MEMORANDUM OPINION AFTER TRIAL ON THE MERITS IN SUPPORT OF JUDGMENT AND AWARD OF RELATED RELIEF
JAMES S. STARZYNSKI, Bankruptcy Judge.
This matter came before the Court for trial on the merits of the claims of AG NEW MEXICO, FCS, ACA ("ACA"), AG NEW MEXICO, FCS, PCA ("PCA"), and AG NEW MEXICO, FCS, FLCA ("FLCA") (collectively "Plaintiffs" or "AGNM") against Joe Bettencourt Borges ("Mr. Borges") and Maria Rocha Borges ("Ms. Borges") (collectively "Borges'" or "Debtors") and Debtors' Counter-claims against the Plaintiffs. For the reasons set out below, the Court will grant judgment and other relief in part to AGNM and to the Debtors, and will remand Adversary Proceeding 10-1170 to the state court from whence it was removed.
Procedural Background and Pleadings
Debtors filed a joint chapter 11 petition for themselves dba J & M Dairy. Case no. 10-12800. Maria Borges was dismissed from the case without prejudice for failing to obtain the requisite prepetition credit counseling. Main case, doc 92. She promptly filed another chapter 11 case, no. 10-14903, which was quickly substantively consolidated with the earlier filed no. 10-12800. Doc 113.
AGNM had filed a complaint for money due and for foreclosure against Borges and others (none of the latter, except Frank and David Borges, remain in the action), seeking to collect proceeds from the liquidation of the Borges' dairy herd and to collect on other collateral, and to foreclose on and sell a dairy facility and an adjacent farm. The action was filed in the Fifth Judicial District Court, County of Eddy, State of New Mexico (CV-09-610) ("State Court Action") on August 28, 2009. Debtors had answered and raised affirmative defenses and counterclaims against AGNM. Id. Debtors removed the State Court Action to this Court. Adversary Proceeding No. ("AP") 10-1170. Debtors filed an adversary proceeding against AGNM, seeking avoidance of AGNM's liens and turnover of the proceeds in the Court registry. AP 11-1012. Debtors also filed an adversary proceeding against AGNM and the National Milk Producers Federation dba Cooperatives Working Together
On September 6, 2011, the Court entered its memorandum opinion (doc 78) and order (doc 79) in AP 10-1170, granting partial summary judgment to Plaintiffs that all three plaintiffs hold a security interest in the funds in the registry of the Court and that PCA has a perfected secured claim in the funds. However, the Court declined to award the registry funds to AGNM because the issue of whether AGNM was owed anything at all was not and could not be decided by the summary judgment. In consequence, the $4 million remains in the registry of the Court in connection with AP 11-1105. Several additional motions for summary judgment were filed by the parties (AP 10-1170 docs 53, 55, 57 and 129), but the Court entered an order deferring ruling on those motions (doc 132). Thereafter the trial on the merits commenced May 21, 2012, with the presentation of evidence concluding on May 31. Closing arguments in the form of briefing concluded on July 16, 2012, at which time the matter was submitted.
As noted, in the State Court Action, and now in AP 10-1170 and the other proceedings, AGNM seeks a judgment establishing the debts owed to it and permitting it to foreclose or otherwise collect on its collateral. The collateral includes, according to the complaint, the proceeds of the bid which CWT accepted to take the dairy herd out of production
In response, Borges' deny many of the allegations of the complaint (mostly for lack of information and belief). AP 10-1170, doc 5, at 1-7. Borges' also raise affirmative defenses of unclean hands, failure to mitigate damages, waiver and estoppel, breach of good faith and fair dealing,
On May 21, 2012, the Court commenced an eight-day trial on the merits of the claims and counterclaims. The parties then submitted simultaneous closing arguments and responses to the closing arguments in writing. Docs 168 ("Borges Closing"), 169 ("AGNM Closing"), 180 ("AGNM Reply"), and 181 ("Borges Reply").
Plaintiffs are federally chartered agricultural lenders. PCA (Production Credit Association) and FLCA (formerly the Federal Land Bank) are wholly owned subsidiaries of ACA (Agricultural Credit Association). ACA is under the supervision of Farm Credit Bank of Texas ("FCBT"), headquartered in Austin, Texas.
Joe and Maria Borges were dairy farmers for decades, first in California and then in New Mexico. In 2006, the Borges' dba J & M Dairy in Artesia, New Mexico began dealing with AGNM.
On June 6, 2006, the Borges' dba J & M Dairy signed a promissory note to PCA — loan no. 216100056 (variously "Note 56", "Cow Note", "Operating Note", or "[Revolving] Line of Credit Note") — for a line of credit in the original principal amount of $4,750,000. AGNM exhibit A ("Ex. A"). That note was renewed by a note dated and signed July 13, 2007 in the amount of $5,575,000. Ex. B. That note in turn was renewed by a note dated and signed May 29, 2008 in the amount of $6,100,000. Ex. C. Loan 56 was continuously directly collateralized by over 7,000 cattle (mostly dairy cattle, plus their offspring and bulls), including any replacements, as well as by, among other things, all milk and milk proceeds, all crops including hay and other feed, the farm equipment and any accounts receivable. Commercial Security Agreement, dated June 6, 2006. Ex. G. The Borges' executed renewal security agreements on July 13, 2007, Ex. H, and May 29, 2008. Ex. I. The security agreements were perfected by filing a financing statement with the Secretary of State. Ex. J-1. Repayment of Note 56 was also collateralized by a Line of Credit Mortgage dated June 6, 2006 ("2006 Mortgage"). Ex. 15.
Also on June 6, 2006, the Borges' signed a promissory note to FLCA — loan no. 860090 (variously "Note 90", "Facility Note", "Real Estate Note") — in the original principal amount of $3,126,177. Ex. O. Repayment of Note 90 was secured by the June 6, 2006 mortgage. Ex. 15. The legal description attached to Ex. 15 covered much of the land owned by Borges'.
The core of the funding arrangement was the continual production of milk, enabled by advances on Note 56 for feed, payroll, utilities, etc., which advances were in turn paid down by the proceeds of the sales of the milk. Borges' sold their milk to the Dairy Farmers of America ("DFA") who twice a month sent a check jointly payable to Borges' and AGNM, which AGNM applied to the loans. These "milk checks" were applied first to make the monthly mortgage payment (Note 90), then the monthly payment on Note 60, then expenses and interest on Note 56, and finally to pay down principal on Note 56. The milk checks arrived every two weeks or so, and usually averaged $200,000 to $400,000. The checks were the primary cash flow of the entire dairy operation and the life blood of the arrangement with AGNM that funded the operation. With a total herd exceeding 7,000 milking cows, heifers, bulls and bull calves, the J & M Dairy was one of the largest in the state. In consequence, the receipt on a regular basis of "good sized"
During the first part of the decade, milk prices steadily rose as millions of people across the globe accumulated wealth and moved into the middle class, thereby creating heightened demand for dairy protein and causing milk prices to rise. However, with the worldwide financial crisis that caused millions of people to lose wealth and drop back out of the middle class, the demand for dairy protein fell off, causing a significant reduction in milk prices in the United States. That decline naturally adversely affected the economics of many
PCA began seeking more collateral from the Borges' or alternatively the relationship moving to another financial institution, due at least in part to its major exposure from a number of dairy related loans. At some point during this period Maria Borges decided to get out of the dairy business, and she communicated that thought to AGNM. AGNM claims that message was communicated in 2007; Debtors claim it was in 2008. Regardless, no later than the middle to end of 2008, both Borges' and AGNM were expecting the sale of the herd and the end of the dairy operation by Borges'. Ex. 28 (November 3, 2008 e-mail from FCB Texas to AGNM approving additional lending to Borges' but requiring downgrade in risk rating from "9A" to "11A" due to operating losses sustained by dairy and to Ms. Borges' decision to cease the dairy operations).
What the contents of Ex. 25 suggest is that in late October 2008 Ms. Borges would have been justified in thinking that AGNM wanted her to get the cattle sold (and she to be the one to get that done), and that AGNM was also expecting some sort of plan from her (perhaps with AGNM input) that would provide for the continuing assured paydown of the FLCA note, and that AGNM would cooperate in that process. This provides a context which may explain somewhat why Ms. Borges did not communicate with AGNM much about the proposed March 2009 Devine Farms transaction.
In December 2008, Ron Pietersma, a dairy broker who had worked with the Borges' previously, tentatively put together a transaction that would have resulted in the sale of the herd, but through no one's fault that transaction was never consummated.
The next transaction that the Borges' attempted was the one with Devine Farms 10, LLC, and Mr. Corley (Devine Farms and Corley are used interchangeably in this memorandum as appropriate). Mr. Corley did not have access to sufficient funds to purchase the herd, much less the entire dairy operation. So he and Ms. Borges made arrangements for the use of Borges assets to facilitate the sale of the herd, in an arrangement that bore some resemblance to a leveraged (partial) buyout. However, neither of them informed AGNM of any details until very shortly before the proposed closing of the arrangement.
