Bankruptcy Court Determines Remedy For Avoided Fraudulent Farm Lease.

The debtor operated a land partnership with other partners and two of the partners filed an involuntary Chapter 11 bankruptcy against the debtor and the partnership.  The primary asset of the partnership was two tracts of land that were verbally leased to a friend of the debtor. The lease was reduced to writing a few days before the involuntary bankruptcy filing.  The bankruptcy trustee alleged that the written lease was actually executed after the bankruptcy filing, but had been backdated to a date before the filing.  The written lease was for a three year term covering the 2011-2013 crop years.  Under the terms of the lease, the tenant was to pay 20 percent of the gross proceeds with a minimum annual payment of $300,000.  The first year’s rent of $311,464.55 was deposited into the trust account of the tenant’s lawyer near the end of 2011.  The trustee attempted to sell the properties, but buyers did not want to buy the properties with the lease in place.  The trustee, as a result, moved to avoid the lease as being entered into post-petition without authorization under 11 U.S.C. Sec. 549, or as a fraudulent transfer under 11 U.S.C. Sec. 548(a)(1) on the basis that the rent was less than fair market rent.  During pendency of the adversary action, the bankruptcy was converted to Chapter 7.  The bankruptcy court held that held that the lease was entered into pre-petition, but that the rent was below fair market rent and avoided the lease on that ground.  The court held that the tenant was entitled to the growing crops, but had to pay the 2011 rent and a pro-rata share of the 2012 rent for the time the tenant occupied the property.  The properties were then sold with the growing alfalfa crops, but not the growing wheat crops.  The lease was terminated and the wheat crop harvested which netted $442,218.09 for the bankruptcy estate.  The tenant claimed he was entitled to the wheat crop proceeds for the 2012 crop year.  The bankruptcy court held that estate was entitled to the fair market rent for the entire time the tenant was in possession - $745,200 less the amount he previously paid for the 2011 rent, which came to $431,200.  Then the court took that amount and deducted expenses the tenant incurred and determined that the tenant was entitled to a judgment of $147,377.95 as a claim against the bankruptcy estate.  On further review, the court affirmed the bankruptcy court’s determination that the tenant owed the estate $431,200 in rent.  However, the court reversed the bankruptcy court on the set-off amount, finding that the tenant was entitled to the wheat crop proceeds of $442,218.09 plus property taxes of $14,879.95 that the tenant had paid on the property during the time he possessed the property.  The result was that the tenant was entitled to a judgment of $25,898.04 of a claim against the bankruptcy estate.  The tenant was not entitled to compensation for the wheat he planted into the alfalfa that was sold with the land because it didn’t add any value to the property.  In re Grabanski Land Partnership, Nos. 14-6037, 14-6042, 2015 Bankr. LEXIS 1642 (B.A.P. May 14, 2015).    

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