#2017 order amending attached
Appeal dismissed on debtors' motion 5-18-95 (Crow, J.)
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
RICHARD D. DRIMMEL, SHARON K. DRIMMEL,
MEMORANDUM OF DECISION
This case is once again before the Court for decision on confirmation of a plan of reorganization filed by the debtors. The Rushville State Bank (RSB) has objected to the plan. On November 14, 1989, the Court denied confirmation of an earlier plan--also opposed by RSB--largely because the plan did not comply with 11 U.S.C.A. §1129(b)(2)(B)(ii), commonly referred to as the "absolute priority rule." The District Court affirmed the ruling that the plan violated the absolute priority rule, but the Tenth Circuit affirmed the decision on March 5, 1993, on other grounds, without deciding the absolute priority rule issue. RSB complains that the debtors' new plan: (1) is not feasible, (2) violates the liquidation test of §1129(a)(7), and (3) violates the absolute priority rule.
The debtors are represented by counsel William Metcalf of Metcalf & Justus of Topeka, Kansas.
RSB is represented by counsel Charles Engel of Cosgrove, Webb & Oman of Topeka, Kansas.
The confirmation hearing was held on November 18, 1993, and January 4, 1994. Presentation of
evidence and briefing of issues is now complete and the confirmability of the plan is now ready for
FINDINGS OF FACT
Though this case is now six years old and has once been appealed to the Circuit, it is not a large case. The debtors' income before living expenses but after business expenses is $35,600. Mr. Drimmel earns a salary of $24,000 per year. Mrs. Drimmel earns a salary of $5,400 per year. They also operate and live on a small farm which had previously belonged to Mr. Drimmel's father and uncle. The net income from the farm after expenses is about $6,200. The farm consists of 220 acres more or less, and the Drimmels intend to retain only the 160-acre portion they have exempted as their Kansas homestead. Under their proposed plan, they intend to sell the remaining acreage and to distribute the proceeds to Bank IV, which holds three mortgages with priority over a mortgage that RSB owns. RSB's claim is substantially undersecured.
The debtors' living expenses average about $1700 per month. Their reported food and charitable contribution expenses are somewhat flexible, and so they will be able to pay up to $1,400 per month for debt service.
The parties' only material factual dispute is the value of the real property. The debtors contend it is worth $161,000, while RSB argues it is worth $196,000. The debtors owe Bank IV $89,682.93 on its mortgages. RSB's mortgage is secured to the extent of the remaining value of the real property, so its secured claim is not less than $71,317.07 and not more than $106,317.07
Bank IV has agreed to accept notes from the debtors which will amortize its claim over 20 years, with interest at 9% for the first five years. At the end of five years, the remaining principal will become due, but the debtors can renew the notes at the bank's then-current interest rate. Initially, then, the debtors will need to pay Bank IV $806.84 per month. The 60 acres to be sold under the plan are expected to bring $30,000; this would be applied to reduce the Bank IV debt to about $60,000, which would reduce the debtors' monthly obligation to $539.84.
Two appraisers testified. Both appear to have the necessary qualifications to render an opinion on the value of the debtors' farm. They agree that the way the debtors have split the exempt portion of the land from the nonexempt portion detracts from the overall value of the 220 acres. Their best estimate of the decrease in value was about $6,000, but they were not given time to reflect on this question, or to apply normal appraisal techniques like looking for sales of comparable land and so forth.
The debtors' appraiser, Gary L. Gurss, valued the property at $161,000. In making his appraisal, Mr. Gurss did not ascertain the nature of the soil types on the debtors' land or the land included in the comparable sales he used, nor did he ascertain the type of crop production the debtors were able to realize on their land. He acknowledged that soil types affect crop yields, and that some soil types might require more use of costly chemicals to achieve the same yields as other types, thus reducing the profitability of farming land of those soil types. Mr. Gurss also made adjustments based on tract size to the comparables he used, relying on his belief that a 30-acre farm tract will bring more per acre than an otherwise comparable 120- or 160-acre tract. The Court is uncertain that such adjustments are appropriate.
