Opinion
06-10-2014
In re: Sandpoint Cattle Company, LLC Debtor.
Chapter 11
No.
Sandpoint Cattle Company, LLC, filed a case under Chapter 11 of Title 11 of the United States Code. The debtor, Sandpoint Cattle Company, LLC, together with Clark Compher and George Londos (collectively "Sandpoint" or debtors), filed objections to Claim Nos. 6 and 9, filed by Alger Cattle Company, LLC, and Ray-Mar Farms ("Alger"). On March 10-13, 2014, I held an evidentiary hearing on the objections to the claims. I now enter my findings of fact and conclusions of law and order relief as set forth below.
Clark Compher and George Londos are interested parties as members of Sandpoint Cattle Company, LLC, and as personal guarantors of the promissory note that is the subject of Claim No. 6.
A. Introduction
This case was tried before the undersigned as a United States District Judge, sitting by designation for the District of Nebraska. I withdrew the reference to the bankruptcy court pursuant to 28 U.S.C. § 157(d) and tried the case in the United States District Court for the District of Nebraska.
For administrative convenience, all pleadings and filings to date have been filed in the bankruptcy case with the clerk of the bankruptcy court for the District of Nebraska. For purposes of the entry of this order and judgment, I will request the clerk of the United States District Court for the District of Nebraska to open a file for Sandpoint Cattle Company, LLC, and to docket this order and judgment in the district court accordingly.
The parties have presented me with a number of issues related to the disputed claims. Some of these issues were resolved at the conclusion of the hearing on March 13, 2014. Specifically, Claim No. 9, filed as an unsecured claim in the amount of $6,393,028, was allowed in the amount of $273,294. The balance of the claim was disallowed. This opinion will address further adjustments to Claim No. 9, as an unsecured claim, that need to be made before reaching a final unsecured claim amount.
In addition, the parties disputed whether the asset purchase agreement ("APA"), which is the subject of this litigation, was an integrated agreement. At the hearing's conclusion, I ruled it was and could not be modified by parol evidence. Consequently, the agreement forms the basis of the contract between the parties, subject to two possible modifications. Those modifications include determining how to apply a settlement agreement relating to cattle that had a genetic defect known as "AM," and deciding whether there was a mutual mistake in setting the sale price.
As to both Claim Nos. 6 and 9, I have been presented with a myriad of issues relating to claimed offsets, credits, additions, the reasonableness of the disposition of collateral, appropriate pre-petition and post-petition interest rates, mutual mistake, and various other asserted adjustments under the APA. I believe the most efficient way to address these issues is to set forth as findings of fact a general background section describing the relationship of the parties and the genesis of this dispute. I will then address the various issues in separate sections and make appropriate findings of fact and conclusions of law as may be required to resolve each dispute.
B. Background
Raymond Alger owns Alger Cattle Company, LLC, one of the creditors in this case. Alger is 73 years old and has more than 60 years of experience in the cattle business. His home operation is in California and partially operates under the name "Ray-Mar Farms." About 20 years ago he became involved in the purebred Angus business. Currently, Alger, together with family members and other partners, runs extensive cattle and dairy operations in both California and Texas.
In 2004, Alger met John Widdowson. Widdowson was involved in operating a 12,000-acre ranch known as "Sandpoint Cattle Company" in Lodgepole, Nebraska. The ranch's primary business consists of cultivating Angus cattle and genetics to sell around the world. Specifically, the ranch produces purebred Angus bulls to sell to commercial ranches to improve herd quality and sells bull semen and fertilized embryos from the purebreds as well. Eventually, Alger became convinced to purchase all of Sandpoint's assets, including its land, cattle inventory, machinery, and the like. Upon purchasing the ranch, Alger retained Widdowson to run its day-to-day operations. Widdowson's job responsibilities included, among other things, supervising the ranch workers, conducting periodic inventories, and breeding cattle to improve genetic quality.
In 2007, Widdowson met Michael Deutsch, a tax accountant and investor in cattle ranches. Deutsch told Widdowson that Deutsch and a group of investors were interested in buying the ranch from Alger. Widdowson arranged for Deutsch to meet with Alger to discuss a potential deal. In the course of negotiations, Alger told Deutsch that he was willing to sell the entire ranch and its inventory for $ 16,000,000. Negotiations for the ranch continued through the summer of 2008. Deutsch and his investor group ultimately made a deal with Alger to purchase the ranch.
The new owners created an entity called Sandpoint Cattle Company, LLC, to legally own the ranch. Sandpoint designated Widdowson to continue to manage the ranch. The new owners took physical possession of the ranch on August 1, 2008, but the ranch sale did not close until November 19, 2008. As such, Sandpoint was in control of the ranch for more than three and one-half months before the deal closed and Sandpoint became the ranch's new owner.
At the closing, representatives from Sandpoint and Alger signed and executed several documents. Widdowson signed the APA on Sandpoint's behalf. As detailed in the APA, the final agreement between Sandpoint and Alger was that Alger would sell the ranch's non-real estate "assets" (as defined in the APA) for $11,343,000. In a separate real estate purchase agreement, Alger agreed to sell the real property constituting the ranch for $4,657,000. Thus, the total sale price was $16,000,000. Deutsch explained in his testimony how the parties settled on that amount:
Plourde: Okay. And the purchase price that you agreed to, how did that relate to, if at all, to the 3/15 inventory and the list of subsequent purchases?TT, Day 3, pg. 103, In. 13-20; id. at pg. 106, In. 7-23.
Deutsch: The 3/15 inventory, plus the subsequent purchases, plus our evaluation of the equipment, plus our evaluation of the land, based upon whether it was irrigated or not irrigated acres, was all part of determining the purchase price of 16 million dollars.
. . .
Plourde: And can you tell me the process of determining that number?
Deutsch: Of determining the allocation of purchase price?
Plourde: Yes.
Deutsch: We started with the total number, and then what we did is we started calculating all of the things that we knew. So we went through and figured out all of the equipment. We had John [Widdowson] make a complete listing of all the equipment, so we would determine the value of the equipment. We had John go through and make a complete mapping of all of the fencing that was there, so we could determine the exact linear foot of fencing because, from an accounting standpoint, fencing is depreciable where land isn't, and that was quite an arduous process. And then we took the land, based upon what we understood the fair market value of the land was from a couple of different sources, and we backed into the remaining number which was the number allocated to cattle.
For the purposes of this opinion and order, I cite the official transcript from the March evidentiary hearing. See Doc. 498. Because this case originated in the bankruptcy court for the District of Nebraska, citations to the docket are from that original case, No. 13-40219.
To determine how to value the assets, Widdowson supervised the creation of a detailed cattle inventory that was current as of March 15, 2008 (the "March 15 inventory"). The inventory listed all cattle on the ranch as well as embryo and pregnancy counts. As part of the inventory, a value was assigned to each head of cattle on the ranch, with the reference date for the asset's value being December 2007. The parties all understood that there would be some fluctuation in the number of cattle between the March 15 inventory and the date of closing due to births, deaths, sales, and purchases. Alger created a separate document to record the ranch's new purchases after the March 15 inventory (the "new purchases document"). The new purchases document was intended to reflect all new purchases of cattle after the March 15 inventory up till July 31, 2008. The cut-off date for the new purchases document was the day before Sandpoint took control of the ranch. Sometime in July 2008, Widdowson compared the new purchases document with the March 15 inventory and identified numerous duplicate entries. That is, cattle appeared on both the March 15 inventory and the new purchases document. Several months after the closing, an analysis of the two documents was conducted, which determined that there was $ 1,016,319.00 worth of cattle double-listed on the March 15 inventory and the new purchases document.
Alger agreed to finance a portion of the purchase price. He loaned $ 10,800,000 at 5% annual simple interest to Sandpoint in exchange for a security interest in the ranch's real and personal property. Under the terms of the promissory note, Sandpoint promised to pay Alger $600,000 annually from 2008 until 2012, with the annual amount increasing to $800,000 from 2013 until 2016. All unpaid principal and interest was due on December 31, 2017. Pursuant to the note's forbearance provisions, see ¶¶ 3-5, portions of the annual payment could be "deferred" to a later date. In return, the deferred amounts were subject to an increased interest rate of 8%. The note also specified that if Sandpoint defaulted on any payment, an acceleration clause would be triggered and a 10% default interest rate would apply instead of the 5% rate.
The loan also required Sandpoint to pay an additional $500,000 on December 31, 2012.
As will be set forth in more detail below when resolving the claims disputes, Sandpoint started missing payments under the APA and promissory note within a fairly short time after the transaction was consummated. The failure to make timely payment was attributable, at least in part, to a severe drought in western Nebraska. The parties executed a separate forbearance agreement, see Doc. 329, which was made effective March 1, 2012, in an attempt to address delinquent loan payments. At about the same time, a number of disputes arose relating to issues surrounding the APA. These included the double-counted cattle mentioned above, a problem with certain cattle that had a genetic defect known as "AM carrier," how certain payments that were made were to be applied, and a myriad of other more minor issues.
One of the more difficult issues in this case is when and whether certain disputed issues were settled. As discussed below, there were multiple meetings at which the parties attempted to hammer out a resolution of a whole list of issues. There is evidence in the record that the parties were able to reach a satisfactory resolution as to some of the issues, while other "agreements" appeared to be more in the nature of attempts at a global settlement. In other words, Party A will agree to X, but only if Party B agrees to Y. Other issues did not appear to be contingent upon any other agreements. One of the tasks before me will be to sort out which issues were resolved pre-petition, and which remained open for negotiation after Sandpoint filed its bankruptcy petition.
