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Table of Contents
I. Revised Article 9 ………………………………………………. A-3
A. Attachment
B. Perfection
C. Priority
D. Enforcement
II. Article 2 ………………………………………………….……. A-13
A. General
B. Formation
C. Construction
D. Title
E. Performance
F. Breach
G. Remedies
H. Miscellaneous
III. Bankruptcy ……………………………………………………. A-15
A. General
B. Case Administration
C. Bankruptcy Estate
D. Chapter 7
E. Chapter 11
F. Chapter 12
G. Chapter 13
H. Avoidance Actions
IV. State Law ………………………………………………..……. A-24
A. Fraudulent Transfers
B. Exemptions
C. Miscellaneous
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I. REVISED ARTICLE 9.
A. Attachment.
1. Value Given to Debtor.
a. Extrinsic evidence may be used to show value given by secured
creditor. Debtor David Duckworth had a farming operation with an
operating loan with the State Bank of Toulon. The loan was secured by a
blanket security interest in the farm equipment of the Debtor. The security
agreement misidentified the date of the promissory note. The Debtor filed
bankruptcy and the trustee argued that under its judgment creditor
avoidance powers that the secured creditor’s security interest did not
attach to the farm equipment because of the error in the security
agreement. The Court disagreed and held that the extrinsic evidence
showed that value was provided by the Secured creditor to the debtor in
conjunction with the operating loan and, therefore, even though the
security agreement misidentifies the promissory note, the security interest
is still enforceable and cannot be avoided by the trustee under its
avoidance powers. State Bank of Toulon v. Covey (In re Duckworth),
2013 Bankr. LEXIS 223, 79 U.C.C. Rep. Serv. 2d (Callaghan) 533, 2013
WL 211231 (Bankr. C.D. Ill. 2013).
2. Debtor has Sufficient Rights in the Collateral.
No relevant cases since October 2012.
3. Sufficient Description in Security Agreement.
No relevant cases since October 2012.
B. Perfection.
No relevant cases since October 2012.
C. Priority.
1. Competing Article 9 secured creditors.
No relevant cases since October 2012.
2. Purchase Money Security Interests (PMSI).
a. The security agreement does not need to identify the financing
as a purchase money security interest to be effective. The secured
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creditor extended credit to the debtor to buy certain equipment, including a
skid steer loader. Although the loan proceeds were used to buy the skid
steer, no separate security agreement was executed by the debtor as to the
skid steer. The bankruptcy trustee moved to avoid the lien because of the
failure to have a separate security agreement. The Court disagreed and
held that under UCC § 9-103 the security agreement did not have to
identify the financing as a purchase money security interest. In re Saxe,
2013 Bankr. LEXIS 1224 (Bankr. W.D. Wis. 2013).
b. No separate UCC-1 finance statement is required to establish a
purchase money security interest. The secured creditor extended credit
to the debtor to buy certain equipment, including a skid steer loader.
Although the loan proceeds were used to buy the skid steer, no separate
UCC-1 filing was filed that identified the purchase money security
interest. The bankruptcy trustee moved to avoid the lien because of the
failure to have a separate UCC-1 filing. The Court disagreed and held that
under UCC § 9-103 the secured creditor was not required to file a separate
UCC-1 financing statement that identifies the equipment as a PMSI. In re
Saxe, 2013 Bankr. LEXIS 1224 (Bankr. W.D. Wis. 2013).
c. The refinancing of debt secured by a purchase money security
interest does not destroy its PMSI status. The secured creditor extended
credit to the debtor to buy certain equipment, including a skid steer loader.
The secured creditor and debtor restructured the debt obligations by
having the debtor execute a new note to renew the debt obligation secured
by the PMSI. The bankruptcy trustee argued that the new debt obligation
was a novation and the new debt obligation extinguished the old debt
obligation and the PMSI. The Court disagreed and held that the trustee
failed to establish that the parties intended the old note to be extinguished
and, instead, the refinancing was a renewal of the original PMSI
obligation. In re Saxe, 2013 Bankr. LEXIS 1224 (Bankr. W.D. Wis.
2013).
Comment Note. The secured creditor should be careful to clarify, when
using a new promissory note to restructure a debt obligation, that the new
debt is a renewal of the existing debt obligation and does not extinguish
the existing debt obligation when the existing debt obligation is secured by
specific collateral like a purchase money security interest.
3. Statutory Liens.
a. Agricultural Supplier/Service Provider Lien.
i. Supplier of feed and other related services is limited to a
livestock production lien under Minnesota law, and is also not
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entitled to the higher priority feeder’s lien. The feed supplier
Wilmont-Adrian Cooperative supplied feed and provided
nutritional analysis and custom nutrition plans to the hog producer
Profit Pork. New Vision Coop only supplied feed to the hog
producer. The hog producer went insolvent and the feed suppliers
asserted various statutory liens against certain proceeds from the
sale of hogs. Wilmont-Adrian Cooperative argued that it was
entitled to a higher priority feeder’s lien under Minnesota law
because the Minnesota feeder’s lien included any one that “stores,
cares for, or contributed to the keeping, feeding… or other care of
livestock.” The Court held implied that a lien claimant may only
be entitled to one lien category and to be eligible for the feeder’s
lien the supplier must directly care for or contribute to the feeding
of the livestock. Because the livestock input lien was more
applicable to the goods and services provided by Wilmont-Adrian
Cooperative, the Court held that it was not also entitled to the high
priority feeder’s lien. First Nat'l Bank v. Profit Pork, LLC, 820
N.W.2d 592, 2012 Minn. App. LEXIS 96 (Minn. Ct. App. 2012).
ii. Failure to properly identify the hogs in the UCC-1 filing
under the Iowa agricultural supply dealer’s lien causes the lien
to be unperfected. The supply dealer filed a UCC-1 that stated
“All livestock located at [certain barn location].” The Bankruptcy
Court ruled that for any hogs not located at the barn locations listed
in the UCC-1, the lien was unperfected. First Nat'l Bank v.
Farmers Coop Soc’y (In re Coastal Plains Pork, LLC) 2012 WL
6571102 (E.D. N.C. Bankr. 2012).
