Opinion
Case No. 95-12376-7
March 30, 2001
MEMORANDUM OPINION AND ORDER
Before the Court for consideration is the Objection to Secured Claim of Bennington State Bank filed by the Chapter 7 Trustee ("Trustee") and First National Bank in Junction City ("FNB"). For the reasons expressed herein, the Court denies in part the objection as it relates to Bennington State Bank's secured status; and sets for further hearing the issue of the amount of the Bank's claim and whether it is oversecured pursuant to 11 U.S.C. § 506(b).
Future references are to Title 11 of the United States Code unless otherwise indicated.
BACKGROUND
The following undisputed facts are taken from a stipulation entered into by the parties. 1. On February 20, 1991, Steven and Bonnie Schild (collectively "Schilds") granted a mortgage in favor of the Bennington State Bank ("BSB") in the amount of $100,000, which covered a number of tracts owned by the Schilds, including specifically the N.E. 1/4 and W 1/2 of Section 29, Township 17 South, Range 5 East of the 6th P.M. in Morris County, Kansas. This specific property will hereafter be referred to as the Second Mortgage Property or SMP. 2. On February 28, 1992, the Schilds granted a second mortgage covering their property, including the SMP, in the amount of $75,000. 3. On October 6, 1994, BSB delivered a mortgage release covering only the SMP. This release was filed of record on October 12, 1994 and released the February 20, 1991 and February 28, 1992 mortgages on the SMP. The BSB gave this release so that the Schilds could obtain a first-mortgage loan from Peoples National Bank in Belleville ("Peoples"). 4. On October 6, 1994, the Schilds executed a separate mortgage on the SMP in the amount of $60,000. This mortgage was filed of record on October 12, 1994. This is a second mortgage loan behind Peoples' first mortgage loan. 5. On August 18, 1995, the Schilds executed a promissory note in favor of the BSB in the amount of $60,000. This note was secured by the October 6, 1994 mortgage on the SMP. 6. The Schilds filed a voluntary Chapter 12 bankruptcy petition on August 22, 1995, case number 95-12376. 7. On November 30, 1995, BSB filed a proof of claim in the amount of $292,111.91. BSB's proof of claim indicated it was secured by, among other assets, real estate mortgages on: (1) the Second Mortgage Property; and
(2) the E 1/2 of the N.E. 1/4 of Section 14, Township 17 South, Range 4 East in Marion County and the W 1/2 of Section 17, Township 17 South, Range 5 East in Morris County (the First Mortgage Property or FMP).
The Second Mortgage Property was subject to the first mortgage by Peoples. No objections to the BSB's claims were filed between November of 1995 and April of 2000.
8. An agreed order confirming the Chapter 12 plan was filed on June 6, 1997. The Confirmation Order provided as follows with regard to the treatment of BSB:
6. Each holder of a secured claim has accepted the Plan, shall retain its lien on property securing the claim under the Plan and will receive property that has a value of not less than the allowed amount of such claim; or the debtor has or will, prior to the Effective Date of the Plan, surrender property securing the claim.
. . .
8. The objections of Bennington State Bank. . . and the Standing Trustee have been resolved by agreement, as more fully set forth below.
. . .
11. Confirmation shall bind the debtors and each creditor listed in the matrix filed in this case or who have actual notice of the case, whether or not such creditor is provided for in the Plan.
12. Except as provided for in the Plan and this Order, all property of the estate is hereby vested in the debtors free and clear of all claims and interest of creditors.
. . .
15. The Court entered its Order Confirming Chapter 12 Plan Subject to Subsequent Notice and notice was given to all creditors and other parties in interest with an opportunity to object to the order's provisions by December 31, 1996. On [sic] the Chapter 12 Standing Trustee and Bennington State Bank filed objections to the order. These objections were resolved with the agreements contained in this Order.
16. The Plan treatment of the following claims shall be modified and the claims shall be treated as provided below:
The language is taken from the parties' stipulation; any sequential errors in numbering/lettering are the parties' and have not been altered by the Court.