An unusual aspect of this case is the fact that two of its key players each represented opposing parties to this dispute at various times. As previously indicated, Widdowson was the ranch manager for Alger until the time the ranch was sold. He then became an employee and manager for Sandpoint Cattle Company, LLC. In fact, Widdowson is the individual who signed the closing documents on behalf of Sandpoint. Another key person in this dispute is Don Ozenbaugh. Ozenbaugh is related by marriage to Alger and was acting as his representative in the negotiations leading up to the sale of the ranch. Ozenbaugh continued to represent Alger through at least the end of 2010. However, at some point thereafter, he apparently attempted to take on a "mediator" role to resolve the various disputes that had arisen. He then, over the objection of Alger, became a consultant for Sandpoint and represented their interests in negotiations in various attempts to settle the claims. To the extent it becomes significant, I find that Widdowson represented Alger through August 1, 2008, and was a representative for Sandpoint thereafter. Likewise, I find that Ozenbaugh was a representative and had binding authority for Alger through December 31, 2010, and became a representative for Sandpoint after that date.
Although, for reasons not entirely clear from the record, Widdowson was not allowed to see or read the documents prior to executing them.
On February 6, 2013, Sandpoint filed a Chapter 11 bankruptcy petition in the United States District Court for the District of Nebraska. Alger later filed Claim No. 6, asserting a secured claim valued at $ 12,274,917.86. Claim No. 6 was for amounts owed under the $ 10,800,000 promissory note, amounts claimed to be owed under the terms of the March 1, 2012 forbearance agreement, and interest that had accrued on the total unpaid debt.
On June 28, 2013, Sandpoint filed a motion seeking to abandon 2,453 cattle to Alger. The motion alleged that" [r]equiring Debtor to continue to maintain collateral for the Alger Entities would not bring any benefit to the bankruptcy estate and would, instead, be burdensome because such maintenance would be very costly, and because the collateral is 100% encumbered." Widdowson's testimony at the March 2014 hearing corroborated the fact that the ranch could no longer sustain the amount of cattle there:
Plourde: In July of 2008 [sic] was the ranch able to sustain these cattle?TT, Day 4, pgs. 74-75, In. 23-25, 1-6. On July 10, 2013, Sandpoint filed an amended motion seeking to abandon 2,376 cattle. After hearing arguments from both sides on July 24, 2013, the bankruptcy court granted the amended motion and ordered Alger to remove 2,376 cattle from the Sandpoint ranch by August 13, 2013. Prior to the March 2014 hearing, virtually all of the abandoned cattle had been liquidated, with the exception of a relatively small number that Alger retained.
Widdowson: Can you define sustain?
Plourde: Was it your plan to leave the cattle on the ranch at that time whether or not they were abandoned?
Widdowson: Whether the cattle were going to be abandoned ----
Plourde: Yes.
Widdowson: -- or not a large, large portion of the inventory would have to be moved to some other place.
C. Commercial Reasonableness of Post-Abandonment Cattle Sales
One of the most significant issues I must determine in this case is whether the manner in which Alger liquidated and accounted for the sale proceeds of the abandoned cattle was "commercially reasonable." Commercial reasonableness is a question of state law. See City Nat. Bank of Fort Smith, Ark, v. Unique Structures, Inc., 49 F.3d 1330, 1333 (8th Cir. 1995) (applying state law to decide whether the sale of collateral under Article 9 of the U.C.C. was commercially reasonable); Neb. Rev. Stat. U.C.C. § 9-610(b) ("Every aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable."). I turn to that issue first in determining the allowed amount of Claim No. 6.
As mentioned above, the bankruptcy court granted Sandpoint's motion to abandon 2,376 cattle to Alger and ordered Alger to remove the cattle from the Sandpoint ranch by August 13, 2013. Sandpoint hired Eddie Sims to appraise the cattle prior to abandoning them to Alger. Sims has worked in the purebred and commercial cattle business for 46 years. He currently owns National Cattle Services, which provides various services, including cattle appraisals. Sims inspected the Sandpoint cattle July 8-10, 2013. TT, Day 3, pg. 58, In. 8-10. Sims appraised the 2,376 cattle as worth $7,979,950 at the time.
Sandpoint relies heavily on Judge Mahoney's statement during a July 2013 cash collateral hearing that the abandoned cattle would be valued as of the time they were placed on the truck and taken off the Sandpoint ranch. Because of this statement, Sandpoint argues that Eddie Sims's $8 million appraisal of the cattle should be the value I assign to the abandoned cattle for purposes of computing the unpaid balance of the $10.8 million loan.
I reject Sandpoint's argument for a few reasons. First, I question whether Judge Mahoney's comment carries the weight Sandpoint attributes to it. The comment referred to was made in the course of back and forth between counsel over how the cattle were to be delivered, how the deliveries were to be made, who was to pay for trucking, the time allowed for delivery, and other acrimoniouslylitigated issues. I do not believe that Judge Mahoney's comment can be read to sanction a valuation of the cattle based upon Sims's appraisal.
Second, even if Judge Mahoney's comments are to be construed as setting the date of abandonment as the date for valuation of the collateral, it says nothing about how that valuation is to be made. As indicated in footnote 7, I find the appraisals performed by debtor's appraisers to be of little use in determining value. At the end of the day, the best measure of value is the amount the cattle were sold for in a commercially reasonable manner or should have been sold for if a sale was not commercially reasonable. Judge Mahoney's comment is merely an acknowledgment that Alger obtained title and possession of the cattle as of the date the cattle were delivered as a result of the abandonment. That is the date credit for the cattle will be given. The comment says nothing about the method of valuation or amount of credit to be given to the cattle. Accordingly, I reject Sandpoint's argument.
I discount Sims's appraisal for several reasons. First, the estimate was based on "current sales" and "everyday marketing." TT, Day 3, pgs. 58-59, In. 24-25, 1-2. Because of the widespread drought, however, many ranches were selling animals to make their herds smaller. This naturally creates lower-than-normal prices in the market. Basing the estimate on typical marketing would also unnaturally inflate the prices because abandoning 2,376 cattle is atypical, and it was virtually impossible for Alger to sell the cattle using standard marketing practices. Second, Sims's estimate is based on additional optimal conditions that, either by stipulation of the parties or impossibility, did not occur, including: selling the cattle at the most desirable time of year; selling the cattle off in small numbers so as not to flood the market; selling the purebred Angus cattle at the Sandpoint ranch; and selling the cattle under the Sandpoint name. See generally TT, Day 3, pgs. 56-81. These assumptions inflated Sims's appraisal, and I find these various factors render the appraisal unreliable to the extent that Sandpoint relies on it to prove the various sales were not conducted in a commercially reasonable manner.
Alger traveled from the Ray-Mar ranch in California to Sandpoint to retrieve and sell the cattle. Alger then disposed of most of the cattle at sales between August 2013 and January 2014. The various cattle sales have netted $4,677,348.88 to date. Alger claims he accrued $1,328,107.82 in expenses related to the abandonment and sale of the cattle. The net proceeds from the cattle abandonment according to Alger is therefore $3,384,979.87.
Alger argues that he sold all the cattle in a commercially reasonable manner, and that because he did so, he is entitled to a deficiency judgment. Sandpoint argues that Alger did not conduct the sales in a commercially reasonable manner and that he is therefore barred from receiving a deficiency judgment for the remaining balance due on the promissory note.
1. Nebraska's Adoption of the Uniform Commercial Code
Nebraska's adoption of the Uniform Commercial Code (U.C.C.) governs my analysis of whether Alger disposed of the cattle in a commercially reasonable manner. The U.C.C. requires that "[e]very aspect of a disposition of collateral, including the method, manner, time, place, and other terms, must be commercially reasonable." Neb. Rev. Stat. U.C.C. § 9-610(b). I consider several factors when determining if the sales were commercially reasonable, including:"(1) whether the timing between the sale and notice was too short or too long; (2) whether the seller advertised the sale; (3) whether the sale was in a proper place; (4) whether the seller permitted necessary inspections by prospective bidders; (5) whether the seller performed necessary repairs; and (6) whether the seller held the sale at the same time and location as advertised." Wells Fargo Bus. Credit v. Environamics Corp., 934 N.E.2d 283, 289 (Mass. App. Ct. 2010); see In re Youngblood, 167 B.R. 870, 874 (Bankr. W.D. Tenn. 1994) (listing factors, including purchase price). In addition, "the adequacy or insufficiency of the price" is another factor I consider, First Westside Bank v. For-Med, Inc., 529 N.W.2d 66, 70 (Neb. 1995), but "no single factor, even price, will conclusively determine the commercial reasonableness of a secured party's actions," Bezanson v. Fleet Bank-NH, 29 F.3d 16, 20 (1st Cir. 1994).
The secured party "may dispose of collateral by public or private proceedings, by one or more contracts, as units or in parcels, and at any time and place and on any terms." Neb. Rev. Stat. U.C.C. § 9-610(b). "Whether a sale of collateral was commercially reasonable ... is a question of fact." First Westside Bank, 529 N. W.2d at 68. Nebraska has adopted the rebuttable presumption rule, which means that once the debtor raises the issue of commercial reasonableness, the burden is on the secured party to establish that the sale of the collateral complied with the U.C.C.'s requirements. See Neb. Rev. Stat. U.C.C. § 9-626(2). Because Sandpoint challenges the commercial reasonableness of the various cattle sales, Alger must prove that the sales were commercially reasonable to receive a deficiency judgment. If Alger does not meet his burden, Sandpoint's liability is limited "to an amount by which the sum of the secured obligation, expenses, and attorney's fees exceeds the greater of the amount of proceeds that would have been realized had the non-complying secured party proceeded in accordance" with a commercially reasonable sale. See id. at (3)(B).
2. Notice Issue
Nebraska's U.C.C. provides that a secured party "shall send" reasonable notice of the intent to dispose of collateral to, among other persons, the debtor. Neb. Rev. Stat. U.C.C. § 9-611(b). Notice is sufficient if it does the following:
(A) describes the debtor and the secured party;Neb. Rev. Stat. U.C.C. § 9-613(1).
(B) describes the collateral that is the subject of the intended disposition;
(C) states the method of intended disposition;
(D) states that the debtor is entitled to an accounting of the unpaid indebtedness and states the charge, if any, for an accounting; and
(E) states the time and place of a public disposition or the time after which any other disposition is to be made.
