Opinion
Case No. 98-74154
November 27, 2000
John S. Narmont, 209 Bruns Lane, Springfield, Il., 62702.
John M. Myers, 1300 South Eighth St., Springfield, Il., 62703.
Michael D. Clark, 401 Main St. #1130, Peoria, Il., 61602.
U.S. Trustee, 401 Main St. #1100, Peoria, Il., 61602.
OPINION
This matter is before the Court on Debtors' Amended Chapter 12 Plan and the Objection thereto filed by Illini Bank ("Illini")
On November 17, 1998, Debtors filed their Chapter 12 petition in bankruptcy. On December 2, 1998, Debtors filed their bankruptcy schedules. Schedule D listed Illini as having a secured claim in the amount of $40,000 based upon a 1997 security agreement and a lien on certain machinery and equipment valued at $45,000. On February 16, 1999, Debtors filed their Chapter 12 plan. The plan proposed to pay Illini's claim of $40,000 at a rate of $7,682.90 per year over seven years at an annual interest rate of eight percent. Illini did not object to the plan (why would they?), and a preliminary confirmation hearing was held on March 17, 1999. Illini was represented at the hearing by Attorney A. Mark Rabin. Debtors' counsel, John S. Narmont, claims that he stated in open court at the preliminary confirmation that Illini's claim was actually unsecured and would be treated as such (the hearing was not transcribed; the Court's notes do no address this issue, and the Court has no independent recollection of any statements made or not made by Mr. Rabin at the hearing). Mr. Narmont also asserts that Mr. Rabin tacitly acquiesced to Illini's treatment as an unsecured creditor. Mr. Rabin disputes that he received any notice, at the preliminary confirmation hearing or elsewhere, that Debtors were proposing to treat Illini's claim as unsecured. At any rate, an Order Confirming Chapter 12 Plan was entered on May 27, 1999. The Confirmation Order made no specific reference to Illini or its claim so, inferentially, Illini's claim was to be paid a nominal percentage pro rata along with other general unsecured creditors.
Debtors failed to make the first payment due under the plan on March 30, 2000. On April 20, 2000, Illini filed a Motion to Dismiss the case for that reason. After a hearing at which Mr. Narmont argued that Illini was an unsecured creditor and at which Mr. Myers (Mr. Rabin's partner) argued the contrary, the Court ordered Debtors to file an Amended Chapter 12 Plan. On May 16, 2000, Debtors filed their Amended Chapter 12 Plan, which treats Illini as an unsecured creditor, but which proposes to treat all other creditors identically to how they were treated under the original Plan.
On June 2, 2000, Illini filed an Objection to the Amended Plan. Illini argues that it is improper to allow Debtors to recharacterize Illini's claim as unsecured at this late date. In any case, Illini asserts that its claim is secured by a perfected purchase money security interest in a 1995 John Deere tractor, and a perfected non-purchase money lien on all other farm equipment owned by Debtors. Debtors assert that another creditor, First National Bank of Pana ("FNBP"), has a prior and superior lien on the farm equipment owned by Debtors.
Initially, the Court must determine whether it may, and whether it should, reconsider the Order of Confirmation. 11 U.S.C. § 1227 (a) provides as follows:
Except as provided in section 1228 (a) of this title, the provisions of a confirmed plan bind the debtor, each creditor, each equity security holder, and each general partner in the debtor, whether or not the claim of such creditor, such equity security holder, or such general partner in the debtor is provided for by the plan, and whether or not such creditor, such equity security holder, or such general partner in the debtor has objected to, has accepted, or has rejected the plan.
The Seventh Circuit has recognized the sanctity of confirmation orders. Matter of UNR Industries, Inc., 20 F.3d 766 (7th Cir. 1994);Holstein v. Brill, 987 F.2d 1268 (7th Cir. 1993); Matter of Chappell, 984 F.2d 775 (7th Cir. 1993); Matter of Pence, 905 F.2d 1107 (7th Cir. 1990) An order confirming a Chapter 12 plan has res judicata effect as to all issues which were decided, or could have been decided, at the time of confirmation. In re Young, 76 B.R. 504 (Bankr. E.D.Pa. 1987); In re Williams, 96 B.R. 149 (Bankr. N.D. Ill. 1989); In re Edelson, 101 B.R. 386 (Bankr. S.D. Fla. 1989). Failure to appeal the confirmation order precludes a party from attacking any provision in the plan in a later proceeding. Matter of Chappell, supra 984 F.2d at 782.
Fed.R.Bankr.P. 9024 makes Federal Rule of Civil Procedure 60 applicable to bankruptcy proceedings. Rule 60 (b) provides for relief from a final order for, inter alia, mistake, inadvertence, surprise, excusable neglect, or any other reason justifying relief from the operation of the judgment. A motion for relief from a final order of judgment filed pursuant to Fed.R.Civ.P. 60 (b) must be filed within one year after the order was entered.
