In re Krieger

In re: MARK ALLEN KRIEGER and JAME SUE SECONDINO KRIEGER, Debtors.

Case No. DK 19-02148

UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF MICHIGAN

December 18, 2019

Chapter 11

Hon. Scott W. Dales

MEMORANDUM OF DECISION AND ORDER

PRESENT: HONORABLE SCOTT W. DALES Chief United States Bankruptcy Judge

I. INTRODUCTION

The court held an evidentiary hearing on November 25, 2019 in Kalamazoo, Michigan, to consider motions for relief from the automatic stay filed by creditors First Financial Bank, N.A. ("First Financial") and BMO Harris Bank ("BMO," and with First Financial, the "Banks"), and for related relief under 11 U.S.C. § 543(d).¹ Chapter 11 debtors Mark and Jame Sue Krieger (the "Debtors"), First Financial, and BMO all appeared through counsel. The court heard testimony from the Debtors, a lender representative, and two real estate professionals, and admitted fourteen exhibits, largely without controversy.

By agreement reached after the preliminary hearing last July,² the parties limited the issues for initial consideration to (1) whether the Debtors' prepetition forbearance agreements, whichincluded provisions requiring the Debtors not to oppose stay relief, constitute "cause" to lift the automatic stay; and (2) whether the Indiana state court receiver, Halderman Farm Management & Real Estate Service (the "Receiver"), should be excused from compliance with its turnover obligations under § 543(a) and (b).³

This Memorandum of Decision and Order constitutes the court's findings of fact and conclusions of law in accordance with Rule 52, made applicable to this contested matter through Rules 7052 and 9014.⁴ For the following reasons, the court will grant relief from the automatic stay, and excuse the Receiver from complying with the turnover obligations under § 543.

II. JURISDICTION AND AUTHORITY

The United States District Court for the Western District of Michigan has subject matter jurisdiction over the Debtors' chapter 11 case, and in rem jurisdiction over their property, including the property encompassed in the Indiana receivership estate, which is also part of the Debtors' bankruptcy estate. 28 U.S.C. § 1334(a) and (e); 11 U.S.C. § 541(a). The district court has referred its jurisdiction over the case, related proceedings, and the bankruptcy estate to the United States Bankruptcy Court pursuant to W.D. Mich. LGenR 3.1(a) and 28 U.S.C. § 157(a). The contested matters, commenced when the Banks filed their Motions, are "core proceedings" within the meaning of 28 U.S.C. § 157(b)(2)(E) and (G). The court finds that it has jurisdiction and ample authority to resolve the Motions with a final order, subject to appellate review under 28 U.S.C. § 158. The parties have not suggested otherwise.

III. ANALYSIS

1. Factual Background

As set forth in the two forbearance agreements (FFB Exh. H and BMO Exh. E), the Debtors financed their former cattle operation by borrowing substantial sums of money from the Banks pursuant to several promissory notes, which they secured with several mortgages encumbering over 2,300 acres of agricultural or recreational land in Indiana's Vermillion and Vigo counties. Prior to filing their bankruptcy petition, the Debtors raised cattle on their acreage, but after defaulting on their obligations to the Banks in May 2017, they sold their livestock and farming equipment, in consultation with the Banks. By the time they reached bankruptcy court, the Debtors were no longer engaged in cattle ranching, and had relocated to their current residence in Southwest Michigan. As of their bankruptcy filing, the Debtors owed approximately $3,504,619.83 to BMO as represented by the judgment of the Vermillion County court. They also owed First Financial approximately $2,591,268.52 pursuant to a separate Indiana judgment. According to the Debtors' schedules, and their list of 20 largest creditors, the scheduled unsecured claims in this case will not likely exceed $167,629.00. In addition, according to the Debtors' schedules, they also have a substantial but fully secured residential mortgage. Although the court makes no findings regarding the universe of claims, it cannot be denied that the Banks, by far, hold the lion's share of the claims in this case.

BMO and First Financial both assert interests in the same acreage by virtue of prepetition mortgage and judgment liens, with BMO in first position on approximately 1,077 acres in which First Financial holds a junior position, and First Financial in first position on approximately 1,350-1,382 acres in which BMO holds the junior position. See BMO Exh. E (Debtors' acknowledgment of obligations to BMO); FFB Exh. H (Debtors' acknowledgment of obligations to First Financial). The testimony of First Financial's Randy Snyder and Mark Krieger was generally consistent on these points.

