Matter of Day Resource & Development Co.
| Citation | 21 BR 176 |
| Decision Date | 17 June 1982 |
| Docket Number | 82-0244 and 82-0243.,Adv. No. 82-0242 |
| Parties | In the Matter of DAY RESOURCE AND DEVELOPMENT CO., INC., Debtor. DAY RESOURCE AND DEVELOPMENT CO., INC., Plaintiff, v. FIRST INTERSTATE BANK OF IDAHO, N.A., formerly Bank of Idaho, N.A., Defendant. FIRST INTERSTATE BANK OF IDAHO, N.A., Plaintiff, v. DAY RESOURCE AND DEVELOPMENT CO., INC., Defendant. In the Matter of IDAHO FARM SUPPLY AND LEASING CO., INC., Debtor. FIRST INTERSTATE BANK OF IDAHO, N.A., Plaintiff, v. IDAHO FARM SUPPLY AND LEASING CO., INC., Defendant. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Idaho |
Judd & Judd, Post Falls, Idaho, for First Interstate Bank of Idaho.
Grudem, Verby & Elsaesser, Sandpoint, Idaho, for Day Resource And Development Co., Inc. and Idaho Farm Supply And Leasing Co., Inc.
These matters are before the court following trial. Three interrelated actions were consolidated for trial. In Day Resource & Development Co. (Day Resource) v. First Interstate Bank, No. 82-0242, the debtor-in-possession seeks turnover of property which is in the possession of the bank pursuant to a state court order. In First Interstate Bank v. Day Resource & Development Co., No. 82-0244, and First Interstate Bank v. Idaho Farm Supply & Leasing Co. (IFSL), No. 82-0243, the bank seeks relief from the 11 U.S.C. § 362 stay in order to liquidate the property in the bank's possession.
I find the essential facts to be as follows. Day Resource intended to build a plant for the production of compressed wood pellets for sale as an alternative fuel to oil or gas and, in August 1979, borrowed $200,000 from the bank, followed by an additional $1,050,000 borrowed in July 1980, for this purpose. This indebtedness is evidenced by promissory notes which require monthly payments of approximately $16,000. Only one $1,000 payment has ever been made on these notes. Debtors granted the bank security interests in all of their assets to secure the above obligations. Jason Day, as the controlling stockholder of the debtor corporations, executed guarantees as well as additional security agreements.
In March 1981, the bank commenced a claim and delivery action in state court. In August of 1981, the parties entered into an agreement as a result of which an order in the state court was entered granting the bank immediate possession of all collateral and requiring immediate turnover of all the collateral to the bank. Warranty deeds to certain Boise property were given the bank in satisfaction of Jason Day's personal guarantee. However, by a contemporaneous "covenant not to enforce order", debtors received possession and use of the collateral for a period lasting seven months from the date of the order during which time the bank agreed not to enforce the provisions of the state court order. The order, dated August 31, 1981, stated that the bank was to sell the property upon possession and apply the proceeds "as provided by Idaho Code 28-9-504 et seq." The order also recited that the bank had the right to a deficiency judgment should the proceeds of the collateral be insufficient to pay the debt.
The covenant not to enforce order expired on March 31, 1982, and, as debtors had failed to meet the terms of the agreement, the bank, on April 1, 1982, took possession of the collateral. At 5:00 that same day, debtors filed their petitions for relief under chapter 11 of the Bankruptcy Code.
The threshold issue is whether or not a Bankruptcy Court can order the turnover of collateral where the secured party has obtained possession and the right to liquidate the collateral before an order for relief under the Bankruptcy Code has been entered. Two lines of authority on the issue have evolved. One is represented by In re Cross Electric Co., Inc., 664 F.2d 1218, 5 C.B.C.2d 1273 (4th Cir. 1981) which holds that, in circumstances analogous to the case at bar, it cannot do so because only the debtor's right to redemption passes to the debtor-in-possession under § 541 of the Code and because, under § 542 of the Code, only an entity in possession of property which a trustee may use, sell or lease under § 363 is required to turn over the same even if a debtor can offer the creditor adequate protection of its interest in the collateral.
The Code can certainly be read to support the Cross decision, however, such a reading defeats the general rehabilitative theories of chapters 11 and 13 of the Code. In the well reasoned case of In re Whiting Pools, Inc., 674 F.2d 144, 8 B.C.D. 1138, 5 C.B.C.2d 1584 (2d Cir. 1982), the Court of Appeals held that an entity in possession of a debtor's property, which was subject to sale in satisfaction of the debtor's indebtedness to it, was required to turn over such property to the chapter 11 debtor-in-possession if that debtor could offer adequate protection for the creditor's security interest in the property. While the Court of Appeals for the Second Circuit noted the conflicting bankruptcy and district court opinions on the subject, and the contrary result in Cross, it concluded that the language of the Code, when taken in conjunction with precedent, legislative history and the rehabilitative policies of the Code, required the conclusion that such property be returned to the debtor's estate assuming adequate protection and a reasonable possibility of successful reorganization. I believe that Whiting Pools is the correct rule.
In In re Ferguson, No. 81-00775, (October 19, 1981) I arrived at essentially the same...
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