Opinion
BK Case No. 99-40740, Adversary Case No. 99-6317, District Ct. Case No. CV-01-365-E-BLW.
March 28, 2002
MEMORANDUM DECISION AND ORDER
INTRODUCTION
The Court has before it an appeal from a decision of the Bankruptcy Court. The appeal is fully briefed and at issue. After reviewing the briefing and the record, the Court finds the Bankruptcy Court's decision should be affirmed. This decision is explained below.
STANDARD OF REVIEW
The Court reviews the conclusions of law of the Bankruptcy Court de novo and its factual findings for clear error. In Re Parker, 139 F.3d 668, 670 (9th Cir. 1998); In Re Kim, 130 F.3d 863, 865 (9th Cir. 1997). Contractual ambiguity is a question of law which the Court reviews de novo. U.S. v. Contract Management, Inc., 912 F.2d 1045, 1046 (9th Cir. 1990); Federal Deposit Ins. Corp. v. Air Florida Sys., 822 F.2d 833, 836 n. 2 (9th Cir. 1987).
BACKGROUND
This appeal presents a priority contest between two creditors. This case is an adversary proceeding filed by Plaintiff-Appellant Agricredit Acceptance, LLC, to enforce the terms of a Subordination Agreement signed by Defendant-Respondent J.R. Simplot Company. The adversary proceeding followed the confirmation of Defendants Ritchies' Chapter 12 Plan of Reorganization. Agricredit appeals the judgment of the Bankruptcy Court in this matter.
The factual background was adequately set forth by the Bankruptcy Court in its Memorandum of Decision; therefore, the Court will adopt the Bankruptcy Court's recitation of facts and will not repeat them here. The choice of law provision and the role it plays in these proceedings was also set forth by the Bankruptcy Court in its Memorandum of Decision; the parties did not challenge those findings. The Court will adopt those determinations as well.
ANALYSIS
The Bankruptcy Code provides "[a] subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law." 11 U.S.C. § 510(a). The parties may use the terms of a subordination agreement to vary or modify priority of security interests. I.C. § 28-9-316. In bankruptcy proceedings, courts are to interpret subordination agreements in accordance with ordinary contract principles. Exec Tech Partners v. Resolution Trust Corp. (In re Exec Tech Partners), 107 F.3d 677, 681 (8th Cir. 1997).
The intent of the parties controls contract interpretation, and unless there is an ambiguity in the contract, that intent is determined by the language of the contract itself. Smith Barney v. Keeney, 570 N.W.2d 75, 78 (Iowa 1997). Whether an ambiguity exists in a contract is a matter of law. Hartig Drug Co. v. Hartig, 602 N.W.2d 794, 797 (Iowa 1999). A contract is ambiguous when, after application of the rules of interpretation to the face of an instrument, a genuine uncertainty exists as to which one of the two or more possible meanings is correct. Small v. Ogden, 147 N.W.2d 18, 20 (Iowa 1966). If the language of the contract "is found to be ambiguous, extraneous evidence is admissible as an aid to interpretation of the contract." Dickson v. Hubbell Realty Co., 567 N.W.2d 427, 430 (Iowa 1997). Contracts that are ambiguous should be strictly construed against the drafter. Id. In attempting to determine the intent of the parties, the Court must consider all the language used in the agreement. Small, 147 N.W.2d at 20. The time of contract execution is the important time frame for determining the parties' intent. Davenport Osteopathic Hosp. Ass'n v. Hospital Serv., Inc., 154 N.W.2d 153, 161 (Iowa 1967).
The Bankruptcy Court found ambiguity in the subordination agreement. The Court agrees with that finding. The agreement contains three provisions which attempt to limit Simplot's rights: a lien subordination provision, a payment subordination provision, and an exclusion of Debtors' machinery and equipment from the effect of the terms of the subordination agreement. Read together, one or more of the provisions become superfluous or contradictory. Most significantly, giving effect to the payment subordination clause swallows the rest of the elements of the subordination agreement. As a result, the Court finds the subordination agreement is ambiguous.
Having made that determination, the Court may look to extraneous evidence as an aid to interpretation of the contract. The Court must strictly construe the subordination agreement against Agricredit. As to the lien subordination clause, it appears undisputed that the intent of the parties was for Simplot to grant Agricredit a subordination of Simplot's senior security interests in Debtors' 1997 and 1998 crops. In exchange, Agricredit would advance credit to Debtors to be used during those respective farm seasons. It is also clear that the parties intended to exclude machinery and equipment from this subordination. The Court makes these conclusions because the parties negotiated the inclusion of the lien subordination clause and the exclusion of machinery and equipment.