Comment Note. The Court implied that had the UCC-1 just stated
“[A]ll livestock” the UCC-1 would have properly identified all of
the hogs. The assumption is that that the Court deferred to the
general principles under Revised Article 9 (UCC § 9-504 and § 9-
108(2)(a)-(f)) that a UCC-1 that describes a general category of
collateral is sufficient to prefect a security interest. The take away
is that the UCC-1 filer should either not attempt to identify the
specific barn locations or, the UCC-1 should state “all livestock,
including but not limited to, the livestock located at the following
barn locations: [and then list the barn locations]”.
iii. Factual issues in the calculation of a priority lien under
the Iowa agricultural supply dealer’s lien preclude granting
summary judgment. The Iowa agricultural supply dealer’s lien
(Iowa Code § 570A.5(3)), provides that if properly perfected, the
supply dealer is entitled to a priority lien for the difference
between the acquisition price of the livestock and the fair market
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value of the livestock at the time the lien attaches or the sale of the
livestock, whichever is greater. The Bankruptcy Court ruled that
there remains factual issues as to: (1) the acquisition price of the
hogs and whether feed, transportation, shelter and supervision
expenses should be considered in the acquisition cost; (2) the value
of the hogs considering some hogs did not consume any of the
unpaid feed; and (3) whether the lien includes non-feed charges for
interest and financing. First Nat'l Bank v. Farmers Coop Soc’y (In
re Coastal Plains Pork, LLC) 2012 WL 6571102 (E.D. N.C.
Bankr. 2012).
b. Grain Handler/Storage Liens.
i. Lien enforcement and priority of allocation of proceeds
for failed agricultural commodity handlers in Ohio. Central
Erie operated a grain elevator and farm commodity related
business. Central Erie purchased grain from local grain farmers.
Central Erie was indebted to Citizens Bank and the debt was
secured by a security interested in its grain. Central Erie went
insolvent and the Ohio Department of Agricultural (ODA)
commenced a legal action, on behalf of the unpaid grain farmers,
to determine the priority claims of the farmers. The trial court held
that under applicable Ohio law Central Erie was an “agricultural
commodity handler” and, therefore, the unpaid grain farmers
would be paid first and the secured creditor second. The secured
creditor appealed. The Court of Appeals affirmed holding that the
ODA has the authority to enforce lien claims and allocate proceeds
and the first priority of proceeds lies with claimants. Importantly,
the Court also determined that the ODA’s statutory lien takes
priority over an antecedent security agreement held by creditors
giving rights to after-acquired property of the agricultural
commodity handler. Ohio Dep't of Agric. v. Cent. Erie Supply &
Elevator Ass'n, 2013 Ohio App. LEXIS 3118 (Ohio Ct. App., Erie
County July 12, 2013).
4. Buyer of Farm Products (Federal Food Security Act).
a. The Federal Food Security Act pre-empts Revised Article 9.
The Illinois Court of Appeals affirmed a trial court decision that the Food
Security Act preempts Revised Article 9. The Court adopted the
reasoning in Farm Credit Midsouth, PCA v. Farm Fresh Catfish Co., 371
F.3d 450 (8th Cir. 2004), relying on the Supremacy Clause of the
Constitution, the language of UCC § 9-109 (“This Article does not apply
to the extent that: a statute . . . of the United States preempts this Article.”)
and the language of the Food Security Act § 1631(d) (“notwithstanding
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any other provision of Federal, State, or local law[.]”) in support of its
decision. State Bank of Cherry v. CGB Enterprises, Inc., 964 N.E.2d 604
(Ill. Ct. App. 2012); (affirmed by State Bank of Cherry v. CGB Enters.,
984 N.E.2d (Ill. 2013)).
b. Direct Notice States.
i. Strict Compliance.
1. Failure to identify county where crops were
grown invalidates notice. The secured creditor failed to
include the names of certain counties where the debtor
grew crops. The secured creditor argued that it was not
required to strict comply with the notice requirements and,
that by identifying the other counties were crop were
grown, the secured creditor was in substantial compliance.
The Court disagreed and held that the Federal Food
Security Act expressly requires the secured party to provide
a description of the farm products subject to the security
interest created by the debtor and the name of each county
where the farm products are located. The Court recognized
some conflicting and non-binding state case law as to
“substantial compliance” with the notification statute.
Accordingly, the buyer purchased debtor’s crop free of the
secured creditor’s security interest despite knowing of the
secured creditor’s security interest.1 State Bank of Cherry v.
CGB Enterprises, Inc., 964 N.E.2d 604 (Ill. Ct. App. 2012)
(affirmed by State Bank of Cherry v. CGB Enters., 984
N.E.2d (Ill. 2013)).
2. Failure to identify debtor’s social security
number and proper description of crops invalidates
notice. The secured creditor failed to include the social
security number of the debtor on the CNS statement and
failed to properly identify the county were the crops were
being grown. The secured creditor argued that it was not
1 As noted in the case summary, there is conflicting case law as to whether the direct notice provisions of the FSA require strict or substantial compliance. The Illinois Court of Appeals in this case relied on the 8th Circuit decision in Farm Credit Midsouth for holding that the secured creditor must strictly comply with the statute. Alternatively, First Nat’l Bank & Trust v. Miami County Cooperative Ass’n, 897 P.2d 144 (Kan. 1995); Farm Credit Services of MidAmerica, ACA v. Rudy, Inc., 680 NE2d 637 (Ohio Ct. App. 1996); and Lisco State Bank v. McCombs Ranches, Inc., 752 F. Supp. 329, 13 UCC Rep. 2d 928 (D. Neb. 1990) have all held that the standard is substantial compliance. As for the 5th Circuit, even the majority and dissent in State Bank of Cherry disagreed whether the holding in Peoples Bank v. Bryan Brothers Cattle Co., 504 F.3d 549, 64 UCC Rep. 2d 113 (5th Cir. 2007), required strict or substantial compliance.
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required to strict comply with the notice requirements. The
Court disagreed and held that the failure of the secured
creditor to include the debtor’s social security number and
a proper description of the crops in the Food Security Act
notice invalidates the notice and allowed a grain elevator to
purchase the crops free and clear of any claims of the
secured creditor. CNH Capital v. Trainor Grain and
Supply Co. (In re Printz), 2012 LEXIS 4506 (Bankr. C.D.
