In re Vander Vegt

Citations: 499 B.R. 631; 2013 WL 5652157Docket: Nos. 12-02144, 12-02146

Court: United States Bankruptcy Court, N.D. Iowa; October 16, 2013; Us Bankruptcy; United States Bankruptcy Court

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Debtors, a dairy farm operated by Herman and Hendrina Vander Vegt and their son Jeremy, sought court approval to incur secured debt for constructing a waste storage facility and a rotational grazing facility. The financing would create a priming lien on collateral held by First Security Bank and Trust Company of Charles City, Iowa (FSBTC), which opposed the motion, arguing that the applicable statute, 11 U.S.C. § 364(c), was not relevant and that a priming lien under § 364(d) was improper due to insufficient protection for FSBTC. FSBTC also filed a Motion to Dismiss based on the Debtors' failure to submit a plan under 11 U.S.C. § 1221. The Vander Vegts have a substantial history in dairy farming, having operated in New York before moving to Butler County, Iowa, where they purchased a dairy operation from FSBTC in 2009. Following operational difficulties, including a decline in cattle numbers and production issues, the Debtors filed for bankruptcy in 2012. After addressing some of the operational challenges, they now aim to secure financing of $300,000 from First National Bank of Waverly, Iowa, to facilitate their planned improvements.

The loan has a six-month term with an interest rate of 8%, increasing to 18% upon default. It stipulates that the general contractor must hold a performance bond and requires First National Bank to secure a first position priority lien on Debtors' property, which would subordinate FSBTC’s existing lien. The U.S. Department of Agriculture’s NRCS has granted Debtors $300,000 for two construction projects, with First National Bank obtaining a security interest in these grants until project completion. Debtors plan to apply the grant funds immediately to repay the loan in full. Monthly interim financing costs range from $1,666.00 to $2,000.00. Jeremy Vander Vegt testified about issues with the current waste storage system, which is nearing capacity and could lead to regulatory penalties if not addressed. He emphasized the necessity of a new system for the dairy's recovery and the benefits of a rotational grazing system. NRCS approval is required for both projects, with the waste storage facility plans already approved. Scott Kaisand from First National Bank confirmed the bank's intent to proceed with the loan upon court approval and stressed the need for a priming lien due to perceived undersecurity of FSBTC. He expressed confidence in Debtors' business plan and their potential success. Debtors are seeking permission under 11 U.S.C. 364(c) and 364(d) to incur secured credit, claiming their request under 364(c) is unopposed and that 364(d) should be granted as FSBTC will be adequately protected despite being primed, due to the value added by property improvements.

Debtors argue that necessary improvements to their farm will ensure compliance with Iowa law and facilitate successful reorganization. They assert that the 8% interest on a six-month loan will not compromise FSBTC’s security interest and highlight that their 2013 Cash Flow Projections allocate $2,375 per month for post-petition credit from a Barn Renovation Loan and a USDA Emergency Loan for cattle. Although these loan authorizations have not been requested, Debtors contend that funds could be redirected to pay off the First National Bank loan. They emphasize that First National Bank's conditions, such as requiring a bond, insurance, and site inspections, also serve to protect FSBTC’s interests.

Debtors claim they have met or will soon meet the requirements for an NRCS grant that would fully finance two construction projects. In contrast, FSBTC opposes the motion, arguing that Debtors have not met the necessary conditions to subordinate FSBTC’s rights as the primary lien holder, asserting that subordination undermines FSBTC's original priority position. FSBTC further contends that Debtors' claims of adequate protection depend on uncertain variables and that essential loan conditions, like tax return submissions and performance bond acquisition, remain unmet. FSBTC questions the necessity of the improvements given the Debtors' uncertain viability.

Regarding Debtors' Motion to Incur Secured Debt under 11 U.S.C. 364(c), the court determines that this section is not applicable due to First National Bank's requirement for a priming lien, which is only accessible under 11 U.S.C. 364(d). Consequently, the request under 364(c) is denied. 

For the Motion to Incur Secured Debt under 11 U.S.C. 364(d), the court outlines that to prime an existing lien, Debtors must demonstrate that alternative financing is unavailable and that adequate protection is provided to the original lien holder. Debtors have shown they cannot obtain less burdensome financing, as evidenced by Jeremy’s testimony about unsuccessful attempts to secure funding from 15 to 20 lenders, thereby meeting their burden under section 364(d)(1)(A).

