United States District Court, N.D. Iowa, Central Division
MEMORANDUM OPINION AND ORDER REGARDING APPEAL OF BANKRUPTCY COURT ORDER
MARK W. BENNETT, District Judge.
This appeal from a decision of the bankruptcy court for the Northern District of Iowa raises the question of whether family dairy farmers should be permitted to incur $300, 000 in additional debt for farm improvements, pursuant to 11 U.S.C. § 364(d), from a new creditor, with the loan being secured by "priming liens." This and other questions are raised on the appeal by the family dairy farmers' primary creditor, a bank, from the order of the bankruptcy court conditionally granting the family dairy farmers' Motion to Incur Secured Debt and denying the bank's Motion to Dismiss the family dairy farmers' Chapter 12 bankruptcy case.
I. INTRODUCTION AND BACKGROUND
A. Factual Background
First Security Bank and Trust Company ("First Security") is a community bank with its primary office in Charles City, Iowa. In 2009 and 2010, First Security made a series of loans to Boerderij De Veldhoek, L.L.C. ("the L.L.C."), an Iowa L.L.C. These loans were for the L.L.C. to purchase an 80 acre dairy farm, livestock, and dairy farm equipment in Butler County, Iowa ("Butler County Farm"). Herman and Hendrina Vander Vegt ("the Vander Vegts") owned and operated the L.L.C. (collectively, the Vander Vegts and the L.L.C. will be referred to as "the Debtors"). First Security owned the Butler County Farm, along with the livestock and dairy farm equipment, as a result of its foreclosure on the prior owner.
The Vander Vegts operated a dairy farm, Aver-Berkendijk Dairy Farms, Inc., in upstate New York until 2009, when they and their son, Jeremy Vander Vegt, moved to Iowa at the time of the Butler County Farm purchase. Aver-Berkendijk Dairy Farms, Inc., is a New York corporation ("the New York Farm"). The Vander Vegts also moved livestock and equipment from New York to Iowa. They continued to own real estate in New York and did not wind up the New York Farm.
First Security obtained a real estate mortgage on the Butler County Farm, and priority liens on certain personal property belonging to the Debtors. This personal property included all accounts and other rights to payment, inventory, equipment, instruments and chattel paper, general intangibles, documents, farm products and supplies, government payments, investment property, and deposit accounts. First Security perfected all of its security interests. First Security also received the Vander Vegts' unlimited personal guarantees as well as their agreement to maintain life insurance. First Security made additional loans to the Debtors in early 2010, and obtained a mortgage on the New York Farm.
During the next three years, First Security and the Debtors worked through a series of defaults and payment schedules while the Butler County Farm continually lost money. In the summer of 2012, First Security began foreclosure proceedings in the Iowa District Court for Butler County and was preparing to file foreclosure proceedings in New York.
B. Procedural Background
On August 31, 2012, the Vander Vegts and the L.L.C. each filed for bankruptcy, under Chapter 12 of the United States Bankruptcy Code, in the United States Bankruptcy Court for the Northern District of New York. The Debtors' bankruptcy filings automatically stayed, pursuant to 11 U.S.C. § 362, First Security's state court foreclosures for property located in Iowa and New York, pending resolution of the Debtors' Chapter 12 bankruptcies. First Security is the primary creditor, with claims against the Debtors' assets totaling over $2, 684, 040.75.
First Security obtained transfer of the cases from the Northern District of New York to the Northern District of Iowa. The two cases were transferred on October 25, 2012. The Vander Vegts' case was designated bankruptcy case no. 12-02144 and the L.L.C.'s case was designated bankruptcy case no. 12-02146. On December 7, 2012, First Security sought expedited relief from the automatic stay, or dismissal of the Debtors' Chapter 12 cases. On January 7, 2013, following a hearing and on the agreement of the parties, the bankruptcy court indefinitely continued First Security's motion.
On February 25, 2013, the Debtors filed a motion for authority to use cash collateral to purchase additional cattle and finance dairy operations. The bankruptcy court consolidated the Debtors' cash collateral motion with First Security's motion for relief from the automatic stay/motion to dismiss. On April 30, 2013, the bankruptcy court partially denied First Security's motion for relief from the automatic stay, and completely denied First Security's motion to dismiss. The bankruptcy court granted the Debtors' motion to use cash collateral. The bankruptcy court ordered the Debtors to pay First Security adequate protection payments once the Debtors reached designated revenue levels: at $47, 500 per month in milk revenue, First Security is entitled to $2, 500 per month; and at $50, 000 per month in milk revenue, First Security is entitled to $5, 000 per month. The bankruptcy court also granted First Security permission to commence foreclosure on the property located in New York.
