Lone Star Milk Producers, Inc. v. Litzler

Citations: 370 B.R. 671; 2007 Bankr. LEXIS 2213; 2007 WL 1891179Docket: 19-30782

Court: United States Bankruptcy Court, N.D. Texas; June 27, 2007; Us Bankruptcy; United States Bankruptcy Court

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Lone Star Milk Producers, Inc. filed for a declaratory judgment to claim ownership of certain funds held by the defendants, arguing these funds are held in trust for them under the Texas Agriculture Code. The defendants countered with a Partial Motion for Summary Judgment, questioning whether Lone Star qualifies as a "dairy farmer" and if they preserved trust fund protection under the applicable statute. The court confirmed its jurisdiction under 28 U.S.C. 1334 and 151, categorizing the matter as core under 28 U.S.C. 157(b)(2)(A, B, O). 

The case stems from an involuntary chapter 7 bankruptcy filed against Americana Foods Limited Partnership, with John Litzler appointed as the Chapter 7 Trustee. Before the bankruptcy, Americana owed Lone Star $585,593.10 for raw milk supplied between August 1, 2006, and the petition date. During this period, Americana received over $8 million in deposits related to the sale of dairy products. Lone Star filed a Motion for Relief from the Automatic Stay, seeking either to lift the stay to preserve their rights under the Texas Milk Statute or to compel Americana to surrender the trust funds.

The Lift Stay Motion was granted on October 16, 2006, allowing Lone Star to issue notices under chapter 181 of the Texas Agriculture Code. Subsequently, Lone Star initiated an adversary proceeding against the Debtor and JPMorgan Chase Bank, N.A. on December 1, 2006. On January 8, 2007, both the Trustee and JPMorgan Chase filed answers denying liability. A Stipulation and Agreed Order was entered on February 1, 2007, which included: (i) substituting 2118769 Ontario, Inc. as a Party Defendant for JPMorgan Chase; (ii) dismissing JPMorgan Chase from the case; and (iii) directing the deposit of $1 million into the Court's registry to cover any judgment against the Defendants.

Key legal issues outlined include: a) the validity of the trust under chapter 181 of the Texas Agriculture Code; b) whether Lone Star qualifies as a "dairy farmer" under section 181.001(2) of the Texas Milk Statute; c) the obligation of the Debtor and Trustee to hold proceeds from dairy product sales in trust for Lone Star under section 181.002(a); and d) the ownership of the proceeds from dairy product sales, specifically whether they belong to Lone Star or the Debtor's bankruptcy estate.

The analysis section details the standard for summary judgment, which requires that the moving party shows no genuine material fact issue exists, with the burden on the nonmovant to present evidence demonstrating a factual dispute. The court must interpret evidence favorably for the nonmovant, resolving factual controversies only when both parties present conflicting evidence.

In McCallum Highlands, Ltd. v. Washington Capital Dus, Inc., the court emphasized that the nonmoving party in a summary judgment must provide specific facts beyond mere pleadings to demonstrate a genuine issue for trial. It established that property interests are governed by state law, as per Butner v. United States, and that the Texas Agriculture Code creates a valid trust for milk sales, prioritizing dairy farmers until full payment is made. Defendants contended that this statute improperly alters bankruptcy priorities by favoring dairy farmers over other creditors. The court acknowledged that while state law can exclude certain properties from bankruptcy estates, it must not solely aim to manipulate bankruptcy priorities. For a state law to validly create such an exclusion, it must serve a purpose outside of bankruptcy and the trust must attach before the bankruptcy petition date. If the Plaintiff can prove the elements of the Texas Milk Statute, the trust would grant them superior rights to the contested funds over the Defendants.

Lone Star qualifies as a "dairy farmer" under the Texas Milk Statute, which defines such an entity as one engaged in milk production for sale to milk processors directly or through a cooperative. As a cooperative of about 220 active raw milk producers, Lone Star meets the statutory definition. Section 181.0015 states that when a dairy farmer markets milk through a cooperative, that cooperative is also considered a dairy farmer. To gain statutory protections, Lone Star must demonstrate that the entities it claims payments from are dairy farmers and that they are members of Lone Star. Evidence presented includes Membership and Marketing Agreements for twenty-five members, an affidavit, articles of incorporation, bylaws, and statements of members' equity, confirming Lone Star’s status as an agricultural cooperative under Ohio law and the Capper-Volstead Act. 

