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In re Arkansas Catfish Growers

January 25, 2007

IN RE: ARKANSAS CATFISH GROWERS, LLC, DEBTOR,
RENEE S. WILLIAMS, TRUSTEE, PLAINTIFF,
v.
BAXTER LAND COMPANY, INC., FRANK A. PUGH, THOMAS R. PUGH, AND DAVID M. YOCUM, IV, DEFENDANTS.



The opinion of the court was delivered by: Susan Webber Wright United States District Judge

Chapter 7

(Adversary No. 06-01276)

MEMORANDUM AND ORDER

On July 18, 2006, the trustee in this Chapter 7 case, Renee S. Williams, filed a complaint (subsequently amended) in the United States Bankruptcy Court for the Eastern District of Arkansas to avoid preferential transfer to guarantors. The trustee seeks to recover from Jeff Baxter, Frank A. Pugh, Thomas R. Pugh, and David M. Yocum, IV, certain alleged preferential transfers made to the Arkansas Development Finance Authority ("ADFA"). See Am. Compl. [doc.#3]. By Order entered November 30, 2006, this Court, on the unopposed motion of separate defendant Yocum, withdrew the reference to the United States Bankruptcy Court and directed that this matter be transferred to the United States District Court for the Eastern District of Arkansas for a jury trial. The matter is now before the Court on Yocum's motion to dismiss the amended complaint for failure to join a necessary party under Fed.R.Civ.P. 19 and for failure to state a claim under Fed.R.Civ.P. 12(b)(6) [doc.#'s 20, 22]. The trustee has responded in opposition to Yocum's motion, Yocum has filed a reply to the trustee's response, and the trustee has filed a response to Yocum's reply. Having considered the matter, the Court denies Yocum's motion to dismiss.

I.

According to the trustee's amended complaint, on February 28, 2002, Farm Fresh Catfish Company ("FFCC") borrowed $3,000,000 from the ADFA. The note was guaranteed by the following persons in the indicated percentage amounts:

Jeff Baxter16.67% Frank A. Pugh and Anessa Pugh27.78% Thomas R. Pugh and Cynthia L. Pugh27.78% David Yocum IV27.78%*fn1

On September 1, 2002, the debtor, Arkansas Catfish Growers, LLC, purchased certain assets of FFCC, consisting of accounts, inventory, furniture, fixture and equipment, and facilities in Hollindale, Mississippi, and Lake Village, Arkansas. The debtor also assumed the ADFA note, the balance of which at the time of assumption was approximately $2,959,301. The debtor did not execute a security agreement at the time of the transfer of the note to secure the debt owed to ADFA. ADFA was still secured by the assets of FFCC, but such property apparently became valueless when FFCC ceased operating. In this respect, the trustee contends that on September 1, 2002, the only collateral held by ADFA to secure the note was the personal guarantee of the above-listed parties. The note was not otherwise secured until September 30, 2003, at which time the debtor gave ADFA a new security agreement and new deeds of trust on facilities at Eudora, Arkansas, Lake Village, Arkansas, and Hollindale, Mississippi, plus furniture, fixture and equipment at each location, and accounts and inventory of the debtor.

The trustee deems this transfer a preference for the following reasons:

a. On September 30, 2003, the date ADFA obtained the new collateral, the exposure of the above-listed parties under their continuing guaranty agreements given on February 28, 2002, was significantly reduced by ADFA collateralizing the note.

b. The transfer was made within one year prior to June 8, 2004, the date of the filing of the above-captioned case.

c. The debtor transferred new collateral for the benefit of the guarantors, all of whom are insiders, in values that at least total the value of the processing facilities located in Hollindale, Mississippi, and the Lake Village, Arkansas plants.

The trustee states that the transfer was made while the debtor was insolvent, and that the transfer will enable defendants to recover more than they would receive as a creditor if: (a) the bankruptcy case were a case under Chapter 7 of Title 11, United States Code; (b) the transfer had not been made; and (c) the defendants received payment of its debts to the extent provided by the provisions of Title 11. The trustee contends that the transfer of collateral constitutes a voidable preference against the guarantors to the extent of the proportionate amount of ...


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