Opinion
Bankruptcy No. 00-31676, 00-31677, 00-31679, Adv No. 01-7004, 01-7005, 01-7006 Chapter 11.
January 17, 2001.
MEMORANDUM OPINION AND ORDER
By identical complaints filed in each of the above captioned cases on January 17, 2001, the named Dullea entities, as debtors in possession. seek to avoid three prepetition conveyances of real property by quit-claim deed to Ideal Ag Corporation ("Ideal Ag") on the grounds that the conveyances in question constituted preferences, or alternatively, fraudulent transfers prohibited by the Bankruptcy Code.See II U.S C. §§ 547, 548. The trial of this matter was conducted on May 30, 2001 The Court's findings of fact and conclusions of law are as follows
Although the original complaints also sought to avoid certain transfers of farm machinery and equipment, those counts have been voluntarily dismissed. The only remaining issue is the transfer of the Dullea entities' farm land. of the four original plaintiff entities, Dullea Company did not own any of the land at issue and is no longer a party to this adversary proceeding. The Dullea entities that remain as parties in this adversary proceeding are: (I) Dullea Land Company, (2) DD CD Farms, and (3) DD CD Family, LLP.
I. FINDINGS OF FACT A. The Parties
For many years, the Dullea family, through a number of business entities, ran a large farming operation with land in both Minnesota and North Dakota. Specifically, the Dullea entities which prosecuted the instant adversary proceeding were Dullea Land Company, DD CD Farms, and DD CD Family, LLP. Each of the foregoing entities was the owner of certain farm land that was transferred to Ideal Ag by several quit-claim deeds in lieu of foreclosure recorded on November 9, 2000. The present adversary proceeding constitutes an attempt by these entities to recover the transferred land. Ideal Ag is the primary lender for all of the Dullea entities.
B. The Loan Agreement
On October 4, 1999, the Duilca entities entered a master loan agreement with Ideal Ag. Pursuant to that agreement, the Dullea entities executed three promissory notes in favor of Ideal Ag which were secured by three mortgages covering the real estate owned by Dullea Land Company, DD CD Farms, and DD CD Family, LLP. At the time they were executed, the principal balance of all three notes combined equaled $7,981,627.80. The notes were subject to an annual variable interest rate set at two percent above the prime rate, and quarterly payments of accrued interest were due on the following dates: December 1, 1999, March 1, 2000, and June 1, 2000. The notes were set to mature on September 1, 2000, and full payment of the principal and any accrued interest was to take place on that date.
All of the Dullea entities were guarantors of the three promissory notes. Furthermore, the master loan agreement provided the following:
16 CROSS DEFAULT AND CROSS COLLATERALIZATION. A default under any of the Notes, Guarantees, or under any of the terms and conditions of this agreement or any other Loan Document will constitute a default under all of the loans between the parties, such that Lender may, at its discretion, declare the entire outstanding balance of all loans between the parties to be immediately due and payable. Further, all of the security for the Notes are cross collateralized to the extent that Lender may exercise any or all remedies with respect to its security, in any order that Lender desires with respect to its remedies.
Plaintiffs Exhibit #6, Tab 1, p 13 Thus, the assets of all the Dullea entities stood as collateral for each of the three promissory notes, and any default by any of the Dullea entities would enable Ideal Ag to pursue its remedies against any of the collateral pledged as security by any of the Dullea entities.
C. The Debtors' Performance
The Dullea entities experienced financial difficulties which caused them to default on the payments due under the master loan agreement with Ideal Ag, and Ideal Ag was poised to pursue its remedies against the collateral that the Dullea entities had pledged as security. However, the parties, each represented by counsel, agreed to enter mediation, and a settlement was reached on August 7, 2000, whereby Ideal Ag restructured the terms for payment of the promissory notes and extended the maturity dates. In exchange, the Dullea entities executed three quit-claim deeds in lieu of foreclosure in favor of Ideal Ag. The settlement agreement called for a payment to ideal Ag in the amount of $2,750,000.00 on November I, 2000. A second payment in an amount equal to the full outstanding balance on all three notes was to be paid on December 15, 2000. If either of the required payments was not made, the parties agreed that Ideal Ag could record the quit-claim deeds and reduce the outstanding balance of the promissory notes by "80% of the appraised value of the deeded land" based upon the May 12, 2000, appraisals performed by Herman Natwick, an appraiser employed with Arneson Appraisals.
