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#2304 signed 2-28-97

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS




In re:

LARRY D. BOND,

BONNIE L. BOND,

DEBTOR(S).





CASE NO. 96-42743-13

CHAPTER 13





MEMORANDUM OF DECISION

This case is before the Court on Kansas State Bank's objection to confirmation of the debtors' chapter 13 plan and its motion to dismiss or for relief from the automatic stay. The Bank appears by counsel Patricia A. Reeder. The debtors appear by counsel Lynn D. Lauver. The Court has reviewed the relevant pleadings and is now ready to rule.

FACTS

The debtors have been operating a cattle ranch for many years. They filed this chapter 13 case less than a year after receiving a discharge in a chapter 12 case in May 1996. When they filed their chapter 12 case in December 1991, the debtors listed 300 head of cattle as assets: 11 bulls, 54 heifer calves, 60 steer calves and 175 cows, 32 of which were bred heifers. Although the record is somewhat confusing, it appears the Court found the debtors had 11 more heifers at that time as well. The Court held an evidentiary hearing on confirmation of the debtors' proposed chapter 12 plan in early March 1992. The Court determined the Bank had a properly perfected security interest in the debtors' equipment and cattle, and in the postpetition offspring of the cattle. The Court found that the cattle were worth $191,596 as of the day the debtors filed their chapter 12 case, and that 61 calves which had been born postpetition were worth $9,150. The Court denied confirmation at that time, but did allow the debtors to avoid the Bank's lien on some of their equipment.

On April 17, 1992, the debtors filed a new motion to avoid the Bank's lien, seeking "to avoid a non-possessory, non-purchase money lien to the value of $5,250.00 of adult cattle." On August 6, 1992, an order was entered avoiding the Bank's lien "in and to the debtors' adult cattle of the value of $5250.00 [and] in and to all the calves of these cattle born post-petition." The debtors now contend this motion and order avoided the Bank's lien in 11 cows and their calves that were born in the spring of 1991, as well as all the calves they had postpetition. Besides the new motion to avoid lien, the debtors also filed an amended plan, which was confirmed in August 1992.

Among other things, the debtors' chapter 12 plan provided:

The debtors have requested the authority to use cash collateral to continue their operation and in doing so grant a replacement lien in future cattle to the [Bank]. Over a period of time, the debtors will reduce the amount owed and expect to be able to successfully . . . reorganize and continue their operation for the foreseeable future.

The debtors' plan provides that upon the payment of the annual payment each year to the trustee or, post discharge, to [the Bank], then [the Bank] will release all liens in and to the proceeds of that calf crop. The debtors will continue their program of replacing superannuated cows with either new purchase or by raising heifer calves to maturity to serve as breeding stock and thereby continue approximately the same or increased level of cattle herd and cow-calf operation in the foreseeable future.

As is required, the plan provided that the Bank would retain the lien which secured its claim. The plan also extended the Bank's payout beyond the debtors' chapter 12 discharge.

In September 1994, the debtors filed a motion to modify their plan, in part because Mr. Bond had been ill and begun receiving Social Security benefits. At a hearing, the debtors withdrew the motion, and the Court declined to prohibit them from selling breeding stock but ordered them to "give notice to the Bank of any intent to sell breeding stock in the future so that the Bank may file an objection at that time." Soon after the debtors became entitled to discharge in their chapter 12 proceeding, they defaulted on their payments to the Bank.

On June 24, 1996, the Bank filed a foreclosure proceeding in the District Court of Osage County, Kansas. The Bank sought an order restraining the debtors from, among other things, selling cattle subject to the Bank's lien without the Bank's prior approval. In a response filed on July 24, the debtors declared they had 85 cattle which were subject to the Bank's lien. The state court granted the Bank's motion with respect to cattle subject to its lien and also ordered the debtors to advise anyone who bought any of their cattle which they claimed were not subject to the lien of the existence of the Bank's lien and the dispute about whether the lien attached to the cattle being sold. The court also ordered the debtors to provide the court and the Bank, within three days of a sale, "the terms of any sale, the cattle sold, the buyer and price."

In November, the Bank filed a motion for an order to show cause why the debtors should not be held in contempt for violating the restraining order. Several days later, Mr. Bond filed a report of the sale of 8 calves at three separate sales. On November 18, the day scheduled for the contempt hearing, the debtors filed their present chapter 13 bankruptcy case. The debtors' counsel appeared for them at the hearing and, through him, they conceded: (1) they were in contempt of the court's order and (2) the contempt hearing was not stayed by their bankruptcy filing. The court declared the debtors were in contempt but did stay execution on that order due to the new bankruptcy case. The debtors filed their schedules and chapter 13 plan along with their bankruptcy petition.

