Court Opinion

ID: 621318
Source: CourtListenerOpinion
Date Created: 2012-01-23 17:06:15+00
Date Added: 2024-06-11T15:12:05.670934
License: Public Domain

United States Bankruptcy Appellate Panel
                            FOR THE EIGHTH CIRCUIT

                                       No. 11-6042

In re:                                      *
                                            *
In re: AFY, Inc., also known as             *
Ainsworth Feed Yards Company, Inc.,         *
                                            *
         Debtor.                            *
                                            *
Robert A. Sears; Korley B. Sears,           *        Appeal from the
                                            *        United States
         Interested parties - Appellants,   *        Bankruptcy Court for the
                                            *        District of Nebraska
               v.                           *
                                            *
                                            *
Ronald H. Sears; Ron H. Sears Trust;        *
Rhett R. Sears; Rhett Sears Revocable       *
Trust; Dane Sears,                          *
                                            *
         Claimants - Appellees.             *

                             Submitted: November 30, 2011
                                Filed: January 23, 2012

Before KRESSEL, Chief Judge, SCHERMER and VENTERS, Bankruptcy Judges

SCHERMER, Bankruptcy Judge
       Robert A. Sears (“Robert”) and Korley B. Sears (“Korley”) appeal from the
June 8, 2011 order of the bankruptcy court:1 (1) overruling their objections to Claim
Nos. 8, 9 and 10, which claims were filed by Rhett R. Sears, Rhett R. Sears
Revocable Trust, Ron H. Sears Trust, Ronald H. Sears, and Dane R. Sears
(collectively, the “Sears Family Members”) in the bankruptcy case of AFY, Inc., also
known as Ainsworth Feed Yards Company, Inc. (the “Debtor”); and (2) disallowing
Claim No. 26 of Korley.2 We have jurisdiction over this appeal from the final order
of the bankruptcy court. See 28 U.S.C. § 158(b). For the reasons set forth below, we
affirm.

                                        ISSUES
       The issues before this Court are whether the bankruptcy court erred when it:(1)
disallowed Claim No. 26 filed by Korley B. Sears; (2) overruled the objection to the
claim of the Sears Family Members; and (3) denied the requests by Korley and Robert
to have the hearing postponed to allow time for discovery and for a hearing with
testimony and cross-examination of witnesses, rather than having the matters
submitted on affidavit evidence. In addition, the Sears Family Members argued that
if we affirm the bankruptcy court’s denial of Korley’s Claim No. 26, Robert and

      1
             The Honorable Thomas L. Saladino, Chief United States Bankruptcy
Judge for the District of Nebraska.
      2
              In their Notice of Appeal, Robert and Korley also indicate that they
appeal from a June 10, 2011 order of the bankruptcy court that denied the Chapter
7 trustee’s objection to Korley’s Claim No. 26 as moot because the bankruptcy
court had already disallowed Claim No. 26 by its June 8, 2011 order. There is no
reference to the trustee’s objection to Claim No. 26 or the June 10, 2011 order in
Robert’s and Korley’s Designation of Record and Statement of Issues, and the
trustee’s objection to Claim No. 26 and the June 10, 2011 order were not discussed
in the briefs or at oral argument. In addition, if Robert and Korley sought to
appeal from the June 10, 2011 order, they were required to file a separate notice of
appeal, accompanied by the applicable filing fee. Accordingly, we do not consider
the June 10, 2011 order as part of this appeal.
                                         -2-
Korley do not have standing to appeal the bankruptcy court’s order overruling their
objections to the claims of the Sears Family Members. Because we affirm the
bankruptcy court’s decision to disallow Korley’s Claim No. 26, we also consider
whether Robert and Korley have standing to bring this appeal. Nevertheless, we
agree with the bankruptcy court on all issues and, therefore, we affirm.

                                 BACKGROUND
         On June 22, 2007, the Sears Family Members executed a Stock Sale
Agreement whereby they sold their interests in the Debtor to the Debtor and to
Korley. The Debtor executed the Stock Sale Agreement through its President,
Robert, and its Vice President, Korley. Korley also signed the Stock Sale Agreement
in his individual capacity.

       Paragraph 2 of the Stock Sale Agreement lists “Buyers” as “AFY, Inc., a
Nebraska corporation formerly known as Ainsworth Feedyards Company, Inc., and
Korley B. Sears.” Paragraph 4 refers to “[t]he purchase price to be paid by Buyers
to Sellers. . . .” Paragraph 7 of the Stock Sale Agreement provides that within a
certain period of time, “the Buyer(s) shall execute, for each Seller, a Promissory Note,
and a Pledge and Security Agreement.” Only Korley executed promissory notes in
favor of the Sears Family Members.