The Banks' overlapping interests evidently fostered a great deal of cooperation between them prepetition, producing remarkably similar forbearance agreements -- including an identical paragraph 24 in each agreement through which the Debtors agreed not to oppose the Banks' request for relief from the automatic stay in a future bankruptcy case, as explained more fully below.

The Banks' respective interest in the parcels is different in this respect: BMO sought and, with the consent of the Debtors, obtained an order from the Vermillion County (Indiana) Circuit Court appointing the Receiver to take custody of the 1,077 acres in Vermillion County in which BMO enjoyed the senior position. See Agreed Order Appointing Receiver Over Real Estate (BMO Exh. D, the "Receivership Order"). First Financial did not obtain an order appointing a receiver. Instead, it successfully pursued judicial foreclosure in the courts of Vigo County, Indiana, eventually resulting in the Agreed Order of Partial Summary Judgment, Replevin, and Decree of Foreclosure on June 22, 2018 (FFB Exh. D).

By the time the Debtors reached the bankruptcy court, the two state courts had entered foreclosure decrees divesting the Debtors of their equity of redemption, remitting them to a statutory right of redemption that they must exercise before the "hammer falls" at the respective foreclosure sales, but leaving them with title to the property until then. See In re Collins, No. 03-10138-JKC-13, 2003 WL 25321292, at *1 (Bankr. S.D. Ind. July 17, 2003) ("a sheriff's sale is complete when the hammer falls"); In re Masters, 104 B.R. 83, 85 (Bankr. S.D. Ind. 1989) ("title to the mortgaged property does not pass until sale").

Both Debtors have been involved in agriculture their entire lives and are knowledgeable in several areas of farming including cattle, pesticides, livestock insurance and in some aspects of purchasing and selling farmland. Mr. Krieger is 57 years old, attended two years of college at Michigan State University, studying agriculture. He testified that he has no reading disability, and indeed read a portion of a forbearance agreement without apparent difficulty in open court. Mrs. Krieger, 59 years of age, has also been involved in farming her entire life. She earned a four-year degree from Purdue University, studying agricultural economics. She also holds licenses in many jurisdictions authorizing her to sell livestock insurance throughout the midwestern and eastern United States. She and her husband have been involved in approximately 30 real estate transactions throughout their lives. As the former proprietors of a large livestock operation over several decades, they are sophisticated business people.

The testimony from the witnesses paints a picture of former cattle farmers in Indiana who, throughout the course of several years, became indebted to the Banks for several million dollars. In an attempt to pay down the loans after their debts matured and the Banks pursued legal remedies, the Debtors sold all of their livestock and farming equipment, turned the proceeds over to the Banks, and moved to Berrien County, Michigan. The proceeds of the sales of personal property were not enough to satisfy the Banks' loans.

In 2017, after the Debtors' obligations to the Banks matured, the Banks informally agreed to forebear from collection while the Debtors attempted to refinance their debts or sell their acreage and other property to satisfy the Banks' claims. The testimony in no way suggested an acrimonious relationship, although the borrowers and their lenders did have their disagreements involving the latter's refusal to release liens, or the Receiver's delay in consummating several sales that the former procured. Instead, it appears that the parties generally cooperated with respect to the collection activity, both hopeful that a refinancing would end their debtor-creditor relationship, though both sides were frustrated with the slow pace in liquidating the acreage for a price acceptable to all.

In October 2018, in conjunction with a forbearance agreement (BMO Exh. E), BMO and the Debtors entered into the Receivership Order (BMO Exh. D) which provided for the appointment of the Receiver with authority to sell 1,077 of the roughly 2,055 acres of land the Debtors still owned. Together, the Receivership Order and the Forbearance Agreement dated October 9, 2018 stayed BMO's collection of its prior judgment in order to give the Debtors an additional chance to refinance their obligations to BMO by December 31, 2018. In nearly lockstep fashion, after a similarly extensive but informal period of forbearance, the Debtors and First Financial also penned a formal forbearance agreement that similarly allowed the Debtors until December 31, 2018 to refinance their obligations to First Financial (FFB Exh. H). In exchange for this forbearance, the Debtors acknowledged their debts, waived various claims against their lenders, and agreed to other typical provisions customarily included in forbearance agreements.

On or about January 3, 2019, the Indiana state court appointed the Receiver. From Mr. Litten's credible testimony and BMO Exh. LL, the...