In re Graves Farms

IN RE: GRAVES FARMS, Debtor

IN RE: HAROLD DEAN GRAVES KAREN LYNN GRAVES Debtors

IN RE: MICHAEL KEITH GRAVES RACHELLE RAE GRAVES Debtors.

Case No. 18-10893

Case No. 19-10064

Case No. 19-10982

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF KANSAS

July 26, 2019

DESIGNATED FOR ONLINE PUBLICATION

Chapter 12

MEMORANDUM OPINION

This is Graves Farms' second attempt to confirm a plan. The initial Graves Farms Chapter 12 plan (the "Partnership Plan") could not be confirmed because that debtor did not present evidence of its previous performance and the proposed plan represented a significant change in the debtor's historical operations by adding a new crop (cotton), a new operator whose position or status with the debtor was unclear (Kylee Graves), and new debt. It was impossible to be "reasonabl[y] assur[ed] that the plan could be effectuated."¹

Now Graves Farms has filed a second amended plan (the "Joint Plan") that not only addresses its debts, but also those of its individual partners, Harold Dean Graves ("Dean") and Michael Graves ("Mike"), each of whom have filed individual Chapter 12 cases with their spouses.² The Joint Plan proposes that Kylee Graves, Mike's daughter, will operate the partnership farming assets, contribute some of her own assets and lines of credit, pay either salary or distributions to Dean and Mike, and, at the end of 2023, make balloon payments that will pay off RCB Bank's allowed secured claims. The partnership debtor proposes to make distributions to its creditors through the Chapter 12 trustee and to pay Dean and Mike enough to service their individual debts.

There remain too many factual, legal, and practical problems to confirm the Joint Plan. It still doesn't appear that these three debtors can make all of their plan payments. Kylee's legal relationship with the partnership debtor remains unclear.³ The Joint Plan doesn't recognize the separate nature of the partnership's and the individuals' estates. It provides for paying a non-debtor's debts with estate assets. It completely ignores partnership law concerns. It cannot be confirmed.⁴

Facts

An extensive description of the partnership's assets and operations is found in the prior order denying confirmation of Graves Farms' amended plan.⁵ Several additional findings are necessary here. First, on January 14, 2019, the Bank sought and received charging orders in state court that encumber Dean's and Mike's partnership interests in Graves Farms.⁶ Dean filed his individual case a few dayslater; Mike did not file until May 29, 2019, after counsel drafted the "joint plan" in which he and his wife were included.⁷ Before Mike filed, the Bank foreclosed on his partnership interest and purchased his partnership interest at a sheriff's sale that was confirmed in Cowley County District Court on April 1, 2019.⁸ The Bank became a "transferee" of Mike's partnership rights under the Kansas Uniform Partnership Act.⁹ Transferee status entitles the Bank to claim any of Mike's distribution rights and to seek dissolution and wind up of the partnership.¹⁰ Dean's charging order remains unenforced and his partnership interest unforeclosed due to his intervening bankruptcy filing.

Where the Partnership Plan merely addressed partnership claims, the Joint Plan speaks to those claims as well as claims against the individuals.¹¹ Kylee Graves began farming the partnership's Poovey ground and Dean's "home place" farm ground in the fall of 2018. Expanding her role, the Joint Plan contemplates that she will now operate the partnership assets with Mike's assistance. To that end, Kylee has (1) acquired farm leases that were formerly the partnership's;¹² (2)personally borrowed money to buy 86 heifers that she will raise and run in her cow/calf operation for the partnership's benefit;¹³ (3) personally borrowed operating money from Community National Bank, a $130,000 line of credit, that she has and will contribute to the debtor operation; (4) personally borrowed $300,000 from Farm Services Administration to acquire some of Graves Farms' machinery and equipment; and (5) agreed to acquire the remainder of the Graves Farms assets that are secured to the Bank before or at the end of the 5-year plan term by borrowing balloon payments in her own right from Community National Bank.

The Joint Plan proposes that Kylee purchase these assets by making a series of payments to the Bank under the plan and pay off the Bank's secured claims by making two balloon payments that are due in 2023. Those payments total more than $500,000 that Kylee would fund with new borrowing. At trial, Kylee said she intended to "take out" the Bank's debt prior to the balloon payment due dates, but her lender Community National Bank wanted her to wait a year or two, before taking on more debt.¹⁴

The Joint Plan retained the original plan's reliance on growing cotton, but at trial Kylee stated she has changed the cropping plans for the partnership, pivoting from her original proposal to growing more traditional row crops and adding to thesize of her calf crop. This change was decided two weeks prior to trial in consultation with the Graves's agronomist witness, Shelly Hubler.