Ill. Sept. 27, 2012).
c. Central Filing States.
i. Priority limited to locations specified in the CNS
statement. The secured creditor filed two CNS farm product
financing statements with Mississippi Secretary of State. Each
CNS listed sweet potatoes as the farm product, included the county
codes for two counties and listed the six parcels within those two
counties. The debtor planted crops on the six parcels, but also in
an unlisted county. A produce company bought the sweet potatoes
and did not make the check payable to the producer and the
secured creditor. The Court found that for the two counties that
the secured creditor properly listed, the produce company failed to
comply with the Food Security Act and the secured creditor took
priority. However, for the third unlisted county, the Court held
that the produce company took priority because the secured
creditor limited its CNS to the listed six parcels. In re Moore,
2013 Bankr. LEXIS 2060 (Bankr. N.D. Miss. May 17, 2013).
Comment Note. The creditor should not limit the scope of its CNS
statement but, instead the creditor should identify all crops and all
counties in the state in the CNS to avoid this outcome.
ii. The county were the crops are processed is not relevant
for purposes of the Food Security Act. The Secured Creditor
filed two CNS farm product financing statements with Mississippi
Secretary of State. Each CNS listed sweet potatoes as the farm
product, included the county codes for two counties and listed the
six parcels within those two counties. The debtor planted crops on
the six parcels, but also in an unlisted county. However, the sweet
potatoes grown in the unlisted county were processed in one of the
listed counties. A produce company bought the sweet potatoes and
did not make the check payable to the producer and the secured
creditor. The Secured creditor argued that the CNS is not limited
to the location the crop is grown but, instead, includes the location
the crop is processed. The Court disagreed and held that the
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county were the crops are processed is not relevant because the
CNS must identify the county were the crops are grown. In re
Moore, 2013 Bankr. LEXIS 2060 (Bankr. N.D. Miss. May 17,
2013).
d. Set-off by Buyer.
i. Buyer is not entitled to set-off. A buyer of farm products
is not entitled to set-off the obligation owed to the seller for the
sale of grain against the prior indebtedness owed by the seller to
the buyer. The Food Security Act allows a buyer of farm products
to purchase the farm products free and clear of any security
interests. However, the Food Security Act does not allow a buyer
of farm products to acquire the proceeds of the farms products
(through a common law set-off) free and clear of any security
interest in the sale proceeds. The FSA only defines a “security
interest” as “an interest in farm products that secured payment or
performance of an obligation.” The term does not reference or
include within its definition the proceeds of the security interest.
The Court reasoned that at the moment the grain buyer set-off
against the debt owed to the seller, the grain buyer was no longer a
buyer in the ordinary course of business but, instead, a creditor.
To allow the common law setoff would circumvent Revised
Article 9. CNH Capital v. Trainor Grain and Supply Co. (In re
Printz), 2012 LEXIS 4506 (Bankr. C.D. Ill. Sept. 27, 2012).
5. Statutory Trusts.
a. Perishable Agricultural Commodities Act (PACA).
i. A United States business address in a PACA license is
sufficient evidence that the PACA dealer has a place of
business in the United States for purposes of jurisdiction under
the Uniform Commercial Code and PACA. VLM Food
Trading, a Canadian business operating in the United States, sold
wholesale produce to Illinois Trading. Illinois Trading ordered,
and VLM Food delivered, frozen potatoes to Illinois Trading.
Illinois Trading failed to make payment and VLM Food asserted a
PACA claim. Illinois Trading asserted that VLM was not
operating in the United States and, therefore, was not entitled to
relief under the Uniform Commercial Code and PACA, but
instead, the UN Convention on Contracts for the International Sale
of Goods was applicable. The Court disagreed and held that
VLM’s PACA license which stated in had an office in New Jersey
was sufficient evidence that VLM had a place of business in the
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United States. VLM Food Trading Int'l, Inc. v. Ill. Trading Co.,
2013 U.S. Dist. LEXIS 29791 (N.D. Ill. Mar. 5, 2013).
ii. Legal fees and interest can be asserted under a PACA
claim if contractually agreed to. VLM Food Trading sold
wholesale produce to Illinois Trading. Illinois Trading ordered,
and VLM Food delivered, frozen potatoes to Illinois Trading.
Illinois Trading failed to make payment and VLM Food asserted a
PACA claim. Illinois Trading asserted that the master contract did
not provide for legal fees and interest and, therefore, the PACA
claim should not include fees and interest terms provided for in
later invoice. The Court disagreed and held that the parties
contemplated the payment of legal fees and interest and, therefore,
the PACA claim should be expanded to include these expenses.
VLM Food Trading Int'l, Inc. v. Ill. Trading Co., 2013 U.S. Dist.
LEXIS 29791 (N.D. Ill. Mar. 5, 2013).
iii. Special counsel not entitled to be paid from PACA trust
funds. Delta Produce was a broker of produce. Delta failed to
make payment for produce and the claimants asserted their various
PACA claims in a subsequent bankruptcy of Delta Produce. In
conjunction with the bankruptcy, a special counsel was appointed
to administer the PACA claims. The special counsel made a claim
against the PACA funds for its legal fees arguing that the fees were
incurred in connection with the various transactions; the same
standard that other courts have allowed the legal fees of claimants
counsel to be paid from PACA funds. On appeal, the District
Court disagreed and held that special counsel, acting as a trustee
for a PACA trust, is not counsel for the claimants and, therefore, is
not entitled to its legal fees paid out of the PACA trust. The fees
would only be awarded if all trust beneficiaries are paid in full.
Kingdom Fresh Produce v. Bexar Cnty (In re Delta Produce, LP),
2013 WL 5441971 (W.D. Tex. Sept. 27, 2013)
iv. Sufficient inconsistencies of evidence exists that the
produce was not received by a commission merchant, dealer or
broker to deny summary judgment as to a PACA trust claim.
The producer sold blueberries and raspberries to the buyer on
credit. A material issue of fact existed as to whether all of the
produce alleged by the producer was actually received by the buyer
to allow for a PACA trust claim. The Court denied summary
judgment and allowed for additional discovery to determine
whether documentation existed as to the produce actually
delivered. Or. Potato Co. v. Seven Stars Fruit Co., LLC, 2013
U.S. Dist. LEXIS 8601 (W.D. Wash. Jan. 18, 2013).
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v. Sufficient inconsistencies of evidence exists that the
purchaser paid for the produce to deny summary judgment as
to a PACA trust claim. The producer sold blueberries and
raspberries to the buyer on credit. A material issue of fact existed
as to whether all of the produce alleged by the producer was
actually paid for by the buyer to allow for a PACA trust claim.
The Court denied summary judgment and allowed for additional
discovery to determine whether documentation existed as to what
payments were actually made and applied against the delivered
produce. Or. Potato Co. v. Seven Stars Fruit Co., LLC, 2013 U.S.
Dist. LEXIS 8601 (W.D. Wash. Jan. 18, 2013).
vi. Supplier’s custom of sending invoices to buyer more
than 30 days after the shipment did not constitute a waiver of
the supplier’s PACA rights. Pacific Tomato sold produce to the
buyer TDI. The seller invoiced the buyer more than 30 days after
the shipment. The buyer argued that the seller waived its PACA
trust rights because it agreed to be paid outside the 30 day window.
The Court disagreed and held that although the seller issued its
invoices outside the 30 day window, the parties not agree to this
practice and, therefore, the seller did not waive its PACA rights.
Pac. Tomato Growers, Ltd. v. Tanimura Distrib., Inc., 2012 U.S.