. . .
SECURED CLAIMS: 3. Bennington State Bank ("BSB") $320,147.53
This claim is based on mortgage loans secured by certain real estate owned by the Debtors. BSB shall retain its mortgage liens and security interests to the extent they are perfected until its secured claim is paid in full. BSB's claim is made up of the following parts:
(a) $312,807.53 after capitalization of interest provided below and secured by a mortgage encumbering the Northwest Quarter (NW1/4) of Section Seventeen (17), Township Seventeen (17) South, Range Five (5) East of the Sixth Principal Meridian, Morris County Kansas; and
a $60,000 mortgage encumbering the East Half of the Northeast Quarter (E1/2 NE1/4) of Section Fourteen (14), Township Seventeen (17) South, Range Four (4) East of the Sixth Principal Meridian in Marion County, Kansas, (commonly referred to as the "Hog Farm"), provided, however, that if such real estate is sold within 5 years from August 18, 1995, and before the mortgages are released, the entire net proceeds after customary closing costs and expenses will be paid to BSB for application on the debt secured by the mortgage;
(b) Approximately $12,000 accrued interest on loans secured by certificates of deposit and an annuity;
(3) Approximately $7,340 remaining due from the "hog obligation;" and
(4) Leases of farm land.
BSB's claim shall be paid as follows:
(5) The 1996 cash rent for leased land in the amount of $25,610.00 shall be paid to Berco Ventures, Inc. on or before December 31, 1996. The parties acknowledge that this payment has been made.
(6) The secured claim of $280,125 shall bear interest at the rate of 8.5% per annum from August 18, 1995 until December 31, 1996. This accrued interest of $32,682.53 shall be capitalized and added to the principal to become the new principal balance of $312,807.53 as of January 1, 1997. The new principal balance shall then be repaid in 40 equal semi-annual payments of principal and interest payable August 1 and February 1 each year beginning August 1, 1997. Interest shall accrue on the new principal balance at the initial rate of 8.5% per annum from and after January 1, 1997. The interest rate shall be adjusted every three years beginning January 1, 1999 to a rate equal to 250 basis points above the BSB's three year certificate of deposit rate for the first adjustment, and 350 basis points above the three year certificate of deposit rate for each adjustment thereafter.
(7) The debtors shall pay the accrued interest on the loans secured by certificates of deposit and an annuity through December 31, 1996 of approximately $12,000 in the following manner:
(1) The accrued income from the annuity securing the loans of approximately $5,878.00 shall be paid to BSB and applied to the loans on or before the Effective Date of the Plan;
(2) The remaining interest through December 31, 1996 shall be added to the "hog obligation" and treated and paid as provided below.
(8) The remaining balance of $7,340.00 from the "hog obligation" shall be added to the remaining interest accrued through December 31, 1996 on the two loans secured by certificates of deposit and an annuity for a total balance of approximately $13,462.00. This portion of the BSB claim shall be paid in 5 monthly payments of $1,000.00 without interest beginning March 15, 1997 and continuing on the fifteenth day of each month for the following 4 months. The remaining balance of approximately $8,462.00 shall be paid on or before August 15, 1997.
(9) BSB through Berco Ventures, Inc. holds tracts of real estate conveyed to it by the debtors and subject to purchase options held by the debtors. In the event that the debtors exercise their option and purchase at least one quarter (160 acres) of the real estate which is subject to the April 1, 1995 lease by the option deadlines or such time as is mutually agreed later, BSB and Berco Ventures, Inc. agree to extend the debtors' tenancy on all remaining real estate described in the April 1, 1995 lease for at least one more year at the current per acre rent for the acreage then rented. In that event, Berco Ventures, Inc. and BSB also agree to extend the debtors' purchase options for the real estate described in the April 1, 1995 lease for one more year beyond the original contemplated term. The parties further agree that the real estate referred to as the "Martin Farm" in the April 1995 and August 1995 agreements between BSB and the debtors is not subject to these extensions. The debtors may repurchase the Martin Farm under the original March 1995 option terms and conditions at any time before BSB sells the real estate to a third party in a bona fide sale.
