In re Bootjack Dairy M&D, LLC

654 B.R. 368

IN RE: BOOTJACK DAIRY M&D, LLC, Debtor.

In re: Bootjack Dairy, Inc., Debtor.

Bankruptcy Case No. 23-40226-JMM

Bankruptcy Case No. 23-40227-JMM

United States Bankruptcy Court, D. Idaho

Signed August 28, 2023

D. Blair Clark, Boise, Idaho, Attorney for the Debtors.

Kim J. Trout, Trout Law, PLLC, Boise, Idaho, Steven L. Taggart, Olsen Taggart PLLC, Idaho Falls, Idaho, and Steven F. Schossberger, Trout Law, PLLC, Boise, Idaho, Attorneys for Black Butte Ranch, LLC.

MEMORANDUM OF DECISION

JOSEPH M. MEIER, CHIEF UNITED STATES BANKRUPTCY JUDGE

Introduction

Before the Court are Black Butte Ranch, LLC's ("Black Butte") motions to dismiss Bootjack Dairy M&D, LLC ("LLC") and Bootjack Dairy, Inc.'s ("Inc.," collectively the "Debtors") chapter 12 bankruptcies as bad faith filings. Also before the Court are LLC and Inc.'s motions to reject a purchase and sale agreement they entered into that was later assigned to Black Butte.¹ The Court held an evidentiary hearing on the motions on June 30, 2023, which was continued to July 20, 2023. At the initial hearing, the Court heard testimony from the principals of the Debtors, Doug and Mark Kerner and the principals of Black Butte, Karl Studer and Matthew Darrington. At the continued hearing, the Court heard testimony from the Debtors' accountant, Audra Wagner, and Mr. Studer again. Numerous exhibits were admitted at the hearings, many by stipulation. The parties submitted written closing arguments on August 4, 2023. LLC Doc. Nos. 82 & 83, Inc. Doc. Nos. 104 & 105. The Court then took the matter under advisement. Having considered the evidence and arguments made by the parties, this decision sets forth the Court's findings, conclusions, and reasons for its disposition of the motions. Rules 7052 and 9014.²

Background

A) Prepetition events: the Debtors, Black Butte, the purchase and sale agreement, and the state court litigation

The Debtors own and operate a dairy and farm in central Idaho. They milk over 1,000 cows and farm around 2,400 acres of cow feed, including hay, corn, and barley. Ex. 352, p. 72:4-12. LLC is the land-holding company and owns the bulk of the real property used by Inc. Inc. is the operating entity and owns the other assets used in the dairy and farm, which it operates for the benefit of both entities. The Debtors' principals are brothers Doug and Mark Kerner.³ The Kerners' grandfather started the dairy operation, which they took over after their parents retired. Id. at p. 70:10-17. The dairy operation employs approximately 30 people, many of whom live on the property. Id. at p. 117:19-118:1. Some of the real property used by Inc. is still owned by Bootjack Limited Partnership ("Limited Partnership"), an entity established by the Kerners' parents. The Kerners formed LLC to own the real property when they took over the operation from their parents.⁴

In 2022, the Debtors decided to sell the dairy operation and some of their farmland. The Kerners testified the reason for the sale was that the operation had been experiencing a few drought years.⁵ Id. at p. 73:20-25, 80:4-6. This made it difficult to grow sufficient feed and necessitated the purchase of more outside feed, which subtracted from the operation's bottom-line. Id. at p. 80:7-81:20. In July 2022, the Debtors and Limited Partnership entered into a purchase and sale agreement (the "Sale Agreement") with Magic Milk, Inc. "and/or assigns" to sell the bulk of their dairy operation while retaining just under 1,000 acres of farmland, which they intended to continue farming.⁶ Exs. 332-336. Magic Milk's president was Brent Funk. Funk was a known dairyman in the area and the Kerners' understanding was that Magic Milk was going to continue the dairy operation. Ex. 352, p. 117:11-18; Ex. 330, p. 130:13-19. When the Sale Agreement was negotiated and executed neither the Kerners nor the Debtors had an attorney. LLC Doc. No. 41 & Inc. Doc. No. 64, p. 9. The original real estate agent the Debtors worked with became ill and they worked with a real estate agent with whom they did not have a prior relationship. Ex. 352, p. 135:6-23.

The agreed upon purchase price was $19.8 million, comprised of $100,000 in earnest money and an $8.7 million down-payment to be paid in cash at the September 16, 2022 closing.⁷ Exs. 332 & 335. The remaining $11 million was to be financed by the Debtors, secured by a "mortgage," and repaid via "annual payments at 4% interest amortized over twelve (12) years." Ex. 335. The assets being acquired included about 1,671 acres of real property, water rights, 2,612 cows, the dairy and outbuildings, and an assignment of the entity's Dairy Farmers of America ("DFA") milk shipping rights and Confined Animal Feed Operation ("CAFO") permits. Id. The Sale Agreement contained rights of first refusal to buy "properties owned by Boot Jack Dairy, it's [sic] members or principals that are ancillary to its agricultural operation in Lincoln and Gooding Counties[ ]" and feed "produced on any farm ground owned by Boot Jack Dairy, and it's [sic] affiliates."⁸ Id.

