In re Sunbelt Grain Wks, LLC

• Decision Date: 18 June 2009
• Docket Number: Bankruptcy No. 08-10204.,Adversary No. 08-5112.
• Parties: In re SUNBELT GRAIN WKS, LLC, Debtor. Steven L. Speth, Trustee, Plaintiff, v. Whitham Farms Feedyard, L.P., and Security State Bank, Defendants.
• Court: U.S. Bankruptcy Court — District of Kansas

406 B.R. 918

In re SUNBELT GRAIN WKS, LLC, Debtor Steven L. Speth, Trustee, Plaintiff, v. Whitham Farms Feedyard, L.P., and Security State Bank, Defendants.

Bankruptcy No. 08-10204.

Adversary No. 08-5112.

United States Bankruptcy Court, D. Kansas.

June 18, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Timothy J. King, Speth & King, Wichita, KS, for Plaintiff.

Bruce J. Woner, Luke P. Sinclair, Woner Glenn Reeder Girard & Riordan, Topeka, KS, Lyndon W. Vix, Fleeson Gooing Coulson & Kitch LLC, Thomas J. Lasater, Wichita, KS, for Defendants.

MEMORANDUM OPINION

ROBERT E. NUGENT, Chief Bankruptcy Judge.

Security State Bank ("SSB") moves for summary judgment on the trustee's complaint against itself and Whitham Farms Feedyard, LP ("Whitham"). The trustee in bankruptcy, Steven Speth, filed an adversary complaint under Fed. R. Bankr.P. 7001(2) seeking a determination of the validity, priority, and extent of defendants' respective interests in certain proceeds from the trustee's sale of debtor Sunbelt Grain WKS, LLC's ("Sunbelt") grain inventory and asserting its 11 U.S.C. § 544 rights as a hypothetical bona fide purchaser. In its answer to that complaint, SSB asserts a perfected security interest in grain inventory that was stored at Sunbelt at the time of commencement of this bankruptcy case and that this interest primes that of Whitham and the trustee. In response, Whitham claims it owned a portion of the corn in the debtor's elevator because it purchased same and prepaid for it. As a buyer in the ordinary course of business, Whitham contends that it prevails over SSB.¹ Whitham also later asserted its priority to the sale proceeds under the doctrine of equitable subordination.² The ultimate issues here are (i) whether Whitham has an ownership interest in the corn or is a buyer in the ordinary course of business; and (ii) whether SSB's conduct affords the Court a basis to equitably subordinate its claim below that of Whitham.³

Procedural Background

This bankruptcy case was commenced by the filing of an involuntary chapter 7 petition on February 4, 2008. SSB was one of the petitioning creditors. Steven Speth was appointed chapter 7 trustee. After the order for relief was entered on March 5, 2008, the trustee sought and obtained court approval to sell Sunbelt's grain inventory (corn and wheat).⁴ Said sale occurred on April 10, 2008. Thereafter, the Court approved the trustee's disbursement of a portion of the sale proceeds to various open storage holders.⁵ SSB and Whitham asserted competing claims to the remainder of the corn sale proceeds held by the trustee, approximately $3.3 million.⁶ According to the pretrial order, SSB asserts a claim of $3.2 million as Sunbelt's secured lender and Whitham asserts a claim of $2.19 million for 580,000 bushels of prepaid corn of which only 56,000 bushels were delivered and received.⁷

The trustee commenced the instant adversary on May 29, 2008 to determine these parties' interests in the sale proceeds. Following a period of discovery, SSB filed its motion for summary judgment on the trustee's complaint. The trustee does not contest SSB's motion, leaving Whitham and SSB as the sole parties battling over the sale proceeds.⁸ It is undisputed that SSB holds a valid and perfected security interest in Sunbelt's grain inventory, accounts and proceeds thereof.⁹ Accordingly, the motion for summary judgment centers on Whitham's ability to establish its ownership of a portion of the corn inventory and its status as a buyer in the ordinary course or the doctrine of equitable subordination, in order to overcome SSB's perfected security interest in the grain.

Summary Judgment Standards

This Court's function in reviewing SSB's motion for summary judgment is to first determine whether genuine issues of fact exist for trial. In making this determination the Court may not weigh the evidence nor resolve fact issues.¹⁰ On summary judgment, it is not the Court's function to determine witness credibility, weigh evidence or decide competing inferences.¹¹ Once the Court determines those facts to which there is no dispute, it must then determine whether those uncontroverted facts establish a sufficient legal basis which entitle the movant to judgment as a matter of law.¹² If different ultimate inferences may properly be drawn from the facts, summary judgment is not appropriate.¹³