Sandpoint argues that adequate notice of a sale is not merely one factor in the commercial reasonableness analysis but is a prerequisite to recovering a deficiency judgment at all. Sandpoint quotes First National Bank of Bellevue v. Rose for the proposition that a creditor's "failure to give proper notice of the sales of the collateral is an absolute bar to the recovery of a deficiency judgment." 249 N.W.2d 723, 726 (Neb. 1977).
Prior to 1991, Nebraska's U.C.C. did not specify how to treat a secured party's failure to provide notice. This gap was filled by Nebraska common law, which established that a party's failure to provide notice absolutely barred a creditor from obtaining a deficiency judgment. See, e.g., Mason State Bank v. Sekutera, 461 N.W.2d 517, 523 (Neb. 1990) (per curiam) ("[C]ompliance with the requirements of the Uniform Commercial Code for notification as to the disposition of collateral is a condition precedent to a secured creditor's right to recover a deficiency, . . . the burden of proof is on the secured party to prove compliance with the statutory notice requirements, and . . . failure to give reasonable notice is an absolute bar to the recovery of a deficiency."). Sandpoint's reliance on pre-1991 cases is misplaced, however, because the U.C.C. has been revised several times since those cases were decided. See, e.g., Old Mill Toyota. Inc. v. Schroeder, 1993 WL 259350, at *7 (Neb. Ct. App. 1993) (unpublished) (noting that recent U.C.C. changes "reflected the Legislature's rejection of any 'absolute bar' rule that had been announced in Rose . . . to prevent the recovery of deficiency judgments when notice of a sale had been inadequate" (emphasis added)).
In 1991, the Nebraska Legislature added U.C.C. section 9-504(7), which stated that complying with the notice provisions "shall not be a condition precedent to the right of a secured party to recover any deficiency[.]" Howard Kool Chevrolet. Inc. v. Blomstedt, 511 N.W.2d 222, 227 (Neb. Ct. App. 1994). The Nebraska Legislature adopted U.C.C. section 9-504(7) to "provide a greater degree of fairness in commercial transactions by eliminating the punitive 'bar to deficiency judgment' rule." Id. at 228. A more recent revision to the U.C.C, though, is once again silent on the effect a failure to provide required notice has on a creditor's ability to recover a deficiency judgment. Nebraska courts have yet to address this latest revision, but I decline to infer that the absence of Section 9-504(7) in the latest version of the U.C.C. means that the drafters intended to resurrect the absolute bar rule. Indeed, the U.C.C. commentary says the exact opposite. See U.C.C. § 9-101, official comment ("For non-consumer transactions, Section 9-626 rejects the "absolute bar" test that some courts have imposed; that approach bars a noncomplying secured party from recovering any deficiency, regardless of the loss (if any) the debtor suffered as a consequence of the noncompliance."); Herman v. Midland AG Service, Inc., 264 N.W.2d 161, 171 (Neb. 1978) (citing U.C.C. commentary as persuasive authority); TCFIF Inventory Fin., Inc. v. Appliance Distributors, Inc., No.12-C-332, 2014 WL 806961, at *11 (N.D. Ill. Feb. 28, 2014) (applying Illinois law) ("But the secured creditor is not barred from bringing a deficiency action against the debtor or guarantor merely because notice was not given prior to disposition.").
I must apply the law as I believe the Nebraska Supreme Court would. See Grassmueck v. Am. Shorthorn Ass'n, 402 F.3d 833, 839-40 (8th Cir. 2005) ("If the path that a state court would follow when presented with a novel question is unclear, then we may decide the issue by predicting what the state court would do."). I find persuasive the fact that the most recent Nebraska cases to address the issue, applying the previous version of the U.C.C., considered insufficient notice as simply one factor in the overall commercial reasonableness analysis rather than an absolute bar to recovery. See Howard Kool Chevrolet, 511 N.W.2d at 227; Old Mill Toyota, Inc., 1993 WL 259350, at *7. Cf. 4 James R. White & Robert S. Summers, Uniform Commercial Code § 34-12, (6th ed. 2010) ("In general we are unsympathetic to debtor claims that they have been injured by the creditor's failure to give adequate notice."). And I find persuasive the commentary to the U.C.C., which suggests that deficiencies in complying with the default rules affect the overall commercial reasonableness inquiry and are not an absolute bar to recovery. See U.C.C. §9-101, official comment.
I conclude that if the secured party has failed to comply with the U.C.C.'s notice requirements, then the U.C.C. provision that discusses the effect of non-compliance with the statute as it relates to the disposition of collateral applies. That provision is found at Neb. Rev. Stat. U.C.C. § 9-626, which states when a secured party's compliance with the U.C.C.'s requirements is challenged, a rebuttable presumption arises that the value of the collateral sold was equal to the total amount of debt that the collateral secured. Therefore, in order for Alger to receive a deficiency judgment, he bears the burden to prove that he has sold the collateral in a commercially reasonable manner, and I will look at the adequacy of notice as one of several factors in deciding whether Alger should receive a deficiency judgment.
In this case, Alger mailed three separate notices to Sandpoint to alert them of various planned sales: (1) notice of a private sale of 1,321 cattle in August 2013, Exhibit 352; (2) notice that 500 cattle mentioned in the private sale would instead be sold in a public auction at the Ogallala sales facility, Exhibit 353; and (3) notice stating that Alger was disposing of 1,055 cattle at a private sale in September 2013, Exhibit 354. These notices, however, do not line up with how the cattle were sold. In addition to the notices just listed, Alger supplied a declaration in October 2013, Doc. 264, which was entered into evidence on November 1, 2013, Doc. 269. In this declaration, Alger describes his intent to sell 1,145 cattle at the Ogallala Livestock Auction Market (the "Ogallala sale barn") on December 9 and 10, 2013, which provided the parties with actual notice of the upcoming collateral disposition. I will discuss below what factor, if any, any insufficient notice plays in assessing the commercial reasonableness of the cattle sales.
3. Abandoned Cattle
Alger faced a number of very difficult and immediate problems when Judge Mahoney ordered the abandonment. He was about to receive over two-thirds of Sandpoint's cattle inventory (with no place to take them), and only a short time to arrange for pick-up, transportation, and temporary housing prior to selling the animals. And in assessing commercial reasonableness in this case, I note that some of the problems with the cattle sales were created by Sandpoint itself. These included the fact that such a large number of cattle were being disposed of at the time of severe drought in western Nebraska. This left little ranch land outside Sandpoint to house the cattle on. Alger had asked to have the cattle remain at the Sandpoint ranch, and he offered to pay the expenses of feed and maintenance while they remained there so that there could be an orderly disposition of the cattle. However, that request was refused. See TT, Day 2, pgs. 21-22, In. 18-25, 1-20; Day 4, pg. 78, In. 1-9. Sandpoint also refused a request to sell the cattle under the Sandpoint name. See TT, Day 2, pgs. 66-67, In. 12-25, 1-3; Day 4, pg. 78, In. 1-9. Significantly, all the testifying experts agreed that the best way to dispose of cattle is on a ranch (as opposed to a commercial facility), and that the Sandpoint name has value and would have raised the sale price of the cattle had they been allowed to be sold under that name.
Another immediate problem Alger faced was the fact that over 700 head of the abandoned cattle were bred heifers. These are young female cows that are about to give birth. In many cases, the cattle were literally within days of calving. In fact, 29 calved within two weeks of abandonment. There was some suggestion at the March 2014 hearing that the fall-bred heifers should have been sent to California to calve. However, even the debtor's experts did not support that idea, and Alger's experts indicated that putting cows that were about to give birth on a truck for cross-country transportation bordered on the inhumane.
Sandpoint argues Alger should have done something "different" than what he did but offers no viable suggestion as to what that "different" should be. There was some suggestion that the cattle should have been shipped to California and sold at the Ray-Mar ranch. However, some of the sales that actually occurred at the Ray-Mar ranch are now the subject of another Sandpoint argument that the sales were not commercially reasonable. In any event, that was not a feasible alternative since California was experiencing just as bad, if not worse, drought conditions as western Nebraska.
There was also a suggestion that selling at a sale barn is not the optimal way to sell Angus cattle. However, even the Sandpoint experts could not point to a feasible alternative if sale at the ranch was not possible. There was a suggestion of a sale at a local fairgrounds, but no real explanation as to why that would be better than an established sale barn with sorting pens, sales arena, etc. At the end of the day, the only real alternative proposed appears to be that Alger should have gone into the cattle business in Nebraska with the abandoned cattle. Essentially, as I understand the argument, Sandpoint contends Alger should have calved out all the fall-bred heifers and held the entire herd until the spring in hopes that the market would improve (which, in fact, it did). However, as explained above, I find nothing in the Nebraska U.C.C. that requires a party to hold and bear the expense of collateral for up to 10 months and speculate on market conditions. Indeed, I have no doubt that if Alger held the cattle, and the market went down between August 2013 and March 2014, Sandpoint would argue that Alger should have sold the cattle sooner, and so it was unreasonable to feed and house nearly 2,400 head of cattle for more than half a year.
With this background in mind, I now turn to the individual sales to determine which were commercially reasonable, and, to the extent any are not commercially reasonable, to adjust the credit to be given to Sandpoint on Claim No. 6.
4. 38 Fall-Bred Heifers Kept by Ray-Mar Farms
Around August 1,2013, immediately after the abandonment, Alger shipped 38 fall-bred heifers to the Ray-Mar ranch in California. He did not try to sell these particular cattle at a public sale, nor did he discuss with Sandpoint his intentions to send these cattle to Ray-Mar. Alger picked these cattle in particular because they were still two months away from giving birth, which allowed them to travel safely to California. Alger assigned each animal a value of $2,500 (for a total value of $95,000). The cattle continue to reside at the Ray-Mar ranch in California. At trial, Alger testified that he believed the price was fair and "if [Sandpoint] want[s] them back for that price, they can send a truck and pick them up." TT, Day 2, pg. 125, In. 20-21. Alger testified that he "was under a short period of time" and "needed to do whatever [he] felt best to bring the best price [he] could so [he] evaluated them at $2,500 [which was] over what the average brought." TT, Day2, pg. 126, In. 1-4; see also Day 2, pg. 124, In. 23-25 ("[The] 38 at $2500 . . . is referring to the fall bred cows. That is the price I put on the fall bred cows."). Sandpoint argues that Alger cannot prove that it was commercially reasonable for him to take bred heifers on his own and assign them a price without advertising the cattle, soliciting bids from potential purchasers, or providing a reason for setting the price.