Dist. LEXIS 171189 (C.D. Cal. Nov. 13, 2012).
6. Buyers in the Ordinary Course of Business.
a. Buyer purchased coal free of security interest because coal
purchased in the ordinary course of business. Constellation Energy
bought coal on contract from Black Diamond Mining. CIT Group had a
security interest in the coal inventory of Black Diamond as collateral for a
loan. Back Diamond filed bankruptcy and the secured creditor asserted a
security interest in the coal purchase by the buyer. The general rule under
UCC § 9-320 is that a security interest continues in the collateral and is
effective as to any purchasers of the collateral. The buyer relied on an
exception under UCC § 9-320; that a buyer in the ordinary course takes
free of any security interest created by the seller even if the buyer knows
of the existence of the security interest and the security interest is
perfected. The secured creditor argued that the buyer lacked good faith
because the buyer was aware of the secured creditor’s inventory lien, but
more importantly, that the buyer was aware that the sale violated the term
of the loan agreement and intentionally structured the sale to circumvent
the secured creditor’s security interest. The Court ruled that the buyer had
no knowledge of the terms of the loan agreement, nor was there any
intention to circumvent the security interest. In addition, the Court held
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that the security interest was extinguished because the secured creditor
implicitly authorized the sale free of the security interest because of its
knowledge of the relationship. CIT Group/Commercial Servs., Inc. v.
Constellation Energy Commodities Group, 2012 U.S. Dist. LEXIS 146673
(E.D. Ky. 2012).
7. Miscellaneous.
a. Jurisdiction. A United States business address in a PACA
license is sufficient evidence that the PACA dealer has a place of
business in the United States for purposes of jurisdiction under the
Uniform Commercial Code and PACA. VLM Food Trading, a
Canadian business operating in the United States, sold wholesale produce
to Illinois Trading. Illinois Trading ordered, and VLM Food delivered,
frozen potatoes to Illinois Trading. Illinois Trading failed to make
payment and VLM Food asserted a PACA claim. Illinois Trading asserted
that VLM was not operating in the United States and, therefore, was not
entitled to relief under the Uniform Commercial Code and PACA, but
instead, the UN Convention on Contracts for the International Sale of
Goods was applicable. The Court disagreed and held that VLM’s PACA
license which stated in had an office in New Jersey was sufficient
evidence that VLM had a place of business in the United States. VLM
Food Trading Int'l, Inc. v. Ill. Trading Co., 2013 U.S. Dist. LEXIS 29791
(N.D. Ill. Mar. 5, 2013).
D. Enforcement.
1. Defenses.
i. The failure of account buyer to properly notice an account
debtor before payments are made to the debtor discharges the
obligation of the account debtor. Mossy Creek was indebted to
Southwest Iowa Cattle Feeders on five promissory notes. Southwest Iowa
Feeders assigned the notes to Rolling Hills Bank. The secured creditor
failed to give notice of the assignment to the account debtor Mossy Creek.
Mossy Creek continued to make payments to Southwest Iowa Feeders.
The secured creditor made demand for the debt. The account debtor
Mossy Creek argued that the debt was discharge because of the payments
made to the debtor and the secured creditor’s failure to give notice under
UCC § 9-406(1). The Court agreed and held that the debt was discharged
prior to the notice given to Mossy Creek. Rolling Hills Bank & Trust v.
Mossy Creek Farms Ltd. P’ship, 828 N.W.2d 325 (Iowa Ct. App. 2013).
2. Commercially Reasonable Sale.
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i. A conflicting affidavit of borrower as to value of equipment
constitutes a genuine issue of material fact to not justify summary
judgment. The equipment purchaser of two pieces of heavy logging
equipment defaulted and the finance company repossessed and sought to
recover the deficiency. The finance moved for summary judgment. The
borrower submitted an affidavit of its principal that attested to a
conflicting value of the equipment. The Court held that the conflicting
affidavit was enough to deny the motion for summary judgment. Mason
Logging Co. v. GE Capital Corp., 2013 Ga. App. LEXIS 594 (Ga. Ct.
App. July 8, 2013).
E. Liabilities.
No relevant cases since October 2012.
II. ARTICLE 2.
A. General.
No relevant cases since October 2012.
B. Formation.
1. Written confirmation of sale constitutes a contract between
merchants. Brooks Peanut purchased certain peanuts from Great S. Peanut, a
competitor, though a broker. No written contract was signed or acknowledged by
the parties. The broker only faxed a written confirmation of the sale to both
parties. The seller objected to the sale upon realizing the identity of the buyer,
arguing that the sale failed to satisfy the Statute of Frauds under UCC § 2-201.
The Court disagreed and held that the parties were merchants and, therefore,
because the seller did not timely object under UCC § 2-201(2), the parties had a
valid and enforceable contract. Brooks Peanut Co. v. Great S. Peanut, LLC, 2013
Ga. App. LEXIS 618 (Ga. Ct. App. July 11, 2013).
2. Subsequent written agreements with arbitration clause are binding. Sheeder verbally agreed to sell certain corn to Bartlett Grain. Bartlett Grain
subsequently mailed and Sheeder signed a written confirmation of the sale. The
written confirmation included an arbitration clause. Sheeder argued that because
he did not verbally agree to arbitrate, the subsequent written concession was not
enforceable. The Court disagreed and held that under UCC § 2-202 the
subsequent written confirmation and arbitration clause are enforceable as a final
expression of their agreement. Bartlett Grain Co., LP v. Sheeder, 829 N.W.2d 18
(Iowa 2013).
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3. Oral agreement for sale of corn followed by modification by written
agreement containing arbitration clause controlled. Both parties signed the
confirmations of the oral agreements for the sale of corn. The confirmations
contained an arbitration clause. The Court held that the modification of the oral
agreements by later signed writings was not unconscionable and the arbitration
clause was valid. Bartlett Grain Co., LP v. Sheeder, 829 N.W.2d 18 (Iowa 2013).
C. Construction.
1. Arbitration clause is not unconscionable. Sheeder verbally agreed to
sell certain corn to Bartlett Grain. Bartlett Grain subsequently mailed and
Sheeder signed a written confirmation of the sale. The written confirmation
included an arbitration clause. Sheeder argued that the arbitration clause was
unconscionable because the terms were unfair. The Court disagreed and held that
under UCC § 2-302 the buyer was aware of or should have been aware of the
terms and was free to negotiate the sale of corn to other buyers. Bartlett Grain
Co., LP v. Sheeder, 829 N.W.2d 18 (Iowa 2013).