Their arrangement began with Ms. Borges assigning the milk checks beginning March 1, 2009 to Corley. That is, the proceeds of milk sold to DFA starting March 1, which would result in a check about two weeks later, would, and did, go to Mr. Corley. The arrangement also included having Mr. Corley lease the dairy beginning about the middle of March, and using the dairy to both maintain the cows and milk production, sell off as much of the herd as necessary to pay AGNM enough to obtain a release of the rest of the herd. The sales that would make up the liquidation of the herd were to be through an escrow arrangement managed by a title company. With a payoff of about $6.1 — 6.3 million on Note 56, and a proposed purchase price of $7.6 million, Mr. Corley would be able to pay Ms. Borges about $1.3 million. That in turn would enable her to pay most of her accounts payable (she had large overdue accounts payable) and have funds left over to maintain a farming operation. The $7.6 million would also allow Mr. Corley (more accurately, Devine Farms) to keep some of the cows, which would be sent to the Devine Farms operation in Muleshoe, Texas. As of late February, Mr. Corley was claiming to have had as much as $5 million worth of cattle purchase commitments (presumably arranged with Messrs Faria and Craig) and in fact enough to permit Devine Farms to purchase the remainder of the herd. Exs. 70 and 71. Sometime after the completion of the sale and shipping of the herd, to take about a month, the temporary lease of the dairy would end. At that point it could be sold to retire more AGNM debt. And, with the sale of the herd, Ms. Borges expected that she and AGNM would reach an agreement on a lower interest rate on Note 90.
Although AGNM first learned of some deal in the making as early as February 2009 and began making inquiries and asking for details then, Ex. AA
As it was, Peggy Moncrief first received a copy of the proposed contract between the parties late on Tuesday, March 10, 2009, and immediately forwarded it to upper management that evening. Ex. BB. The proposed closing was to take place on the morning of Friday, March 13. Ms. Borges essentially gave AGNM a little more than 60 hours to react to, and hopefully cooperate with, the proposed arrangement, a critical part of which (the assignment of the DFA payments) had already been completed.
Although there is a considerable dispute between the two sides about the timing of delivery of payoff figures at that moment for both Loan 56 (about $6.3 million) and for the entire debt then owed AGNM (about $9.4 million), what is clear is that fairly quickly AGNM's upper management (which did not include Ms. Moncrief) decided to demand all the net proceeds from the sale of the herd. That decision was justified by when and what AGNM learned of the proposed (and partially completed) transaction with Devine Farms, which itself came against a background of, among other things, increasing distrust arising from the Bynum lawsuit and the allegations (made but certainly not proved) of someone trying to mislead AGNM with a fake contract. And the decision to require payment of all the proceeds to AGNM, together with the background that led to that decision, justified AGNM fully informing all the parties about what the complete Borges/AGNM debt picture was. The Court finds that Mr. Yoakum was credible in testifying about his concerns to protect and preserve AGNM's rights in the collateral to assure payment of the total debt owed AGNM, and in testifying that he was not trying to torpedo the deal.
Unfortunately, in another puzzling instance of stunningly poor communication, AGNM, having previously left the (correct) impression that it would release its lien on the cattle for (1) the receipt of funds to pay in full the Cow Note ($6.1 to $6.3 million) and (2) the receipt of the remainder of the net funds, it faxed a pay off figure, and apparently only one pay off figure, to Mr. Phil Brewer, who was consummating the transaction and orchestrating the closing on behalf Mr. Corley. The payoff was faxed the evening of Thursday, March 12, the day before the scheduled closing. That single pay off figure was for $9.4 million, far more than the $7.6 million that was the subject of the closing. In consequence, Mr. Brewer, apparently believing
In fact, that was not AGNM's position. A letter to Ms. Borges dated March 13 and hand-delivered to her that morning clearly stated otherwise. See Testimony of Dale Moorman, Bill Yoakum and Maria Borges.
That Friday morning, when everyone had gathered for the closing, Mr. Logsdon called Ms. Borges into another room at the title company and presented her with the letter from AGNM. Effectively Ms. Borges was told that, other than some relatively small items to be reserved to pay certain obligations and the allowance to her of certain non-closing proceeds — the monthly lease payment of $30,000 from Mr. Corley and the mid-March milk check which turned out to be $261,000, both of which by rights AGNM was entitled to receive — the proceeds of the sale were to go to AGNM in their entirety. Apparently that made the transaction entirely unworkable for Ms. Borges. She was extremely angry and stormed out of the meeting with Mr. Logsdon and headed back to the dairy. The closing, to the extent it might have taken place, collapsed and never did take place.
In the meantime, the proposed sale, looked at against the backdrop of the overall lending and collateral picture, had caused AGNM to examine its collateral position. It had discovered that the legal description attached to the 2006 Mortgage did not include all the real property which both AGNM and the Borges' appear to have intended to include in the mortgage at the time the mortgage was signed. Specifically it did not include 220 acres of farmland attached to the dairy facility and also used to grow crops for feed. To remedy this AGNM took the original mortgage
Subsequently Mr. Corley approached AGNM with a conditional offer to purchase the herd and all the milk checks from March 1, 2009 forward for $6.8 million. AGNM was willing to accept this offer, but Mr. Corley could not come up with that large a sum (at least as quickly as AGNM needed), so there never was a sale of any sort to him.
What happened after that was a painful denouement. Note 56 was extended several times, through July 1, 2009. This was done in major part to permit further lending in order to preserve the collateral (the dairy herd); regulations applicable to AGNM allowed further advances even if a loan was over the credit limit but did not allow further advances for matured or past due loans. AGNM, faced with a lending limit on this loan that had sometimes been reached or exceeded, repeatedly loaned just enough money (and sometimes not enough) to feed the cattle, to permit Ms. Borges to make payroll (though not both at the same time) and to cover some other expenses. Almost every time the process required documentation from Ms. Borges to be delivered in Roswell, the signing by Ms. Borges of an optional advance agreement, and a waiting period before delivery of the funds that threatened to result in hungry cows.
It was during this time that AGNM informed Ms. Borges that it was raising (retroactively, from January, 2009) the interest rate from 3.55% per annum to 6.01% on Note 56 (but not on Notes 60 and 90, which in any event were not at all in default) and demanded her assent to that change as a condition of continuing to receive funding for feed and payroll. She consented to the demand. The demand for the additional interest was based on AGNM's alleged declaration of a default on Note 56, purported to have taken place on December 12, 2008
In April 2009 Ms. Borges and AGNM learned of a CWT program to pay dairies to stop producing milk by getting out of the business (and staying out for at least a year) and to send their cattle to slaughter. Ms. Borges with the emphatic approval
Ms. Borges then arranged with Lewis Land & Livestock, Ltd., Co. through Steve Lewis ("Lewis") to transport the cattle to the packing house and obtain payment to be delivered to AGNM, much the same as he had done before. In this instance, however, AGNM, contrary to the arrangements it usually agreed to, insisted initially that any checks come first to it, and it would then pay the trucking costs and the commissions to Mr. Lewis. When Mr. Lewis hotly refused, AGNM insisted instead on further arrangements which it asserted were necessary in light of the fact that this was a CWT herd-retirement sale. This caused Mr. Lewis to double his commission from $1.00 per hundredweight to $2.00 (aside from the trucking bills), resulting in an extra charge, essentially paid by Borges', of [$78,352.80 - $39,176.40 =] $39,176.40.
By July 1, 2009, the status was that the cattle were mostly all gone
Although AGNM finally started receiving again the milk checks, with the herd gone, that source of income ended, with the final payments on all three notes from the milk checks being made on July 20, 2009. In the meantime, a dispute had arisen between Borges' and AGNM concerning the CWT proceeds; Ms. Borges insisted that the commercial security agreement did not give AGNM a lien on those proceeds
On August 14, the Cow Note was put on nonaccrual status. Then on August 28, 2009, as threatened, AGNM commenced this foreclosure action. That action proceeded until the Borges' filed their joint chapter 11 petition on June 1, 2010, after which the foreclosure action was removed to this Court by Borges'. It was after that that the CWT proceeds were transferred into the registry of this Court, where they remain today. In the meantime, of the diverted DFA proceeds (the milk checks), AGNM has received the approximately $90,000 which DFA had originally interpleaded into the Fifth Judicial District Court. The initial $65,000 that went to Mr. Corley was kept by Mr. Corley and therefore was not applied to reduce the debt owed on the Cow Note.
Relations between AGNM and members of the Borges family did not get any better. AGNM suspects that someone from the Borges family either stole, or learned about but did not immediately report the theft of, irrigation sprinklers and related equipment, and refrigeration units and copper tubing from the dairy sometime during the winter of 2009-2010, in contravention of AGNM's lien rights. At trial it appears that Borges' were arguing that someone but not the Borges' stole the equipment and copper tubing, and the Borges' produced a copy of a police report to show that in February 2010 they reported such a theft.
The events of the week of March 9-13, 2009, are the epicenter of the primary (but far from only) dispute between the two sides. In essence Debtors are arguing that if AGNM had cooperated with the Devine sale, AGNM would have ultimately been paid in full and Debtors would have been able to survive financially. AGNM is arguing that implementing or consummating the proposed transaction would have put at risk AGNM's chances of full repayment and that it therefore acted reasonably to protect itself. The Court finds that AGNM has the better argument.
