Matter of Burger, Bankruptcy No. 89-376
| Decision Date | 03 April 1991 |
| Docket Number | Adv. No. 89-94.,Bankruptcy No. 89-376 |
| Citation | 125 BR 894 |
| Parties | In the Matter of Josef A. BURGER and Vera L. Burger, Debtors. Josef A. BURGER and Vera L. Burger, Plaintiffs, v. LEVEL END DAIRY INVESTORS, Defendant. |
| Court | U.S. Bankruptcy Court — District of Delaware |
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John J. Schreppler, II, Charlene D. Davis, Wilmington, Del., for plaintiffs.
Elwyn Evans, Jr., Jane W. Evans, Wilmington, Del., for defendant.
Debtors Josef and Vera Burger (Burger) initiated this adversary proceeding by objecting to Level End Dairy Investors' (Investors) proof of claim and seeking the turnover of feed monies owed by the Investors. The Investors answered and counterclaimed against Burger for their losses alleging breach of contract premised on his failure to meet the requisite standard of care under the services contract. This dispute focuses on the parties' business relationship regarding a dairy herd which was owned and financed by the Investors while Burger managed the day-to-day affairs of the herd. Jurisdiction of this court is based on 28 U.S.C. § 1334, and this is a core proceeding under 28 U.S.C. § 157(b)(2)(B), (C), and (E).
Burger filed a voluntary petition under Chapter 12 of the Bankruptcy Code on June 29, 1989. Chapter 12 affords special protection to family farmers with regular annual income in a financial rehabilitation scheme analogous to Chapter 13 but with higher debt ceilings. The financial statements and schedules subsequently filed with the court list a $7,000.00 debt owed to the Investors as well as a contingent and unliquidated claim for $20,000.00 against the Investors. On August 16, 1989, the Investors through their attorney-in-fact, Johannes R. Krahmer, Esquire (Krahmer) filed a proof of claim seeking $109,348.00 damages due to Burger's alleged breach of the services contract. Thereafter, Burger commenced this adversary proceeding on September 9, 1989 objecting to the Investors' claim and seeking to reclaim about $20,000.00 for feed monies allegedly owed by the Investors. The resolution of this dispute hinges upon the interpretation of the instruments governing this business relationship, especially the services agreement, in view of the circumstances surrounding this transaction and business venture.
Josef Burger had emigrated from Germany in 1951 and commenced with his father a joint dairy operation in Delaware around 1961. In 1972, Burger acquired the complete interest in Level End Farm from his parents and took over all the farm operations. Sometime in 1974, Burger installed a modern milking facility called a "milking parlor", but had problems with this system from the outset. Eventually, Burger was referred by a neighbor to Frances Biondi, Esquire (Biondi) concerning the problems with the milking parlor, and after consultation, Biondi advised Burger that the statute of limitations had expired on the contract of warranty for the system. At this time, Biondi was practicing law at Biondi & Babiarz located on King Street in Wilmington. Later, in 1979, Burger consulted Biondi concerning his father's will and regarding financial matters whereby Biondi suggested Burger obtain a FmHA loan. On July 1, 1979, Biondi and his law partner, John Babiarz, joined the law firm of Morris, Nichols, Arsht & Tunnell. Krahmer, who is a Delaware attorney specializing in tax law and estate planning, had been a member of this firm since September of 1964.
In 1981, Biondi informed Burger that a partner at his firm was interested in investing in a dairy operation for tax write-off purposes. This prompted Burger's interest and, subsequently, Burger met with Krahmer to discuss the terms of the proposed venture. Krahmer wanted to initiate a tax shelter for a consortium of investor-subscriber clients to take advantage of the favorable treatment given to dairy investments which included, inter alia, tax credits and depreciation deductions. After some negotiations, Burger generated certain projections upon Krahmer's request concerning the prospective milk revenues and the growth of the dairy herd. These projected figures estimated by Burger predicted an upward trend over the term of the proposal.
