IN RE: MORGAN & SON DAIRY CASE NO. 95-50188

UNITED STATES BANKRUPTCY COURT 

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

IN RE:

MORGAN & SON DAIRY CASE NO. 95-50188

DEBTOR

MEMORANDUM OPINION

This case came on before the court on April 19, 1996, upon notice to all parties in interest, for a hearing on confirmation of the debtor's First Amended Chapter 12 Plan.

On March 13, 1995, when it filed a petition for relief under chapter 12 of the Bankruptcy Code, the debtor, a partnership, operated a dairy farm. The partners are Gerald Morgan and Bettye Morgan, his wife, and James "Randy" Morgan and Christi Morgan, his wife. James Morgan is the son of Gerald and Bettye Morgan. According to the partnership agreement dated May 15, 1992, James "Randy" Morgan is the managing partner. The Morgan family in partnership owned two tracts of land, an 83.80-acre tract on which was located a dairy barn, silo and bunker and a 100.2366-acre tract on which is located a tobacco barn and a combination tobacco barn and feed barn. Both tracts are fenced and are used for raising hay for livestock and for raising other crops, including tobacco.

The farms and farm machinery and equipment of the debtor, the interest of the debtor in livestock and crops, and the income of the debtor from the sale of milk are encumbered by mortgages and security interests held by Farmer's Deposit Bank of Flemingsburg, Kentucky to secure indebtedness evidenced by various notes. The balance due on the indebtedness when bankruptcy ensued was approximately $347,154.22, plus interest and attorney fees. The individual partners as well as the partnership are obligated on this indebtedness.

The debtor did not submit with the petition a Statement of Financial Affairs for a Debtor Engaged in Business (questions 15-21) so the addresses of the individual partners are not provided. However, the partners apparently do not reside on the farms owned by the partnership. The partners and the partnership all appear to reside on Route 3, Flemingsburg, Kentucky.

None of the partners appeared at the initial 341 meeting held on March 21, 1995; they did appear at a continued meeting held on May 12, 1995.

On May 15, 1995 the debtor filed a plan signed by three of the partners which proposed restructuring of the indebtedness of the partnership by stripping down the allowed amount of the secured claim of Farmers Deposit Bank to the value of the two farms and the farm machinery and equipment of the partnership and to the value of the debtor's interest in livestock. Insofar as the court can determine the plan made no provision for payment of any unsecured deficiency claim of the bank although the plan proposed to pay all other unsecured debts aggregating $37,400 in full.

On or about May 22, 1995 the debtor terminated its dairy operation on the 83-acre farm and moved the operation to a farm leased from Ernest Barker. The dairy cows have been moved to the leased farm. See Dep. of James Randall Morgan, July 17, 1995, pgs. 89-96. The lease of the dairy facility from Mr. Barker and the removal of the dairy herd to Mr. Barker's farm occurred without court approval. The ostensible reason for the move was the fact the debtor could not afford to purchase fertilizer for the planting of a corn crop to produce feed for the cattle. Id.

On or about March 7, 1994, prior to bankruptcy, the debtor purchased 19 milk cows from Mr. Barker and gave him a security interest in the cows to secure payment of the purchase price. According to the schedules to the petition the debtor owes Mr. Barker $28,000 for these cows. Apparently these cows are among the 56 cows the debtor has moved to the farm leased from Mr. Barker. The details of the arrangements between the debtor and Mr. Barker are not discernable from the record.

On July 20, 1995 the court conducted a hearing on confirmation of the debtor's plan and a final hearing on the motion of Farmers Deposit Bank for relief from stay. The court declined to confirm the plan proposed by the debtor. The court sustained the motion of the bank insofar as it related to the 83-acre tract. This tract was subsequently sold and the proceeds of sale ($75,000), after deduction of expenses, were applied to reduce the indebtedness of the debtor to the bank by approximately $69,000. The debtor was also directed to grant the bank a security interest in the 1995 tobacco crop being grown on the debtor's farm to compensate for the failure of the debtor to remit proceeds of sale of milk to the bank subsequent to bankruptcy. This has resulted in payment of an additional $30,000 toward reduction of the indebtedness to the bank.

Following the evidentiary hearing held on July 20, 1995 the court entered an order fixing the value of the debtor's 83-acre tract at $75,000 and the value of the 100-acre tract at $100,000, based on the testimony and an appraisal report submitted by Craig A. Stanfield, an appraiser with the Bill Kachler Real Estate and Appraisal Service of Mays Lick, Kentucky, a witness for Farmers Deposit Bank.

This order directed the debtor to file an amended plan taking into account the sale of the 83-acre farm and providing for payment of the unsecured deficiency claim of Farmers Deposit Bank remaining after the strip-down of the bank's lien to the value of the collateral securing the indebtedness to the bank.

On March 1, 1996 the debtor filed a First Amended Plan (dated February 29, 1996) which proposed to treat the claim of Farmers Deposit Bank as an allowed secured claim to the extent of $150,510 ($87,500 secured by the 100-acre farm + $30,835 secured by cattle + $32,175 secured by farm equipment and machinery = $150,510). The plan proposes to pay the balance of the bank's claim, which the debtor calculates as approximately $85,000, as an unsecured claim the extent of .15 cents on the dollar, the amount to be paid on other unsecured claims. This plan is likewise signed by only three of the general partners. For some reason general partner Christi Morgan has not signed either of the plans.