RSB's appraiser, Speed W. Stanton, valued the property at $196,000. In a 1988 hearing in this case, he had valued the property at $175,000. The Court's findings in regard to that appraisal are in an "Order on Valuation and on Objection to Exemptions," pleading number 78, and are included as a part of the debtors' "Notice of Plan Amendment," pleading number 195, which is a part of the plan currently under consideration. Mr. Stanton's present appraisal has lowered the value of the improvements by $20,000 but has raised the overall value of the land by $41,000. The tracts to which he compared the debtors' land had sold at prices that varied little between the two appraisals; nevertheless, he concluded the debtors' land, which he appraised as three separate tracts, had increased in value by 20%, 33% and 39%. He made a major adjustment to the value of the debtors' land based on its location, an adjustment Mr. Gurss did not believe to be major. Mr. Stanton added over $33,000 to the comparables due to the location of the debtors' land, primarily on the theory that city dwellers would be willing to pay more than actual farmland prices for land so close to town. Though he made a similar adjustment then, Mr. Stanton did not explicitly disclose it on his first appraisal. Based on a review of the appraisals and consideration of their flaws, the Court finds that the value of the debtors' real property is $176,000.
The debtors' plan proposes to pay secured creditors Bank IV and RSB the value of their security,
plus 9% interest, over twenty years. Neither of them complain that the term is too long or the
interest rate too low. A third secured creditor's collateral is to be liquidated and the proceeds paid
to him in full satisfaction of the debt. That creditor has not objected to the plan. The debtors
propose to pay their unsecured creditors the amount they would receive in a liquidation, which,
because of administrative expenses, will likely be nothing; in no event will the unsecured creditors
be paid in full. Most, if not all, of the administrative expenses are owed to the debtors' attorney.
He has stated on the record that he will limit his fee to the extent necessary for the debtors to pay
the secured creditors until the 60 acres is sold or its value is applied to the Bank IV note. He is
not subordinating his claim to the unsecured creditors. On January 4, 1994, the debtors had about
$16,000 in cash and unencumbered, unsold grain. All the cash and grain proceeds will be used to
pay the administrative claims and, if necessary, make payments on the secured claims.
DISCUSSION AND CONCLUSIONS
The parties do not dispute that the debtors' plan is feasible, as required by 11 U.S.C.A. §1129(a)(11). They agree the debtors can earn the money and will incur the expenses stated in their plan. As the Court found, in light of the flexibility in their budget, the debtors can pay up to $1,400 per month, which would service the amount they must pay to Bank IV and RSB, amortized over 20 years at 9% interest. As indicated, the debtors' counsel is willing to subordinate his administrative claim to insure payment to the secured creditors, at least until the debtors sell the 60 acres through the plan and reduce their monthly obligation to Bank IV. The debtors are attempting to retain their home, and the Court believes that their annual income, coupled with the reserve they would have at the beginning of the plan, is sufficient to allow them to make the payments to the secured creditors as they come due.
RSB contends that if the property were liquidated under chapter 7, it would receive more money than it will under the debtors' plan, that is, that the plan fails the best interest of creditors test established by §1129(a)(7). This contention is grounded on the $6,000 guesstimate of the reduction in the overall value of the debtors' land if it is divided as proposed in their plan. Of course, if the property were liquidated in chapter 7, either (1) the trustee would sell it with the consent of the secured creditors, incurring trustee fees, sale expenses, and possibly realtor fees, or (2) the debtors would exempt 160 acres, the trustee would abandon the rest, and the secured creditors would have to foreclose, incurring foreclosure costs, including attorney fees and sale costs, and possibly losing some time value of money as well during a marketing period. Since the debtors instead propose to retain and pay for the exempt acreage at its fair market value, the Court is convinced the total amount that RSB would receive through the plan would be greater than the amount it would realize through liquidation, after the costs of liquidation are deducted from the fair market value.
Finally, RSB contends the plan violates the absolute priority rule imposed by §1129(b)(2)(B)(ii) because its deficiency claim would not be paid in full even though the debtors, junior interest-holders, would retain property. The debtors argue that since they are only retaining exempt property, the absolute priority rule does not apply to their situation. Kansas law, the debtors point out, provides that unsecured creditors may not look to the debtors' exempt homestead for payment of their claims. The Court certainly agrees with that general proposition. See Bellport v. Harder, 196 Kan. 294, 302, 411 P.2d 725 (1966); Note, Survey of Kansas Homestead Law, 13 Wash.L.J. 446, 447 (1974). Even RSB does not dispute this facet of Kansas homestead law.
