, Bankruptcy Judge.

This matter came before the Court for an evidentiary hearing on the following Motions:

Motion of Creditor Citizens First Bank (“CFB”) to Prohibit Use of Cash Collateral;

Motion of CFB for Relief from the Automatic Stay on Livestock and Farm Equipment;

Motion of Sunshine Heifers, LLC (“Sunshine”) to Extend Time to Assume or Reject Unexpired Leases; and

Motion for Relief from Stay on Livestock.

The Court determined at the hearing that a decision regarding whether the Sunshine documentation constitutes a true lease or a disguised financing transaction, as well as the post-petition effect of the milk assignments, must be made prior to a decision on the other pending matters.

Therefore, the Court reviewed the entire record, considered the testimony of the witnesses, Debtor Lee Purdy (“Debtor”), Karissa Peterson, Becky Moore, Jeff E. Blevins, Martin Anthony Martinez and the depositions of Linus Kuennen and Kendall Branstetter. For the following reasons, the Court DENIES Sunshine's Motions to Extend Time to Assume or Reject Unexpired Leases and for Relief from Stay on Livestock and by separate Order reschedules CFB's Motions to Prohibit Use of Cash Collateral and Relief from the Automatic Stay for hearing. An Order incorporating the findings herein accompanies this Memorandum–Opinion.

I. FINDINGS OF FACT

Debtor is a dairy farmer who currently operates on property he leases from Martin Martinez in Cave City, Kentucky. In 2008, Debtor entered into a loan agreement with CFB pledging, among other things, his dairy cattle herd as collateral. In 2009 Debtor refinanced the loan, executing a new Promissory Note in the amount of approximately $460,000 and on July 3, 2009, an Agricultural Security Agreement (“Agreement”). Pursuant to the Agreement Debtor granted CFB a:

Purchase Money Security Interest in all Chattel Paper, Accounts, Equipment, Farm Products, Livestock (including all increase and supplies) and Farm Equipment currently owned hereafter acquired located on his farm at 884 Hiseville Road, Cave City, Barren Co., Ky., and located at other real estate.

See, JT Index. No. 1. On July 6, 2009, CFB filed a Financing Statement with the Kentucky Secretary of State perfecting its security interest referenced above. For identification, CFB required its livestock collateral to bear white ear tags and by the terms of the Agreement and Financing Statement, its lien extended to all livestock on the farm then owned by Debtor and thereafter acquired.

On August 19, 2010, Debtor and CFB executed an Agricultural Security Agreement in which Debtor granted CFB a security interest in the following:

All Crops, Farm Products and Livestock (including all increase and supplies) currently owned and hereafter acquired including but not limited to all dairy cattle currently owned and hereafter acquired regardless of location of cattle....

See, JT Ex. 3. On September 1, 2010, CFB filed a UCC Financing Statement with the Kentucky Secretary of State perfecting its security interest referenced above.

On May, 31, 2012, Debtor and CFB executed an Agricultural Security Agreement in which Debtor gave CFB a security interest in “All Farm Products.” See, JT Ex. 5. On June 26, 2012, CFB filed a UCC Financing Statement with the Kentucky Secretary of State perfecting its security interest referenced above.

At the time of the hearing, Debtor had outstanding loans of approximately $455,000, $153,000 and a $40,000 line of credit with CFB. Debtor held only one bank account and that was with CFB. All business cash from whatever source derived was deposited in the CFB account. All disbursements made by the Debtor were made from this same account.

A. Dairy Cow Leases.

While utilizing the CFB loans for operations, Debtor decided he wanted to increase his herd. Debtor met with Jeff Blevins of Sunshine, a knowledgeable dairy farmer and financier, at Debtor's operation. During May and June of 2009, 45 head of cattle were delivered to the farm. This small group of stock had been recovered by Blevins from a farm upon which he had foreclosed. 16 of those cows were unfit and had to be culled from the herd. Blevins bought replacements from Darol Hartzler and supplied them to Debtor. Debtor paid Blevins by check for the cattle. Blevins accepted the check for payment. Nearly three months after the cows were delivered to Debtor's farm, on August 7, 2009, Debtor and Sunshine executed a “Dairy Cow Lease” (“Lease 1”) and a Security Agreement in connection with the Lease which identified the collateral as:

All cows, heifers, offspring or replacements including, but not limited to cattle on Exhibit “A” attached.

See, Sunshine Ex. 6. Debtor, however, scratched out the term “heifers” and the term “offspring” in the description of the collateral.