In brief, the Court makes two rulings that resolve the basic issues underlying this case. First, the Court finds that the inadvertent failure to include the 220 acres in the legal description attached to the 2006 Mortgage was not remedied by AGNM's purported "rerecording" of the corrected mortgage in 2009. AGNM reasonably was worried about whether the 220 acres would continue to collateralize its loans, a worry that turns out to have been justified by this Court now ruling that Borges' as debtors in possession had the right to exercise the strong arm powers granted them by section 544(a)(3) to void any purported lien on the 220 acres.
Second, the Court finds that the Devine sale as structured would more likely than not have resulted in the liquidation of the herd for the anticipated $7.6 million but that AGNM's collateral position left it no room (in the course of legitimately looking out for its own interests) to give up any of its collateral without risking having some of its debt become unsecured.
Avoidance of the lien on the 220 acres
Ms. Borges contends that, as the debtor in possession, she is entitled to avoid the Corrected Mortgage pursuant to 11 U.S.C. § 544(a). AGNM asserts that Ms. Borges cannot avoid the Corrected Mortgage because she had constructive notice of that document.
Under Section 544(a), a bankruptcy trustee or debtor in possession has the power to avoid certain transfers of real property by the debtor. More specifically,
The power to avoid transfers under 11 U.S.C. § 544(a) is known as the "strong arm power." In re Colon, 563 F.3d at 1173 (internal citations omitted). The strong arm power arises regardless of whether the trustee or debtor in possession has actual knowledge of the mortgage or lien. See 11 U.S.C. § 544(a) ("without regard to any knowledge of the trustee"); McCannon v. Marston, 679 F.2d 13, 15-16 (3rd Cir. 1982) (distinguishing actual "knowledge" from actual "notice"). Essentially, "the bankruptcy code imposes a fiction on the debtor-in-possession, who likely has actual knowledge of any transfers the debtor made, in order to give the... debtor-in-possession ... the ability to avoid certain transfers for the benefit of the bankruptcy estate." In re Crowder, 225 B.R. 794, 796 (Bankr.D.N.M.1998). To determine whether a debtor in possession qualifies as a bona fide purchaser under Section 544(a)(3), the Court must examine whether the debtor in possession had constructive notice of any encumbrance under applicable state law, regardless of whether the debtor in possession had actual knowledge of the encumbrance. In re Colon, 563 F.3d at 1173.
Under New Mexico, a bona fide purchaser of real property who does not have notice of an encumbrance takes the property free of the encumbrance. See N.M.S.A.1978 § 14-9-3 (1990) ("No deed, mortgage or other instrument in writing not recorded ... shall affect the title or rights to, in any real estate, of any purchaser, mortgagee in good faith or judgment lien creditor, without knowledge of the existence of such unrecorded instruments.").
Despite the rather broad definition of constructive notice under New Mexico law, a mortgage must nonetheless be properly recorded in order to provide constructive notice to any prospective purchasers. Pursuant to N.M.S.A. § 14-9-1 (2003), "[a]ll ... mortgages ... shall be recorded in the office of the county clerk of the county or counties in which the real estate affected thereby is situated." Before a mortgage can be recorded, it must be properly acknowledged. See N.M.S.A. § 14-8-4 (2011). Thus, an unacknowledged mortgage cannot provide constructive notice to a bona fide purchaser, notwithstanding the fact that it appears in the county land records. See N.M. Properties, Inc. v. Lennox Ind. Inc., 95 N.M. 64, 65, 618 P.2d 1228, 1229 (1980) (finding that unacknowledged instruments may not be treated as recorded and/or provide constructive notice to good faith purchasers); In re Crowder, 2007 WL 7689183, *4 (Bankr.D.N.M.2007) (finding that an unacknowledged document was not binding against prospective purchasers because it was ineligible for recording).
This Court addressed the issue of constructive notice in the context of 11 U.S.C. § 544(a)(3) in Jesko v. Bank of America, NA (In re Jesko), Adv. No. 04-1166 (Bankr.D.N.M.2006). There, the bank sought to enforce a mortgage from a trust. However, the mortgage was acknowledged by the trustees in their individual capacities and not as trustees of the trust. The Court found that under New Mexico law, an improperly acknowledged mortgage is considered unrecorded. Because such a mortgage is treated as if it does not appear in the county land records at all, the Court concluded that it cannot provide constructive notice to a bona fide purchaser. Id. at p. 11-12.
AGNM argues that the Corrected Mortgage was acknowledged because the 2006 Mortgage and the Corrected Mortgage are merely two versions of the same document. AGNM believes the acknowledgement contained in the 2006 Mortgage satisfies the acknowledgement requirement as to the Corrected Mortgage. The Court disagrees. First, the two documents are not the same; they contain distinctly different legal descriptions of the property. Second, the New Mexico recording statute is quite broad and requires each and every instrument to be acknowledged before it is recorded. See N.M.S.A. § 14-8-4 ("Any instrument of writing, not duly acknowledged and certified, may not be filed and recorded, nor considered of record....") (emphasis added). If the Court were to accept AGNM's argument that the acknowledgement in the 2006 Mortgage fulfilled the requirement to acknowledge any associated documents under N.M.S.A. 14-8-4, parties could simply modify and rerecord a mortgage without the knowledge or consent of other parties to the agreement. This is not consistent with the law regarding unilateral modification of mortgages and other contracts. See, e.g., 17A C.J.S. Contracts § 545 ("Generally, one party may not unilaterally modify a contract; mutual assent is required."); Blades v. Wells Fargo Bank NA, 2012 WL 2885133, *2 (2012) (a deed could not "unilaterally modify [a] mortgage agreement because... [d]efendants did not consent to any modification").
AGNM also argues that the Change of Ownership of Water Rights form, which was executed on the same day as the 2006 Mortgage, provided constructive notice that AGNM had an adverse claim to the additional 220 acres. AGNM contends that any prudent prospective purchaser would inquire further as to the nature and extent of the property pledged
Whether AGNM Can Foreclose on the Additional 220 Acres
AGNM contends that it entitled to foreclose on the entire 550 acres of the Property because the Corrected Mortgage became effective on the date it was recorded (March 13, 2009). Having concluded that Borges is entitled to avoid the Corrected Mortgage under 11 U.S.C. § 544(a)(3) because the Corrected Mortgage was never acknowledged and/or recorded, the Court need not address this argument.
It is undisputed that the 2006 Mortgage was properly acknowledged and recorded with the Clerk of Eddy County, New Mexico. The Court therefore finds that AGNM is entitled to foreclose on the 2006 Mortgage, and in particular the 337 acres of the Property described therein. For the reasons stated, AGNM is not entitled to foreclose on the additional 220 acres of the Property described in the Corrected Mortgage.
Overall reasonableness of AGNM's actions
AGNM argues that the proposed sale to Devine Farms would not have worked because it left AGNM without control over its own collateral and because Corley never had the money to purchase the herd in any event. First, the escrow arrangement was designed specifically to solve the control problem. AGNM's objection that it had never had its cattle collateral sold through escrow does not negate the security of that device. Indeed, if AGNM has ever participated in a real estate transaction, it will have used an escrow process with the title company. None of AGNM's lien on any cattle would be released unless AGNM was assured of receiving the proceeds, and none of the cattle were leaving the dairy until all the cash for all the cattle was in escrow. And AGNM routinely allowed Borges' cattle to be shipped off and sold subject to being paid later; the Lewis transaction is but one example. And there is no reason to think that AGNM would have refused to permit the sale of any cattle unless they were all being sold at one time. AGNM Ex. E is replete with examples of sales of some but not all of the cattle. But the most telling argument against AGNM's position is that it was willing to allow the Corley transaction to take place, provided that it received all the proceeds. The Court seriously doubts that the claimed concern about an escrow arrangement not being typical was any more than an after-the-fact attempt to justify its actions.
However, the reduction of the debt by the $6.3 million rather than $7.6 million would have left AGNM owed approximately (9.4 - 6.3 =) $3.1 million rather than (9.4-7.6 =) $1.8 million. With both the herd and the milk proceeds gone (no cows = no milk = no milk checks), AGNM's remaining collateral would have been the dairy and the farm less the 220 acres that were not explicitly covered by the mortgage. In consequence, AGNM's actions to collect the maximum amount it could from the collateral it indisputably retained rights in were reasonable, and thus the affirmative defenses or counterclaims that require some sort of malfeasance or misfeasance on the part of AGNM cannot stand.
The form 1100 report serves as an AGNM status report on a borrower's loans. Ex. 42 is one such report dealing with real estate, dated January 1, 2009, and reports that based on a December 22, 2008 appraisal, the value of the dairy and the other real estate is $5.35 million, securing repayment of the Note 90 debt at that time of $3.01 million, resulting in equity of about $2.34 million at that time. That appraisal appears not to have been entered into evidence.
The Court is a bit skeptical about whether AGNM genuinely believed the in value represented on the report, since in these circumstances, with AGNM concerned about maintaining its borrowing base with FCBT, it would have wanted to show as strong a collateral position as possible, even if the Borges' loans were risk rated at "11".