In late October 2000, the Dullea entities negotiated an extension for the first payment due under the settlement agreement. In exchange for a payment of $100,000.00 on November 1, 2000, Ideal Ag agreed to accept the $2,750,000.00 payment on November 13, 2000. Although Ideal Ag received a check for $100,000.00 on November 1, 2000, a stop payment order was put on the check, and Ideal Ag received no funds. As a result, Ideal Ag declared a default under the terms of the settlement agreement and recorded the quit-claim deeds on November 9, 2000. The Dullea entities subsequently filed chapter II bankruptcy petitions on November 13, 2000
D. The Real Estate Deeded to Ideal Ag I. The Land in Minnesota
Dullea Land Company was a holding company for the land farmed by the Dullea entities in Minnesota. All of this land was subject to a quit-claim deed executed in favor of Ideal Ag which was recorded on November 9, 2000 At trial, various evidence was submitted as to the fair market value of the Minnesota land. The Dullea Land Company's bankruptcy schedules disclosed that the subject real estate was worth $4,500,000.00. This figure is supported by a 1998 appraisal performed by Brent Qualey, a well-known farm real estate appraiser who testified at trial and has practiced in this geographic area for over twenty years. The original Qualey appraisal was dated in early 1998 but was updated as of December 13, 1999. According to the update, the value of the subject real estate had not changed from $4,500,000.00, and this figure included the value of all buildings on the property. Furthermore, Qualey testified that as of the date of trial, the subject property was still worth no more than $4,500,000.00. Upon recording the quit-claim deed regarding the subject Minnesota farm land, Ideal Ag reduced the total amount of the outstanding obligation on the promissory notes by $4,503,200.00.
In January 2001, Ideal Ag listed the Minnesota farm real estate for sale, and the real estate brokers/agents fur the listing are John Botsford and Brent Qualey. Like Qualey, Botsford has over twenty years experience as a farm real estate appraiser, is familiar with the land in this geographic area, and was called to testify at trial. He testified that the listing price for the subject land was $4,600,000.00. However, since the property has been on the market, only one offer has been made on it That offer was in the amount of $3,800,000.00 and has since been rejected. Botsford testified that although it may take more time to realize a higher sale price for the land, he felt the asking price was nevertheless too high
On May 12, 2000, Herman Natwick, an appraiser employed with Arneson Appraisals, valued the subject Minnesota real estate at $4,945,000.00 — excluding the value of the buildings located on the property. Factoring in an additional $684,000.00 for the value of the buildings, Natwick determined that the total value of the subject real estate was $5,629,000.00. At trial, Natwick testified that the value of the subject real estate remained equal to the foregoing figure. However, Natwick's credibility was impeached in several important respects. Although Natwick's valuation was based on comparable sales, he failed to take into account several recent sales reflecting lower land values, in addition, two of the comparable sales used in Natwick's appraisal were not appropriate in that they took place too long ago to have any current significance. One sale in particular was a contract for deed transaction entered in 1991 which had recently been completed. Such a sale was clearly too remote in time to have any real bearing on current land values. Moreover, Natwick's appraisal does not appear to consider the effect that soil quality has on the value of farm land. Although the crop rating is listed for each comparable sale, there is no mention of soil quality, and this factor can have a substantial effect on the value of farm land Testimony at trial indicated that many of the comparable sales used by Natwick were for farm land with Bearden soil types, and Bearden soils are generally more valuable than the Fargo clay soil types which dominate the Dullea land in Minnesota. Natwick also testified that he has been an appraiser for approximately nine years, that the majority of his time is spent appraising commercial property, and that he performs perhaps ten or twelve farm appraisals a year. Thus, Natwick is less experienced in conducting farm appraisals than Qualey and Botsford, who collectively conduct approximately 250 farm appraisals per year. Moreover, as farm real estate brokers/agents, Qualey and Botsford are more familiar with the current market for farm real estate in this area.
