Document ID: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-ca10-06-00028/USCOURTS-ca10-06-00028-0/pdf.json

Parties Involved:
C.H. Brown Company
Appellee
Rafter Seven Ranches L.P.
Appellant

Document Text:

* The parties did not request oral argument, and after examining the briefs

and appellate record, the Court has determined unanimously that oral argument

would not materially assist in the determination of this appeal. See Fed. R.

Bankr. P. 8012. The case is therefore ordered submitted without oral argument.

FILED

U.S. Bankruptcy Appellate Panel

of the Tenth Circuit

February 21, 2007

Barbara A. Schermerhorn

Clerk PUBLISH

UNITED STATES BANKRUPTCY APPELLATE PANEL

OF THE TENTH CIRCUIT

IN RE RAFTER SEVEN RANCHES

LP,

Debtor.

BAP No. KS-06-028

RAFTER SEVEN RANCHES LP,

Appellant,

Bankr. No. 05-40483-12

 Chapter 12

v. OPINION

C.H. BROWN COMPANY,

Appellee.

Appeal from the United States Bankruptcy Court

for the District of Kansas

Submitted on the briefs:*

William E. Metcalf of Metcalf & Justus, Topeka, Kansas, for Appellant.

Richard Petersen-Klein and Justice B. King of Fisher, Patterson, Sayler & Smith,

Topeka, Kansas, for Appellee.

Before CORNISH, MICHAEL, and THURMAN, Bankruptcy Judges.

CORNISH, Bankruptcy Judge.

In this Chapter 12 bankruptcy, Rafter Seven Ranches LP (“Debtor”) appeals

the bankruptcy court’s denial of its objection to a creditor’s claim, as well as the

BAP Appeal No. 06-28 Docket No. 2-1 Filed: 02/21/2007 Page: 1 of 10
1 In its Memorandum and Order Addressing Matters Relating to C.H. Brown

Co. (“Memorandum”), the bankruptcy court makes very extensive findings of

fact. See Memorandum at 2-12 in Appellant’s App. at 37-47. A complete

recitation of those facts in this Opinion are not necessary to disposition of the

appeal, and thus what follows is a summary of the pertinent facts.

-2-

denial of a motion to reconsider. For the following reasons, we affirm both

orders of the bankruptcy court.

I. BACKGROUND FACTS1

In 2001, Debtor needed irrigation sprinkler systems on four quarter-sections

of its Kansas farm property. Debtor was interested in purchasing used sprinkler

systems. Therefore, its general partner, Michael J. Friesen (“Friesen”), contacted

Ochs’ Irrigation (“OI”), one of very few dealers selling used sprinkler systems. 

OI did not have suitable used sprinklers in stock, but Kenny Ochs (“Ochs”),

principal of OI, after some investigation, soon apprised Debtor he had located the

desired sprinklers. However, Ochs informed Debtor he needed funds before he

could purchase the sprinklers. Debtor did not have funds available to purchase

the sprinklers, so at the suggestion of Ochs, Debtor contacted C.H. Brown Co.

(“Brown”), a Wyoming private agricultural and equipment lender, regarding

financing the purchase of the sprinkler systems. At a meeting conducted on April

20, 2001, Brown agreed to finance Debtor’s acquisition of four used sprinkler

systems to be supplied and installed by OI.

Shortly after the meeting, Brown forwarded four equipment leases

(collectively “Leases,” individually “Lease”), one for each sprinkler system, to

the Debtor for execution. General manager Erol Klassen (“Klassen”) immediately

executed the Leases on behalf of Debtor. They were each for a term of five years;

required semi-annual payments; and were to be governed by Wyoming law. The

Leases approved payment to OI for the sprinkler systems by Brown. Brown then

forwarded the purchase money to OI. The parties were aware that the sprinkler

systems were needed as soon as possible for the May, 2001, corn planting season. 

BAP Appeal No. 06-28 Docket No. 2-1 Filed: 02/21/2007 Page: 2 of 10
2 Under the Leases, interest at the rate of 10% was due from the date of each

semi-annual payment required but not made.

-3-

In July, 2001, one sprinkler system was delivered and installed by OI, but it

did not conform to any of the Leases in terms of serial number or equipment

characteristics. Nevertheless, Debtor made what use he could of the sprinkler

system. Two additional nonconforming sprinkler units were delivered to Debtor

sometime between mid-August and mid-September of 2001. After examination,

Friesen directed that they not be installed. This equipment was left standing in

the fields. It was never completely assembled, nor was it made operational. The

fourth sprinkler system was never delivered.

