Westpfahl v. Clark (In re Westpfahl)

171 B.R. 330, 1994 Bankr. LEXIS 1330

• Court: District Court, C.D. Illinois
• Decided: August 31, 1994
• Docket: Bankruptcy Nos. 92-82691, 92-91658, 93-81825, 93-82159 and 93-80994; Adv. Nos. 93-8168, 93-9041
• Status: Published

Opinion

OPINION

WILLIAM V. ALTENBERGER, Chief Judge.

The issue before the Court represents the second stage of hearings to determine if the Chapter 12 Debtors may make direct payments to creditors, thereby bypassing the Chapter 12 Trustee and avoiding his statutory fee. At the first stage, this Court denied numerous challenges to the legal status of the Chapter 12 Trustee, and the manner in which his fees are calculated, but held that in general a Chapter 12 debtor was not precluded from making direct payments to creditors without recompense to the Chapter 12 Trustee and that a further hearing was necessary to determine when direct payments should be approved. In re Westpfahl, 168 B.R. 337 (Bkrtcy.C.D.Ill.1994). A subsequent hearing was held and the matter was taken under advisement.

Several general conclusions can be drawn from the subsequent hearings. First, no creditor has objected to direct payments. Second, the Chapter 12 Trustee has not maximized his statutory compensation and it does not appear he is close to doing so. Third, by permitting both a Debtor and a Chapter 12 Trustee to make payments to creditors, the ability of a Chapter 12 Trustee to supervise and control the plan and the payments to creditors is made more difficult. Split sources of payment lack a continuity a single source of payment provides.

In its previous Opinion, this Court listed thirteen factors that other courts had considered in determining if direct payments were appropriate and indicated there could be others. An important factor to consider is the type of debt which the Debtors propose to directly repay. In all these cases, the Debtors propose to directly pay long term secured real estate debt. Neither the Chapter 12 Trustee nor the U.S. Trustee has given any reason why that is inappropriate. To the contrary, there are several reasons which support direct payments. The debt is long term which exceeds the life of the plan. The real estate cannot be disposed of so as to adversely affect a creditor’s rights. Historically, except for the period in the early to mid 1980’s when farm real estate prices experienced a sharp drop, real estate has been a stable form of security. The secured creditor is protected and except for an indirect benefit of continuity which the Chapter 12 Trustee brings to the reorganization, the secured creditor receives little benefit from the reorganization. Furthermore, Chapter 12 of the Bankruptcy Code is patterned after Chapter 13 of that Code. In a Chapter 13 case the trustee routinely permits Chapter 13 debtors to directly pay long term secured real estate debt. This Court can see no reason why long term secured real estate debt in a Chapter 12 should be treated differently.

A second type of debt in these cases is short term secured equipment loans. Creditors holding this type of debt signed stipulations wherein they agreed to be paid direct. However, they are in a slightly different situation than creditors holding secured real estate debts. Their collateral is subject to depreciation. It is important that the payments be made timely or a situation could develop where the value of the collateral will drop without a concurrent reduction in the loan balance. At the subsequent hearings, the Debtors’ attorney indicated that, from a debtor’s point of view, it was important to have certainty as to what a court expected in a debtor’s plan and that to have a consistent policy short term secured equipment loans should be paid through the trustee. This Court would agree.

A third type of debt involves taxes. These in turn can be subclassified into real estate taxes and other taxes due the federal and state governments. Real estate taxes need not be paid through the Chapter 12 Trustee as they are secured by a tax lien and one way or another will be paid. Therefore, the supervision and continuity a trustee provides is not needed to insure payment. As to the other type of taxes, while they are given special status and protection under the Bankruptcy Code and federal and state statutes, that status and protection is limited. It has been this Court’s experience that in some instances taxes are the first expense which prepetition debtors stop paying. Once a plan of reorganization has been confirmed debtors can stop paying prepetition taxes and incur more post-petition taxes. So the supervision and continuity a Chapter 12 trustee brings to the reorganization process mil help to insure payment of taxes. Therefore, non real estate taxes included in a Chapter 12 plan should be paid through the Chapter 12 Trustee.¹

Another factor to consider is the source of the funds for the payments. In two of the cases before this Court the Debtors propose to liquidate collateral and pay creditors. The Chapter 12 Trustee plays a very minor role in this part of these two Chapter 12 plans and no good reason has been put forth which would justify burdening the Chapter 12 plans with a fee on those payments.