D. Title.
1. Reservation of Title/Reservation of Security Interest. The delivery of
corn under an agreement which provides that title will not transfer under the
corn is processed by the buyer (and in which the corn is not segregated by
the buyer) is only a reservation of a security interest by the seller. Perdue
BioEnergy sold corn to the debtor Clean Burn Fuels; an ethanol plant. The
agreement provided that, even after the corn had been delivered to the debtor, the
seller would retain title to the corn until the corn crossed a weighbelt for
processing at the debtor’s plant. The Chapter 7 trustee objected. The trustee
argued that, although the contract allowed for title to transfer post-delivery, the
act of delivery and the failure to identify the seller’s corn while in the possession
of the debtor caused title to pass and left the seller with only a reservation of a
security interest in the corn under UCC § 2-501 and § 2-401(1). The Court agreed
and held that the seller was only entitled to a reservation of a security interest
under UCC § 2-401(1) and because the seller failed to perfect its security interest
it failed to take priority to that of the bankruptcy trustee under its judgment
creditor avoidance powers. Clean Burn Fuels, LLC v. Perdue BioEnergy, LLC (In
re Clean Burn Fuels, LLC), 492 B.R. 445, 2013 Bankr. LEXIS 2009 (Bankr.
M.D.N.C. 2013).
E. Performance.
No relevant cases since October 2012.
F. Breach.
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No relevant cases since October 2012.
G. Remedies.
No relevant cases since October 2012.
H. Miscellaneous.
1. International Sale of Goods Jurisdiction. A United States business
address in a PACA license is sufficient evidence that the PACA dealer has a
place of business in the United States for purposes of jurisdiction under the
Uniform Commercial Code and PACA. VLM Food Trading, a Canadian
business operating in the United States, sold wholesale produce to Illinois
Trading. Illinois Trading ordered, and VLM Food delivered, frozen potatoes to
Illinois Trading. Illinois Trading failed to make payment and VLM Food asserted
a PACA claim. Illinois Trading asserted that VLM was not operating in the
United States and, therefore, was not entitled to relief under the Uniform
Commercial Code and PACA, but instead, the UN Convention on Contracts for
the International Sale of Goods was applicable. The Court disagreed and held that
VLM’s PACA license which stated in had an office in New Jersey was sufficient
evidence that VLM had a place of business in the United States. VLM Food
Trading Int'l, Inc. v. Ill. Trading Co., 2013 U.S. Dist. LEXIS 29791 (N.D. Ill.
Mar. 5, 2013).
III. BANKRUPTCY.
A. General.
No relevant cases since October 2012.
B. Case Administration.
1. The debtor failed to show substantial possibility of success to stay
foreclosure pending an appeal. The debtor filed a Chapter 12 bankruptcy to
stay a scheduled foreclosure sale. It was the debtor’s second Chapter 12 filing.
The first Chapter 12 was dismissed because the debtor was unable to demonstrate
that her plan was feasible. The second bankruptcy was also dismissed because the
debtor, again, failed to demonstrate her second bankruptcy was feasible and the
debtor appealed. The debtor motioned the Court to stay the foreclosure pending
the appeal. The Court denied the motion because the debtor failed to establish a
substantial possibility of success on the merits of the appeal. The debtor failed to
demonstrate that there were any changes in circumstances to find her plan was
feasible. Ellis v. NBT Bank, N.A., 2013 WL 140405 (N.D.N.Y Jan. 11, 2013).
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2. Automatic stay extends to post-confirmation property vested with a
debtor under his Chapter 12 plan. The debtor filed and confirmed a Chapter 12
plan that vested the property of the bankruptcy estate with the debtor at plan
confirmation. The Chapter 12 plan provided that the debtor would receive his
discharge upon completion of the payments under the plan. Post-confirmation,
but before discharge, a creditor commenced a legal action against the debtor
without obtaining stay relief. The creditor argued that the property was no longer
property of the estate and, therefore, no stay was in effect. The Court disagreed
and held that even though the property vested with the debtor in his Chapter 12
plan, under Code § 362(c)(5), the creditor was still stayed from taking legal action
against property of the debtor. In re Blankenship, 2013 Bankr. LEXIS 1767
(Bankr. S.D. Ohio April 29, 2013).
C. Bankruptcy Estate.
1. Property of the Bankruptcy Estate.
a. The delivery of corn under an agreement which provides that
title will not transfer under the corn is processed by the buyer (and in
which the corn is not segregated by the buyer) is property of the
debtor (and therefore, property of the estate). Perdue BioEnergy sold
corn to the debtor Clean Burn Fuels; an ethanol plant. The agreement
provided that, even after the corn had been delivered to the debtor, the
seller would retain title to the corn until the corn crossed a weighbelt for
processing at the debtor’s plant. The Chapter 7 trustee objected. The
trustee argued that, although the contract allowed for title to transfer post-
delivery, the act of delivery and the failure to identify the seller’s corn
while in the possession of the debtor caused title to pass and left the seller
with only a reservation of a security interest in the corn under UCC § 2-
501 and § 2-401(1). The Court agreed and held that the seller was only
entitled to a reservation of a security interest under UCC § 2-401(1) and
because the seller failed to perfect its security interest it failed to take
priority to that of the bankruptcy trustee under its judgment creditor
avoidance powers. Clean Burn Fuels, LLC v. Perdue BioEnergy, LLC (In
re Clean Burn Fuels, LLC), 492 B.R. 445, 2013 Bankr. LEXIS 2009
(Bankr. M.D.N.C. 2013).
b. Pre-petition transfers made for adequate consideration are not
property of the Estate. Debtor transferred funds from sale of grain, the
proceeds of which were deposited in non-debtor entities’ accounts
controlled by the debtor which subsequently transferred the funds to
another related limited liability company (LLC). The LLC transferred the
funds to pay the personal obligations of the debtor. The transferee argued
that the funds were not property of the estate at the time the bankruptcy
petition was filed because the non-debtor entities and the LLC were
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distinct legal entities and had dominion and control of the funds and,
therefore, neither Code § 549 nor § 550 are applicable. The Court agreed
with the transferee. The transferred funds were not property of the estate
because the trustee was unable to show that the pre-petition transfers to the
non-debtor entities were made without adequate consideration to the
debtor. Covey v. Peoria Speakeasy, Inc. (In re Duckworth), 2013 Bankr.
LEXIS 1396 (Bankr. C.D. Ill. Apr. 5, 2013).
D. Chapter 7.
No relevant cases since October 2012.
E. Chapter 11.
No relevant cases since October 2012.