The record provides no indication, however, that the parties negotiated the inclusion of the payment subordination clause. The intent of the parties as to that clause is difficult to ascertain. Simplot provided virtually no evidence to explain its intent. Agricredit, however, provided the testimony of a former employee, Nancy Von Feldt. To her knowledge, Agricredit consistently used payment subordination clauses. The purpose was to ensure that if a debtor sold property on which no creditor had a lien, Agricredit would have a prior right to those proceeds over the subordinated creditor. Thus, if Agricredit and/or Simplot held a security interest in the source of the funds, the lien priority provisions determined which party would get paid first. If neither party held a security interest in the funds, Agricredit would get paid first.
Based on the evidentiary record, however, the Bankruptcy Court declined to accept this one witness's explanation of the purpose of the payment subordination clause. The Court finds the Bankruptcy Court's determination is not clear error. The Court finds the parties did not reach a consensus as to the intent of the inclusion of the payment subordination clause.
Construing the subordination agreement against Agricredit, therefore, the Court will not give effect to the clause. The Court will give effect, however, to the lien subordination and exclusionary clauses. As a result, Agricredit has first priority to the collateral recited in the 1998 subordination agreement. As against Simplot, Agricredit is entitled to any payments made by Debtors pursuant to the confirmed plan. The Court also finds that due to the exclusionary clause, the subordination agreement does not modify the parties' rights concerning Debtors' equipment.
The next major issue the Bankruptcy Court had to address was whether Agricredit or Simplot had a priority security interest in Debtors' farm equipment and machinery. The confirmed plan makes certain payments on account of that equipment; therefore, the priority of the parties' security interests will determine to whom the plan payments should be paid. The Court must use the usual priority rules of state law to make this determination. Idaho Code § 28-9-322(a)(1) provides:
As noted above, the Court has already determined that the subordination agreement effectively excludes equipment and machinery.
Conflicting perfected security interests [in the same collateral] . . . rank according to priority in time of filing or perfection. Priority dates from the earlier of the time a filing covering the collateral is first made or the security interest . . . is first perfected, if there is no period thereafter when there is neither filing nor perfection.
It appears to be undisputed that Simplot perfected its security interest prior to Agricredit in at least some of Debtors equipment and machinery; the question is "how much." Simplot filed a UCC-1 on April 18, 1995, in an attempt to perfect its security interest. In the space provided for a description of the collateral covered by the filing, Simplot instructed the reader to "See Attachment A." Attachment A was entitled "Richie Farm Equipment" and it listed various items of machinery and equipment.
On May 12, 1997, Agricredit perfected its security interest in Debtors' equipment. It described its collateral as all machinery and equipment owned by the Debtors or acquired in the future. Agricredit insists that it holds a prior perfected security interest in all Debtors' farm equipment not specifically listed in Attachment A.
The Bankruptcy Court disagreed. It found that based on the information available to Agricredit at the time it sought to perfect its own security interest, the inclusion of the words "Richie Farm Equipment" was sufficient to put Agricredit on notice that Simplot may claim a security interest in more than the specific items listed below. The Court finds this conclusion is consistent with the purpose of the UCC-1 perfection rules and with the Bankruptcy Court's findings of fact. Agricredit was aware from the beginning of its relationship with Debtors that Debtors had granted Simplot some sort of lien in Debtors' equipment. In addition, Simplot made it clear to Agricredit that it would not subordinate its claim on Debtors' equipment. The Court finds these facts should have put Agricredit on notice that Simplot's security interest may have extended past the items listed in Attachment A. The security agreements signed by Debtors granted Simplot a lien in all Debtors' farm equipment; therefore, Agricredit's security interest is perfected in all Debtor's farm equipment.
In its appellee brief, Simplot requests attorney's fees for the underlying action. Simplot did not appeal any issues in this case; therefore, the Court will not take up this issue now.
Both parties request attorney's fees and costs on appeal. Idaho Code § 12-120(3) provides that in any commercial transaction, "the prevailing party shall be allowed a reasonable attorney's fee to be set by the court." Section 12-120(3) applies on appeal as well as at the trial court level. Farm Credit Bank v. Stevenson, 869 P.2d 1365, 1370 (Idaho 1994). Accordingly, the Court will award attorney's fees and costs to Simplot on appeal.
NOW THEREFORE IT IS HEREBY ORDERED, that the Memorandum of Decision of the Bankruptcy Court (Docket No. 77 in Adversary Case No. 99-6317) is hereby AFFIRMED and this action is hereby DISMISSED IN ITS ENTIRETY. The Court awards costs and attorney's fees on appeal to Defendant-Respondent J.R. Simplot Company.