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In re Big Drive Cattle, L.L.C.

United States District Court, D. Nebraska

March 30, 2016

IN RE: BIG DRIVE CATTLE, L.L.C., Debtor,
v.
CAROL KNISLEY, Appellant. JAMES A. OVERCASH, Trustee; Appellee, Bankruptcy No. BK A13-4040

MEMORANDUM OPINION

Laurie Smith Camp Chief United States District Judge

This matter is before the Court on appeal from the order and judgment issued by the United States Bankruptcy Court for the District of Nebraska[1] (the “Bankruptcy Court”), granting the request of James A. Overcash, the Chapter 11 Trustee (“Trustee”), that certain payments to Appellant, Mr. Carol Knisley (“Appellant”) from Debtor Big Drive Cattle, L.L.C. (“Debtor”) be regarded as voidable transfers under 11 U.S.C. § 547(b). Appellant elected to have this appeal heard by this Court. (Filing No. 3.) For the reasons discussed below, the order of the Bankruptcy Court will be affirmed.

PROCEDURAL BACKGROUND

Debtor filed for relief under Chapter 11 of the Bankruptcy Code on September 9, 2011. On July 31, 2013, Trustee filed an adversary proceeding to recover from Appellant several alleged preferential transfers, totaling $836, 066.64, under 11 U.S.C. 547(b). (United States Bankruptcy Court for the District of Nebraska, Case No. 13-04040, Filing No. 1.)[2] Appellant filed an Answer on September 5, 2013. (BK Filing No. 5.) Appellant and Trustee filed cross motions for summary judgment. (BK Filing Nos. 12, 14, 18, 20, 21, 23, and 24.) On February 20, 2014, the Bankruptcy Court entered an Order denying Appellant’s Motion for Summary Judgment and granting the Trustee’s Summary Judgment Motion. (BK Filing No. 28.) Appellant filed a Notice of Appeal and separate Election to Appeal to the District Court on February 25, 2014. (BK Filing Nos. 31 and 32.) On appeal, this Court reversed the Bankruptcy Court’s Order granting summary judgment on the basis that there remained genuine issues of material fact for trial, including a factual issue regarding whether a bailment was created under Nebraska law that could extend to the cattle sale proceeds, and whether such proceeds were debtor property. Overcash v. Knisley, 512 B.R. 235 (D. Neb. 2014) (Strom, J.) (BK Filing No. 44.) This Court remanded the case to the Bankruptcy Court for further proceedings (the “Remand Order”). (BK Filing No. 44.)

The parties submitted a Joint Preliminary Pretrial Statement to the Bankruptcy Court on November 12, 2015, providing a summary of the issues to be decided at trial. (BK Filing No. 48.) Trial was held on February 10, 2015. At trial, Appellant’s testimony was received through his wife, Shirley Knisley, as Appellant was said to be incapacitated with Alzheimer’s Disease. (BK Filing No. 77; Trial Transcript, Filing No. 14 (“Tr.”) 3:20-25.) The Bankruptcy Court ordered the parties to submit post-trial briefs, and the parties did so. (BK Filing Nos. 80, 81 and 82.) On March 30, 2015, the Bankruptcy Court entered its Order (BK Filing No. 83) and Judgment (BK Filing No. 84). This appeal followed.

FACTUAL BACKGROUND

I. Appellant’s General Relationship to Debtor

Appellant held an equity membership interest in Big Drive Cattle, LLC (“Debtor”), a cattle feedlot, from the time of its inception in or around February 2009. (BK Filing No. 48, Summary of Uncontroverted Facts (“SUF”) ¶ 1.) Debtor had an operating line of credit account (the “Account”) with Farm Credit Services of America (“FCSA”) in the amount of $1, 500, 000. (BK Filing No. 57.) Other than the Account, Debtor did not have a deposit, checking account, or any other account with FCSA. (BK Filing No. 29-2.) In order for Debtor to secure the Account, FCSA required Appellant to execute a Promissory Note and Limited Guaranty of Payment (the “Promissory Note”). (BK Filing Nos. 57-60.) The Promissory Note stated, in part, that “undersigned Borrower(s) jointly and severally promise to pay in U.S. dollars to [FCSA], Lender, at its office in Omaha, Nebraska, or order, the principal sum of ONE MILLION FIVE HUNDRED THOUSAND, $1, 500, 000, (Maximum Principal Balance), plus interest on the principal remaining from time to time unpaid.” (BK Filing No. 58 at 1.) The Promissory Note was signed by Debtor’s members, including Appellant on behalf of Debtor and on behalf of the Knisley Trust. (BK Filing No. 58 at 2-3; BK Filing No. 97; Tr. 21:12-23:19.)

The Promissory Note provided that FCSA was not obligated to advance any funds; was not obligated to provide notice of nonpayment; could decrease the funds available to Debtor; was granted a security interest in any funds held by FCSA; and could apply any such funds against any loans or other obligations Debtor owed FCSA. (BK Filing No. 58 at 2-4; BK Filing No. 97.) With respect to FCSA’s security interest, the Promissory Note stated:

Any voluntary advance conditional payments made by me/us to [FCSA] or any funds held by [FCSA] in any account are subject to applicable policies and procedures as may be adopted from time to time. [FCSA] is granted a security interest in all of the above funds and may exercise the right to apply these funds against any loans or other obligations I/we may owe lender.