With one exception, it is undisputed that First Security is the priority lienholder on all of the Debtors' real and personal property in both Iowa and New York. On June 7, 2013, the Debtors filed their Motion to Incur Secured Debt in which they sought permission to grant a new creditor "priming liens" to finance the Debtors' building of a new waste storage facility and a rotational pasturing facility for the Butler County Farm. The Debtors asserted that these facilities would improve their dairy operation's efficiency and profitability. In order to build these new facilities, the Debtors requested that the bankruptcy court permit them to incur $300, 000 in additional secured debt, pursuant to either 11 U.S.C. § 364(c) or 11 U.S.C. § 364(d). The Debtors proposed borrowing the money from First National Bank of Waverly ("First National"). The Debtors' proposal would permit First National to obtain a security interest senior to First Security on the Debtors' real and personal property. Thus, all of First National's $300, 000 loan would be senior to First Security's $2, 684, 040.75 claim. First Security objected to the Debtors' proposal and filed a Motion to Dismiss. In its Motion to Dismiss, First Security contended that the Debtors' Chapter 12 case should be dismissed for failing to file a proposed plan for reorganization of their operation within 90 days of their filing for bankruptcy, pursuant to 11 U.S.C. § 1208(c)(3).
On October 13, 2013, the bankruptcy court conditionally granted the Debtors' Motion to Incur Secured Debt, and denied First Security's Motion to Dismiss. In re Vander Vegt, 499 B.R. 631, 639-640 (Bankr. N.D. Iowa 2013). The bankruptcy court first concluded that 11 U.S.C. § 364(c) was inapplicable to the Debtors' motion to secure debt due to First National's requirement that it be given priming liens on the Debtors' property. Id. at 636. The bankruptcy court next addressed whether the Debtors had met the requirements to incur secured debt under 11 U.S.C. § 364(d). First, the bankruptcy court found that the Debtors had met their burden, under § 364(d)(1)(A), of demonstrating that less burdensome financing options were unavailable. Id. This conclusion was based on Jeremy's testimony that he had unsuccessfully requested financing from 15 to 20 other lenders. Id. Next, the bankruptcy court found that the Debtors had met the requirement of providing First Security with adequate protection, as required by § 364(d)(1)(B). Id. at 637. In reaching this conclusion, the bankruptcy court found that the two projects would "more likely than not increase the value of the Debtors' property and [First Security's] collateral." Id. at 639. This factual finding was, in turn based on several other factual determinations. Specifically, the bankruptcy court found that the Debtors' project was only anticipated to take three months to complete and that, upon completion, two grants, totaling $300, 000, from the United States Department of Agriculture, Natural Resources Conservation Service ("NRCS") would be distributed to the Debtors, enabling them to pay off the priming liens. Id. The bankruptcy court further found that the contractors on both projects would be required to carry performance bonds. As a result, the bonds not only protected First National's interests, but also provided "an additional layer of protection" for First Security because any payments to First National, from delays in the projects' completion, would be from a source other than First Security's collateral. Finally, the bankruptcy court found that another layer of protection for First Security was provided by the bankruptcy court's conditioning its approval of the Debtors' Motion to Incur Secured Debt on the Debtors meeting all of the requirements for the NRCS grants prior to First National taking priming liens on First Security's collateral. Id. Thus, based on these unique factual circumstances, the bankruptcy court concluded that the Debtors had met the requirements to incur secured debt under § 364(d) and conditionally granted the Debtors' motion.
The bankruptcy court then turned to First Security's Motion to Dismiss. The bankruptcy court concluded that the Debtors' should be granted additional time to file their plan in this case because there had been a number of excusable delays outside the Debtors' control in getting their plan on file. Id. at 640. Therefore, the bankruptcy court denied First Security's Motion to Dismiss. In response to the bankruptcy court's order, First Security timely filed its appeal of the bankruptcy court's rulings on the Debtors' Motion to Incur Secured Debt and First Security's Motion to Dismiss.
II. LEGAL ANALYSIS
A. Appellate Jurisdiction
A district court has jurisdiction to hear appeals from a bankruptcy court pursuant to 28 U.S.C. § 158. See In re Gaines, 932 F.2d 729, 731 (8th Cir. 1991). A reviewing district court has jurisdiction to hear appeals from final orders, pursuant to 28 U.S.C. § 158(a)(1), and from interlocutory orders with leave of the court, pursuant to 28 U.S.C. § 158(a)(3). See In re M & S Grading, Inc., 526 F.3d 363, 368 (8th Cir. 2008); see also In re Hollway, 370 Fed.App'x 490, 492 (5th Cir. 2010); In re Comdisco, Inc., 538 F.3d 647, 650 (7th Cir. 2008); In re Hooker Invs., Inc., 937 F.2d 833, 836 (2d Cir. 1991).