That in turn leads the Court to wonder about the reliability of the December 2008 appraisal, and the reports based on it. In consequence, the Court believes that there is some utility in relying at least partly on the May 18, 2006 appraisal (Ex. W), since it would have been generated in circumstances more conducive to accuracy. That appraisal had valued the dairy and land (including improvements) at $4,450,000. Given that the 2006 appraisal was almost three years old when this sale proposal suddenly arose, at a time when there was considerable turmoil in the financial markets, a recession going on, depressed milk prices but increasing crop prices, AGNM could reasonably wonder how accurate the 2006 appraisal continued to be. That of course would be a reason to obtain a new appraisal.
Nevertheless, assuming that the dairy and real estate continued to have a value of no less than $4,450,000, a remaining debt of $3.1 million (as of mid-March 2009) would have yielded a loan to value ratio of 1 to 1.44, whereas a remaining debt of $1.8 million would have yielded a loan to value ratio of 1 to 2.47. Even in stable economic times, a loan to value ratio of 1 to 1.44 for real estate (as opposed to, say, money market funds or certificates of deposit) is not especially secure; in the parlous times of the spring of 2009 during which AGNM
Add to that the subsequently justified concern about the status of its claim to the 220 acres as collateral for its loans. As noted, the land that was explicitly described in the legal description attached to the original mortgage, Ex. R, excluded 220 acres of farmland. Thus, AGNM would have been looking at the possibility that the total real estate covered by its mortgage was about 337 acres instead of 557 acres. That might well have reduced the value of its collateral by about (220 ÷ 557 =) 40%, resulting in a potential appraised value of ($4,450,000 * .6 =) $2,670,000. That would leave a collateral value of $2.67 million to repay $3.1 million. AGNM could find itself with a negative loan to value ratio.
In summary, then, AGNM was acting reasonably in attempting to protect its collateral position by not agreeing to permit the Borges' to keep $1.3 million or so of the sale proceeds. Thus, any cause of action that requires a finding that AGNM was acting in bad faith by insisting on receiving all the proceeds must fail. That would at a minimum apply to the counterclaims of lack of good faith and fair dealing (counter claim count 2) and prima facie tort (count 10).
The Court also finds that at no time did AGNM promise to accept $6.3 million from the sale of the herd, or indeed any amount less than the full sale proceeds. AGNM did promise to allow Ms. Borges to sell the herd; indeed, encouraged and even insisted on it. But that fact by itself does not require a conclusion that AGNM agreed to take less than all the proceeds. First, as explained above, it had no obligation to take less than all the proceeds. It could, and ultimately did, insist reasonably that it receive all the proceeds. If that is the case, then leaving the Borges family and others with the impression that it would accept less than all the proceeds of the sale and then refusing to do so, cannot create AGNM liability. That is, if AGNM had no obligation (whether as part of good faith and fair dealing, or avoiding prima facie tort, or on whatever ground) to accept less than all the proceeds, then it cannot be found to have acted unreasonably
Beyond that, the evidence is simply not there that AGNM acted unreasonably in the circumstances. Although AGNM was insisting that Ms. Borges sell the herd and liquidate the operation to pay off her debt to AGNM, the record is clear that Ms. Borges did not inform AGNM of the proposed sale arrangements, and particularly of the need for AGNM to give up $1.3 million of its collateral, until shortly before the proposed closing of March 13. That left very little time for AGNM to fully assess its position and determine whether the proposed sale arrangements conformed with its legitimate interests.
And that is without even taking into account Ms. Borges's unilateral assignment of the milk checks to Corley without informing AGNM at the time, much less getting AGNM's agreement. AGNM made it eminently clear how heavily they depended on the arrival of those checks regularly. Indeed, Ex. E shows that in 2008 and 2009, a stream of checks, most for about $250,000 or more, arrived about once every two weeks, constituting the major source of repayment of all the loans. That stream was quite regular except when it was interrupted as a result of the assignment to Mr. Corley effective with the checks that would be arriving on March 17, 2009 and afterward. The Court does not find that Ms. Borges was acting in bad faith or trying to conceal anything from AGNM, only that in her determination to work out of her deep financial problems, she was less than meticulous about keeping her lender fully and immediately advised of everything that she planned to do and that she did do.
The net result was that AGNM found itself faced with (1) the completely surprising loss of a huge source of repayment and (2) a proposal for the disposition of another huge source of repayment part of the proceeds of which it was expected to simply give up. Even if AGNM's collateral position were so extravagant as to require it, reasonably, to agree to the proposed sale and its terms (decidedly not the case, as explained above), the shortness of notice would have justified AGNM in defensively insisting on all the proceeds of the collateral from the closing or, alternatively, a delay in the closing until it could accurately assess its complete position.
Further, there is the claim underlying all of this that by insisting on taking all the proceeds of the sale of the herd, AGNM effectively would have left Ms. Borges for a period of months (until crops could be harvested and sold in late summer or fall 2009) without any cash whatever to pay the mortgage, to pay any other creditors or to support herself. This assessment of the consequences of AGNM's actions seems to be accurate. But it does not lead to a conclusion of liability on the part of AGNM. As cold as that result might be, the fact is that AGNM had no obligation to put any part of its recovery at risk in order to in effect provide support for Ms. Borges or to assure that her other creditors were paid. Ms. Borges has cited no authority that holds otherwise, and the Court is not aware of any either.
With the foregoing in mind, the Court now turns to the various counterclaims asserted by Borges', and then subsequently addresses more briefly the asserted affirmative defenses.
1. Breach of contract
Borges' allege that AGNM breached its contracts with them in several ways, including failure to apply payments per the terms of the contract, arbitrarily increasing the interest rate on the Operating Note, and failing to reduce the interest rate on the dairy facility. They claim damages, including lost interest and other amounts to be proved.
A contract is a legally enforceable promise. UJI 13-801 NMRA. To be legally enforceable there must be an offer,
If there is no contract, there can be no cause of action for a breach of contract. Joseph E. Montoya and Assoc. v. New Mexico, 103 N.M. 224, 226, 704 P.2d 1100, 1102 (1985). See also Healthsource, Inc. v. X-Ray Assoc. of New Mexico, P.C., 2005-NMCA-097, ¶ 19, 138 N.M. 70, 77, 116 P.3d 861, 868, cert. denied, 2005-NMCERT-7, 138 N.M. 146, 117 P.3d 952.
A plaintiff must prove the existence of a contract and its breach before being awarded any damages. Naranjo v. Ortiz, 94 N.M. 393, 394, 611 P.2d 216, 217 (1980). A plaintiff must also prove that any conditions precedent to the contract have been performed. Id. See also Western Commerce Bank v. Gillespie, 108 N.M. 535, 537, 775 P.2d 737, 739 (1989):
and Restatement (Second) of Contracts § 224 (1981) ("A condition is an event, not certain to occur, which must occur, unless its non-occurrence is excused, before performance under a contract becomes due.")
A. "Funds Held Account"
Borges' argue that AGNM, by putting receipts from collateral into a "Funds Held" account ("FH account")
As part of its accounting on Note 56, AGNM began maintaining the FH account in February 2009. Ex. E at 87-88. On February 17, 2009, AGNM received $200,000 from the sale of some heifers. It promptly disbursed the identical amount two days later, on February 19, to pay for feed.
None of the funds in the account have ever been applied to reduce the balance owed on the Cow Note. On April 21, 2010, counsel for AGNM e-mailed Borges' counsel saying that AGNM had determined that $320,000 of the funds in that account were no longer needed to pay expenses related to the collateral, and asking counsel's consent to apply the $320,000 to the debt. Ex. KK. Inexplicably, there was no response from Borges' counsel. Then, on June 1, Borges' filed their chapter 11 petition, and AGNM calculated that the automatic stay prevented it from applying the funds without obtaining relief from the stay.
AGNM asserts that it had the right to maintain the FH account based on the Voluntary Advance Conditional Payment Account Agreement ("VACP") (Ex. 17). The Court disagrees.
The VACP loosely speaking is a device that establishes a sort of savings account in which a borrower can deposit funds with AGNM, which funds are to be held by AGNM, at interest, and then applied to future loan repayments when the date comes to make those loan payments. Alternatively, the borrower can withdraw the funds from the "savings account". Two aspects of the VACP are significant in this context: first, AGNM is supposed to pay interest, see ¶¶ 6 and 7, and second, it is the borrower who puts funds into the account. ¶ 4.
Joe and Maria Borges executed the VACP on June 6, 2006, at the same time they were signing the three promissory notes. But while the VACP requires that interest be paid at a rate less than the interest rate on PCA Note 56, no interest rate is specified. This suggests that the VACP was executed simply as part of a package and little thought was given to it.
More to the point, deposits into the VACP are to be made by the borrower,
In consequence, the Court finds that the amounts received from August 2009 through October 2009 should have been applied to the Cow Note in the amounts and on the date each was received.
The bankruptcy petition was filed on June 1, 2010. AGNM's proof of claim 16-1 (Exhibit 274) for Note 56 lists a principal balance of $4,915,949.37 and accrued interest of $276,555.51 and "receivables" of $58,521.23 (presumably attorney fees, insurance, taxes, and similar expenditures).