On December 15, 2010, Debtor entered into a “Dairy Cow Lease” (“Lease 2”) with Sunshine for 240 head of Holstein heifers for a term of 50 months. Debtor had 2 cattle buyers, Danny Layton and Kendall Branstetter, find these cattle and purchase them for Debtor. Once the cows were delivered to Debtor's farm he began milking and caring for them. Sunshine later sent Debtor a check which he used to reimburse Layton and Branstetter for the cattle purchases. The parties also entered into a Security Agreement and a Financing Statement covering the 240 cows. See, Sunshine Ex. 1. In July 2011, Debtor had Linus Kuennen purchase 50 head of cattle for him. Kuennen selected the cattle for Debtor. Sunshine wrote Kuennen a check for the cattle. On July 22, 2011, Debtor entered into a “Dairy Cow Lease” (“Lease 3”) with Sunshine for this 50 head of cattle for a term of 50 months. On cattle purchased by Linus Kuennen for Debtor, the cattle were branded and tagged on behalf of Sunshine prior to delivery to Debtor's farm pursuant to the terms of Lease 3.

On July 14, 2012 Sunshine had Debtor enter into a “Dairy Cow Lease” (“Lease 4”) to cover 285 head of cattle as documentation to “wrap up” the cattle covered by Leases 1 and 2.

Debtor testified that in May 2012, he asked Blevins if he had built up enough equity to acquire more cattle although Blevins testified that he never saw his transactions with the Debtor involving “equity.” Nevertheless, Blevins checked and told him if he paid $1,500 more per month, he could acquire another 100 head of cattle. On July 14, 2012, Debtor entered into a “Dairy Cow Lease” (“Lease 5”) with Sunshine for 100 head of cattle for a term of 50 months. Kendall Branstetter purchased the 100 head from different places and they were placed on Debtor's farm between June and July 2012. Debtor paid Branstetter for the cattle. Sunshine eventually sent a check to Debtor for the money he had advanced Branstetter to purchase the cattle. The cattle, however, had already been delivered to Debtor's farm and he was milking and caring for them prior to the time Sunshine sent the check to Debtor. The cattle purchased and delivered to Debtor by Layton and Branstetter,however, were branded with Sunshine's brand and tagged by Debtor and his employees after they reached Debtor's farm.

In addition to the above referenced purchases, Debtor purchased other cattle using funds from the CFB bank account that had no relationship to a Sunshine lease. At one point by mistake, all cattle that came onto the farm were branded by Debtor's employees with the Sunshine brand. After a time, misbranding and tagging resulted in the inability of anyone to distinguish cows purchased with funds deposited in the CFB account from those ostensibly covered by the Leases. For example, Debtor purchased at least 42 cows from Kuennen in the fall of 2012 that arrived on his farm with the Sunshine brand although Debtor personally paid for these cows and they were not part of any of the Leases.

Dairy cattle husbandry requires periodic culling, approximately 30 percent of the herd per year, and sale or retirement of livestock to keep milk production high and consistent. Throughout his lending relationship with CFB, Purdy culled and sold the entire herd and replenished his operation with purchased cattle. In July 2012, Debtor's herd reached about 750 head. The volume of Debtor's replacements for culled cattle exceeded the number of head covered by the Leases.

All replacement cattle were purchased with proceeds from sales of culled cows and calves and all from funds on deposit at CFB. Debtor testified that Blevins was aware of this and never objected to the practice despite the fact that this practice deviated from Debtor's contractual obligation with Sunshine. CFB also made regular inspections of Debtor's herd, the last occurring on August 14, 2012. At that time, Debtor had a total of 961 cows on the farm. 320 of the cows had Sunshine brands and tags. It is undisputed that landlord Martin Martinez had some cattle on the premises but they were removed by the time of trial. See, JT Ex. 19.

All five Sunshine Leases are identical except for the date of entry and number of cattle involved. Only Leases 3, 4 and 5 are still in operation as of the date of the petition. The Leases do not permit Debtor to terminate the Lease at will and return the cattle to Blevins/Sunshine. While the Leases include a 50 month lease term, the useful life of a dairy cow is less than 50 months. The Leases placed the risk of loss of cattle on Debtor. The Leases evidence the industry practice of culling and replacement of nonproductive cows, whether due to low production or poor health. Blevins/Sunshine did not tender any indicia of ownership of any of the cows delivered to Debtor's farm either from the inception of his business relationship with Debtor or during the course of the Leases.

In February or March of 2011, Debtor...