"To determine the finality of a bankruptcy court order, we consider (1) the extent to which the order leaves the bankruptcy court nothing to do but execute the order; (2) the extent to which delay in obtaining review would prevent the aggrieved party from obtaining effective relief; (3) the extent to which a later reversal on [the contested] issue would require recommencement of the entire proceeding.'" Ritchie Special Credit Invs., Ltd. v. U.S. Trustee, 620 F.3d 847, 852 (8th Cir. 2010); see In re M & S Grading, Inc., 526 F.3d at 368; In re Farmland Indus., Inc., 397 F.3d 647, 650 (8th Cir. 2005); First Nat'l Bank v. Allen, 118 F.3d 1289, 1293 (8th Cir. 1997); In re Broken Bow Ranch, Inc., 33 F.3d 1005, 1007-08 (8th Cir. 1994); In re Apex Oil Co., 884 F.2d 343, 347 (8th Cir. 1989). The Eighth Circuit Bankruptcy Appellate Panel has considered the same three factors in determining finality under 28 U.S.C. § 158(a)(1). See In re Coleman Enters., Inc., 275 B.R. at 538.
There is no dispute that the bankruptcy court order granting the Debtors' Motion to Incur Secured Debt is a final, appealable order. Federal courts have repeatedly held that rulings on such motions are final orders for appeal purposes. S ee In re Swedeland Dev. Grp., Inc., 16 F.3d 552, 559 n.4 (3d Cir. 1994); In re Foreside Mgmt. Co., 402 B.R. 446, 450 (B.A.P. 1st Cir. 2009); In re Indian Motocycle Co., Inc., 289 B.R. 269, 283 (B.A.P. 1st Cir. 2003); In re CMGT, Inc., 424 B.R. 355, 360 (N.D. Ill. 2010); Suntrust Bank v. Den-Mark Constr., Inc., 406 B.R. 683, 687-88 (E.D. N.C. 2009); Bank of New England v. BWL, Inc., 121 B.R. 413 (D. Me. 1990); In re Gloria Mtg. Corp., 65 B.R. 341, (E.D. Va. 1985). The parties, however, dispute whether the bankruptcy court's decision denying First Security's Motion to Dismiss is a final order. Generally, orders denying a motion to dismiss have been deemed to be interlocutory. See In re Coleman Enters., Inc., 275 B.R. 533, 537 (B.A.P. 8th Cir. 2002); see also In re Tr-Valley Distrib., Inc., 533 F.3d 1209, 1216 (10th Cir. 2008); In re Rega Props., Ltd., 894 F.2d 1136, 1138 n.4 (9th Cir. 1990) (citing 1 COLLIER ON BANKRUPTCY ¶ 507, 5-29-30 (Lawrence P. King, ed., 15th ed. rev. 2001)); In re Jartran, Inc., 886 F.2d 859 (7th Cir. 1989); In re Waag, 418 B.R. 373, 377 (B.A.P. 9th Cir. 2009); Gebhardt v. Hardigan, ___ B.R. ___, 2014 WL 1320006, at *1 (S.D. Ga. Mar. 31, 2014).
Analyzing the three factors identified above for determining whether a bankruptcy court order is final, the first factor does not weigh in First Security's favor since the bankruptcy court has work remaining, namely, to determine whether any plan of reorganization can be confirmed and, if not, whether the case should then be converted to a Chapter 7 bankruptcy or dismissed. As to the second factor, any delay in reviewing the bankruptcy court order would not prevent First Security from obtaining effective relief. First Security's claims may well be paid through the normal course of the bankruptcy proceedings. If no confirmable plan is possible, the bankruptcy court may decide to dismiss the case. Meanwhile, all issues concerning the Debtors and their creditors are capable of resolution in the bankruptcy court, where all the Debtors' assets are under its control. Further, denial of First Security's Motion to Dismiss does not interfere with its ability to raise claims and defenses before the bankruptcy court. Thus, the second factor also does not weigh in First Security's favor. Finally, other courts have found that denial of a motion to dismiss is not a final order because such an order does not conclude the litigation. As the court recognized in Coleman: "denial of a motion to dismiss, ordinarily, is the "antithesis" of a final order because, instead of terminating the case or any aspect of it, it allows the matter to proceed.'" In re Coleman Enters., Inc., 275 B.R. at 538 (quoting In re Giguere, 188 B.R. 486, 488 (D.R.I. 1988)); see In re National Office Prods., Inc., 116 B.R. 19, 21 (D.R.I. 1990) (describing the denial of motion to dismiss as representing the "antithesis" of a final order). Accordingly, I find that the portion of the bankruptcy court's order denying First Security's Motion to Dismiss is an interlocutory order.
