In re Woker, Bankruptcy No. BK 88-30886
| Decision Date | 22 October 1990 |
| Docket Number | Adv. No. 90-0001.,Bankruptcy No. BK 88-30886 |
| Citation | 120 BR 454 |
| Parties | In re James WOKER and Linda Woker, d/b/a Woker Dairy Farms, Debtor(s). Gibson D. KARNES, Trustee of the Estate of James and Linda Woker, Plaintiff, v. RAKERS ELEVATOR, INC., Defendant. |
| Court | U.S. Bankruptcy Court — Southern District of Illinois |
Steven T. Stanton, East St. Louis, Ill., for Trustee.
Norman Conrad, Breese, Ill., for defendant Rakers Elevator, Inc.
The debtors, who are grain and dairy farmers, executed "future delivery" contracts in the spring of 1988 with the defendant, Rakers Elevator, Inc. ("Rakers"), by which they sold soybeans to Rakers at a specified price to be paid upon delivery of the grain in the fall. During the course of the year, the debtors purchased seed, fertilizer, and chemicals from Rakers on a credit basis. When the soybeans were delivered to Rakers in November 1988, Rakers applied the proceeds of sale to offset the debtors' outstanding account balance with Rakers.
Following the debtors' bankruptcy filing in December 1988, the trustee brought this preference action against Rakers to recover the amount of the soybean proceeds that had been applied to the debtors' account. Rakers contends that the trustee has failed to prove the elements of a preference and that judgment should be entered in its favor. Specifically, Rakers asserts that the evidence shows that "transfer" of the soybeans occurred in May 1988 when the grain contracts were executed, which was more than 90 days before the debtors' bankruptcy filing, and not in November 1988 when the soybeans were delivered to Rakers. Rakers further contends that the sale of supplies to the debtors was conditioned upon the debtors' execution of such contracts and that Rakers thus had a right to set-off the indebtedness owing to it when Rakers received the soybean proceeds in the fall. Rakers additionally asserts that its application of the soybean proceeds to the debtors' account was in the ordinary course of business because it had used this same procedure on prior occasions. Finally, Rakers contends that the trustee may not recover the soybean proceeds as a preference where this recovery would benefit only the debtors, who have signed a reaffirmation agreement with a secured creditor holding a lien on the debtors' crops.
The grain contracts in question were signed by the debtors on May 11 and May 20, 1988. The contracts were entitled "Purchase Contract" and provided that "Seller hereby sells and agrees to deliver and Buyer hereby purchases and agrees to receive" a total of 3,200 bushels of soybeans at $7.04 and $7.50 per bushel, with delivery to be from September to November 1988. The "Remarks" section of the contracts contained the words "To be applied to account." Rakers stipulated that this language was added to the contracts as an intraoffice procedure after the contracts were signed and that the language had not been intended to be a term of the contracts.
On November 1, 2, and 4, 1988, Rakers received delivery of the soybeans covered by the May contracts. On November 4, 1988, Rakers applied the proceeds from the sale of these soybeans to the debtors' account, offsetting the debtors' account balance of $25,052.48 by the amount of $24,137.62. The debtors subsequently filed their bankruptcy petition on December 13, 1988.
At trial, Jerry Rakers, owner and operator of Rakers Elevator, Inc.,1 testified that in February 1988 the debtors talked to him about advancing supplies needed by them to produce their crops that year. Rakers told the debtors that he would advance supplies to them on a credit basis if they would sign contracts selling their grain to him. Rakers testified that on the "very day" of his meeting with the debtors on February 9, 1988, the debtors signed a contract selling wheat to him for future delivery. The debtors executed additional wheat contracts with Rakers on February 22 and May 19, 1988, as well as the soybean contracts of May 1988. Rakers stated that the soybean contracts were executed at his request so that the debtors could obtain supplies on credit, with the understanding that the proceeds would be applied to the debtors' account when the soybeans were delivered in the fall.
Rakers testified that until the fall of 1987, he had always sold supplies to the debtors on an open account basis, and the debtors would pay for that season's supplies when they harvested their crops. In mid-1987, Rakers noticed "problems" with the debtors' payment record. Rakers thereafter changed his method of doing business with the debtors, requiring that they sign contracts for the sale of grain before he would advance supplies. The debtors accordingly sold grain on contract to Rakers in September 1987, and, when the grain was harvested in October 1987, Rakers applied the proceeds from sale of the grain to the debtors' account balance.