The Chapter 12 Trustee argues the various factors involved in these cases for the most part cancel out each other leaving two in conflict, the ability of the Debtor to achieve a meaningful reorganization versus the Chapter 12 Trustee being reasonably compensated for his services. The record was not fully developed in this regard. As would be expected, the Debtors testified they needed to make direct payments to have successful plans, while the Chapter 12 Trustee testified the plans would cash flow if the payments were made through him. From the Chapter 12 Trustee’s perspective there wasn’t any detailed evidence concerning his duties and his expenses and expected profit. While there was a general reference to his statutory duties under § 1202 of the Bankruptcy Code, 11 U.S.C. § 1202, there was very little specifies as to how he was performing those duties. Nor was there any specifics as to his expenses, with limited testimony as to his profitability. The Chapter 12 Trustee testified he lost money the first year of service, made a profit of $1,000.00 the second, and was making $5,000 to $6,000 profit in the third year, which is not yet completed. That is the type of profit pattern that would be expected with a start-up endeavor.

In balancing these factors, several points need to be made. First, most courts recognize that most Chapter 12 plans are thin and are designed to do what is necessary to achieve success. Second, the Chapter 12 Trustee does provide valuable services to a Chapter 12 ease. The Chapter 12 Trustee supervises the operation of the plan and keeps the Court informed as to its status, thereby bringing a continuity to the debtor’s affairs. He is entitled to be paid for those services. The creditors want to be paid, the debtors want to retain their farms, the debt- or’s attorney is paid. There is no reason why the Chapter 12 Trustee should be considered an inferior player in the game of reorganization and be penalized in order to have a successful plan of reorganization. If a debtor is to reorganize, the debtor must be able to fund all the parties to it. If a debtor cannot do so, he is not reorganizable.

At the subsequent hearings, the Chapter 12 Trustee testified that he expected to take the good with the bad and that on average to be reasonably compensated. That is a realistic position to take. Attached as Schedules 1-5 to this Opinion are updated charts, prepared by this Court, which show the amounts being offered by the Debtors, being requested by the Chapter 12 Trustee, and to be paid the Chapter 12 Trustee based on this Court’s opinion. On average he is being paid approximately $8,300.00 per case. Based on the evidence and this Court’s general knowledge of the Chapter 12 Trustee efforts in Chapter 12 cases, that is a reasonable figure.

This Court will now turn its attention to the specific eases before it. In re Thompson, No. 93-0994, complies with the holdings set forth above and should be confirmed. In re Hebb, No. 93-82159, and In re Larson, No. 93-81825, with one exception, also comply with the above holdings and are confirmable. The one exception is that the Chapter 12 plans should be modified to provide that the short term secured equipment loans should be paid through the Chapter 12 Trustee.

Both In re Ferguson, No. 92-91658, and In re Westpfahl, No. 92-82691, need more changes to be confirmable. First, both Chapter 12 plans need to be modified to provide that the non real estate taxes will be paid through the Chapter 12 Trustee. Second, in both cases the Chapter 12 plans provide the Chapter 12 Trustee’s fee is equal to the amount being paid to unsecured creditors. That exceeds the 10% fee prescribed by the statute. Therefore, the Chapter 12 plans need to be modified to limit the Trustee’s fee on payments to unsecured creditors to 10% of those payments. Finally, in both Ferguson, and Westpfahl, with the exception of the Reynolds State Bank loan, the plans need to be amended to provide the short term secured equipment loans will be paid through the Chapter 12 Trustee. The loan by the Reynolds State Bank in Westpfahl need not be paid through the Chapter 12 Trustee as it is a revolving loan which involves not only repaying old debt, but the incurring and repaying of new post-petition debt as part of the debtor’s ongoing operations.²

In In re Larson, there is an additional objection to confirmation filed by Marcus Plotner (PLOTNER) which is unrelated to the issue involving the computation of the Chapter 12 Trustee’s fee. PLOTNER, a former landlord of the LARSONS, objected to the treatment of his claim under the Chapter 12 plan. The LARSONS rented land from PLOTNER under a crop sharing lease for the 1991 year. The Debtor harvested the crop and sold it through Rumboldt and Kuhn Elevator and used the proceeds to pay the Princeville State Bank, which had a lien on the crops. On August 9, 1993, the LAR-SONS filed a Chapter 12 petition in bankruptcy, classifying PLOTNER’s claim for part of his landlord’s share of soybeans as unsecured. PLOTNER objected to the plan, claiming secured status by reason of the statutory landlord’s hen under Illinois law and the filing of a Uniform Commercial Code UCC-1 financing statement. A hearing was held on the objection and the parties submitted briefs on the issue.

