In re Wolsky, Bankruptcy No. 83-05094.

• Decision Date: 04 October 1985
• Docket Number: Bankruptcy No. 83-05094.
• Citation: 53 BR 751
• Parties: In re Leland WOLSKY and Karen Wolsky, Debtors.
• Court: U.S. Bankruptcy Court — District of North Dakota

53 B.R. 751 (1985)

In re Leland WOLSKY and Karen Wolsky, Debtors.

Bankruptcy No. 83-05094.

United States Bankruptcy Court, D. North Dakota.

October 4, 1985.

Roger Minch, Fargo, N.D., for debtors.

Jay Carlson, Fargo, N.D., for Unsecured Creditors Committee.

Paul Scheerer, Minneapolis, Minn., for First Bank.

William Westphal, U.S. Trustee, Minneapolis, Minn. (information).

MEMORANDUM AND ORDER

WILLIAM A. HILL, Bankruptcy Judge.

First Bank of North Dakota — Jamestown (FIRST BANK), on August 13, 1984, filed a Motion for Relief From Stay pursuant to section 362(d) of the Bankruptcy Code. This Court's decision of September 7, 1984, 46 B.R. 262, entered in consequence of that Motion was appealed to the United States District Court for the District of North Dakota which, by Order entered June 10, 1985, remanded the case to the Bankruptcy Court for further proceedings to determine the issue of adequate protection for present value, consistent with the standard recently enunciated in In re Martin, 761 F.2d 472 (8th Cir.1985) and In re American Mariner Industries, Inc., 734 F.2d 426 (9th Cir.1984). Pursuant to this Court's Order of June 24, 1985, an evidentiary hearing was held on July 16, 1985, at which time the parties presented evidence consistent with the Order of Remand. On the heels of the Order of Remand, First Bank, by Motion filed June 27, 1985, renewed its motion for relief from stay alleging that the Debtors have failed to provide it adequate protection consistent with the Opinion of the District Court. By its present Motion, First Bank seeks the opportunity cost of the value of the collateral less the $50,000.00 payment made by the Debtors subsequent to the original 1984 relief from stay hearing, at the rate of 15% which is the current contract rate. This renewed Motion for Relief From Stay was heard concurrent with the evidentiary hearing and is also addressed herein.

FINDINGS OF FACT

This Court's findings of fact from the original hearing, reported at In re Wolsky, 46 B.R. 262 (Bankr.D.N.D.1984), as relevant to this matter, are summarized as follows:

Debtors, Leland and Karen Wolsky, were indebted to First Bank for $559,899.61 as of the date of filing. The Debtor's Petition, signed by both Leland and Karen Wolsky, listed First Bank as having a security interest in all farm machinery and equipment. After adjusting for superior security interests held by other creditors, the secured value of First Bank's interest was determined to be $531,208.00 as of the date of filing. The Court held that the stay would be lifted unless the Debtors made two $25,000.00 payments to First Bank as adequate protection for past and future decline in the value of the collateral. In re Wolsky, 46 B.R. at 265.

Since the original hearing, the Debtors have paid First Bank the two $25,000.00 payments which this Court found was necessary to prevent a relief from stay. Id. Evidence at the July 16 evidentiary hearing indicated that the payments were applied by First Bank against the Debtors' principal debt, thereby reducing the principal balance of the Debtors' obligation to $481,208.00. With regards to the principal issue of opportunity cost, the Bank introduced testimony of its president, Densel Mason, as to interest rates. He stated that the contract interest rate is variable with a floor of 15% and a ceiling of 18%, with the rate between February 1983 and July 16 at 15%. Based on these calculations, he concluded that the interest accrued through July 17, 1985, was $187,251.06. In argument, First Bank's counsel urged that the Bank is entitled to the sum of $187,251.06 as its opportunity cost from February 83 through July 16, 1985, as calculated by Mr. Mason (15% interest on $531,208.00 less the $50,000.00 paid).

At the July 16 hearing, Karen Wolsky, in an effort to establish an interest in the machinery and equipment, stated that she has worked on the farm with responsibilities for the house and various farm chores. She testified that she was unaware that all the farm machinery was going to be used as collateral and that she did not specifically authorize her husband to give the Bank a lien on her interest. Mrs. Wolsky testified that she did not know if she signed any purchase money contracts for the machinery but that she put as much into the farm as her husband did.

CONCLUSIONS OF LAW

1.