The problem with the debtors' plan is that they propose to retain more than their homestead.
They seek to retain an interest in and control of a business, farming, intending to operate that
business, as they have in the past, to generate nonexempt income that would not be protected
from the claims of their general creditors. In Kansas, crops are part of the real estate while they
are growing, but once harvested, they become personalty that is subject to execution or
attachment by general creditors. Isely Lumber Co. v. Kitch, 123 Kan. 441, 444-46, 256 Pac. 133
(1923); In re Thexton, 39 B.R. 367, 371 (Bankr.D.Kan. 1984). Since the debtors would be
retaining an interest in property other than exempt property that would not be available to general
unsecured creditors, the absolute priority rule does apply. The debtors' plan fails the test set forth
in §1129(b)(2)(B)(ii) because it provides that holders of unsecured claims would not receive the
present value of their claims while the debtors would retain property on account of their junior
interest. See Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 202 (1988); In re Drimmel,
987 F.2d 1506, 1507-08 (10th Cir. 1993). Consequently, confirmation of the debtors' plan must
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 May, 1994.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
In Re: )
RICHARD D. DRIMMEL, ) NO. 87-40940-11
SHARON K. DRIMMEL, ) CHAPTER 11
ORDER AMENDING JUDGMENT ISSUED MAY 4, 1994
This case is before the Court on the debtors' motion to alter or amend the judgment issued on May 4, 1994. The debtors appear by counsel William E. Metcalf. There are no other appearances. The Court has reviewed the relevant pleadings and is now ready to rule.
Two of the debtors' assertions concern the only full paragraph on page 5 of the Memorandum of Decision. First, the debtors point out that, rather than paying Bank IV and Rushville State Bank (RSB) both over twenty years, their plan proposes to pay Bank IV over twenty years and RSB over thirty. The first sentence of the paragraph is hereby amended to read: "The debtors' plan proposes to pay secured creditors Bank IV and RSB the value of their security, plus 9% interest, over twenty years for Bank IV and thirty for RSB." Next, the debtors indicate the Court's description of their attorney's offer concerning his fee is incorrect. The seventh sentence of the same paragraph is hereby amended to read: "He has stated on the record that, until the 60 acres is sold or its value is applied to the Bank IV note, he will either loan or give the debtors enough of the funds due as his fee to assure that they will be able to pay their secured creditors." Neither of these amendments changes the Court's conclusions about the debtors' plan.
Finally, the debtors state that (1) as of the confirmation hearing, they had no crops planted on their homestead, and (2) they understand the Court's ruling to mean "that the Debtors' ability to plant crops with exempt equipment, through [their] own labor, on exempt real estate, in the future, is not exempt property and therefore the plan fails to meet the absolute priority rule." The first point seems insignificant since they clearly intend to plant crops throughout the life of their plan. The second is not exactly what the Court meant. The absolute priority rule, 11 U.S.C.A. §1129(b)(2)(B)(ii), requires that junior interest-holders "not receive or retain under the plan on account of such . . . interest any property" (emphasis added) if a dissenting senior class of unsecured claims is not going to be paid in full. Although it may be accurate to say that with respect to their exempt property, the debtors are senior to their unsecured creditors, the debtors' thirty-year plan not only calls for them to retain the ability to plant crops with exempt equipment on exempt real estate in the future, but also to turn those crops into nonexempt harvested crops and proceeds of crops. The unsecured creditors are senior to the debtors with respect to harvested crops and their proceeds, yet the plan would allow the debtors to use them to pay for their exempt property. In applying the absolute priority rule, the Court cannot simply ask what existing property the debtors will receive on the effective date of the plan, but must also consider what future property they are to receive "under the plan," for the duration of the plan.
The debtors' motion to alter or amend is granted to the extent indicated in this order, but the conclusions reached in the May 4, 1994, judgment remain unchanged.
IT IS SO ORDERED.
Dated at Topeka, Kansas, this _____ day of July, 1994.
JAMES A. PUSATERI
CHIEF BANKRUPTCY JUDGE