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In re Liberty Milk Marketing Cooperative

Court of Appeals of Wisconsin, District III

September 10, 2019

In the matter of Liberty Milk Marketing Cooperative:
v.
Nasonville Dairy, Inc., Defendant-Appellant. Daniel R. Freund, as Receiver for Liberty Milk Marketing Cooperative, Plaintiff-Respondent,

          APPEAL from a judgment of the circuit court for Chippewa County: No. 2014CV421 JAMES M. ISAACSON, Judge. Affirmed.

          Before Stark, P.J., Hruz and Seidl, JJ.

          HRUZ, J.

         ¶1Nasonville Dairy, Inc. ("Nasonville") appeals a judgment awarding $290, 000 to Daniel Freund, as receiver for Liberty Milk Marketing Cooperative ("Liberty"). Following a bench trial, the circuit court concluded that Nasonville's receipt of a $290, 000 payment from Liberty, which occurred less than one month prior to when Liberty entered receivership, constituted a preferential transfer that disadvantaged Liberty's other similarly situated creditors. The court concluded the preference was voidable and ordered that Freund recover the $290, 000 payment from Nasonville.

         ¶2 The first issue on appeal concerns a question of statutory interpretation regarding what elements must be proved to render a preference voidable under Wis.Stat. § 128.07(2) (2017-18).[1] We conclude a preference is voidable under that subsection if (provided the other statutory requirements have been satisfied) an ordinarily prudent business person would, under the circumstances, have reasonable cause to believe both that the transferor is insolvent and that the effect of the transfer would be to enable the recipient to obtain a greater percentage of debt than any other creditor of the same class.

         ¶3 The circuit court did not explicitly resolve the parties' disagreement regarding how Wis.Stat. § 128.07(2) should be interpreted, but it did make findings of fact and ultimately determined that Nasonville had reasonable cause to believe its receipt of the $290, 000 would effect a preference. We conclude the evidence was sufficient to support the court's conclusion that the payment at issue constituted a voidable preference. Specifically, there was sufficient evidence upon which the court could reasonably determine that Nasonville had reasonable cause to believe at the time of the payment both that Liberty was insolvent and that receipt of the payment would allow Nasonville to obtain a greater percentage of its debt than other general unsecured creditors. We therefore affirm.

         BACKGROUND

         ¶4 The basic facts in this case are undisputed. To properly understand the legal claims and arguments at issue in this appeal, a fairly detailed recitation of the nature and history of the transactions between Liberty and Nasonville, as well as of other facts, is required.

         ¶5 Liberty was a milk contractor that acted as a producer agent, buying milk from dairy farmers and then supplying that milk to customers. As a producer agent, Liberty was licensed and regulated by the Wisconsin Department of Agriculture, Trade and Consumer Protection (DATCP), which conducted periodic reviews to ensure that Liberty's producers were being paid. Liberty sold the milk from its producers to cheesemakers like Nasonville and other dairy plants.

         ¶6 In the summer of 2011, Nasonville's general manager, Kenneth Heiman, made a $100, 000 personal loan to Kevin Dickinsen, who was the principal of Liberty.[2] The loan was apparently designed to forestall Dickinsen's home from being foreclosed upon. Heiman expected relatively prompt repayment of the loan (i.e., at some point in 2012), but Dickinsen told Heiman he was unable to pay him and would attempt repayment from other investments. Dickinsen never repaid the money.

         ¶7 According to the exhibits admitted at trial, the business transactions involving Liberty and Nasonville for the remainder of 2011 were mostly unremarkable. Liberty would ship milk to Nasonville and then send an invoice approximately twice per month. The parties were dealing in significant quantities of milk, with the invoices between October and December 2011 totaling hundreds of thousands of dollars each month.[3] Nasonville would issue checks to Liberty shortly after receiving the invoices, usually within about one week.

         ¶8 In January 2012, Liberty and Nasonville began engaging in a series of short-term loans, known as "milk advances." Heiman testified that Dickinsen requested the advances because Liberty was having difficulty paying its producers while it awaited milk payments from its customers. The milk advance transactions were structured such that Nasonville would make a loan to Liberty, which Liberty would then repay once it had received payments from its customers. In some instances, Liberty assigned the receivable item to Nasonville, and Liberty's customers paid Nasonville directly for milk they had purchased from Liberty.

         ¶9 For example, the first substantial milk advance appears to have occurred on January 9, 2012. On that date, Nasonville loaned Liberty $500, 000. Approximately one week later, Liberty invoiced its various customers for milk deliveries and assigned those receivables to Nasonville. Cheryl Aumann, Nasonville's accountant, testified the advance was repaid as Nasonville received the checks from Liberty's customers. Nasonville continued making lump-sum advances directly to Liberty between January and June 2012. Generally speaking, the transactions during that time resulted in a zero balance between Liberty and Nasonville, as Nasonville received payments directly from Liberty's customers, including itself, in the amount of the advances.

         ¶10 The milk advances continued for the remainder of 2012 until Liberty's collapse in late 2014. By mid-2013, Liberty was taking on increasing amounts of debt to Nasonville; Nasonville's attorney acknowledged there were "six figure arrears for pretty much the entire year of 2013." During April 2013, for example, Liberty's account had a positive balance only once, and at one point Liberty owed Nasonville over $550, 000. For the remainder of the year, Liberty was always in debt to Nasonville in varying amounts between approximately $34, 000 and $795, 000.

         ¶11 Liberty was able to become current on the advances at various points in 2014, but it frequently owed Nasonville hundreds of thousands of dollars, including $860, 321.69 on February 17, 2014. On November 30, 2014 (what was to become a significant date related to the receivership action), Liberty entered the day owing Nasonville approximately $560, 000. After Liberty invoiced two customers (one of them Nasonville) for milk sales, Liberty's debt to Nasonville on the milk advances stood at $16, 832.35.

