The opinion
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEBRASKA
IN THE MATTER OF: ) Case No. BK19-41570-BSK
)
WESLEY H. HITCHCOCK, ) Chapter 12
)
Debtor. )
)
Order
THIS MATTER comes before the Court on two motions. The first is a motion for
relief filed by American Mortgage Company (“AMC”) (Doc. #131). The second is
Debtor’s objection to AMC’s three proofs of claim, and request for valuation and
cramdown. (Doc. #140). Trial on both motions was held by video conference on
August 6, 2020. Patrick M. Patino appeared for the Debtor, and Cindy R. Volkmer
appeared for AMC.
For the reasons stated herein, AMC is granted relief as to all collateral that secures
its claims. Debtor cannot cram down AMC’s claim as a matter of law because Debtor
does not own the real estate. Debtor has not been able, and does not appear to be
able, to file a feasible Chapter 12 Plan. On or before August 27, 2020, Debtor shall
show cause as to why his bankruptcy case should not be dismissed. Alternatively,
Debtor may move to convert his case to a Chapter 7 case.
Debtor’s indebtedness to AMC is secured, in part, by agricultural real estate located
in Brown County and Cherry County, Nebraska. In the parties’ pretrial statement,
AMC asserts that its claims are over-secured by $1,844,433.69, while Debtor asserts
that they are under-secured by approximately $1,700,000. AMC also contends that
the automatic stay does not apply to the real estate collateral because it is not owned
by the Debtor. Alternatively, AMC contends that cause exists to grant relief from the
automatic stay.
Facts
Except as noted below, the parties stipulated to the following facts in their Joint
Preliminary Pretrial Statement (Doc. #202).
1. Debtor and his wife Candace S. Hitchcock filed for Chapter 12 relief on
September 17, 2019.
2. Debtor and Mrs. Hitchcock are presently involved in a dissolution of marriage
action. The cases were deconsolidated, and Mrs. Hitchcock’s case was converted
to a Chapter 7 case. (Doc. #187; Doc. #190).
3. AMC filed three claims totaling $4,583,075.31, including Claim No. 32 in the
amount of $1,335,761.08, Claim No. 33 in the amount of $1,341,637.59, and
Claim No. 34 in the amount of $1,905,676.64.
4. The indebtedness owed to AMC is cross-collateralized by corn, cattle, machinery
and equipment and real estate. The parties stipulated the value of the non-real
estate collateral is $2,331,575.30. After deducting the non-real estate collateral,
Debtor owes AMC $2,251,500.01 as of the petition date.
5. AMC has already been granted relief from stay as to the corn and cattle. (Doc.
#81; Doc. #98l; Doc. #141; Doc. #169).
6. The real estate is subject to a first position lien held by Security First Bank. As
of the petition date, Security First Bank was owed $4,259,066. Therefore, AMC is
fully secured if the real estate is worth more than its debt plus Security First
Bank’s debt, which equals $6,510,566.01.
7. Debtor does not own the real estate collateral. It is owned by Hitchcock One, LLC
(“Hitchcock One”), and Gordon and Shirley Hitchcock.
Relief from Automatic Stay
AMC seeks relief against machinery and equipment owned by the Debtor and
against real estate owned by third parties Hitchcock One and Gordon and Shirley
Hitchcock. The automatic stay prohibits certain actions against the Debtor. See 11
U.S.C. § 362(a). However, “[t]he automatic stay does not, in general, apply to actions
against third parties.” Nat’l Bank of Ark. v. Panther Mountain Land Dev., LLC (In re
Panther Mountain Land Dev., LLC), 686 F.3d 916, 921 (8th Cir. 2012). Although
Debtor is a member of Hitchcock One, as a general matter the automatic stay does
not apply “to actions against parties who enjoy factual or legal relationships with a
debtor, such as a debtor's wholly owned subsidiaries.” Id. at 923.
The automatic stay clearly applies to machinery and equipment collateral as it is
owned by the Debtor. The automatic stay only applies to the real estate if it is
property of the estate. The stay prohibits acts “to obtain property from the estate,”
“to exercise control over property of the estate,” or to “enforce any lien against
property of the estate.” 11 U.S.C. § 362(a). The bankruptcy estate is comprised of “all
legal and equitable interests of the debtor in property as of the commencement of the
case,” see 11 U.S.C. § 541(a)(1), and is to be “construed broadly as encompassing a
debtor’s many and varied property interests.” Panther Mountain Land Dev., 686
F.3d at 924.
In his brief, Debtor asserts a legal or equitable interest in the real estate because
“his entire farming operation comprises the 700 acres that he has already planted
with his 2020 crop of piddle (sic) beans”, and “he physically occupies and leases the
700 acres.” A leasehold coupled with a possessory interest would qualify as property
of the estate. See In re Hejco, Inc., 87 B.R. 80, 83 (Bankr. D. Neb. 1988).