On November 1, 2001, Debtor sent a letter to Brown stating that it had

previously threatened to reject the sprinklers and repudiate the Leases, and that

under the circumstances, Debtor could not honor the Leases. This letter was sent

before the first payments were due. Upon receipt of the November 1st letter,

Brown phoned Friesen to inform him that Brown had no responsibility for breach

of warranty, and that Debtor still owed the payments under the Leases. Debtor

then sent Ochs a letter dated November 23, 2001, indicating it expected Ochs to

pay Brown for the sprinkler systems. However, the letter also indicated Debtor

would try to mitigate further damages by hiring someone to move or modify the

existing systems to try to make them operational. No payments were ever made

under the Leases. After demand letters proved futile, Brown filed suit against

both Debtor and Ochs in Wyoming state court in July, 2003. A default judgment

was eventually entered in favor of Brown against Ochs. 

Debtor filed this Chapter 12 bankruptcy action on March 7, 2005. The

filing of this bankruptcy case stayed Brown’s Wyoming state court action against

Debtor. Brown filed its proof of unsecured claim in the amount of $116,680 due

under the Leases, plus interest2

 and attorney’s fees. Debtor objected to Brown’s

BAP Appeal No. 06-28 Docket No. 2-1 Filed: 02/21/2007 Page: 3 of 10
-4-

claim, asserting the equipment was never delivered, and that Debtor rescinded and

repudiated the Leases in its November 1, 2001, letter to Brown. A trial on

Debtor’s objection to Brown’s claim was held on January 9-10, 2006.

After trial, the bankruptcy court entered its order on February 10, 2006,

finding that Debtor was liable under three of the four Leases. The court further

ruled Brown was entitled to a claim for rental payments, prepetition interest at the

contract rate, and prepetition attorney’s fees and expenses with respect to the

Leases. On February 20, 2006, Debtor filed its motion to reconsider. On March

8, 2006, the bankruptcy court entered its order denying Debtor’s motion to

reconsider. Debtor now appeals both the bankruptcy court’s order denying its

objection to Brown’s claim and the order denying its motion to reconsider.

II. JURISDICTION

This Court has jurisdiction to hear timely-filed appeals from “final

judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit,

unless one of the parties elects to have the district court hear the appeal. 28

U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr. P. 8002. Neither party

elected to have this appeal heard by the United States District Court for the

District of Kansas. The parties have thus consented to appellate review by this

Court. 

A decision is considered final “if it ‘ends the litigation on the merits and

leaves nothing for the court to do but execute the judgment.’” Quackenbush v.

Allstate Ins. Co., 517 U.S. 706, 712 (1996) (quoting Catlin v. United States, 324

U.S. 229, 233 (1945)). An order disposing of an objection to a claim is a final

order for purposes of 28 U.S.C. § 158(a)(1). See In re Geneva Steel Co., 260

B.R. 517, 520 (10th Cir. BAP 2001) (citing In re Garner, 246 B.R. 617, 619 (9th

Cir. BAP 2000)), aff’d, 281 F.3d 1173 (2002). Here, nothing remains for the

bankruptcy court’s consideration. Thus, the orders denying Debtor’s objection to

claim and denying Debtor’s motion to reconsider are final orders for purposes of

BAP Appeal No. 06-28 Docket No. 2-1 Filed: 02/21/2007 Page: 4 of 10
-5-

review.

III. STANDARD OF REVIEW

We review de novo mixed questions consisting primarily of legal

conclusions drawn from facts. Gullickson v. Brown (In re Brown), 108 F.3d

1290, 1292 (10th Cir. 1997) (citing Clark v. Sec. Pac. Bus. Credit, Inc. (In re Wes

Dor, Inc.), 996 F.2d 237, 241 (10th Cir. 1993)). De novo review requires an

independent determination of the issues, giving no special weight to the

bankruptcy court’s decision. Salve Regina Coll. v. Russell, 499 U.S. 225, 238

(1991). The bankruptcy court’s denial of Debtor’s objection to Brown’s claim is

predicated on Debtor’s liability under the Leases, which in turn depends on

whether Debtor accepted or effectively rejected the sprinkler systems. This

situation presents a mixed question consisting of a legal conclusion drawn from

the facts.

The bankruptcy court’s denial of Debtor’s motion to reconsider is subject to

the abuse of discretion standard of review. Comm. for the First Amendment v.

