K Lazy K Ranch, Inc. v. Farm Credit Bank of Omaha

• Decision Date: 15 May 1991
• Docket Number: Civ. No. 90-3028.
• Citation: 127 BR 1014
• Parties: K LAZY K RANCH, INC.; Simon Kusser; and Joe Kusser, Plaintiffs, v. FARM CREDIT BANK OF OMAHA, successor-in-interest to the Federal Land Bank of Omaha; Richard L. and Bernadette A. Knox; Gerald W. and Doris J. Knox; and Todd Cowan, Defendants.
• Court: U.S. District Court — District of South Dakota

127 B.R. 1014 (1991)

K LAZY K RANCH, INC.; Simon Kusser; and Joe Kusser, Plaintiffs, v. FARM CREDIT BANK OF OMAHA, successor-in-interest to the Federal Land Bank of Omaha; Richard L. and Bernadette A. Knox; Gerald W. and Doris J. Knox; and Todd Cowan, Defendants.

Civ. No. 90-3028.

United States District Court, D. South Dakota, C.D.

May 15, 1991.

James P. Hurley, Bangs, McCullen, Butler, Foye & Simmons, Rapid City, S.D., Jonathan K. Van Patten, Vermillion, S.D., for plaintiffs.

Brent A. Wilbur, May, Adam, Gerdes & Thompson, Pierre, S.D., for defendant Federal Land Bank of Omaha.

William G. Taylor, Woods, Fuller, Shultz & Smith, P.C., Sioux Falls, S.D., for defendants Richard L. and Bernadette A. Knox, Gerald W. and Doris J. Knox, and Todd Cowan.

MEMORANDUM OPINION

DONALD J. PORTER, Chief Judge.

The plaintiffs, K Lazy K Ranch, Inc., Simon Kusser and Joe Kusser, filed an adversary proceeding in bankruptcy court contending that the defendant, Farm Credit Bank of Omaha (FCBO), had breached the terms of a stipulation agreement which had been approved by the bankruptcy court. The adversary proceeding was transmitted to this Court based on the bankruptcy court's finding that the defendants were entitled to a jury trial. The trial was held in March of 1991 with the jury finding in favor of the defendants. During the course of the trial, this Court ruled on several issues as a matter of law. This memorandum opinion explains the Court's rulings in further detail.

I. FACTS

The plaintiffs are K Lazy K Ranch, Inc., a South Dakota family farm corporation, and Simon and Joe Kusser, stockholders of the corporation. Plaintiffs filed a voluntary Chapter 11 petition in bankruptcy court on January 28, 1987. At the time of the filing plaintiffs owed $942,800.00 principal and $204,324.56 interest to FCBO. The loan was secured by a mortgage on approximately 7,000 acres of plaintiffs' land.

On April 22, 1988, FCBO and plaintiffs entered into a written agreement.¹ By the agreement, plaintiffs deeded the 7,000 acres of land to FCBO and FCBO then leased the land back to plaintiffs for two years. The stipulation agreement provided that plaintiffs "shall be accorded all rights to which they are entitled under the Farm Credit Act of 1987, Public Law 100-233, or otherwise provided by law."²

On December 7, 1988, FCBO had an appraisal done on the entire 7,000 acres by Jerald M. Lewis, an employee of FCBO. The appraisal was then reviewed and countersigned by Fred Bement who was also an employee of FCBO. The appraisal valued the property at $900,000.00.

Pursuant to the right of first refusal found at 12 U.S.C. § 2219a(b)(1), FCBO notified plaintiffs of their right to purchase the property at the appraised price of $900,000.00. Plaintiffs' counteroffer of $400,000.00 was rejected by FCBO.

Another appraisal was completed by FCBO employees in March of 1989. Paul Reisch and Jim Vietor appraised the property in three separate tracts: Tract I — $178,600.00; Tract II — $186,300.00; and Tract III — $531,800.00. The total appraised value was $896,700.00. Plaintiffs were again given the opportunity to purchase the property at the appraised price and were also advised that they could offer to purchase different portions of the property other than the three tracts which were appraised separately by FCBO. Plaintiffs' counteroffer of $525,800.00 was refused.

FCBO then advertised the property and eventually sold Tract II to defendants Richard and Gerald Knox for $205,000.00. The property was sold under contracts for deed which divided the property between the Knox brothers. Tract I was sold to defendant Todd Cowan for $180,000.00. After the sale of Tracts I and II, plaintiffs purchased Tract III, which consisted of approximately 3500 acres, for $450,000.00.

Subsequent to the sales of Tracts I, II, and III, plaintiffs brought an adversary proceeding in bankruptcy court claiming FCBO breached the terms of the stipulation agreement. Plaintiffs asserted five causes of action: 1) failure to comply with statutory requirements;³ 2) breach of stipulation agreement; 3) breach of the covenant of good faith and fair dealing; 4) injunctive relief; and 5) declaratory relief. The bankruptcy court granted plaintiffs' motion for injunctive relief by enjoining FCBO from selling, transferring, leasing, or disposing of any of the land previously owned by the plaintiffs. The case was transmitted to this Court by the bankruptcy court for jury trial.