I understand that Alger was in a difficult position of suddenly having to sell large numbers of cattle, particularly the fall-bred heifers who needed to be relocated quickly before giving birth. However, I find that Alger's unilateral decision to keep the fall-bred heifers for himself without discussing the price with Sandpoint or obtaining an outside appraisal of their value was commercially unreasonable. The U.C.C. only allows a secured party to purchase collateral privately "if the collateral is of a kind that is customarily sold on a recognized market or the subject of widely distributed standard price quotations." Neb. Rev. Stat. U.C.C. § 9-610(c)(2). These purebred Angus cattle do not fall into this category, and as such, Sandpoint should theoretically receive some credit against the deficiency judgment that Alger seeks. This number, however, is nearly impossible to quantify, as I find Alger's testimony credible that he assigned each animal a value that was higher than average. In addition, Sandpoint offered no evidence that $2,500 per head was too low, merely suggesting that it was possible the fall-bred heifers could have generated a higher profit if sold publicly rather than privately. The only countervailing testimony is the Sims's appraisal, which I discount for the reasons previously discussed. As such, no additional credit will be applied against the secured debt.
5. 167 Bred Heifers to Baldridge
Around August 4, 2013, Alger sold 167 bred heifers to Baldridge, an Angus cattle ranch in North Platte, Nebraska. Each animal was assigned a value of $ 1,800, totaling $300,600. At trial, Alger testified that he believed $1,800 per head was a good price because the quick sale allowed Alger to save significant expenses, including feed costs and sales commissions. TT, Day 2, pg. 126, In. 12-24. Alger also testified that the cattle sold to Baldridge "were the bottom end" of the bred heifers. TT, Day 1, pg. 90, In. 4. Sandpoint argues that Alger has failed to sustain his burden to prove commercial reasonableness because he offered no evidence that the sale was advertised or that he solicited other bids for the cattle.
I find Alger's testimony that the bred heifers were the poorest quality of the abandoned cattle credible, and this supports the relatively low price per animal. The marginal increase in price that would result from keeping and calving the heifers does not outweigh the increased costs of feeding and sheltering the animals. See Ford Motor Credit Co. v. Solway, No. 84 C 6081, 1986 WL 12809, at *2 (N.D. Ill. Nov. 7, 1986) (unpublished) ("While generally a secured party should not dispose of collateral when the market for it has collapsed if a recover [sic] is likely later, it is also not commercially reasonable for a secured party to hold the collateral for a long time, running up storage charges for which the debtor will be liable."). I find this disposition of cattle was commercially reasonable, and I deny Sandpoint any additional credit toward the deficiency judgment based on this sale to Baldridge.
6. 509 Head Sold at Ogallala Sale Barn on August 14, 2013
August 14, 2013, was the first public disposition of the cattle that Sandpoint had abandoned between July 30 and August 13, 2013. Most, but not all, the cattle in this sale were the remaining fall-bred heifers. Alger had these cattle shipped directly from the Sandpoint ranch to the Ogallala sale barn. At trial, Alger testified that he could not take the pregnant animals to Olson's Feed Yard, where he took the other Sandpoint cattle, because that facility had dirt pens that would be inadequate to calve cows safely. TT, Day 1, pg. 86, In. 1-3. The Ogallala facility had adequate straw pens and personnel to allow these fall-bred heifers to give birth. Id. at In. 12-21. The total number of cattle sold was 538, because 29 of the cows had already calved. The calves are not included in the figures of abandoned cattle, so I will only look at the 509 that Sandpoint abandoned, which yielded $1,122,410 in proceeds at the sale. Prior to the abandonment, Eddie Sims appraised the cattle as worth an average of $4,554 each, or $2,317,986 total—almost twice as much as they actually brought.
Sandpoint argues that the public sale at Ogallala was a "fire sale" and not commercially reasonable. Sandpoint claims Alger failed to show the sale was commercially reasonable because the advertising was minimal—Alger made some personal phone calls and the sale was advertised online—and only conducted for about 10 days. Sandpoint also claims that the Ogallala sale barn is a commercial beef barn, not a registered Angus sale barn, so selling the cattle there was unreasonable because it was not the type of venue buyers looking to purchase purebred Angus cattle would expect and thus hinted that the cattle were not high quality. Lastly, Sandpoint argues that Alger should have held on to the cows, helped them give birth, and then sold the cows with their calves at their sides, as this is typical in the Angus industry and would have made the total number of cattle worth more.
I find that this disposition of cattle was commercially reasonable. As discussed with the two other dispositions above, the fall-bred heifers were close to calving at the time of abandonment. Sandpoint would not allow the cattle to remain on the ranch, and Alger could not ship these animals to California. When asked about that possibility at trial, Alger responded that there would have been a high death rate if he had put the pregnant animals on a truck for the twenty-hour drive to the Ray-Mar ranch and intimated that Sandpoint's suggestion to ship the pregnant cattle was inhumane:
Let's assume that you put them all in a truck and they're going to, according to that date, calve, or a week early, and you sent them on the truck. The cow wants to go in labor so she wants to lay down. Trucks are full. There's really not - no room to lay down. And so she lays down, other cows stand on her, a calf is born, and another cow is going to step on its head or stomach. It's totally ludicrous[.]TT, Day 2, pgs. 115-16, In. 24-25, 1-5.
In addition, Alger testified that he looked for space available for the calves but was unable to locate any suitable places close to the Sandpoint ranch. "Nebraska courts have long recognized that in reviewing the price obtained at a sale of secured goods, the trier of fact should consider the circumstances under which they were sold[.]" United States v. Pirnie, 339 F. Supp. 702, 711 (D. Neb. 1972) (emphasis added). Alger's decision to utilize the Ogallala sale barn was commercially reasonable because it was close to the Sandpoint ranch, had space available to accommodate a large number of cattle, had the manpower and cleanliness to safely calve the pregnant cows, and had a good reputation. Larry Cotton (who will be discussed later) testified that the Ogallala sale barn "would be right at the very top in the nation as far as market reputation, number of head, value per head, et cetera." TT, Day 2, pg. 32, In. 12-14. Cotton also testified the sale was commercially reasonable, and I find his testimony credible. Sandpoint is not entitled to any additional credit against the deficiency relating to this sale.
7. Ray-Mar Bull Sale
Around September 7, 2013, Alger sold 56 bulls from the Sandpoint abandonment at Ray-Mar's annual bull sale in California. Twenty-two bulls sold at the sale, and those garnered an average $2,626 per animal. Alger sold the remaining bulls privately. Eleven bulls sold for an average of $2,845. Alger kept 3 of the bulls and assigned them each a value of $2,000. Alger disposed of the remaining 20 bulls for commercial beef, which sold for $28,652.50 (an average of $ 1,432.63 per animal). Because this was Ray-Mar's annual sale, the bulls were advertised with flyers and in magazines and trade journals.
I do not understand Sandpoint to be contesting the value of these 3 bulls that Alger purchased after failing to sell them at the public auction.
Sandpoint claims that Alger likely selected the best bulls to bring to Ray-Mar in California. Sims appraised the best of the abandoned bulls as worth $5,250 each, so Sandpoint argues the low price shows that the bull sale must not have been conducted in a commercially reasonable manner. One reason for the low price, Sandpoint suggests, is that the California market was already saturated with bulls, so bringing the bulls to California to sell may have played a role in the low prices.
I note that Sims's appraisal was conducted at the Sandpoint ranch, and the appraisal price assumed the cattle would be sold at the ranch and under the Sandpoint name—two factors that both sides agreed would garner higher profits. Sandpoint asserts in its post-trial brief that "Sandpoint's bulls typically sell at a substantially higher price than Ray-Mar's bulls." Doc. 514, at pg. 25. Larry Cotton testified that the bulls would have brought a higher price if they had been sold under the Sandpoint name rather than Ray-Mar; however, Sandpoint's counsel agreed that they did not allow Alger to use the Sandpoint name when selling the bulls. I find Sandpoint's use of Sims's appraisal to be suspect because the appraisal assumed favorable conditions that Sandpoint later explicitly disallowed. See TT, Day 3, pgs. 75-76, In. 18-25, 1-25 (Sims cross-examination). These bulls were understandably worth less because they were sold without the Sandpoint name. Because of this, I do not accept the Sims appraisal as the price a commercially reasonable sale should have brought.
I also reject Sandpoint's contention that Alger flooded the California market with the addition of the abandoned bulls. Like Nebraska, California was experiencing drought conditions. TT, Day 2, pg. 66, In. 7-8. During trial, Sims admitted that his appraisal did not take into account the fact that the drought forced many ranches to cut down their herds and that other ranches would not have had room for the bulls. TT, Day 3, pg. 73, In. 21-22 (stating that Sims was not interested in buying the cattle, even though he would have gotten a good deal, because "we don't have room for them after a three-year drought"). Sandpoint seems to suggest that Alger should have held onto the bulls for an additional, unknown amount of time. I disagree. The law does not require a secured party to hold on to collateral for an extended amount of time in the hope that the delay in selling the collateral will result in higher profits. See Pirnie, 339 F. Supp. at 711 ("Generally the law frowns upon the secured party's retaining possession of security for an extended period of time."). For these reasons, I will not grant Sandpoint additional credit against the deficiency owed to Alger for the bull sale.
This sale also shows some of the inconsistency in debtor's position. On the one hand Sandpoint argues Alger should have taken the fall-bred heifers to California and held them for several months, while at the same time arguing that the limited number of cattle Alger did take from this sale to California flooded the market.