(10) The Debtors agree to sign such documents as are reasonably necessary to place a quit claim deed to the Hog Farm in escrow with a mutually agreed third party to further secure the payment of the $312,807.54 portion of BSB's claim as described above under the following terms and conditions:
(1) The Debtors shall place a deed to the Hog Farm real estate in escrow with a mutually agreed third party for the first three years of the plan payments (until June 30, 2000). The deed shall be in favor of BSB and shall be returned to the Debtors June 30, 2000 if they are current on their $312,807.53 obligation to BSB under the Plan, upon the full payment of their obligation after June 30, 2000. In the event that the Debtors fail to make a payment to BSB on the $312,807.53 portion of the claim as required by the Plan or this Order, the Bank must give written notice of default as provided below and provide an opportunity to cure the default as described below.
In the event the Debtors fail to make any payment on the $312,807.53 portion of the claim as required under this Plan to BSB, BSB shall give written notice of default by certified mail with a written receipt to the Debtors and their attorney at the following addresses: [addresses omitted]
If the Debtors fail to bring the payment(s) current within thirty (30) days after the Notice of Default is mailed to the Debtors and their attorney, then BSB will be entitled to the delivery of the deed from the escrow agent and to take such other legal action as it deems necessary and appropriate to protect its position without reference to the 11 U.S.C. § 362 automatic stay. The escrow agent will be authorized and directed to release the deed to BSB upon the presentation of a sworn affidavit substantially in the form attached as Exhibit "C". Both the Debtors and BSB agree to enter into an agreement to hold the escrow agent harmless from loss caused by release of the deed to BSB after presentation of such an affidavit.
In the event of a conflict between BSB's loan documents and this Order or the Plan of Reorganization, the terms of this Order and of the Plan of Reorganization shall control.
9. After the Chapter 12 plan was confirmed, BSB received $41,459.19 from the Schilds pursuant to the plan terms, $18,051.08 of which was applied to the secured debt. The balance of this payment was applied to the unsecured portion of the debt. However, the payment due under the confirmed plan from the Schilds to BSB on February 1, 1998 was not made. BSB gave the Schilds 30 days written notice of default and then commenced a foreclosure action on the First Mortgage Property against Steven Schild in rem. The foreclosure petition was filed with the Marion County District Court on June 28, 1998. In its petition, BSB sought foreclosure of the First Mortgage Property only. BSB did not seek judgment against the Schilds on the Second Mortgage Property, which was covered by a separate note and second mortgage.
10. A Journal Entry of Judgment was entered in the foreclosure action on the First Mortgage Property on February 4, 1999. The judgment ordered that the First Mortgage Property be sold at a sheriff's sale and that BSB have an in rem judgment against defendant Steven A. Schild in the amounts of (a) $66,722.09 plus accrued interest through June 12, 1998 totaling $4,898.14 and interest at the rate of $15.55 per diem from June 12, 1998 until paid, and (b) $178,240.79 plus accrued interest through June 12, 1998 totaling $13,075.06 and interest at the rate of $41.51 per diem from June 12, 1998 until paid.
11. On April 6, 1999, the Clerk of the Marion County District court entered an Order of Sale directing that the First Mortgage Property be sold at a sheriff's sale. The sheriff's sale took place as scheduled at 3:00 p.m. on Tuesday, May 4, 1999. The First Mortgage Property was purchased by Eastern Livestock Company for $282,444.85. This amount represented the full amount of the judgment, plus costs. BSB claims that the balance still owing on the remaining debt, represented by the August 18, 1995 note and secured by the October 6, 1994 mortgage on the SMP, was approximately $75,867.83 after application of the sale proceeds from the FMP.
