In re Brett M. Shulista And Patricia A. Shulista, Bankruptcy No. 10–00019.

451 B.R. 867

74 UCC Rep.Serv.2d 370

In re Brett M. SHULISTA and Patricia A. Shulista, Debtors.Wells Fargo Bank, N.A., Plaintiff,

v.Tama Benton Cooperative; Interstate Grain, Defendants.

Bankruptcy No. 10–00019.

Adversary No. 10–09032.

United States Bankruptcy Court, N.D. Iowa.

April 19, 2011.

G. Mark Rice, Whitfield & Eddy, P.L.C., Des Moines, IA, for Plaintiff.Marty L. Rowlet, Shuttleworth & Ingersoll, P.L.C., Jeffrey P. Taylor, Cedar Rapids, IA, for Defendants.

RULING ON THE MOTION OF WELLS FARGO BANK, N.A. AND CROSS–MOTION OF INTERSTATE GRAIN FOR SUMMARY JUDGMENT

THAD J. COLLINS, Chief Judge.

This matter came before the Court on the Motion of Plaintiff Wells Fargo Bank, N.A. for Summary Judgment. Defendant Batcheler Enterprizes, Inc. d/b/a Interstate Grain Service filed a Resistance and Cross–Motion for Summary Judgment. The Court held a telephonic hearing on November 19, 2010. Wells Fargo Bank, N.A. (“Wells Fargo”) was represented by G. Mark Rice. Batcheler Enterprizes, Inc. d/b/a Interstate Grain Services (“Interstate Grain”) was represented by Jeffrey P. Taylor. Defendant Tama Benton Cooperative did not participate. After hearing arguments of counsel, the Court took the matter under advisement. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), (K), and (O).

STATEMENT OF THE CASE

This Court previously ordered a sale of livestock that has been the subject of disputes about ownership between creditors in this case and the related HighSide Pork, LLC bankruptcy case. Two creditors in this case, Wells Fargo and Interstate Grain, claim competing interests in the livestock sale proceeds. In Cross Motions for Summary Judgment, the parties seek an interpretation of Iowa Code § 570A.4 which governs the lien priority of an agricultural supply dealer. The interpretation of that Code section will determine the relative priority of these parties to the sale proceeds. Wells Fargo argues Interstate Grain has a priority limited to the $51,365.04 in feed it sold in the 31 days before Interstate Grain filed its financing statement. Interstate Grain asserts it has a superior priority to Wells Fargo for $70,599.50 of the proceeds and equal priority for $22,542.42.

The Court resolves this complicated issue by applying the plain meaning of Iowa Code § 570A.4 and concludes that Interstate Grain has a perfected lien limited to $51,365.04. The Court does not resolve the issue of priority in the remaining livestock sale proceeds. That issue will be set for hearing.

PROCEDURAL AND FACTUAL BACKGROUND

a. Factual Background

The parties agree on the material facts. The Shulistas are in the hog business both individually and through their ownership of another corporation, HighSide Pork, LLC (“HighSide”). HighSide is a limited liability company they formed to produce SEW (Special Early Wean) pigs. The Shulistas are the sole members of, and control HighSide. The Shulistas filed for Chapter 12 bankruptcy on January 8, 2010 (Case No. 10–00019). HighSide separately filed a Chapter 12 bankruptcy on the same date (Case No. 10–00020). Both the Shulistas and HighSide were involved in some aspects of the hog operation. They both owned pigs and hogs at various times. Ownership of the animals routinely shifted between the two.

When HighSide and the Shulistas filed their respective bankruptcy cases, there was uncertainty about which of them owned the livestock at that time (the “Pigs”). To complicate matters, the Pigs were being fed by nine different custom growers in Delaware, Linn, and Benton County, Iowa.

HighSide and the Shulistas both filed expedited motions to sell the Pigs on the first day of their bankruptcy cases. The Court authorized them to market and sell 5,002 head of feeder pigs. The Order stated that “the liens of all parties claiming an interest in pigs [with the exception of the custom growers' liens not at issue here] shall attach to the proceeds in the same manner and fashion as if the [P]igs had not been sold and with the same priority as if the [P]igs had not been sold.” Order Approving Motion to Sell Free and Clear of Liens Except the Liens of Custom Growers Under Iowa Code § 579B at 2, Case No. 10–00019, ECF No. 13. The Court required the proceeds from the sale to be held in a separate account pending resolution of the question of who is entitled to the proceeds.

In a ruling in the HighSide bankruptcy (Case No. 10–09031), filed concurrently with the Ruling here, this Court resolved the ownership issue. The Court ruled that the Pigs were the property of the Shulistas—and not HighSide—at the time of the bankruptcy filings. As such, the sale proceeds are the property of the Shulistas' bankruptcy estate for distribution to the Shulistas' creditors. The proceeds from the sale totaled $250,671.50. The proceeds are currently being held in escrow by the Shulistas' counsel. Both Interstate Grain and Wells Fargo claim an interest in the sale proceeds.