In his brief filed May 23, 1994, PLOTNER concedes that a statutory landlord’s hen is avoidable under § 545 of the Bankruptcy Code. In any event, the hen afforded landlords under Illinois is only of limited duration. The statute provides that the hen continues for a period of six months after the termination of the lease. 735 ILCS 5/9-316 (1992). While a copy of the lease between the parties is not a part of the record and this Court is not certain as to the term of the lease, it is without question that the lease expired no later than February, 1992, a date not within the six-month period preceding the filing of the Chapter 12 petition.

PLOTNER also claims that he perfected his hen by filing a UCC-1 financing statement in the Office of the Stark County Recorder on July 10,1989. While PLOTNER’s position is not entirely clear, this Court will construe his contention as best it can. The Uniform Commercial Code has no appheation to landlord’s hens. 810 ILCS 5/9-104(b). Thus, PLOTNER cannot bootstrap his status as holder of a statutory landlord’s hen to the umbrella of the Uniform Commercial Code by the filing of a UCC-1 financing statement.

In order for a creditor to claim a security interest in cohateral which is enforceable against the debtor under the Uniform Commercial Code, the creditor must either have possession of the collateral or the debtor must have signed a security agreement containing a description of the collateral. 810 ILCS 5/9-203. The record does not contain, nor does it appear that the parties entered into a separate security agreement granting PLOTNER a hen on the crops. The lease is not a part of the record and PLOTNER has not argued that the language of the lease creates a security interest. The only document in the record which could be considered to give rise to a security interest is the UCC-1 financing statement signed by LARSON. A UCC-1 financing statement cannot substitute for a security agreement unless it contains an express grant by the debtor creating a security interest in the collateral described. Victor v. Griffin, 122 Idaho 395, 884 P.2d 912 (Ct.App.1992); In re Flores De New Mexico, Inc., 151 B.R. 571 (Bkrtcy.D.N.M.1993); In re Zurliene, 97 B.R. 460 (Bkrtcy.S.D.Ill.1989). In the present case, as in those cited, the UCC-1 financing statement contains no language indicating that the LARSONS had granted PLOT-NER a security interest in the collateral, but merely identifies the collateral.

Even if the UCC-1 financing statement created a security interest, PLOT-NER’s contention that he achieves secured status under the Chapter 12 plan would still fail. Citing § 9-306(2) of the Uniform Commercial Code, (810 ILCS 5/9-306(2), PLOT-NER argues that when the crops were sold he continues to have a security interest in the proceeds. A creditor must, however, adequately trace the proceeds it claims. In re Highland Park Associates Ltd. Partnership I, 130 B.R. 55 (Bkrtcy.N.D.Ill.1991). The parties have agreed here that the proceeds from the sale of the crop were paid to the Princeville State Bank. PLOTNER has no claim to any monies in the hands of the LARSONS. For the foregoing reasons, PLOTNER’s claim is properly treated as unsecured and his objection to the LAR-SONS’ Chapter 12 plan should be overruled.

This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.

See written Order.

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ORDER

For the reasons set forth in the Opinion entered this day; IT IS HEREBY ORDERED:

1. In re Thompson, No. 93-80994, is con-firmable and the Debtor has fourteen (14) days within which to submit a confirmation order.

2. In re Hebb, No. 93-82159, In re Larson, No. 93-81825, In re Ferguson, No. 92-91658, and In re Westpfahl, No. 92-82691, are not confirmable and confirmation is denied, with the Debtors having fourteen (14) days within which to file amended plans consistent with the Opinion entered this day.

1 . As a general rule, post-petition taxes are not included in a Chapter 12 plan and are paid direct by a debtor. This Opinion is not suggesting post-petition taxes be paid through the Chapter 12 Trustee. However, the debtor may elect to do so. For example, a debtor may elect to include in a Chapter 12 plan post-petition taxes coming due before confirmation. If so included, those post-petition taxes should be paid through the Chapter 12 Trustee.

2 . As indicated earlier in this Opinion, the Chapter 12 Trustee is not entitled to a fee on payments to creditors arising out of the liquidation of collateral (i.e. Mer-Roc FS, Inc. in Westpfahl and Household Finance in Ferguson.)