12. On or about February 5, 2000, the Trustee filed a Motion and Notice of Intended Sale of Real and Personal Property. The real property in question was the Second Mortgage Property. The Trustee's notice acknowledged that this real estate was subject to a first mortgage lien by Peoples dated October 6, 1994. In addition, the Trustee acknowledged that the real estate was subject to a second mortgage in favor of BSB in the amount of $60,000 dated October 6, 1994.
13. BSB filed an objection to the Trustee's motion because BSB felt that the commission being sought by the Trustee and the auctioneer were duplicative and were not reasonable since they totaled 10% and BSB believed that an auctioneer could have been retained for only 4%. That objection was overruled following a hearing on February 23, and Journal Entry filed on February 28, 2000.
14. The sale took place on February 28, 2000. Following payment of Peoples' first mortgage and the administrative expenses, the amount of $49,932.96 remained available for distribution. The Trustee asserted that this sum was subject to a dispute between the Trustee and BSB as to the actual amount of the remaining claim of BSB. Therefore, the Trustee requested and obtained an order allowing the Trustee to withhold those funds pending a determination from the Court relative to the distribution of those funds.
15. On May 11, 2000, the Trustee filed an objection to the secured claim of BSB. An unsecured creditor, First National Bank of Junction City, also objected to BSB's secured claim on May 10, 2000. BSB filed a brief in support of its secured claim on May 31, 2000. First National Bank of Junction City filed a brief in support of its objection on July 18, 2000. The dispute in this case is whether the Trustee or BSB is entitled to the funds that remain after the sale of the Second Mortgage Property.
16. BSB claims that the unpaid principal itself exceeds the amount being held by the Court. BSB claims that the payments received by it and the accrued interest as of February 28, 2000, the approximate date of the sale of the SMP, are as follows:
Secured Claim $312,807.53 as outlined in Chapter 12 Plan of 1/1/97
21,416.60 accrued interest to 10/21/97 ____________ $334,224.13 Total
— 18,051.09 payment from Bankruptcy Court ____________ $316,173.05 balance owing 10/21/97
+ 5,227.68 accrued interest to 12/31/97
+ 26,874.71 accrued interest to 12/31/98 _____________ $348,275.44 balance owing as of 12/31/98
+ 9,130.04 accrued interest to 5/4/99 _____________ $357,405.47 balance owing 5/4/99
— 281,537.64 amount of net judgment on _____________ two parcels of land sold at foreclosure
$ 75,867.83 balance owing
5,300.36 accrued interest to 2/28/00 _____________ $ 81,169.19 total balance owing as of 2/28/00
17. The above stipulations are supplemented by the following findings of this Court based upon a review of the court file. In addition to the real estate notes and mortgages, the Schilds executed several promissory notes in favor of BSB secured by livestock. All of the Schilds' indebtedness to BSB appears to be cross-collateralized and BSB's proof of claim included as attachments copies of the real estate and livestock notes and mortgages. On August 21, 1995, the Schilds and BSB entered into a refinancing agreement, which was apparently not implemented, as the Schilds filed their Chapter 12 petition the following day. During the course of the Chapter 12 proceedings, BSB did not file a motion for valuation of its collateral or a determination of secured status under § 506(b).
DISCUSSION A. "One Suit Rule" .
FNB takes the position that by filing suit on the First Mortgage Property note and mortgage, BSB waived any claim to any other property, specifically the SMP. In support of its argument, FNB cites the Kansas "one suit rule" as set forth in the case of Home State Bank v. P.B. Hoidale Co., Inc. and In re Wilson. In the Home State Bank case, the court held that if a mechanic's lien holder brings an action and secures a personal judgment without foreclosing its mechanic's lien, it has waived its security and may not foreclose the lien later in a separate action. In Wilson, the court held that a judgment creditor, who obtained an in personam judgment on debt without also bringing an action to replevin or foreclose on the collateral, was precluded, under the principles of res judicata, from bringing a subsequent action to enforce its security interest, and was likewise precluded from enforcing its security interest against the bankruptcy trustee.