The court conducted a hearing on April 19, 1996 for the purpose of considering confirmation of the debtor's First Amended Plan. On the same date the court considered the motions of Ernest Barker and Farmers Deposit Bank to dismiss the case.

The First Amended Plan does not comport with the court's order of August 9, 1995 fixing the value of the 100-acre farm at $100,000. Prior to the hearing on confirmation of the plan counsel for the debtor filed with the clerk an appraisal report by James Doran valuing the 100-acre farm at $87,500, the figure used in the debtor's plan. The appraisal is dated February 15, 1996 and purports to value the property as of February 3, 1996. This appraisal was performed several months prior to the hearing on April 19, 1996. Mr. Doran was not offered as a witness at the hearing on April 19, 1996. The filing of this appraisal report with the clerk of the court rather than as evidence at a hearing does not have the effect of making the report evidence that should be considered by the court. Counsel for the bank and the court have not had an opportunity to examine Mr. Doran concerning his qualifications or his report. Accordingly, his appraisal report is disregarded by the court in reaching its conclusions in this matter. The prior ruling of the court fixing the value of the 100-acre tract at $100,000 stands.

The debtor has not filed monthly operating reports in a timely manner as directed by the order of the court entered on February 15, 1995 at the outset of this case. The court has considered the reports for March and April 1995, filed on May 23, 1995, the reports for June, July, August and September 1995, filed on March 25, 1996, and the reports for October, November, December 1995 and January 1996, all filed on April 19, 1996, and the reports for February and March 1996, filed on April 22, 1996. There is no report for the month of May 1995. These reports show rather conclusively that the debtor is unable to make any debt service payments from the income from its dairy operation or from miscellaneous sale of cattle or other miscellaneous income.

Counsel for the debtor argues vociferously that the debtor will be able to make the debt service payments proposed by the First Amended Plan, approximately $32,000 annually from income from tobacco. The problem is the debtor's financial reports for November and December 1995 and January and February 1996 (the tobacco sale season) show only $296.31 received from Duke Warehouse. We do know that Farmers Deposit Bank received $30,333.12 from the sale of the 1995 tobacco crop raised on the debtor's farm. We are not provided evidence that the debtor had substantial income from tobacco from any other source. This income is not sufficient to service the debt proposed by the plan when the secured debt to Farmers Deposit Bank is increased by $12,500 as required by the finding of the court that the 100-acre farm should be valued at $100,000.

Moreover, it makes no sense to compromise the unsecured portion of the indebtedness to Farmers Deposit Bank and the claims of other unsecured creditors to .15 cents on the dollar when all the general partners, the Morgans, will remain individually liable for the full amount of that debt. Counsel for the debtor makes much of the fact that payment of 90% of the principal and interest of the loans made by the bank to the partnership is guaranteed by the Farmers Home Administration. However, if the FHA is required to pay these loans, it will succeed to the right of the bank to collect from the individual partners any deficiency balance due on the loans.

CONCLUSIONS OF LAW:

The Bankruptcy Code permits a partnership in which more than 50 percent of the equity is held by one family, or by one family and the relatives of the member of such family, to seek relief under chapter 12 of the Bankruptcy Code. 11 U.S.C. 101(18)(B), 101(19), 109(f). However, under the Bankruptcy Code a partnership is recognized as an entity separate and apart from the individual partners. In this instance the "debtor" is the partnership and not the Morgans individually. 11 U.S.C. 101(13), 101(41). Upon completion of the plan in this case, assuming the plan were confirmable, it is the "debtor," the partnership, that would receive a discharge from the balance of the unsecured indebtedness owed by the partnership. The partners, individually, the Morgans, would remain fully responsible for the balance due on that indebtedness. 11 U.S.C. 524(e). This case and this plan does nothing to relieve the Morgans of their individual responsibility for the indebtedness to the bank, except to the extent that such indebtedness may be reduced by liquidation of the assets of the partnership. The only partnership plan that would substantially benefit the Morgans is one that proposes payment of partnership debts in full. On the facts of this case such a plan is not feasible.

Accordingly, aside from the fact the plan is not confirmable in its present form and is not feasible, the court is persuaded that it is in the best interest of all the parties, including the Morgans, that this case be dismissed.

Dated:

By the court -

 

_____________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

Richard J. Getty, Esq.

Jerry D. Truitt, Esq.

Mike Baker, Esq.

John Ames, Esq.

U.S. Trustee

Debtors

 

 

 

 

f:\opinions\1996\dairy

UNITED STATES BANKRUPTCY COURT

EASTERN DISTRICT OF KENTUCKY

LEXINGTON

 

 

IN RE:

 

MORGAN & SON DAIRY CASE NO. 95-50188

 

DEBTOR

 

 

 

ORDER OF DISMISSAL

 

 

In conformity with the memorandum opinion of the court this day entered, IT IS ORDERED that confirmation of the debtor's First Amended Chapter 12 Plan is denied and that this case be and the same is hereby dismissed.

The court retains jurisdiction for the purpose of adjudicating pending adversary proceedings related to this case.

Dated:

By the court -

 

________________________________

JOE LEE, CHIEF JUDGE

 

Copies to:

 

Richard J. Getty, Esq.

Jerry D. Truitt, Esq.

Mike Baker, Esq.

John Ames, Esq.

U.S. Trustee

Debtors