In re Smith

• Decision Date: 22 September 2020
• Docket Number: Case No. 19-10939
• Citation: 622 B.R. 26
• Parties: IN RE John H. SMITH, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Tennessee

622 B.R. 26

IN RE John H. SMITH, Debtor.

Case No. 19-10939

United States Bankruptcy Court, W.D. Tennessee, Eastern Division.

Signed September 22, 2020

Justin T. Campbell, Phillip G. Young, Jr., Thompson Burton PLLC, Franklin, TN, for Debtor.

Lynda F. Teems, Law Office of Lynda Teems, Memphis, TN, for Trustee.

James F. Parker, Hodges, Doughty & Carson, PLLC, Knoxville, TN, for Movant Farm Credit Services of America, PCA

Michael Patton, Baker, Donelson, Bearman, Caldwell & Berkowitz, PC, Memphis, TN, for objecting party IberiaBank

MEMORANDUM OPINION RE: (1) FARM CREDIT SERVICES OF AMERICA, PCA'S MOTION FOR RELIEF FROM ORDER GRANTING DEBTOR AUTHORITY TO SELL ASSET FREE AND CLEAR OF LIEN, CLAIM, AND ENCUMBERANCE, AND REQUEST FOR CORRECTION OF PRIORITY AND ENTITLEMENT TO PROCEEDS FROM SALE TO PAUL HERBERT (ECF NO. 215) AND (2) IBERIABANK'S OBJECTION THERETO (ECF NO. 224)

Jimmy L. Croom UNITED STATES BANKRUPTCY JUDGE

Farm Credit Services of America, PCA d/b/a AgDirect ("AgDirect"), seeks to set aside two orders of this Court and recover proceeds from the sale of a piece of farm equipment in which AgDirect claims a first priority security interest. IberiaBank objects to the requested relief and asserts that it held the first priority lien at the time of the sale. Resolution of this matter requires the Court to determine what effect, if any, termination statements as to AgDirect's Original UCC-1 had on the priority of the security interests in this matter and on the orders approving the sale of the collateral.

This proceeding arises in a case referred to this Court by the Standing Order of Reference, Misc. Order No. 84-30 in the United States District Court for the Western District of Tennessee, Western and Eastern Divisions, and is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(K). This Court has subject matter jurisdiction over core proceedings pursuant to 28 U.S.C. §§ 157(b)(1) and 1334(a). This Court also has constitutional authority to hear and finally resolve this matter. Black Diamond Commercial Fin., L.L.C. v. Murray Energy Corp. (In re Murray Energy Holdings Co. ), 616 B.R. 84, 87 (Bankr. S.D. Ohio 2020). Thus, the Court may enter a final order in this matter. This memorandum opinion shall serve as the Court's finding of facts and conclusions of law. Fed. R. Bankr. P. 7052 and 9014.

I. Facts

The parties in this matter filed a Joint Stipulation of Undisputed Facts on July 30, 2020, which are reproduced here, verbatim, (footnotes in original).

1. On or about October 27, 2014, AgDirect financed John H. Smith's (the "Debtor") purchase of a certain Geringhoff NS 1230F Corn Head, bearing Serial Nos. 1011206151230F and 10435 (the "Corn Head") through a retail installment contract and security agreement (the "Security Agreement") [Doc. 215-1, ¶4 (Affidavit of Mike Spence) ].

2. On October 29, 2014, the Debtor purchased the Corn Head from JL Farm Equipment Company, Inc., and AgDirect filed a UCC-1 (Doc. #422331499) with the Tennessee Secretary of State (AgDirect's "Original UCC-1") [Doc. 215-1, ¶¶5-6].

3. Two years later, on September 22, 2016, the Debtor refinanced his credit facility. Part of the new credit facility was an equipment loan from IberiaBank in the amount of $1,607,750.00 (the "Equipment Loan") [Doc. 224, ¶3].

4. In order to secure the Equipment Loan, the Debtor executed an Equipment Security Agreement in which he granted a security interest to IberiaBank in his farm equipment. One of the pieces of farm equipment in which a security interest was given is the Corn Head which was specifically described in the Equipment Security Agreement as a Gering Hoff 12-Row Corn Header (Serial No. 10435). [Doc. 224, ¶4].

5. On September 26, 2016, IberiaBank filed a UCC-1 (Doc. 425699843) with the Tennessee Secretary of State as to the security interest which it was granted in the Corn Head and other farm equipment under the Equipment Security Agreement.

6. On October 3, 2016 (ten days after the Equipment Loan was funded), an individual named Walter Smith filed a termination statement as to AgDirect's Original UCC-1. This termination statement states that it was filed on behalf "Farm Credit Services of Mid-America, PCA" and the termination statement further contains the following language:

Send Acknowledgment to (name and address)

Farm Credit Services of America, PCA

PO Box 2409 Omaha, NE 88103 This is the same address listed for AgDirect shown [on] AgDirect's Original UCC-1 [Doc. 224, ¶6].

7. AgDirect is a separate and distinct legal entity from Farm Credit Services of Mid-America, PCA and from successor entities Farm Credit Mid-America, FLCA and Farm Credit Mid-America, PCA, which are subsidiaries of Farm Credit Mid-America, ACA. Each of these entities are distinct and separate legal entities from AgDirect, and none have authority or power to act on behalf of AgDirect or to authorize termination of AgDirect's UCC-1 financing statements.

