McElwee v. Scarff Bros., Inc. (In re McElwee)

• Decision Date: 03 May 2012
• Docket Number: No. 1–10–bk–02566 RNO.,1–10–bk–02566 RNO.
• Citation: 469 B.R. 566
• Parties: In re Thomas H. McELWEE, Jr. and Becky S. McElwee. Thomas H. McElwee, Jr. and Becky S. McElwee, Objectant v. Scarff Brothers, Inc., Claimant.
• Court: U.S. Bankruptcy Court — Middle District of Pennsylvania

469 B.R. 566

In re Thomas H. McELWEE, Jr. and Becky S. McElwee.Thomas H. McElwee, Jr. and Becky S. McElwee, Objectant

v.Scarff Brothers, Inc., Claimant.

No. 1–10–bk–02566 RNO.

United States Bankruptcy Court, M.D. Pennsylvania.

May 3, 2012.

Recognized as Unconstitutional

28 U.S.C.A. §§ 157(b)(2)(C), 1471

William C. Cramer, Chambersburg, PA, for Debtor.

OPINION¹

ROBERT N. OPEL, II, Bankruptcy Judge.

This matter concerns claims litigation in the above Chapter 12 case. Scarff Bros., Inc. filed an Amended Proof of Claim in the amount of $878,249.11. The Debtors objected to the Proof of Claim on several bases. For the reasons stated below, I will overrule the claim objections and allow the amended claim as filed.

I. JURISDICTION

This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157(b)(2). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(B) and (C).

II. FACTS

Thomas H. McElwee, Jr. and Becky S. McElwee, his wife, family farmers (“Debtors”), filed a voluntary Chapter 12 petition on March 30, 2010. On July 9, 2010, Scarff Bros., Inc. filed Proof of Claim Number 11, the claim asserts a secured claim in the amount of $878,249.11. The Original Proof of Claim Number 11–1 consists of the one-page Official Form B10 and a one-page exhibit which is a numerical itemization of the amounts claimed. On July 9, 2010, Scarff Bros., Inc. filed an Amended Proof of Claim to Claim Number 11–2. The Amended Claim consists of the Official Form B10 and it continues to assert a secured claim in the amount of $878,249.11. The Amended Proof of Claim differs from the Original Claim only with respect to its attachments. The Amended Proof of Claim includes seven exhibits; in addition to the claim itemization, the Amended Claim attaches certain loan documents between the Debtors and Scarff Bros., Inc. The Amended Proof of Claim is hereinafter referred to as “Claim 11–2”.

The Debtors objected to Claim 11–2 on October 21, 2010 (“Claim Objection”). The Claim Objection interposes several objections including objections to the amount of Claim 11–2, the default interest rate, and the extent to which the claim is a secured claim. Finally, the Claim Objection contains an eleventh paragraph which states:

Debtors are entitled to a setoff, or, alternatively, hold a counterclaim against Scarff Brothers, for any sums remaining due and owing Scarff Brothers (after application of all credits to which Debtors are due), because of the aforesaid defaults by this Claimant. The amount of this setoff, or counterclaim, is presently being calculated by Debtors, and that information will be available at a subsequent hearing to adjudicate these objections. Debtors will advise counsel for Scarff Brothers of the amount of the setoff or counterclaim due Debtors as soon as that information is available.

Three days of testimony were taken regarding the Claim Objection. Briefs were filed by Scarff Bros., Inc. (“Claimant”) in support of Claim 11–2 and by the Debtors in support of the Claim Objection, respectively.

The hearing record shows that the Debtors have been farming since 1985. In that year, they purchased a 28.43–acre parcel which is improved, in part, with the Debtors' residence (“Jumper Road Property”). In 1999, the Debtors purchased 104.24 acres, which property is improved with an older two-story farmhouse, a barn, and other outbuildings (“Big Spring Road Property”). In 2003, the Debtors purchased a 7.49–acre parcel, improved with a brick dwelling, a barn, garage, and other outbuildings (“Wayne Road Property”). Much of the Debtors' farming operations has been devoted to the purchase and sale of beef cattle. Mr. McElwee testified that he has purchased and sold beef cattle since 1980. The Debtors' farming operation has included buying cattle from others, raising cattle for others, and raising cattle for their farm.

The Debtors' method of cattle raising has changed over the course of time. Prior to 2003, the Debtors generally purchased a cow weighing 300 to 400 pounds, raised it, and sold it when its weight reached the 1,200– to 1,400–pound range. Purchasers from the Debtors during that period of time were packing houses which slaughtered the cattle for their meat. The Debtors also operated a “receiving station”. They took possession of other farmers' calves at the receiving station and transported them to purchasers on a commission basis.