F. Chapter 12.
1. Eligibility.
a. Debtor who owns farm equipment and farms 31 acres is
engaged in farming operation for purposes of eligibility under
Chapter 12. The debtor was a partner in a farming operation that
dissolved in 2010. Although the debtor retained some farm assets, the
debtor agreed to transfer substantially all of the farm assets to the other
partner. The debtor filed a Chapter 12 bankruptcy and the IRS argued that
the debtor was not eligible for Chapter 12 relief because the debtor was
not engaged in a farming operation. The Court disagreed and held that the
debtor because the retained some farm equipment and continued to farmed
31 acres, the debtor was engaged in a farming operation. In re Hemann,
2013 Bankr. LEXIS 1385 (Bankr. N.D. Iowa Apr. 3, 2013).
b. Debt incurred through a dissolved partnership may be
considering for purposes of the 50% debt eligibility requirement. The
debtor was a partner in a farming operation that dissolved in 2010.
Although the debtor retained some farm assets, the debtor agreed to
transfer substantially all of the farm assets to the other partner. The debtor
filed a Chapter 12 bankruptcy and the IRS argued that the debtor was not
eligible for Chapter 12 relief because the less than 50% of the debtor’s
debt was related to the debtor’s current farming operation being
reorganized. The Court disagreed and held that the debtor could include
the debt related to the earlier farming partnership because 101(18)(A) does
not limited the debt to the debt related to the farming operation to be
reorganized and the debt had “some connection” to the debtor’s farming
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operation. In re Hemann, 2013 Bankr. LEXIS 1385 (Bankr. N.D. Iowa
Apr. 3, 2013).
c. Income incurred through a dissolved partnership may be
considering for purposes of the 50% income eligibility requirement. The debtor was a partner in a farming operation that dissolved in 2010.
Although the debtor retained some farm assets, the debtor agreed to
transfer substantially all of the farm assets to the other partner. The debtor
filed a Chapter 12 bankruptcy and the IRS argued that the debtor was not
eligible for Chapter 12 relief because the less than 50% of the debtor’s
income was related to the debtor’s current farming operation being
reorganized. The Court disagreed and held that the debtor could include
the income related to the earlier farming partnership because 101(18)(A)
does not limited the income to the income related to the farming operation
to be reorganized and the income had “some connection” to the debtor’s
farming operation. In re Hemann, 2013 Bankr. LEXIS 1385 (Bankr. N.D.
Iowa Apr. 3, 2013).
d. Tree farming is a farming operation only if there is an
integrated operation. Debtor owned real estate and planted tree
seedlings on the property for later harvest. The Chapter 12 trustee
objected to confirmation of a debtor’s plan on the basis that, under In re
Miller, 122 B.R. 360 (Bankr. N.D. Iowa 1990), tree farming was not a
farming operation under 11 U.S.C.S. § 101(21). The debtor argued that,
under the expansive definition of a farming operation under In re Sugar
Pine Ranch, 100 B.R. 28 (Bankr. D. Or. 1989), tree farming is a farming
operation. The Court found that, unlike In re Sugar Pine Ranch, the
debtor did not have an integrated farming operation because there were no
tree management plan or ongoing income from the sale of trees and,
therefore, the debtor was not eligible for Chapter 12 relief. In re
McMahon Family L.P., 2013 Bankr. LEXIS 2771, 58 Bankr. Ct. Dec. 51
(Bankr. E.D. Wis. July 10, 2013).
2. Dismissal/Conversion.
a. Several bankruptcy filings and misrepresentation of facts is
cause to dismiss a Chapter 12. The debtor filed three Chapter 12
bankruptcies in 29 months, misrepresented of the facts for the debtor’s
scheduled debt, filed the third bankruptcy to avoid state court litigation,
and the debtors failed to comply with the Court’s orders in aid of
discovery for a motion to value collateral; all of which constitute a bar
faith filing and cause to dismiss the bankruptcy under Code § 1208(c). In
re Cabral, 2013 Bankr. LEXIS 2382 (Bankr. E.D. Cal. June 3, 2013).
3. Plan.
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a. Administration Claims.
i. Priority Stripping of Tax Claims. The claims of the IRS
and Iowa Department of Revenue were subject to the priority-
stripping effect of Code § 1222(a)(2)(A). The debtor was a
partner in a farming operation that dissolved in 2010. Although
the debtor retained some farm assets, the debtor agreed to transfer
substantially all of the farm assets to the other partner. The debtor
filed a Chapter 12 bankruptcy and the IRS argued that the debtor
was not eligible for the benefits of Code § 1222(a)(2)(A) because
the Supreme Court decision in Hall applied to the pre-petition
transfer of farm assets by the debtor through the dissolution of the
farming partnership. The Court disagreed and held that Hall was
limited to the sale of post-petition assets and, therefore, the debtor
was entitled to treat the resulting tax liability from the transfer of
the partnership assets as a unsecured claim. In re Hemann, 2013
Bankr. LEXIS 1385 (Bankr. N.D. Iowa Apr. 3, 2013).
ii. Debtor Can Not Use Estate Assets to Pay Post-Petition
Capital Gains Taxes. The debtor proposed to use the equity from
the sale of 48 acres to pay post-petition capital gains incurred by
the debtor from the earlier sale of equipment. The objecting
creditors and Chapter 12 trustee argued that, under the U.S.
Supreme Court decision in Hall, estate assets cannot be used to pay
post-petition capital gains taxes. The debtor argued that Hall was
not applicable; arguing that Hall only limited the debtor from
categorizing capital gains as a general unsecured claim for
purposes of plan confirmation. The Court disagreed and held that
Hall was more expansive than just the treatment of capital gains
taxes and prohibited to use of estate assets to pay post-petition
capital gains taxes because the tax obligations were not tax
obligations of the bankruptcy estate; and instead, are tax
obligations of the individual. Hall held that post-petition taxes are
outside Section 503(b) and, therefore, the taxes are not an allowed
claim that may be treated within a Chapter 12 plan. In re Ferguson,
2013 Bankr. LEXIS 6 (Bankr. C.D. Ill. Jan. 2, 2013).
iii. Proceeds of livestock and crops are not farm assets
“used in a farming operation” and, therefore, the debtor was
not eligible to treat the related tax liability as an unsecured
claim. The debtor raised crops and finished cattle. The debtor
filed a Chapter 12 bankruptcy and argued that the sale of crops,
cattle and the crop insurance proceeds received by the debtor were
farm assets “used in the debtor’s farming operations” and,
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therefore, under Code § 1222(a)(2)(A) the debtor was entitled to
treat the related tax liability as a general unsecured claim. The
Court disagreed and held that, although the proceeds from the sale
of farm products and crop insurance proceeds were farm assets, the
proceeds were not “used in the debtor’s farming operation” and,
therefore, the debtor was not eligible for beneficial treatment under
Code § 1222(a)(2)(A). In re Keith, 2013 Bankr. LEXIS 2802
(Bankr. D. Kan. 2013).
iv. The marginal method (as opposed to the proportional
method) is the appropriate calculation of the Code §
1222(a)(2)(A) claims. The debtor raised crops and finished cattle.
