Bank of England v. Rice
ORDER affirming the Bankruptcy Court's decision. Signed by Judge D. P. Marshall Jr. on 2/4/13. (kpr)
IN THE UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF ARKANSAS
BANK OF ENGLAND
M. RANDY RICE, Trustee
Bank of England claims to have a perfected security interest in rice
owned by Dudley R. Webb Jr. Farms Joint Venture because the Bank says it
dealt with a partnership and not the individual debtors, Dudley R. Webb Jr.
and his wife Peggy J. Webb. The Bank asks the Court to hold that the
Bankruptcy Court* handling the Webbs' estate did not have subject matter
jurisdiction to authorize Trustee Rice's sale of the rice. The Bank also says
that the Bankruptcy Court's factual findings were clearly erroneous, leading
to an incorrect determination that the rice was part of the individual debtors'
estate. The Bank's claim hangs on a single question: Is Dudley R. Webb Jr.
Farms Joint Venture a partnership under Arkansas law?
It is not. The distinction between partnership and joint venture matters
• The Honorable Audrey R. Evans, United States Bankruptcy Judge.
in this case because partnership property is not the property of the individual
partner's bankruptcy estate. In re Burnett, 241 B.R. 438,439 (Bankr. E.D. Ark.
1999). If the rice belonged to the partnership rather than a joint venture in
which the Webbs participated, then the sale proceeds should satisfy the
partnership's debt at Bank of England, not the Webbs' creditors. The Court
reviews the Bankruptcy Court's factual findings for clear error" and its legal
conclusions de novo. In re Burnett, 241 F.3d 1005, 1007 (8th Cir. 2011).
In considering whether the joint venture is a partnership, Judge Evans
heard testimony from Mr. Webb, Bank representative Joey Adams, and
Trustee Rice. She also reviewed almost eighty exhibits and heard counsel's
arguments before ruling from the bench, a salutary practice. The Court
confirmed its oral ruling in a written order. No. 4:12-ap-01044 (Bankr. E.D.
Ark. 3 July 2012), Document No. 41.
Mr. Webb testified that the assets of the joint venture and the estate
were all one in the same." Mr. Webb also said that the venture was formed
for the purpose of involving his wife more in the farm's operations and to
help establish her credit. The Webbs always reported farming operation
income on Schedule F of their individual tax returns rather than a Form 1065
partnership return. The Schedule did include the joint venture's federal tax
ID number. There were no bills of sale documenting hard asset transfers for
depreciation claimed by the joint venture, a typical partnership practice.
Bank representative Adams testified that Bank of England loaned
money for farm operations to the Webbs individually. Business was done this
way both before and after the joint venture's formation. Adams also said the
Webbs submitted personal federal income tax returns and individually signed
loan agreements for the joint venture. The Webbs did not designate that they
were partners or acting as partners.
Trustee Rice testified that the Bank's original motion for relief from the
automatic stay Court assumed the rice was part of the Webbs' estate; the
motion did not include the joint-venture agreement. Rice also said that the
Bank did not disclose information about its dealings with the Webbs and the
joint venture that had occurred around the time they filed for bankruptcy.
According to Rice, the Bank did not try to exercise control over the rice until
a few months later. This move necessitated the immediate determination of
whether the rice was property of the Webbs' estate or a of separate entity.
The Bank presented no evidence that the Webbs' joint venture had
separate balance sheets or inventories. There was no evidence that this entity
was registered with the Arkansas Secretary of State's office. The Webbs did
not transfer any property to the joint venture at formation either. The joint
venture agreement refers to the entity as a "partnership" once, but then it
speaks unequivocally: "nothing herein shall be construed to create a
partnership of any kind." While not determinative, of course, this expression
of intention is clear and important.
The Bankruptcy Court's well-reasoned bench ruling, and later written
order, considered all these facts and concluded that the Webbs' joint venture
was not a partnership. The Court agrees. Intent is the test under Arkansas
law. Gammill v. Gammill, 256 Ark. 671,674,510 S.W.2d 66,68 (1974). Based
on the facts of record, the Webbs did not intend to form a partnership and did
not do so. In re Curtis, 363 B.R. 572, 578 (Bankr. E.D. Ark. 2007).
Deciding whether the entity was a partnership was a core proceeding
necessary to determine if the rice was part of the Webbs' bankruptcy estate.
28 U.S.C. § 157(b)(2)(A). The Bankruptcy Court therefore had subject matter
jurisdiction to decide this issue. 11 U.S.C. § 541. That power extended to
authorizing Trustee Rice to sell the Webbs' rice for the estate's benefit and to
stopping the Bank's assertion of control. Contrary to the Bank's argument,
the Bankruptcy Court's partnership decision did not involve an erroneous
"separate entity" test. Rather, the Court considered the lack of registration
with the Arkansas Secretary of State as part of its finding the material facts,
a necessary step along the way to deciding whether the joint venture's assets
were property of the Webbs' bankruptcy estate.
D.P. Marshall Jr.
United States District Judge
4 February 2013