In this case, the Order of Confirmation was entered on May 27, 1999. On April 20, 2000, Illini filed its Motion wherein it alleges that the claim of Illini Bank was unjustly compromised in the Order of Confirmation. Accordingly, Illini's Motion pursuant to Fed.R.Civ.P. 60 (b) is timely.
The parties disagree as to whether counsel for Illini was given notice of and agreed to the proposed modification of Illini's claim from secured to unsecured at the confirmation hearing. Mr. Narmont asserts that Mr. Rabin was told in open court that the Order of Confirmation would modify the treatment of Illini's claim from how it was proposed to be treated under the Plan. Mr. Rabin disputes Mr. Narmont's contention and testified that he has no recollection of ever being so advised.
The Court has always found both Mr. Narmont and Mr. Rabin to be highly credible and trustworthy. However, because of the clear dispute in their testimony and the unavailability of any corroboration in the form of a transcript of the hearing or notes or an independent recollection by the Court, it would be inappropriate to risk denying Illini the opportunity to obtain an adjudication of its claim. Clearly, the Court must err on the side of granting too much due process over granting too little. Accordingly, the Court will grant Illini relief from the Order of Confirmation on the basis of mistake, and will consider whether Illini's claim is secured, as Illini contends, or whether FNBP has a prior perfected security interest in the collateral claimed by Illini. Evaluating the relative rights of Illini and FNBP requires a detailed examination the transactions between the Debtors and the two banks.
On February 2, 1993, Debtors (individually and as officers of Tri-County Farms, Inc.) entered into a master note, a security agreement and a UCC-1 financing statement with FNBP. Debtors borrowed $130,000 at 8.5% interest. The master note indicates that the loan was secured by a security agreement dated February 2, 1993, and went on to say the following: "The Security Agreement will secure future or other indebtedness, cover after acquired property, and cover the following collateral: All crops and other farm products, including but not limited to corn and soybeans and wheat, all harvested or stored crops, and all products of crops whether now owned or hereafter acquired on real estate described in the Security Agreement dated February 2, 1993. See Security Agreement dated February 2, 1993 for more detail on collateral." The security agreement, which is typed on a form entitled "Security Agreement — Farm Equipment and Products", indicates that a security interest was given to FNBP in the following: "All Borrower's farm equipment and livestock located or to be located at ___________________________________ ______________________________ Section, Township, Range, City or To wn, County, State on premises belonging to _____________________________ which without limitation include on the date hereof: All crops and other farm products, including but not limited to corn, soybeans and wheat, all harvested or stored crops and all products of crops whether now owned or hereafter acquired on the following described real estate: (description of real estate omitted) and all inventory; all accounts; all general intangibles; all documents of title or other documents including but not limited to negotiable or nonnegotiable warehouse receipts; all payments, commodities, entitlements, certificates or other rights under any government or other loan reserve, disaster, diversion, deficiency, soil conservation or other production control or price support programs; all private and federal insurance policies and all payments thereon; whether now owned or hereafter acquired, as well as any and all proceeds thereof." The UCC-1 financing statements which were executed (and presumably filed) in February, 1993, are completely silent as to farm equipment, and mention only the crops and other items, again in the same detail as in the security agreement.
In or around May, 1994, Debtors, pursuant to another transaction with FNBP, executed a UCC-1 financing statement in favor of FNBP. The UCC-1 financing statement covered the following: "All equipment including but not limited to Washers: 15 G.E. 12#, 15 W-74 18#, 5 P-b 10#, 7 W-124 30# and 1 Giant 50#. Dryers: 20 American. Any and all accessories, parts and accessions." Said UCC-1 financing statement was recorded on May 13, 1994. Another UCC-1 financing statement was recorded on March 10, 1995, which covered "ALL EQUIPMENT NOW OWNED OR HEREAFTER ACQUIERD (sic), AS WELL AS ALL ACCESSORIES, PARTS, REPLACEMENTS AND ACCESSIONS, AND ALL SUPPLIES.
On December 8, 1997, Debtor Larry Rochkes executed a Promissory Note in favor of Illini in the principal amount of $22,023.00. Mr. Rochkes also executed a commercial security agreement which gave Illini Bank a security interest in "all farm equipment". A UCC-1 financing statement covering "All Farm Equipment; together with the following specifically described property: 1995 JOHN DEERE 8400 TRACTOR . . ." was executed by Mr. Rochkes and recorded in the Office of the Recorder of Christian County, Illinois on December 12, 1997.
Debtors contend that the master note and security agreement executed February 2, 1993, and UCC-1 financing statement recorded May 13, 1994, endowed FNBP with a perfected security interest in Debtor's farm equipment, and that said security interest is prior to and superior to Illini's purported security interest.