Despite defendants' claims that Lone Star has not proven all suppliers are members or dairy farmers, they provided no rebuttal evidence to dispute Lone Star's assertions. The burden of proof does not rest on mere allegations but requires substantial evidence. Additionally, defendants argue that any dairy product proceeds are part of the debtor's estate due to an implied trust formed post-bankruptcy. However, there is a distinction between implied trusts (which require equitable remedies due to unjust enrichment) and express trusts, which are created explicitly under the law.

A resulting trust is established when the actions of involved parties indicate an intention for property to be held in trust, serving to prevent unjust enrichment. In contrast, express trusts are traditional trusts where one party holds property for another's benefit, often formalized through a trust document. The absence of such documentation does not automatically classify a trust as implied; for instance, trusts created by statute are considered express trusts. The Texas Agriculture Code's Chapter 181 was designed to protect dairy farmers by mandating that proceeds from milk sales be held in trust for unpaid dairy farmers. This statute delineates Lone Star's rights as a trust beneficiary and negates the need for a resulting trust under equitable principles. 

The Defendants argue that Ontario held a prior perfected security interest in Americana's assets, including proceeds from dairy products, suggesting that Lone Star's claim cannot supersede this lien. They contend that Lone Star, as an unperfected trust beneficiary, must yield to Ontario's prior lien and equate to a constructive trust beneficiary. However, Chapter 181 explicitly states that funds held in trust by a milk processor belong to the dairy farmer, indicating that the proceeds from dairy products are property of Lone Star and never belonged to the Debtor, thus Ontario's lien does not attach. Additionally, the Defendants assert that Chapter 181 implicitly requires tracing of specific products tied to the raw milk sold, which is not supported by the statute's language.

Section 181.002(a) mandates that milk processors hold all payments from milk sales in trust for dairy farmers until they receive full payment for their milk. The necessity of tracing such payments is clarified in section 181.002(b), which allows dairy farmers to request an escrow account, requiring processors to deposit all payments from milk and dairy product sales into this account. Section 181.002(c) details that deposits should reflect the proportion of raw milk supplied by the farmer, indicating a system that accommodates the commingling of milk from multiple sources without necessitating tracing.

The court concludes that the statute does not impose an implicit requirement for dairy farmers to trace their specific raw milk in products sold to processors, supported by precedents under similar statutes like the Perishable Agricultural Commodities Act (PACA), which also does not require tracing of trust assets. The court noted that tracing is often practically impossible and would undermine the statute's purpose. The Fifth Circuit has similarly ruled against tracing requirements under the Packers and Stockyards Act due to the nature of the meat packing industry. 

As a result of this ruling, Lone Star is entitled to interest and attorney's fees on its claims, as the Texas Milk Statute stipulates that processors failing to pay for raw milk must compensate farmers for the purchase price, interest at the legal rate, and reasonable attorney's fees for collection efforts.

Lone Star has requested interest and attorney's fees, including claims from its members and associated cooperatives related to milk sales to Americana. The Court has instructed Lone Star to resubmit its request after dropping claims for three nonmember cooperatives. Following this, the Court will rule on the resubmitted motion, allowing Lone Star to prepare a judgment. The Texas Agriculture Code, specifically chapter 181, provides protections for dairy farmers, creating a trust for those supplying milk if statutory requirements are met. Lone Star has demonstrated compliance with these requirements, thus is entitled to summary judgment. Notably, the case involves issues of first impression, and Lone Star has narrowed its claims to those from its twenty-five members. Additionally, some Membership and Marketing Agreements were produced late but were not stricken. The Defendants argue that extensive evidence is required to prove the membership and dairy farmer status of the members, yet the Court remains uncertain if such evidence would be sufficient. Chapter 181 is applicable to dairy farmers, while the Perishable Agricultural Commodities Act (PACA) pertains to producers of perishable agricultural goods.