8. Walter Smith was never an employee or agent of AgDirect, and AgDirect did not authorize or have knowledge of this termination statement filed by Walter Smith [Doc. 215-1, ¶20, 22].

9. During its investigation, AgDirect learned that Walter Smith was a former employee of Farm Credit Mid-America [Doc. 215-1, ¶20]. Farm Credit Mid-America, PCA was previously known as Farm Credit Services of Mid-America, PCA.

10. AgDirect did not discover the termination statement filed by Walter Smith until it initiated its investigation after learning of this bankruptcy [Doc. 215-1, ¶ 23].

11. AgDirect never received a request to terminate its Original UCC-1, and AgDirect has never received any payments for termination of its Original UCC-1 [Doc. 215-1, ¶24].

12. On August 2, 2018, after defaults on the credit facility, IberiaBank obtained a Temporary Restraining Order from the Henry County Chancery Court which precluded the Debtor from misappropriating or improperly disposing of collateral securing its loans [Doc. 224, ¶8].

13. On August 14, 2018, the Debtor filed his first Chapter 11 Petition in the Western Division (Memphis) of the U.S. Bankruptcy Court for the Western District of Tennessee (Case no. 2:18-bk-26817) (the "First Chapter 11 Proceeding") [Doc. 224, ¶9].

14. The Schedules to the First Chapter 11 Petition show the following:

a. The Debtor owns the Corn Head which has a value of $45,000.00 (Schedule A/B);

b. IberiaBank is the secured creditor with the paramount lien on the Corn Head (Schedule D-2.6);

c. Murray Bank has a junior lien on the Corn Head (Schedule D-2.67); and

d. AgDirect is not listed as a creditor of the Debtor (Schedule E/F). [Doc. 224, ¶10(a)-(d) ].

15. On October 3, 2018, the First chapter 11 Proceeding was dismissed [pursuant to 11 U.S.C. § 1112(b) ].

16. On October 5, 2018, IberiaBank filed an Amended Complaint in the Henry County Chancery Court. Marianna "Molly" Williams was appointed as receiver and began to collect and liquidate the assets of the Debtor [Doc. 224, ¶12].

17. Molly Williams was the Court appointed receiver from October 5, 2018, until the filing of the Second Chapter 11 Proceeding on April 26, 2019. Molly Williams never made a payment to AgDirect.

18. In December 2018, AgDirect received two payments from John Smith in the total amount of $12,521.33. The first payment was by a check dated December 10, 2018, from John H. Smith and Sherry R. Smith (bearing no. 121018) in the amount of $6,000.00. The second payment was by a check dated December 26, 2018, from John H. Smith and Sherry R. Smith (bearing no. 122618) in the amount of $6,521.33.

19. In order to stop a pending foreclosure of the deed(s) of trust securing the Real Estate Loan, on April 26, 2019, the Debtor filed a second Chapter 11 Petition, this time in the Eastern Division (Jackson) of the U.S. Bankruptcy Court for the Western District of Tennessee (Case no. 2:19-bk-10939) (the "Second Chapter 11 Proceeding") [Doc. 224, ¶13].

20. The Schedules to the Second Chapter 11 Petition show the following:

a. The Debtor owned the Corn Head with value of $45,000.00 (the "Geringhoff") (Schedule A/B);

b. IberiaBank was the secured creditor with the paramount lien on the Corn Head and all of the Farm Equipment (Schedule D-2.6); and

c. AgDirect was not listed as a creditor of the Debtor (Schedule E/F).

21. AgDirect was not listed in the creditor matrix as to either Petition, and therefore did not receive notice of the Debtor's First Chapter 11 Petition or Second Chapter 11 Petition, nor did AgDirect have contemporaneous knowledge of the filing of either proceeding [Doc. 215-1, ¶13].¹

22. On June 6, 2019, IberiaBank filed a Motion for Relief from the Automatic Stay and to Excuse Turnover (the "Motion for Stay Relief"). The Motion specifically covered the Equipment listed in the Equipment Security Agreement including the Corn Head [Doc. 224, ¶ 15].

23. On June 19, 2019, AgDirect's filing service filed a continuation statement as to its Original UCC-1 (Doc. 430608343) (AgDirect's "Continued UCC-1") [Doc. 215-1, ¶8; Doc. 224, ¶16].

24. On August 21, 2019, the Debtor and IberiaBank entered into an Agreed Order as to the Motion for Stay Relief (the "Agreed Stay Relief Order"). In the Agreed Stay Relief Order, the Court lifted the Automatic Stay and granted IberiaBank the right to sell the Equipment including the Corn Head [Doc. 224, ¶17].

25. In paragraph 4 of the Agreed Stay Relief Order, the Court, however, granted to the Debtor a right of first refusal (the "Right of First Refusal") during a twenty-one (21) day period following the entry of the Agreed Order in which to purchase any or all of the Equipment from the Estate at the "orderly liquidation" value listed in the Equipment Appraisal [Doc. 224, ¶18].

26. The Debtor elected to exercise this Right of First Refusal and, on September 13, 2019, filed a Motion for Authority to Sell Assets pursuant to 11 U.S.C. § 363 Free and Clear of Liens, Claims and Encumbrances (the "363 Motion"). In the 363 Motion, the Debtor proposed selling certain equipment listed in Exhibit A to the 363 Motion to Paul

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