JE Livestock, Inc. v. Wells Fargo Bank, N.A. (In Re JE Livestock, Inc.)

375 B.R. 892, 2007 WL 2753762

• Court: Bankruptcy Appellate Panel of the Tenth Circuit
• Decided: September 24, 2007
• Docket: BAP No. WY-06-127, Bankruptcy No. 05-21009
• Status: Published

Opinions

OPINION

NUGENT, Bankruptcy Judge.

Appellant JE Livestock, Inc. (“JE”) appeals a stay modification order entered by the United States Bankruptcy Court for the District of Wyoming, granting Wells Fargo Bank, N.A.’s (“Wells Fargo”) request to lift stay in order for it to proceed with foreclosure of JE’s real estate. We AFFIRM.

I. Appellate Jurisdiction

We have jurisdiction of this appeal. An order granting relief from the automatic stay is a final order subject to appeal under 28 U.S.C. § 158(a)(1).¹ The Appellant timely filed its notice of appeal.² The parties have consented to this Court’s jurisdiction because they have not elected to have the appeal heard by the United States District Court for the District of Wyoming.³

II. Standard of Review

We review a bankruptcy court’s determination of “cause” under Section 362(d)(1) for an abuse of discretion.⁴ “Under the abuse of discretion standard: ‘a trial court’s decision will not be disturbed unless the appellate court has a definite and firm conviction that the lower court made a clear error of judgment or exceeded the bounds of permissible choice in the circumstances.’ ”⁵ An abuse of discretion, however, may occur when a ruling is premised on an erroneous conclusion of law or on clearly erroneous fact findings.⁶ We review the bankruptcy court’s conclusions of law de novo.⁷ ‘When an appellate court reviews a [trial] court’s factual findings, the abuse-of-discretion and clearly erroneous standards are indistinguishable....”⁸

III. Factual Background

JE is an agricultural corporation and had a mortgage with Wells Fargo. In November of 2004, JE defaulted and Wells Fargo initiated foreclosure proceedings. After Wells Fargo obtained a default judgment, JE filed for Chapter 11 bankruptcy on May 23, 2005.⁹

JE scheduled Wells Fargo’s debt on Schedule D, listing Wells Fargo as a secured creditor with a total claim of $220,234 and a deficiency claim of $16,584 on real property valued at $203,650. On Schedule A, however, JE listed the value of its real property at $80,750. JE did not indicate that Wells Fargo’s claim was disputed, unliquidated, or contingent.

The deadline to file a proof of claim was September 19, 2005. Wells Fargo did not file a proof of claim.

On February 10, 2006, JE amended its Schedule D by changing the stated value of its real property to $124,750. JE also filed a Chapter 11 plan, proposing to treat Wells Fargo as having an allowed secured claim of $96,500 and a $116,360 unsecured deficiency claim. Wells Fargo objected to JE’s Amended Disclosure Statement and plan, disputing JE’s valuation of its real property and its classification of Wells Fargo as a partially unsecured creditor.

On June 20, 2006, the bankruptcy court held a confirmation hearing on JE’s Chapter 11 plan. The bankruptcy court heard evidence regarding the value of JE’s real property. On July 11, 2006, the bankruptcy court issued an order (1) denying confirmation of JE’s proposed plan for failing to satisfy the absolute priority rule and (2) setting the value of JE’s real estate at $410,000.¹⁰ The July 11, 2006, order has never been appealed.

On August 25, 2006, Wells Fargo filed a “Motion to Modify Stay and Notice of Time to Object,”¹¹ seeking modification of the stay to permit it to repossess and foreclose its security interest in JE’s real property, inventory, accounts, equipment, crops, and livestock pursuant to 11 U.S.C. § 362(d)(1).¹² Wells Fargo claimed that JE filed this case in bad faith to avoid paying Wells Fargo, there was no progress and much delay in this case (ie., after 15 months, a plan had still not been confirmed), and the delay was prejudicial to Wells Fargo. JE objected to Wells Fargo’s motion to modify stay, contending any delay was merely caused by negotiations. JE also argued that because Wells Fargo failed to file a proof of claim, its claim was not only deemed allowed in the amount scheduled, but that its allowed secured claim was deemed allowed in an amount equal to the value of the real property that JE scheduled.

