Matter of Hemphill, Bankruptcy No. 80-1671-W

CourtUnited States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Southern District of Iowa
Citation18 BR 38
Docket NumberAdv. No. 80-0210.,Bankruptcy No. 80-1671-W
PartiesIn the Matter of Glenn HEMPHILL and Norma Hemphill, Debtors. Glenn HEMPHILL and Norma Hemphill, Plaintiffs, v. T & F LAND COMPANY, a corporation; T.C. & J. Grain Company, a corporation; Triple F Farms, a partnership; C & J Farms, a partnership; Tony Freund, Sr.; Charles Freund; John W. Freund; and Tony Freund, Jr., Defendants.
Decision Date22 January 1982

18 B.R. 38 (1982)

In the Matter of Glenn HEMPHILL and Norma Hemphill, Debtors.
Glenn HEMPHILL and Norma Hemphill, Plaintiffs,
T & F LAND COMPANY, a corporation; T.C. & J. Grain Company, a corporation; Triple F Farms, a partnership; C & J Farms, a partnership; Tony Freund, Sr.; Charles Freund; John W. Freund; and Tony Freund, Jr., Defendants.

Bankruptcy No. 80-1671-W, Adv. No. 80-0210.

United States Bankruptcy Court, S.D. Iowa.

January 22, 1982.

18 BR 39
18 BR 40
Maureen E. McGrath and Terrence J. Ferguson, Kutak, Rock & Huie, Omaha, Neb., for plaintiffs

Frank H. Kulig, Venteicher, Strasheim & Laughlin, P.C., Omaha, Neb., Robert J. Baudino, Jr. and Donald F. Neiman, Des Moines, Iowa, for defendants.

Frank W. Pechacek, Jr., Council Bluffs, Iowa, for creditors' committee.

Charles L. Smith, Council Bluffs, Iowa, for debtors.


RICHARD STAGEMAN, Bankruptcy Judge.

This is an adversary proceeding to avoid the transfer of certain land and chattels. The legal bases of the action are Sections 547 and 548 of the Bankruptcy Code (11 U.S.C. §§ 547, 548), the common law of Iowa relating to fraud, reformation and rescission of contracts, and failure of consideration. The plaintiffs, Glenn and Norma Hemphill seek the return of the subject matter land and chattels, money damages and general equitable relief.

The plaintiffs are husband and wife. They are also debtors under a jointly filed Chapter 11 bankruptcy case. The order for relief was automatically entered October 14, 1980.

The plaintiffs reside near Griswold, Iowa, where for some years past they owned and operated a seed and grain sales and storage business, raised swine for market, and farmed. Part of these agricultural pursuits were conducted in the Iowa corporate name Hemphill Seed and Grain, Inc. ("H.S.&G."). The land used by H.S.&G. was leased from the plaintiffs.

The defendants, Tony Freund, Sr., John W. Freund, and Charles Freund are partners in an Iowa farm partnership, Triple F Farms, also a defendant. The defendants, John W. Freund, and Charles Freund are partners in an Iowa farm partnership, C&J Farms, also a defendant. Tony Freund, Jr., the son of Tony Freund, Sr., and brother to Charles and John W., also farms. The Freunds are the owners of defendants T.C.&J. Grain Company ("T.C.&J.") and the T&F Land Company ("T.&F.L."), Iowa corporations.

On March 3, 1981, the official creditors' committee was authorized to intervene as an interested party plaintiff.

The issues raised in this proceeding center on a transaction between the plaintiffs and defendants relating to 120 acres of farm land, the facilities and personal property used in the plaintiffs' seed and grain sales and storage business, and the facilities and personal property used in the swine raising business. ("Land & chattels").

These businesses and a general grain farming operation grew from a modest start in the mid 1960's. They represent a commitment of years of labor and a substantial portion of the accumulated fortune of the plaintiffs, farmers from farm families.

In 1974, the plaintiffs formed H.S.&G., and then leased the land to H.S.&G.H.S. &G.'s operations were adjacent to Griswold, Iowa, on the south.

The storage capacity of the H.S.&G. grain elevator was comparatively small. In order to handle the amount of corn grown in the immediate area it influenced the elevator pre-sold corn harvested at a later date which allowed an immediate shipment

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directly to other terminals without being stored in H.S.&G.'s facilities

H.S.&G. also bought and sold market and seed soybeans under agreements that did not call for storage. H.S.&G. would contract for the future bean crop of a farmer at planting time. There were "seed grower contracts," carrying a 40 cent a bushel premium, whereunder the farmer delivers the soybeans contracted for at a price to be fixed at such later time as the farmer chooses. Under this arrangement the elevator obtained title to the beans and was free to sell them when delivered.

H.S.&G. also bought grain for immediate resale under "deferred price contracts" whereunder the farmer seller could defer pricing his grain to a later date, and hopefully higher price, even though it was presently delivered and sold.

