Rainsdon v. Davisco Foods Int'l, Inc. (In re Azevedo)

• Decision Date: 19 August 2013
• Docket Number: Bankruptcy No. 11–41561–JDP.,Adversary No. 12–8095–JDP.
• Citation: 497 B.R. 590
• Parties: In re Antonio Helio AZEVEDO, Debtor. Gary L. Rainsdon, Chapter 7 Trustee, Plaintiff, v. Davisco Foods International, Inc., Defendant.
• Court: U.S. Bankruptcy Court — District of Idaho

497 B.R. 590

In re Antonio Helio AZEVEDO, Debtor.Gary L. Rainsdon, Chapter 7 Trustee, Plaintiff,

v.Davisco Foods International, Inc., Defendant.

Bankruptcy No. 11–41561–JDP.

Adversary No. 12–8095–JDP.

United States Bankruptcy Court, D. Idaho.

Aug. 19, 2013.

Daniel C. Green and Brett R. Cahoon, Racine, Olson, Nye, Budge & Bailey, Pocatello, ID, Attorneys for Plaintiff.

Joseph M. Meier and Matt B. Schelstrate, Cosho Humphrey, LLP, Boise, ID, Attorneys for Defendant.

MEMORANDUM OF DECISION

JIM D. PAPPAS, Bankruptcy Judge.

Introduction

Plaintiff chapter 7 ¹ trustee Gary L. Rainsdon (“Trustee”) commenced this adversary proceeding against Defendant Davisco Foods International, Inc. (“Davisco”) to avoid a transfer made by Debtor Antonio Helio Azevedo (“Azevedo”) to Davisco while he was operating his dairy business under chapter 12. Trustee and Davisco have filed cross-motions for summary judgment. Dkt. Nos. 11 and 16. On July 15, 2013, the Court conducted a hearing at which counsel for the parties appeared and presented arguments in support of their respective motions. At the conclusion of the hearing, the Court took the issues under advisement. This Memorandum of Decision represents the Court's findings of fact and conclusions of law and disposes of the issues raised by the motions.²

Facts

The parties do not dispute the following material facts.

Davisco produces cheese at its plant in Jerome, Idaho. To do so, it purchases and receives more than ninety truckloads of raw milk daily from area dairy farmers. Affidavit of Jim Ward, CFO of Davisco, Dkt. No. 16–1 at ¶ 5. Azevedo, a dairy farmer, sold his milk to Davisco from August 1997 until December 2012. Id. at ¶ 7.

In the industry, it is typical for the commercial purchaser to pay the dairy farmer for the milk in the month following delivery when the milk prices in the heavily-regulated market can be determined. Id. at ¶ 8. However, in some instances, the milk purchaser, at its discretion and upon request of the dairy farmer, may give the dairy farmer a cash “advance,” or in other words, a payment in advance of the due date for milk delivered within the same month. Id. at ¶ 10. Instead of netting out the amount advanced against monies due to the diary farmer the following month, the milk purchaser will deduct the advance from future payments to the farmer over time. Id. at ¶ 13. In this fashion, the dairy farmer will have access to cash to operate, but will not have to continually request an advance from the purchaser. Affidavit of Steve Ewing, Dkt. No. 16–3 at ¶ 5. In addition, the use of advances helps ensure the purchaser's access to a steady supply of milk from stable producers. This sort of transaction forms the basis of the dispute in this case.

As noted above, Azevedo was a long-time Davisco milk supplier. Azevedo sold milk to Davisco in December 2010. Needing funds to operate, that same month, Azevedo asked Davisco for an advance for the milk he had delivered. Affidavit of Jim Ward, CFO of Davisco, Dkt. No. 16–1 at ¶ 14. At the time of the delivery, Davisco owed Azevedo $132,847.88 for milk, which amount, under normal circumstances, would be paid to Azevedo in January 2011. Id. Of that amount, Azevedo asked Davisco for an advance of $100,000. Id.

Davisco complied with Azevedo's request. The parties agreed that, instead of netting out the $100,000 advance from the payments to be made by Davisco to Azevedo in January, Davisco would deduct a fixed sum from each future payment it owed to Azevedo for future deliveries until the advance, plus 8% interest, was repaid. Id.; see also Patron Advance Disbursement, Dkt. No. 1, Exh. A. Consistent with this agreement, Davisco made deductions of approximately $8,700 each month from payments made to Azevedo from January 1, 2011 through December 22, 2011. Id. Over this span, Davisco deducted the agreed amount to cover the prepayment, and interest, it made to Azevedo in December 2010; the deductions from Azevedo's milk checks totaled $104,133.84. Affidavit of Jim Ward, CFO of Davisco, Dkt. No. 16–1 at ¶ 16.