239 Kan. 165, 718 P.2d 292 (1986).
390 F. Supp. 1121 (D.Kan. 1975).
239 Kan. 165, Syl. ¶ 2.
The Court finds these cases to be distinguishable from the situation at hand and notes that Wilson has been discredited by the Tenth Circuit. By choosing to foreclose only on its first mortgage property, BSB was not splitting its cause of action. Rather, the SMP was covered by a separate note and a second mortgage behind that of Peoples. There is nothing precluding BSB from bringing separate actions on separate mortgages covering separate parcels of real estate. The Court denies FNB's objection on these grounds.
See Bank of Oklahoma, N.A. v. Fidelity State Bank and Trust Co., 623 F. Supp. 479, 484 (D.Kan. 1985) (citing Hill v. Bank of Colorado, 648 F.2d 1282 (10th Cir. 1981)).
B. Secured Status of BSB's Claim .
The Trustee argues that pursuant to the terms of the confirmed plan and § 1227, the Debtors' property vested in the Schilds free and clear of liens and BSB did not maintain its mortgage in the SMP under the terms of the plan. BSB contends that the Trustee's argument ignores the fact that the Chapter 12 was converted to a Chapter 7 proceeding.
The Trustee relies on § 1227 for support that, upon confirmation of the Schilds' Chapter 12 plan, BSB was bound to the terms of the plan. Section 1227 provides:
(a) [T]he provisions of a confirmed plan bind the debtor, each creditor, each equity security holder, and each general partner in the debtor, . . . whether or not such creditor . . . has objected to, has accepted, or has rejected the plan.
(b) Except as otherwise provided in the plan or the order confirming the plan, the confirmation of a plan vests all of the property of the estate in the debtor.
11 U.S.C. § 1227. Confirmation of a Chapter 12 plan binds the debtor and the creditor and imposes a stay of action against codebtors. However, this protection applies only as long as the debtor makes payments according to the plan or until the plan is closed, dismissed, or converted to a case under Chapter 7.
See Benson v. Empire State Bank, 516 N.W.2d 550 (Minn.App. 1994);First Federal Sav. and Loan Ass'n v. Hysten, 18 Kan. App. 2d11, 846 P.2d 261, 263 (1993).
The Trustee cites Chapter 11 cases in support of its position that a creditor's rights are defined in a confirmed reorganization plan. Unlike Chapter 11 reorganization, a Chapter 12 discharge is contingent upon the debtor's performance of the plan. The Code provides:
See In re American Properties, Inc., 30 B.R. 239, 246 (Bankr.D.Kan. 1983); In re Penrod, 50 F.3d 459, 463 (7th Cir. 1995).
Under Chapter 11, confirmation of a Chapter 11 plan results in a discharge of the debtor from prepetition unsecured debts. 11 U.S.C. § 1141. Under Chapter 12, the debt is discharged only after the debtor has completed the plan. 11 U.S.C. § 1228(a).
As soon as practicable after completion by the debtor of all payments under the plan, . . . the court shall grant the debtor a discharge of all debts provided for by the plan.
11 U.S.C. § 1228(a). The binding effect of confirmation in Chapter 12 continues only as long as the debtor makes payments under the plan. Once the plan is converted to Chapter 7, however, the unconsummated Chapter 12 plan no longer binds the debtors or creditors. Rather, the effect of the plan is subject to defeasance if the debtor fails to obtain a discharge. If discharge is denied, claims against the debtor will be discharged only to the extent of payments actually received by the creditor. The effectiveness of the vesting free and clear of liens and claims is also subject to the debtor's subsequent obtaining of a discharge. If a discharge is not obtained in the Chapter 12, then the property of the estate that has vested in the debtor is subject to the claims of creditors.
In re Muzzey, 134 B.R. 800, 807 (Bankr.D.Vt. 1991).
8 Collier on Bankruptcy ¶ 1227.01[2] (Lawrence P. King 15th Ed. Revised 2000).
Id. at ¶ 1227.03.