8. Ogallala Livestock Auction Market Sale
Subsequent to the initial sales of the fall-bred heifers and other miscellaneous sales, Alger employed the services of Larry Cotton of Cotton & Associates. Cotton has a lengthy history in managing the sales of registered Angus cattle. Cotton assisted Alger and prepared a marketing plan for the cattle that remained at Olson's Feed Yard and at the Ogallala sale barn. He was involved with Alger's decision to schedule the December sale at Ogallala.
Cotton and his staff assisted in advertising the sale, including preparing a sale catalogue and advertising the sale to prospective purchasers. He also worked with the Ogallala sale barn's marketing system and hired a second internet marketing company to broadcast the sale nationwide so that there were two internet outlets for advertising and bidding. Further, he assisted in preparing and sorting the cattle for sale. On December 9 and 10, 2013, Alger sold 1,210 animals at a public auction held at the Ogallala sale barn. Alger testified that he and Cotton attempted to maximize the value of the cattle slated to be sold at the auction by inseminating them. Prior to the sale, Cotton appraised the cattle as worth $2,370,850. The cattle ultimately sold for $2,579,042. Of the cattle sold at the auction, Alger purchased 36 animals to send back to Ray-Mar farms in California.
Sandpoint makes several arguments regarding the commercial reasonableness of the public auction. First, Sandpoint argues that a large auction like this should not be held in December and that Alger should have waited until spring to sell the cattle. Second, Sandpoint argues that a large public auction like this should be advertised at least 6 months in advance, rather than only 4 months. Third, Sandpoint argues that the Ogallala sale barn was predominantly used to auction commercial beef cattle, not purebred Angus. Because of the barn's reputation and typical use, Sandpoint believes the Angus cattle received lower bids. This is highlighted by the testimony of Jarold Callahan. Callahan the is President of Express Ranches in Yukon, Oklahoma, and has extensive experience in the management, care, and marketing of purebred Angus. Callahan testified that he purchased 58 bulls online and resold 30 of them immediately for a $1,500 profit per head. TT, Day 3, pg. 87, In. 12-13. Lastly, Sandpoint argues it did not receive adequate notice of the sales, so Alger should be barred from recovering a deficiency judgment. I find that despite Sandpoint's numerous arguments, the public auction was conducted in a commercially reasonable manner.
First, as discussed above, Pirnie establishes that a secured creditor is not obligated to hold collateral for an extended period of time before offering it for sale. See Pirnie, 339 F. Supp. at 711 ("[T]he fact that a better price could have been obtained by a sale at a different time or in a different method from that selected by the secured party is not in itself sufficient to establish that the sale was not made in a commercially feasible manner."). One reason for this is the added expense involved with keeping collateral. At trial, Sims estimated that feeding the abandoned cattle for 8 months, from the August abandonment until the following April, would have cost roughly $1.6 million. TT, Day 3, pg. 70, In. 7. Adjusting that figure for the amount of cattle sold at the December sale, had Alger kept these cattle until spring instead of selling them in December, it would have cost Alger roughly $435,600 in feed costs alone. And that doesn't account for the inherent additional costs involved with sheltering and caring for the animals, such as rent for the holding facility and veterinary expenses, as well as normal deaths that occur during the winter months. I find these are significant additional expenses that the creditor is not obligated to bear simply in the hopes that a higher price can be obtained later for the collateral. See Pirnie, 339 F. Supp. at 711 (noting that "the expenses of holding the property for an extended period of time easily could outweigh any increased value the property might obtain").
Sims reached this figure by estimating that it costs an average of $3 per day to feed the cattle. Since 1,210 animals sold during the Ogallala December sale, it cost approximately $3,630 per day to feed the animals.
Even if it were possible that a spring sale would have generated a better outcome, Widdowson testified at one of the hearings in July 2013 in support of the motion to abandon that sales of registered Angus occur continually throughout the year. When responding to a statement that Angus sell better depending on the time of year, Widdowson responded:
You know, the statement that buyers are not accustomed to purchasing breeding animals during the summer, crop, and hay season, or in the depth of cold winter months, I really don't agree with that. I mean, Mr. Cotton himself is managing sales in those time periods. There's sales every month of the year so I don't agree with that.Doc. 459, pg. 15, In. 15-21.
In Pirnie, the court held that a sale was commercially reasonable when it "was conducted at a recognized public auction in the area where possession was obtained and where a year-round market existed for the property sold." Pirnie, 339 F. Supp. at 711. The Ogallala sale barn is a recognized public auction, and as Widdowson testified, there is a year-round market for Angus cattle. Selling the cattle in December may not have yielded the highest price possible, but it was nevertheless commercially reasonable.
Second, Sandpoint argues the Ogallala auction should have been advertised better. Cotton testified about putting together a sale catalogue in advance of the auction, TT, Day 2, pg. 27, In. 3, and Alger said the cattle were advertised as Ray-Mar cattle with Sandpoint genetics, TT, Day 2, pg. 128, In. 4-5. Further, Ogallala's in-house marketing team advertised the sale, and Cotton hired another internet marketing company to "broadcast[] the sale nationwide." TT, Day 2, pg. 34, In. 15-16. The online marketing teams sent emails to prospective buyers. Purchasers who did not travel to Ogalalla for the sale could purchase cattle online or by telephone. In fact, Callahan testified that he himself purchased some of the abandoned cattle through Ogalalla's online purchasing option. TT, Day 3, pgs. 86-87, In. 20-25, 1-2. I find the advertising was conducted in a commercially reasonable manner.
Sandpoint argues that 4 months was not sufficient to advertise a large cattle auction. Callahan testified that he likes to have "a minimum of six months" to sort the cattle and advertise. TT, Day 3, pg. 86, In. 6-8. However, Cotton testified that a 3-4 month timeline was sufficient. TT, Day 2, pg. 41, In. 8-23. Further, at the July 2013 hearing on the cattle abandonment motion, Widdowson agreed that Alger would have sufficient time to plan and advertise a sale in November or December. Doc 458, pg. 40, In. 18-22 ("I mean, based upon having a sale in November or December, if he took possession of those cattle in the next ten days, he would have - he would have plenty of time to properly put that sale together."). Because Sandpoint argued in support of the timing of the abandonment that 4 months was sufficient to advertise a large sale of cattle, and that December is an appropriate time of the year to sell purebred Angus, I reject counsel's arguments now that 4 months was not enough time. Alger has shown that his preparation and advertising for the December sale was commercially reasonable.
Third, Sandpoint argues that the Ogallala sale barn was typically used for auctioning cattle for commercial beef, not for auctioning Angus cattle. Tom Burke testified for Sandpoint. Burke manages registered Angus auctions and has extensive experience in the Angus industry. Burke testified about his impressions of the Ogallala facility:
[I]t's a great place to sell commercial cattle. They have a wonderful facility. But when you start talking about registered Angus cattle, I guess I couldn't think of a much worse place, because they take on what I call that sale barn atmosphere. Because commercial cattle, they can only bring so much because they sell by the pound, but registered Angus cattle can bring considerably more. And so Ogallala, where it's a great place to sell commercial cattle, it would be pretty substandard when it comes to competing against selling on a farm or a ranch. Because when people go to buy registered cattle, they're always concerned about disease, and things that they may pick up at a yard that you don't normally have to worry about on a farm or ranch. So I'd say that there's no substitute for having a sale on a farm or ranch.TT, Day 2, pgs. 151-52, In. 22-25, 1-10.
Everyone who testified during the March hearing seemed to agree on two things: (1) registered Angus cattle net the highest price if they are sold on a ranch; and (2) the abandoned cattle could not, for various reasons, be sold on the Sandpoint ranch. That left Alger with a lot of cattle to sell but very few options for doing so. Cotton agreed with Burke's testimony that the Ogallala sale barn's primary focus is commercial cattle, which are sold there nearly every week. TT, Day 2, pg. 43, In. 18-20. However, on occasion, Cotton testified that Ogallala would conduct some "pure bred sales." Id. at In. 20. In addition, the Ogallala sale barn was close to the Sandpoint ranch, so the expenses of transporting the animals was reduced.
It is clear that Ogallala was not the optimal place to auction the registered Angus, but the alternatives were far worse. Holding the cattle until spring would have racked up significant additional expenses, including feed and shelter, that may well have offset any increase in the prices fetched. No other ranch, including Ray-Mar, could accommodate the large number of abandoned cattle due to the nationwide drought. If the registered Angus cattle could not be sold on a ranch, then Ogallala was likely the best facility available, even though it typically sold commercial beef. Both sides agree that Ogallala was otherwise an excellent facility, and it was near the Sandpoint ranch, which minimized trucking expenses and trauma to the animals. Because Alger has shown his decision to use Ogallala was reasonable, and because neither side presented me with better available alternatives, I find that the decision to use the Ogallala sale barn to auction the cattle was commercially reasonable. See Pirnie, 339 F. Supp. at 711 (noting that when a quick sale of repossessed collateral is involved, "the price obtained may not be as high as the price would be if a farmer were selling his own property"); cf. 4 White & Summers, Uniform Commercial Code § 34-11 ("[T]he secured creditor is selling not only in the wholesale market, but usually at the low end of that market. . . . In some cases the low value of the goods after repossession may be related to the reasons why the debtor's business could not make a go of it with such goods as inventory or equipment.").
Lastly, Sandpoint argues they never received notice of the December sales. I disagree. Alger submitted a declaration containing notice of the December sale in October 2013 that was entered into evidence in this case on November 1, 2013. See Docs. 264 & 269. This declaration not only supplies actual notice to Sandpoint regarding his intention to sell the cattle on December 9 and 10, but it also complies with nearly all the U.C.C.'s requirements. The declaration described the debtor, described the collateral, stated the method of disposition, and stated the time and place of the disposition. See Neb. Rev. Stat. U.C.C. § 9-613(1). To the extent that the declaration is insufficient because it does not contain a statement that "debtor is entitled to an accounting of the unpaid indebtedness and states the charge, if any, for an accounting," I find that this omission does not render the notice ineffective. See Neb. Rev. Stat. U.C.C. § 9-613(2) ("Whether the contents of a notification that lacks any of the information specified in subdivision (1) are nevertheless sufficient is a question of fact").
