In re Mensonides Dairy LLC

Case Type:
Case Status:
20-1105 (9th Circuit, Dec 10,2020) Not Published
The Bankruptcy Appellate Panel of the Ninth Circuit (BAP) affirmed the decision of the U.S. Bankruptcy Court for the Eastern District of Washington (BC) that the debtors had not defaulted under their confirmed Joint Chapter 11 Plan of Reorganization (Plan), as contended by their primary secured lender, Northwest Farm Credit Services, PCA and FLCA (NW). It deemed as unripe, and thus did not consider, Northwest’s appeal of the BC’s oral ruling that the debtors were entitled to attorneys’ fees, as the BC had denied the debtors’ specific request without prejudice in the order actually on appeal.
Procedural context:
Before the BC, Northwest and the Debtors (together, the Parties)—Mr. and Mrs. Mensonides (together, Mensonides) and the business, Mensonides Dairy, LLC (Dairy)—fought over whether the Debtors had violated the settlement agreement (Term Sheet) between the Parties that had been incorporated into the Plan, confirmed by the BC in the summer of 2019. Northwest charged the Debtors with six defaults, four of which formed the crux of this appeal, and the Debtors responded, consistent with the Term Sheet, with a Motion for Determination as to (A) Whether Debtors Have Defaulted Under the Plan; (B) Whether Debtors Have Cured Any Plan Defaults; and (C) Impact of Plan Defaults on Future Performance Under the Plan (Motion for Determination). The Debtors argued that no defaults had occurred under the Plan or, alternatively, that any defaults had been cured or could be cured prior to the 45-day deadline set in the Term Sheet. Northwest countered, and then the Debtors offered their rejoinder. After hearing argument from the Parties, as well as the Unsecured Creditors Committee (Committee) which supported Debtors’ position, the BC made its oral ruling. It found that that there were no defaults under the Plan. It further concluded that the Debtors, as the prevailing party on an action to enforce the contract, were entitled to reasonable attorney’s fees and costs. The BC had declined to then award attorney’s fees until the order for the Motion for Determination was final, which it “opined was after the exhaustion of any appeals,” a conclusion described as an “incorrect statement of the law” by the BAP.
The mores of the agricultural world set the meter of the parties’ relationship. The Debtors are three persons sited within the borders of the State of Washington: the Mensonides and the business, Dairy, that they jointly own and whose sole members they have always been. Prepetition, the Dairy employed about 70 full-time employees, and the Mensonides’ adult children were involved (and remain involved) in the Dairy’s management and daily operations. As of the Petition date, its estimated value was $53.1 million. As the Debtors; primary secured lender, Northwest was owed $29 million at the time of the bankruptcy filings. Naturally, its loan were cross collateralized and secured by substantially all of Debtors’ assets, including cattle, milk checks, crops, farm products, inventory, accounts receivable, equipment, and real property. Its collateral further encompassed assets of a non-debtor affiliated company, A & T Well Drilling, LLC, that the Mensonides solely owned and had established for the purpose of drilling wells to allow for beneficial use of all water rights for the Dairy’s operations. The Debtors’ bankruptcy case proceeded smoothly at first. A hint of surprise attended these early days, for the Mensonides and the Dairy had filed separate Chapter 11 bankruptcy cases on June 14, 2018, only after Northwest had declared Debtors in default on the loans and began seeking appointment of a receiver to operate the Dairy. Prior to filing their Joint Chapter 11 Plan of Reorganization (Plan), the Debtors and Northwest entered into a settlement agreement (Term Sheet) subsequently incorporated into the Plan. This contract enumerated Northwest’s remedies should Debtors default, and specified that the Debtors’ monthly Plan payments to Northwest were to be funded from what are called the “Dairy Assignments.” Essentially, a portion of the funds that would normally be sent to the Dairy for milk sales were to be paid directly to Northwest. Per the Plan, Northwest could give Debtors a written notice of default if Northwest asserted that Debtors had defaulted under the Plan. Upon receipt of a default notice, Debtors had 45 days to cure any default or file a motion contesting the alleged default. If Debtors failed to timely cure the default or contest it, Northwest could immediately appoint a Plan Agent to operate and manage the Dairy or liquidate its assets. The Committee fully supported the Plan. The BC confirmed the Plan on August 16, 2019, and its effective date was set for September 3, 2019. On October 31, 2019, less than two months after the Plan became effective, Northwest sent Debtors a Notice of Default. Of the six named, four were at issue in this appeal: Debtors’ purported failure to cooperate with Northwest’s attempted sale of the well-drilling equipment, to provide Plan payments via the Diary assignments, to respond or assist with Northwest’s efforts to send direct notices to buyers or to get buyers to include Northwest as a payee, and to ensure that it was named on certificates of title to all motor vehicle collateral. The Debtors countered with the Motion for Determination and, after Northwest replied, a response.
Julia W. Brand; Scott H. Gan; and Robert J. Faris

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