In re Yagow

• Decision Date: 10 January 1986
• Docket Number: Bankruptcy No. 85-05257.
• Citation: In re Yagow, 62 B.R. 73 (Bankr. N.D. 1986)
• Parties: In re Merlyn YAGOW and Delores Yagow, individually and d/b/a D & M Trust, Debtors.
• Court: U.S. Bankruptcy Court — District of North Dakota

62 B.R. 73 (1986)

In re Merlyn YAGOW and Delores Yagow, individually and d/b/a D & M Trust, Debtors.

Bankruptcy No. 85-05257.

United States Bankruptcy Court, D. North Dakota.

January 10, 1986.

COPYRIGHT MATERIAL OMITTED

Shirley A. Dvorak, Grand Forks, N.D., for debtor.

Brad Sinclair, Fargo, N.D., for PCA, U.S. Trustee.

William Westphal, Trustee, Minneapolis, Minn., (info copy).

MEMORANDUM AND ORDER

WILLIAM A. HILL, Bankruptcy Judge.

This Order addresses whether Production Credit Association of Fargo(PCA) has a valid lien in the Debtors' 1984 crop.This question, although touched upon in several previous hearings and orders, has not been directly at issue until now.

On November 4, 1985, and November 6, 1985, the Debtors, Merlyn & Delores Yagow, by separate Motions sought leave to use cash collateral derived from the proceeds of their 1984 crop.Use of the proceeds was sought in order to meet an adequate protection payment to Federal Land Bank and meet existing lease obligations.PCA resisted both Motions asserting it has a perfected lien in the 1984 crop and proceeds, an interest for which it has not been offered adequate protection.An expedited hearing on the Debtors' November 4, 1985, Motion was held on November 13, 1985, and the Court denied the Debtors' proposed use for the reason that PCA had not been afforded adequate protection for its interest in the crop.

The Debtors' November 6, 1985, Motion came on for hearing on December 5, 1985, at which time the Debtors for the first time challenged the validity of PCA's security interest in the 1984 crops.The Debtors broached the issue in a Brief filed the day before the hearing wherein they charge that the security agreements by which PCA claims a perfected security interest in the 1984 crops are contrary to section 35-05-04 of the North Dakota Century Code and are thereby invalid.Counsel for PCA had not received the Brief and was unprepared to substantively address the Debtors' argument on such short notice.However at the hearing counsel for PCA orally suggested that the issue was resolved in previous hearings and the doctrine of res judicata prevented the issue from again being considered.The Court took the matter under advisement giving both parties additional opportunity to brief the issue of lien validity and whether or not res judicata ought to be invoked.

The Debtors, in their Brief as well as in a Motion filed November 18, 1985, have also challenged the validity of PCA's lien on the 1985 crop.As the Court previously indicated at the December 5 hearing, the question of the 1985 crop lien will not be specifically addressed herein except insofar as the legal issues now resolved may be the same as those which would of necessity be reached with regards to the 1985 crop issue.The Court notes the Debtors have commenced an adversary proceeding with regard to PCA's claim in the 1985 crop.Although pursuant to Rule 7001 of the Bankruptcy Rules of Procedure the proper vehicle for challenging a creditors' lien is through an adversary proceeding, in the interest of expeditiously resolving this matter in view of the Debtors immediate need for cash, and in view of PCA's failure to object to resolution of the issues in this manner, the Court in this instance will address the issue despite it being raised by motion.

1.

Preparatory to addressing the Debtors' argument concerning the applicability of section 35-05-04, the Court will address PCA's contention that the issue of the validity of PCA's 1984 lien is res judicata.The doctrine of res judicata prevents parties from relitigating claims which have already been properly decided by the same, or a different court.SeeWestwood Chemical Co., Inc. v. Kulick,656 F.2d 1224, 1227(6th Cir.1981).Relitigation of issues actually litigated or which could have been litigated, but were not, is also barred.Lovell v. Mixon,719 F.2d 1373, 1376(8th Cir.1983).Res judicata, though not an inflexible principle, is intended to promote finality of judgments, discourage multiple litigation, and conserve judicial resources.Id.

The Eighth Circuit Court of Appeals recently set forth the generally accepted elements of res judicata, which must be established by a party objection to a later suit:

1) The first suit resulted in a final judgment on the merits;

2) The first suit was based on proper jurisdiction;

3) Both suits involved the same cause of action; and

4) Both suits involved the same parties or their privies.

Lovell v. Mixon, Id.See alsoSouthmark Properties v. The Charles House Corporation,742 F.2d 862, 869(5th Cir.1984);Hotel Corp. of South v. Rampart 920, Inc.,46 B.R. 758, 764(E.D.La.1985).In order to resolve whether the doctrine ought to be now applied, it is necessary to recall those previous instances when the question of PCA's interest in the 1984 crop was raised and the manner in which it was resolved.