Although not an express term in the advance contract, it was understood by the parties that Azevedo would continue to supply milk to Davisco. Id. at ¶ 17. As a result, during the time that Davisco made deductions to satisfy the advance balance, and while Azevedo continued to deliver milk, Davisco was never owed more than the amount it owed to Azevedo. Id. at ¶ 19. It was also understood that if Azevedo were to stop delivering milk, Davisco would deduct the full balance due on the advance from Azevedo's final milk payment. Id.

After Azevedo received the advance from Davisco, on September 20, 2011, Azevedo filed a chapter 12 bankruptcy petition. As agreed, during the pendency of the chapter 12 case, Azevedo continued to deliver milk to Davisco, and Davisco continued to make deductions from Azevedo's milk checks until December 2011 when the advance was paid in full, plus interest. The total amount deducted by Davisco during the pendency of the bankruptcy was $25,810.56.

When he could not confirm a debt repayment plan, Azevedo's bankruptcy case was converted to a chapter 7 case on May 11, 2012. Trustee commenced this action against Davisco on December 21, 2012, seeking to recover the amount Davisco deducted from Azevedo's milk payments during the pendency of the chapter 12 case as unauthorized, postpetition transfers under §§ 549(a) and 550. Dkt. No. 1. In its answer to Trustee's complaint Davisco asserted the equitable defense of recoupment. Dkt. No. 6. The parties then each moved for summary judgment.

Analysis and Disposition

In support of his motion for summary judgment Trustee argues that the “advance” transaction between Davisco and Azevedo, at bottom, constituted a loan from Davisco to Azevedo that was repaid with interest during the pendency of Azevedo's bankruptcy case. Trustee argues Davisco's deductions were unauthorized postpetition transfers of property of the bankruptcy estate, and pursuant to §§ 549(a) and 550, he is entitled to avoid the payments and recover them for the benefit of the creditors of the bankruptcy estate to share.

Davisco urges its summary judgment motion should be granted because the deductions it made from Azevedo's milk checks to recover the advance are protected under the equitable doctrine of recoupment. It points out that all the elements of recoupment are met under these facts, and that it is equitable to apply the defense in this case.

In reply, Trustee first argues that recoupment may not be asserted as a valid defense to a § 549(a) action by a bankruptcy trustee as a matter of law. Next, he argues that, if recoupment is an available defense in this context, it is inapplicable here because Davisco can not satisfy the “same transaction” test required by the defense. Finally, at the hearing on the motions, Trustee argued that it would be inequitable to allow Davisco to retain the funds it deducted from the milk checks because its agreement with Azevedo was not disclosed to, nor authorized by, the Court. Simply put, Trustee argues that allowing Davisco to recover its prebankruptcy loan in this fashion is inequitable to other unsecured creditors and violates the policy of pro rata distributions as to such creditors incorporated in the Bankruptcy Code.

I. Summary Judgment Standard

Rule 7056 incorporates Civil Rule 56, which sets forth the familiar summary judgment standard for evaluating the parties' motions here: “The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Civil Rule 56(a). A party seeking summary judgment bears the initial burden to demonstrate the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Once this initial burden is met by the moving party, the adverse party must come forward with evidence to demonstrate the existence of a genuine issue of material fact for trial. Id. at 323–24, 106 S.Ct. 2548;Devereaux v. Abbey, 263 F.3d 1070,1076 (9th Cir.2001). However, the movant may still be entitled to summary judgment if there is a dispute of fact so long as there is no “genuine” dispute of fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A “genuine” dispute of fact is one that could affect the outcome of the case, or demonstrate that the moving party is not entitled to judgment as a matter of law. Id.

When parties submit competing motions for summary judgment targeting the same claims or issues, “each motion must be reviewed on its own merits.” Fair Hous. Council of Riverside Cnty., Inc. v. Riverside Two, 249 F.3d 1132, 1136 (9th Cir.2001). That is, a trial court is required to review the evidence properly submitted in support of each motion to determine whether each motion satisfies the summary judgment standard. Id. Even when faced with cross-motions for summary judgment, the court still has the responsibility to determine whether there are genuine issues of material fact for trial. Id.

Applying these principles to this action, the Court agrees with the parties that the issues presented for resolution are solely questions of law. Because there are no genuine issues of material fact that must be resolved in order to address the legal issues, the outcome may be determined on summary judgment. The pivotal decision for the Court under these facts is whether, as a matter of law, Davisco may invoke the equitable doctrine of recoupment as a defense to Trustee's § 549 avoidance claims, and if so, whether the defense is properly applied to the transactions between Davisco and Azevedo.

II. Applicable Law.A. Section 549.

Section 549(a) provides that “a trustee may ‘avoid a transfer of property of the estate—(1) that occurs after the commencement of the case; and ... (2) ... (B) that is not authorized under this title or by the...