The record does not include evidence that a leasehold or possessory interest exists or
the terms of any lease. Debtor’s schedules identify his ownership interest in
Hitchcock One, which itself “owns farmground” (Doc. #20). Debtor’s Schedule A
provides the real estate is owned by third parties and that it is scheduled “for
disclosure purposes only”. While Debtor’s Schedule G identifies unexpired leases
between Hitchcock One and DJ Hladky, and between Hitchcock One and Kraig
Freeman, it does not identify any leases between Debtor and Hitchcock One.
Even if Debtor leased the real estate at the time the bankruptcy was filed, the leases
were not assumed and are deemed rejected as a matter of law. Unexpired leases of
nonresidential real property are deemed rejected if not assumed by the earlier of
“120 days after the date of the order for relief; or the date of the entry of an order
confirming a plan.” 11 U.S.C. § 365(d)(4). Upon rejection, the real estate must be
surrendered to the lessors, in this case Hitchcock One and Gordon and Shirley
Hitchcock. Id.
Debtor asserts that the automatic stay should be extended to Hitchcock One and
Gordon and Shirley Hitchcock. The Eighth Circuit is generally reluctant to expand
the scope of the automatic stay and has allowed extensions only where “unusual
circumstances” exist. “The unusual circumstances in which the bankruptcy court can
stay cases against non-debtors are rare”. Panther Mountain Land Dev., 686 F.3d at
921 (quoting Ritchie Capital Mgmt., L.L.C. v. Jeffries, 653 F.3d 755, 762 (8th Cir.
2011)). Such unusual circumstances do not appear to be present in this case. Debtor
asserts he leased property owned by a third party, which is a common occurrence.
Moreover, AMC has liens against the fee interest in the real estate, not against
Debtor’s leasehold interest. The real estate is subject to first position liens owned by
Security First Bank. Security First Bank is free to foreclose its liens upon default.
Even if such unusual circumstances existed, Debtor was required, but did not ask
the court to expand the automatic stay to third parties. To stay an action against a
third party, a bankruptcy court must exercise its broad equitable powers under 11
U.S.C. § 105, requiring the court to weigh the normal considerations justifying
injunctive relief. Panther Mountain Land Dev., 686 F.3d at 926.
[W]e believe that in a situation such as this, where the proposed action
involves only third parties and no estate property, and where an “unusual-
circumstances” “exception” would be needed to justify extension of the
automatic stay, § 105 is the more appropriate source of authority for
assessing the propriety of a stay. We also agree with the Bank that a stay
issued pursuant to that section should be treated as an injunction.
Id. The Court of Appeals added that “[t]he procedures and standards applicable
pursuant to § 105 . . . provide a more than adequate framework for assessing the
propriety of stays in ‘unusual’ situations.” Id. at 927.
Valuation
Debtor seeks to cram down AMC’s lien against the real estate in accordance with 11
U.S.C. § 506(a)(1). That section provides:
An allowed claim of a creditor secured by a lien on property in which the
estate has an interest, or that is subject to setoff under section 553 of this
title, is a secured claim to the extent of the value of such creditor’s interest in
the estate’s interest in such property, or to the extent of the amount subject to
setoff, as the case may be, and is an unsecured claim to the extent that the
value of such creditor’s interest or the amount so subject to setoff is less than
the amount of such allowed claim.
11 U.S.C. § 506(a)(1) (emphasis added).
Debtor and AMC presented evidence as to the value of the fee interest in the real
estate. However, Debtor does not own the real estate. At best he may hold, or have
held, a leasehold or possessory interest. There is no evidence as to the value of
AMC’s interest in Debtor’s leasehold or possessory interest, which is the focus of
§ 506(a)(1).
The failure to present evidence of AMC’s interest in the estate’s interest in the real
estate is of no consequence. A discharge of the Debtor does not affect AMC’s lien in
property owned by third parties as a matter of law. See 11 U.S.C. § 524(e)
(“[D]ischarge of a debt of the debtor does not affect the liability of any other entity
on, or the property of any other entity for, such debt.”). As such, a discharge of
Debtor will not extinguish AMC’s lien against the real estate. It will only release the
Debtor from personal liability. AMC’s lien will survive the bankruptcy case
regardless of the value of the real estate.
In any event, the evidence presented indicates that AMC’s lien is fully secured as of
the date of the bankruptcy petition. Debtor and AMC each presented expert
testimony regarding value of the fee interest.