On May 20, 1985, this Court held a hearing on the Debtors' Motion to recover machinery which had been repossessed by PCA on the day the Debtors filed bankruptcy.For purposes of that hearing, this Court found the value of the Debtors' assets secured by PCA to be $953,500.00, which included a value of $67,500.00 attributed to the remnants of the 1984 crop.The Court found that the encumbrances against the collateral totalled approximately $780,000.00 leaving the Debtors an equity cushion of approximately $173,500.00 which the Court concluded was sufficient to adequately protect PCA's interest in the machinery.PCA was ordered to return the machinery to the Debtors.

Merlyn Yagow, represented by Atty. Dvorak, testified at the May hearing that PCA did have a valid lien on the 1984 crop.The following dialogue occurred while Atty. Minch, counsel for PCA, cross-examined the Debtor, Merlyn Yagow:

MINCH (Q): You do recognize the fact that PCA has a lien on all of your 1984 crops?

YAGOW (A): Uh-huh.

(Q): You do agree to that?

(A): Yeah.

In re Yagow, Transcript of Proceedings, pp. 39-40, commencing May 20, 1985.

The May 20, 1985, oral order of the Court reduced to writing on June 11, took into consideration the value of PCA's 1984 crop lien in determining that PCA was adequately protected.This is not to say that this Court would have found PCA not to be adequately protected had the value of the crops and proceeds not been included as collateral.Absent a valid lien in the 1984 crop, an equity cushion of $86,000.00 or 11% would have existed which still would have insured that PCA was adequately protected.

The Debtors filed, on August 27, 1985, a Motion for sale of stored grain, and a Motion to deposit checks representing proceeds in an escrow account stating that PCA held a security interest in the corn and soybeans.PCA filed a return to the Debtors' Motions on August 28, 1985, objecting to sale of the corn and soybeans "unless the Debtors unconditionally admit that the . . . corn and . . . soybeans represent PCA's collateral."The Court's order entered October 8, 1985, states that "the Debtors do not dispute the fact that these checks are proceeds of the sale of PCA's collateral."The Order further states that "the Debtors do not deny that the corn and beans were grown during 1984 and that PCA has a lien in these crops."Absent from the Order is any language indicating that the Debtors "unconditionally admit" that the corn and soybeans represent PCA's collateral.This Court granted the motion to sell 16,000 bushels of corn and 1500 bushels of soybeans providing, among other things, that the proceeds be deposited in an escrow account.PCA submits that the October 8, 1985, Order of this Court conclusively settled the issue of the validity of PCA's interest and res judicata bars the Debtors from raising the issue in the action before this Court.

One of the elements which must be established before standing on the doctrine of res judicata is that the first suit must have resulted in a final judgment on the merits.Lovell v. Mixon,719 F.2d at 1376(emphasis added).Neither the June 11 or October 8 Order of this Court is considered a final judgment on the merits.In neither hearing did the Debtor disagree with PCA's position that it had a valid lien on the 1984 crop nor was North Dakota Century Code section 35-05-04 ever mentioned.Even though the Orders were entered with the Court being under the impression that PCA held a valid crop mortgage on the 1984 crop, the issue of whether the 1984 crop mortgage is valid under North Dakota statutory law has never been directly before the Court.

This Court's June 11 Order finding PCA adequately protected would have been entered irregardless of whether PCA's crop lien was valid.Likewise, the September 9 Order allowing checks to be cashed and crop to be sold, entered while assuming the crop mortgage was valid, would have been entered irregardless of whether PCA's crop mortgage was valid.Although the portion of the Order providing for the proceeds to be placed in an escrow account would obviously not have been necessary.In neither instance was PCA prejudiced by the Court's Orders entered on the assumption that the lien was valid."Neither collateral estoppel nor res judicata is to be rigidly applied.Both rules are qualified, or rejected when their application would contravene an overriding public policy or result in manifest injustice".Westwood Chemical Co., Inc. v. Kulick,656 F.2d at 1229(quotingTipler v. E.I. duPont de Nemours and Co.,443 F.2d 125, 128(6th Cir.1971)).This Court's early Orders were not on the merits of the validity of the 1984 crop mortgage and it would be manifest injustice to prevent the Debtors from having an opportunity to have the validity of PCA's security agreements ruled upon.Hence, res judicata does not bar the Debtors from raising the issue before the Court.

PCA in its Brief also relies on the doctrine of collateral estoppel in its belief that the Debtors' objection should not be heard."Collateral estoppel...