Where a bankruptcy order is not a final order, a district court may nevertheless grant leave for an interlocutory appeal. 28 U.S.C. § 158(a)(3). Although First Security did not seek leave to appeal the bankruptcy court's interlocutory order denying First Security's Motion to Dismiss, I may consider First Security's timely-filed notice of appeal as a motion for leave to appeal. FED. R. BANKR. P. 8003(c); see In re M & S Grading, Inc., 526 F.3d at 371; In re Faragalla, 422 F.3d 1208, 1211 (10th Cir. 2005); In re Wallace & Gale Co., 72 F.3d 21, 23 n.1 (4th Cir. 1995); In re Coleman Enters., Inc., 275 B.R. at 537. A decision to deny leave to appeal an interlocutory order is purely discretionary. See In re M & S Grading, Inc., 526 F.3d at 371; In re Coleman Enters., Inc., 275 B.R. at 537. When deciding whether to grant leave to appeal an interlocutory order, courts have looked to the standards found in 28 U.S.C. § 1292(b), which govern the jurisdiction of courts of appeals to review interlocutory orders. See In re Machinery, Inc., 275 B.R. 303, 306 (B.A.P. 8th Cir. 2002); In re Coleman Enters., Inc., 275 B.R. at 538; In re Moix-McNutt, 215 B.R. at 409 n. 6 (B.A.P. 8th Cir. 1997). "Section 1292(b) requires that: (1) the question involved be one of law; (2) the question be controlling; (3) there exists a substantial ground for difference of opinion respecting the correctness of the [bankruptcy] court's decision; and (4) a finding that an immediate appeal would materially advance the ultimate termination of the litigation." In re Machinery, Inc., 275 B.R. at 306 (citing 28 U.S.C. § 1292(b)); see In re Lewis and Clark Apartments, LP, 379 B.R. 47, 52 (B.A.P. 8th Cir. 2012); In re Coleman Enters., Inc., 275 B.R. at 538-39; In re Moix-McNutt, 215 B.R. at 409 n. 6. Here, First Security seeks to raise the question of whether the bankruptcy court abused its discretion in granting the Debtors an extension of time to file their reorganization plan. This is a controlling question that is a question of law which holds the possibility of advancing the ultimate termination of this litigation. Finally, the question raises the possibility for a difference of opinion concerning the correctness of the bankruptcy court's decision. Although I view this as an extremely close question, I will exercise my discretion to hear this interlocutory appeal. First Security's notice of appeal, which I construe as a motion for leave to appeal the Motion to Dismiss, is granted.
B. Standard Of Review
"When a bankruptcy court's judgment is appealed to the district court, the district court acts as an appellate court and reviews the bankruptcy court's legal determinations de novo and findings of fact for clear error.'" In re Falcon Prods., Inc., 497 F.3d 838, 841 (8th Cir. 2007) (quoting In re Fairfield Pagosa, Inc., 97 F.3d 247, 252 (8th Cir. 1996)); see In re Armstrong, 291 F.3d 517, 521-22 (8th Cir. 2002); In re Cedar Shore Resort, Inc., 235 F.3d 375, 379 (8th Cir. 2000); In re Clark, 223 F.3d 859, 862 (8th Cir. 2000); In re Dakota Rail, Inc., 946 F.2d 82, 84 (8th Cir. 1991); FED. R. OF BANKR. P. 8013. A district court reviews the bankruptcy court's interpretation of the bankruptcy code de novo. See In re Zahn, 526 F.3d 1140, 1142 (8th Cir. 2008); In re Farmland Indus., Inc., 397 F.3d 647, 650 (8th Cir. 2005). Where issues are committed to the bankruptcy court's discretion, review is for abuse of discretion. See In re Zahn, 526 F.3d at 1142. "The bankruptcy court abuses its discretion when it fails to apply the proper legal standard or bases its order on findings of fact that are clearly erroneous.'" Id. (quoting In re Farmland Indus., Inc., 397 F.3d at 651). "Under the clearly erroneous standard, we will overturn a factual finding only if it is not supported by substantial evidence in the record, if it is based on an erroneous view of the law, or if we are left with the definite and firm conviction that an error was made." Kingman v. Dillard's, Inc., 721 F.3d 613, 616 (8th Cir. 2013) (quoting Roemmich v. Eagle Eye Dev., LLC, 526 F.3d 343, 353 (8th Cir. 2008) (citation and internal quotation marks omitted)).
I will apply these standards to each of the issues now asserted in First Security's appeal of the bankruptcy court's order conditionally granting the Debtors' Motion to Incur Secured Debt and denying First Security's Motion to Dismiss.
C. Issues On Appeal
First Security raises several issues in its appeal. Initially, First Security contends that the Debtors have failed to meet the requirements of 11 U.S.C. § 364(d). Specifically, First Security contends that the Debtors have not established that they have been unable to obtain credit by any other means, as required by § 364(d)(1)(A). First Security also contends that the Debtors have failed to show that First Security's position is adequately protected, as required by § 364(d)(1)(B). First Security also appeals the bankruptcy court's decision to deny First Security's Motion to Dismiss. First Security argues that the ...