Debtor’s expert, Donald Kracke, a licensed real estate broker and Accredited Land
Consultant, performed a sales comparison approach. He opined that the combined
value of all real estate (1042.70 acres in Brown County and 952.13 acres in Cherry
County) equaled $4,885,222.64. This value results in AMC’s claim being unsecured
by $1,625,343.37. Kracke testified that agricultural land values decreased in both
counties by 33% between January 2018 and September 2019, in significant part due
to softening commodity prices. Kracke testified that he calculated the 33% decrease
by plotting the price per irrigated acre for eight sales in Brown County, Nebraska,
between January 2018 and August 2019.
The Court is not inclined to accept Kracke’s valuation. Kracke did not explain his
methodology or calculations to arrive at a 33% reduction in value. He did not explain
how he used this percentage to arrive at his final per-acre values. He did not
indicate whether or how the 33% decrease impacted non-irrigated land. He did not
indicate how or whether he adjusted his comparable sales to the subject property.
AMC’s expert, Chad Tetherow, a licensed certified general appraiser, appraised the
parcels and opined the total value equaled $7,490,000. At this valuation, AMC’s
claims are over-secured by $979,433.99.1 Tetherow’s appraisal is certified as
conforming with the Uniform Standards of Professional Appraisal Practice.
Although he agreed with Kracke that the agricultural economy was weaker in
September 2019, he opined that higher quality land in other counties had only
decreased between 3% and 15%, depending on the desirability of the land. He
testified that the Brown County real estate was higher quality for Nebraska. The
real estate in Cherry County was average for the area, but lower quality for
Nebraska.
Debtor disputed the use of the comparable properties Tetherow selected and in using
Brown County sales for neighboring Cherry County. However, Tetherow and Kracke
both testified that there were almost no comparable sales in Cherry County during
the applicable period. Tetherow testified that his use of the comparable properties
was proper under the circumstances and that he properly adjusted them.
Debtor also disputed Tetherow’s valuation of irrigated portions of Brown County
real estate at $5,000 per acre. Kracke testified that the last time irrigated real
estate sold in Brown County for such a price was in early 2018. However, Tetherow’s
valuation results in an over-secured claim of $979,433.99. AMC’s claim would be
over-secured at a per acre value significantly less than $5,000 when spread over the
754.3 irrigated acres in Brown County.
Debtor’s objection to AMC’s three proofs of claim, and request for valuation and
cramdown, is overruled.
Show Cause
Debtor shall show cause on or before August 27, 2020 as to why his case should not
be dismissed. Debtor has filed three Chapter 12 Plans and has been unable to
confirm any of them. Debtor’s current Chapter 12 Plan (Doc. #185) is not
confirmable as it is predicated upon AMC’s claims being crammed down as under-
secured, which Debtor cannot do as a matter of law. The failure to file a confirmable
plan is grounds for dismissal.
The fact that the Plan is not confirmable under § 1225 is by itself grounds for
dismissal. Also, “filing for Chapter 12 protection without the ability to
reorganize renders the petition subject to dismissal. Cause for dismissal
1 AMC asserts in the Joint Preliminary Pretrial Statement (Doc. #202) that the real estate is
valued at $7,735,000 and it is over-secured by $1,844,433.69. This value most closely aligns
with appraisals with an effective date of March 28, 2018, which is not the applicable date for
valuation purposes.
exists where a Chapter 12 debtor has had ample opportunity to propose a
confirmable plan but has failed to do so.
In re Michels, 301 B.R. 9, 18 (Bankr. N.D. Iowa 2003). Debtor’s inability to propose a
confirmable plan is further evidenced by Debtor’s First Amended Chapter 12 Plan
(Doc. #110), which projected a negative cash flow without cramming down AMC’s
claims. Debtor’s Second Amended Chapter 12 Plan projects a positive cash flow, but
in an amount significantly less than what is required to service the indebtedness
owed to AMC.
IT IS THEREFORE ORDERED:
1. Debtor’s Objection to Proof of Claims No. 32, 33, And 34, and request for
valuation and cramdown (Doc. #140) is overruled;
2. Confirmation of Debtor’s Second Amended Chapter 12 Plan (Doc. #185) is denied;
3. American Mortgage Company’s Second Motion for Relief from the Automatic
Stay (Doc. #131) is granted; and
4. Debtor shall have until August 27, 2020 to show cause as to why his case should
not be dismissed. Alternatively, Debtor may file a motion to convert his case to a
Chapter 7 case. If Debtor fails to do either, Debtor’s case will be dismissed
without further notice.
Dated: August 14, 2020
BY THE COURT:
/s/ Brian S. Kruse
United States Bankruptcy Judge
Notice given by the court to:
*Patrick M. Patino
*Cindy R. Volkmer
United States Trustee
Movant (*) is responsible for giving notice to other parties if required by rule or statute.