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By Diane Davis
Feb. 12 --A bankruptcy court did not err in holding that a debtor had not created a separate legal entity with its joint venture agreement and that the rice grain was part of the debtor's individual bankruptcy estate, the U.S. Court of Appeals for the Eighth Circuit held Feb. 6 (Bank of England v. Rice (In re Webb), 2014 BL 31787, 8th Cir., No. 13-1495, 2/6/14).
Affirming the judgment of the bankruptcy court, Judge Diana E. Murphy concluded that the debtors' joint venture agreement supports the bankruptcy court's determination that the debtors had not intended to create a separate entity.
If the court were to conclude that the language of the agreement were not dispositive, the court correctly considered evidence outside the four corners of the agreement. The court's reference to the lack of entity registration also served as further evidence of the debtors' intent, the court said.
The question of whether the debtors' entity was a partnership was a core proceeding necessary to determine if the rice was part of the bankruptcy estate, the court said, citing 28 U.S.C. § 157(b)(2)(A). If property is determined to be part of the bankruptcy estate, the bankruptcy court may authorize the trustee to sell it, the court said.
During the operation of the business, the debtors borrowed money from the Bank of England and from the U.S. Department of Agriculture Commodity Credit Corporation. Many of these loan agreements were executed in the name of the joint venture.
The Bank of England filed a motion for relief from the automatic stay imposed under Bankruptcy Code Section 362, arguing that it had a perfected security interest in the rice equipment arising out of nine unpaid loans made by the bank to the joint venture.
The next day, the trustee received a letter from the bank indicating that it intended to liquidate the rice and equipment immediately because the rice bushels are not property of the debtors' bankruptcy estate but belong to a separate entity, Dudley R. Webb Jr. Farms Joint Venture.
In response to the letter, the trustee filed a motion for a temporary restraining order, preliminary injunction, and emergency hearing. The bankruptcy court issued a temporary restraining order and set the case for an emergency hearing.
According to documents submitted at the hearing, the debtors reported their income from the farming operations on Schedule F of their Form 1040 individual tax returns rather than on a Form 1065 partnership return. Webb also testified that he never prepared any bills of sale to transfer property to the joint venture at the time it was created. Neither party produced evidence that the joint venture was registered as a separate entity with the Arkansas Secretary of State's office.
The bankruptcy court then entered a permanent injunction enjoining the Bank of England from taking control of the assets and ordered that the trustee sell the contested rice grain and hold the proceeds from the sale in an estate account pending the determination of the various parties' rights.
The Bank of England appealed to the Eighth Circuit, arguing that the debtors' joint venture was a partnership under Arkansas law and that the rice grain and equipment should be excluded from the couple's bankruptcy estate.
While a joint venture can be a partnership if it fits the definition of such an entity, an association is not classified as a partnership simply because it is called a “joint venture,” the court said, citing Uniform Law Comment 2 to Ark. Code Ann. § 4-46-202. According to the court, joint ventures differ from general partnerships in the “ad hoc nature of joint ventures” or their concern with a single transaction or isolated enterprise, plus the loss-sharing is not as essential to joint ventures as it may be for partnerships. Under Arkansas law, the question of whether a partnership exists depends primarily on the intent of the parties to form and operate a partnership, which is a question of fact, the court said.
The appeals court rejected the Bank's argument that public policy compelled reversal because while the condition that influenced the bankruptcy court's decision is no longer a concern, the court's ruling will negatively impact the bank and other creditors in this case and in all other dealings with persons purporting to be operating a joint venture. According to the court, only those issues in the adversary proceeding are before the court and the trustee sought an injunction directly in response to the Bank's attempt to exercise authority over the disputed rice grain without awaiting a ruling from the bankruptcy court. Further, the trustee requested a hearing on both his complaint and the Bank's motion for relief from stay, the court said. Thus, public policy does not compel a reversal, the court said.
Judges James B. Loken and Lavenski R. Smith joined the opinion.
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