Further, Sandpoint does not even point out specifically how the lack of notice injured them, only stating that with notice, "Debtor's members may have been able to bid on or re-purchase some of the cattle, and Sandpoint could have had arranged for other people in the cattle industry to show up and bid at those auctions." Doc. 514, pg. 16. But Sandpoint did have actual and U.C.C.-compliant notice of the sale. See Neb. Rev. Stat. U.C.C. § 9-613(2); White & Summers, Uniform Commercial Code § 26-11, at 1352 ("We are always skeptical of debtor claims that with proper notice, they would have sprung to action and produced many aggressive bidders at the sale of the collateral."). I reject Sandpoint's position here, and I will not award any additional credit to Sandpoint against the deficiency judgment.
9. Remaining Cattle Sales
After adding up the five cattle dispositions previously discussed, 396 animals remain unaccounted for. Sandpoint argues—and Alger does not seem to dispute—that it is unknown what happened to 13 of those animals. Alger suggests that they could have died as part of a natural animal loss rate. The record supports this assertion. Sims testified that he estimated the 2,376 abandoned cattle could suffer a "one to two percent" death rate. TT, Day 3, pg. 71, In. 6-10. So, if 13 of the abandoned cattle died, that amounts to a .547% death rate (a little over ½ of 1%), which would have been even lower than Sandpoint's estimate. For this reason, I will treat the 13 unaccounted-for animals as part of the herd's natural death rate and will not give Sandpoint a credit for those animals.
Alger sold the remaining 383 animals in public and private sales between August 7, 2013 and January 31, 2014. Most of these cows were sold as beef or feeders, and most were removed from the December Ogallala sale at Cotton's recommendation due to their poor quality. Cotton testified:
[Some of the cattle sold for beef] were probably females that maybe they got hurt on the truck or something happened to them, they were not ones that you would move on and breed. [Of the cows born in 2013], 35 were just lighter, smaller heifers that we didn't think would be advantageous to put added dollars into them, both labor and feed, to sell them on December 9th and 10th.TT, Day 2, pg. 47, In. 6-11. Alger testified that crippled cows were also sent to be sold as beef, TT, Day 1, pg. 82, In. 20, as well as were cows that had abscesses, were blind, or had other maladies, TT, Day 2, pg. 106, In. 8-10. Alger testified that his "decision was beef is the best thing and [he] would have done the same practice in [his] own operation." TT, Day 2, pg. 109, In. 20-21.
At the end of December 2013, nearly three weeks after the large Ogallala public auction, Alger sold 132 steers for an average price of $1,197.30 each at a livestock market in California. When asked about Alger's decision to sell the steers as feeders, Burke testified that he thought it was a "drastic move," stating:
[T]he bull demand today in the Angus breed is the greatest it's ever been in the 141 years that Angus cattle have been in the United States of America. Bulls are bringing on ranches between four and eight thousand dollars, and I think any time you have a herd the calabur [sic] of Sandpoint . . . I guess I'd have to say it was a pretty drastic move, as far as putting them in the steer category, not evaluating them a little further and making - and bringing more value to the table."TT, Day 2, pg. 150, In. 14-23.
Sandpoint points out the lack of evidence regarding the advertising done for the sales and the unknown number of bidders at the sales. Sandpoint also argues that because Alger has not provided evidence that these cattle were crippled or somehow otherwise not quality bulls, I should hold Alger to his burden and declare that the sale of 383 animals for commercial beef was unreasonable.
After reviewing the testimony regarding the determination that some of the animals were of poor quality and best sold for beef, I will credit the testimony of Cotton and Alger. Burke's testimony regarding the quality of Sandpoint animals pertains to their general reputation and not to the particular animals at issue in this case. Cotton and Alger prepared for the various sales by personally examining and sorting the animals. In addition, it is reasonable to infer that Sandpoint abandoned the least desirable cattle to Alger, so the likelihood of higher numbers of small, poor-quality animals is perhaps higher than what would be found in a typical Sandpoint herd. Further, as mentioned extensively above, Alger was under no obligation to hold the animals for an extended period of time. Even if the animals may have been worth more had he fed, sheltered, and cared for them through the winter and sold them in the spring, Alger was not obligated to incur these additional expenses in the hope that his efforts could result in potentially higher profits. For these reasons, I find that selling the remaining animals for beef was commercially reasonable.
10. Deficiency Calculation and Credits
In determining the credit to be applied against the secured debt in connection with the disposition of collateral, Alger presented Exhibit 345, Doc. 345, an accounting that purports to include all reasonable expenses, including feed, trucking, consulting fees, advertising, attorneys' fees, etc., incurred in connection with the holding and eventual sale of the collateral. I adopt this accounting, subject to a few adjustments.
First, Alger conceded at the hearing that he placed into the December Ogallala auction a number of his own cattle. He also acknowledged that the sale expenses should be prorated to reflect the fact that he included his own cattle in the sale. See TT, Day 2, pgs. 130-38 (cross-examination of Alger). Alger has not attempted to quantify a number to account for the presence of his own cattle in the sale. Sandpoint has presented an analysis it argues shows that Alger is responsible for at least $41,544.64 of the sale expenses. This is based on Alger being responsible for 13.2% of the total sale expenses incurred. I find this to be a reasonable estimate and will give Sandpoint a full credit for this amount.
I would note in Sandpoint's accounting that Alger apparently received $381,300 out of the December sale proceeds, which totaled $2,579,042. If anything, the 13.2% credit requested by Sandpoint may be conservative.
Another item of concern is Alger's inclusion of all his attorneys' fees, including fees associated with the 2008 sale of the ranch. There does not appear to be anything in the APA or loan documents that would justify inclusion of such fees. Accordingly, I will deduct from the expenses all attorneys' fees shown on invoices that predate January 1, 2012. Those fees total $35,138.26.
In summary, Sandpoint will be given credit against the secured indebtedness in the amount of $3,461,662.77. This represents the credit set forth in Exhibit 345 of $3,384,979.87, plus attorneys' fees of $35,138.26, plus Alger's pro rata share of the sale expenses of $41,544.64. Credit will be given as of the completion of the abandonment on August 13, 2013. As of that date, Alger had possession and ownership of all the cattle.
D. AM Carrier Settlement
A significant issue in this case is whether I should give a credit to Sandpoint against the balance due on the promissory note for what has been referred to as the AM carrier cattle issue. AM carrier cattle have a genetic defect known as "AM." An agreement was reached between the parties concerning the AM carrier cattle when the defect was discovered in certain cattle after the sale of the ranch closed. In essence, the agreement was that Sandpoint would be given credit against the value of the cattle, and Alger would receive title to the cattle and their progeny.
The progeny have value since they do not necessarily carry the same genetics as their parents and could therefore be born without genetic deficiencies.
Alger appeared at one point to take the position that no agreement was ever reached. However, the evidence, based on the parties' declarations, exhibits, depositions, and trial testimony, is quite compelling that the agreement as outlined above existed between the parties long before Sandpoint filed its bankruptcy petition. There also had been a general agreement as to the amount of the credit. Ozenbaugh testified about an October 2010 meeting that took place in Wisconsin, at which all the parties were represented. Ozenbaugh represented Alger at that meeting. An agreement was reached there on the AM carrier cattle issue and amount of credit to be given against the note. At the March 2014 hearing, Alger's counsel acknowledged the agreement and agreed that the amount of the credit to be given was $835,669.51. See TT, Day 1, pgs. 27-28, In. 21-25, 1-6. Sandpoint will be given credit against the balance owed on the promissory note in that amount, as of the date of closing.
There remains a dispute as to whether Sandpoint should be reimbursed for any expenses incurred in connection with feeding and housing the AM carrier cattle prior to the consummation of the agreement. Based on Ozenbaugh's testimony regarding his understanding of the agreement, see TT, Day 4, pgs. 121-24, I find that the expenses for feed and housing should be allowed in the amount of $314,980.60, but I will credit this amount against the unsecured claim. I find that this is part of the unsecured claim since it is part of the give and take of the parties' negotiations over how the APA is to be interpreted. Sandpoint did not specifically ask that the feed expenses be a credit against the secured debt, and there is nothing in the testimony to indicate there was any agreement to that effect.
E. $250,000 Payment
Another dispute that arose in this case after the deal closed was how to apply a $250,000 payment made by Sandpoint to Alger on January 30, 2009. Alger argues that the payment should be applied against the payment required in paragraph 2.4.4 of the APA. That provision provides that Sandpoint should reimburse Alger for the greater of $250,000, or all documented costs and expenses incurred by Alger in connection with the planting of the 2008 crop. Alger contends that the $250,000 payment made on January 30, 2009, was for payment of that contractual amount.
Sandpoint maintains that the $250,000 payment should apply as a credit against the secured note. I find that the evidence supports Sandpoint's position. First, there is no evidence in the record that any agreement was ever reached as to whether $250,000 would be the amount to be paid for the 2008 crop. $250,000 was a minimum payment, subject to possible increases based on documented crop input expenses. Second, Ozenbaugh gave credible testimony that it was the intent of the parties that the payment be made against the secured note, and Ozenbaugh was representing Alger at the time of the payment. He testified that it was important for both parties that the parties could truthfully represent that the note was current as of the end of January 2009. See TT, Day 4, pgs. 139-40. As such, I find that the payment was to be applied against the secured note.
The parties acknowledge that only one $250,000 payment was made and that if it was applied to the secured note, then the contractual obligation in paragraph 2.4.4 of the APA remains unpaid. Since I'm disallowing the $250,000 payment as a credit against the contract amount, I will increase the unsecured claim by that amount.
F. Double-Counted Cattle
As mentioned in the background section, Widdowson prepared the March 15 inventory, which reflected all the ranch's assets as of March 15, 2008. Alger created a new-purchases document to record the ranch's cattle purchases from March 15 until Sandpoint took physical possession of the ranch on August 1, 2008. At some point, it was discovered that a significant number of cattle were listed on both documents. A number of months after closing, Bruce Buethe, who works in Sandpoint's business office, analyzed the two documents and determined that there was $1,016,319.00 worth of cattle listed twice.
