Summary of a Recent
Judicial Development in
Secured Transactions

Crop-Share Leases, Landlord's Lien, Equitable Subordination, and the Marshaling Doctrine

Walt McCarter
National AgLaw Center Research Associate

Summary of Decision

In In re Rogers Hog Farms Co., Inc., No. BK02-43097, Adv. No. 4031, 2005 WL 3199673 (Bankr. D. Neb. Aug. 26, 2005), the United States Bankruptcy Court for the District of Nebraska held: (1) that a plaintiff-landlord did not have an interest in crops grown on his leased farmland because he accepted cash payments, making it a cash rent and not a crop-share lease; (2) the plaintiff did not have a landlord's lien because he never filed financing statements to perfect his interest; (3) equitable subordination was not appropriate because there was no inequitable conduct by the creditor; and (4) the marshaling doctrine requires two parties to have a lien on the same property, and so was not available to the plaintiff as an unsecured creditor.

Background

Debtor leased farmland from the Noltes, and as rent, the Noltes were to receive the proceeds of 40 bushels of corn per acre. Id. at *1. Mr. Nolte also advanced the Debtor operating funds to be repaid with additional bushels of corn at harvest. Id. Riverside Fertilizer & Propane extended credit to the Debtor for crop inputs, cash rents and other farm expenses. Id. In return, Riverside took a blanket security interest in farm products, equipment, inventory, accounts, chattel paper, notes, intangibles, investment property, commodity accounts, cash and non-cash proceeds, and consumer and household goods, as well as assignments of USDA payments and crop insurance proceeds. Id. Riverside later repossessed and auctioned some of the Debtor's real estate, bought the property themselves at the auction and resold it privately for $48,000 more than their purchase price. Id. at *2.

Arguments

The Noltes argued that, as landlords, they held a tenancy in common interest in proceeds of the corn, superior to Riverside's interest. Id. at *1. They also argued that the sale of the Debtor's real estate was not properly conducted and resulted in a profit to Riverside which should have gone to the Debtor's estate. Id. at *2. They further argued that Riverside's claim should be subordinated to theirs pursuant to 11 U.S.C. § 510(c), based on inequitable conduct. Id. at *6. Finally, they argued that the marshaling doctrine should be applied to force Riverside to look to other collateral for satisfaction of debt. Id. at *7.

Analysis and Holdings

Crop-share leases
The court restated the rule in Nebraska regarding crop-share leases:
[W]here land is leased and rent is to be paid by a share or specified amount of

the crops to be raised, the landlord and tenant are tenants or owners in common of the growing crops until such time that the crop is harvested and divided. The tenant may mortgage or sell his interest in the crops, but his mortgagee is charged with notice of the landlord's interest. The tenant's interest is determined by the terms of the lease, and his mortgagee can take no greater interest in the crop as against the landlord than could be asserted by the tenant himself.
Id. at *2.

However, the landlord was paid cash from the proceeds of the sale of the crops, rather than with the crops themselves. Id. at *3. A landlord "cannot accept from his tenant money in lieu of a rent in kind or undivided interest in a crop, and at the same time seek to establish such interest in the crop." Id. The court concluded that the Noltes' acceptance of the cash constituted an abandonment of his claim to a portion of the crop and created a new rent contract. Id.

Landlord's lien
Regarding the Noltes' argument that they had a landlord's lien on the crops, the court pointed out that they never filed financing statements to perfect their interest, and since Riverside did so it had priority over the Noltes' interest in the escrowed funds. Id. As to the cash advances provided to the Debtor from Nolte, the court reasoned that regardless of whether they are considered advances or operating loans, the result is the same. Id. at *4. If the payments were considered cash advances, Nolte's right to repayment attached at the time to the future crop as part of the crop-share lease; however, he had surrendered his interest in the crops. Id. If the payments were loans, they were unrecorded and Nolte's interest was not perfected. Id. The court also found that there was no evidence that the auction conducted by Riverside was improper. Id.

Equitable subordination
There is a three-part test for determining whether equitable subordination is appropriate: "(i) [t]he claimant must have engaged in some type of inequitable conduct, (ii) [t]he misconduct must have resulted in injury to the creditors of the bankrupt or conferred an unfair advantage on the claimant, (iii) [e]quitable subordination of the claim must not be inconsistent with the provisions of the Bankruptcy Code." Id. at *6. The court found that Riverside had not engaged in any inequitable conduct, so there was no basis for equitable subordination. Id. at *7.

Marshaling doctrine
The Noltes alternatively argued that Riverside should be forced to obtain satisfaction from some other source before collecting from the escrowed funds (i.e., to apply the marshaling doctrine). Id. The court pointed out, however, that the marshaling doctrine requires that both parties have a lien on the same property, so it is not available to unsecured creditors. Id. Because it had already determined that the Noltes did not have a lien on the funds in escrow, the court dismissed their complaint. Id.

The case was decided on August 26, 2005.