United States Bankruptcy Appellate Panel

FOR THE EIGHTH CIRCUIT

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No. 03-6087 MN

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In re: Donald A. Anderson, *

as surety for Andair Farms, *

also known as Anderson Farms; *

Joyce D. Anderson, *

*

Debtors. *

 * 

JaKS Farm Custom Forage * Appeal from the United States

Harvesting, L.L.C., * Bankruptcy Court for the 

 * District of Minnesota

Creditor-Appellant, *

*

v. *

*

Donald A. Anderson and *

Joyce D. Anderson, *

*

Debtor-Appellees. *

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Submitted: March 2, 2004

Filed: March 16, 2004

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Before FEDERMAN, MAHONEY, and VENTERS, Bankruptcy Judges.

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FEDERMAN, Bankruptcy Judge.

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1

Appellant’s Appendix at A-114.

2

JaKS Farm Custom Forage Harvesting, L.L.C. (JaKS) appeals from an order

of the bankruptcy court confirming debtors Donald and Joyce Anderson’s Chapter 12

plan, and from an order of the court denying its motion for a new trial. We reverse the

order confirming the Chapter 12 plan and remand for further proceedings.

FACTUAL BACKGROUND

The Andersons owned 220 acres of farm real estate in Carlton County,

Minnesota. They also owned 47 1⁄2 percent of Andair Farms Partnership (Andair).

Andair owned 478 acres of farm real estate in Carlton County.

On September 16, 2002, JaKS obtained a judgment against Donald Anderson

and Andair in the amount of $23,847.1

 The judgment was duly docketed in Carlton

County.

On June 30, 2003, the Andersons filed a Chapter 12 bankruptcy petition.

Andair had previously filed a Chapter 12 bankruptcy petition, and the court had

confirmed Andair’s Chapter 12 plan without objection.

In their bankruptcy schedules the Andersons and Andair combined their assets

and liabilities save for their farm real estate, personal property, and the Andersons’

unpaid income taxes. The two cases, however, were never consolidated. Andair

scheduled real estate with a value of $254,500 and personal property with a value of

$405,596.33. Andair also scheduled secured debt in the amount of $868,843.98,

including AgStar Financial Services’ (AgStar) claim against the real estate in the

amount of $257,100.93, priority debt in the amount of $32,358.98 and unsecured

debt in the amount of $345,876.89. AgStar is a secured creditor of both the

Andersons and Andair. The Andersons represented that both Andair and the
2

The Andersons’ attorney indicated that his computer software apportioned

only part of AgStar’s real estate debt to the Andersons, even though, if the debt is

cross-collateralized, the entire real estate debt would be secured by the Andersons’

real estate.

3

Andersons executed a series of notes with AgStar, all of which are crosscollateralized. No documents were admitted into evidence, however. Andair

scheduled secured claimants other than AgStar with claims totaling $129,957.27. 

The Andersons scheduled real estate with a value of $168,800 and personal

property with a value of $61,103.95. Like Andair, they claim secured debt in the

amount of $868,843.98, including AgStar’s claim against the real estate in the amount

of $47,170,2

 and unsecured debt of $345,876.89. Their priority debt includes Andair’s

claim for $32,358.98, plus an additional claim for personal income taxes due for a

total claim of $46,272.68. Like Andair, the Andersons scheduled secured claimants

other than AgStar, with claims totaling $129,957.27. 

The scheduled combined value of the Andersons’ and Andair’s real and

personal property is, therefore, $890,000.28. AgStar claims liens, allegedly crosscollateralized, in the amount of $745,000 on the real and some of the personal

property. Other secured claimants hold claims totaling $129,957.27. The Andersons’

schedules list no other creditors with claims against the real estate.

AgStar filed a proof of claim in the Andair case for real estate debt totaling

$304,270.93. It did not, however, file a proof of claim in the Andersons’ case prior

to the confirmation hearing. While the numbers do not totally correspond, this is in

keeping with the Andersons’ schedules, which apportioned a lien to their 220 acres

in the amount of $47,170 and a lien to Andair’s 478 acres in the amount of

$257,100.93. 
3

Appellant’s Appendix, Doc. # 12 (Amended Order Authorizing Sale of Real

Estate).

