Williams v. McNabb (In re McNabb), Case No. 16–10010

• Decision Date: 05 May 2017
• Docket Number: Adv. Pro. No. 16–5110,Case No. 16–10010
• Citation: 567 B.R. 326
• Parties: IN RE Joseph MCNABB and Loretta McNabb, Debtors. Marianna Williams, Chapter 7 Trustee, Plaintiff, v. Emily Ann McNabb, Defendant.
• Court: U.S. Bankruptcy Court — Western District of Tennessee

567 B.R. 326

IN RE Joseph MCNABB and Loretta McNabb, Debtors.Marianna Williams, Chapter 7 Trustee, Plaintiff,

v.Emily Ann McNabb, Defendant.

Case No. 16–10010

Adv. Pro. No. 16–5110

United States Bankruptcy Court, W.D. Tennessee, Eastern Division.

Signed May 05, 2017

Adam C. Crider, Rainey, Kizer, Reviere & Bell, P.L.C, Charles C. Exum, Jackson, TN, for Plaintiff.

Steven N. Douglass, Harris Shelton Hanover Walsh, PLLC, Memphis, TN, for Defendant.

MEMORANDUM OPINION RE COMPLAINT TO AVOID PREFERENTIAL TRANSFERS AND TO RECOVER AMOUNT OF SUCH TRANSFERS

Jimmy L. Croom, UNITED STATES BANKRUPTCY JUDGE

At issue in this proceeding are four pre-petition transfers the debtors made to the defendant within one year of the filing of the debtors' bankruptcy petition. Three of the transfers were transfers of money totaling $183,950.00. The fourth transfer occurred when the debtors granted the defendant a security interest in their crops that the defendant did not perfect until approximately five months after execution of the promissory note. The defendant in this matter is the mother of one of the debtors.

The Chapter 7 Trustee is seeking to avoid these transfers pursuant to 11 U.S.C. § 47 and to recover the value of these transfers pursuant to 11 U.S.C. § 550(a). The Court conducted a trial in this matter on March 8, 2017, pursuant to Fed. R. Bankr. P. 7001. Thereafter the parties filed post-trial briefs.

This proceeding arises in a case referred to this Court by the Standing Order of Reference, Misc. Order No. 84–30 in the United States District Court for the Western District of Tennessee, Western and Eastern Divisions, and is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(F) and (O). This Court has jurisdiction over core proceedings pursuant to 28 U.S.C. §§ 157(b)(1) and 1334. The Court also has the constitutional and statutory authority to finally resolve preference actions. Martino v. Miszkowicz (In re Miszkowicz ), 513 B.R. 553, 556 (Bankr. N.D. Ill. 2014). Thus, the Court may enter a final order in this matter. This memorandum opinion shall serve as the Court's findings of facts and conclusions of law. Fed. R. Bankr. P. 7052.

I. FACTS

On May 1, 2015, Joseph and Loretta McNabb (collectively the "Debtors") and J & L McNabb Family Farm Partnership ("Partnership") signed a promissory note ("Promissory Note") to Emily McNabb ("Defendant") in the amount of $183,950.00. The Defendant is the mother of Joseph McNabb. The Debtors and the Partnership used these proceeds to purchase crop inputs for the production of their 2015 crop. The note provided that "this loan may be drawn on as needed." (Tr. Ex. 1). Pursuant to the terms of the Promissory Note, the loan was payable "as soon as monies become available at harvest, but no later than November 1, 2015." (Id. ). The Defendant disbursed the loan proceeds to the Debtors in five (5) separate installments: $25,000.00 on May 1, 2015; $128,950.00 on May 21, 2015; $10,000.00 on July 23, 2015; $10,000.00 on August 12, 2015; and $10,000.00 on September 9, 2015. (Tr. Ex. 7). The loan was interest-free.

The Defendant testified that she has not borrowed money since the 1960s. She also testified that she is not in the business of lending money. Prior to the loan at issue in this proceeding, the Defendant never made a loan of this type to Joseph McNabb. At the time of making the loan disbursements to the Debtors and the Partnership, the Defendant stated that she did not know the Debtors were having financial difficulty. She admitted that Joseph McNabb told her that without her loan, he would not be able to farm and that his normal lender, the Bank of Fayette County, would not loan him enough money to plant and harvest his 2015 crops. These statements, however, did not cause her to suspect that the Debtors were experiencing any trouble paying their bills as they became due. Instead, she assumed that the Debtors did not have enough collateral to support financing the entire amount with the Bank of Fayette County.

Joseph McNabb testified that he prepared the Promissory Note without the assistance of an attorney. He also testified that he copied the language in the note from his note with the Bank of Fayette County. The Defendant testified that the parties did not execute a security agreement in conjunction with the Promissory Note nor did they discuss executing a security agreement at the time the loan was made in May 2015; however, the Promissory Note contains the following provision: "For collateral and security there shall be a lien on all 2015 crops grown including corn, milo, soybeans, and cotton." (Tr. Ex. 1). The Defendant testified that she thought that this statement meant that her loan would be repaid once the 2015 crops were harvested.

