In re R.F. Cunningham & Co., Inc.

• Decision Date: 20 November 2006
• Docket Number: No. 805-84105-511.,805-84105-511.
• Citation: 355 B.R. 408
• Parties: In re R.F. CUNNINGHAM & CO., INC., Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of New York

355 B.R. 408

In re R.F. CUNNINGHAM & CO., INC., Debtor.

No. 805-84105-511.

United States Bankruptcy Court, E.D. New York.

November 20, 2006.

COPYRIGHT MATERIAL OMITTED

Jeffrey Herzberg, Esq., Zinker & Herzberg, LLP, Smithtown, NY, for Champaign Landmark, Inc.

Michael S. Amato, Esq., Ruskin Moscou Faltisckek PC, Uniondale, NY, for the Debtor.

Alan D. Halperin, Esq., Halperin Battaglia Raicht, LLP, New York, NY, for the Official Committee of Unsecured Creditors.

David C. Barrett, Jr., Barrett, Easterday, Cunningham & Eselgroth LLP, Dublin, OH, for Agland Grain, Inc., Fulton-Marshall Co-Op and Stockland Grain Co.

MEMORANDUM DECISION

(Re: Motion for Relief from the Automatic Stay)

MELANIE L. CYGANOWSKI, Chief Judge.

At a hearing held on September 29, 2005, this Court heard and determined a motion by Champaign Landmark by which it sought relief from the automatic stay pursuant to 11 U.S.C. § 362(d) for the purpose of enforcing an Ohio statutory lien that encumbered certain agricultural commodity assets of the debtor, R.F. Cunningham and Company (the "Debtor"). The motion was denied. At the request of the parties, the Court issues this Memorandum Decision which reflects the oral decision rendered at the time of the hearing.

BACKGROUND OF THE PROCEEDINGS

The Debtor filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code ("Bankruptcy Code"), on June 13, 2005, and has been acting as a debtor in possession since that time. According to the Debtor's petition, it is a New York corporation licensed to transact in sales of grain commodities in the State of New York. The movant, Champaign Landmark, Inc., is a cooperative of grain farmers located in the State of Ohio. Champaign Landmark did business with the Debtor prepetition, selling it grains for pick-up within the boundaries of Ohio.

The Debtor, on its petition, indicated that Champaign Landmark was owed approximately $140,000 for grains picked up in Ohio for resale. Champaign Landmark disputes the sum, and argues its records show the sum owing from the Debtor to be approximately $150,000.

Champaign Landmark relies on the statutory scheme of the State of Ohio as the basis for relief from the stay. It contends that Chapter 926 of Ohio's Revised Code Annotated ("ORCA") applies to the situation at hand. Ohio Rev.Code Ann. § 926 (West 2005). Specifically, Champaign Landmark contends that by virtue of ORCA § 926.021, there is a statutory lien that attaches to the grain sold to the Debtor and that as a consequence, Champaign Landmark should be permitted to have the automatic stay lifted to allow it to enforce its lien against the Debtor. Champaign Landmark argues that it is not adequately protected in any fashion and that the Debtor has no equity in the grain deposits until the same are resold and payment is made to Champaign Landmark.

Opposing the motion for relief from the stay is the Debtor, the Committee of Unsecured Creditors and Agland Grain, Inc., a creditor of the Debtor. Among the arguments offered is that by the Debtor which urges that Ohio law does not apply in the first instance because the contract between Champaign Landmark and the Debtor, entered into in New York, provides, in substance, that it is New York law that controls the parties' rights under the agreement.

The Debtor further argues that even if Ohio law applies, any lien arising under the statutory scheme of ORCA § 926.021 must be avoided pursuant to 11 U.S.C. § 544, because it is in effect a "secret lien," creating a priority secured claim in derogation and in detrimental harm to the rights of other creditors, all of which is in violation of the statutory priority scheme of the Bankruptcy Code. This argument is based on the proposition that the statutory lien that arises pursuant to ORCA § 926.021 extends beyond the grain sold by Champaign Landmark to the Debtor. The Debtor points out that the definition of "agricultural commodity assets" (the collateral to which the lien purportedly attaches) is found in ORCA § 926.021(A)(3). That section provides that "agricultural commodity assets" include the agricultural commodities owned or stored, redeposited agricultural commodities, proceeds from the sale of the agricultural commodities due or to become due, any other unencumbered funds, property or equity in funds or property wherever located that can be directly traced to the sale of agricultural commodities by the handler, and any other unencumbered funds, property or equity in assets. Because ORCA § 926.021(B) provides that a lien shall exist on all of the Debtor's agricultural commodity assets, the Debtor argues this lien, if held to apply, would attach to all assets of the Debtor, wherever located, and thus would be a secret lien as the term has been utilized in other cases. See, e.g., In re Canney, 284 F.3d 362 (2d Cir.2002).