I asked the parties to brief the issue of whether such double counting created a mutual mistake regarding the number of cattle included in the sale of the ranch. "A mutual mistake is a belief shared by the parties, which is not in accord with the facts. It is a mistake common to both parties in reference to the instrument to be reformed, each party laboring under the same misconception about its instrument. Mutual mistake exists where there has been a meeting of the minds of the parties and an agreement actually entered into, but the agreement in its written form does not express what was really intended by the parties." R & B Farms, Inc. v. Cedar Valley Acres, Inc., 798 N. W.2d 121, 129 (Neb. 2011) (footnotes omitted). "To overcome the presumption that the agreement correctly expresses the parties' intent and therefore should not be reformed, the party seeking reformation must offer clear, convincing, and satisfactory evidence. Clear and convincing evidence means that amount of evidence which produces in the trier of fact a firm belief or conviction about the existence of a fact to be proved." Id. (footnotes omitted).
Sandpoint insists that it should receive a $1,016,319.00 credit against the balance of the promissory note for the value of the double-counted cattle to correct the parties' mutual mistake. Alger contends that Sandpoint should receive no credit for the double-counted cattle because the total purchase price for the ranch's assets was intended to be a flat number ($16 million), and thus any double counting is irrelevant. After reviewing the evidence and testimony provided at trial, I conclude that there was a mutual mistake as to the number of cattle included in the sale and that the total value of the double-counted cattle was $1,016,319.00. I will credit this amount against the note's outstanding balance.
At trial, several witnesses testified about the double counting. For example, Alger himself acknowledged that he knew about the issue and that the parties continued to discuss it after the sale closed. See TT, Day 1, pg. 70, In. 1-4 ("Well, my comment to Mr. Ozenbaugh was, oh, I happened to notice a couple items that were both on [the March 15 inventory] and Exhibit A. Whether that means anything or not, at that point, that wasn't material to me. It was just an observation."); see also id at In. 5-16 (agreeing with counsel that he talked about the issue with Ozenbaugh after the deal closed).
Deutsch testified that all parties knew about the double counting. He added, however, that the parties did not think it was necessary to resolve the issue before closing, specifically because Alger helped to finance the deal, so the parties would continue to resolve loose ends after the deal closed:
Craig: And did you have discussion with Mr. Ozenbaugh and/or Mr. Alger when Mr. Ozenbaugh was still representing Mr. Alger concerning [the double counting] issue?TT, Day 3, pg. 130, In. 13-25 (emphasis added). See also Day 3, pg. 133, In. 3-7 (testimony of Deutsch) ("There was an enumerable [sic] amount of meetings between Mr. Ozenbaugh and myself, both in person and on the telephone and both with Mr. Widdowson and Mr. Alger present. Some of them extending as long as a full day trying to work these issues out.").
Deutsch: I had discussions with Mr. Ozenbaugh about it, and once again it wasn't an issue that was needed to be addressed right then and there because both him and I had the same exact understanding that the contract would allow for adjustments to the note. Since Mr. Alger had
financed 10.8 million none of us felt there was any urgency to finalize that right at that moment, but we were both well-aware of this, and I know Mr. Alger was aware of it, also.
Ozenbaugh corroborated Deutsch and Alger's testimony. He further explained that the parties had discussed the double-counting issue in the context of settling the AM carrier dispute:
Plourde: Now, are you familiar with the what I'll call the double count issue?TT, Day 4, pgs. 115-16, In. 25, 1-22.
Ozenbaugh: Yes.
Plourde: And would you tell the Court what that issue was?
Ozenbaugh: Well, it was a, from my involvement, it was an issue subsequent to, quite a ways subsequent to the agreement itself, to this agreement that you're referring to. And it actually came to light, again, from my involvement when we were working on the schedule of the AM -- what I refer to as the AM carriers which ultimately arrived at credit for the AM.
But in doing that research, it appeared or became obvious that there were some specific animals that were on both, they were on the 3/15 inventory and they were also on the Exhibit A, I think is where the term double counting came from. I first became aware of it -- I was not aware of what the ultimate magnitude was going to be, but I became aware of it when we were looking at some specific animals for the purposes of the AM and I believe that Ray did, as well, either at that point -- Ray
Alger[], either at that point or later, in one or more of our meetings, he raised that issue with me that it appears that there needs to be some adjustment here. I don't remember the exact phrase, I may owe them some money, something like that.
Alger maintains that the parties never intended to reduce the $16 million purchase price to account for double counting. But "[t]he fact that one of the parties to a contract denies that a mistake was made does not prevent a finding of mutual mistake or prevent reformation." R & B Farms, Inc., 798 N.W.2d at 129. Alger acknowledged that he and Ozenbaugh discussed the issue. And while Ozenbaugh eventually was hired to consult for Sandpoint, I find Ozenbaugh's testimony credible regarding his conversations with Alger at the time when Ozenbaugh represented him.
I also note that the double counting implicates a significant amount of money. While it was anticipated that there would be some fluctuation in the value of the cattle inventory (due to births, deaths, sales, and purchases), there was no evidence presented to suggest the value of the cattle was expected to decrease by over $1,000,000. This amounts represents over 6% of the total purchase price, a material sum.
Alger separately argues that Sandpoint must bear the risk of the double-counting mistake because Sandpoint had "limited knowledge with respect to the facts to which the mistake relates but treat[ed] [its] limited knowledge as sufficient." Restatement (Second) of Contracts § 154(b) (1981). Sandpoint—acting through its agent, Widdowson—assumed control of the ranch's assets beginning August 1, 2008, even though the deal didn't close until November 19, 2008. During that time, Sandpoint did not conduct an inventory to determine the amount of cattle that had been double counted. According to Alger, Sandpoint's inaction during this time period precludes a finding of mutual mistake.
I disagree. For one, while the APA notes that Sandpoint took possession of the ranch on August 1, 2008, see APA section 2.4.3, in effect this meant nothing to the status quo: Widdowson at all times remained the ranch manager. As he characterized his position,
At that point in time, I didn't know if the transaction would be closed and final. You know, things go stray, so there could be a reality that I would still be working for Mr. Alger potentially if the deal went bad. And so it wasn't like the light switch went off on July 31 st for Ray and the light switch went on for the new owners on August 1st.TT, Day 3, pgs. 197-98, In. 21-25, 1-2. Under such circumstances, the legal control of the assets did not carry any real weight in the context of determining who should bear responsibility for the double counting. Alger remained the ranch owner until the deal closed, and Widdowson remained tasked with managing the ranch's operations. And the testimony taken together illustrates that while the parties understood, both prior and subsequent to the closing, that some double counting had occurred, neither appeared to appreciate the magnitude of the issue until it came up in the context of settling the AM carrier dispute almost two years later. Further, Alger financed a portion of the $10.8 million note himself. See TT, Day 3, pg. 130, In. 13-25 (testimony of Deutsch). Such self-financing suggests Alger contemplated continuing to interact with the new ownership in some capacity after the sale closed. And it at least partly explains Sandpoint's lack of urgency in determining the extent of the double-counting when it controlled, but did not yet own, the ranch.
For the above reasons, I find that Sandpoint has shown by clear and convincing evidence that the "mistake [was] common to both parties in reference to the instrument to be reformed, each party laboring under the same misconception about its instrument." R & B Farms, Inc., 798 N.W.2d at 129. The value of the double-counted cattle was $1,016,319.00, and I will credit that amount against the secured claim, as of the date of closing.
G. Interest Rate
Yet another dispute in this case is the appropriate interest rate to be charged on the outstanding unpaid balance. Arguably, there are at least three interest rates that could apply.
The APA, loan agreement, and promissory note provide that interest will accrue at 5%, simple interest, on all unpaid balances. There are two provisions that may result in an increase to that rate. The first is what has been commonly referred to as the forbearance loan provisions. See Promissory Note, ¶¶ 3-5. Essentially, these are provisions in the loan documents that allow Sandpoint to skip a payment, under certain conditions, have that payment deferred, and avoid being in default. The deferred payments will carry an interest rate of 8%. The remaining balance on the loan, other than the deferred payments, will continue to accrue interest at 5%.
There is also a provision in the loan documents for a default rate of interest. The promissory note states at paragraph 8:
Should Borrower . . . fail to make any payment of any installment or other sum within ten (10) days after the date when due, . . . the whole sum of principal and interest shall become immediately due at the option of the Lender and regardless of any prior forbearance. Interest shall accrue following any default hereunder at the applicable rate under the Note, plus five (5.00%) (or 500 basis points).See Exhibit 319 (Promissory Note). The above language indicates that the entire balance shall become due and payable at the option of the lender. The only evidence in the record concerning whether that option was exercised is language in the March 1, 2012, forbearance agreement. See Exhibit 329. In the recitals to that agreement the following statement appears in paragraph E:
Lender has provided to Borrower, Unlimited Guarantor and other parties to the Loan Documents written notice that Lender considers Loan and Additional Loans to be fully due and payable as a result of the continued existence of multiple uncured monetary and non-monetary events of default under the Loan Documents and under the terms governing the Additional Loans[.]The forbearance agreement goes on to provide in paragraph G that Sandpoint and its unlimited guarantors dispute the existence of several of the events of default and assert that the lender does not have any right to accelerate the amounts due and exercise its rights of default. It does not say, however, that Sandpoint and the unlimited guarantors contest that notice was given. The forbearance agreement is dated March 1, 2012.
Sandpoint argues that the entire debt continues to carry an interest rate of only 5%. It bases this argument on the premise that while certain payments were not made and arguably could be subject to the forbearance rate of 8%, the provisions in the loan documents have not been complied with in order to trigger any increased interest rate. Specifically, the loan documents envision that each time a payment is missed, the borrower (Sandpoint) will request forbearance from the lender (Alger), and the parties will execute a new promissory note for the amount of the missed payment with the increased interest rate of 8%. Since no action was taken by Sandpoint, other than to miss the payment, and no new notes were signed, Sandpoint contends that the interest rate remains at 5%.