4

Gourley v. Usery (In re Usery), 123 F.3d 1089, 1093 (8th Cir. 1997); O'Neal

v. Southwest Mo. Bank (In re Broadview Lumber Co., Inc.), 118 F.3d 1246, 1250 (8th

Cir. 1997) (citing First Nat'l Bank of Olathe, Kansas v. Pontow, 111 F.3d 604, 609

(8th Cir.1997)). Fed. R. Bankr. P. 8013.

4

During the pendency of the Chapter 12 case, but prior to confirmation, the

Andersons moved to sell 40 acres of their homestead property for $80,000. They

proposed applying the proceeds of that sale to AgStar’s chattel loans, and JaKS

objected. On October 14, 2003, the court overruled the objection and entered an order

authorizing the sale. The order provided, however, that the proceeds of the sale were

to be applied first to costs of sale, then to “AgStar loan no. 759622700 (‘Long Term

Note’) dated August 15, 2003, refinancing and reamortizing loan nos. 6006278500

and 753235600, secured by mortgages encumbering the above-described real estate

and filed with the Carlton County Recorder on February 15, 1995, as Document No.

301769 and on June 2, 2000, as Document No. 341335.”3

On September 25, 2003, the court held a confirmation hearing. At the hearing

the court found that JaKS failed to prove its claim was secured; therefore, on October

2, 2003, the court confirmed the Andersons’ Chapter 12 plan. JaKS filed a timely

motion for a new trial, which was denied on October 30, 2003, following another

hearing. 

STANDARD OF REVIEW

A bankruptcy appellate panel shall not set aside findings of fact unless clearly

erroneous, giving due regard to the opportunity of the bankruptcy court to judge the

credibility of the witnesses.4

 We review the legal conclusions of the bankruptcy court
5

First Nat’l Bank of Olathe, Kansas v. Pontow (In re Pontow), 111 F.3d 604,

609 (8th Cir. 1997); Sholdan v. Dietz (In re Sholdan), 108 F.3d 886, 888 (8th Cir.

1997).

6

Fed. R. Bankr. P. 7001(2).

7

11 U.S.C. § 502(a).

5

de novo.5 Whether the bankruptcy court considered all of the elements of 11 U.S.C.

§ 1225 of the Bankruptcy Code (the Code) is subject to de novo review. Whether the

court erred when it found JaKS failed to prove it held a secured claim is a factual

finding.

DISCUSSION

We begin with the observation that neither party requested a valuation hearing.

Moreover, the Andersons did not object to the claim of JaKS, nor did they file a

proceeding to avoid JaKS’ lien.6

 A proof of claim is deemed allowed unless a party

in interest objects.7

 Thus, because the parties did not follow the procedure outlined

in the Code and the Federal Rules of Bankruptcy Procedure, the court was required

to deal with these matters at the confirmation hearing. 

Section 1225 of the Code specifically sets forth the requirements for

confirmation of a Chapter 12 plan. Section 1225(a)(5) provides for the treatment to

be accorded a secured claim:

(a) Except as provided in subsection (b), the court shall

confirm a plan if—

. . .

(5) with respect to each allowed secured

claim provided for by the plan—
8

11 U.S.C. § 1225(a)(5).

9

Appellant’s Appendix, Doc. # 6 at page A-61 (Chapter 12 Plan dated August

22, 2003).

6

(A) the holder of such claim

has accepted the plan;

(B) (i) the plan provides

that the holder of such claim

retain the lien securing such

claim; and

(ii) the value, as

of the effective

date of the plan, of

property to be

distributed under

the plan on account

of such claim is not

less than the

allowed amount of

such claim; or

(C) the debtor surrenders the

property securing such claim to

such holder.8

The court found that JaKS failed to prove its claim was secured. We conclude

that such a finding is clearly erroneous. The Andersons listed JaKS as an unsecured

creditor, but Mr. Anderson freely admitted at the confirmation hearing that JaKS had

obtained a judgment in Carlton County, Minnesota. The Andersons never properly

contested the validity of JaKS’ lien. Instead, the Andersons filed a Chapter 12 plan

that classified any judgment as a Class 12 unsecured claim, “liens of all which are

avoided under 11 U.S.C. § 506.”9

 JaKS had already filed a proof of claim and
10Minn. Stat. Ann. § 548.09.

11Lowe v. Reierson, 201 Minn. 280, 285, 276 N.W. 224, 226 (1937).