Plaintiffs' assertion that FCBO breached the settlement agreement was based on section 3(e) of the agreement which states that the plaintiffs "shall be accorded all rights to which they are entitled under the Farm Credit Act of 1987, Public Law 100-233, or otherwise provided by law."⁴ Plaintiffs contended that FCBO failed to give them certain repurchase rights set out in the Act when it contracted to sell the land to Cowan and the Knoxes.

II. DISCUSSION

A. RIGHT OF FIRST REFUSAL

Plaintiffs claimed FCBO violated the right of first refusal provision of the Agricultural Credit Act of 1987, 12 U.S.C. § 2219a.⁵ The resolution of most of the issues presented in this case centered on statutory or contractual interpretation, ruled on by this Court as matters of law during the course of the trial.⁶ The following issues were decided by the Court: 1) whether FCBO was allowed, under the Act, to divide the property into separate parcels; 2) whether terms and conditions which were offered to the Knoxes and Cowan, but not to the plaintiffs, violated the Act; 3) whether the Knoxes and Cowan purchased the property for less than the appraised value; 4) whether the plaintiffs could attack the validity of the appraisals used by FCBO; 5) whether FCBO breached the implied covenant of good faith and fair dealing. The Court ruled in favor of the defendants on all of these issues.

The only remaining issue⁷ — whether the FCBO appraisers were accredited — was a fact issue submitted to the jury.⁸ The jury found the appraisers were accredited.

1. Division of the Land into Separate Tracts

One of the claimed violations centered on whether FCBO had the right to divide the property into separate parcels after having elected to sell the entire property. This issue involved statutory construction and a determination of congressional intent. As such, it was a question for the court. Stissi v. Interstate and Ocean Transport Co. of Philadelphia, 765 F.2d 370, 374 (2d Cir.1985) (interpretation of a statute is a question of law). (citations omitted); Beattie Through Beattie v. United States, 635 F.Supp. 481, 488 (D.Ala. 1986), aff'd, 831 F.2d 916 (9th Cir.1987), cert. denied, 485 U.S. 1006, 108 S.Ct. 1469, 99 L.Ed.2d 699 (1988) (A court must "interpret the words of the statute in light of the purposes the legislature sought to serve.") After examining the statute and the legislative history, this Court ruled that FCBO was not prohibited from dividing the property.

FCBO first appraised, and then offered, the entire 7,000 acres of land to the plaintiffs. After rejecting the plaintiffs' counteroffer, FCBO had the property reappraised as three separate tracts and offered these tracts to the plaintiffs. Plaintiffs contended that once FCBO decided to sell the entire property, it was prevented from dividing the property into separate parcels. Plaintiffs' claim is based on the language of the statute that "within 15 days after an institution of the System first elects to sell acquired real estate, or any portion of such real estate, the institution shall notify the previous owner. . . ." 12 U.S.C. § 2219a(b)(1).

In support of their theory that FCBO's decision to sell the entire property precluded it from selling the land in tracts, plaintiffs focused on the words "first elects" — FCBO elected to sell the entire property and must therefore sell the property as a whole. Plaintiffs also relied on a recent bankruptcy court opinion in which the court interpreted the statute "to require that property must be sold as one unit in those cases where an institution of the system elects to sell the entire property." In re Jarrett Ranches, 107 B.R. 969, 974 (Bankr.D.S.D.1989), vacated on other grounds, Jarrett Ranches, Inc. v. Farm Credit Bank of Omaha, 128 B.R. 263 (D.S.D.1990) (emphasis original).

This Court found nothing in the plain language of the statute, or, indeed, nothing in the legislative purpose behind the enactment of the statute to support the plaintiffs' contention that if an institution decides to sell the entire property it is then foreclosed from selling the property in separate parcels. In fact, legislative history shows that the Senate Committee "does not favor the sale of large tracts of acquired farmland. The Committee favors sales in smaller tracts so that family farmers will have an opportunity to acquire additional land." Senate Comm. on Agriculture, Nutrition and Forestry, Farm Credit Act Amendments of 1987, S.Rep. No. 100-230, 100th Congress, 1st Sess. at 35 (November 20, 1987).

Moreover, plaintiffs were given an opportunity to purchase the land as one unit. It was only after their counteroffer was rejected that the bank divided the property into three separate parcels and then offered the parcels to the plaintiffs. It should also be noted that the division into three separate parcels resulted in a slight decrease of the total purchase price; this was not a situation where the bank divided the property into smaller tracts in order to increase the asking price for the property. The division did not prevent the plaintiffs from purchasing the entire property; it merely gave them the added option of buying smaller tracts if they did not have the financial ability to purchase the entire property.

2. Different Terms and Conditions

After the plaintiffs' counteroffer on the three separate parcels was refused by the bank, the bank sold two of the tracts to Richard and Bernadette Knox, Gerald and Doris Knox and Todd Cowan. The plaintiffs...