       The “Minutes [of the] 2008 Annual Meeting of Shareholders [of the Debtor]”
recite with respect to the stock purchased in the Stock Sale Agreement that “the stock
should be redeemed by [the Debtor] and held as treasury stock and should not pass
to Korley B. Sears when paid for.” A resolution (the “2008 Resolution”) was adopted
providing that “the [Debtor] shall redeem and make all payments required to be made,
to acquire all shares of [the Debtor], stock and all other shares provided to be sold by
[the Sears Family Members] under the terms of the June 2007 Stock [Sale]
Agreement.” The Debtor made a down payment and the first installment payment
under the Stock Sale Agreement, but made no additional payments.

                                          -3-
       In February 2010, Robert and Korley each filed a petition for relief under
Chapter 11 of Title 11 of the United States Code (the “Bankruptcy Code”). In March
2010, the Debtor filed its bankruptcy petition. Robert and Korley submitted that they
are the only shareholders of the Debtor. The Sears Family Members submitted that
they have a security interest in Korley’s shares in the Debtor and that they have the
right to vote those shares. When disputes arose between Robert and Korley on the
one hand, and the Sears Family Members on the other hand, regarding ownership and
control of the Debtor and issues related to the bankruptcy case, the Debtor’s counsel
withdrew his representation and, upon a motion made by the Sears Family Members,
a Chapter 11 trustee (the “Trustee”) was appointed. The case was then converted to
a Chapter 7 case and the Trustee was appointed as trustee in the Chapter 7 case.
During the course of the case, the Trustee assumed certain pre-petition contracts of
the Debtor, including pre-petition contracts to sell real estate.

       The Sears Family Members filed Claims Nos. 8, 9 and 10 in the Debtor’s
bankruptcy case, seeking sums due under the Stock Sale Agreement. Attached to
each proof of claim is, among other things, a narrative explanation of the claim,
copies of the Stock Sale Agreement, a promissory note from Korley and the Minutes
from the 2008 Annual Meeting of Shareholders. Robert and Korley objected to the
Sears Family Members’ claims, maintaining that the Debtor bears no liability for the
sums due under the Stock Sale Agreement. Robert and Korley argue further that,
even if the Debtor was liable to the Sears Family Members under the Stock Sale
Agreement, its liability should be discharged based on certain defenses. As an
alternative to the Sears Family Members’ claims for the direct liability of the Debtor
under the Stock Sale Agreement, the Sears Family Members argue that, as third party
beneficiaries of a promise made by the Debtor to Korley, as evidenced by the 2008
Resolution, they have a claim against the Debtor’s estate.

                                         -4-
      Korley filed his Claim No. 26, as a contingent claim in the amount of
$5,325,291.16, the aggregate amount claimed by the Sears Family Members. The
Sears Family Members and the Trustee objected to Claim No. 26.

       Robert and Korley requested that the hearing on the objections to Claims Nos.
8, 9, 10 and 26 be postponed to allow them time to conduct discovery. They also
requested a hearing with testimony and cross-examination of witnesses, rather than
having the matters submitted on affidavit evidence. The bankruptcy court denied the
requests by Robert and Korley. In a text order dated April 25, 2011, the bankruptcy
court stated:

      The court generally agrees with [Counsel to Robert and Korley] that an
      opportunity for discovery and cross examination are important elements
      in any claim objection proceeding, but the hearing on affidavit evidence
      should not be eliminated. [Counsel to Robert and Korley] still has over
      three weeks to conduct initial discovery (and obviously has had many
      months to have done so). Further, at such a hearing, the Court can
      determine the complexity of the issues, the efforts of the parties to date,
      and whether further proceedings are necessary or appropriate under the
      circumstances.

On May18, 2011, the bankruptcy court held a hearing on the objections to Claims
Nos. 8, 9, 10 and 26. The bankruptcy court took the matters under advisement and
entered its ruling in a written order dated June 8, 2011. Referring to its April 25,
2011 text order, the bankruptcy court explained in its June 8, 2011 order that:

      [Counsel to Robert and Korley] requested the hearings be postponed to
      allow time for discovery and that they be set for live testimony. While
      the court generally agrees that time for discovery and live testimony are
      generally appropriate where there are disputed issues of fact, [counsel’s]
      motions were denied and the hearing held to determine the extent of any
      factual disputes and to determine issues of law (Fil. # 386).

                                          -5-
      The bankruptcy court overruled the objections of Robert and Korley to the
Sears Family Members’ claims and allowed those claims. It sustained the objections
to Korley’s Claim No. 26 and disallowed that claim.