(BK Filing No. 58 at 2.)

On March 10, 2010, and April 27, 2010, Appellant entered into Limited Guaranty of Payment contracts, in which Appellant personally guaranteed the payment of the debt incurred by Debtor on the FCSA $1, 500, 000 line of credit account, up to 39.31 percent of the remaining balance of the indebtedness. (BK Filing Nos. 59-60.) Appellant purchased the feed lot used by Debtor, and purchased irrigated farm ground around the feed lot to grow corn. (Tr. 30:15-24.) Appellant pledged the real estate and personal property at the farm and at the feed lot as security for the Debtor’s operating line of credit with FCSA. (Tr. 78:23-79:12.)

II. Transactions Between Debtor and Appellant

Trustee seeks to void five specific transfers in this case (referred to collectively as the “Transfers”). (BK Filing No. 48.) From at least February 2009, until December 2010, Appellant purchased certain cattle through cattle buyers, using funds from an operating loan at National Livestock Credit Corporation (“NLCC”), and shipped the cattle to Debtor to be fed and held until such time as they reached an appropriate weight and size. (BK Filing No. 48, SUF ¶ 2.) At no time did Appellant transfer or intend to transfer legal title or ownership interest in those cattle to Debtor. (BK Filing No. 48, SUF ¶ 3.) Appellant directed that, once those cattle reached an appropriate weight and size, Debtor was to negotiate the sale of those cattle to third parties on behalf of Appellant. (BK Filing No. 48, SUF ¶ 4.) Debtor negotiated such sales on behalf of Appellant. (BK Filing No. 48, SUF ¶ 5.) Debtor regularly calculated the price of the feed it used to feed Appellant’s cattle. (BK Filing No. 48, SUF ¶ 6.) Once Debtor sold cattle on behalf of Appellant to third parties, the third parties transferred the proceeds (referred to in this Memorandum Opinion as the “cattle sale proceeds”) to Debtor. (BK Filing No. 48, SUF ¶ 7.) Debtor then transferred the cattle sale proceeds into its FCSA Account. (BK Filing No. 48, SUF ¶ 8.) Debtor calculated the amount of money Appellant owed Debtor for feeding Appellant’s cattle, and Debtor retained that money. (BK Filing No. 48, SUF ¶ 9.) Debtor eventually sent the remaining proceeds to NLCC by drafts made payable to Appellant and NLCC jointly. (Tr. 34:14-25, 34:14-35:7, 45:11-16, 59:24-60:474:12-13; BK Filing No. 68 at 1, 3; BK Filing No. 69 at 1-2; BK Filing No. 70 at 1, 3; BK Filing No. 71 at 1-3; BK Filing No. 72 at 1-4.)

Three transfers, for $31, 735.99, $121, 433.63, and $136, 823.92, were completed on October 26, 2010. (BK Filing No. 54 at 9.) Another, in the amount of $113, 408.74, was completed on November 17, 2010. (BK Filing No. 55 at 5.) A final transfer, for $347, 084.99, was completed on either December 16, 2010 (Filing No. 72), or December 22, 2010 (BK Filing No. 56 at 6.) Debtor’s drafts were written on the FCSA Account. (BK Filing Nos. 61-65.) The five transfers (the “Transfers”) are summarized as follows:

Debtor Lot #

# of Cattle

Weight in (lbs) (Shipped)

Weight out (lbs) (Sold)

Date Sold

Date Debtor Sent Payment to Appellant

Amount Received by Appellant

155

123

581

1188

9/02/2010

10/20/2010

$121, 433.63

181

29

728

1187

9/02/2010

10/20/2010

$31, 735.99

203

149

627

1188

9/02/2010

10/20/2010

$136, 823.92

238

146

664

1194

9/08/2010

11/15/2010

$113, 408.74

170

312

386

1188

7/07-

11/2/2010

12/02/2010

$347, 084.99

(See BK Filing No. 48, SUF ¶ 11, 13, 15, 17, 19; BK Filing No. 68 at 1, 3; BK Filing No. 9 at 1-2; BK Filing No. 70 at 1, 3; BK Filing No. 71 at 1-3; BK Filing No. 72 at 1-4.)

The last of these payments initially did not clear. Debtor’s Statement of Account demonstrates that FCSA reversed draft number 8816, in the amount of $347, 087.99 at the first presentation on December 17, 2010, due to insufficient funds (BK Filing No. 56 at 5-6, 9), and did not clear until the second presentation on December 22, 2010. (BK Filing No. 56 p.5-6, 9). The Knisleys did not receive notice that any transfer made to NLCC on their behalf by Debtor was dishonored by Farm Credit. (Tr. 68:7-69:13.)

STANDARD OF REVIEW

This Court has jurisdiction over appeals from final judgments and orders of the Bankruptcy court under 28 U.S.C. § 158(a)(1). The bankruptcy court's factual findings are reviewed for clear error and its conclusions of law are reviewed de novo. In re M & S Grading, Inc., 526 F.3d 363, 367 (8th Cir. 2008); see also Fed. R. Bankr. P. 8013. The district court may affirm, reverse or ...


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