The Borges' accountant expert report, Exhibit 285, Part 5-C (Bates # 021760) details cumulative interest accruals at 6.01% on the daily balances in the funds held account through September 24, 2009 and 6.51% from then to May 21, 2012. May 21, 2012 is 720 days after the petition date. The Court will therefore back out 720 days of accrued interest to determine the amount accrued on the petition date. The Court will also adjust the per diem postpetition.
720 days/365 * 6.51% * $399,985.80 = $51,364.75 postpetition
Part 5-C lists interest to May 21, 2012 of $68,333.47. Subtracting the $51,364.75
B. Increased interest rate on Note 56
AGNM retroactively increased the interest rate on Note 56 to 6.01% effective as of January 1, 2009
Nothing in the record indicates that this CFR was ever complied with. Furthermore, this requirement cannot be waived by a borrower except in certain circumstances not applicable here. See 12 CFR § 617.7010 (2005). Therefore, the Court will adjust the interest accrued to the date of the petition, and the per diem postpetition.
Exhibit 285, Part 5, page 2 (Bates # 021756) lists interest accrued to the petition date of $445,496.95 based on the 6.01% and 6.51% rates. Exhibit 285, Part 5-B, page 2 (Bates # 021759) lists interest accrual to the petition date of $238,581.52 based on the 3.55% rate. This difference, $206,915.43 should be subtracted from the interest accrued on the proof of claim. It also shows that the daily per diem would be $478.13.
The overall impact of the "funds held" account and the reduced interest rate can be summarized as follows: AGNM's proof of claim for loan 56 principal should be reduced by $399,985.80 to $4,515,963.57. Interest accrued but unpaid should be reduced by [$16,968.72 + $206,915.43 =] $223,884.15 to $52,671.36. Accounts receivable is increased to [$58,521.23 + $45,367.86 =] $103,889.09. The accrual of interest post-petition should be reduced to [$478.13-$38.90 =] $439.23.
C. Failure to reduce interest rate on Note 90
Ms. Borges repeatedly invokes the "Two-Step Plan" as a major basis for its claims against AGNM. The Two-Step Plan was that "(1) the Borgeses would sell the cattle and pay the Cow Loan; and, (2) the Facility Loan would be restructured with a lower interest rate and a change
Just as clearly, a condition precedent to any alleged restructuring agreement was the sale of the cattle and payment of the Cow Note. Id. The last of the cows were not sold and paid for until October 2009. Ex. E at 87 (receipt on October 6, 2009 of $191,874.89 from Lowell Craig for "363 hd"). Even then the Cow Note was not paid off, due to the dispute over the CWT funds. Then, on October 28, the foreclosure action was filed. Thus, and quite unfortunately, things never got to the stage where the parties were obligated even to talk about the Facility Note.
In summary, there was no agreement to restructure the Facility Note. And even if there had been, the condition precedent of the cattle sold and the Cow Note paid off was never met. As a result, much of Borges' argument for AGNM liability has no factual predicate.
2. Breach of Obligation of Good Faith and Fair Dealing
Borges' argue that AGNM wrongfully withheld benefit of the Borges contracts from the Borges', and that conduct was detrimental, it constituted a deliberate disregard of potential harm to the Borges', and that it was without just cause or excuse. Borges' further argued that the conduct caused damages, including lost sale proceeds, lost lease payments, lost operating expense reimbursements, lost milk proceeds, lost interest income, lost CWT payments, lost use of proceeds, lost profits, accrual of interest, attorney fees and costs for pursuing recovery of property from DFA, Devine and Corley (the milk checks), the expense of an increased commission to Mr. Lewis for getting the herd slaughtered; and that the conduct generated potential liability to Devine and to DFA (again, the milk checks).
The Sanders court also emphasized that the covenant cannot be used to override express terms in the contract. Id. ¶ 27, 144 N.M. at 456, 188 P.3d at 1207. And, it stated that a court will not apply the implied covenant of good faith and fair dealing to add an omitted term to a contract when those terms are not necessary to effectuate the parties' agreement. Id. ¶29, 144 N.M. at 456, 188 P.3d at 1207.
What is relatively clear from a review of all the evidence is that there was no breach of good faith or fair dealing.
And to be clear, the Court rejects the claim that AGNM hoped to torpedo the Corley transaction with Ms. Borges in order to obtain the cattle, sell them for a higher price, and at the same time realize the full value of the real estate pledged to it, so as to recover as much as $14 million for a $9.4 million debt. That scenario is incredible if for no other reason than that AGNM and its lender FCBT were quite worried about whether the loans would be repaid in full. That was one of the reasons the loans were rated "11".
It is worth noting that the awful financial temblor that so suddenly plunged so many people (and nations) deeply into debt caught the Borges' as well. The drastic fall in milk prices coupled with the equally drastic rise in commodity (feed) costs left a high-quality dairy incurring huge and ongoing operating losses. Ex. 38 (showing negative debt service margin of $2,561,000 for CY 2008 for the J & M Dairy).
In consequence, the counterclaim for breach of the covenants of good faith and fair dealing will be dismissed.
3. Promissory Estoppel
Under the theory of promissory estoppel, "[a] promise which the promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise." Strata Prod. Co. v. Mercury Exploration Co., 121 N.M. 622, 627, 916 P.2d 822, 827 (1996) (citing Restatement (Second) of Contracts § 90(1) (1981)).
In order to maintain a claim under the theory of promissory estoppel under New Mexico law, the movant must prove the following elements:
Magnolia Mountain Ltd., Partnership v. Ski Rio Partners, Ltd., 139 N.M. 288, 295-296, 131 P.3d 675, 682-683 (Ct.App.2005) (internal citations omitted). As long as each element is present, the promisee need not suffer "an immediate and identifiable economic loss." Strata Prod. Co. v. Mercury Exploration Co., 121 N.M. at 628, 916 P.2d at 828.
Borges relies on the same set of operative facts to support both her UPA
As the Court previously explained, there is no evidence that AGNM made any actual promises with regard the payoff amount or interest rate of the facility loan. Instead, the parties engaged in a series of negotiations. It is well settled that such indefinite statements cannot serve as the basis for an "actual promise" under the theory of promissory estoppel. See 31 C.J.S. Estoppel and Waiver § 117 ("[P]romissory estoppel cannot be based on preliminary negotiations and discussions.").
The Tenth Circuit Court of Appeals has addressed the question of whether statements made during preliminary negotiations can serve as the basis for a promissory estoppel claim. In Brown v. Royal Maccabees Life Ins. Co., 137 F.3d 1236 (10th Cir.1998), buyers of life insurance policies sued the insurer after the policies they received differed from the computer-generated illustration used to sell the policies.
The Court is convinced that AGNM did not make any actual, definite promises regarding the facility loan or the proceeds of the cattle sale. As such, Borges cannot maintain a claim under the theory of promissory estoppel.
In addition, promissory estoppel, while not requiring an immediate and identifiable economic loss, still requires some sort of injustice that needs to be avoided if the doctrine is to be applicable. In this case, all the work that Ms. Borges did (some of it behind the back of AGNM, such as the assignment of the milk checks) did not give her the right to deprive AGNM of the net proceeds of its collateral. Indeed, applying promissory estoppel here to in effect rule that AGNM had to give up $1.3 million of proceeds would cause injustice (to AGNM) rather than prevent it (to Ms. Borges).
Count three of Borges' counterclaim will therefore be dismissed.
4, 5 and 6. Interference with Contract generally
New Mexico recognizes a cause of action for tortious interference with contractual relations. El Dorado Utilities, Inc. v. Eldorado Area Water and Sanitation District, 2005-NMCA-036, ¶ 24, 137 N.M. 217, 222, 109 P.3d 305, 310. (Citations omitted). To establish liability for intentional interference with Contract under New Mexico law, the plaintiff has the burden of showing that (1) the defendant had knowledge of the contract between plaintiff and a third party, (2) performance of the contract was refused, (3) the defendant played an active and substantial part in causing plaintiff to lose the benefits of the contract (4) damages flowed from the breached contract, and (5) the defendant induced the breach without justification or privilege to do so. Bogle v. Summit Investment Co., LLC, 2005-NMCA-024, ¶ 20, 137 N.M. 80, 88, 107 P.3d 520, 528. (Citing Ettenson v. Burke, 2001-NMCA-003, ¶ 14, 130 N.M. 67, 17 P.3d 440.) See also Deflon v. Sawyers, 2006-NMSC-025, ¶ 16, 139 N.M. 637, 643, 137 P.3d 577, 583. (Same, except stating that element (2) was "Plaintiff was unable to fulfill her contract obligations".) (Citing Ettenson). The "without justification or privilege" element can be met by demonstrating that the defendant's actions were done through improper means or with an improper motive. Bogle, 2005-NMCA-024, ¶ 21, 137 N.M. at 88, 107 P.3d at 528. "Improper means" can be tortious behavior or any "predatory" behavior based on standards in a trade or profession. Id., 137 N.M. at 89, 107 P.3d at 529. As to "improper motive," the New Mexico courts have recognized that the alleged tortfeasor may have more than one motive for his or her actions. See Fikes v. Furst, 2003-NMSC-033, ¶ 22, 134 N.M. 602, 609, 81 P.3d 545, 552 ("[T]he improper motive need not be the sole motive.") (Citing Restatement (Second) of Torts § 767 cmt. d). If one is protecting their own legally protected interest which they believe may be impaired or destroyed by performance of the contract, they are privileged to interfere. Id. ¶ 23 (Citing Speer v. Cimosz, 97 N.M. 602, 606, 642 P.2d 205, 209 (Ct. App.1982)). "The inquiry, in the end, should be to determine the party's primary motivation for the interference. If it was primarily improper, then the person has no privilege. If it was primarily proper, then liability should not attach." Id., 134 N.M. at 609-10, 81 P.3d at 552-53.