On August 3, 1981, Burger and Krahmer entered into the Services Agreement which was the centerpiece of their business arrangement. The contract was drafted by Krahmer and did not expressly reference the projections calculated by Burger. In the agreement, Burger promised to assist Krahmer in purchasing the herd for $150,000.00 and to manage, maintain, and expand the herd as well as to improve its quality. In addition, the Investors were to contribute another $10,000.00 for the acquisition. As part of the deal, Krahmer agreed to pay all feed and upkeep expenses while Burger would pay over all milk revenues and any sale proceeds from bulls or cull cows. As an incentive, Burger was entitled to 50% of any annual cash revenues once the Investors had been allocated an amount equal to a 15% annual return on their investment before legal fees. Upon the total or partial liquidation of the herd, Burger would receive 15% of the surplus over the original purchase price as an added incentive. Furthermore, the contract contained a consultation provision which provided that "Burger and Krahmer agree to meet on a regular basis to discuss operations ... as well as any other matters of importance relating to operation of the Herd." Finally, the Services Agreement was to continue until the total liquidation of the dairy herd or the death of Josef Burger.
Along with the contract, the same parties executed a lease agreement for a seven-year term wherein the Investors, per Krahmer, would pay $4,000.00 a month rent (paid in bimonthly installments) for keeping the herd at the Level End Farm. The seven year period was inextricably linked to the Services Agreement due to the Investors' depreciation considerations and was the anticipated time for total liquidation of the herd. The lease also expressly prohibited Burger from maintaining any other dairy livestock except that owned by the Investors. Lastly, the lease contained various standard provisions allotting various duties and charges concerning the property between Burger and Krahmer.
The Investors were comprised of four private individuals and Krahmer. These persons were solicited by Krahmer and Biondi who promoted this dairy venture as a good, solid investment with favorable tax benefits. Shortly before entering into the agreement, Krahmer circulated a memorandum dated July 15, 1981, which outlined for potential investors the general proposal with Burger and included a business magazine article discussing the subject. See Barnfather & Schriber, Forbes "Milking the Taxman" (June 8, 1981). The memo discussed the positive aspects of dairy investments, but also noted that "there are many imponderables in the dairy business." The memo then goes on to recite a number of these imponderables including the uncertain ratio of cow and bull offspring, the impossibility of predicting feed and milk prices, and "the possibility of deaths in the herd which may exceed normal statistical percentages." In addition, on the subscription agreement form included with the memorandum, each potential investor acknowledged that "I understand that there are substantial risks in this investment and am prepared to accept them." Eventually, five persons invested with an unequal breakdown in sharing in the investment: two individuals took one-fourth interests and the remaining three, including Krahmer, took one-sixth interests in the venture. Throughout the entire period spanning the agreement, Krahmer kept in touch with the Investors through written memos and apprised them generally of the events concerning the dairy operation as well as relevant tax information pertaining to their investment.
After entering into the Services Agreement, Burger acquired approximately 120 head of unregistered cows for the Investors with 58 coming from his own herd and the remainder coming from Harry Rudnick & Sons. Based on Krahmer's instructions, Burger spent only $100,000.00 on milk producing cows and, therefore, purchased a large percentage of heifers (cows not yet producing milk) specifically because of the Investors' tax considerations. However, some of the cows had uterine infections which caused a calf mortality rate of roughly 75-80%. Burger attempted to contain the outbreak of disease and contacted Dr. Michael Forney, a veterinarian from the Chestertown Animal Hospital, to treat the sick animals. Dr. Forney and his two other associates visited the Burger farm on numerous occasions during the 1981-82 period, but despite their efforts, some animals died. In addition, the herd had a high number of bull calf offspring around this time and this shifted the male-female ratio of cattle dramatically. Meanwhile, Krahmer had assisted Burger in obtaining refinancing since there was an apparent blanket lien against Burger which adversely affected the milk revenues due the Investors. Since Krahmer believed Burger benefitted from his work, Krahmer sent Burger a bill for attorney services in late 1982. In 1983, the dairy herd did not rebound as was hoped and its population had been reduced to the neighborhood of 90 head. Based in part on Burger's recommendation and the predicted lull in the operation (based on Burger's 1981 projections), Krahmer went to the Investors again to raise additional capital in order to rejuvenate the entire dairy project by purchasing more cows.
On August 17, 1983, Burger and Krahmer amended the lease agreement agreeing that the Investors would infuse an additional $40,000.00 for the purchase of additional cows, but in return, they were accorded an option to terminate the lease after 30 days notice if during any six month period expenses exceeded revenues. Unfortunately, some of the next...
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