L.L. Murphrey Company et al v. D.A.N. Joint Venture III, LP

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NORTH CAROLINA
WILSON DIVISION
IN RE:
L.L. MURPHREY COMPANY,
DEBTOR.
L.L. MURPHREY COMPANY,
LARRY BARROW, LOIS BARROW, and
DORIS MURPHREY,
Plaintiffs,
v.
D.A.N. JOINT VENTURE III, L.P.,
Defendant.
CASE NO. 00-03213-8-JRL
CHAPTER 11
ADVERSARY PROCEEDING
NO. 11-00139-8-JRL
ORDER
This matter came before the court on the motion for summary judgment of L.L.
Murphrey Company, Larry Barrow, Lois Barrow, and Doris Murphrey (collectively “plaintiffs”).
The defendant, D.A.N. Joint Venture III, L.P. (“DAN”), filed a response to plaintiffs’ motion
and also filed a cross motion for summary judgment against plaintiffs. A hearing was held on
November 21, 2011, in Raleigh, North Carolina.
L.L. Murphrey Company (“LLM” or “debtor”) filed for relief under chapter 11 of the
SO ORDERED.
SIGNED this 16 day of December, 2011.
________________________________________
J. Rich Leonard
United States Bankruptcy Judge
____________________________________________________________
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1 “Excess Cash Flow” was defined as:
Net Income plus depreciation, amortization and other non-cash expenses, less
scheduled principal payments paid under this Plan of Reorganization and less
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Bankruptcy Code on June 8, 2000. On July 13, 2001, this court entered an order confirming the
debtor’s fourth amended plan of reorganization (“Plan”). The plaintiffs instituted this adversary
proceeding on April 25, 2011, seeking declaratory judgment, pursuant to 28 U.S.C. § 2201, for
the purpose of determining the plaintiffs’ liability for the obligations specified in the Plan. DAN
filed a counterclaim, asking the court to determine whether a certain herd of swine is in fact
collateral for LLM’s obligation to DAN.
BACKGROUND
LLM is North Carolina corporation engaged in the swine business, with its principal
place of business in Greene County, North Carolina. Larry Barlow, Lois Barlow, and Doris
Murphrey (collectively “guarantors”) are citizens and residents of Greene County, North
Carolina and principals of LLM. When LLM filed its bankruptcy petition, LLM owed Wachovia
Bank, N.A. (“Wachovia”) a total of $12,790,522.36, pursuant to various notes. Wachovia also
asserted claims against LLM based on two guaranty agreements signed by its principals. The
guarantors had previously executed guaranty agreements to Wachovia in connection with the
loans evidencing Wachovia’s claim.
Pursuant to the Plan, the treatment of Wachovia’s claims was divided into two notes:
Note A and Note B. Note A was an amortizing note in the amount of $8,000,000.00 and called
for monthly payments of $70,500.00. Note B was a cash flow note in the amount of
$3,500,000.00, less any payments from certain hog sales netting more than $3,000,000.00, and
provided for an excess cash flow based payment.1 In 2003, Wachovia sold its notes and other
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distributions to shareholders for Sub-S tax payments. Excess Cash Flow shall be
determined in accordance with Generally Accepted Accounting Principles and using
the Debtor’s fiscal year end financial statements.
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loan documents to Cadlerock Joint Venture, L.P., and these obligations were later sold or
assigned to DAN in 2008. In accordance with Note A, LLM made monthly payments to
Wachovia and later to DAN. However, because the excess cash flow has been insufficient, there
have been no payments made on Note B. Both notes had a maturity date of September 30, 2011.
The Plan provided that following the maturity date, Note A and Note B would be recapitalized as
follows:
Following the maturity of Notes A and B, and providing that there have been no
material and uncured defaults with regard to Notes A and B, Wachovia shall
recapitalize the then remaining unpaid balances due upon Notes A and B (the
“Recapitalized Debt”), less an amount determined on the basis of calculating
Debtor's capacity to feasibly amortize indebtedness of Wachovia and Michigan
Livestock Credit Corporation over a period of fifteen (15) years from maturity (the
“Forgiven Debt”).