The portion of the legal standard most applicable to reject Borges' argument is that "defendant induced the breach without justification or privilege to do so." As noted already, AGNM had a very legitimate fear that giving away $1.3 million in proceeds might leave it partially unsecured. AGNM was justified and privileged to assert its right to receive all the net sale proceeds.
4. Interference with Devine Farms Contract
Briefly Borges' argue that AGNM knew of the Devine contract, that the Borges' were unable to fulfill their obligations under contract because AGNM had an active and substantial part in causing them to lose the benefits of the contract, and that AGNM induced the breach without justification or privilege. (It appears no damages are specified, but that turns out to be a moot point.)
As noted already, there was no unjustified or unprivileged action by AGNM in protecting its collateral. In consequence, Count 4 will be dismissed.
5. Interference with CWT Contract
The claim is that AGNM knew of the CWT contract (to put it mildly), that
To begin with, the Court has entered its memorandum opinion (doc 78) and order (doc 79) in AP 10-1170, granting partial summary judgment to Plaintiffs on the issue of who is entitled to the CWT proceeds. It withheld entering an order to have the funds delivered to AGNM, however, on the ground that the Court did not know at that time whether AGNM might have a debt to which the CWT proceeds could be applied. That issue is now being resolved in favor of AGNM.
The summary judgment establishes that the CWT funds are in fact proceeds of AGNM's collateral. Consistent with the rulings so far on similar and related causes of action, AGNM was justified in seeking to recover and apply to the debt owed to it the proceeds of its collateral. Therefore the Court will not only dismiss this count but also issue an order permitting the disbursement of the CWT funds in the registry of the Court to AGNM upon submission of the proper paperwork.
6. Interference with Lewis Contract
In this instance, Borges' claim that AGNM knew of the contract with Mr. Lewis to get the cattle to the slaughter houses and played a substantial role in causing Mr. Lewis to (threaten to) not perform, without justification or privilege, resulting in a doubling of the commission he charged.
The Court has detailed the main circumstances of the Lewis contract. Given the verification requirements of the CWT program, such as delivery to Virginia of thousands of eartags attached to the ears, something that is not required in the typical slaughterhouse accounting process, it is not unreasonable that the Borges' absorb this cost. It was after all their cattle that were being transported and beefed. It appears that AGNM's anxiety on this specific issue may have led to some clumsiness in firming up the arrangements with Mr. Lewis, and that in turn might have resulted in him charging a somewhat higher commission than he might have otherwise (say, $.50 per hundredweight instead of $1.00). But any shifting of that extra commission over to AGNM's side of the ledger would be based only on speculation. And there is no basis for punishing AGNM if they were merely being overbearing.
Count 6 will be dismissed.
7 and 8: Conversion
In Muncey v. Eyeglass World, LLC, 2012-NMCA-120, ¶ 22-23, 289 P.3d 1255, 1262 the New Mexico Court of Appeals discussed the current state of the law of conversion. It reads:
Id. (quoting Restatement (First) of Torts § 927 (1939)); see also Cornell v. Albuquerque Chem. Co., 92 N.M. 121, 125, 584 P.2d 168, 172 (Ct.App.1978) (stating that, in Frank Bond & Son, Inc., New Mexico adopted the Restatement measure of damages for conversion of a chattel), abrogated on other grounds by Albuquerque Concrete Coring Co. v. Pan Am Servs., Inc., 118 N.M. 140, 879 P.2d 772 (1994). In Valley Chevrolet Co. v. Whitaker, 76 N.M. 488, 490, 416 P.2d 154, 155 (1966), the Court stated that "[i]n a conversion action, where the property has not been returned to the owner, the measure of damages is the value of the property at the time of conversion with interest." Citing Valley Chevrolet Co., in Crosby v. Basin Motor Co., 83 N.M. 77, 79, 488 P.2d 127, 129 (Ct.App.1971), this Court followed suit.
In both Counts 7 and 8, Borges argues that "[t]he measure of damages for conversion is the value of the property at the time of the conversion plus interest," citing Sec. Pac. Fin. Servs. v. Signfilled Corp., 1998-NMCA-046, ¶ 15, 125 N.M. 38, 956 P.2d 837. This is often stated to be the rule of damages in a conversion case. See, e.g., Eyeglass World, 2012-NMCA-120, ¶ 39, 289 P.3d at 1266 (Damages for the conversion were the value of the files at the time they were converted.) This rule of damages applies, however, only in certain circumstances.
Under New Mexico law, any person with a right to immediate possession of any goods or personalty, wrongfully taken or detained, can bring an action for replevin for the recovery of the property for damages sustained by reason of the unjust detention thereof. N.M. Stat. Ann. § 42-8-1. This person would also have an action for conversion, as discussed above. In this situation, the injured party must elect its remedies by filing either for conversion or for replevin. Signfilled Corp., 1998-NMCA-046, ¶ 16, 125 N.M. at 43-44, 956 P.2d at 842-43. See also N.M. Stat. Ann. § 42-8-7 (If the plaintiff prevails, the verdict fixes the value of the property and the damages for its detention. Then, the judgment shall be for the damages for detention "and either for the value of such property, as so fixed, or for the return
Accord NIKA Corp. v. City of Kansas City, Missouri, 582 F.Supp. 343, 365 n. 10 (W.D.Mo.1983):
(Applying Missouri law); Andrus v. Hamlin (In re Hamlin), 411 B.R. 310, 314 (Bankr.W.D.La.2009) ("The damages for tortious conversion is `the value of the property at the time of the conversion' when the defendant is unable to restore the property to the rightful owner or possessor.") (Citing Dual Drilling Co. v. Mills Equipment Investments, Inc., 721 So.2d 853, 857 (La.1998).); In re Ocean Transport Corp., 213 B.R. 383, 386 (Bankr. N.D.Fla.1997) ("Since the property can not be returned, the damages for conversion is the value of the property at the time of the conversion.") (Citations omitted.)
In this case, the Borges' are seeking judgments for the amounts over which AGNM "unlawfully exercised dominion and control" and "prevented payment ... to the Borgeses, all in defiance of the Borgeses' rights" plus interest. However, those amounts are being held either in the Court Registry or in an account at AGNM for application against the Borges' debt. In other words, they seek to have their cake and to eat it to.
9. New Mexico Unfair Practices Act
Under the New Mexico Unfair Practices Act ("UPA"), "[u]nfair or deceptive trade practices [or] unconscionable trade practices in the conduct of any trade or commerce are unlawful." N.M.S.A.1978, § 57-12-3 (1971). The UPA defines the term "unfair or deceptive trade practice" as
In general, "the UPA is designed to provide a remedy against misleading identification and false or deceptive advertising." Lohman v. Daimler-Chrysler Corp., 2007-NMCA-100, ¶ 22, 142 N.M. 437, 166 P.3d 1091. The UPA provides examples of conduct that could potentially violate the statute. See, e.g., NMSA 1978, § 57-12-2.D(1)-(18) (stating that "`unfair or deceptive trade practice' means ... and includes:"). The non-exhaustive list of unfair trade practices includes "using exaggeration, innuendo or ambiguity as to a material fact or failing to state a material fact if doing so deceives or tends to deceive; [and] stating that a transaction involves rights, remedies or obligations that it does not involve." N.M.S.A.1978, § 57-12-2.D(14)-(15).
A movant must prove four elements in order to maintain a claim under the UPA. Dellaira v. Farmers Ins. Exchange, 136 N.M. 552, 558, 102 P.3d 111, 117 (Ct.App.2004). First, the movant must show that the party charged made an "oral or written statement, visual description or other representation" that was either false or misleading. Stevenson v. Louis Dreyfus Corp., 112 N.M. 97, 100, 811 P.2d 1308, 1311 (1991) (internal quotations omitted). Second, the false or misleading representation must have been "knowingly made in connection with the sale, lease, rental or loan of goods or services in the extension of credit or ... collection of debts." Id. Third, the conduct must have occurred in the regular course of the representer's trade or commerce. Id. Fourth, the representation must have been of the type that "may, tends to or does, deceive or mislead any person." Id.