The Sale Agreement also had several other provisions relating to feed, specifically that the sale included "feed inventory on time of signing," that the parties would verify the feed inventory within the due diligence period, and that the included feed inventory would be "ample to carry dairy until 2023 crop is harvested." Id. The Sale Agreement further provided that the buyer was "responsible for the harvest of 2022 corn crop," and would pay $50 per ton "for all harvested corn with the exception of corn harvested from any farm pertaining to this agreement." Id.

The Sale Agreement was memorialized by a "Re-23 Commercial/Investment Real Estate Purchase and Sale Agreement," "Addendum # 1," and "Counter Offer #1,"⁹ each of which were executed by Doug Kerner on July 21, 2022. Exs. 332-336. Funk executed the first two documents on July 18, 2022 and the counteroffer on July 25, 2022.¹⁰ Id.

Shortly thereafter, Magic Milk assigned the Sale Agreement to Black Butte via an Assignment of Contract dated August 10, 2022.¹¹ Ex. 342. Black Butte was a recently formed entity owned by Karl Studer, a businessman and rancher with land near the Debtors. Matthew Darrington, a local attorney in the area, was Black Butte's general counsel and general manager. The assignment came as a surprise to the Kerners. They did not know who Black Butte or Darrington were and did not learn of Mr. Studer's involvement until much later.

In early August 2022, the Debtors executed Addendum #2 to the Sale Agreement, which is not in the record. Ex. 330, p. 28:24-29:16. The buyer would not execute it because, per Mr. Darrington, it made the Sale Agreement more seller friendly by limiting the rights of first refusal and changing the amount of feed to be included in the sale. Id. After the assignment, Black Butte and the Debtors executed several addendums, which mainly operated to extend the due diligence and closing deadlines.¹² In mid-August 2022, Black Butte and the Debtors executed "Addendum # 3" to the Sale Agreement. Ex. 337. The addendum extended the approaching due diligence deadline to September 14, 2022 and the closing to October 14, 2022. In mid-September 2022, Black Butte and Debtors executed "Addendum #4" to the Sale Agreement which extended the due diligence period another 30 days and acknowledged by reference to earlier parts of the Sale Agreement that the corn from one of the properties being sold, referred to as the Pantone property, was included in the sale. Ex. 338.

In September 2022, it came time for the Debtors to harvest their corn crops. The Kerners testified they had their real estate agent contact Black Butte's broker and real estate agent about the harvest, but did not hear anything back from Black Butte regarding the harvest of the corn on the Pantone property. Ex. 352, p. 91:3-14, 130:23-131:12. The Debtors assert that Black Butte was obligated to harvest the 2022 corn crop on the land it was purchasing under the Sale Agreement. Mr. Darrington testified his interpretation of the buyer being "responsible for 2022 corn harvest" was that Black Butte only had to physically harvest the corn if the deal closed before harvest-time and otherwise only had to reimburse the Debtors for their harvest expenses. Id. at p. 54:21-56:15. Moreover, he testified that no one from the Debtors made a demand on anyone at Black Butte in September 2022 that it physically harvest the corn.¹³ Ex. 330, p. 22:24-25:3.

In early October, the Debtors invoiced Black Butte for their harvest expenses on the Pantone property and for the corn they harvested on their other properties. The invoiced amount was approximately $379,000. Ex. 331, p. 14:9-12. The Debtors testified they never really got a response from Black Butte on the invoices. Ex. 352, p. 93:25-94:5. Black Butte apparently was confused by the invoices and wanted more documentation concerning the volume of corn harvested and a breakdown of the expenses of the harvest before it would pay it. Id. at p. 55:23-56:3.

On October 7, 2022, Black Butte and the Debtors executed "Addendum # 5" to the Sale Agreement which extended the closing deadline to November 14, 2022. Ex. 339. On October 12, 2022, Mr. Darrington communicated to Black Butte's broker and real estate agent that he had reviewed the feed inventory that the Debtors' real estate agent had sent to Black Butte's broker and real estate agent via email on August 27, 2022 and agreed to accept it, citing language in the Sale Agreement stating that "Seller and Buyer will verify inventory of cattle, feed, and dairy supplies." Ex. 344 & Ex. 330, p. 37:1-10. The feed inventory was "as of August 1, 2022" and part of a multi-page document, which included a burn-rate for feed being consumed.¹⁴ The Debtors assert this was not the correct feed inventory; while they did provide this document to their real estate agent, they contend it did not reflect the feed inventory accurately and/or the inventory to be...