Illini argues that FNBP does not have (and does not claim to have) a perfected senior security interest in farm equipment for several reasons. First, the security agreement of February, 1993, is silent as to the farm equipment allegedly securing the loan. Second, the UCC-1 financing statements executed in February, 1993, are completely silent as to farm equipment. Third, subsequently filed UCC-1 financing statements which refer to equipment pertain only to laundry equipment, as shown by contemporaneously executed notes and security agreements.
Under Illinois law, when contract terms are unambiguous, those terms are to be given their clear and natural meaning, and the rights of the parties are limited by the terms expressed in the contract. American Reserve Corp. v. Beigel Sandler, 1993 WL 62984 (N.D. Ill. 1993) (citations omitted). The Illinois Supreme Court has provided that, when a contract is unambiguous, "[b]oth the meaning of the instrument and the intention of the parties must be gathered from the face of the document without the assistance of parol evidence or any other extrinsic aids."Rakowski v. Lucente, 104 Ill.2d 317, 323, 472, N.E.2d 791, 794 (1984) (citation omitted). However, when loan documents contain a latent or extrinsic ambiguity, parol and other extrinsic evidence may be considered to aid in interpreting the loan documents. In re Bellevue Place Associates, 173 B.R. 1009, 1017 (Bankr. N.D. Ill. 1994) (citations omitted)
In the case at bar, the security agreement executed February 2, 1993, is ambiguous. The security agreement was prepared on a pre-printed form which, in its boilerplate, granted FNBP a security interest in "All Borrower's farm equipment and livestock located or to be located at (BLANK) on premises belonging to (BLANK) which without limitation include on the date hereof: All crops and other farm products, including but not limited to corn, soybeans and wheat, all harvested or stored crops and all products of crops whether now owned or hereafter acquired on the following described real estate: (description of real estate left BLANK) and all inventory; all accounts; all general intangibles; all documents of title or other documents including but not limited to negotiable or nonnegotiable warehouse receipts; all payments, commodities, entitlements, certificates or other rights under any government or other loan reserve, disaster, diversion, deficiency, soil conservation or other production control or price support programs; all private and federal insurance policies and all payments thereon; whether now owned or hereafter acquired, as well as any and all proceeds thereof."
The blanks on the form were not filled in, and there is no other reference to a lien or security interest in farm equipment in any of the other loan documents executed contemporaneously therewith. The master note makes no reference to farm equipment, and a UCC-1 financing statement which was executed and recorded contemporaneously makes no reference to farm equipment.
Debtors assert that the failure to include farm equipment in the contemporaneously-recorded financing statement merely means that the security interest was unperfected until a subsequently executed UCC-1 financing statement which included "equipment" was properly recorded on May 13, 1994. Debtors' contention does not discount the fact that the loan documents are ambiguous on their face. Accordingly, parol and other extrinsic evidence may be considered to aid in interpreting the loan documents.
A plain reading of the February, 1993, loan documents reveals that the transaction was a farm operating loan for the year 1993. The master note makes no reference to security in farm equipment; rather, it refers only to crops, other farm products, and products of crops. The only reference to farm equipment in the corresponding security agreement is found in the boilerplate language on the pre-printed form, and said reference is to "farm equipment . . . located or to be located on (BLANK)", and the blank space was never completed. Accordingly, the extrinsic evidence supports Illini's contention that no security interest in farm equipment was granted to FNBP in 1993; rather, the issue of farm equipment arose only because it was mentioned in the boilerplate of a pre-printed form. The subsequently-recorded UCC-1 financing statements, which were recorded in 1994 and 1995 and which do make reference to equipment, do not change that conclusion. These financing statements were executed and recorded contemporaneously with loans obtained by Debtors from FNBP which were to be secured by laundromat equipment. In fact, all specific references are to laundromat equipment, and neither of these financing statements makes reference to "farm equipment" or to any specific item(s) of farm equipment. In addition, and perhaps most importantly, so far as the Court has been made aware, FNBP has never claimed to have a security interest in Debtors' "farm equipment". Thus, the weight of evidence in this case suggests that FNBP did not ask for, and Debtors did not intentionally grant, a security interest in "farm equipment" to FNBP.
For the reasons set forth above, the Court finds that Illini has a perfected security interest in Debtors' farm equipment and FNBP does not. Debtors shall file a Second Amended Plan to reflect this conclusion within 21 days.
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.
ORDER
For the reasons set forth in an Opinion entered this day,
IT IS HEREBY ORDERED that the Objection filed by Illini Bank to Debtors' Amended Chapter 12 Plan be and is hereby sustained.
IT IS FURTHER ORDERED that Illini Bank has a perfected security interest in Debtors' farm equipment.
IT IS FURTHER ORDERED that First National Bank of Pana does not have a perfected security interest in Debtors' farm equipment.
IT IS FURTHER ORDERED that Debtors file a Second Amended Plan reflecting the Court's findings within 21 days of the date of this Order.