In late September 2015, Joseph McNabb prepared a UCC–1 Financing Statement ("Financing Statement") which granted the Defendant a security interest in the Debtors' 2015 crops in exchange for the May 2015 loan. Joseph McNabb gave the Financing Statement to his mother and advised her to file it with the Tennessee Secretary of State. The Secretary of State accepted the Financing Statement for filing on October 2, 2015. (Tr. Ex. 2). Pursuant to the Financing Statement, the Defendant held an "Agricultural Lien" in the amount of $183,540.00¹ in "All 2015 Crops, including soybeans, corn, milo and cotton." The Financing Statement listed the Debtors and the Partnership as the lienees.

Two weeks prior to the filing of the Financing Statement, Crop Production Services ("CPS") filed a lawsuit against the Debtors in state court seeking damages of $521,095.89 related to the financing of the Debtors' 2014 crops. Joseph McNabb testified that he met with CPS in January 2015 about his 2014 crop loans and had been trying to resolve the dispute. Although he disputed the precise amount of the debt, McNabb testified that he did not dispute the fact that he owed CPS a substantial sum of money for his 2014 crops. Joseph McNabb received formal notice of the CPS lawsuit on September 19, 2015. Thereafter, he advised the Defendant to file the Financing Statement. The Defendant testified that she was completely unaware of the CPS lawsuit at the time of filing the Financing Statement with the Secretary of State.

Although the Promissory Note matured on November 1, 2015, the Debtors did not pay the Defendant until November 17, 2015. Joseph McNabb testified that the heavy rains in the spring and fall of 2015 caused a delay in planting and harvesting his crops. Because there was a delay in the harvest, there was also a delay in paying the creditors secured by the crops. Once the Debtors' crops were sold, they paid the first priority lienholder, the Bank of Fayette County, and the Defendant in full. Joseph McNabb testified at the trial in this matter that his ordinary way of doing business was to repay the lienholder once his crops were harvested and sold.

Because the Defendant obtained the funds she lent to the Debtors from three different sources, she asked the Debtors to make three separate disbursements to her when repaying the loan. Accordingly, the Debtors executed three Loan Disbursement Checks to the Defendant on November 17, 2015. The checks totaled $183,950.00. (Tr. Ex. 3).

The Debtors filed their chapter 7 bankruptcy petition on January 5, 2016. Joseph McNabb testified that he did not know he would need to file for bankruptcy relief until he harvested and sold his crops in late fall of 2015. He paid his bankruptcy attorney $2,500.00 on November 23, 2015, in anticipation of filing for bankruptcy relief. (Tr. Ex. 5 at 7). At the trial in this matter, the Defendant testified that she did not know the Debtors were going to file for bankruptcy relief until December 2015. Joseph McNabb supported the Defendant's claim about her lack of knowledge at the time of making the loan and at the time of filing the Financing Statement.

The Debtors disclosed the pre-petition transfers to the Defendant under item number 7 on their Statement of Financial Affairs which asks debtors to disclose any payments to insiders within one year prior to filing for bankruptcy relief. On the schedules attached to their petition, the Debtors indicated that they had $1,581,535.00 in total assets and $1,657,841.41 in total liabilities at the time of filing for bankruptcy relief. Of the Debtors' total liabilities, $988,750.28 was secured debt. At the trial in this matter, Joseph McNabb admitted that there were not any significant differences in the amount of assets he owned or the amount of secured and unsecured debt he owed six months prior to filing his chapter 7 petition. The Debtors listed two unsecured debts with CPS on Schedule E/F of their petition: (1) one in the amount of $517,435.89 and (2) one in the amount of $23,600.00. They did not indicate that either debt was contingent or unliquidated. Because the Debtors had fully repaid the loan to the Defendant pre-petition, they did not list the Promissory Note on their schedules.

Over multiple objections by counsel for the Chapter 7 Trustee, the Court allowed counsel for the Defendant to introduce a "Balance Sheet" ("Balance Sheet") into evidence "for whatever probative value it may have, if any." (Tr. Ex. 8). There is a line at the top of the Balance Sheet which states "03/09/2015 2015 Renew/LNG/DOL/PC" and a line at the bottom of the Balance Sheet which states "4/20/2015." Page 2 of the document indicates the Debtors signed it on May 21, 2015. The following statement appears immediately above the signature lines:

This information above and on attached schedules is furnished for the purpose of securing and maintaining credit and is certified to be true and correct. The undersigned authorizes the [Farm Services Agency] to make all inquiries deemed necessary to verify the accuracy of the information contained above to determine my credit-worthiness and to answer questions about their credit experience with me.

(Tr. Ex. 8 at 2). Joseph McNabb testified that Farm Services...