The undisputed facts giving rise to the priority issues in this case are as follows. The Shulistas individually executed four promissory notes (collectively, “Notes”) in favor of Wells Fargo. They also executed a security agreement in favor of Wells Fargo. The security agreement grants Wells Fargo a security interest in the Shulistas' livestock, other property, and all proceeds thereof. On October 13, 1998, Wells Fargo perfected its security interest by filing a UCC Financing Statement with the Iowa Secretary of State. Wells Fargo made the necessary filings to properly continue the Financing Statement.

Interstate Grain provided feed for the Shulistas' hog operation. As required by Iowa Code § 570A.2, Interstate Grain sent a certified request for financial information about the Shulistas to Wells Fargo before selling feed. Wells Fargo failed to respond to Interstate Grain's certified request.

From November 6, 2009 through January 8, 2010, Interstate Grain sold $93,141.42 in feed to the Shulistas. Of that total, the Shulistas purchased $51,365.04 of the feed in the 31–day period from November 6, 2009 to December 7, 2009. On December 7, 2009, Interstate Grain filed a financing statement with the Iowa Secretary of State to perfect its lien. The Shulistas are listed on the financing statement as the debtor. The collateral description includes all hogs owned by the Shulistas and proceeds thereof. Interstate Grain filed no additional financing statements.

Wells Fargo has filed a Proof of Claim in both the Shulista bankruptcy case and the HighSide bankruptcy case (where it is also a creditor). Each Proof of Claim is in the amount of $579,372.05. This represents the total amount due under the Notes as of the Petition date. Interstate Grain has filed a claim in the Shulista bankruptcy asserting an agricultural supply dealer lien of $93,141.42 in the sale proceeds.

Wells Fargo brought this adversary proceeding against Interstate Grain and another Shulista creditor, Tama Benton Cooperative. Wells Fargo seeks a determination of the extent and priority of the Defendants' liens. Wells Fargo and Tama Benton Cooperative agreed to an Order to deal with Tama Benton's interest in the sale proceeds. This adversary case proceeds solely to determine the priority of the claims of Wells Fargo and Interstate Grain.

b. Summary Judgment Filings and Arguments

On October 11, 2010, Wells Fargo moved for summary judgment. Wells Fargo argues that Iowa Code §§ 570A.4 & 570A.5 limit Interstate Grain to a superior perfected supply dealer lien of $51,365.04. This amount, according to Wells Fargo, covers only the feed sold to the Shulistas in the 31–day period from November 6, 2009 through December 7, 2009. Wells Fargo argues its own prior-perfected security interest is superior to the remainder of Interstate Grain's $41,776.38 unperfected lien for the remaining feed Interstate Grain supplied. Wells Fargo argues it has first priority in the remaining $199,306.46 of sale proceeds ($250,671.50 less Interstate Grain's superior perfected portion of its lien, $51,365.04).

Interstate Grain argues for a different reading of Iowa Code § 570A.4. Interstate Grain believes that its single filing at the end of the first 31–day period that it sold feed perfected its interest on a continuing basis for all feed it sold to the Shulistas. Interstate Grain argues § 570A.4 is ambiguous regarding the need for additional filings and the Court must evaluate the Code language using a broader practical and historical context. It argues that Wells Fargo's plain-meaning construction would lead to absurd results, including unnecessary multiple filing fees and repeated expensive requests by suppliers for updated financial information from banks. It argues that a requirement of multiple filings runs contrary to the core principle of notice underlying the central filing system. It further argues that Wells Fargo's plain-meaning approach would render a portion of the Iowa UCC addressing agricultural liens meaningless. It also makes equitable arguments that it supplied feed to Wells Fargo's collateral and Wells Fargo should not be allowed to both trump Interstate Grain's lien and benefit from the feed supply.

Based on its interpretation of § 570A.4, Interstate Grain argues that the portion of its secured claim superior to that of Wells Fargo is $70,599.50. It argues it is perfected under § 570A.4 for the total value of feed supplied, $93,141.42. It contends that Iowa Code § 570A.5(3) determines its priority when an agricultural supplier and a lender are both perfected in the collateral. Under the § 570A.5(3) formula, Interstate Grain has priority for the value the feed contributed as an input to the livestock's market value. Interstate Grain argues that value is $70,599.20. It asserts the remaining $22,542.42 of its perfected lien is equal in priority to Wells Fargo's $579,372.05 security interest under Iowa Code § 570A.5(2). As a result, Interstate Grain contends the parties must share pro rata in the remaining sale proceeds...