Wells Fargo’s August 25, 2006, motion stated an objection deadline of September 8, 2006. The debtor timely objected on September 6. On September 8, 2006, the bankruptcy court entered an order (1) scheduling a preliminary hearing on Wells Fargo’s motion for September 28, 2006, (2) finding that Wells Fargo had waived the 80-day hearing requirement of § 362(e), and (3) ordering that the automatic stay remain in effect until the conclusion of a final hearing.¹³ In that order, the court specifically found that Wells Fargo had waived the 30-day requirement of § 362(e). Moreover, Wells Fargo at no time invoked the § 362(e) period, either in the bankruptcy court or on appeal.¹⁴

On September 28, 2006, the bankruptcy court held a preliminary hearing on Wells Fargo’s motion to modify stay and heard oral arguments.¹⁵ JE argued that stay relief would disrupt ongoing negotiations. Noting that JE had been ordered to file a plan by September 29, 2006, the bankruptcy court set the matter over for a final hearing to allow “time for progress.”¹⁶ The bankruptcy court issued an order scheduling the final hearing on November 14. 2006, after again “finding that the mov-ant has waived the 30-day hearing requirement of 11 U.S.C. § 362(e)....”¹⁷

On October 10, 2006, JE filed an Amended Chapter 11 plan.¹⁸ The amended plan proposes to allow Wells Fargo’s secured claim at $203,650, the value stated on JE’s original Schedule D and to classify part of Wells Fargo’s claim as unsecured.

The bankruptcy court held the final hearing on Wells Fargo’s motion to modify stay on November 14, 2006. The parties submitted stipulated exhibits and made oral arguments. On November 17, 2006, the bankruptcy court issued its ruling and granted Wells Fargo’s motion, essentially ruling that cause existed to lift the stay because JE “has attempted every means to avoid proposing a chapter 11 plan that will pay Wells Fargo’s over-secured claim.... ” The bankruptcy court noted the debtor’s “unwillingness to propose a plan that incorporates the very collateral valuation that the Debtor sought from the court.” It also noted that JE had threatened to devalue the property by cutting off water rights to the property.¹⁹ The court buttressed these conclusions with a determination that the amended plan would be unconfirmable because, by ignoring the court-determined valuation of the collateral, JE did not propose to pay Wells Fargo’s secured claim as required by §§ 1129(b)(2)(A)(i) and 506(a).

On appeal, JE argues that because Wells Fargo failed to file a proof of claim, its claim is deemed allowed in the amount scheduled and that the value of its real property is also deemed to be what JE placed in its schedules. Under this theory, JE argues that its amended plan is con-firmable and that Wells Fargo failed to establish cause to grant stay relief. This argument is rife with flaws as discussed below.

IV. Discussion

1. JE’s “scheduled valuation” theory is based on a fallacy.

JE devoted much of its brief and oral argument to its assertion that when a creditor fails to file a proof of claim in a Chapter 11 case, not only its claim, but also its allowed secured claim are “deemed allowed,” essentially causing the value of the secured creditor’s collateral to be controlled by the debtor’s schedules. JE contends that the bankruptcy court erred by relying upon a valuation order rather than its schedules when it lifted the stay based in part upon its conclusion that JE’s amended plan could not be confirmed.²⁰ JE argues that a valuation under § 506 does not substitute for or alleviate the necessity of filing a proof of claim for plan confirmation process.

The bankruptcy court concluded that: a debtor’s valuation asserted in the schedules does not fix the value of the collateral for purposes of an allowed secured claim. Section 1111(a) cannot be read so broadly as to preclude a court from exercising its discretion under § 506(a) to determine the amount of a creditor’s allowed secured claim based on the value of the collateral. Indeed, the Debtor has offered no authority for the proposition that § 1111(a) somehow overrides § 506(a), or that § 1111(a) does anything more than establish the existence of a claim.²¹

We agree. There is no support for JE’s argument that its valuation of the collateral in its schedule controls when a creditor fails to file a proof of claim. The flaw in this position is that, while § 1111(a) deems allowed a scheduled claim that is not contingent, unliquidated or disputed, nothing in the Code or Rules provides for the deemed allowance of an allowed secured claim under § 506(a). The Code and Rules contemplate a separate process for the valuation of a secured creditor’s collateral under § 506(a) and Federal Rules of Bankruptcy Procedure 3012. The claims allowance process is not intended to deal with secured claim valuation under § 506(a).²² Moreover, JE’s “scheduled valuation” theory would encourage debtors to set a trap for unwary creditors. Conceivably, if a debtor sets the value of the collateral in its schedule at $1 and the creditor failed to file a proof of claim, the creditor is bound by that value. Such a result is unpalatable. Nothing in the Bankruptcy Code or Rules indicates an intent to permit a creditor to be bound by the collateral value stated in a debtor’s schedule.

