Matter of Schulz, Bankruptcy No. 85-980
| Decision Date | 01 April 1986 |
| Docket Number | Bankruptcy No. 85-980,Adv. No. 85-195,85-112. |
| Citation | 63 BR 168 |
| Parties | In the Matter of Harold SCHULZ, Debtor. FARMERS AND MERCHANTS NATIONAL BANK, WEST POINT, NEBRASKA, Plaintiff, v. Harold D. SCHULZ and Marilyn Schulz, Defendants. |
| Court | U.S. Bankruptcy Court — District of Nebraska |
John Guthery, Lincoln, Neb., for the Bank.
C.G. Wallace, III, Omaha, Neb., for debtor.
These two adversary proceedings were combined for trial and evidence was heard on February 13, 1986. Case No. A85-195 is a complaint by the Bank objecting to the discharge of the debtor under Bankruptcy Code § 727. Case A85-112 is a complaint by the Bank against the debtor and his wife, a non-debtor, for a determination of the extent and validity of a security interest. Appearing on behalf of the Bank was John Guthery of Perry, Perry, Witthoff, Guthery, Haase & Gessford, P.C., Lincoln, Nebraska. Appearing on behalf of the debtor and, apparently on behalf of the wife of the debtor, was C.G. Wallace, III, of Thompson, Crounse, Pieper and Quinn, Omaha, Nebraska.
The debtor is a farmer who, prior to bankruptcy, operated a farming operation and a dairy herd. Debtor filed a Chapter 11 petition on May 1, 1985. He has operated as a debtor-in-possession since that time.
Debtor's wife of 30 years has participated with him in the operation of the farm and the dairy herd throughout the years.
The debtor and his wife own all of their titled real and personal property as joint tenants with rights of survivorship.
Throughout the years, the debtor borrowed money from the Bank, provided financial information on financial statement forms, signed promissory notes, signed at least two security agreements and at least one financing statement. His wife did not sign any of the debt or security instruments.
The financial statements provided to the Bank indicated that the assets and the liabilities were owned by the debtor. However, the Bank realized that the real estate listed on the financial statement was actually owned in some type of joint or common ownership between the debtor and the debtor's wife.
The Bank loaned money to the debtor based upon the information provided in the financial statements. Specifically, the Bank made a determination on a annual basis that if liquidation of the debtor became necessary, the personal property assets listed on the financial statement as owned by the debtor would be sufficient or nearly sufficient to satisfy the debtor's obligations to the Bank.
The debtor and his wife communicated freely with one another concerning the need to borrow money from the Bank, the need to grant a security interest in the assets and the fact that money was borrowed and that assets were pledged to secure the debts. Mrs. Schulz was shown the various promissory notes, was shown the financing statement and security agreement and was shown the financial statements which were signed by Mr. Schulz.
The proceeds of the loans from the Bank were used for the benefit of Mr. and Mrs. Schulz in the farming operation.
Mrs. Schulz consented to the granting of the security interest in the farm assets.
Prior to bankruptcy the Bank did not inquire of Mrs. Schulz whether or not she had an ownership interest in the non-titled assets. The Bank relied totally upon the financial statements provided by Mr. Schulz and upon some theory that the Bank officers had that the male operator of the farm was the actual owner of all of the assets.
The debtor, and not his wife, signed numerous contracts, leases and government documents on behalf of the farm operation. He, and not she, had an ownership interest in certain companies which farrowed pigs. Such ownership interest gave him, and not her, the right to purchase a certain number of pigs per year.
After the bankruptcy petition was filed, Mr. Schulz, as debtor-in-possession, segregated the proceeds of the sale of livestock and grain and equipment. He and his wife apparently decided that she had always had a one-half ownership interest in all of the farm assets and, therefore, the proceeds from the sale of those assets should be divided one-half for her and one-half for him as debtor-in-possession. Based upon that division, she received certain proceeds from the sale of assets in which the Bank claims a security interest and she has spent those proceeds.
Prior to bankruptcy, the Debtor held an interest in a bank account at a bank other than the plaintiff. He failed to list that bank account on his bankruptcy schedules. The plaintiff, through investigation, discovered the existence of the bank account and his interest in it and further discovered that approximately $6,000 was deposited in the account on the day the bankruptcy was filed.