In order to protect itself against a rise in grain prices which must be paid after the elevator has sold grain purchased under seed grower and deferred pricing agreements H.S.&G. "hedged" its position in the market by purchasing futures contracts on the Chicago Board of Trade. H.S.&G. with obligations to pay a present market price higher than the price it had earlier received for grain could offset the impending loss by selling its own futures commodity contracts at the same time and higher price level.

In 1979, circumstances conspired to bring H.S.&G. down, the limited storage capacity, the large amounts of cash needed to maintain positions in commodity futures, a good crop year calling for greater expenditures on deferred price contracts, and an irregular grain market. Farmers needed cash because agricultural credit was tight. H.S.&G. did not have a cash reserve. The result was that H.S.&G. ran out of cash.

In the spring of 1980, H.S.&G. issued over $500,000 in "no funds" checks to meet grain contracts and other obligations. The Oakland Savings Bank refused to grant H.S.&G. any further credit. On May 30, 1980, the Iowa Commerce Commission ("I.C.C.") temporarily suspended H.S.&G.'s grain dealers and warehouseman's licenses because H.S.&G.'s net worth had fallen below the required statutory level of $25,000. A hearing on whether the suspension should be made permanent was set for July 8, 1980, before the I.C.C.

H.S.&G. closed down and the plaintiffs searched desperately for a source of credit to save the business.

A broker brought in the Certified Public Accounting firm of Touche Ross & Co. The accounting firm first suggested a sale of H.S.&G.'s assets and a lease-back to the plaintiffs or their company. Attempts to find interested investors failed.

The plaintiffs next consulted one Willis Mouttet, a part time minister, self appointed financial advisor and proven bad risk. Mouttet considered himself knowledgeable in the structuring of financial rehabilitations by means of sale and lease-back arrangements. He undertook the task of saving H.S.&G. for an initial fee of $15,000.* Mouttet first tried to generate interest in H.S.&G. among the company's former creditors. This proved fruitless.

The plaintiffs tried capitalizing $1,357,596.74 in accounts of H.S.&G. due them personally, $500,000 in debts due farmers they personally assumed, and $855,000 in direct obligations of H.S.&G. They also transferred 120 acres of farm land to H.S.&G. Even these measures did not raise the net worth of H.S.&G. to the $25,000 required by law.

By mid-July 1980, the plaintiffs needed $250,000 in immediate cash to hedge "short positions" in commodity contracts. On July 14, 1980, Mouttet asked the defendants if they would loan the plaintiffs $250,000 secured by a second mortgage on the elevator. The defendants were friends of the plaintiffs and had done business with H.S.&G.H.S.&G. owed the defendants approximately $226,000, so the defendants had a direct personal interest in the survival of H.S.&G.

The defendants rejected the idea of a short term loan because of the possibility that the defendants themselves might end

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up in bankruptcy. Before the defendants would venture $250,000 they wanted to talk to a bankruptcy specialist. They consulted Jerrold Strasheim of the Omaha law firm of Marer, Venteicher, Strasheim, Seidler and Laughlin. Charles Freund, Mouttet and Strasheim met on July 21, 1980, in Strasheim's office. Strasheim advised the defendants against a loan secured by a mortgage because the terms of a mortgage could be modified under the "cram-down" provisions of the Bankruptcy Code in the event of bankruptcy. Strasheim suggested a "buy-sell" arrangement with an option to repurchase. Such a transaction would protect the defendants from the "cram-down" features of the Bankruptcy Code. The defendants agreed to the concept of the "buy-sell" and repurchase option

A Mr. Kulig of Strasheim's firm, present counsel for the defendants, drafted all the documents that made up the agreement of the plaintiffs and defendants. Mr. Kulig's documentation of the parties' agreements consisted of 47 tightly drawn pages of undertakings and conditions. They were delivered to a Mr. Howe who was representing the plaintiffs before the I.C.C. Mr. Howe delivered the documents to a Mr. Chabot for his consideration. Neither Howe or Chabot took part in the negotiations that resulted in the agreements they were being asked to examine and weigh as lawyers.

On July 31, 1980, Howe, Chabot, Glenn Hemphill and Mouttet met to consider the proposed agreement. Howe and Chabot advised Hemphill that he should not sign the contracts. Their principal concern was that the defendants would be unable to meet the stringent conditions of the option to repurchase their property and they could lose it all. The best they could do to protect the plaintiffs was to talk Glenn Hemphill into waiting until after August 4, the date the I.C.C. was to decide whether H.S.&G. could regain its licenses.

If H.S.&G. lost its license permanently, Howe felt it was unlikely that Glenn Hemphill would be granted a license or even allowed to manage a licensed business. If that were correct the plaintiffs could not meet the conditions of the sale, lease-back, repurchase agreements that would allow the redemption of the lands and chattels from the defendants.

It may be that Mouttet convinced Glenn Hemphill that the plaintiffs had a better chance before the I.C.C. if the agreement with the defendants was already signed when the August 4 hearing was held, or it may be that Hemphill was under such financial pressure and so anxious about his businesses that he...

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