2. The bankruptcy court did not abuse its discretion in finding cause to grant stay relief.

Section 862(d) provides that a bankruptcy court “shall grant relief from the stay provided under subsection (a) of this section, such as by terminating, annulling, modifying, or conditioning such stay—1) for cause, including the lack of adequate protection of an interest in property of such party in interest ...” As this Court has previously noted:

While cause under § 362(d)(1) includes “the lack of adequate protection of an interest in property,” it is not so limited. 11 U.S.C. § 362(d)(1). Because “cause” is not further defined in the Bankruptcy Code, relief from stay for cause is a discretionary determination made on a case by case basis.²³

Among the factors to be considered in determining whether the automatic stay should be modified for cause are the good or bad faith of the debtor and the injury to the movant if the stay is not modified.²⁴ As one judge has eloquently stated:

The totality of the circumstances of a case encompasses, among other things, how the parties have conducted themselves, their good or bad faith, and their motives. Good faith is an intrinsic and integral component of the bankruptcy process.²⁵

JE argues that its failure to file a con-firmable plan does not constitute “bad faith” cause for relief from stay under § 362(d)(1), but is, instead, a basis for relief from stay under § 362(d)(2). Since Wells Fargo’s request from relief of stay was based on § 362(d)(1), JE contends the bankruptcy court erred when it based its ruling on (d)(2) grounds. This argument misses the point of the bankruptcy court’s ruling which was not that the debtor would be unable to effectively reorganize, but that the debtor’s repeated reliance on its own valuation rather than that determined by the court at the debtor’s request was one example of the debtor’s lack of good faith in prosecuting the Chapter 11 case. Therefore, it was well within the bounds of permissible choice for the bankruptcy court to conclude that cause existed to grant stay relief under § 362(d)(1).

In its conclusions of law, the bankruptcy court referred to debtor’s delay of the case, its bad faith as evidenced in part by its proposed treatment of Wells Fargo’s claim, and its failure to propose a plan that treated the Wells Fargo claim consistent with the court’s valuation order. We think these conclusions are warranted by the record. As the bankruptcy court noted, (1) this is not a complex case as it involves a single creditor dispute, (2) this case has been pending for 18 months, which is longer than necessary to propose a confirmable plan, (3) JE proposed a Chapter 11 plan only after being ordered to do so by the court, (4) JE did not amend the Chapter 11 plan until the court, once again, ordered it to do so, and (5) JE has made little or no progress in payment of the debt. JE’s bad faith is evidenced by (1) its inconsistent valuations of the collateral, (2) its threats to devalue the property, and (3) proposing an amended plan that once again ignores the bankruptcy court’s valuation. JE’s filing an unconfirmable-plan, standing alone, may not constitute cause under § 362(d)(1), but its headstrong persistence in filing a plan that utterly disregards a judicial finding of value under § 506(a), particularly after taking inconsistent positions as to the value of the collateral and after receiving the court’s valuation ruling, does. Filing the amended plan based on a faulty value premise previously rejected by the bankruptcy court exhibits disregard, if not disdain, for the bankruptcy court’s orders and authority. The bankruptcy court’s comments show that it clearly believed debtor to be willfully uncooperative:

The Debtor has attempted every means to avoid proposing a chapter 11 plan that will pay Wells Fargo’s over-secured claim, including threats to the status of the collateral, statements of the collateral’s value that are inconsistent among themselves, and an unwillingness to propose a plan that incorporates the very collateral valuation that the Debtor sought from the court.²⁶

We should, and do, defer to the views of the bankruptcy judge, who has experienced the debtor and this case “on the ground,” unless the court’s actions are somehow beyond the bounds of permissible choice. It is clear here that they are not.

3. Wells Fargo waived the operation of Section 362(e).

At oral argument, the Court inquired of the parties about the fact that a preliminary stay relief hearing was not convened until after the expiration of 30 days. The Wells Fargo motion was filed on August 25, 2006, but the first hearing on the matter did not occur until September 28, 2006. Section § 362(e) provides that, upon expiration of 30 days after the motion is filed, the stay is terminated unless the court orders that it continue pending the conclusion of the final hearing and a ruling thereon. The September 6, 2006, order contained a finding that the movant had waived the 30-day deadline. After the preliminary hearing on September 28, 2006, the bankruptcy court entered a further order delaying the final hearing on the motion until November 14, 2006, and finding again that Wells Fargo had waived the § 362(e) deadline. Section 362(e) does not afford us an independent basis to conclude that the stay terminated in this case.

