Matter of Kain, Bankruptcy No. GG 86-01111.

• Decision Date: 13 May 1988
• Docket Number: Bankruptcy No. GG 86-01111.
• Citation: 86 BR 506
• Parties: In the Matter of Larry KAIN, a/k/a Larry Richard Kain, and Larry R. Kain and Irma Kain, a/k/a Irma L. Kain, Debtors.
• Court: U.S. Bankruptcy Court — Western District of Michigan

86 B.R. 506 (1988)

In the Matter of Larry KAIN, a/k/a Larry Richard Kain, and Larry R. Kain and Irma Kain, a/k/a Irma L. Kain, Debtors.

Bankruptcy No. GG 86-01111.

United States Bankruptcy Court, W.D. Michigan.

May 13, 1988.

Paul B. Newman, Newaygo, Mich., on behalf of Larry Kain and Irma Kain, debtors.

Edith Landman, Asst. U.S. Atty., on behalf of the Dept. of Agriculture Farmers Home Admin. Grand Rapids, Mich.

OPINION REGARDING APPLICATION OF ADEQUATE PROTECTION PAYMENTS AND APPROPRIATE PRESENT VALUE RATE UNDER DEBTORS' CHAPTER 11 PLAN

JAMES D. GREGG, Bankruptcy Judge.

ISSUES

This case presents two interesting issues raised in connection with the confirmation of the Debtors' proposed Chapter 11 plan.

First, with respect to certain adequate protection payments made by the Debtors after filing and prior to confirmation, to what obligation, if any, should such payments be applied? The Debtors assert that the adequate protection payments should be applied only toward their outstanding secured indebtedness owed to the creditor with respect to certain livestock notes. The secured creditor opposes such an application and implicitly asserts that the payments should be applied toward the livestock notes, even if not secured, or toward so-called lost opportunity costs. Both parties refer the court to United Sav. Ass'n of Texas v. Timbers of Inwood Forest Assocs., Ltd., ___ U.S. ___, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988), but neither party is certain what that case mandates pursuant to the existing facts in this matter.

Second, what is the appropriate present value rate, i.e. interest rate, to be provided with respect to the creditor's allowed secured claim? The Debtors argue that the specific contract interest rates set forth in certain promissory notes should govern, relying upon Cardinal Fed. Sav. and Loan Ass'n v. Colegrove (In re Colegrove), 771 F.2d 119 (6th Cir.1985). The secured creditor asserts that current market interest rates should be utilized relying upon Memphis Bank & Trust Co. v. Whitman, 692 F.2d 427 (6th Cir.1982).

FACTS

Larry and Irma Kain, husband and wife, referred to as the "Debtors", filed their voluntary petition for relief under Chapter 11 of the Bankruptcy Code¹ on April 18, 1986. Mr. Kain is a crop farmer and livestock producer who also owns and is employed by Farm Feeds and Farm By-Products, Inc.

The United States of America, Department of Agriculture, Farmers Home Administration, referred to as the "FmHA", is a creditor of the Debtors which holds a prepetition security interest in all of the Debtors' crops, livestock and equipment. The FmHA's security interest in the Debtors' collateral was properly perfected by the filing of various financing statements with the Montcalm County Register of Deeds, as required by the Uniform Commercial Code as adopted in the State of Michigan. The FmHA also was granted five mortgages with regard to the Debtors' real property. Those mortgages have been duly recorded and perfected as required by Michigan law.²

On June 26, 1986, the FmHA filed its proof of claim in this case. The amount of that claim was $411,119.06 which is comprised of $279,537.76 in principal indebtedness and $131,581.38 in accrued unpaid prepetition interest.³

On December 10, 1987, the Debtors filed their Chapter 11 Plan of Reorganization and their Disclosure Statement. On January 19, 1988, the Debtors filed their First Amended Disclosure Statement which was approved by this court. A confirmation hearing was originally scheduled to take place on March 15, 1988.

Objections to the Debtors' plan were filed by the FmHA; the Federal Land Bank of St. Paul; and the United States of America, Internal Revenue Service. At an adjourned confirmation hearing on April 12, 1988, nearly all objections to confirmation were resolved or withdrawn. The only remaining issues relate to the treatment of the FmHA's allowed secured claim and the application of periodic payments previously received by the FmHA.⁴ The Debtors, the FmHA, and other interested parties have agreed that the Chapter 11 plan of the Debtors might be confirmed subject to this court's determination of the outstanding legal issues.