12United States v. Krause (In re Krause), 261 B.R. 218, 222 ( B.A.P. 8th Cir.

2001).

13Id.

7

designated its claim as secured. The Andersons never objected to that claim,

therefore, the claim is deemed allowed as filed. Moreover, in Minnesota a judgment

becomes a lien and attaches to non-homestead real estate at the time a judgment is

docketed:

Subdivision 1. Entry and docketing; survival of judgment. Except

as provided in section 548.091, every judgment requiring the payment

of money shall be entered by the court administrator when ordered by

the court and will be docketed by the court administrator upon the filing

of an affidavit as provided in subdivision 2. . . . From the time of

docketing the judgment is a lien, in the amount unpaid, upon all real

property in the county then or thereafter owned by the judgment debtor,

but it is not a lien upon registered land unless it is also filed pursuant to

sections 508.63 and 508A.63.10

Not only does a judgment become a lien upon docketing, but such “docketed

judgment is placed upon the same footing as a recorded conveyance.” 11Under the

facts established above, JaKS’ claim is allowed as secured, and the court erred in

shifting the burden to JaKS to so prove. 

Over the objection of a secured creditor, the Andersons must prove that their

proposed Chapter 12 plan satisfies section 1225(a)(5) of the Code.12 In United States

v. Krause (In re Krause), we concluded that the Chapter 12 debtor has the burden of

proving that his Chapter 12 plan meets all of the requirements of section 1225.13 If a

creditor has a secured claim then the plan must provide that the creditor retains its
1411 U.S.C. § 1225(a)(6).

15101 F.3d 574 (8th Cir. 1996).

16Id. at 583.

17Id. at 581.

8

lien, and that it is entitled to the present value of its secured claim.14 The Andersons’

Chapter 12 plan did not classify JaKS’ claim as a secured claim. It provided no

payment for JaKS’ claim, and it arbitrarily provided that all judgment liens are

avoided. 

The Andersons cite no provision of the Code that permits a debtor to use the

Chapter 12 confirmation process to avoid judgment liens. They rely on Harmon v.

U.S. Through Farmers Home Administration (In re Harmon),

15 but such reliance is

misplaced. In Harmon, the debtors proposed a plan that bifurcated a second mortgage

into secured and unsecured portions. The parties agreed on the value of the real

estate, and on the amount of the mortgagee’s secured and unsecured claims. The

debtors completed their plan payments and received a discharge. Thereafter, upon

sale of the real estate, Ms. Harmon paid the remainder of the secured claim. The

creditor then attempted to attach the proceeds of the sale for the remaining unsecured

claim. The Eighth Circuit held that the unsecured portion remaining after debtors

completed their Chapter 12 plan had been discharged.16 The Andersons attempt to use

Harmon for the premise that a proposed Chapter 12 plan can be used as the vehicle

for determining that a secured claim, unsupported by collateral value, should be

treated as unsecured. But in Harmon that was never an issue since the parties had,

prior to the confirmation hearing, stipulated, without evidence as to value, that part

of the secured claim should be treated as unsecured.

Indeed, in Harmon the Eighth Circuit noted that “... if the bankruptcy court

never considers the lien the plan cannot extinguish it.”17 In doing so, the court cited
1858 F.3d 89 (4th Cir. 1995)

19Id. at 92.

20Fed. R. Bankr. P. 7001(2)

21Fed. R. Bankr. P. 3007, which provides that “[i]f an objection to a claim is

joined with a demand for relief of the kind specified in Rule 7001, it becomes an

adversary proceeding.”

2267 B.R. 240 (Bankr. D. Minn. 1986).

9

to a Fourth Circuit case Cen - Pen Corp. v. Hanson,18 in which a Chapter 13 debtor

had obtained confirmation of a plan which treated a lienholder as an unsecured

creditor. The lienholder had neither objected to confirmation, nor filed a proof of

claim. The Fourth Circuit held that confirmation of the plan did not establish that the

creditor’s lien was avoided. “For a debtor to extinguish or modify a lien during the

bankruptcy process, some affirmative step must be taken toward that end. Unless the

debtor takes appropriate affirmative action to avoid a security interest in property of

the estate, that property will remain subject to the security interest following

confirmation.”19 As the Hanson Court pointed out, Bankruptcy Rule 7001(2)

expressly requires initiation of an adversary proceeding “to determine the validity,

priority, or extent of a lien or other interest in property.”20 Where the lienholder has

filed a proof of claim, as JaKS did here, debtors may bring the issue to a head by

filing an objection to such claim.21 In any event, it is the debtor which must take an

affirmative step to avoid the lien, and the debtor which bears the burden of proof as

to the value of the collateral.