The debtor filed a Chapter 12 bankruptcy and the IRS argued, for
purposes of Code § 1222(a)(2)(A), the Court should apply the
proportional method to calculate the resulting unsecured claim of
the IRS. The Court disagreed and held that the marginal method
adopted by Knudsen and Ficken (and not overturned by the
Supreme Court in Hall) represent the proper calculation. In re
Keith, 2013 Bankr. LEXIS 2802 (Bankr. D. Kan. 2013).
b. Secured Claims.
i. 15 year amortized term loan on cropland at prime plus
2.5% is customary and provides a sufficient risk factor to the
secured creditor. The debtor proposed a 15 year amortization
term loan on cropland at prime plus 2.5%. The secured creditror
objected arguing that it is customary for loans secured by crop land
to mature within five years and that the customary interest rate
would be 6.25% to 8%. The Court disagreed and held in favor of
the debtor on the basis that to preserve the farming operation a 15
year term is required. Prime plus 2.5% provides a sufficient risk
factor under the U.S. Supreme Court decision in Till. In re Wise,
2013 Bankr. LEXIS 2299 (Bankr. D.S.C. June 3, 2013).
ii. 25 year amortized term loan on ranch property is not
reasonable. The debtors owned a 900 acre ranch. The debtors
filed a Chapter 12 bankruptcy and proposed to pay the secured
creditor over 25 years. The secured creditor objected on the basis
that the terms were not reasonable. The Court agreed and held that
a 25 year term was not reasonable under current market conditions
for purposes of Code § 1225(a)(5)(B). In re Standley, 2013 Bankr.
LEXIS 1114 (Bankr. D. Mont. Mar. 22, 2013).
iii. Prime plus 1.25% is customary and provides a
sufficient risk factor to the secured creditor. The debtors owned
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a 900 acre ranch. The debtors filed a Chapter 12 bankruptcy and
proposed to pay the secured creditor over 25 years at prime plus
1.25%. The secured creditor objected on the basis that the interest
rate was not reasonable. The Court disagreed and held that prime
plus 1.25% is reasonable for purposes of Code § 1225(a)(5)(B). In
re Standley, 2013 Bankr. LEXIS 1114 (Bankr. D. Mont. Mar. 22,
2013).
c. Unsecured Claims.
i. Priority Stripping of Tax Claims. The claims of the IRS
and Iowa Department of Revenue were subject to the priority-
stripping effect of Code § 1222(a)(2)(A). The tax claims arose
from the pre-petition dissolution of the debtor’s 50% interest in a
partnership set up for a farming operation. The disposition of
debtor’s farm partnership interest was a farm asset used in the
debtor’s farming operation. The Court held that the tax claims
were subject to priority stripping under Code § 1222(a)(2)(A)
because the tax claim arose from the result of a sale or other
disposition of a farm asset used in the debtor’s farming operation.
The tax claim was therefore treated as an unsecured claim not
entitled to priority under Code § 507. In re Hemann, 2013 Bankr.
LEXIS 1385 (Bankr. N.D. Iowa Apr. 3, 2013).
ii. Treatment of Capital Gains. Postpetition tax liabilities
from the post-confirmation sale of a farm. Debtor’s
postpetition tax liability was not an allowable administrative
expense. The Court found that a postpetition income tax liability
incurred by a debtor, personally, is not an allowable prepetition
claim under § 502 of the Bankruptcy Code. Further, the Court held
that it was settled that a debtor’s postpetition income tax liability is
not allowable as an administrative expense under either Code §
1222(a)(2)(A) or § 503(b)(1)(B). In re Ferguson, 2013 Bankr.
LEXIS 6 (Bankr. C.D. Ill. Jan. 2, 2013).
d. Feasibility.
i. Debtor filed Chapter 12 bankruptcy and proposed a
plan to repay a debt over a 15 year period. The Court
determined the plan must be confirmed if it meets the requirements
of Code § 1225. Additionally, the Court must determine the
feasibility of the plan for the ability of the debtor to make the
payments called for in the plan and to otherwise comply with the
plan. The Court noted that although feasibility is never certain, the
Debtor’s projections supported a finding that the plan was feasible.
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The Court found the extension of time for repayment of the debt
was satisfactory and met the requirements of the Code. Similarly,
the interest rate was sufficient, if not high, to compensate the
creditor. In re Wise, 2013 Bankr. LEXIS 2299 (Bankr. D.S.C.
June 3, 2013).
ii. Tree Farm Operator unable to make proposed plan
payments. Debtor owned real estate and planted tree seedlings on
the property. The tree seedlings had not matured and the debtor
had no income from the sale of trees. The Chapter 12 trustee
objected to confirmation of a debtor’s plan on the basis that the
debtor had no actual or expected income to fund its Chapter 12
plan under Code § 1225(a). The debtor argued that mature trees
were available for harvest; although the debtor was unable to prove
any market or interested buyer for the mature trees. The Court
found that the debtor had not proved that it could make the
proposed payments under the plan as required by Code §
1225(a)(6). In re McMahon Family L.P., 2013 Bankr. LEXIS
2771, 58 Bankr. Ct. Dec. 51 (Bankr. E.D. Wis. July 10, 2013).
4. Post-confirmation.
No relevant cases since October 2012.
G. Chapter 13.
No relevant cases since October 2012.
H. Avoidance Actions.
1. Preferential Transfers.
No relevant cases since October 2012.
2. Fraudulent Transfers.2
a. Heightened pleadings requirements for constructive fraud.
The Trustee sought to avoid as fraudulent transfers payments made by the
debtor to secured creditors of a principal of the debtor on six lines of credit
secured by the debtor’s crops and livestock. The Court held that the
complaint failed to establish the heightened pleadings requirement of
constructive fraud, with the exception of payments made by the debtor for
2 Fraudulent transfers under state law are also avoidable under the Bankruptcy Code (UCC § 544(b)). A discussed
of state fraudulent transfer cases is in Section IV(A) below.
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the benefit of the principle of the debtor on the sixth line of credit. In re
Tanglewood Farms, 2013 Bankr. LEXIS 1443 (Bankr. E.D.N.C. Apr. 8,
2013).
b. The setoff or withholding of payments constitute a “transfer”
for purposes of Code § 548. The debtor was indebted to the creditor for
soybean seeds. The debtor sold soybeans to the creditor at harvest and the
creditor applied a portion of the sale proceeds against the account payable.