                              STANDARD OF REVIEW
      We review the bankruptcy court’s findings of fact for clear error and its
conclusions of law de novo. Fed. R. Bank. P. 8013; Dove-Nation v. eCast Settlement
Corp. (In re Dove-Nation), 318 B.R. 147, 150 (B.A.P. 8th Cir. 2004) (citations
omitted).

                                   DISCUSSION
       A creditor of the debtor may file a proof of claim. See 11 U.S.C. §501(a).
Bankruptcy Code §502(a) explains that “[a] claim . . , proof of which is filed under
§501 of [the Bankruptcy Code], is deemed allowed unless a party in interest . . .
objects.” 11 U.S.C. § 502(a). When an objection to the claim has been filed, the
court is charged with determining the amount of the claim as of the petition date and
it shall allow the claim in such amount unless the exceptions listed in Bankruptcy
Code §§502(b)(1) through (9) apply. See 11 U.S.C. §502(b)(1)-(9).

       A proof of claim that is filed in accordance with the Federal Rules of
Bankruptcy Procedure is “prima facie evidence of the validity and the amount of the
claim.” Fed. R. Bankr. P. 3001(f). To overcome a claim’s presumptive validity, an
objection must be supported by substantial evidence. McDaniel v. Riverside Cnty.
Dep’t of Child Support Servs. (In re McDaniel), 264 B.R. 531, 533 (B.A.P. 8th Cir.
2001); Consumers Realty & Dev. Co, Inc. v. Goetze (In re Consumer Realty & Dev.
Co., Inc.), 238 B.R. 418, ( B.A.P. 8th Cir. 1999) (party objecting to proof of claim
must produce evidence to overcome prima facie validity). The claimant must
provide additional evidence of the claim’s validity if the party objecting to the claim
rebuts its presumptive validity. Gran v. I.R.S. (In re Gran), 964 F.2d 822, 827 (8th
Cir. 1992).

                                          -6-
        I.    Disallowance of Korley’s Claim No. 26
        The bankruptcy court correctly disallowed Claim No. 26 filed by Korley.
Although the alleged basis for Korley’s Claim No. 26 is difficult to decipher, Robert
and Korley describe it as a contingent claim by which “if there was a contract by the
corporate resolution to redeem the stock of Korley, he has greater rights to payment
by [the Debtor] on the claims aggregating $5,325,291.16 than do [the Sears Family
Members].” Attached to Korley’s Claim No. 26 is a narrative explanation of the
claim and the proofs of Claims Nos. 8, 9, and 10 filed by the Sears Family Members,
without most of their exhibits. We agree with the bankruptcy court’s assessment that
on its face, Korley’s proof of claim provided absolutely no legal basis for liability by
the Debtor.

      II.    Allowance of claims of Sears Family Members
             A.    Liability under the Stock Sale Agreement
       We agree with the bankruptcy court’s determination that Robert and Korley
failed to overcome the presumptive validity of the proofs of claim filed by the Sears
Family Members. The plain language of the Stock Sales Agreement imposes liability
on the Debtor for the deferred purchase price and the Debtor’s liability was not
discharged under any of the defenses submitted by Robert and Korley.

         The parties agree that the Stock Sale Agreement is the controlling document,
that it is unambiguous and that Nebraska law governs. The parties disagree, however,
regarding whether the Debtor is liable under the agreement. According to Robert and
Korley, the “the unambiguous Stock [Sale] Agreement on which [the Sears Family
Members] base their claim[s] does not provide that [the Debtor] has any . . . liability.”
The Sears Family Members maintain, however, that the Stock Sale Agreement plainly
provides that the Debtor is liable for the deferred purchase price.

      We review the bankruptcy court’s interpretation of the unambiguous contract
de novo and we do not consider extrinsic evidence of intent. See ABC Elec., Inc. v.

                                           -7-
Neb. Beef Ltd., 249 F.3d 762, 766-67 (8th Cir. 2000); Davenport Ltd. P’ship v. 75 th
& Dodge I, L.P., 780 N.W.2d 416, 422 (2010) (“A contract written in clear and
unambiguous language is not subject to interpretation or construction and must be
enforced according to its terms.”). The fact that each party claims the Stock Sale
Agreement unambiguously supports its position does not preclude us from finding
unambiguity. Neb. Pub. Power Dist. v. MidAmerican Energy Co., 234 F.3d 1032,
1041 (8th Cir. 2000) (citation omitted); Davenport, 780 N.W.2d at 422 (“A court
interpreting a contract must first determine as a matter of law whether the contract is
ambiguous.”).