At the evidentiary hearing on remand, the Debtors alleged for the first time that First Bank's security interest, signed by Leland Wolsky, is only valid as to one-half of the equipment and machinery owned by the Debtors. The Debtors' basis for this contention is that Karen Wolsky owns one-half of the collateral, and she did not sign the security interest. This issue will be addressed preparatory to consideration of the adequate protection problem.

The Debtors' Chapter 11 Petition and Schedules, though not conclusive of ownership interest in property, are indicative of the Debtors' belief as to the ownership status of their property at the time of filing. The Debtors' Petition, signed by both Leland and Karen Wolsky, lists First Bank as having a security interest in all of the machinery and equipment. The validity of First Bank's security interest was not raised at the original hearing on this matter held on August 29, 1984. Finally, approximately two and one-half years following the commencement of the Chapter 11 case, the Debtors file their objection to First Bank's Proof of Claim and allege on remand that one-half of the machinery and equipment is owned by Karen Wolsky and not subject to First Bank's security interest.

A bankruptcy court is bound by state law in determining ownership interest in property. See In re Davison, 738 F.2d 931, 933-34 (8th Cir.1984). This Court discussed a similar ownership issue in In re Asbridge, 45 B.R. 564 (Bankr.D.N.D.1984) and concluded that marital status alone is not sufficient to prove an ownership interest in property. Id. at 565. Evidence as to an individual's contribution towards management of daily affairs, negotiation on various loans, and purchase of machinery and equipment is to be considered. See id. Moreover, the Debtors have not presented any evidence of purchase documents or partnership agreements which would indicate joint ownership.

This Court is unclear from the less-than-complete testimony presented at the evidentiary hearing on what basis Karen Wolsky purports to own an unsecured one-half interest in machinery and equipment. We have great difficulty in ascertaining how she could have an ownership interest in the machinery and equipment if she has not been extensively involved in the management, decision-making and daily activities of the farm operation. If, on the other hand, she has been extensively involved in the management, decision-making and daily activities of the farm, she may then have a partnership interest in the machinery and equipment. The existence of a partnership is determined on a case-by-case basis. Gangl v. Gangl, 281 N.W.2d 574, 579 (N.D.1979). Certain critical elements necessary to the existence of a partnership include: "an association, or an intention to be partners; co-ownership of, and a community of interest in, the business of the partnership; and the profit motive." Hoggard v. Rotzien, 200 N.W.2d 112, 115 (N.D. 1972). The North Dakota Supreme Court has held that: "control is an indispensable component of co-ownership which, when combined with profit sharing, strongly suggests the existence of a partnership." Gangl, 281 N.W.2d at 580. The North Dakota Supreme Court further stated that "a person may be a partner even though he has entrusted control of the business exclusively to his associates. The question then becomes whether or not the participant had the right to exercise control in the management of a business." Id.

Partnerships may arise from contract, or they may be implied. Schlichenmayer v. Luithle, 221 N.W.2d 77, 82 (N.D. 1974). Further, ostensible partnership or partnership by estoppel may arise as to a third party who relies on conduct of individuals which justifiably leads the third party to believe a partnership exists. Id. at 82. If the Wolsky's or First Bank had proven that a partnership existed, Leland Wolsky would have had the authority, as an agent of the partnership, to grant the First Bank a security interest without Karen Wolsky's signature. N.D.Cent.Code § 45-06-01 (1977); see also Maercklein v. Maercklein, 64 N.D. 733, 256 N.W. 180, 181-82 (N.D. 1934).

The Debtors have not met their burden of proving Karen Wolsky's actual ownership in the property. Davison, 738 F.2d at 936 (debtors were held to have burden of proving ownership interest). This Court is not satisfied, in light of the foregoing case law, that Karen Wolsky's marital rights alone provide her a one-half interest in the farm machinery and equipment.¹ Moreover, Karen Wolsky has not contributed a substantial amount of outside income to the purchase of the machinery and equipment. Thus, any legal interest which she asserts in the property must be derived from her efforts in the farming operation and would be in the form of a partnership interest, thereby giving Leland Wolsky the authority to encumber the machinery and equipment by signing a security interest. This Court concludes, regardless of Karen Wolsky's basis for asserting an ownership interest, that First Bank holds a valid security interest in all of the machinery and equipment.

2.

The core issue in this case, and the pivotal issue on remand, is to what extent is First Bank entitled to adequate protection for the present value of its collateral, perhaps more appropriately explained by the Eighth Circuit as the entitlement "to interest for any delay in repayment" of obligations. In re Martin, 761 F.2d at 477. In the past, this Court, as have a number of bankruptcy courts, has found that secured creditors are adequately protected under section 361 of the Bankruptcy Code when they are protected against...