The Andersons also rely on Cook v. Farmers Elevator Coop of Sleepy Eye (In

re Cook),22 for the premise that a secured creditor must first apportion payment on a

mortgage to the nonexempt property that collateralizes the loan. AgStar’s mortgage

includes both homestead property, as well as the nonhomestead property to which the

JaKS judicial lien attached. The Andersons claim that, if AgStar were forced to look
23Id. at 242 citing Mn. Stat. Ann. § 582.04.

24175 Minn. 541, 222 N.W. 71 (1928).

25Id., 175 Minn. at 544, 222 N.W. at 72.

26Appellant’s Appendix, Doc. # 12 at page A-97 (Amended Order Authorizing

Sale of Real Estate dated October 14, 2003).

10

first to the nonhomestead property for satisfaction of its mortgage, there would be no

equity in such property to support JaKS’ junior judicial lien. 

In Cook, the court found that under Minnesota law a debtor can “force a

foreclosing creditor to first sell all nonexempt property covered by its mortgage

before resorting to exempt property.”23 However, as the court stated in Bowers v.

Norton,

24 “[t]he right to marshal assets is a matter of equity, and is governed by

equitable principles. The doctrine will be applied only when it can be done with

justice to the creditor and his debtor, and without prejudice to third persons.”25 JaKS

is a third party with a valid judicial lien that attached to any non-exempt real estate

at the time the judgment was docketed. Earlier in this case the Andersons voluntarily

decided to sell 40 acres of homestead property for $80,000. The court at that time

determined that the Andersons must apply the proceeds of that sale to the note

secured by such real estate, including the homestead;26 thus, debtors were denied the

option of applying the proceeds so as to defeat the junior lien. That holding was

consistent with Minnesota law as expressed in Bowers.

In sum, if debtors wish to avoid a lien as being without value they must take

affirmative steps to bring that issue before the Court, and must prove that there is no

equity to support such lien. In so doing, debtors must allocate debt and collateral

values to, if possible, preserve junior liens. With these principles in mind, we turn to

the evidence offered by debtors here.
27Though the parties do not raise the issue in their briefs, JaKS has a judgment

only against Donald Anderson, and the Andersons’ schedules indicate they own the

real estate jointly. 

11

The only evidence of valuation before the court was provided by the Andersons

through their schedules and their plan’s liquidation analysis. Those values indicate

that the combined value of the Andersons’ and Andair’s real estate is $423,300.

AgStar filed a proof of claim in the amount of $304,270.93 in Andair’s bankruptcy,

which claim was secured by said real estate, thus indicating equity sufficient to

support JaKS’s judgment lien. 

The Andersons value their personal property at $61,103.95 and Andair’s

personal property at $405,596.33, for a total value of $466,700.28. AgStar also filed

a proof of claim in Andair’s bankruptcy secured by real estate, machinery, livestock,

harvested and processed crops, manure handling equipment, milking equipment,

contract rights, chattel paper, documents, accounts, and general intangibles in the

amount of $430,008.50. According to the Chapter 12 plan, other secured claimants

hold claims in the amount of $129,957.27, for total secured claims for personal

property in the amount of $559,965.7. Based upon the values reflected in the

Andersons’ schedules and plan, the Andersons and Andair claim total assets in the

amount of $890,000.28. Secured claims appear to be in the amount of $864,236.70.

At a minimum, if cross-collateralization is proven, using only the Andersons’

schedules for values, the Andersons have nonexempt equity in the amount of

$25,763.58. Such equity, if it were found to exist, would be sufficient to pay the JaKS

judgment lien.27 Thus, the court erred as a matter of law when it confirmed a Chapter

12 plan that failed to provide for the claim of a secured creditor, as required by

section 1225(a)(5) of the Code.

We, therefore, reverse the order confirming the Chapter 12 plan. We remand

the case for a determination by the court as to the value of the Andersons’ real and
12

personal property, the effect of any cross-collateralization as to AgStar’s liens, and

the extent and validity of JaKS’ lien.

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