The Trustee's argument fails. Confirmation of the Chapter 12 plan bound BSB to accepting the treatment of its mortgage in the SMP only as long as the Schilds complied with the Chapter 12 plan. Because the Schilds defaulted under their Chapter 12 plan without obtaining a discharge, BSB's secured obligation adjusted by the plan reverted back to its original terms. The bankruptcy code does not bind creditors to the terms of a Chapter 12 reorganization plan after the debtor has defaulted and converted to Chapter 7. BSB is entitled to retain its original second mortgage lien on the SMP.
Benson, 516 N.W.2d at 544.
C. Amount of BSB's claim/§ 506(b) status .
BSB filed a secured proof of claim in November 1995, claiming a secured debt of $292,111.91, secured by real estate and livestock. In its accounting set forth in ¶ 16, supra, however, BSB uses as its starting point the claim amount set forth in the confirmed Chapter 12 plan, or $312,807.53, plus interest accruing at 8.5% per annum. Under the analysis urged by BSB and adopted above, however, BSB is no longer bound by the terms of the Chapter 12 plan. This means that although BSB retains its second mortgage in the SMP, it is no longer bound by the treatment afforded in the plan. Rather, BSB is correct in its assertion that the case is treated as if filed as a Chapter 7 on August 22, 1995. Thus, BSB's claim reverts back to its original terms and must be calculated as of the date of filing as set out in its proof of claim.
BSB stipulates that it received a total of $41, 459.19 from the Schilds through plan payment, although its accounting only gives credit for a payment of $18,051.09. At the sheriff's sale on the first mortgage property, BSB received its entire judgment of $282,444.85 from the purchaser. Thus, BSB has been paid a total of $323,904.04 on a claim originally filed for $292,111.91. While BSB may retain its second mortgage lien on the SMP, it appears to the Court that, unless it can prove that it was oversecured and thus entitled to postpetition interest, BSB has been paid in full.
In general terms, 11 U.S.C. § 502(b)(2) disallows a claim for unmatured interest.
Section 506(b) provides that an oversecured creditor is entitled to contractual interest, fees, if reasonable, and costs to the extent that the claim is oversecured. A secured creditor may therefore recover interest, fees and costs from the difference between the amount of its claim and the value of its collateral, namely the equity cushion. The Supreme Court has held that the equity cushion constitutes the outside limit on the postpetition interest and fees which may be collected by an oversecured creditor. This Court has previously ruled that valuation of the creditor's claim is measured as it existed at the time of the petition date, because postpetition interest is limited to the amount by which the claim was oversecured at that time.
United Sav. Ass'n of Texas v. Timbers of Inwood Forest Associates, Ltd., 484 U.S. 365 (1988).
In re Anderson Farms, Case No. 98-40445-12 and In re Anderson, Case No. 98-40304-12 (Bankr.D.Kan. May 2, 2000).
Whether BSB's claim is oversecured remains to be established. If, in fact, BSB was oversecured on the date of filing, it would be entitled to postpetition interest up to the value of its collateral under § 506(b). The Court cannot ascertain from BSB's accounting, the stipulated facts or the file whether this was the case. Thus, the Court will set this matter for pretrial on the issue of whether BSB's claim was oversecured and the resulting amount of its claim.
D. Laches/estoppel .
BSB asserts that the objections filed by the Trustee and FNB should be overruled on the basis of laches and estoppel, arguing that the case has been pending for over five years with no objections to BSB's claim having been filed. Having ruled in BSB's favor on the issue of whether it holds a secured claim in the SMP, the Court need not address the merits of this issue, other than to note that the issue of BSB's secured status and claim was not an issue until the case was converted to Chapter 7.
IT IS THEREFORE ORDERED BY THE COURT that the objections to secured claim of Bennington State Bank are denied in part as to the issue of whether the bank retains a second mortgage lien in the SMP.
IT IS FURTHER ORDERED BY THE COURT that a pretrial will be set for:
May 4, 2001 at 2:15 p.m. in Wichita, Kansas, on the issue of whether BSB is oversecured under § 506(b) and the resulting amount of its claim.
IT IS SO ORDERED.