The cropping pivot is Kylee's entirely reasonable reaction to the historically wet and cool conditions experienced in south central Kansas this spring and early summer. Rainfall has exceeded 100-year levels in many places and our usual hot, dry conditions have only recently returned as of mid-summer, 2019. Kylee testified that several of the fields had been waterlogged, significantly delaying planting.¹⁵ On June 24, the date of trial, none of the planned 1,250 acres of beans had been planted. Nor had the 146 acres of milo. Most of the 552 acres of corn have only recently been planted and photographs of those fields show its immaturity.¹⁶ Wheat had yet to be harvested—some 514 acres. The late planting and harvesting call the accuracy of the projected yields into question.

Where the Partnership Plan contained no historical data, the Joint Plan included as exhibits a set of 2019 RCIS insurance documents that contained the Graves's historical production and yields from 2009-2018 for each of the named fields or farm tracts in Sumner and Cowley County.¹⁷ The Bank's trial exhibit summarized this data and suggested ranges of historical production per acre that are similar to the Joint Plan's projections.¹⁸ The Bank's representative employed the "Approved Yield" from the RCIS reports. Kylee presented a summary of theyields from the RCIS reports for each crop on the various fields over the past 5 years—and contends these more recent figures are the more relevant ones.¹⁹ Kylee also offered evidence of forward contracts for wheat and some of the beans that lock in prices higher than those projected by the Bank and current market for those commodities.²⁰

The projections published with the Joint Plan (which included cotton as well as payments on Kylee's own obligations) were very different from those presented at the confirmation hearing.²¹ While both sets of projections demonstrate positive cash flow, they are difficult to reconcile. If the Court takes the projections offered at trial at face value, the partnership could have gross income of $969,784 and expenses of $686,948. Including interest payable on funds borrowed by Kylee for operating, cash of $268,836 would be available to pay plan payments.²² The partnership's projected expenses include $63,730 in loan payments to FSA on Kylee's loans as well as $45,000 for her to purchase cattle.²³ The expense projections also include over$56,000 for "Cash Rent" expense—farm leases that are now in Kylee's name.²⁴ Other expenses listed appear to relate to only Kylee's cow/calf operation.²⁵

The Joint Plan addresses the "sale" of the partnership assets to Kylee (the Poovey ground valued at $280,000 and remaining equipment valued at $411,000), subject to the Bank's liens which Kylee will retire by making payments similar to those contemplated in the first plan, through 2023, culminating in the balloon payments. The Plan also provides for Kylee to acquire the approximate 113-acre tract that is part of Dean's homestead and is referred to as the "Home Place." RCB holds four mortgages with a $288,000 principal balance on this property. The partnership would make payments on the Bank's mortgages through December of 2023, at which time Kylee would pay off the claim on the Home Place.²⁶ Dean objects to the penalty interest portion of RCB's claim against the 113 acres. Dean will retain and live in his residence, which is situated on a 40-acre tract in the southeast part of his home quarter-section, but which is excluded from the RCB mortgages and only encumbered by a mortgage of Quicken Loans. Under the Joint Plan, Dean will pay the Quicken mortgage directly each month.²⁷

The Joint Plan also provides for payment of the individual debtors' debts. It says that the individuals will pay their respective tax debts "in full and without interest or penalties" over the life of the plan. The IRS filed a tax claim against Dean for $141, 384. Dean concedes that he owes at least $62,711.²⁸ Dean also owes the Kansas Department of Revenue $10,829. As noted above, Kylee would take over Dean's payments on the Home Place's 113 acres. The IRS filed a tax claim against Mike for $153,584. Mike concedes that he owes $71,605. Mike also owes the KDR $12,997.²⁹ Both Dean and Mike objected to the IRS claims, asserting that some of the taxes are attributable to capital gains that can be discharged under § 1232. Mike also proposes to pay $6,507 to Deere Credit for a John Deere mower under the plan . The partnership will convey the 135-acre Price tract to Mike in exchange for his assuming the partnership's debt to the Farm Service Agency. Mike would make the annual contractual payments of $12,282 directly to FSA.³⁰

The Joint Plan doesn't specify payment amounts for the individuals' tax debts, nor did it include any financial projections for Dean...