In re Thompson

• Decision Date: 22 September 2004
• Docket Number: Adversary No. 04-6017.,Bankruptcy No. 03-62656.
• Citation: 315 B.R. 94
• Parties: In re John William THOMPSON and Kelli Leann Thompson, Debtors. Nick Wieberg, Plaintiff, v. John William Thompson and Kelli Leann Thompson, Defendants.
• Court: U.S. Bankruptcy Court — Western District of Missouri

315 B.R. 94

In re John William THOMPSON and Kelli Leann Thompson, Debtors.

Nick Wieberg, Plaintiff, v. John William Thompson and Kelli Leann Thompson, Defendants.

Bankruptcy No. 03-62656.

Adversary No. 04-6017.

United States Bankruptcy Court, W.D. Missouri.

September 22, 2004.

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Mark A. Rice, Springfield, MO, for Debtors.

MEMORANDUM OPINION

ARTHUR B. FEDERMAN, Bankruptcy Judge.

Plaintiff Nick Wieberg filed this adversary proceeding to object to the dischargeability of a deficiency claim in the amount of $53,888. He contends primarily that debtors John (Jay) and Kelli Thompson converted cattle in which he held a security interest. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) over which the Court has jurisdiction pursuant to 28 U.S.C. § 1334(b), 157(a), and 157(b)(1). The following constitutes my Findings of Fact and Conclusions of Law in accordance with Rule 52 of the Federal Rules of Civil Procedure as made applicable to this proceeding by Rule 7052 of the Federal Rules of Bankruptcy Procedure. For the reasons set forth below, I find that the debt is nondischargeable as to both Jay and Kelli Thompson.

FACTUAL BACKGROUND

Debtors Kelli and Jay Thompson leased pasture land and ran a contract cattle operation beginning in 1994. On January 31, 2000, the Thompsons leased 1500 acres from Bradley and Neva Koon. They also leased 2800 acres from Jerry Highland and 400 acres from Glen Anderson. Wieberg contracted with the Thompsons to care for his cattle beginning sometime in 2000.

On March 7, 2000, the Thompsons borrowed $57,000 from the Farm Service Agency (FSA), and granted FSA a security interest in all crops, all equipment, and all livestock now owned or hereafter acquired. On that same date, FSA filed a UCC-1 financing statement with the Recorder of Deeds and the Office of the Secretary of State. On May 7, 2001, the Thompsons executed two loans with FSA in the amount of $70,000 each. On December 19, 2002, FSA filed an amendment to the UCC-1 in both locations.

On January 17, 2002, the Thompsons purchased 365 head of Wieberg's cattle for a purchase price of $259,150, plus interest. They signed a Cattle Sales Agreement (the Agreement) and a Promissory Note (the Note). According to the terms of the Agreement, the Thompsons gave Wieberg a down payment of $26,000 and promised to pay $67,475 on February 1, 2003, and $197,868 on February 1, 2004. The Agreement also provided that the Thompsons would not sell or relocate either the cattle or the calves without notifying Wieberg. The 365 head of cattle purchased by the Thompsons from Wieberg were designated by a purple and white ear tag. The Thompsons kept these cattle primarily on the Highland Farm. On January 31, 2003, over one year after signing the Agreement, Wieberg filed a UCC-1 with the Missouri Secretary of State.¹

The Thompsons claim that, despite the language of the Agreement, they had an oral agreement with Wieberg that the February 1, 2003, payment would not be due until March 1, 2003. Wieberg denies such an oral agreement. Nonetheless, the language of the Agreement is controlling, and I find that no oral agreement existed.

On March 7, 2002, the Thompsons formed JK Cattle Ranch, L.P. (JK). Jay Thompson and Charles Reed were the general partners of JK. Reed and Thompson formed JK for the purpose of conducting a cattle feeding, raising and sales business. While the Thompsons never transferred ownership of the cattle to JK, they did use JK's account to pay the expenses of both the contract cattle and their own cattle.

In December of 2002 Wieberg discovered that, without his knowledge, the Thompsons had moved some calves to a feed lot, that JK intended to sell the calves, and that the Thompsons had taken an advance against the sale. Wieberg then contacted the Thompsons, and on January 8, 2003, Wieberg and Jay Thompson together counted the cattle with purple and white ear tags. They counted 322 cattle and 120 calves, and Wieberg documented that number by letter dated January 10, 2003. They both agreed at that time, assuming 10 had cattle died, that 33 cattle were missing.