The Debtor also argues that Champaign Landmark, in any event, does not have standing to assert the lien rights under Ohio law. Subsection (D) of ORCA § 926.021 provides that it is the Director of Agriculture who has exclusive authority to enforce the lien claims that arise by virtue of the statute.

The Committee of Unsecured Creditors joins in the Debtor's arguments, and also argues that it is black letter law that state statutory schemes, such as ORCA § 926.021, cannot be applied to property outside of the state, and that the doctrine prohibiting such extraterritorial application limits the reach of the Ohio statute. The Committee argues, therefore, that because the Debtor has no assets in the State of Ohio, the statutory lien cannot reach the assets of the Debtor.

Champaign Landmark argues in reply that the mere fact that Champaign Landmark agreed to the New York choice of law provision is of no moment given that the lien is held by the Department of Agriculture and the Department was not a signatory to the contract. With respect to the extraterritorial application of the statute, Champaign Landmark argues that the lien follows the grain and that even if the Court were to hold it inappropriate to have extraterritorial application beyond the borders of Ohio, the decision of In re Eddingfield, 67 B.R. 1000 (Bankr.C.D.Ill.1986), supports the notion that this Court should give comity and recognize the lien of the sister state.

DISCUSSION

11 U.S.C. § 362(d) governs motions for relief from the stay. That section provides, to the extent relevant:

(d) On request of a party in interest and after notice and a hearing, the court shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay—

(1) for cause, including the lack of adequate protection of an interest in property of such party in interest;

(2) with respect to a stay of an act against property under subsection (a) of this section, if—

(A) the debtor does not have an equity in such property; and

(B) such property is not necessary to an effective reorganization....

11 U.S.C. § 362(d) (2000).

The Court has broad discretion to lift the stay. See, e.g., Capital Communications Federal Credit Union v. Boodrow, 197 B.R. 409, 412-13 (N.D.N.Y. 1996), aff'd, 126 F.3d 43 (2d Cir.1997), cert. denied, 522 U.S. 1117, 118 S.Ct. 1055, 140 L.Ed2d 118 (1998) ("Since cause is not defined in the Code, a court has broad discretion to lift the stay in `appropriate circumstances'") (citation omitted). With respect to relief for "cause," however, it is the movant who must make an initial showing of cause before any burden shifts to the debtor; absent such showing, relief from the stay will be denied. See In re Mazzeo, 167 F.3d 139, 142 (2d Cir.1999). The determination of whether to lift or modify the stay ultimately turns on the facts of each given motion. See, e.g., In re Bogdanovich, 292 F.3d 104, 110 (2d Cir. 2002). In general, before relief will be granted, there must be a showing of harm to the secured creditor caused by the continuation of the stay. Boodrow, supra, 197 B.R. at 413. There is no statutory requirement that unsecured creditors receive adequate protection, and the lack of adequate protection does not entitle an unsecured creditor to relief from the stay. See In re Aquarius Disk Services, Inc., 254 B.R. 253, 260 (Bankr.N.D.Cal.2000). Only in extraordinary circumstances will an unsecured creditor be granted relief from the stay. See, e.g., In re Leibowitz, 147 B.R. 341, 345 (Bankr.S.D.N.Y.1992) (citing Sonnax Industries, Inc. v. Tri Component Products Corp., 99 B.R. 591, 595 (D.Vt. 1989), aff'd, 907 F2d 1280 (2d Cir.1990)); In re I. Burack, Inc., 132 B.R. 814, 817 (Bankr.S.D.N.Y.1991); In re Pioneer Commercial Funding Corp., 114 B.R. 45, 48 (Bankr.S.D.N.Y.1990). The general principle is that "unsecured claims should not be granted relief from the stay because to do so would result in a violation of one of the fundamental concepts of bankruptcy law; that there should be an equality of distribution among creditors." Leibowitz, 147 B.R. at 345.

To the extent Champaign Landmark is requesting relief from the stay in order to enforce a statutory lien, it is a threshold question for the Court whether Champaign Landmark does indeed hold an enforceable lien against the Debtor's assets.

STATUTORY FRAMEWORK

We begin with a review of the Ohio statutory framework to better understand the issues presented in this case. Subsection (B) of ORCA § 926.021 states:

(B) A lien shall exist on all agricultural commodity assets of an agricultural commodity handler in favor of any of the following:

(1) Claimants, including lenders, who possess receipts covering grain owned or stored by the handler;

(2) Claimants who possess written evidence of ownership other than a receipt disclosing a storage obligation of the handler, including tickets;

(3) Claimants who surrendered receipts as part of an agricultural commodity sales transaction but were not paid fully for the agricultural commodity and the handler...