So, the argument goes that if Sandpoint fails to make payments and does not invoke forbearance, that it would then be in default, but that the note does not provide for any increased interest rate in the event of default. This statement appears to run directly contrary to the terms of the promissory note, see Exhibit 319, which contains the language I quoted above. Under the terms of the promissory note itself, it appears that if Sandpoint had not invoked the forbearance provisions of the loan agreement and promissory note, that it would be obligated to pay 10% on the entire unpaid balance since at least the date of the forbearance agreement, March 1, 2012.
Alger has not asked for the default interest rate, but rather argues that it has been the course of conduct of the parties that the missed payments, which are alleged to total $1,350,000, carry the forbearance rate of 8%. In its proof of claim, it has computed interest on the unpaid balance aside from the forbearance payments at 5%, and the forbearance amounts at 8%.
Based upon the course of conduct in this case, I conclude that Alger's position will be adopted. That is, missed payments will accrue interest at 8% from the date the payment was due, but not made.
Based on the documents attached to Alger's declaration in support of Claim No. 6, see Doc. 264, it appears the missed payments were $600,000 on December 31, 2009, $600,000 on December 31, 2010, and $150,000 on December 31, 2011, for a total of $1,350,000.
While Alger could have invoked the 10% default rate since at least March 1, 2012 (and even earlier if notice of acceleration had been given at an earlier date), it appears to me that, based on my review of all the documents in this case, it was the consistent position of the parties that the forbearance terms of the loan agreement and promissory note would apply to the missed payments. I acknowledge that the literal terms and conditions of the forbearance agreement were not complied with in this case. However, it also appears to me that from the various documents and testimony that the parties consistently took the position that the missed payments carried the 8% interest rate from the date the payments were missed.
This assumes that notice was required to trigger the default rate of interest. The language quoted above indicates that if a payment is not made within ten days of the day when it is due, the whole sum of principal and interest shall become immediately due at the option of the lender and shall carry the default rate of 10%. I assume, without deciding, that the language that it becomes immediately due and payable at the option of the lender requires some type of notice of acceleration by the lender.
This conclusion is supported by the testimony and evidence relating to Ozenbaugh. Alger's accountant, Scott Kerr, testified that he prepared an accounting of the unpaid balances after meeting with Ozenbaugh and while Ozenbaugh was representing Sandpoint. See TT, Day 3, pgs. 31-32. The interest rate to be applied to the missed payments (8%) was supplied by Ozenbaugh based upon his understanding of the forbearance agreement. TT, Day 4, pg. 133, In. 3-7, 20-24.
Specifically, Ozenbaugh corroborated the fact that he met with Kerr and told him how to apply the payments, and what he believed Sandpoint owed Alger. Again, this was at a time when Ozenbaugh represented the Sandpoint entities. At the March 2014 hearing, Ozenbaugh testified:
Weidemann: In any event, you would agree with me that with respect to the forbearance amounts, that did have a higher percentage of interest at eight percent?
Ozenbaugh: It did. And the schedules that I've provided Scott Kerr would have indicated that.
TT, Day 4, pg. 133, In. 20-24. In sum, I conclude that based upon the course of conduct and the discussions of the parties, it was clearly the understanding of all concerned that the missed payments would carry the forbearance rate of 8%, regardless of the lack of strict compliance with the formalities of the loan agreement and promissory note. It appears evident that Sandpoint wanted to take advantage of the more lenient provisions of the forbearance agreement, as opposed to the much more draconian acceleration of the entire debt and default rate of 10%. It would be inequitable for Sandpoint to switch positions at this point, and it would open up a whole new set of issues revolving around when the note went into default, when notice of default was given (assuming notice was required), whether the amounts were accelerated, and when the 10% default rate was triggered.
In its post-trial brief, Sandpoint questions whether Alger is entitled to post-filing interest. Alger is entitled to post-filing interest and expenses of collection to the extent it is an over-secured creditor. See 11 U.S.C. § 506(b). When Alger filed its proof of claim (Claim No. 6), Sandpoint did not appear to contest Alger's status as an over-secured creditor and has, in fact, argued that Alger was adequately secured in various motions filed in this case, including motions for use of cash collateral. Presumably that position was based on Sims's cattle appraisal valuing the abandoned at cattle at roughly $8 million dollars. I have now concluded that Alger disposed of those cattle in a commercially reasonable manner and netted less than $3.5 million. No determination has been made as to what equity exists in the real estate and, so at this point, it is not possible to determine whether Alger is over-secured, and whether Alger is entitled to post-filing interest. Accordingly, my judgement in this case will include both a date of filing amount for the secured claim and an amount that accrues interest through the date of judgment, taking into account credit for the sales of abandoned cattle. To the extent a subsequent valuation determines that Alger was over-secured on filing and later became under secured, an adjustment to the allowed secured claim will be made at that time.
In conclusion, interest on the debt owed by Sandpoint to Alger on the outstanding balance of the $10.8 million note will be computed at 8% on the deferred payments (those payments being the ones outlined in the documents attached to Doc. 264) and 5% on the remaining debt as modified by the other adjustments (e.g., AM carrier cattle and double counting) as outlined in this opinion to date of filing. A separate amount will be determined for the debt owed as of the date of judgment, using the interest rates outlined above and taking into account the post-filing sales of the abandoned cattle.
To head off what will surely be another dispute in this case: I find at this point that the debtor can apply the proceeds from the disposition of the secured collateral first to the deferred payments and then to the balance on the remaining debt. The net effect will be that the outstanding balance will accrue interest from and after August 1, 2013, at the non-default, non-forbearance interest rate of 5% per annum.
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H. Miscellaneous Expenses
Under the APA, Alger was responsible for any pre-sale expenses that remained unpaid at the time of closing. See APA, section 1.4, Exhibit 317. Sandpoint has set forth and presented some evidence concerning certain payments made subsequent to the closing that should have been Alger's responsibility. These payments will be allowed as a set-off against the unsecured claim arising out of the APA. Specifically, the following are allowed: (1) a guarantee obligation of Sandpoint to Tailor Cattle Farms, $12,000; (2) guarantee obligation of Sandpoint to Double R Bar ranch, $42,750.00; (3) Sterling Hunter payment, $12,000.00; (4) Prairie dog extermination expenses, $2,862.15; (5) IRS payment, $3493.57; and (6) Stegeman Services payment, $10,045.51.
To the extent Sandpoint claims any other credits, those will be disallowed for failure of proof. Sandpoint indicates in footnote 6 of its post-trial brief that there were other items identified for which no proof was presented. See Doc. 514, pg. 9. Sandpoint claims that it reserves the right to seek further payment at a later date. However, those claims are disallowed. It was always my intent and the understanding of the parties that the hearing held in March 2014 was to be a final claims determination as to all pre-petition claims and credits between the parties. To the extent there are post-petition claims, they will be dealt with separately, either by a claims determination or through a Chapter 11 plan.
I. Summary
As to Claim No. 6, the secured claim filed by Alger, the $10,800,000.00 promissory note will be reduced, as of the date of closing, by $1,016,319.00 for the mutual mistake regarding double counting, and $835,669.51 for the AM carrier cattle settlement. This results in a balance on the promissory note of $8,948,011.00 (rounded to the nearest dollar). It is that starting number that will be used to determine the applicable interest accrued and against which credits will be applied for the payments and disposition of collateral for the purposes of determining the outstanding balances at the date of filing and the date of judgment as discussed above.
As to Claim No. 9, the unsecured claim, the previously allowed claim of $273,294.00 will be increased by the failure to make the payment for crop inputs of $250,000.00, for a total of $523,294.00. Credits and offsets against that amount will be allowed as follows:
| AM Cattle Feed | $314,980.60 |
| Taylor Cattle Farms | $12,000.00 |
| Double R Bar Ranch | $42,750.00 |
| Sterling Hunter | $12,000.00 |
| Prairie Dog Expenses | $2,862.15 |
| IRS Payment | $3493.57 |
| Stegeman Electric | $10,045.51 |
| TOTAL | $398,131.83 |
Deducting $398,131.83 from $523,294 results in an allowed unsecured claim (Claim No. 9) of $125,162.17.
J. Conclusion
Finally, prior to entry of a final judgment and determination of a final dollar amount for Claim No. 6, I will direct the parties to do the following within ten (10) days from the date of this order:
1. The parties are to identify if there are any issues that need to be resolved that have been omitted, and whether there has been any computational errors as a result of my review of the evidence in this case. This is not an opportunity to re-argue conclusions and issues that have been resolved, but only to avoid the necessity of a further amended judgment if there are any mathematical issues or obvious factual inaccuracies.
2. The parties shall meet and confer in an attempt to compute the amount owed on Claim No. 6, both as of the date of filing and as of today's date (with an amount for daily-accruing interest) in light of my determination of the various issues in dispute. This will be a strictly mathematical computation and, hopefully, the parties can reach an agreement as to an amount. In the event the parties are unable to do so, they shall advise me within 10 days, with specificity, as to the nature of the dispute and how each side computes the amount currently due and owing on the note.
3. The parties should begin discussions as to the valuation of the remaining collateral in an attempt to determine if Alger is over-secured and the amount of the claim that will have to be addressed in any proposed plan of re-organization. I anticipate setting a hearing by separate notice on a number of outstanding issues and motions. At that hearing, I will also conduct a status conference, and I anticipate discussing with counsel each side's intentions going forward, whether a valuation hearing is necessary to determine whether Alger is an over- or undersecured creditor, the time needed to formulate a plan, and other matters, as appropriate, that need to be accomplished to bring this case to a final resolution.
4. Upon receipt of an agreed amount as to Claim No. 6, or my resolution of any dispute between the parties, a final judgment will be entered fixing the amount of Claim No. 6.
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Michael J. Melloy, U.S. Circuit Judge
Sitting by Designatk