Saturday, June 13, 2020

FYI: 8th Cir BAP Holds Owners of Debtor Estopped from Contradicting Debtor's BK Filings

The U.S. Bankruptcy Appellate Panel for the Eighth Circuit recently held managing members of a limited liability that filed a Chapter 11 bankruptcy were equitably estopped from asserting ownership of equipment where the members previously verified documents in the bankruptcy showing ownership of the equipment by the company.


A copy of the opinion is available at:  Link to Opinion


A family farm organized as an LLC, where the husband and wife farmers (Farmers) where members and guarantors of the LLC, filed a Chapter 11 bankruptcy petition in January 2015.  An agricultural lender was a secured creditor of the farm.  The farmers, as managing members of the farm, represented that the farm owned the machinery and equipment at issue in the monthly operating reports which were part of the bankruptcy filings.


In November 2016, the lender's attorney sent an email to the farm's attorneys stating that lender would need signed and verified balance sheets from the guarantors before it would consider dismissing litigation against them.


On December 10, 2016, the guarantor Farmers signed an individual balance sheet itemizing their fixed assets which did not include the machinery and equipment that is at issue in this appeal.


On December 16, 2016, the Third Amended Plan was filed in the bankruptcy. The farm's post-petition tax returns tax returns, signed by one of the Farmers, claimed ownership of many pieces of the machinery and equipment at issue.


In January 2017, lender dismissed its pending state court action against the Farmers without prejudice.


In February 2017, the farm confirmed its Third Amended Chapter 11 bankruptcy plan with an addendum which required liquidation of substantially all the farm's assets including substantially all the farm's equipment, in cooperation with lender. No list of equipment was attached to the Plan.


Post-confirmation litigation ensued concerning ownership of machinery and equipment.


In August 2018 the bankruptcy court granted lender's request to compel the farm to sell (or deliver to lender) machinery and equipment owned by the farm on the confirmation date, conditioned on lender's timely filing of a list of machinery and equipment with evidence that the farm owned the machinery and equipment at confirmation. The farm failed to comply and lender filed a motion for civil contempt and sanctions and writ of execution which the court granted.


The farmers filed a motion to amend the Civil Contempt and Sanctions Order (Motion to Amend), to which lender objected.


The bankruptcy court held two hearings on the Motion to Amend. At the first hearing, the bankruptcy court recounted that it had determined at the earlier hearing on lender's motion to direct compliance with the Plan that the farm owned the property listed on the Writ of Execution. The Farmers now claimed that while the farm did own the property at one point, it was transferred to the Farmers in 2012. However, the list of the equipment in the farm's annual balance sheet submitted to the lender at the end of 2012 included the same equipment the Farmers.


After a second hearing, the bankruptcy court determined the Farmers were equitably estopped from asserting ownership to the equipment at issue. The court also denied the relief they requested in their motion to amend or for a new trial.  The Farmers eventually appealed to the Eighth Circuit. 


The Eighth Circuit BAP noted equitable estoppel under Nebraska law requires lender to prove six elements:


"(1) conduct which amounts to a false representation or concealment of material facts or, at least, which is calculated to convey the impression that the facts are otherwise than, and inconsistent with, those which the party subsequently attempts to assert; (2) the intention, or at least the expectation, that such conduct shall be acted upon by, or influence, the other party or other persons; (3) knowledge, actual or constructive, of the real facts; (4) lack of knowledge and of the means of knowledge of the truth as to the facts in question; (5) reliance, in good faith, upon the conduct or statements of the party to be estopped; and (6) action or inaction based thereon of such a character as to change the position or status of the party claiming the estoppel."


Woodard v. City of Lincoln, 588 N.W.2d 831, 836 (Neb. 1999) (citation omitted).


The Court examined each element, beginning its analysis by noting that the Farmers did not dispute the first element or third elements.


As to the second element, the Farmers argued the lender's evidence showed carelessness or mistake, but not intent. The Court disagreed, noting that the Farmers, both in their individual and corporate representative capacities on multiple occasions and in multiple contexts, made misrepresentations about ownership of the machinery and equipment.


As to the fourth element, the Eighth Circuit BAP rejected the Farmers' argument that fact that the farm's schedules state that some of the machinery and equipment was acquired before the farm's formation should have required lender to inquire further. The Court responded that a lender is not required to take the multiple steps proposed to verify the accuracy of a borrower's schedules which were signed under penalty of perjury.


As to the fifth element, the Court noted that the lender relied on the representations made by the Farmers and the farm when the lender agreed to a stipulated plan for the farm and dismiss the litigation against Farmers as guarantors. The Court added that the entitlement to rely on representations made in a Debtor's schedules and statements is clear. Mertz v. Rott, 955 F.2d 596, 598 (8th Cir. 1992) ("[T]he petition, including schedules and statements, must be accurate and reliable, without the necessity of digging out and conducting independent examinations to get the facts.") (citation and internal quotation marks omitted); Bauer v. Iannacone (In re Bauer), 298 B.R. 353, 357 (B.A.P. 8th Cir. 2003).


The Eighth Circuit BAP agreed with the bankruptcy court's determination that the farm's confirmed Plan, which was reached after lengthy negotiations of the parties and which included the farm's promise to sell its machinery and equipment, is evidence that the lender actually relied on those representations.


As to the sixth element, the Court found no merit in the Farmer's argument that the lender would not be harmed by a ruling that the Farmers owned the machinery and equipment at issue because the lender did not perfect a security interest in it.


The Farmers also appealed the bankruptcy court's order on their Rule 59 Motion in which they asked the bankruptcy court to amend its ruling on their Motion to Amend to deny relief under equitable estoppel to the lender or, in the alternative, hold a new trial to allow them to present evidence regarding the lender's equitable estoppel claim.


As you may recall, "[m]otions under Rule 59(e) 'serve the limited function of correcting manifest errors of law or fact or to present newly discovered evidence' and 'cannot be used to introduce new evidence, tender new legal theories, or raise arguments which could have been offered or raised prior to entry of judgment.' " Ryan, 889 F.3d at 507 (quoting United States v. Metro. St. Louis Sewer Dist., 440 F.3d 930, 933 (8th Cir. 2006)). "A motion for new trial will be granted when a miscarriage of justice occurred in the first trial." Larson, 211 F.3d at 1095.


Other than the prior arguments, the Farmers did not state specifically how the bankruptcy court erred in denying their Rule 59 Motion. The Eighth Circuit BAP's own review showed that the bankruptcy court carefully considered the arguments in the Rule 59 Motion and, as supported by the record, exercised its discretion to deny the requested relief.


Accordingly, the Eighth Circuit BAP affirmed the ruling of the bankruptcy court.




Ralph T. Wutscher
Maurice Wutscher LLP
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