In re Zwagerman, Bankruptcy No. NG 85-02901

CourtUnited States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Michigan
Writing for the CourtU.C.C. § 2-326 provides
Citation115 BR 540
PartiesIn re Gordon ZWAGERMAN and Joan Zwagerman, d/b/a Zwagerman Farms, Debtors. James D. ROBBINS, Trustee, Plaintiff, v. COMERICA BANK-DETROIT, Red River Company, David Bradley, the United States of America, Acting Through the Farmers Home Administration, Defendants.
Docket NumberBankruptcy No. NG 85-02901,Adv. No. 86-375.
Decision Date19 June 1990

115 B.R. 540 (1990)

In re Gordon ZWAGERMAN and Joan Zwagerman, d/b/a Zwagerman Farms, Debtors.
James D. ROBBINS, Trustee, Plaintiff,
COMERICA BANK-DETROIT, Red River Company, David Bradley, the United States of America, Acting Through the Farmers Home Administration, Defendants.

Bankruptcy No. NG 85-02901, Adv. No. 86-375.

United States Bankruptcy Court, W.D. Michigan.

June 19, 1990.

115 BR 541
115 BR 542
Varnum, Riddering, Schmidt & Howlett (Robert A. Hendricks, and William E. Rohn), Grand Rapids, Mich., for plaintiff

Miller, Canfield Paddock & Stone (Robert F. Wardrop, II), Grand Rapids, Mich., for defendant Comerica Bank-Detroit.

Hunter M. Meriwether, Grand Rapids, Mich., for defendants Red River Co. and David Bradley.

Visser & Bolhouse (Donald R. Visser), Grand Rapids, Mich., for debtors Gordon Zwagerman and Joan Zwagerman.


DAVID E. NIMS, Jr., Bankruptcy Judge.

This case comes before the court on the complaint filed by James D. Robbins, the Trustee in this estate, for a determination as to the respective interests in proceeds from the sale of cattle present on the farm of Gordon and Joan Zwagerman, doing business as Zwagerman Farms, the Debtors herein, at the time of the filing of the petition and also to recover preferential transfers by the Debtors to the Defendant David Bradley, doing business as the Red River Company. The United States, one of the Defendants, took no part in the trial and apparently makes no claim to the cattle.


Gordon and Joan Zwagerman filed their Chapter 7 bankruptcy petition on December 30, 1985. Other than at a 341 Meeting held on February 5, 1986, the Debtors have refused to testify, claiming their privilege against self-incrimination. David Bradley claims that all proceeds belong to him because he owned the cattle on the Debtors' farm. Comerica Bank-Detroit, the Bank herein, argues that based on their properly perfected security interest in the cattle, they are entitled to the proceeds.

Since approximately 1969, the Debtors operated a farm at which they fattened hogs and cattle and then sold them for slaughter. Originally, the Debtors fattened livestock which they personally owned. At some point in the early 1980's the Debtors apparently had a cash flow problem and started to bring some cattle into their feedlots1 in which they did not have an ownership interest. Those cattle were furnished by David Bradley, a man the Debtor met while buying cattle out of the South. Bradley agreed to deliver cattle to the Zwagerman farm in order for the cattle to be fattened. The first delivery to the Debtors was on or about November 27, 1981. Both the number of head per shipment and the number of shipments per month were sporadic. Each shipment was accompanied by a contract, generally including the following pertinent provisions:

1. That Red River will deliver a specified number of cattle on a specified date, with the expense of hauling to be paid by Red River.
2. Zwagerman agrees to feed such cattle and to be paid fifty-five (55) cents per pound for the poundage the cattle gain after being delivered.
3. Any loss of cattle by death shall be borne by Zwagerman.
4. Zwagerman agrees to feed the cattle until the weights reach approximately one thousand one hundred (1,100) pounds and when sold, the proceeds will be delivered to Red River. Red River will send to Zwagerman its check for the number of pounds gained by the cattle from time of delivery to Zwagerman to time of sale.
115 BR 543
5. The parties agree that should any dispute arise in this agreement that the forum for settling such dispute will be Sumner County, Tennessee.

When the Red River cattle were received, they were not separated from the other cattle on the farm. The cattle were not branded, ear tagged, or identifiable in any such manner. Testimony produced at trial suggested that it is not the practice of farmers to so mark feeder cattle. Mr. Bradley stated that he knew that the Debtors originally had some of their own cattle on the farm, but thought that after shipping cattle for some time, his cattle were the only cattle on the farm. It appears, however, that Zwagerman purchased cattle intermittently from various parties, including 500 purchased from Bradley in April, 1983.

Each shipment from Bradley was composed of cattle of varying weights. Upon delivery to the farm, the Bradley cattle would be sorted and put into pens with animals of similar weight since cattle fatten best when they are in equally fat company.