Based on the record in this case, we do not have a definite and firm conviction that the bankruptcy court abused its discretion by making a clear error of judgment or exceeded the bounds of permissible choice under these circumstances. JE’s persistence in filing a plan that fails to acknowledge the court’s valuation of the collateral, taken with JE’s other actions in the case, constitute sufficient cause under § 362(d)(1).

V. Conclusion

Finding no error, the decision of the bankruptcy court to lift stay is AFFIRMED.

1 . Franklin Sav. Ass’n v. Office of Thrift Supervision, 31 F.3d 1020, 1022 n. 3 (10th Cir.1994).

2 . Fed. R. Bankr.P. 8002(a).

3 . 28 U.S.C. § 158(b)-(c); Fed. R. Bankr.P. 8001(e).

4 . Franklin Sav. Ass’n, 31 F.3d at 1023.

5 . Moothart v. Bell, 21 F.3d 1499, 1504 (10th Cir.1994) (quoting McEwen v. City of Norman, 926 F.2d 1539, 1553-54 (10th Cir.1991)).

6 . Kiowa Indian Tribe v. Hoover, 150 F.3d 1163, 1165 (10th Cir.1998).

7 . Elder v. Holloway, 510 U.S. 510, 516, 114 S.Ct. 1019, 127 L.Ed.2d 344 (1994).

8 . Cooter & Gell v. Hartmarx Corp., 496 U.S. 384, 401, 110 S.Ct. 2447, 110 L.Ed.2d 359 (1990).

9 . Appellant's Appendix ("App.”) at 13-20.

10 . Order on Confirmation of [February 10, 2006] Chapter 11 Plan, in App. at 21-24.

11 . Wells Fargo’s Motion to Modify Stay and Notice of Time to Object, in App. at 25-27.

12 . All future references to "Section” or "§ ” are to the Bankruptcy Code, Title 11 of the United States Code unless otherwise indicated.

13 . See Docket No. 87 in Docket Report, in App. at 8. A copy of this order was not provided in the App.

14 . See J.H. Streiker & Co., Inc. v. SeSide Co., Ltd. (In re SeSide Co., Ltd), 155 B.R. 112, 116 (E.D.Pa.1993) (Implied waiver may be found where a creditor's actions are clearly inconsistent with an intention to insist on its rights.); Borg-Warner Acceptance Corp. v. Hall, 685 F.2d 1306, 1308 (11th Cir.1982) (implied waiver where creditor not only failed to object to the absence of .preliminary hearing but also attended the final hearing beyond thirty day period without objection); In re McNeely, 51 B.R. 816, 821 (Bankr.D.Utah 1985) (implied waiver where creditor failed to schedule final hearing within thirty day period); In re Small, 38 B.R. 143, 147 (Bankr. D.Md.1984) (implied waiver of thirty day requirement where creditor filed discovery request to which responses were due beyond the thirty day period); In re Wilmette Partners, 34 B.R. 958, 961 (Bankr.N.D.Ill.1983) (implied waiver where creditor agreed to continuance of preliminary hearing beyond thirty day time period).

15 . Minutes of [9/28/06] Proceedings, in App. at 87.

16 . Id.

17 . See Order Scheduling Hearing, attached to Appellant's Reply Br.

18 . Amended Plan of Reorganization, in App. at 102.

19 . Order on Motion to Modify Stay at 2-3, in App. at 163-64.

20 . Appellant’s Br. at 6.

21 . Order on Motion to Modify Stay at 5, in App. at 165.

22 . See In re Duggins, 263 B.R. 233, 238 (Bankr.C.D.Ill.2001) (The bifurcation or valuation process contemplated by § 506(a) is not properly part of the claims allowance process.).

23 . In re Busch, 294 B.R. 137, 140 (10th Cir. BAP 2003) (citing Pursifull v. Eakin, 814 F.2d 1501, 1506 (10th Cir.1987)).

24 . In re A Partners, LLC, 344 B.R. 114, 127 (Bankr.E.D.Cal.2006). See also In re Superior Siding & Window, Inc., 14 F.3d 240, 242 (4th Cir.1994).

25 . In re Mack, 347 B.R. 911, 915 (Bankr.M.D.Fla.2006), citing Little Creek Dev. Co. v. Commonwealth Mortgage Corp. (In re Little Creek Dev. Co.), 779 F.2d 1068, 1071 (5th Cir.1986).

26 . Order on Motion to Modify Stay at 4, in App. at 164.