        The bankruptcy court agreed with the parties that the Stock Sale Agreement
is unambiguous. It also agreed with the Sears Family Members that the Debtor was
liable as the “Buyer” under the agreement. We agree with the bankruptcy court. In
the plainest of language, Paragraph 2 defines the Debtor as one of the buyers. In
Paragraph 4, it explains that the purchase price is “to be paid by Buyers to Sellers. .
. .” Likewise, the Debtor signed the Stock Sale Agreement as a buyer.

       Among other arguments, Robert and Korley maintain that by using the term
“Buyer(s),” the Stock Sale Agreement did not require both Korley and the Debtor to
sign promissory notes and it only imposes liability for the purchase price on the
person or entity who does sign a promissory note.3 Paragraph 7 of the Stock Sale
Agreement explains that “Buyer(s) shall execute, for each Seller, a Promissory Note
and a Pledge and Security Agreement.” According to Robert and Korley, the Debtor
is not liable to the Sears Family Members because only Korley, and not the Debtor,
executed promissory notes.

      3
              One of the other arguments made by Robert and Korley is that the
reading of the Stock Sale Agreement requested by the Sears Family Members
requires this Court to look at Paragraphs 2 and 4 in isolation and would change the
meaning of the agreement as a whole. We disagree. Paragraphs 2 and 4, imposing
liability on the Debtor, are consistent with the agreement in its entirety.
                                          -8-
      We disagree. The four corners of the Stock Sale Agreement unambiguously
provide that the Debtor is liable thereunder. Nowhere does the agreement state that
a party will be released from liability if it fails to sign a promissory note. The
arguments by Robert and Korley amount to an attempt to create an ambiguity in a
document that they have already admitted to be unambiguous, which we will not
allow. Moreover, it is curious that Robert and Korley asked the bankruptcy court and
this Court to refer to extrinsic evidence, the promissory notes, to interpret an
unambiguous contract.

      We note further that Robert and Korley did not provide evidence to dispute the
balance owed to each of the Sears Family Members. The bankruptcy court properly
allowed the claims in the amount for which they were filed.

             B.    Defenses alleged By Robert and Korley4
                   i.    Breach of duty of good faith and fair dealing/loyalty
       Robert and Korley maintain that any liability of the Debtor under the Stock
Sale Agreement was discharged as a matter of law based on the Sears Family
Members’ alleged breach of their implied duties of good faith and fair dealing and
Ron Sears’s and Rhett Sears’s alleged express duties of loyalty to the Debtor set forth
in the Stock Sale Agreement. As grounds for such breaches, Robert and Korley cite
to post-bankruptcy support by the Sears Family Members of the Trustee’s efforts in

      4
              In addition to the two defenses alleged by Robert and Korley that we
discuss in this opinion, Robert and Korley referred to other alleged defenses in
their Statement of Issues. Of the additional defenses, the only defense that Robert
and Korley mentioned beyond their Statement of Issues was the allegation that any
contractual liability of the Debtor was discharged by new or substituted contracts
consisting of the promissory notes. This argument was discussed only briefly and
only in the reply brief filed by Robert and Korley and we, therefore, consider it to
be abandoned or waived.
                                          -9-
assuming executory contracts and closing purchase agreements that were commenced
pre-petition. They also refer to the Sears Family Members’ “opposition to the
Chapter 11 case of AFY,” their sponsorship of the Debtor’s liquidation and their
support for other efforts of the Trustee. Assuming, for the sake of argument, that
these duties existed in the first instance, Robert and Korley have failed to show how
they were breached in a way that would merit disallowance of the claims. They cite
to only post-petition actions of the Sears Family Members as breaches of their duties.
But claims in bankruptcy, such as the claims of the Sears Family Members that are
at issue here, are determined as of the bankruptcy petition date. See 11 U.S.C. §
502(b) (“the court...shall determine the amount of such claim . . . as of the date of the
filing of the petition... ”) (emphasis added). Moreover, it would defy logic to hold
that a claimant would act in bad faith simply by trying to enforce his claim and assist
a case trustee in procuring payment of it.

                     ii.    Supervening frustration
       Robert and Korley also maintain that any liability of the Debtor under the Stock
Sale Agreement was discharged as a matter of law because “the principal purpose
upon which the Stock Sale Agreement was based was frustrated and the basic
assumption on which the Stock [Sale] Agreement was made did not occur.” They
allege that the Stock Sale Agreement is unenforceable because the parties entered into
it under the assumption that the Debtor’s operations would continue as a going
concern and that the payment for the stock would come from the Debtor’s cash flow
and earnings. Due to the country’s unforeseen recession and the withdrawal by the
Debtor’s lender of an operating line of credit, the Debtor did not continue to operate
as a going concern.5