         ¶12 When asked at trial about the significant amounts Liberty owed Nasonville, Aumann agreed Nasonville was extending more credit than was necessary for the milk advances, including as of November 30, 2014. Aumann, referencing a spreadsheet accounting of all milk advances and receivable assignments between the parties, agreed the approximately $16, 800 loan balance as of November 30 had been discounted for an outstanding invoice to a Liberty customer in an amount of more than $425, 000. Because Nasonville had not yet been paid for that invoice, Liberty's actual indebtedness to Nasonville at the time was approximately $443, 000.

         ¶13 Nasonville also made loans to entities associated with Dickinsen, which the parties refer to as the "Plowshare loans." The Plowshare loans were issued between February 2012 and November 2014 in an aggregate amount of $405, 000. The loans were, at least in part, intended to help Liberty pay its dairy farmers, but the loans were not issued directly to Liberty. Nonetheless, both Aumann and Heiman testified at trial that they believed at the time of the relevant transactions that Liberty owed or would be repaying the Plowshare debt.[4] The Plowshare loans were secured by a mortgage on real property owned by one of Dickinsen's other entities, which was located in the Town of Bridge Creek, Wisconsin. The Plowshare Loans were not repaid.

         ¶14 Beginning in January 2014, Nasonville began making another form of short-term loans to Liberty, known as "check swaps." In such transactions, Liberty and Nasonville would exchange checks for an identical amount. Liberty would cash the Nasonville check immediately, while Nasonville would hold Liberty's check until Dickinsen told Nasonville sufficient funds were available, usually a period of days or a few weeks. Dickinsen explained that these transactions were necessary because certain customers had changed their pay schedules and those customers' checks were not arriving before Liberty had to pay its producers. In 2014, these transactions occurred alongside the milk advances.

         ¶15 The final check swap occurred on November 24, 2014, in the amount of $290, 000. Nasonville cashed Liberty's check on November 30, 2014. The check cleared; indeed, none of Liberty's checks to Nasonville were returned for insufficient funds. However, in mid-December 2014, Liberty's producers began contacting the DATCP with complaints that Liberty's checks were bouncing. The DATCP had conducted a compliance audit of Liberty in November 2014, but it was unaware of the check swaps at that time and had every indication that Liberty's producers were being timely paid.

         ¶16 On December 18, 2014, Liberty's field representative, Thomas Olson, began informing farmers that Liberty was going into default and they would not be receiving a milk check. Shortly thereafter, Liberty acknowledged it was insolvent and filed an assignment for the benefit of its creditors in the Chippewa County Circuit Court. The circuit court subsequently appointed attorney Daniel Freund as receiver. Nasonville filed a claim in the receivership proceedings for a total of approximately $465, 000, which included the remaining amount due on the milk advances as well as the Plowshare loans.

         ¶17 In 2016, Freund filed a complaint against Nasonville alleging, as relevant here, that Liberty was not liable for the Plowshare loans and that Nasonville's receipt of the $290, 000 check swap payment on November 30, 2014, constituted a voidable preference under Wis.Stat. § 128.07(2). Accordingly, the receiver sought a judgment requiring Nasonville to disgorge the $290, 000 for the benefit of all of Liberty's creditors. The parties stipulated to allow Nasonville's claim to proceed as a general unsecured claim in the amount of approximately $41, 000, while the circuit court set a bench trial on the receiver's preference claim.

         ¶18 Prior to trial, the parties notified the circuit court about a disagreement over the correct interpretation of Wis.Stat. § 128.07(2). Under that subsection, a preference is voidable if, among other things, "the recipient has reasonable cause to believe that the enforcement of the judgment or transfer would effect a preference." Id. The parties disputed the meaning of that phrase, with Freund arguing the statutory language meant he only had to prove Nasonville had reasonable cause to believe that Liberty was insolvent at the time it received the $290, 000 payment. Nasonville, on the other hand, argued there were two necessary components: knowledge of insolvency and knowledge of preferential treatment. Nasonville contested whether it had reasonable cause to believe both that Liberty was insolvent and that the payment at issue would enable Nasonville to obtain a greater share of its debt than Liberty's other creditors in the same class.[5]

         ¶19 At trial, Nasonville stipulated to most of the elements necessary for the receiver to prove a voidable preference existed. However, Nasonville disputed "the knowledge of insolvency and knowledge of the fact that receipt of the payment would effect a preference." After the evidentiary phase of the trial had been completed, the parties again raised the legal issue regarding the correct interpretation of Wis.Stat. § 128.07(2) in their closing arguments. The circuit court granted judgment for Freund in an oral decision immediately following the arguments, but it did not offer a specific resolution of the parties' dispute concerning the correct interpretation of § 128.07.

         ¶20 Rather, the circuit court made certain findings of fact, which it then stated were sufficient to "put an ordinarily prudent [person] on notice … that this check was a preference." Specifically, the court found that Nasonville knew Liberty was having significant cash flow problems, causing it to engage in unusual business transactions with Nasonville. With respect to the milk advances, the court concluded such transactions should have raised concerns because the money advanced was in amounts larger than Liberty's sales.

         ¶21 Additionally, the circuit court found that despite Dickinsen's explanation that the check swaps were necessary for Liberty to meet its twice-monthly obligations to its producers, the check swaps were occurring much more frequently, including seven swaps in October 2014. Finally, the court found that Nasonville viewed and treated Liberty and Dickinsen's other entities as interchangeable, and that Dickinsen was known to be in a poor financial condition based upon his failure to repay the Plowshare loans or Heiman's personal loan to him. The court found this conduct, in its totality, evidenced a "scheme" to evade DATCP scrutiny, and the court remarked that it ...


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