Campbell, 962 F.2d 1517, 1523 (10th Cir. 1992) (applying a Rule 59(e) abuse of

discretion standard of review to the denial of a motion for reconsideration). See

also Anthony v. Baker, 767 F.2d 657, 666 (10th Cir. 1985). “Under the abuse of

discretion standard[,] ‘a trial court’s decision will not be disturbed unless the

appellate court has a definite and firm conviction that the lower court made a

clear error of judgment or exceeded the bounds of permissible choice in the

circumstances.’” Moothart v. Bell, 21 F.3d 1499, 1504 (10th Cir. 1994) (quoting

McEwen v. City of Norman, 926 F.2d 1539, 1553-54 (10th Cir. 1991)). An abuse

of discretion occurs when the trial court’s decision is “arbitrary, capricious or

whimsical” or results in a “manifestly unreasonable judgment.” Moothart, 21

F.3d at 1504-05 (quoting United States v. Wright, 826 F.2d 938, 943 (10th Cir.

1987)). 

BAP Appeal No. 06-28 Docket No. 2-1 Filed: 02/21/2007 Page: 5 of 10
3 In its Memorandum, the bankruptcy court went through a rather detailed

analysis of Debtor’s objection to Brown’s claim. See Memorandum at 12-24 in

Appellant’s App. at 47-59. Because we agree with the bankruptcy court’s

analysis as correct, it need not be repeated in total in this Opinion. 

4 Wyoming has adopted the 1990 version of the Uniform Commercial Code

at Wyo. Stat. Ann. §§ 34.1-1-101 to -10-104 (2006). Citations herein are to the

1990 version of the U.C.C. rather than the Wyoming statutory sections.

-6-

IV. ANALYSIS3

On appeal, Debtor argues that the bankruptcy court erred in concluding

Debtor accepted delivery of the sprinkler systems because they “were never

completely delivered and [Debtor] was in constant contact with [Brown]

concerning this problem[.]” Appellant’s Brief at 1. Debtor also argues the

bankruptcy court erred “in deciding the case based on issues and principles not

articulated in the Pre-Trial Order or in any other pleadings[.]” Id. These

arguments are not persuasive.

The bankruptcy court determined, and the parties agreed, that the Leases in

dispute are finance leases subject to Article 2A of the Uniform Commercial

Code.4

 Pursuant to U.C.C. § 2A-407, because a lessor is providing only financing

and the goods are supplied to the specifications of the lessee, the lessee’s

promises under the contract generally become irrevocable and independent upon

acceptance of the goods. Here, whether or not Debtor “accepted” the three

sprinkler systems supplied by OI and financed by Brown is the critical issue. The

bankruptcy court found that Debtor “accepted” the sprinkler systems because it

acted in a way indicating intent to retain the goods despite their nonconformity,

and because with respect to the second and third sprinkler systems, it failed to

make an effective rejection. We agree.

Under U.C.C. § 2A-515, acceptance of goods may be made by affirmatively

signifying acceptance, acting with respect to the goods as though they are

accepted, or by failing to make an effective rejection of the goods in accordance

BAP Appeal No. 06-28 Docket No. 2-1 Filed: 02/21/2007 Page: 6 of 10
-7-

with U.C.C. § 2A-509. A rejection of goods pursuant to U.C.C. § 2A-509 “is

ineffective unless it is within a reasonable time after tender or delivery of the

goods and the lessee seasonably notifies the lessor.” If no time is prescribed by

the agreement for rejection, then U.C.C. § 1-204 provides that a “reasonable

time” depends on the nature, purpose and circumstances of such action, and that

an action is taken “seasonably” when it is taken within a reasonable time. 

The first sprinkler system was delivered and installed in July, 2001. Debtor

used the sprinkler for his 2001 crops. In doing so, Debtor acted in such a manner

as to indicate intent to retain the system despite nonconformity with the Lease. 

Such actions constitute acceptance under U.C.C. § 2A-515. With respect to the

two sprinkler systems delivered between mid-August and mid-September,

Debtor’s conduct was also insufficient to avoid acceptance under the Leases. 

Although upon delivery of the second and third sprinkler systems Friesen directed

they not be installed because they were nonconforming, Debtor’s subsequent

actions were inconsistent with its initial position of rejection. Debtor’s letters to

Brown on November 1, 2001, and to Ochs on November 23, 2001, still did not

unequivocally reject the sprinklers. To the contrary, Debtor stated it intended to

place the sprinklers in operation. 

Even if Debtor’s actions with respect to the second and third sprinkler

systems do not constitute conduct establishing acceptance, the bankruptcy court

correctly concluded that Debtor cannot be said to have rejected the goods within a

reasonable time or to have seasonably notified the lessor of any rejection. Debtor

had complained about OI’s performance since early May, but stopped short of

unconditionally rejecting the goods. Brown should have been given prompt

notice of rejection so performance could have been demanded from OI as soon as

Debtor determined the goods were unacceptable. Rejection in November was

simply too late. 