In calculating the amount of the Recapitalized Debt, the Debtor will determine its
average cash flow (“Recapitalization Cash Flow”) at eighty (80) percent of the five
(5) year average net cash flow prior to maturity, after elimination of the two (2) years
during such period which represents the Debtor's best and worst net cash flow years,
(year 6, 7, 8, 9, and 10), consistent with the definition of Recapitalization Cash Flow
as set forth in this Plan. The amount of recapitalized indebtedness shall not exceed
an amount which is feasible for the reorganized debtor to pay. The Recapitalized
Debt can not be less than the balance due at maturity upon Note A and may not
exceed a principal amount that the reorganized debtor can feasibly service by the
payment of the total monthly amount to Wachovia and MLCC of One Hundred
Thousand Dollars ($100,000.00). Upon determination of the Recapitalized Debt, the
reorganized debtor and Wachovia will execute additional and restated Wachovia loan
documents, reasonably necessary to implement these provisions.
The Plan also provided that the obligations of the guarantors would be limited to the amount of
the recapitalized debt.
It is undisputed that as of September 30, 2011, the balance due on Note A is
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approximately $6,186,361.85, and that the Plan provides the appropriate formula for calculating
the recapitalized debt. However, there is a vast disparity in what the parties believe to be the
appropriate figure for the recapitalization cash flow, which results in similarly disparate figures
for the appropriate amount of recapitalized debt. As an ancillary issue, DAN filed a
counterclaim, asking the court to determine whether a certain herd of swine is in fact collateral
for LLM’s obligation to DAN pursuant to a U.C.C. financing statement. The parties now move
the court for summary judgment on both issues.
STANDARD OF REVIEW
Pursuant to Federal Rule of Civil Procedure 56(c), made applicable in bankruptcy by
Bankruptcy Rule 7056, summary judgment is proper “if the pleadings, depositions, answers to
interrogatories and admissions on file, together with the affidavits, if any, show that there is no
genuine issue as to any material fact and that the moving party is entitled to a judgment as a
matter of law.” The “plain language of Rule 56(c) mandates the entry of summary judgment,
after adequate time for discovery and upon motion, against a party who fails to make a showing
sufficient to establish the existence of an element essential to that party’s case, and on which that
party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
In making this determination, conflicts are resolved by viewing all facts and all reasonable
inferences in the light most favorable to the nonmoving party. United States v. Diebold, Inc.,
369 U.S. 654, 655 (1962).
DISCUSSION
In support of its motion for summary judgment, LLM argues that the amount of
recapitalized debt must be equal to the balance of Note A upon the maturity date. LLM offered
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2 LLM acknowledges that the Plan calls for recapitalized debt to contain market terms for
the interest rate. LLM believes that appropriate interest rate is 6.0% per annum, which results in
a monthly payment of $52,149.25 for a period of fifteen years.
3 Once these conjectural figures were removed from the formula, DAN’s figure was
identical to that of LLM—$6,186,362.00.
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the affidavit of a certified public accountant that has provided accounting services to LLM since
2001. In sum, this affidavit states that based on the cash flow of LLM over the previous five
years and the language of the Plan, the debt associated with Note B should not be included in the
recapitalized debt. In other words, because the cash flow of LLM has been so poor, when
analyzed under the formula stated in the plan, the amount of recapitalized debt is the minimum
allowable under the plan: “the balance due at maturity upon Note A.” Therefore, LLM argues
that the amount of debt remaining unpaid on Note A and Note B be recapitalized in the amount
of $6,186,362.002 and that the liability of the Guarantors also be limited to that amount.
DAN argues that based on the amounts owed on the notes and in accordance with the
language of the Plan, the amount of debt to be recapitalized is $11,095,484.08. DAN offered the
affidavit of its internal accountant, which explains how this particular figure was reached.
DAN’s accountant admittedly incorporated hypothetical figures into her calculation of LLM’s
recapitalization cash flow for “demonstrative purposes,” which account for the disparity between
the parties in what they believe to be the appropriate amount of debt to be recapitalized.3
The court finds that on the issue of the amount of debt to be recapitalized, the only
plausible material dispute arises from the figures provided by DAN’s internal accountant, who
admittedly has no factual basis for her assertions. Therefore, DAN has presented no evidence
which raises a genuine issue as to any material fact, and the debt is hereby recapitalized at the
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amount stated in the plaintiffs’ complaint—$6,186,362.00. In regard to whether the herd of
swine is in fact collateral for LLM’s obligation to DAN, the court finds that because there has
yet to be a default, the issue presents no justiciable controversy at this time. In the future, if
there is a default, DAN is free to raise the issue again, but so long as LLM’s payments remain
current, the issue is not ripe for decision.
Based on the foregoing, the defendant’s motion for summary judgment is DENIED and
plaintiffs’ motion for summary judgment is GRANTED.
END OF DOCUMENT
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