Martin, In re
| Decision Date | 07 May 1985 |
| Docket Number | Nos. 84-1766,s. 84-1766 |
| Citation | 761 F.2d 472 |
| Parties | 12 Collier Bankr.Cas.2d 974, Bankr. L. Rep. P 70,543 In re Ray O. MARTIN and Joan Y. Martin, husband and wife, Debtors. Ray O. MARTIN, a/k/a Ray A. Martin and Joan Y. Martin, husband and wife, Appellants, v. UNITED STATES of America, acting through the COMMODITY CREDIT CORPORATION, an agency of the United States Dept. of Agriculture, Appellees. Ray O. MARTIN, a/k/a Ray A. Martin and Joan Y. Martin, husband and wife, Appellants, v. PRODUCTION CREDIT ASSOCIATION OF FARGO, NORTH DAKOTA, Appellee. (Two Cases) In re Curtis Norman BERG and Kathryn Yvonne Berg, husband and wife, Debtors. Curtis Norman BERG and Kathryn Yvonne Berg, husband and wife, Appellants, v. UNITED STATES of America, acting through the COMMODITY CREDIT CORPORATION, an agency of the United States Department of Agriculture, Appellees. In re Thomas NIKOLAISEN and Claudia Nikolaisen, husband and wife, Debtors. Thomas NIKOLAISEN and Claudia Nikolaisen, husband and wife, Appellants, v. UNITED STATES of America, acting through the COMMODITY CREDIT CORPORATION, an agency of the United States Department of Agriculture, Appellee. to 84-1768. |
| Court | U.S. Court of Appeals — Eighth Circuit |
Daniel L. Wentz, Fargo, N.D., for appellants.
Rodney S. Webb, Fargo, N.D., for appellees.
Before HEANEY, ROSS and FAGG, Circuit Judges.
Appellants (debtors) are farmers in North Dakota who have filed petitions for reorganization under Chapter 11 of the Bankruptcy Code. They appeal from the district court's decision barring them from selling grain, stored on their property but mortgaged to Commodity Credit Corporation (CCC), and using the cash proceeds to finance their 1984 farming operations. CCC is an agency of the United States government whose primary purpose is to stabilize, support, and protect the agricultural commodities market. See 15 U.S.C. Sec. 714. In reversing the bankruptcy court's decision allowing the debtors to sell the grain and use the cash collateral, the district court held that debtors' offer of a first lien on the 1984 crop, plus an assignment of Federal Crop Insurance proceeds, was not "adequate protection" of CCC's security interest within the meaning of the Bankruptcy Code. 11 U.S.C. Sec. 361. Because we find that the bankruptcy court applied an incorrect legal standard in making its "adequate protection" determination and did not properly consider relevant factors affecting CCC's security interest, we remand to the district court with instructions to remand to the bankruptcy court for further analysis in light of this opinion.
After filing their petitions for reorganization, debtors attempted to secure loans from various lending institutions within their community in early 1984 for the purpose of continuing their farming operations. When their applications for loans were rejected, debtors filed motions in bankruptcy court requesting the use of cash collateral to finance the planting and harvesting of the 1984 crop. In order to obtain the needed cash, debtors proposed to sell the grain in storage bins mortgaged to CCC. In return, debtors offered to give CCC a first lien on the 1984 crop and assign to CCC the proceeds of Federal Crop Insurance policies.
The bankruptcy court held a hearing on each motion. Debtors estimated the value of the 1984 crop yield primarily using data from previous years of their farming operations. On the basis of these estimates the debtors concluded that after the crop was harvested, the value of the 1984 crop would exceed in value the amount of collateral being requested. After the hearings, the bankruptcy court granted debtors' motions in separate orders, authorizing a sale of the grain and debtors' use of the cash collateral to the extent of the protection afforded CCC under the Federal Crop Insurance policy. Without further analysis, the bankruptcy court found that because of CCC's first lien on the 1984 crop and the assignment of crop insurance proceeds to CCC, "it is virtually certain * * * that [CCC] will be insured a return of its interest." See In re Nikolaisen, 38 B.R. 267, 270 (D.N.D.1984).
CCC immediately filed its notice of appeal to the United States District Court. One week later, the court issued a stay of the bankruptcy court's order pending appeal under Rule 8005 of the Bankruptcy Rules. The district court reversed the bankruptcy court's orders on May 24, 1984, holding that debtors' offer simply did not constitute adequate protection of CCC's security interest. See In re Berg, 42 B.R. 335, 338 (D.N.D.1984).
At the outset, we address the issue of whether debtors' claims are moot. Debtors filed their motions for use of cash collateral in March of 1984 to plant and harvest their 1984 crop. Their cases were not argued orally before this court until December of 1984, well after the 1984 harvesting season.