The `knowingly made' requirement is only met "if a party was actually aware that the statement was false or misleading when made, or in the exercise of reasonable diligence should have been aware that the statement was false or misleading." Stevenson, 112 N.M. at 100-101, 811 P.2d at 1311-1312. In addition, a plaintiff need not prove detrimental reliance upon the defendant's representations. See Lohman v. Daimler-Chrysler Corp., 142 N.M. at 444, 166 P.3d at 1098; Smoot v. Physicians Life Ins. Co., 135 N.M. 265,
If the movant establishes a claim under the UPA, they are entitled to damages regardless of whether they suffered actual monetary or property loss. The UPA provides:
N.M.S.A.1978, § 57-12-10(B). New Mexico courts have consistently confirmed that "in the absence of actual losses, a plaintiff is still entitled under the UPA to recover the statutory damages of one hundred dollars." Lohman v. Daimler-Chrysler Corp., 142 N.M. at 445, 166 P.3d at 1099 (internal quotations omitted). See also Page & Wirtz Constr. Co. v. Solomon, 110 N.M. 206, 211-12, 794 P.2d 349, 354-55 (1990) (stating that the claimant was entitled to recover the statutory one hundred dollars, despite his failure to produce evidence showing that the defendant's deceptive practice caused loss of money or property).
Ms. Borges argues that AGNM made several false representations in connection with a facility loan that AGNM previously made to Borges'. Ms. Borges contends that AGNM convinced her to sell her cattle by promising to: (1) reduce the interest rate on the loan; (2) accept a $6.1 million payoff to release the lien on Borges' cows; and (3) allow Borges' to use any net sales proceeds above $6.1 million. According to Ms. Borges, AGNM secretly planned to renege on all of its promises after the cows were sold. For example, she asserts that AGNM planned to demand a payoff of $9.4 million instead of $6.1 million.
The Court is not convinced that AGNM engaged in a conspiracy to employ a "bait and switch" on Ms. Borges to force her to sell her cows. There is no evidence that AGNM made any false representations in connection with the facility loan. AGNM never promised to restructure the loan in any particular manner. The parties engaged in negotiations but never settled upon specific terms regarding prices or interest rates. Essentially, AGNM understood that Ms. Borges wanted to get out of the dairy business and agreed to negotiate further after she sold the cattle.
Assuming arguendo that AGNM made some false representations as to the facility loan, the Court nevertheless finds that they were not knowingly made. It appears that there was some confusion surrounding the negotiations regarding the facility loan. It is clear that Ms. Borges felt that AGNM agreed to certain terms pertaining to payoff amounts and interest rates. However, AGNM was not aware that any statements it made in the course of negotiations were false or misleading.
After reviewing the evidence, the Court concludes that AGNM did not knowingly make any false representations to Ms. Borges in connection with the facility loan. Borges' claim under the UPA is therefore dismissed.
10. Prima facie tort
In recognizing this tort, the Supreme Court examined the approaches that courts in other states had used, but rejected them in favor of adopting the version set out in the Restatement (Second) of Torts § 870 (1977). Id. at 394, 785 P.2d at 734.
In 2005 the New Mexico Court of Appeals analyzed a trend that had developed in the theory of prima facie tort: that the tort could not be used to circumvent required elements of more traditional torts.
Bogle v. Summit Investment Co., LLC, 2005-NMCA-024, ¶ 22-23, 137 N.M. 80, 89, 107 P.3d 520, 529. That trend has continued to today. See Bull v. BGK Holdings, LLC, 859 F.Supp.2d 1238, 1248 (D.N.M.2012):
Before addressing the specific allegations made by the Borges' relating to this count, the Court first makes the overall observation that from the evidence presented at the trial of this matter the Court is unable to find that AGNM intended to injure the Borges'.
Lexington Ins. Co. v. Rummel, 1997-NMSC-043, ¶ 11, 123 N.M. 774, 777, 945 P.2d 992, 995. Therefore, the Court could stop its discussion of prima facie tort at this point. However, in addition to finding a lack of intent to injure, the Court finds that most, if not all, actions taken by AGNM were justifiable, justified, and generally not culpable. Some actions taken were specifically authorized in the written
In their counterclaim, the Borges' list 16 actions or failures to act in support of their prima facie tort claim. The Court has listed those actions, as well as a minimal summary
1. Subsequent to advising that $6.3 Million True. However, it is anything but clear was the payoff amount required to be paid that that one communication caused the to AGNM from the proceeds from the $7.6 million sale (February 27 purchase Devine Sale, AGNM advised that the agreement) to fall through. payoff amount required to be paid to AGNM from the proceeds from the Devine Sale was $9.4 Million, instead of the $6.3 Million. 2. AGNM contacted CWT and demanded The payment terms (90% and 10% a year that the CWT Payment be paid directly to later) were CWT requirements. As the AGNM, with 90% of the CWT Payment or lienholder on the cattle with a large approximately $3.6 Million to be paid unpaid debt, AGNM reasonably immediately and with 10% of the CWT demanded the proceeds. Payment or approximately $400,000 to be paid when due. 3. AGNM contacted Lewis and certain True. AGNM was the lienholder on the slaughterhouses directly and made cattle and was entitled to assure that it demands on them, including demands that received the net proceeds. payments be made directly to AGNM. 4. AGNM conditioned its agreement to make With Cow Note amount fully committed, advances and made advances or payments AGNM made further advances minimally based upon AGNM's approval of vendors needed to preserve the collateral. and expenses to be paid. 5. AGNM conditioned its agreement to make The DFA advances ("milk checks") were advances and made advances or payments overwhelmingly the primary and regular based upon DFA's release of milk source of cash flow of the dairy and of advances. repayment of Cow Note advances, so the lending needed to be based on the milk checks. 6. AGNM conditioned its agreement to make AGNM had a lien on the cattle and had advances and made advances or payments the right to insist that the checks be made based upon Borges' agreement that they jointly payable to it and Borges'. would not sell cattle to raise funds for feed or expenses. 7. AGNM made the determination of which With Cow Note amount fully committed, vendors and expenses were to be paid and AGNM made further advances minimally in what amount and when. needed to preserve the collateral. 8. AGNM made the determination of when Not true; at most AGNM merely and where dairy cattle should be sold. required that Ms. Borges, after she stated
that she planned to get out of the dairy business, prepare plans for the disposition of the herd, and then ensured it received the proceeds. 9. AGNM made the determination that a AGNM and Borges were both interested CWT bid should be made by Borges and in the CWT program, and Borges insisted in what amount. on making a bid higher than AGNM recommended, which was accepted, to everyone's benefit. 10. AGNM failed or refused to make At times, it did fail or refuse to make advances. advances, but not without justification. 11. AGNM did not respond, either on a timely At one time or another, every party or basis or at any time, to requests for person was not responding to advances of funds for the dairy's communications from another party or operations and to phone calls or other person. However, there was no pattern communications. or practice by AGNM to not respond to Borges'. 12. AGNM increased the interest rate on the Addressed above Operating Note. 13. AGNM showed up on Borges' property to AGNM as lender had the right to inspect inspect the dairy facility or dairy cattle. its collateral. 14. AGNM required Borges to resubmit AGNM did not require resubmissions documentation and information already except incidentally in the course of provided. providing funding and monitoring its collateral. 15. Following acceptance of the CWT bid, True. It had no obligation to do so, and AGNM did not reduce the fixed interest the relationship with Borges' and the loan rate on the Dairy Facility Note to a lower situation had so deteriorated that it was variable rate. reasonable for AGNM to not reduce the rate. 16. AGNM retained payments for application AGNM was entitled to retain payments to expenses incurred by AGNM. for expenses it reasonably incurred in connection with the loans and the collateral. The contention is otherwise addressed above.
Count 10 will be dismissed.
Borges' assert a variety of affirmative defenses to the claims of AGNM. Many of those affirmative defenses are mirrored in Borges' counterclaims, all of which counterclaims have been addressed above. The Court need not address the mirrored affirmative defenses.
1. Unclean hands.
Unclean hands is an equitable doctrine that requires that the party seeking relief (in this case, AGNM) not itself be guilty of fraudulent, illegal or inequitable conduct in the matter for which he seeks relief. Home Savings & Loan Assoc. v. Bates, 76 N.M. 660, 661, 417 P.2d 798, 799 (1966). Other than specified items which the Court has already addressed, such as the "Funds Held account", the unjustified interest rate increase, etc. (which are not so much fraudulent or inequitable as they are mere contract violations), AGNM has clean hands.
2. Failure to mitigate damages.
"A party may not recover as damages any cost or loss with [it] reasonably could have avoided." UJI 13-860 NMRA. The one instance that Borges' cite is the failure of AGNM to accept Borges' offer to it to immediately apply $3.2 million of the $3.6 million in CWT funds that were then available. That offer was part of a larger offer made by Borges' counsel in a letter dated August 10, 2009 (Ex. 259). AGNM could not accept the $3.2 million alone; it could only get those proceeds if it accepted the entire settlement offered by Borges'. Clearly Mr. Arland, a master tactician
3. Waiver and estoppel
The claim is that AGNM's actions led Borges' to believe that it would not foreclose on the collateral. The defense requires that Borges' have an "honest and reasonable belief" that AGNM intended to waive its right to foreclose, J.R. Hale Contracting Co., Inc. v. United New Mexico Bank at Albuquerque, 110 N.M. 712, 717, 799 P.2d 581, 586 (1990), or that AGNM could reasonably expect that its actions would induce Borges' reliance. Id. The Borges' cannot reasonably have expected that as matters between them and AGNM deteriorated, AGNM would never drop the hammer of foreclosure. It is true that AGNM extended the Cow Note several times and made a number of optional advances, but those actions were taken in large part to protect the collateral (suggesting as a result that AGNM was not in effect promising to not take collection action such as a foreclosure). And to the extent that AGNM sought to make things work for the Borges', AGNM should not be punished for that approach or attitude by upholding this affirmative defense against it. This affirmative defense will be denied.