The bankruptcy court determined that because Debtor’s rejection was not

BAP Appeal No. 06-28 Docket No. 2-1 Filed: 02/21/2007 Page: 7 of 10
5 Under Debtor’s contentions in the pre-trial order, it states: “What was

delivered to [Debtor] was basically ‘a pile of junk.’” Final Pretrial Conference

Order at 3 in Appellant’s App. at 108.

-8-

within the required reasonable time, it was ineffective. As a result, Debtor

accepted the sprinkler systems and became liable under the Leases. Here, the

facts presented are undisputed and the bankruptcy court correctly applied the law

to the facts. We see no error on the part of the bankruptcy court. 

The Debtor also argues the bankruptcy court committed error “in deciding

the case based on issues and principles not articulated in the Pre-Trial Order or in

any other pleadings[.]” Appellant’s Brief at 1. Debtor, however, cites no

authority for its position. Primarily, Debtor asserts that “the issue whether

rejection was seasonably provided to [Brown] was never raised . . . .” Id. at 13. 

This argument is without merit. First, Debtor agreed that Article 2A of the

U.C.C. governed the Leases, and the issue of seasonable notice is a provision of

U.C.C. § 2A-509A. Second, the pre-trial order clearly contemplates that the

question of whether “delivery” of the sprinklers had been made was at issue,

notwithstanding that actual delivery of some of the sprinkler systems (although

nonconforming) had in fact been made.5

 The pre-trial order further indicates that

one of the sprinklers was assembled, but never properly operated. Logically, the

actual delivery and use of at least one of the sprinkler systems indicates that

“acceptance or rejection” of the goods is an issue bearing on Debtor’s liability

under the Leases. 

Moreover, several weeks before Debtor filed its objection to Brown’s

claim, Brown filed a motion to establish a specific date for assumption or

rejection of the Leases. The hearing on Debtor’s objection to Brown’s claim was

also a hearing on Brown’s motion to set a date for assumption or rejection. 

Memorandum at 1 in Appellant’s App. at 36. We see no unfairness or impropriety

resulting from the bankruptcy court’s consideration of Debtor’s failure to

BAP Appeal No. 06-28 Docket No. 2-1 Filed: 02/21/2007 Page: 8 of 10
-9-

seasonably notify Brown of its rejection of the goods, as alleged by Debtor. 

Thus, the bankruptcy court’s order finding Debtor liable under three of the Leases

and therefore overruling Debtor’s objection to Brown’s claim to that extent must

be affirmed.

In its motion to reconsider, Debtor further argues the bankruptcy court

made two errors in denying Debtor’s objection to Brown’s claim for the three

sprinkler systems. First, Debtor argues its duty to accept or reject the sprinklers

in a reasonable time would not arise until the sprinklers were completely

delivered and installed so they could be properly tested. Second, Debtor asserts 

it was Brown’s duty to assure the sprinklers were delivered because it was the

only party in privity with OI, the supplier, and this Brown did not do. 

In response to Debtor’s first argument for reconsideration, the bankruptcy

court correctly concluded that acceptance could not be delayed until after

installation and testing of the sprinkler systems. The terms of the Leases specify

that Debtor’s obligation to pay commences upon receipt of the equipment. 

Further, the Leases provide that Brown is not responsible for installation or

servicing of the equipment. Additionally, under U.C.C. § 2-515, acceptance is

conditioned only upon an opportunity to inspect, not an opportunity to test.

In response to Debtor’s second argument for reconsideration, the

bankruptcy court correctly determined that Debtor failed to timely advise Brown

that OI delivered nonconforming sprinklers and that it would not accept them. 

Failing to do so in a reasonable time constituted acceptance. After acceptance,

Debtor’s remedies are against OI, the supplier, not Brown, the lessor. Under

these circumstances, we cannot say that the bankruptcy court’s order denying

Debtor’s motion to reconsider is “arbitrary, capricious or whimsical” or results in

a “manifestly unreasonable judgment.” 

V. CONCLUSION

The bankruptcy court did not err in denying Debtor’s objection to Brown’s

BAP Appeal No. 06-28 Docket No. 2-1 Filed: 02/21/2007 Page: 9 of 10
-10-

claim. Nor did the bankruptcy court abuse its discretion in denying Debtor’s

motion to reconsider. Therefore, the orders must be affirmed.

BAP Appeal No. 06-28 Docket No. 2-1 Filed: 02/21/2007 Page: 10 of 10