Rakers acknowledged that the debtors' grain was subject to a security interest in favor of the First National Bank of Carlyle ("Bank"), but stated that he had an agreement with the Bank that he could "get his money first" from the grain sales proceeds if he would furnish supplies to produce the debtors' crops. Rakers testified that on occasions when a farmer seeking credit already had his crops encumbered by the Bank's lien, Rakers would call the Bank and arrange to advance supplies for the farmer's crops if he could get paid out of grain sales proceeds before remitting the balance to the Bank. Rakers stated that he and the Bank worked closely together and that this was "a deal keep everybody operating." On cross-examination, Rakers reiterated that he did not himself have a security agreement with the debtors but he "had an agreement with the Bank."
When the wheat subject to the February 9 contract was delivered to Rakers in June 1988, the proceeds of sale were applied to the debtors' account. In July, the debtors delivered wheat to fill the February 22, and May 19 contracts, along with another truckload of wheat subject to a contract of July 1, 1988.2 Rakers sold the wheat for the prices specified in the respective contracts and applied the sales proceeds from the July contract to the debtors' account balance, while remitting the proceeds from the two earlier contracts to the debtors and the Bank jointly because, as Rakers stated, "this was the agreement."
According to Rakers' testimony, he told the debtors at the February 1988 meeting that he would need soybean contracts in addition to the wheat contracts, and the debtors agreed to sign such contracts when the price for soybeans reached a certain level. Rakers testified that the Bank had agreed that he could get $25,000 from the sale of the debtors' soybeans. Rakers advanced supplies to the debtors only upon the condition that they sign these contracts, and he monitored the debtors' account closely to make sure they didn't order more supplies than he had contracts for.
Rakers' testimony concerning the grain sales contracts was contradicted by debtor Jim Woker. Woker denied that the debtors signed the contracts for the purpose of obtaining supplies on credit for their 1988 crop. He testified that he "did not remember" Jerry Rakers telling the debtors he would give them credit only if they executed grain sales contracts with Rakers. Rather, Woker stated that the reason the debtors signed the sales contracts for wheat and soybeans was that the crops "were selling at a good price" and he wanted to get that price. Woker agreed that the debtors talked to Rakers in February 1988 about obtaining supplies for the year but stated that they "did not do anything about it" that day.
Woker testified that he did not object when Rakers applied the sales proceeds of the wheat contracts to the debtors' account in mid-1988 because he was able to pay the loan at the Bank and "the rest I let them Rakers have." Although the wheat was subject to the Bank's security interest, the Bank let the debtors "do whatever they wanted with the wheat that was left" after they had the notes paid that were due at that time. The summer of 1988 was a bad drought year, and the debtors' soybean yields were cut in half. In the fall of 1988, Woker had planned to pay the Bank with the soybean proceeds and then borrow from the Bank to pay Rakers. However, when Rakers "kept the beans" in November 1988, the debtors were unable to go back to the Bank for money to pay Rakers.
After the Wokers filed for bankruptcy in December 1988, they signed a reaffirmation agreement in which they promised to repay the debt to the Bank that was secured by their 1988 soybean crop. At the time of trial, the $25,900 note to the Bank had been paid down to $17,000 or $18,000. The reaffirmation agreement provided that any proceeds recovered by the trustee in his preference action against Rakers and paid over to the Bank by reason of its perfected security interest in the debtors' soybeans would be applied to reduce the Wokers' indebtedness on the note. "Transfer" of the Debtors' Property
In order to prevail in a preference action under 11 U.S.C. § 547, the trustee must prove all the elements of an avoidable preference. One of the key elements of a preference is the "transfer" of an interest of the debtor in property within the applicable period—here, 90 days—prior to bankruptcy. 11 U.S.C. § 547(b)(4)(A).
Rakers contends that "transfer" of the debtors' property took place when the debtors signed the two soybean contracts in May, selling the grain to it with the promise of future delivery. Rakers asserts that upon signing the contracts, the debtors conveyed all their rights to the soybeans, so that transfer was complete at that time, and that delivery of the soybeans in the fall was simply performance of the executory contracts signed in May. For this reason, Rakers maintains that the debtors' transfer of the soybeans is protected from the trustee's avoiding powers...
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