In 2003, the Debtors began business dealings with the Claimant. Their business dealings continued and evolved over the course of several years. Part of the business relationship included the Claimant making a series of loans to the Debtors. The loans were evidenced by promissory notes in the following amounts: (1) a note dated July 31, 2003, in the face amount of $200,000.00; (2) a note dated November 24, 2003, in the face amount of $300,000.00; (3) a note dated June 11, 2004, in the face amount of $500,000.00; and, (4) a note dated March 11, 2005, in the face amount of $750,000.00. The last three Notes were refinancings of the earlier obligations. For example, the $300,000.00 Note refinanced the outstanding balance on the $200,000.00 Note and made the difference available to the Debtors as new money. As noted above, Claim 11–2 is in the amount of $878,249.11. The Debtors used a portion of the loan proceeds obtained from the Claimant to remodel an existing barn into the wet barn and to construct a new feeder barn on the Jumper Road Property.

No comprehensive agreement which spelled out the business arrangements between the Debtors and the Claimant was introduced into evidence. I do note that, absent a written agreement with specified terms, it is more difficult for a court to discern the parties' intentions and to give effect to such intentions.

I find that there were two essential relationships between the Debtors and the Claimant. First, the Debtors borrowed money under a loan facility pursuant to the terms of the promissory notes and other loan documents. Second, the parties entered into several contracts concerning the raising of calves.

Beginning in 2003, the Debtors would purchase one- or two-day old calves which would generally each weigh 80 to 100 pounds (“New Calves”). New Calves were originally raised by the Debtors in a “wet barn” on their property where they were fed a milk diet. Grain was gradually introducedto the New Calves' diet; on average, after six to eight weeks, such calves would then be on a grain diet and they would be moved to a second barn—also on the Debtors' property—known as a “feeder barn”. Grain-fed calves generally remained in the feeder barn until they were 18 to 20 weeks old and weighed approximately 350 pounds (“Middling Calves”). I find that the Claimant agreed to purchase the Middling Calves from the Debtors at a purchase price which was periodically agreed to by the parties. After the Claimant purchased the Middling Calves from the Debtors, it would ship them to western feed lots to raise them to a butchering weight, generally, 1200 to 1400 pounds each. Hereafter, I shall refer to this arrangement as the “First Agreement”.

After August, 2005, I find that the Debtors and the Claimant entered into a second contractual arrangement. The Debtors then agreed to raise calves, which were owned by the Claimant, pursuant to the terms of several written Calf Feeding Contracts. The Debtors received a fee to feed a calf to a target weight of 350 pounds. Adjustments were made to the agreed to fee to compensate the Claimant for any calves which were not returned to it because of mortality or other cause. Similarly, the agreed to fee was adjusted upward or downward for each pound by which the weight of the subject calf was over or under the 350–pound target weight. I find that the arrangement between the parties based upon the series of Calf Feeding Contracts ended no later than January 2007. This arrangement shall hereinafter be referred to as the “Second Agreement”.

After January 2007, the parties' business dealings evolved into a third arrangement. Under this agreement, the Debtors would continue to raise New Calves which were owned by the Claimant. However, under this arrangement, the Debtors were paid only for their labor in raising New Calves to the agreed to target weight. Under this arrangement, the Claimant paid a per head daily charge; it also agreed to pay for all other expenses, including feed and veterinary expenses. Hereinafter, I will refer to this as the “Third Agreement”. I also find that the last cattle placed by the Claimant with the Debtors left their farm in May 2008.

After the parties had submitted their Briefs concerning Claim 11–2 and the Claim Objection, the U.S. Supreme Court decided the case of Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (U.S.2011). Because the Claim Objection included what was denominated a setoff or counterclaim, I asked the parties to submit briefs concerning the applicability of Stern v. Marshall to the case at bar. The parties submitted Briefs on this issue and, on March 15, 2012, I heard oral argument on this question.

The Claim Objection to Claim 11–2 is now ripe for decision.

III. DISCUSSIONA. Bankruptcy Court's Authority to Enter Final Judgment on the Claim Objection

Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 180 L.Ed.2d 475 (U.S.2011) considered the following question: Did Congress exceed its Constitutional authority when it gave the Bankruptcy Court, an Article I court, the ostensible authority to render final judgments on counterclaims-based on state law-against a claimant who filed a proof of claim in the bankruptcy case? The Supreme Court ultimately answered this question in the affirmative; finding that the subject counterclaim would not necessarily be resolved in ruling on the subject proof of claim.

Stern v. Marshall, to say the least, has a convoluted procedural history. I will attemptto offer a broad brush outline of that procedural history. Vickie Marshall a/k/a ...