Zink v. Vanmiddlesworth
300 B.R. 394, 2003 WL 22255828 (2003)
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Rule of Law:
In a Chapter 12 bankruptcy proceeding, a creditor seeking adequate protection for its collateral bears the initial burden of proving that protection is necessary, typically by demonstrating that the collateral is likely to decline in value post-petition. To obtain a superpriority purchase-money security interest (PMSI) in livestock over a prior perfected security interest, a creditor must strictly comply with UCC § 9-324(d) by perfecting its interest when the debtor receives possession and notifying the prior secured party before the debtor receives possession.
Facts:
- On April 7, 1998, Frank Vanmiddlesworth granted Marine Midland Bank (HSBC's predecessor) a security interest in his current and after-acquired dairy cattle.
- On November 26, 2001, Robert and Ruth Zink contracted to sell 54 cows to Frank and William Vanmiddlesworth, who operated a farm partnership.
- On the same day, the Vanmiddlesworths executed a security agreement granting the Zinks a purchase-money security interest (PMSI) in the 54 cows.
- The Zinks did not send notification of their PMSI to HSBC.
- On December 4, 2001, the Vanmiddlesworths took possession of the 54 cows.
- On December 5, 2001, the Zinks' attorney mailed a UCC-1 financing statement to the New York Secretary of State, which was received on December 6 but was rejected because it was submitted on an obsolete form.
- A corrected financing statement was not successfully filed by the Zinks until February 4, 2002.
- Frank and William Vanmiddlesworth owned the 54 cows as tenants in common.
Procedural Posture:
- William and Frank Vanmiddlesworth filed for Chapter 12 bankruptcy in the U.S. Bankruptcy Court for the Northern District of New York.
- Robert and Ruth Zink, as creditors, filed motions in the bankruptcy proceedings seeking adequate protection payments or, alternatively, relief from the automatic stay.
- The U.S. Bankruptcy Judge denied the Zinks' motions in a Memorandum-Decision and Order.
- The Zinks, as Appellants, appealed the Bankruptcy Court's order to the U.S. District Court for the Northern District of New York, with the Vanmiddlesworths as Respondents.
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Issue:
In a Chapter 12 bankruptcy, does a creditor seeking adequate protection for its collateral bear the initial burden of proving that the collateral is declining in value post-petition?
Opinions:
Majority - Mordue, District Judge
Yes. A creditor seeking adequate protection for its collateral bears the initial burden of demonstrating a need for such protection. The court first affirmed the bankruptcy court’s determination that the Zinks failed to achieve purchase-money security interest priority over HSBC's pre-existing security interest in after-acquired livestock. Under N.Y.U.C.C. § 9-324(d), a PMSI creditor in livestock must both perfect its interest no later than when the debtor receives possession and provide authenticated notification to the prior secured party before the debtor receives possession. The Zinks failed both requirements: they never notified HSBC, and their perfection was delayed because their initial financing statement was rejected. The court then addressed the central issue of adequate protection, holding that under 11 U.S.C. §§ 363(e) and 1205, the creditor requesting protection has the initial burden to show that the collateral is likely to decline in value post-petition. The Zinks failed to meet this burden, as evidence of a pre-petition decline in value was insufficient, and a settlement offer from the debtors was not a concession of ongoing value depreciation. Since the Zinks failed to make the necessary initial showing, the bankruptcy court’s denial of their motion was not an abuse of discretion.
Analysis:
This decision clarifies the strict, non-negotiable requirements for achieving PMSI superpriority in livestock under revised UCC Article 9, emphasizing that both timely perfection and prior notification are mandatory. It establishes that failure on either front subordinates the PMSI creditor to a prior secured party with an after-acquired property clause. More significantly, the case solidifies the burden-shifting framework for adequate protection in Chapter 12 bankruptcies, placing the initial evidentiary onus on the creditor. This protects debtors from premature or unsupported demands for payment and ensures the automatic stay remains robust unless a creditor can first demonstrate a tangible risk of loss to their collateral's value post-petition.
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