PETER McNIFF, United States Bankruptcy Judge.
This matter came before the court for preliminary hearing January 12, 2000 on the motion to modify stay filed by the Farm Credit Services of America (FCS). The parties agree there is no dispute of fact, and the court should rule on the basis of the record.
This is the second motion for relief from stay filed by the FCS. The first was denied. FCS also filed two motions to dismiss, both of which were denied. FCS has a first priority lien on virtually all of the debtor's personal property, including livestock and crops.
The grounds for the motion are the debtor's failure to provide evidence of insurance on the machinery and equipment and the failure to list FCS as a loss payee on the debtor's insurance policy, and the unauthorized sale of livestock encumbered by the FCS lien. The debtor argues the cattle were sold in the ordinary course of business.
This is the fourth time these or similar issues have been raised in this case. In previous orders, the court admonished the debtor for failure to abide by the statutory and fiduciary requirements of chapter 12; ordered the debtor to "contact its insurer and have the FCS properly listed as loss payee, and provide evidence of such to the FCS through its counsel (September 29, 1999 Order Denying Motion for Relief From Automatic Stay); send endorsed insurance policy to FCS on receipt (Statements on the record November 10, 1999); ordered the debtors to deposit the cash collateral in an interest bearing account (Statements on the record January 12, 2000); and clearly advised the debtor of the consequences of the unauthorized use of cash collateral.
The court has in other cases discussed whether a sale of livestock or crops in an agricultural chapter 11 or chapter 12 case fits within the notice exception of 11 U.S.C. § 363(c)(1). That section authorizes a debtor in possession to sell property of the estate in the ordinary course of business without notice or a hearing. The court believes the section is intended to permit an ongoing business, such as a manufacturing concern or retail business, to operate on a daily basis and turnover inventory and product.
In this case, court authority should have been obtained. The sale of the calves and yearlings was not a sale as contemplated by § 363(c)(1). A cattle sale is normally a yearly occurrence, not an ongoing predictable procedure. The sale resulted in liquidation of over a quarter of the debtor's cattle herd. Replacement collateral is not assured and may not be encumbered by the FCS lien, so protection to FCS is critical.
Here, the creditor had no notice by which it could protect its lien on the proceeds. The location and time of the sale was never disclosed. The cattle were moved. Neither the court, the trustee, nor the creditors had any notice or control over the process.
Further, the cattle were sold free and clear of liens without court authority under § 363(f). The proceeds check was not deposited with the trustee or in an interest bearing account. Had the debtor provided notice of the sale pursuant to § 363(b) (f), this motion would not have been necessary. The issue now is how to protect the interest of FCS in the cash collateral.
Finally, the debtor did not file a report of sale or include the sale and the proceeds as information on its November operating report. All of the foregoing was in violation of a chapter 12 debtor's fiduciary duties.
IT IS, THEREFORE, ORDERED the debtor shall, within five days of the date of this order, file with the court and serve on the FCS and its counsel, and the chapter 12 trustee, proof of insurance and evidence that the FCS is listed as loss payee on the insurance policy; and
FURTHER ORDERED that the parties shall cooperatively and within five days of the date of this order, either deposit the cattle proceeds representing cash collateral in an interest bearing account or with the chapter 12 trustee who is ordered to deposit the funds in an interest bearing account, and the debtor shall file and serve proof of such deposit with the court within the five days period; and
FURTHER ORDERED if the debtor fails to abide by the terms of this order, the relief requested will be granted without further notice or hearing; and
FURTHER ORDERED that the debtor shall, within twenty days of this order amend its financial reports to reflect the cattle sale and account for the cash collateral on hand.