The key issue is whether Debtors have provided adequate protection to FSBTC as required under 11 U.S.C. 364(d)(1)(B). Adequate protection aims to ensure that creditors receive the value they expected pre-bankruptcy. It is determined on a case-by-case basis, with the burden of proof on Debtors. Adequate protection can be provided through cash payments, additional or replacement liens, or other measures that ensure the “indubitable equivalent” of the creditor’s secured interest.

Debtors have not offered cash payments or additional liens, necessitating that they provide FSBTC with the indubitable equivalent of its interest. This concept requires relief that allows for the realization of value. Adequate protection is flexible, allowing courts to adapt to varying circumstances. The bankruptcy court must assess the value of the secured creditor's interest, the risks to that value posed by the debtor's actions, and whether the debtor's proposal effectively mitigates those risks.

Debtors argue that construction projects will increase property value, providing FSBTC with its indubitable equivalent. However, FSBTC contends there is no equity cushion to support both liens and that there is insufficient evidence that the projects will enhance collateral value. The court must first evaluate the value of FSBTC’s claim, noting that FSBTC is undersecured with no equity in the property. Additionally, it must identify risks to FSBTC, such as the potential for First National Bank to call the loan and take precedence in a foreclosure, potentially resulting in a loss of approximately $300,000 for FSBTC. Despite this risk, the court finds it minimal.

Finally, the court must determine if the anticipated increase in FSBTC’s collateral value adequately protects against identified risks in line with indubitable equivalence. Previous cases, such as In re Mosello, highlight that future value claims alone may not suffice for adequate protection, as demonstrated when a debtor's request for a loan secured by a priming lien was denied despite the promise of future value.

The debtor proposed a plan to subdivide twelve acres into twenty building lots for development and sale over three years, contingent on obtaining zoning approvals, installing infrastructure, and adhering to a budget. The court denied this request due to significant uncertainty and risk, emphasizing that the project's ultimate success was speculative and lacked quantifiable evidence. The court expressed concern that the proposal would leave the current lienholder unprotected during most of the reorganization process. In other cases, such as In re YL W. 87th Holdings I, LLC, the court similarly rejected requests for priming liens due to numerous contingencies regarding project completion and value. The debtor's need for Attorney General approval further complicated matters, and a prior abandonment of the project raised doubts about its viability.

In contrast, in In re 195 Central Park Ave. Corp., the court approved a priming lien for a renovation project that had identified potential tenants and their willingness to pay higher rents, establishing a clear path to value increase. Generally, courts have denied financing with priming liens where adequate protection relied on speculative increases, tight timelines, or bureaucratic hurdles. The current case was likened to Central Park, as the debtor's project is expected to take only about three months to complete, with the proposed financing lasting six months, thereby reducing the risk to the subordinated creditor compared to the more extended timelines in Mosello and YL W. 87th Holdings.

In the cases of In re Mosello and In re YL W. 87th Holdings, the debtors' ability to repay a priming lien was contingent on the success of speculative development projects. In this matter, the debtors' repayment hinges solely on completing construction of two projects, after which the NRCS will distribute grants to facilitate repayment of the lien. The Court finds these projects present significantly less risk to FSBTC compared to the aforementioned cases, particularly as the loan mandates securing a performance bond, which protects First National Bank and provides additional security for FSBTC in the event of default. 

FSBTC contends that the debtors have yet to fulfill all NRCS grant requirements, specifically the submission of updated tax returns, which are currently under review by a tax attorney. While FSBTC notes that NRCS must approve the project plans, the evidence indicates that the waste storage facility has already been approved, and the rotational grazing plan is nearing completion. The Court is convinced that the debtors will meet NRCS conditions, leading to projects that are likely to enhance the estate and facilitate reorganization without unduly risking FSBTC's position. 

Jeremy testified to the projects' benefits, including disease prevention, compliance with Iowa DNR regulations, reduced overhead, and improved milk productivity, labeling them as “essential building blocks.” The Court concludes that these projects will likely increase the value of the debtors' property and provide adequate protection to FSBTC through the anticipated value increase, the brief duration of the lien financing, and expected grant payments. However, approval of the debtors' motion to incur secured debt is conditioned upon meeting all NRCS requirements before First National Bank can take a priming lien on FSBTC's collateral.

In response to FSBTC's motion to dismiss the debtors' case under 11 U.S.C. § 1208(c)(3) for failure to timely file a plan as required by § 1221, the Court finds that the debtors are entitled to more time due to various delays, including creditor resistance and court decisions. Thus, the Court denies FSBTC's motion to dismiss, denies the motion for secured debt under § 364(c), and conditionally grants the motion under § 364(d). The document also notes the passing of Herman Vander Vegt, expressing condolences to his family.