Bradley never visited the farm, but called the Debtor two to six times a week to discuss the best time to sell based on the market and cattle conditions. Although no amount of time was set for the fattening of the cattle, Bradley estimated that it took 90-140 days. The purchasers made checks out to the Debtor who then deposited the check into one of his personal checking accounts. Pursuant to the contract, the Debtor was supposed to send a check to Bradley for the full amount of the sale.2 Once Bradley received a check for the sale of cattle, he would send a weight gain check in return to the Debtor. Because the animals which were sold could not be identified with a particular contract, the number sold were credited against the oldest contract with an outstanding balance, a first in, first out (F.I.F.O.) method of accounting.

In the spring of 1983, the Debtor contacted Phillip Roberts, an agricultural loan officer at Comerica Bank, to pursue the refinancing of his debt to P.C.A. and F.M.B. The cattle on the farm were to be part of the security for the Comerica loan, just as they were for the existing P.C.A. loan. In deciding to recommend to the loan committee that a revolving credit loan for $1,300,000.00 and a term loan for $200,000.00 be given to the Debtor, Roberts testified that he took many things into consideration. He went out to the farm and saw cattle which the Debtor referred to as "my cattle." Parties mentioned on the various documents were contacted for verification, including Michigan Livestock Exchange which informed the Bank that Zwagerman bought cattle through them. Lien searches were done at the Register of Deeds. Various financial records, including bank statements and tax returns, were reviewed. A balance sheet paralleling statements dated 12/31/82 and 3/31/83, accompanied by an earnings work sheet, was submitted by the Debtor. Production of the Bills of Sale for the cattle was not required since Comerica was refinancing a debt owed to P.C.A.

The balance sheet bearing dates of 12/31/82 and 3/31/83 indicated in the assets section an increase of 715 cattle in three months and a decrease in liabilities. Roberts commented that it is typical for banks to have problems interpreting the figures submitted by farmers, particularly those who do a large amount of buying and selling, as farmers are usually poor bookkeepers. Therefore, it was left up to an analyst to reconcile the figures. The accompanying earnings work sheet showed "custom cattle" as an entry separate from "cattle" in the amount of $208,232.00 for the period ending 3/31/83. Roberts admitted that in 1983 he knew the term "custom cattle" meant that the farmer didn't own the cattle, but rather would be compensated for feed and care of the cattle pursuant to an agreement with the owner. Furthermore, he stated that he would have red flagged any documents with such an entry to require more information regarding ownership. The only explanation Roberts

115 BR 544
proffered to the Court was that when the loan application was being reviewed in 1983, no one from the Bank, including himself, caught the entry

On November 10, 1983, a note and security agreement were signed. The security agreement purportedly gave the Bank a security interest in the livestock. The following paragraph was also contained within that document,

2.4 At the time any Collateral becomes subject to a security interest in favor of Bank, Debtor shall be deemed to have warranted that (i) Debtor is the lawful owner of such Collateral and has the right and authority to subject the same to a security interest in Bank . . .

A financing statement was filed by the Bank on November 17, 1983.

According to a 11/12/84 annual review by the Bank of the Zwagerman loan, the loan was in default for a variety of reasons and there was noted concern regarding Gordon Zwagerman's speculation in the commodity markets. Nevertheless, the loan commitments were renewed and an additional $80,000.00 was provided to fund a hedge account.

No comprehensive records for any year between 1981 and 1986 were available to the Court to show how and from where all cattle on the Debtors' farm had been obtained. As for 1985, the evidence offered at trial identified three known sources of cattle other than Bradley. Michigan Livestock Exchange sold to the Debtors nine cattle on an unspecified date in 1985. On April 23, 1985, the Debtors purchased 55 head from Barber. On April 24, 1985, the Debtors bought 56 head from Iowa Livestock. Barber made another cattle sale to the Debtors on October 1, 1985, of 110 head. Prior to April 23, 1985, Bradley had shipped to the Debtors over 6,500 cattle, and from April 25, 1985, through the last shipment on November 18, 1985, 1,704 more were delivered.

On December 3, 1985, Bradley received a call from Gordon Zwagerman who disclosed that many Bradley cattle had been sold without accounting for them to Bradley. The last payment Bradley had received for cattle sales was on November 25, 1985, and had been written off by Bradley and Zwagerman against shipment contracts dated 9/21/84 and 10/5/84 pursuant to their F.I.F.O. accounting practice. The 90-140 day turnaround period had become a 13-14 month turnaround period. No cattle were shipped and no checks were sent or received by Bradley after that December 3, 1985, telephone call. A few days later, the Zwagermans' attorney told Bradley that approximately 458 cattle were on the...

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