The Trustee sought to recover from the creditor the funds applied against
the earlier debt as a constructively fraudulent transfer. The creditor argued
the setoff was not a transfer. The Court disagreed and held that the setoff
constituted a transfer for purposes of Code § 548. Angell v. Montague
Farms, Inc. (In re Tanglewood Farms, Inc.), 2013 Bankr. LEXIS
1543(Bankr. E.D.N.C. Apr. 15, 2013).
c. Good faith defense. Debtor transferred funds from sale of grain,
the proceeds of which were deposited in non-debtor entities’ accounts
controlled by the debtor which subsequently transferred the funds to
another related limited liability company (LLC). The LLC transferred the
funds to pay the personal obligations of the debtor. The trustee argued
that the funds were avoidable as an unauthorized post-petition transfer
under Code § 549 and, therefore, the trustee was entitled to a judgment
against the transferee under Code § 550. The transferee argued that the
transfers were protected under the good faith exception to Code § 549
because the transferee gave adequate value for each transfer, in good faith,
and without knowledge of the bankruptcy and possible avoidance claims.
The Court agreed with the transferee. The transferee gave adequate value
for each transfer, in good faith, and without knowledge of the bankruptcy
and possible avoidance claims. Covey v. Peoria Speakeasy, Inc. (In re
Duckworth), 2013 Bankr. LEXIS 1396 (Bankr. C.D. Ill. Apr. 5, 2013).
3. Lien Avoidance.
No relevant cases since October 2012.
4. Miscellaneous.
a. A Chapter 7 Trustee cannot avoid the transfers made by an
earlier Chapter 11 Debtor-in-Possession. The debtor operated a
granary. The debtor filed a Chapter 11 in 2010 and continued to operate
his business as the debtor-in-possession including making payments to
post-petition creditors. The bankruptcy was converted in 2011 and the
Chapter 7 trustee moved to avoid the transfers made by the debtor-in-
possession. The Court dismissed the action because the Chapter 7 Trustee
is bound by the actions the debtor took while it acted as debtor-in-
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possession, including actions approved by the Court. Angell v. Meherrin
Agric. & Chem. Co. (In re Tanglewood Farms, Inc.), 2013 Bankr. LEXIS
1849 (Bankr. E.D.N.C. May 1, 2013).
IV. STATE LAW.
A. Fraudulent Transfer.
1. Payments made by debtor for the benefit of a related entity of
the debtor are fraudulent transfers. Central Illinois Holding Company
was indebted to Oberlander Electric. The Debtor Central Illinois Energy,
a related entity of the holding company, paid $95,625 to the creditor
Oberlander Electric on the account of the Debtor. An involuntary
bankruptcy was filed and the bankruptcy trustee sought the recovery of the
payments as a fraudulent transfer under Illinois law. The trustee asserted
at summary judgment the general rule that a fraudulent transfer occurs
when a debtor pays the debts of another, when the debtor itself is not
obligated on the debt. Oberlander Electric acknowledged the transfer, but
asserted the two exceptions: (1) if a debtor may receive value in the form
of a third party’s agreement to reimburse the debtor, and (2) if the debtor
benefits indirectly from paying the debt of a related third party. The Court
held that the mere opportunity to receive an economic benefit in the future
from an unsecured promise of future payment did not constitute
reasonably equivalent value. Cox v. Oberlander Elec. Co. (In re Cent. Ill.
Energy Coop.), 2013 Bankr. LEXIS 2844 (Bankr. C.D. Ill. July 16, 2013).
B. Exemptions.
1. Chapter 7 debtor can claim hunting and fishing equipment as
exempt tools of his trade in Colorado even though hunting and fishing
was not his principal occupation. The debtor was employed by a
grocery store, but earned income as a hunting and fishing guide. The
Chapter 7 trustee objected to the debtor claiming his hunting and fishing
equipment as exempt tools of his trade. The Court disagreed and held that
under Colorado law the debtor could claim assets as exempt under the
tools of trade exemption for an occupation that was not his principal
occupation at the time of filing bankruptcy nor did the employment need
to be profitable. In re Sharp, 490 B.R. 592, 2013 Bankr. LEXIS 1059
(Bankr. D. Colo. 2013).
C. Miscellaneous
1. A custom feeding endorsement does not insure against losses
incurred in conventional custom feeding operations. The insured
operated a custom hog feeding operation; feeding and finishing hogs of a
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third party. The insured had a general property insurance policy and, in
addition, obtained a custom feeding endorsement. 535 hogs suffocated to
death in the insured building and the insured tendered a claim on their
policy. The claim was denied. The insured brought a legal action and
argued that the policy and endorsement were ambiguous as to coverage
and, as a result, the claim should be honored under the reasonable
expectations doctrine. The District Court agreed. On appeal, the Eighth
Circuit reversed. The Eighth Circuit held that the there was no factual
evidence that the insured expected the endorsement to provide coverage
for the hogs in their care, custody or control and, therefore, the damages
were outside the scope of both the policy and the custom feeding
endorsement. Boelman v. Grinnell Mut. Reinsurance Co., 826 N.W.2d
494, (Iowa 2013).
2. A custom feeding endorsement does not preempt the care,
custody or control exclusions in a property damage policy. The
insured operated a custom cattle feeding operation in which he fed cattle
owned by others. The insured had a general property insurance policy
and, in addition, obtained a custom feeding endorsement. The insured
tendered a claim because of unusual death losses of the cattle located in
the feed lot. The insurance company denied coverage for the cattle losses,
pointing to an exclusion contained in the policy for damage to property in
the “care, custody, or control” of the feed lot operator and arguing that the
custom care endorsement only provided limited coverage and did not
preempt the policy endorsement. The Federal District Court agreed with
the feedlot operator and held that the loss was covered by the custom
feeding endorsement. The insurance provider appealed and the Eighth
Circuit reversed the District Court. The Eighth Circuit held that the policy
provisions were not inconsistent since the custom feeding endorsement
applied to only the custom farming exclusion contained in the policy.
None of the other policy exclusions was affected by the endorsement.
Grinnell Mutual Reins. Co. v. Schwieger, 685 F.3d 697 (8th Cir. 2012)
Comment Note. Considering the Boelman and Schwieger cases, livestock
and poultry growers should obtain, and lenders should require, a custom
feeding endorsement which specifically addresses the policy exclusion.
Although not addressed in the case, many custom feeding contracts shift
legal liability from one party to another through risk of loss,
indemnification, or other provisions. Some standard liability policies
contain exclusions from coverage which also exclude losses incurred as a
result of these contractual agreements. Contract growers should carefully
review their policies to evaluate these exclusions as well.
GPM 3457114
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