Sis v. Banner Capital Bank (In re Sis)

656 B.R. 500

IN RE: Jarett B. SIS, Rose Marie Sis, Debtors.

Jarett B. Sis and Rose Marie Sis, Plaintiffs, v. Banner Capital Bank, Defendant.

Case No. 21-10123-12

Adv. No. 23-5040

United States Bankruptcy Court, D. Kansas

SIGNED January 18, 2024

Nicholas R. Grillot, Hinkle Law Firm, L.L.C., Wichita, KS, for Plaintiffs.

Patricia A. Reeder, Woner, Reeder & Girard, P.A., Topeka, KS, for Defendant.

Memorandum Opinion and Order Memorializing Denial of Motion for Temporary Restraining Order

Dale L. Somers, United States Chief Bankruptcy Judge

Debtors Jarett and Rose Sis filed this adversary complaint to seek an injunction under 11 U.S.C. § 105(a)¹ to re-impose the automatic stay to allow Debtors time to modify their Chapter 12 plan and make payments to Banner Capital Bank before a state court foreclosure of their real property by the Bank. Debtors then filed a motion for temporary restraining order, seeking expedited consideration of their requested relief. The Court held an expedited hearing,² and orally denied Debtors' motion. The Court now issues this written ruling to memorialize its decision.

I. Procedural Background

Debtors operate a large farm in northwest Kansas, growing crops and raising cattle. Debtors' real property consists of five tracts of land in Rawlins County, Kansas, totaling approximately 1148 acres, containing their homestead and farmland. Debtors' farm equipment and vehicles are valued at more than $500,000.³

Prepetition, Debtors signed multiple promissory notes with Banner Capital Bank,⁴ and multiple security agreements were signed giving the Bank a security interest in Debtors' personal and real property. At some point prepetition, Debtors became delinquent on their payments on those notes, and Banner Capital Bank filed a foreclosure action against Debtors' real property in state court in Rawlins County, Kansas.⁵ The security interest given by Debtors to Banner Capital Bank on their real property was based on a real estate deed of trust,⁶ although Debtors informed this Court the state court ruled at some point in the foreclosure case that the State of Kansas foreclosure statutes applied to the parties' relationship.

Debtors then filed a Chapter 12 petition on February 25, 2021. At filing, Debtors' Schedule D stated a claim to Banner Capital Bank of $1,292,234.85, secured in their property in Rawlins County, Kansas for $1,096,300, with the remaining $195,934.85 unsecured.⁷ Per that Schedule D, Banner Capital Bank was the only entity with a security interest in Debtors' real property. Debtors also scheduled secured debt held by CNH Industrial Capital America (claims of $16,800 and $38,000 secured by a combine valued at $35,000, a swather valued at $75,000, and other equipment valued at $72,000), Community Credit Corporation (claim stated at zero but secured in grain sorghum), Currency Capital LLC (claim of zero but secured by a turbo disc valued at $25,000), and Ford Motor Credit (claim of $4300 secured by a Ford Escape valued at $22,325).⁸ Debtors owed real estate taxes for 2020 at filing of $5165.34, and then had $95,706.92 in other unsecured debt, mostly consisting of credit cards.⁹

The parties realized after Debtors' bankruptcy petition was filed that at some point prepetition, the security interest in Debtors' personal property held by Banner Capital Bank became unperfected when Banner Capital Bank failed to file a continuation statement of its perfection per Kansas statutes.¹⁰ As a result, Debtors' proposed Chapter 12 repayment plan¹¹ was to re-amortize Debtors' debt to Banner Capital Bank, make payments to other secured creditors, and pay all unsecured creditors in full.¹² To do so, Debtors anticipated net disposable income of $133,143.54 in 2021, and with proposed total plan payments of $128,712.12 in the first year, Debtors estimated only a $4431.42 cushion to make their plan payments the first year.¹³ Debtors projected their 2022 income and expenses would remain essentially unchanged, but because attorney's fees would decrease, they would have a slightly larger cushion of $6931.42 for the 2022 plan year. The 2023 projections were approximately the same as stated for 2022.