1. Does Mrs. Schulz have an ownership interest in the non-titled personal property?
2. Did Mrs. Schulz grant the Bank a security interest in the non-titled personal property or did she authorize the debtor to grant such a security interest?
3. Does the Bank have a valid security interest in the non-titled personal property?
4. Has the debtor-in-possession violated the Bankruptcy Code by failure to list assets on his schedules and by transferring assets of the estate, not in the ordinary course of business and without court approval?
5. Does a debtor-in-possession have a duty to obtain court approval before transferring assets or permitting the division of assets in which another party claims an ownership interest, but which the debtor knows or should know such interest is or will be disputed by a creditor?
1. Issues 1 and 2: The non-debtor spouse does not have an ownership interest in the non-titled personal property. However, if, under a Nebraska law, it can somehow be construed that she does have such an ownership interest, she specifically authorized her husband to act as her agent to grant a security interest in her property and she is estopped from claiming that the Bank's security interest fails as to her interest in the assets.
2. Issue 3: The Bank does have a valid security interest in the non-titled assets.
3. Issue 4: The debtor's activities, although arguably a violation of the Code, do not rise to such a level of odiousness that his discharge should be denied.
4. Issue 5: Debtor-in-possession and his counsel have a duty to obtain court authority prior to segregating assets and putting them beyond the reach of creditors when a non-debtor claims an ownership interest which the debtor-in-possession knows or should know will be challenged by a creditor.
In Nebraska there must be an express agreement between the husband and wife providing for the wife to acquire an ownership interest in the husband's property in return for her services. In re Estate of Carman, 213 Neb. 98, 327 N.W.2d 611 (1982).
In the absence of an express agreement, the wife involved in the farming operation is not entitled to a one-half interest in the property. Peterson v. Massey, 155 Neb. 829, 53 N.W.2d 912 (1952).
An ownership interest in property used in the farming operation must be established by a preponderance of the evidence, the quality of which is clear, satisfactory and convincing in nature. In re Whiteside's Estate, 159 Neb. 362 at 368, 67 N.W.2d 141 (1954). See also In the Matter of Selden, 58 B.R. 667.
From the evidence presented, the Court is convinced that there was no express agreement that Mrs. Schulz would have an ownership interest in the untitled personal property. In addition, the facts are clear that Mr. Schulz entered into many different contractual arrangements on behalf of the farming operation without her signature and one or more of those contractual arrangements affected the property which she now claims is her own. Therefore, there is no basis for her claim, under Nebraska law.
However, assuming for the purposes of argument that she does have some type of ownership interest in the non-titled assets, her interest was encumbered by the debtor's granting of a security interest. In order for a security interest to attach, § 9-203 Neb. U.C.C. (Reissue 1980) requires that the debtor have "rights" in the collateral. The Code makes it clear that the debtor may acquire such rights in the collateral upon the authorization of the actual owner. See § 9-112, Neb. U.C.C. (Reissue 1980). The court in Val-U Construction Company v. Contractors, Inc., 213 Neb. 291, 328 N.W.2d 774 (1983), stated that:
"The Code recognizes that a debtor who does not own the collateral may nonetheless use the collateral for security thereby acquiring rights in the collateral when authorized to do so by the actual owner of the collateral."
See also Clay v. Greenwood, 35 Neb. 736 (1982).
A debtor acquiring such rights in collateral may encumber the entire property, notwithstanding the actual owner's failure to sign on the note or security agreement. Where such authorization is given, the owner becomes a guarantor or surety by operation of law to the extent of the secured property and, as such, is not subject to the requirements of the statute of frauds that he execute a writing promising to answer for the debt of another. See Mauch v. First National Bank of Prague, 4 U.C.C.Rep. 831 (Okla.1967); 37 C.J.S. Statute of Frauds, § 229.
In addition, the debtor could be construed as being an agent of his spouse. As the Nebraska Supreme Court stated in Buffalo County v. Richards, 212 Neb. 826 at 829, 326 N.W.2d 179, (1982):
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