Before addressing the specifically numbered paragraphs of the statements of fact, a few general comments are in order regarding Whitham's compliance with summary judgment procedure in purporting to controvert SSB's statement of uncontroverted facts. Whitham's memorandum in opposition to SSB's summary judgment motion contains a three-page "factual narrative."¹⁴ While the narrative may be helpful in placing Whitham's position and the chain of events in context, it is devoid of any references to the record and disregards the requirements of D. Kan. LBR 7056.1(b)(2) and (d). As such, the Court will disregard the narrative in its entirety in deciding whether Whitham has shown the existence of genuine issues of material fact that require a trial.¹⁵ Instead, the Court focuses on Whitham's specific responses to SSB's statement of uncontroverted facts, keeping in mind that the Court disregards those factual disputes that are not material to the outcome¹⁶ and a party's characterization of the facts, whether made by the movant or the non-movant.¹⁷

Whitham submits the affidavit of its general partner, Stewart Whitham, as the primary means to controvert SSB's statements of fact.¹⁸ Summary judgment affidavits must meet certain requirements.¹⁹ They must be based upon personal knowledge and must contain information admissible at trial.²⁰ Statements of mere belief are disregarded.²¹ An affidavit that purports to testify concerning another party's intent is improper.²² The affidavit may not be based upon conclusory statements without specific supporting facts.²³

The Whitham affidavit suffers from each of these defects. Mr. Whitham states that "[a]ll the facts set forth in this affidavit are based upon my personal knowledge; my review of relevant documents; my opinion, based upon my experience and knowledge of the operations of [Whitham and Sunbelt], by virtue of having been one of Sunbelt's major—if not the largest—customers ..."²⁴ Yet at another point in his affidavit, Mr. Whitham asserts his "good faith belief and understanding" as a basis to conclude that SSB's actions "appear to be a contrivance."²⁵ Mr. Whitham's affidavit contains several instances of hearsay statements attributed to third parties.²⁶ It purports to state what Sunbelt or SSB intended or knew, matters as to which Mr. Whitham can claim no personal knowledge.²⁷ It abounds with conclusory statements regarding course of dealing without providing any underlying specific facts or evidence of that alleged course of dealing.²⁸ Many of Whitham's conclusory statements are legal conclusions prefaced upon that alleged course of conduct and dealings with Sunbelt. For example, he concludes that title to the corn passed upon payment,²⁹ that delivery costs were included in the prepayment,³⁰ that the corn was identified to the contract at the time of payment,³¹ and that the parties waived the NGFA rules,³² all based upon the parties' alleged course of dealing while setting forth no specific facts. Some of Whitham's conclusory statements lack any evidentiary support whatsoever.³³ Finally, some of Whitham's statements in his affidavit are simply not material to the outcome.³⁴ In summary, very little of the Whitham affidavit is effective to controvert SSB's statement of uncontroverted facts or support Whitham's additional statements of uncontroverted fact because it is made up of largely conclusory statements that lack the necessary supporting facts based upon Stewart Whitham's personal knowledge.³⁵

Applying the foregoing standards, the Court finds the following facts are uncontroverted.

Uncontroverted Facts³⁶

Sunbelt was established in 2006 as an LLC. Its principals, Jim and Kathy Shafer, have been in the grain business in western Kansas for many years. Sunbelt operated elevators at various locations in western Kansas. It purchased grain (corn and wheat) from local farmers for resale to buyers and also maintained open storage operations for grain owned by the producers. SSB was its lender, holding several notes executed by Sunbelt in 2006 and 2007, and extending a line of credit. Sunbelt's indebtedness was secured by nearly all of its property as collateral and the line of credit required it to submit monthly borrowing base certificates.

Whitham is a Colorado limited partnership and operates a feedyard near Leoti, Kansas. Stewart Whitham is the general partner. For a period of more than one growing season, Whitham bought corn from Sunbelt for its feeder operations.

On April 27, 2007, Sunbelt issued a Merchandising Target Offer (MTO) proposing to sell to Whitham or any other taker seven 100,000 bushel lots of corn at prices to be calculated based upon the futures market at the Chicago Board of Trade (CBOT or Board). Under the rather sparsely-worded terms of the offer, each lot would be sold at a price per bushel equal to a certain price quoted on the Board for future grain, plus a mark-up. As an example, the MTO offered 100,000 bushels of corn for delivery in December of 2007 to be priced at "23 H." This means that corn delivered in that lot would be priced at the Board's May, 2008 futures price plus 23 cents. The MTO set out the months in which each lot would be available for delivery. The parties' understanding was that as Whitham needed grain, it would arrange specific delivery dates within the months specified on the MTO.

Whitham offered to buy five of the seven lots (500,000 bushels) at the offered prices. These purchases were confirmed by Confirmation of Sale and Purchase (CSP) forms executed by Karen Allen on behalf of Sunbelt and transmitted to Whitham....