Debtors' plan proposed a provision giving them a thirty-day cure period for any payment due under the plan. If cure was not accomplished in that thirty days, the impacted creditor could file a notice to cure. If payment was still not made within twenty-one days of that notice to cure, then the creditor would "thereafter have immediate relief from stay to pursue any and all foreclosure and other remedies available under state law."¹⁴ Such stay relief would "not require any further order of the Court."¹⁵ The proposed plan also contained a provision stating that confirmation of the plan would "continue to act as a stay of any action against Debtors, their property, or property of the Debtors' Estate until such time as Debtors have completed their payments under this Plan, this case has been dismissed, or Debtors have defaulted on their obligations under this Plan and the terms and conditions of this Plan provide for stay relief."¹⁶ All assets would vest in Debtors at discharge, unless they requested an earlier vesting.¹⁷

Regarding the claim of Banner Capital Bank specifically,¹⁸ Debtors proposed annual payments of $83,287.08 beginning November 1, and on each November 1 thereafter, with a thirty-year amortization. The Bank would be given a four percent interest rate for the first five payments, with the interest rate adjusting every five years to the prime rate plus 1.75%. The proposed plan stated the balance of Banner Capital Bank's claim, with interest and fees, was $1,453,784.19, with Debtors valuing the real property securing the claim at $1,527,700.¹⁹

Debtors' Chapter 12 plan was confirmed on February 11, 2022. The order confirming Debtors' plan modified the terms of the proposed plan in some respects. Regarding Banner Capital Bank,²⁰ Debtors made an adequate protection payment to the Bank of $81,840.39 to compensate the Bank for interest and fees. The interest rate to be paid the first five years of Debtors' plan changed from 4% to 4.75%, but Debtors were given a thirty-five-year amortization. In addition, the due date was changed from November 1 each year to August 31, with the first payment due August 31, 2022. Importantly here, the thirty-day grace period for making annual payments was removed from Banner Capital Bank's claim, meaning that "only" the twenty-one-day cure period applied.

Debtors had trouble making payments to Banner Capital Bank from the beginning, as the Bank filed a notice that its first payment of $83,223.29, due August 31, 2022, was not made.²¹ Debtors provided notice that they made that payment on the twenty-first day of the cure period,²² however, thereby avoiding stay relief being granted to Banner Capital Bank in 2022.

Another year passed, and Debtors found themselves in the same position, as Banner Capital Bank filed another notice that the annual payment was not made when due on August 31, 2023.²³ The notice was filed September 1, 2023, giving Debtors until September 22, 2023, to make the payment before stay relief would go into effect. Debtors filed a response to the notice, indicating the payment would not be made by the deadline, but that they hoped to obtain financing from Ag Resource Management to make the payment by the end of September 2023.²⁴

About six weeks passed. The Court next heard from the Chapter 12 Trustee, who filed a motion to dismiss on November 6, 2023.²⁵ The motion stated Debtors were delinquent on plan payments, had failed to file operating reports in 2023, and had not provided copies of their 2021 and 2022 tax returns. Debtors filed a response, indicating financing to make the payment to Banner Capital Bank had "stalled" and Debtors were negotiating with other lenders to provide take-out financing for Banner Capital Bank.²⁶

About the same time, a motion for relief from stay was filed by a new creditor, First Central Bank McCook, which was later amended.²⁷ First Central Bank McCook reported Debtors obtained five postpetition loans in the spring of 2022 from the Bank secured by Debtors' personal property, including crops, farm equipment, and livestock. None of the loans were obtained with bankruptcy court approval and First Central Bank McCook asserts it was not aware Debtors were in a pending bankruptcy case at the time the notes and security agreements were signed.²⁸ Debtors' total default to First Central Bank McCook was stated at $236,431.81. Debtors dispute the assertion First Central Bank McCook was not aware of its bankruptcy, argue the Bank's alleged security interest is void and an unauthorized postpetition transfer of estate property subject to avoidance under § 549(a), contend the Bank is not entitled to retroactive stay relief, and dispute the alleged default amount asserted by First Central Bank McCook.²⁹

Debtors then filed the above-captioned adversary proceeding on December 21, 2023.³⁰ In their complaint, Debtors seek an injunction under § 105(a) to re-impose the automatic stay to allow Debtors to modify their Chapter 12 plan and make their payment to Banner Capital Bank. In their complaint, Debtors allege that in June 2023 they sold cattle and received net proceeds from that sale of $135,497.90. Debtors applied the funds to the debt owed to First Central Bank McCook, and Debtors claim they were "induced" to do so because First Central Bank McCook "assured" Debtors it would provide financing to either make the annual payment to Banner Capital Bank or to payoff Banner Capital Bank in full.³¹ Debtors then learned in July 2023 that First Central Bank McCook would not provide additional financing, and it was at that point that they began searching for alternate funding.

The adversary complaint reported Banner Capital Bank filed a renewed request for sale in its state court foreclosure suit on October 11, 2023,³² which was granted on November 29, 2023.³³ Debtors...