In their schedules, the debtors listed among their assets two groups of cattle: Group A, those they claimed originated from 11 cow-calf pairs they allege they exempted in their chapter 12 case, consisting of 2 bulls, 88 cows, 28 yearling heifers, and 76 calves born in 1996, for a total of 194 head; and Group B, those they contend are the only cattle subject to the Bank's lien, consisting of 2 bulls, 37 cows, and 30 calves born in 1996, for a total of 69 head. They proposed to surrender Group B to the Bank. In an agreed order granting the Bank stay relief to recover the Group B cattle, the numbers were amended to 1 bull, 33 cows, and 24 calves born in 1996, a total of 58 head. Apparently, these new numbers came from Mr. Bond's testimony at an examination taken pursuant to Bankruptcy Rule 2004, where he said of the Group B cattle that one bull and two cows had been killed by lightning, two more cows had died of disease, and six of the calves had died at birth.

As indicated, the debtors claim the cattle they refer to as Group A all originated from 11 cow-calf pairs, with the calves, all heifers (or females), having been born in the spring of 1991. According to the debtors, between January 1, 1992, and the start of the 1996 spring calving season, that is, for four consecutive seasons, these cow-calf pairs and their offspring produced no bulls, only heifers, all of which survived to produce offspring. Mr. Bond conceded in his 2004 exam that cows calve once a year, in the spring, producing one calf each, and that a heifer calf will not itself calve until it is two years old; the debtors' birth records report that each cow had one calf per year and no cow less than two years old produced offspring. Mr. Bond said one cannot control the sex of the offspring, but luckily, these cows all produced all females four years in a row. Suddenly, in the spring of 1996, this phenomenal lucky-streak ended, and the 88 cows the debtors claimed had arisen from the original 11 cows and their calves produced 46 bulls and 41 heifers (one cow apparently failed to conceive). Two of the heifer calves died at birth and one of the bull calves died two weeks after birth. Despite conceding at the 2004 exam that the Bank had a lien on all the debtors' cattle when they filed their chapter 12 case in 1991, Mr. Bond also claimed the debtors had always had 2 bulls that were not subject to the Bank's lien. The debtors contend that they kept careful records of the individual cattle in Group A, but kept limited records of the Group B cattle. For example, they recorded the amounts received from sales of Group B cattle and sometimes the number of head sold, but did not keep track of which individual cattle they sold.

In his testimony, Mr. Bond indicated he did not consider one-year-old heifers to be adult cattle yet. Nevertheless, in their brief, the debtors argue that their April 1992 motion to avoid the Bank's lien in "adult" cattle of a specified value (as of December 1991) included 11 adult cows and their spring 1991 calves because those calves were adults by the time the Court entered the order granting the motion in August 1992. Clearly, the debtors avoided the Bank's lien only in the 11 adult cows and their offspring that were born after the debtors filed for bankruptcy, not in the 11 calves born in the spring of 1991. Thus, besides the females-only birth phenomenon, the debtors have overstated the number of their cattle which are not covered by the Bank's lien because they included those 1991 calves and their offspring in Group A.

The debtors have failed to pay real estate taxes to Osage County for 1994, 1995 and part of 1996. At least the 1994 taxes should have been paid during the debtors' chapter 12 case. The debtors did not list Osage County as a creditor in their schedules but have filed an amendment showing it as a secured creditor. Their plan does not provide for paying the county as a secured creditor, although they assert in their brief that they will amend the plan to so provide. The debtors owe $5,000 annual pasture rent under a lease which they want to assume but the landlord wants and has attempted to terminate. Their plan does not include a provision for payment of this rent. Although the debtors owe the Bank over $200,000, they intend to pay it only $5,000 through their plan, the value of a tractor they concede is the Bank's collateral, plus its proportionate share as an unsecured creditor of the value of their cattle which are supposedly not subject to the Bank's lien. They have already surrendered the Group B cattle to the Bank, and the Bank apparently sold them for about $16,700.

The debtors' Schedule I--Current Income of Individual Debtors reports they have monthly income of $2,300 from their cattle operation and $504 from Social Security. Their Schedule J--Current Expenditures of Individual Debtors reports they have no monthly expenses from the operation of their business. In their brief, the debtors suggest chapter 13 contains no requirement that they report the gross income and expenses of their business. However, Schedule I of Official Bankruptcy Form 6 requires debtors to report their "Regular income from operation of business or profession or farm (attach detailed statement)" and Schedule J requires them to report their "Regular expenses from operation of business, profession, or farm (attach detailed statement)." The forms require the debtors to provide a detailed statement of their business income and expenses, presumably to permit creditors and the trustee to analyze the reported gross income and expenses to determine what additional information they might want to obtain, while the debtors' approach of reporting only a net income figure improperly transfers the burden to creditors and the trustee to ask for detailed information which was supposed to have been supplied.