      5
             Robert and Korley presented their supervening frustration theory to
the bankruptcy court. The bankruptcy court did not discuss the defense in its
written opinion, so we must assume it rejected that theory. We agree with the
bankruptcy court’s decision.
                                          -10-
       Under the theory of discharge by “supervening frustration,” a party no longer
has the duty to perform under a contract “unless the language or the circumstances
indicate to the contrary” in circumstances “[w]here, after a contract is made, a party’s
principal purpose is substantially frustrated without his fault by the occurrence of an
event the non-occurrence of which was a basic assumption on which the contract was
made.” Restatement (Second) of Contracts §265 (1981) (quoted in Cleasby v. Leo A.
Daly Co., 376 N.W.2d 312, 318-19 (1985)); see also American Prairie Constr. Co.
v. Hoich, 594 F.3d 1015, 1026 (8th Cir. 2010) (citing Restatement (Second) of
Contracts § 265).

       Robert and Korley claim that the parties would not have entered into the Stock
Sale Agreement if the stock purchase price was not going to be paid out of the
Debtor’s cash flow and earnings, and they cite to a declaration of Robert as support
for their argument. Notwithstanding Robert’s declaration, Robert and Korley failed
to satisfactorily prove a supervening frustration defense. Applying the theory of
commercial frustration to the situation here would be akin to allowing any party to
be relieved of his contractual duties simply because he is no longer able to pay them,
and would mean a debtor is freed from his obligations each time he is unable to
reorganize. That is simply not the law. We also note that the Stock Sale Agreement
itself recognizes the possibility of the Debtor’s bankruptcy when it requires in
Paragraph 7.1 that the promissory notes must provide for immediate payment upon
the Debtor’s bankruptcy.

      Robert and Korley failed to provide evidence sufficient to rebut the
presumptive validity of the Sears Family Members’ claims and the bankruptcy court,
therefore, properly allowed the claims as filed.

            C.    Standing
       The Sears Family Members argue that, if we affirm the bankruptcy court’s
disallowance of Korley’s Claim No. 26 (which we do), Robert and Korley will lack

                                          -11-
standing to appeal the bankruptcy court’s allowance of the Sears Family Members’
claims because Robert and Korley will not be directly affected by the bankruptcy
court’s decision.

       The issue of standing is not material to the outcome of this matter because,
even if Robert and Korley have standing, we affirm the bankruptcy court’s decision
to allow the Sears Family Members’ claims. Nevertheless, Korley has standing to
challenge the allowance of the Sears Family Members’ claims. Until we considered
the disallowance of Korley’s Claim No. 26 as a part of this appeal, there was a
possibility that Korley would be a claimant of the Debtor’s estate.6

      III. Denial of request for continuance of hearing and
      hearing with testimony of witnesses and cross-examination

       There was no need for the bankruptcy court to allow Robert and Korley more
time to develop the record or a hearing with testimony and cross-examination of
witnesses, before it ruled on the claim objections. Bankruptcy Code §502(b) provides
that when an objection to a claim is made, “the court, after notice and a hearing, shall
determine the amount of such claim. . . .” Section 102(1)(A) defines the phrase “after
notice and a hearing” as “after such notice as is appropriate in the particular
circumstances, and such opportunity for a hearing as is appropriate in the particular
circumstances.” 11 U.S.C. §102(1)(A) (emphasis added); see also Yehud-Monosson
USA, Inc. v. Fokkena (In re Yehud-Monosson USA, Inc.), 458 B.R. 750, 756 (B.A.P.
8th Cir. 2011) (affirming denial of request for evidentiary hearing prior to conversion
of case from Chapter 11 to Chapter 7).

     By the date of the hearing, over a year had already passed since the Sears
Family Members filed their claims and since the Sears Family Members had objected

      6
            We do not need to consider whether Robert had standing because
Korley also participated in this appeal.
                                          -12-
to Korley’s Claim No. 26. Therefore, Robert and Korley were afforded sufficient
time to conduct discovery. Moreover, Robert and Korley have failed to identify any
fact issue that would have benefitted from the testimony and cross-examination of
witnesses. The bankruptcy court conducted a hearing during which it necessarily
assessed the matters, including the complexity of the issues and whether further
proceedings were necessary, and it properly ruled on them in its June 8, 2011 order.

                                 CONCLUSION
      For the foregoing reasons, we AFFIRM the decisions of the bankruptcy court.

                                        -13-