We believe this case falls within the "capable of repetition, yet evading review" exception to the mootness rule. See Globe Newspaper Co. v. Superior Court, 457 U.S. 596, 602-03, 102 S.Ct. 2613, 2617-18, 73 L.Ed.2d 248 (1982); Flittie v. Erickson, 724 F.2d 80, 82 (8th Cir.1983). The 1984 harvesting season was over before this court could consider debtors' claims. Debtors are still in reorganization under Chapter 11, and there exists a reasonable expectation that the controversy will recur. Under these circumstances, we conclude that debtors' claims present a justiciable controversy.
The bankruptcy court's findings of fact are not to be overturned unless clearly erroneous; however, its conclusions of law are subject to de novo review. In re Comer, 723 F.2d 737, 739 (9th Cir.1984). We recognize that although some courts have held that the issue of adequate protection is a conclusion of law, In re Philadelphia Consumer Discount Co., 37 B.R. 946, 949 (E.D.Penn.1984); In re Schaller, 27 B.R. 959, 962 (W.D.Wis.1983), other courts have held it to be one of fact, In re George Ruggiere Chrysler-Plymouth, Inc., 727 F.2d 1017, 1019 (11th Cir.1984); In re Jim Kelly Ford of Dundee, Ltd., 14 B.R. 812, 816 (N.D.Ill.1980). Upon reviewing the legislative history, we agree with the line of cases that have held that adequate protection is a question of fact.
The concept of adequate protection was designed to "insure that the secured creditor receives the value for which he bargained." S.Rep. No. 989, 95th Cong., 2d Sess. 53, reprinted in 1978 U.S.Code Cong. & Ad.News 5787, 5839 (emphasis added); see also H.R.Rep. No. 595, 95th Cong., 2d Sess. 339, reprinted in 1978 U.S.Code Cong. & Ad.News 5963, 6295. Congress explicitly stated that value was to be considered a flexible concept "to permit the courts to adapt to varying circumstances and changing modes of financing," and that such matters "are [to be] left to case-by-case interpretation and development." H.R.Rep. No. 595 at 339, 1978 U.S.Code Cong. & Ad.News at 6295; see also S.Rep. No. 989 at 54, 1978 U.S.Code Cong. & Ad.News at 5840. Because Congress intended that value was to be determined on a case-by-case basis, that which is designed to protect value, i.e., adequate protection, must also be determined on a case-by-case basis, permitting the debtors "maximum flexibility in structuring a proposal for adequate protection." In re American Mariner Industries, Inc., 734 F.2d 426, 435 (9th Cir.1984).
Nevertheless, an appellate court has the power to correct errors of law, including "a finding of fact that is predicated on a misunderstanding of the governing rule of law." Bose Corp. v. Consumer Union of United States, --- U.S. ----, 104 S.Ct. 1949, 1960, 80 L.Ed.2d 502 (1984); see also Inwood Laboratories v. Ives Laboratories, 456 U.S. 844, 855 n. 15, 102 S.Ct. 2182, 2189 n. 15, 72 L.Ed.2d 606 (1982); Pullman-Standard v. Swint, 456 U.S. 273, 287, 102 S.Ct. 1781, 1789, 72 L.Ed.2d 66 (1982).
The issues before us, then, are whether the bankruptcy court applied the correct legal standard in finding that debtors' offer of a substitute lien in the 1984 crop along with an assignment of Federal Crop Insurance proceeds adequately protected CCC's interest and, if so, whether its determination of adequate protection was clearly erroneous.
It is the debtors' position that their offer afforded adequate protection. They assert the evidence established that the value of the first lien on the 1984 crop exceeded the value of the collateral being requested from CCC, and that a lack of adequate protection would be realized only if there was a failure of the crop. Because debtors offered to assign CCC the Federal Crop Insurance proceeds, they claim that the risk of crop failure would not affect CCC's security interest. The Federal Crop Insurance Corporation (FCIC) guarantees up to seventy-five percent of the crop yield, see 7 U.S.C. Sec. 1508(a), and the debtors were authorized to use cash collateral only to the extent of the protection afforded CCC under the Federal Crop Insurance policy.
CCC argues that an insured, speculative crop is not of the same value as grain already in the bin. Additionally, CCC states that the debtors' proposal fails adequately to protect against a possible decrease in the market value of a crop to be harvested in the future. CCC also points out that FCIC insures only against crop failure due to "unavoidable causes." It does not cover losses due, among other things, to the "neglect or malfeasance of the producer * * * or to the failure of the producer to follow established good farming practices." 7 U.S.C. Sec. 1508(a).
Although we agree with the district court that the bankruptcy court committed error in determining that CCC's security interest was adequately protected, we believe that the bankruptcy court's error was based on a misunderstanding of the law rather than an erroneous determination of the facts. Specifically, the bankruptcy court failed to apply the standard of adequate...
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