In re Slefco
| Decision Date | 27 October 1989 |
| Docket Number | Bankruptcy No. AP 88-560,PB 87-518S. |
| Citation | 107 BR 628 |
| Parties | In re SLEFCO. SLEFCO, Plaintiff, v. FIRST NATIONAL BANK OF STUTTGART, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Arkansas |
Richard Ramsay, Kim Tucker, Pine Bluff, Ark., John Gregg, Batesville, Ark., for debtors.
Baker Kurrus, Little Rock, Ark., for First Nat. Bank of Stuttgart.
Walter Dickinson, Little Rock, Ark., Trustee.
Now before the Court is an Objection and Counterclaim to the Claim filed by First National Bank of Stuttgart ("FNB"). Slefco is an Arkansas general partnership. In addition to the partnership, three of its partners have sought the protection of the bankruptcy court. On June 9, 1987, Carl W. Simpson filed a Chapter 7 bankruptcy case, PB 87-240, and an adversary proceeding against FNB, AP 88-588, was filed by the Trustee on December 27, 1988. On September 4, 1987 Leland and Mildred Simpson filed a Chapter 11 bankruptcy case, PB 87-363, and an adversary proceeding against FNB, AP 88-363, was filed on December 16, 1988. On December 28, 1987 Slefco also filed a Chapter 11 bankruptcy case, PB 87-518, as well as an adversary proceeding against FNB, AP 88-560, which was filed on December 16, 1988. Because the claims and counterclaims in these cases and adversary proceedings are virtually identical, on January 10, 1989, they were, by agreement of all parties and the Chapter 7 trustee, consolidated for trial under Slefco, AP 88-560. The designations Plaintiff, Slefco, and/or debtor throughout this opinion include all Plaintiffs in the consolidated adversary proceedings.
The matter came on for trial January 24-26, 1989. The Plaintiff appeared by its partners and counsel, Richard Ramsay, Esq. and Kimberly Tucker, Esq. The Defendant, First National Bank of Stuttgart, appeared by its executive Vice-President, Cole Martin, and by counsel, Baker Kurrus, Esq. and John Gregg, Esq.
This Court has jurisdiction to hear this matter pursuant to 28 U.S.C. § 1334. Moreover, the Court finds that it is a "core proceeding" within the meaning of 28 U.S.C. § 157(b)(2)(B) and (C) and may enter a final order.
The evidence presented by the parties was substantial and often conflicting. Testimony at trial revealed the following:
First National Bank of Stuttgart is a small bank located in the delta farming region of Arkansas with holdings of approximately $58,000,000.00. Of that amount, $14,000,000.00 is dedicated to agricultural loans with approximately 85% of its other loans being farm related. FNB characterizes its dealings with its customers as "informal" or "casual" due to the size of the bank, the small size of the town, and the fact that the bank deals mainly with farmers. Officers of FNB testified that most of its customers would be classified as unsophisticated borrowers who do not utilize the professional services of accountants. The legal lending limit for FNB is $1,600,000.00.
Leland and Mildred Simpson have been in the farming business for 35 years. In addition to farming, they also own a general store located at Lodge Corner, Arkansas and run a part-time trucking business. The part-time trucking business utilizes the debtor's farm trucks when they are not in use on the farm. When they are used as over-the-road vehicles, they are offered for hire to other farmers to haul grain to storage facilities.
Prior to 1985, the Simpsons obtained their farm financing from the Production Credit Association ("PCA") through its DeWitt, Arkansas office. The Simpsons had both real estate and crop production loans with PCA. Beginning in 1983 and through 1984, problems developed in the Simpson's relationship with PCA. The loan officer at PCA was Waylan Wiggins ("Wiggins"). In 1984, the Simpsons, pursuant to a request from PCA to liquidate some of their land, did sell 525 acres of land. Being dissatisfied with PCA and the loan officer there, however, they transferred their farm financing to the FNB. In January, 1985, the Simpsons borrowed $260,000.00 from FNB to retire their debt to PCA. This initial loan was collateralized by farm equipment. At that time, the loan officer in charge of the FNB agricultural loans was Tommy Gunnell, and he began to handle the Simpson account.