4. Breach of the obligation of good faith and fair dealing
This has already been addressed as a counterclaim. It is denied.
5. Breach of contracts and agreements
While the Court has found that AGNM violated some contractual provisions, none of the violations rise to the level of seriousness that would constitute a breach so material that it constituted a basis for Borges' to repudiate the contracts (the notes). In fact, the initial lending on all three notes and then the continued lending on the Line of Credit Note
The standard for duress is usefully set out in UJI 18-838: "Duress is intentional action by one person presenting such a serious business or financial loss or injury to the other person to the contract that [she, as properly substituted by Borges' counsel] has no reasonable choice or alternative." Ms. Borges asserts she was coerced (or hoodwinked) into a higher interest rate for the Cow Note. Whether that is the case in these circumstances turns out to be moot, since the Court has already determined on other grounds that the interest rate was improperly raised to 6.01% on the Cow Note, and must be reduced to 3.55%. The affirmative defense is denied as moot.
8 [sic]. Offset
The Court agrees that from a practical point of view, the judgment and orders to be entered will in effect net out the claims and defenses of the parties.
10 [sic]. Improper settlement with DFA
Borges' assert that the settlement of the DFA litigation caused them to lose their claim against DFA for $65,000. The Court has already addressed the issue above. But in addition, to the extent that Ms. Borges is now precluded from further pursuing the claim (assuming she did not voluntarily settle it earlier as is suggested by the settlement agreement) because she is a member of DFA and thus bound by the settlement agreement and release, Ex. 267, then there is a serious question about whether she had any right to take any action independent of DFA to begin with. This affirmative defense is denied.
11. Promissory estoppel.
The Court addressed promissory estoppel as one of the counterclaims (no. 3). This affirmative defense is denied.
Borges' claims in Adv. Pro. 11-1012
Ms. Borges argues persuasively that the "Corrected Mortgage" was not effective in 2009 to allow AGNM to escape the reach of the Debtor's strong arm powers. As noted above, the Court agrees.
She also argues that the CWT funds are also to be freed from the claims of the Debtor. In part, the Court agrees with her, in the sense that ACA and FLCA are not parties with perfected interests in the CWT funds. But the same partial summary judgment that made that determination also determined that the perfected party is PCA, and that the only issue remaining with respect to the CWT funds being delivered to PCA is whether AGNM is owed an amount in excess of the CWT funds. This memorandum opinion is such a determination.
On the other hand, the Court has also ruled that the Funds Held account must be applied to the Cow Note as if the receipts (and expenditures) were applied on the date that AGNM's records (Ex. E) show they were received or expended. In effect, those funds will be offset against the Cow Note as requested by Ms. Borges in affirmative defense no. 8.
The water rights issue is one that admits of more complexity.
Avoidance of the interest in water rights
Borges contends that, as the debtor in possession, she is entitled to avoid the AGNM's claimed lien and ownership interest in certain water rights pursuant to 11
As the Court previously explained, Section 544(a) allows a bankruptcy trustee or debtor in possession to use their so-called "strong arm powers" to avoid certain transfers of real property by the debtor. Section 544(a)(1) allows the trustee or debtor in possession "to avoid any transfer or obligation that a hypothetical creditor with an unsatisfied judicial lien on the debtor's property could avoid under relevant state nonbankruptcy law." In re Haberman, 516 F.3d 1207, 1210 (10th Cir. 2008). Similarly, Section 544(a)(3) allows the trustee or debtor in possession to avoid a mortgage or lien if it could be avoided by a hypothetical bona fide purchaser of the property.
Under Section 544(a), a debtor in possession, "in the exercise of his or her strong-arm powers, may avoid a security interest in the debtor's property that was not perfected prior to the petition date." 9B Am. Jur. 2d Bankruptcy § 2016. See also In re Harper, 516 F.3d 1180 (10th Cir.2008) ("Under § 544(a)(1), the trustee has the status of a hypothetical lien creditor once the bankruptcy petition is filed, and may avoid security interests that are unperfected under applicable law."); In re Haberman, 516 F.3d at 1213 (noting that the trustee was entitled to avoid an unperfected lien under Section 544(a)). Thus, to determine whether Borges may avoid the transfer under Section 544(a), the Court must determine whether the assignment of water rights was properly perfected under New Mexico law.
Pursuant to N.M.S.A.1978 § 75-5-22 (1953), "no assignment [of water rights] shall be binding, except upon the parties thereto, unless filed for record in the office of the state engineer." To properly file and perfect such an assignment, the transferee must meet the following requirements:
Borges contends that AGNM has not satisfied the requirements of Section 72-1-2.1. The Court agrees. First, the change of ownership forms were filed on behalf of ACA instead of AGNM. AGNM contends that the forms were properly filed notwithstanding the fact that they listed an incorrect name — ACA instead of AGNM. As the Court previously explained, a transfer of property must be properly acknowledged by the correct parties in order to be classified as recorded for the purposes of 11 U.S.C. § 544(a). See Jesko v. Bank of America, NA (In re Jesko), Adv. No. 04-1166 (Bankr.D.N.M.2006) (finding that an instrument acknowledged by the incorrect parties was not recorded and could be avoided under Section 544(a)). In addition, the change of ownership forms were not accompanied by a copy of a deed or other instrument of conveyance. The parties failed to attached the 2006 Mortgage, the Corrected Mortgage, or any other instrument to the forms before filing them.
The Court finds AGNM failed to fulfill the requirements of N.M.S.A. § 72-1-2.1. The change of ownership forms were not
Section 1452(b) of title 28 of the United States Code provides that "[t]he court to which such claim or cause of action is removed may remand such claim or cause of action on any equitable ground." This subsection grants very "broad discretion" to the bankruptcy court to remand a proceeding back to the state court from which it has been removed or to deny the remand request. 1 Collier on Bankruptcy ¶ 3.07, at 3-79 (15th ed. rev. 2008). See also In re C and M Properties, L.L.C., 563 F.3d 1156, 1160 (10th Cir.2009) (noting that once a proceeding is removed to bankruptcy court, the Court may remand it to state court on "any equitable ground.").
The Court has mostly resolved the debt and collateral issues surrounding the foreclosure action. The foreclosure action and any remaining viable counterclaims are governed by state law and are not core proceedings. See In re Phoenix Environmental, LLC, 2012 WL 4739941, *1 (Bankr.D.N.M. Oct. 3, 2012) (J. Starzynski) (finding that foreclosure action and countclaims related to deceptive trade practices, slander, and quiet title were non-core proceedings under Stern v. Marshall). Moreover, state courts have "more experience and expertise in handling foreclosures" because they "handle literally thousands of mortgage foreclosure proceedings." In re Abruzzo, 1999 WL 1271761, *3 (Bankr.E.D.Pa. Dec. 28, 1999).
The Court is therefore convinced that the case should be remanded to state court so that the proper state authorities may conduct the foreclosure sale. The Court will enter an order accordingly.
AGNM claims that Borges family members either converted or permitted to be converted personal property at the dairy or in the attached farmland that was collateral of AGNM. The lost property included such things as irrigation equipment, refrigeration units and copper tubing (items of immediate and significant value). AGNM further claims that members of the Borges family knew about the conversion — more accurately, theft — but did not report it to anyone in time for an insurance claim to be filed.
The Court has reviewed the evidence, including Ex. LL (the Incident Report, in the limited capacity for which it was admitted), and finds that the evidence that (1) one or more of the Borges' took the property, (2) none of the Borges' took the property but knew about the conversion in time to allow the filing of an insurance claim but did not, or (3) both, is not sufficient to render a judgment against any family member. By reaching this conclusion, the Court does not mean to downplay the seriousness of the allegation nor of the considerable value of AGNM's loss. It is just that, through no fault of AGNM's, sufficient proof to identify who took the property appears not to exist.
For the reasons stated, the Court finds that it should award a judgment against Ms. Borges (only in her capacity as debtor in possession), as set out in orders adjudicating the objections to the proofs of claim (main case, claim nos. 15, 16 and 17 and docs 115, 116 and 117) and further orders that (1) AGNM may foreclose on all of the dairy facility and the adjacent farmland, except for the 220 acres, (2) AGNM may not foreclose on the water rights, (3) the liens on the 220 acres and the water rights are avoided and preserved for the estate, (4) AGNM (specifically PCA) is entitled to
Borges' were current on payments on all three notes through at least June 30, 2009. Ex. 175.
In any event, no such deal ever existed.