Daniel Dullea, president of' Dullea Land Company, testified as to the valuation appearing in Dullea Land Company's bankruptcy schedules. Although Dullea was well aware of the Natwick appraisal at the time he filled Out the schedules, he based the scheduled value of the subject land on the Qualey appraisal. Thus, at the time of filing, Dullea apparently thought that the Qualey valuation more accurately reflected the fair market value of the land. At trial, Dullea urged the Court to adopt the Natwick valuation, but he did not offer an explanation as to why he now thinks the Natwick appraisal is more accurate. Instead. Dullea suggested that the two appraisals at issue were commissioned for different purposes. The Court views Dullea's self-serving testimony with suspicion. Although there may be different reasons for obtaining an appraisal, a given tract of land has only one fair market value. It is clear to the Court that Dullea now supports the Natwick appraisal only because it suits his present purposes to do so. Accordingly, Dullea's testimony lacks credibility.
Based on the evidence adduced at trial, the Court concludes that the Natwick appraisal overstates the value of the subject farm land. The Court finds that the fair market value of the Minnesota farm land transferred to Ideal Ag by quit-claim deed was $4,500,000.00. This figure comports with the value disclosed by Dullea Land Company's own bankruptcy schedules, the value determined by the Qualey appraisal. and the value suggested by the credible testimony of both Qualey and Botsford.
2. The Land in North Dakota
DD CD Farms and DD CD Family, LLP, both executed quit-claim deeds in favor of Ideal Ag that were recorded on November 9, 2000. The fair market value of the deeded land from DD CD Family, LLP, was disclosed as $282,183.00 on that entity's bankruptcy schedules. Upon recording the quit-claim deed from DD CD Family, LLP, Ideal Ag reduced the outstanding balance on the three promissory notes by $286,400.00. The bankruptcy schedules for DD CD Farms disclosed real estate worth a total of $575,000.00. However, only a portion of this land was deeded to Ideal Ag. Upon recording the deed from DD CD Farms, Ideal Ag reduced the outstanding balance on the three promissory notes by $167,200.00. In sum, the total amount that Ideal Ag credited against the Dullea entities' outstanding debt upon recording the deeds conveying North Dakota land was $453,600.00.
Collectively, the Natwick appraisal valued all of the North Dakota land deeded to Ideal Ag at $567,000.00. However, that land has been listed for sale by Ideal Ag since January 2001. The listing price is $425,000.00. To date, only one offer to purchase the North Dakota land has been made. That offer was for $400,000.00 and has since been rejected. As with the Minnesota land, Botsford and Qualey are the brokers/agents Ideal Ag employed to sell the North Dakota land, and both believe the Natwick appraisal overstates the fair market value of the North Dakota land at issue. For many of the same reasons discussed previously, the Court concludes that the Natwick appraisal placed a value on the subject land that was too high and that the valuation testimony of Botsford and Qualey was more credible than the testimony of Natwick. The Court finds that the $425,000.00 listing price for the North Dakota land accurately reflects its fair market value.
II. CONCLUSIONS OF LAW
A The Alleged Preferential Transfers
Trustees and debtors-in-possession are empowered to avoid preferential transfers to discourage creditors from racing to dismember a debtor sliding into bankruptcy and to promote equality of distribution to creditors in bankruptcy. Jones Truck Lines Inc. v. Central States, Southeast and Southwest Areas Pension Fund (In re Jones Truck Lines. Inc.), 130 F.3d 323, 326 (8th Cir. 1997). Section 547(b) of the Bankruptcy Code provides:
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer of an interest of the debtor in property —
(1) to or for the benefit of a creditor.
(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made —
(A) on or within 90 days before the date of the filing of the petition; or
(B) between 90 days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider: and
(5) that enables such creditor to receive more than such creditor would receive if —
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. § 547(b). Thus, in order to avoid a transfer as preferential, the trustee or debtor-inpossession must establish the following by a preponderance of the evidence:
1 A transfer of the debtor's property;
2 Made within 90 days before the date of petition filing;
3 Made to or for the benefit of the creditor;
4. On account of an antecedent debt;
5. While the debtor was insolvent;
6. Which enabled the creditor to receive more than it would have received in a chapter 7 case if the transfer had not been made.