Between July, 1977, and June, 1982, the Debtors executed and delivered nine promissory notes to the FmHA in return for loans made and funds advanced. The various note obligations are set forth in the following summary:⁵

                                                                                      Accrued
                                                              Principal    Contract   Interest
                Date of   Amount of   Type of                 Owed as      Interest   as of        Maturity
                Note      Note        Note6     Secured By7   of 4-18-86   Rate8      4-18-86      Date
                7-27-77   $39,750     OL        Chattels      $13,796.13   8%         $   536.32   7-27-84
                5-3-78     77,240     RE/EM     R. est./
                                                Chattels       65,045.47    3%         11,200.29   5-3-85
                5-3-78     17,000     RE/EM     R. est.        16,270.76    8%          8,035.81   5-3-2018
                5-26-78    32,500     RE/EM     R. est.        30,942.22    8%         15,707.08   X-XX-XXXX
                1-25-80    40,000     RE/EE     R. est./
                                                Chattels       40,000.00    10.5%      26,155.07   1-25-87
                7-2-80     21,500     OL/EM     Chattels       11,844.31    13.5%       7,569.97   7-2-87
                8-8-80     23,000     RE/SW     R. est.        23,000.00    11%        14,136.50   8-8-95
                5-11-81    87,100     Ol/EE     Chattels       35,396.27    14%        18,260.60   5-11-88
                6-14-82    36,000     RE/EM     R. est./
                                                Chattels       36,000.00    16%        22,140.50   6-14-83
                

The parties stipulated that the notes listed above were not accelerated by the FmHA. However, the first two notes listed above matured before the filing of the petition. Based upon the above summary, the principal indebtedness owed by the Debtors to the FmHA was $272,295.16, and the total accrued interest was $123,742.14; as of the filing date, the total indebtedness was $396,037.30.⁹

The Debtors and the FmHA stipulated that the current market value interest rates, for plan confirmation purposes, are 9% per annum with respect to indebtedness secured by chattels and 9½% per annum with respect to indebtedness secured by real property. The parties agreed that the stipulated market interest rates will remain binding notwithstanding any possible increase or decrease in the rates pending the rendering of this court's opinion. The parties further stipulated that the amortization periods now utilized by the FmHA are generally seven years for loans secured by chattels and forty years for loans secured by real estate.

On June 12, 1986, the Debtors filed their Motion for Release of Proceeds of Collateral. The Debtors asserted they needed to utilize the livestock sales proceeds for feed, fuel and utility expenses. In their motion, the Debtors offered to pay an undisclosed portion of the livestock sales proceeds to adequately protect the FmHA "until confirmation or until payments total $23,035.00, plus postpetition interest, whichever occurs first."¹⁰

On or about July 7, 1986, the Debtors and the FmHA entered into a Stipulation to Release Proceeds of the Sale of Collateral and for Adequate Protection Payments. Because the stipulation is relevant to this court's determination regarding the application of the payments, the language of the stipulation is set forth below:

NOW COME Debtors herein, by counsel, and the Farmers Home Administration, by the United States Attorney for the Western District of Michigan, who stipulate and agree as follows:

1. That at the time of the filing of the Petition in the present proceedings, Debtors were indebted to the FHA, which indebtedness was, at least partially, if not fully secured by liens on real estate, farm equipment and livestock.

2. That the operation of Debtors consists primarily of the raising of hogs, which operation necessarily requires that, except for breeding stock, as animals reach market weight, or as breeding stock becomes no longer valuable as such, animals are sent to market.

3. That Debtors need at least a portion of all post petition sales in order to continue operations, and to purchase and grow feed for the herd.

IT IS THEREFORE SPECIFICALLY STIPULATED AND AGREED that of all post petition sales of livestock, Debtors shall retain 75% of the proceeds from the sale thereof to be used for any and all operating expenses, subject only to the limitations contained in the Definitive Order, the Debtors hereby having specific permission of the secured party to use the same for the aforesaid purposes.

IT IS FURTHER STIPULATED AND AGREED that the remaining 25% of the proceeds from the sale of all livestock, post petition, shall be paid to the FHA, as adequate protection.

IT IS FURTHER STIPULATED AND AGREED that the FHA shall apply the monies received pursuant to this Stipulation to the secured portion of the indebtedness to the FHA in the event the FHA is not fully secured, and applied to the specific notes for which security in livestock has been previously given to the FHA by the Debtors.

IT IS FURTHER STIPULATED AND AGREED that the question of whether or not the FHA is less than fully secured, and if so, the amount of the secured portion of the debt shall be held in abeyance, to be resolved at a later time.¹¹

Pursuant to an attendant adequate protection order, the Debtors made periodic payments to the FmHA as follows:¹²

                Date             Amount Paid
                7-7-86            $1,054.06
                8-12-86            1,272.55
                8-20-86            1,054.06
                9-3-86               675.00
                9-23-86            1,450.31
                11-6-86            1,076.61
                11-25-86             252.16
                1-21-87              398.70
                4-3-87             2,913.71
                4-30-87              600.00
                7-14-86              287.83
                7-15-87              766.23
                8-18-87            1,130.46
                8-26-87              454.08
                12-2-87            1,540.75

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