In order for the Simpsons to include their sons, C.W. and Terry, in the farming operation, the Slefco Partnership was formed on March 11, 1985. The partners at the time of formation were Leland Simpson, Mildred Simpson, C.W. Simpson, and Terry Simpson. Leland Simpson was the overall manager of the farming operation and Mildred Simpson kept the books. C.W. and Terry Simpson did the actual farming of the land.
On March 22, 1985 Slefco borrowed $263,000.00 from FNB and pledged as security all of the partnership's 1985 crops and all of its then existing and thereafter acquired machinery and equipment, including pickup trucks, grain trailers and tractor trucks. Leland and Mildred Simpson also mortgaged 120 acres owned by them and 466.8 acres in which Leland Simpson held a one-half interest. On March 22, 1985 Slefco borrowed an additional $50,000 secured by the same crops and machinery.
On December 17, 1985 Slefco applied to FNB for a loan of $192,334.22 to renew the unpaid portion of its previous carry over loan. Slefco pledged as security its remaining unsold 1985 crops, government deficiency payments, 1986 wheat crop, machinery and equipment. The previously pledged real estate belonging to the individuals was repledged. This renewal note had a maturity date of July 1, 1986. On December 17, 1985 Slefco also borrowed $160,000.00 for the purpose of purchasing new equipment. Slefco again pledged all of its crops and old farm implements and equipment. Leland and Mildred Simpson executed another mortgage on the 120 acres owned by them and on the 466.8 acres in which Leland Simpson had an undivided one-half interest. In late December of 1985 Slefco borrowed an additional $50,000.00 and pledged all 1986 crops now growing or to be grown, as well as again pledging all farm implements and equipment belonging to or after acquired by Slefco.
Finally, on February 19, 1986 Slefco signed a new loan application and promissory note for $650,000.00 for the partnership's 1986 crop production. Slefco pledged as collateral for this loan all 1986 crops, all machinery and equipment then existing and thereafter acquired, Leland and Mildred Simpson's 120 acres and Leland Simpson's one-half interest in 466.8 acres.
By this time in February, 1986 Slefco was farming approximately 4,000 acres. Also, at this time the Simpson's two daughters, Diane Dalton and Rose Wood, were added as partners. Slefco's banking relationship with FNB continued, and the partnership dealt exclusively with bank officer Tommy Gunnell. Gunnell was aware of the Simpson's ownership of the Lodge Corner Store and that they ran a part-time trucking business with the farm trucks. He was also aware that some of Slefco's crop production loan proceeds were used in the part-time trucking business. Each time a loan with FNB was made, Slefco and its partners signed the loan request and promissory note simultaneously. These loans were all approved per the face amount on the various notes, and proceeds were immediately available for use by the partnership.
About the time Slefco finalized its $650,000.00 crop production loan for the 4,000 acres, Terry Simpson became aware of an opportunity to farm additional land, the Mehaffy farm, which consisted of 618.8 acres of rice land, 219.8 acres of cotton land, and 406 acres of set aside land. Terry Simpson spoke with Tommy Gunnell about this opportunity and the partnership's need for more money for the 1986 crop year if Slefco farmed this land. A few days later, and before signing a contract to farm the Mehaffy land, Terry and Leland Simpson met with Gunnell again about the Mehaffy land. Gunnell informed the Simpsons that by his calculations the land would cash flow if Slefco could obtain a contract on a 75/25 crop share basis. If Slefco could obtain those terms, Gunnell told Slefco it should go ahead and farm the Mehaffy land. Gunnell also told the Simpsons there was no need to rework the Slefco crop production loan at that time. He knew that Slefco, like most of the farming operations, would run out of money under the $650,000.00 loan and would need additional funds to harvest the crops. Gunnell told the Simpsons that they could at that time come back to FNB and include in their request the additional funds needed for the Mehaffy farm. Slefco, based on Gunnell's representations, signed a contract on a 75/25 crop share basis and began farming the Mehaffy land. The partnership utilized funds from the original $650,000.00 crop production loan to put in the crops on the Mehaffy land.
On June 15, 1986 Tommy Gunnell left the bank and FNB replaced Gunnell July 1, 1986 with Waylan Wiggins, who formerly worked with PCA. One of the first duties Wiggins undertook for FNB was to review its portfolio of farm loans. Slefco's loan file was part of this review. After reviewing the Slefco file Wiggins sent a Memorandum on July 23, 1986 to the bank President, Neil Maynard, noting the following ten "major deficiencies" in the Slefco loan portfolio.
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