Armstrong v. John Deere Company (In re Gilbertson'), 90 B.R. 1006, 1009 (Bankr. D.N.D. 1988). The transferee, or the party against whom recovery or avoidance is sought, bears the burden of establishing an affirmative defense under section 547(c). 11 U.S.C. § 547(g), Stingley v. Allied Signal, Inc. (In re Libby International Inc.), 247 B.R. 463, 466 (B.A.P. 8th Cir. 2000). In the absence of any evidence to the contrary, the debtor is presumed to be insolvent during the 90 days prior to filing a bankruptcy petition. 11 U.S.C. § 547(f); Gilbertson, 90 BR. at 1009. "Payments to fully secured creditors are not considered preferences because the creditor does not receive more than it would in a liquidation." Gilbertson, 90 BR. at 1010. Similarly, a prepetition transfer to a secured creditor of that creditor's collateral does not result in the secured creditor obtaining more than it would have received in a chapter 7 case. Krafsur v. Scurlock Permian Corp. (In re El Paso Refinery. LP), 171 F.3d 249, 254-55 (5th Cir. 1999); Waslow v. MNC Commercial Core (In reM. Paolella Sons Inc.), 161 B.R. 107, 124 (E.D.Pa 1993)
In a case that appears to be squarely on point with the case at bar, a secured creditor held a mortgage against the debtor's residential real property See In re Castillo, 7 B.R. 135, 136 (Bankr. S.D N.Y. 1980). As here, the secured creditor in Castillo obtained and recorded a deed in lieu of foreclosure as to the subject real property prior to the commencement of the debtor's chapter 7 bankruptcy case. Id. The trustee alleged that the foregoing transfer constituted an avoidable preference.Id. However, the court disagreed, stating:
The defendant is a secured creditor who took a deed in lieu of foreclosure and therefore does not have any deficiency claim in this estate. The defendant's sole recourse is directed to the secured collateral. The trustee does not question the validity of the defendant's status as a secured creditor. Accordingly, unless a creditor's security can be invalidated by a trustee in bankruptcy, the secured creditor cannot be regarded as having received any preference since such creditor does not receive any more than such creditor would receive in liquidation under Chapter 7 of the Code. One of the elements of a preferential transfer under Code § 547(b)(5) is that the transfer enables the creditor to receive more than other creditors in his class. Here the secured creditor, College Point Savings Bank, would not receive a distribution under Chapter 7 because it realized upon its first mortgage to the detriment of no other secured creditors in its class. Hence, the trustee's cause of action for a preferential transfer cannot pass muster under Code § 547.
Id. at 137.
The case at bar is very similar to Castillo, and a similar result obtains. Here, Ideal Ag held mortgages against all of the Dullea entities' farm real estate. Prior to the Dullea entities' bankruptcy filings, Ideal Ag then obtained and recorded three deeds in lieu of foreclosure covering several tracts of land that were already subject to Ideal Ag's perfected mortgages. Under these circumstances, the prepetition transfers that occurred did not enable Ideal Ag to recover more than it would have received in a chapter 7 case. El Paso Refinery, LP, 171 F.3d at 254-55; M. Paolella Sons, Inc., 161 B.R. at 124; see also 11 U.S.C. § 725, 363 (generally, secured creditors are entitled to recover their collateral or the proceeds of such collateral). Thus, the requirement found in section 547(b)(5) has not been satisfied, and the disputed transfers were not preferential.
Nevertheless, the Dullea entities argue that Ideal Ag received more by means of recording the deeds in lieu of foreclosure than it would have received in a chapter 7 case. Specifically, the Dullea entities assert that in a chapter 7 case, (1) the land at issue would sell for the full amount of the Natwick valuation rather than 80 percent of such value, (2) the standard real estate commission for selling the land would be 3 percent, and (3) the land would be surcharged under 11 U.S.C. § 506(c). However, the Court has already determined that the fair market value of the land is considerably less than the value stated in the Natwick appraisal. In fact, upon recording the deeds in lieu of foreclosure, Ideal Ag reduced the outstanding obligation on the three promissory notes by an amount that exceeded the land's fair market value as determined by this Court.
Moreover, the purpose for allowing the avoidance of preferential transfers is to prevent the unequal treatment of similarly situated creditors. Any real estate commission that would be generated by a sale of the subject land in a hypothetical chapter 7 case as well as any surcharges against the proceeds of such a sale are not prepetition debts. It is disingenuous to suggest that the transfers at issue should be undone because such expenses might otherwise be incurred in the context of a hypothetical chapter 7 case Section 547(b) exists to promote equality of distribution among similarly situated creditors — not for the purpose of generating real estate sales commissions or surcharging estate assets. Because avoidance of the transfers at issue would not be necessary to promote equality of distribution among similarly situated creditors, the subject transfers cannot be characterized as preferences within the meaning of 11 U.S.C. § 547(b), and the debtors' argument must fail. Having determined that the debtors have not met the requirement of section 547(b)(5), the Court need not address Ideal Ag's argument that the debtors were solvent at the time the deeds in lieu of foreclosure were recorded.