On March 11, 2003, at Wieberg's insistence, Jay Thompson filed a police report with the Camden County sheriff's department. In the report, Thompson is quoted as saying that he had counted 354 head of cattle at the end of January, which is contrary to Wieberg's January 10 letter, but that when he counted again on March 7, 2003, there were only 322 head. Sometime in March he filed an insurance claim for the 33 missing head, again at Wieberg's insistence, which was denied.

Dexter Holmes, Kelli Thompson's father, assisted the Thompsons in their cattle operation until March of 2003. Both Thompsons testified that Holmes left the second week of March, and that they do not know where he went. They said Holmes informed them, as he was leaving town, that "cattle are missing." Kelli stated that she has had no contact with her father since that time, though their daughter did receive an Easter card from him. She said she did not see the envelope and made no effort to discover either a return address or postmark. Jay Thompson did not include the alleged statement of Dexter Holmes in his police report, and he did not amend the report to include any mention of Dexter Holmes.

The Thompsons did not make the payment to Wieberg in the amount of $67,475 due on February 1, 2003. Instead, on March 7, 2003, Wieberg received a check in the amount of $32,813.04 from the sale of calves at the feed lot, and another check from the Thompsons in the amount of $37,792.89.

In May of 2003 the Thompsons lost their lease on the Highland Farm. Wieberg suggested they sell some of the cattle since he no longer had sufficient pasture land to allow the cattle to graze. Between May 16 and May 20, 2003, Wieberg rounded up and sold 200 head of cattle with purple and white ear tags. The proceeds of those sales, the sum of $133,687, were used to reduce the Thompsons' obligation to Wieberg from $187,575 to $53,888. Following the sales, by letter dated June 4, 2003, Wieberg sent the Thompsons an accounting in which he stated that 200 cows had been sold, that 33 cows were missing, that 12 cows were dead, and that he still held a lien on 120 cows. He also inquired about insurance compensation for the missing 33 head of cattle. The Thompsons did not respond, or in any way contradict Wieberg's accounting.

Eventually, the Thompsons lost their leases on the Koons Farm and the Anderson Farm. FSA began foreclosure proceedings on all of the equipment and remaining cattle. On October 27, 2004, the Thompsons filed a Chapter 7 bankruptcy petition. FSA filed a motion for relief from stay claiming a lien, in the amount of $183,144.48, on all of the Thompsons' equipment, 120 beef cows, 2 bulls, 17 cull cows, and 99 calves. This Court lifted the stay and permitted FSA to conduct its sale and ordered that the proceeds be escrowed. On December 3, 2003, FSA sold 205 cows for the sum of $91,077.87. Of those 205 head, 71 of them had a purple and white ear tag.

By the time of the foreclosure sale, the Thompsons were missing 131 head of cattle. Kelli Thompson testified that they had owned 490 head of cattle in December of 2002, which would have included Wieberg's cattle with purple and white ear tags, as well as FSA's cattle with orange ear tags. She further testified that they could account for only 359 head by December of 2003. She stated that she did not remember losing any cattle in 2001 or 2002. Of the 131 missing cattle, no one could account for the 33 Wieberg cattle, which had been missing in January of 2003, or the additional 49 Wieberg cattle, which were missing at the time of the foreclosure sale.

The parties agreed that FSA held a prior claim to the escrowed funds, therefore, FSA received the sum of $91,077.87 in partial satisfaction of its claim. Wieberg received none of the proceeds and filed this adversary proceeding, claiming that the deficiency debt due him is nondischargeable pursuant to three separate provisions of the Bankruptcy Code (the Code).

On August 25 and 26, 2004, this Court held a hearing. At the hearing, counsel for the Thompsons moved for judgment at the close of Wieberg's evidence or, alternatively, for dismissal for failure to state a claim. This Court overruled that motion. Without objection from Wieberg, I granted the Thompsons' motion to amend their response to conform to the evidence and to allow them to assert, as an affirmative defense, that the Agreement did not create a valid security interest.

DISCUSSION

I. Count I-11 U.S.C. § 523(a)(2)(A)

Count I of the Complaint contends, pursuant to 11 U.S.C. § 523(a)(2)(A), that the Thompsons affirmatively represented in the Agreement that they would not move, encumber, or liquidate the cattle without Wieberg's permission, that they would maintain sufficient collateral to pay the obligation, and that these and other representations constituted false pretenses, false representations, or actual fraud.

Section 523(a)(2)(A) excepts from discharge a debt obtained by a false representation:

(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual from any debt —

. . . . .

(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by —

(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.²

Wieberg argues that the Thompsons made false representations when, after acknowledging that some cattle were missing in early 2003, they continued to assure him that cattle remained sufficient to satisfy his debt. This section of the Code, however, requires proof of a misrepresentation at the time credit is given, extended, renewed, or refinanced. The only time Wieberg extended credit to the...