DISCUSSION AND CONCLUSIONS

In 1991, when someone might have inspected their herd, the debtors reported they had 54 heifer calves and 60 steer calves. When apparently no one was checking up on them, the debtors report their initial 11 cow-calf pairs and offspring produced 121 consecutive female calves, all of which survived. For those four years, and indeed into 1996, none of these cattle died or became incapable of bearing calves. In 1996, when again someone might have inspected their herd and learned the truth, those same cows suddenly produced 46 bull calves, one of which died, and 41 heifer calves, two of which died. Meanwhile, during late 1995 and early 1996, five of the adult cattle subject to the Bank's lien died from lightning or disease, and in the spring of 1996, six more of them produced stillborn calves. In sum, the debtors claim that while "their" 11 cow-calf pairs flourished and multiplied beyond the probabilities known to animal science, the cattle pledged to the Bank were sold, grew old, or died. Although willing to stretch credulity this far, Mr. Bond apparently recognized that no one would believe the calves resulted from immaculate conception, so he hopefully declared the debtors had always had two bulls that had escaped the Bank's lien in some unspecified way. The debtors claim they have maintained detailed records on "their" cattle but only minimal records on those pledged to the Bank.

At least as they now have disclosed what they did while operating under their confirmed chapter 12 plan, the debtors treated the Bank with less than good faith. Until 1994, they had no income except from their cow-calf operation. The Social Security benefits that began in 1994 would apparently have paid only about one-third of their monthly debt on their homestead. Since they now report "their" 11 cow-calf pairs produced, and their herd still includes, essentially all the offspring the cattle could have produced, they had to know they were using the proceeds of the Bank's collateral to pay all their business and personal expenses before the Social Security benefits began and still using them to pay by far most of their expenses thereafter. Nevertheless, they felt it was appropriate to do that while they retained their exempt cattle and all offspring, even though the Bank's collateral generated all the money they used to feed and care for those cattle. At best, they violated the Court's mandate by not replacing the Bank's collateral as required and not reporting what they now contend they were doing. They also allowed unpaid real property taxes to accrue, apparently without reporting their accrual to the chapter 12 trustee or the Court. Essentially all the debtors did to deplete the Bank's collateral took place while they were operating their cattle ranch under a confirmed chapter 12 plan. Clearly, the debtors cannot be trusted to run their business for the benefit of their creditors as well as themselves, even under the more-or-less watchful supervision of a bankruptcy trustee and the Court.

Furthermore, because they improperly included the 1991 calves and their offspring as cattle not subject to the Bank's lien, the debtors have overstated the number of lien-free cattle they could possibly have, even if one accepted their unlikely lucky streak of all female births to ceaselessly fertile cows and a 100% survival rate for all the cows and calves. Adjusting their calculations to correct just this mistake, between 1992 and 1996, the debtors' original 11 cows could have generated at most a herd of 55 cows, 33 yearlings, and 55 calves, a total of 143 head. The 11 calves born in 1991 could have generated as many as 88 head, consisting of 11 five-year-old cows, 11 three-year-old cows, 11 two-year-old cows, 22 yearling heifers, and 33 calves born in 1996. So, even if the debtors could otherwise legitimately claim to have the maximum possible 143 head plus the two bulls they contend are not covered by the lien, at least 49 of the 194 cattle they reported as Group A on their schedules have to be subject to the Bank's lien.

Based on these considerations, the Court believes the totality of the circumstances demonstrate that the debtors have not acted fairly and honestly in their reported dealings with the Bank's collateral and the cattle they claim are free of the Bank's lien, and have not been forthcoming with the Court or the Bank. The Court finds their lack of good faith constitutes cause to dismiss their bankruptcy case under 11 U.S.C.A. §1307(c). Gier v. Farmers State Bank (In re Gier), 986 F.2d 1326, 1329 (10th Cir. 1993); In re Love, 957 F.2d 1350, 1354-57 (7th Cir. 1992). In addition, the Court will prohibit the debtors from filing another bankruptcy case for 180 days after this decision becomes final and nonappealable.

The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil Procedure. A judgment based on this ruling will be entered on a separate document as required by FRBP 9021 and FRCP 58.

Dated at Topeka, Kansas, this ____ day of February, 1997.













_________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS




In re:

LARRY D. BOND,

BONNIE L. BOND,

DEBTOR(S).





CASE NO. 96-42743-13

CHAPTER 13





JUDGMENT ON DECISION

This case was before the Court on Kansas State Bank's objection to confirmation of the debtors' chapter 13 plan and its motion to dismiss or for relief from the automatic stay. The Bank appeared by counsel Patricia A. Reeder. The debtors appeared by counsel Lynn D. Lauver. The Court reviewed the relevant materials and has issued its Memorandum of Decision.

For the reasons stated in that Memorandum, judgment is hereby entered dismissing this bankruptcy case. The debtors are hereby barred from filing another bankruptcy case for 180 days after this judgment becomes final and nonappealable.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of February, 1997.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

 

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