B. The Alleged Fraudulent Transfers
Section 548(a)(1)(B) of the Bankruptcy Code appears as follows:
(a)(I) The trustee may avoid any transfer of an interest of the debtor in property that was made or incurred on or within one year before the date of the filing of the petition, if the debtor voluntarily or involuntarily —
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation;
(II) was engaged in business or a transaction, or was about to engage in business or a transaction, for which any property remaining with the debtor was an unreasonably small capital; or
(III) intended to incur, or believed that the debtor would incur, debts that would be beyond the debtor's ability to pay as such debts matured
11 U.S.C. § 548(a)(1)(B). Thus, in order to establish that a fraudulent transfer has occurred pursuant to section 548(a)(1)(B)(ii)(1), "the trustee must prove by a preponderance of the evidence that (1) there was a transfer of an interest of the debtor in property, (2) the transfer was made within one year before the date of the filing of the petition, (3) the debtor was insolvent on the date the transfer was made, and (4) the debtor received less than reasonable equivalent value in exchange for the transfer." Christians v. Crystal Evangelical Free Church (In re Young), 82 F.3d 1407, 1414 (8th Cir. 1996).
Outside the foreclosure context, fair market value is the benchmark for determining reasonably equivalent value. BFP v. Resolution Trust Corp., 511 U.S. 531, 545, 114 S.Ct. 1757, 1765, 128 L.Ed.2d 556 (1994) Whether a transfer is made in exchange for reasonably equivalent value is a "question of fact requiring the court to consider all factors bearing on value in the marketplace" Armstrong v. United Bank of Bismarck (In re Bob's Sea Ray Boats Inc.), 144 B.R. 451, 457 (Bankr. D.N.D. 1992);Jacoway v. Anderson (In re Ozark Restaurant Equipment Co.), 850 F.2d 342, 344-45 (8th Cir. 1988). "Despite lip service given to the weighing of other factors," often there is nothing to consider beyond simply comparing the fair market value of what the debtor transferred against the fair market value of what the debtor received. First Federal Savings Loan Ass'n of Bismarck v. Hulm (In re Hulm), 45 B.R. 523, 528 (Bankr D.N.D. 1984). If the two values were reasonably similar, no fraudulent transfer has taken place. See 11 U.S.C. § 548(a)(1)(B)(i). Moreover, partial satisfaction of an antecedent debt constitutes value for purposes of section 548(a). See 11 U.S.C. § 548(d)(2)(A) ("value" includes the satisfaction of an antecedent debt); Villamont-Oxford Associates Ltd. Partnership v. Multifamily Mortgage Trust 1996-1(In re Villamont-Oxford Associates Ltd. Partnership), 236 B.R. 467, 481 (Bankr. M.D.Fla. 1999) (citations omitted). Thus, if the amount of debt satisfaction was reasonably similar to the fair market value of the property transferred to the creditor, no fraudulent transfer has occurred.
In the case at bar, Ideal Ag credited the Dullea entities with total debt satisfaction in the amount of $4,956,800.00 upon recording the three deeds in lieu of foreclosure. At the same time, the fair market value of the land transferred to Ideal Ag was $4,925,000.00. Because the amount of debt satisfaction actually exceeded the fair market value of the transferred property, the Dullea entities received more than reasonably equivalent value in exchange for the deeded land Accordingly, the transfers at issue were not fraudulent within the meaning of 11 U.S.C. § 548 (a), and the Court need not address Ideal Ag's argument that the Dullea entities were solvent at the time the deeds were recorded.
This figure is derived from the sum of the amounts credited for the Minnesota land ($4,503,200.00) and the North Dakota land ($453,600.00)
This figure is derived from the sum of the fair market values for the Minnesota land ($4,500,000.00) and the North Dakota land ($425,000.00).
III. CONCLUSION
Based on the foregoing, the Court concludes that the disputed conveyances do not constitute preferences or fraudulent transfers within the meaning of sections 547 and 548 of the Bankruptcy Code. Accordingly, judgment shall be entered in favor of the defendant, Ideal Ag Corporation, dismissing the complaints filed by the Dullea entities in the above captioned adversary cases on January 17, 2001.
JUDGMENT MAY BE ENTERED ACCORDINGLY.
SO ORDERED.