Sale of collateral requires consent

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For the first time in decades, the Wisconsin Supreme Court has issued an opinion addressing receiverships under Chapter 128.

Attorney Tim Nixon said he welcomes the opinion, and not just because he represents the prevailing party.

“We use Chapter 128 all the time, but the Court hasn’t addressed it in years,” Nixon said. “It will give assurance to secured lenders what the process is going to be.”

The court unanimously held on July 8 that, in contrast to bankruptcies under federal law, a court cannot order a secured lender’s collateral sold without its consent.

Olsen’s Mill Inc., one of the largest grain elevators in Wisconsin, entered into Chapter 128 in 2009. Its largest creditor was a French bank, BNP Paribas, which was owed approximately $58 million.

GNP Paribas had a lien on Olsen’s Mill’s equipment, real estate, inventory and general intangibles.

The receiver requested and received authority to sell Olsen’s Mill’s assets, “subject to the consent of BNP Paribas.”

The two largest bidders consisted of one group headed by Olsen’s Mill’s prior management, and PRM, a group affiliated with BNP Paribas.

PRM submitted the highest bid, but the court ordered the receiver to sell the assets to the other bidder, after it agreed to pay the same price bid by PRM. BNP Paribas refused to consent to the sale.

The Court of Appeals affirmed, finding the case moot, because the sale had already occurred. The Supreme Court accepted review, and reversed, in an opinion by Justice Ann Walsh Bradley.

The court began by acknowledging that, although Chapter 128 was created in 1937, “There are relatively few appellate cases devoted to its interpretation.”

Accordingly, the court provided an overview of the law and its processes, before reaching the issue in dispute.

Turning to the consent issue, the court relied on Wisconsin Brick & Block Corp. v. Vogel, 54 Wis.2d 321, 326, 195 N.W.2d 664 (1972), in which it held, “A secured creditor under ch. 128 cannot have his security taken away form him without his consent.”

The court further relied on sec. 409.315(1)(a), which provides, “A security interest or agricultural lien continues in collateral notwithstanding sale, lease, license, exchange, or other disposition thereof unless the secured party authorized the disposition free of the security interest or agricultural lien.”

In addition, sec. 128.18(4) provides that liens “given or accepted in good faith and for a present consideration which have been properly recorded or filed shall, to the extent of such present consideration only, not be affected by the provisions of [chapter 128].”

Finally, the court relied on commentary in a law review article, Paul A. Lucey, The Liquidating “Chapter 11” in State Courts, Am. Bankr. Inst. J., Feb. 2001, at 12, which opines, “A bankruptcy trustee can use collateral, even cash collateral, over the objection of a secured creditor if that creditor’s interests are adequately protected under [provisions of the bankruptcy code]. There is no comparable power under state receivership law. If the secured creditor in a receivership wants to take its ball and go home, the game is over.”

Finding the statutes, case law, and commentary all in accord, the court held, “A secured creditor may withhold its consent to the sale of its collateral in a chapter 128 proceeding. If it does, the court cannot order the sale of the collateral free and clear of the secured creditor’s lien.”

The court rejected the argument that, merely by participating in the proceedings, BNP Paribas consented to the sale.

In Wisconsin Brick & Block, the court said that collateral could not be sold because the creditor did not participate in the proceedings.

In the case at bar, the court said that the emphasis on participation merely reflected the fact that the creditor in that case did not participate. But the court concluded that, while consent could not be found in the absence of participation, participation itself does not equate to consent.

Nixon said he is relieved that the court held that consent may not be implied based on a creditor’s participation in the receivership proceedings. While the argument is rarely accepted by circuit courts, Nixon said, it is frequently raised, and he is glad to see it put to rest.

However, the court declined to order any remedy, finding that the circuit court would be better equipped to make the findings necessary to fashion an appropriate remedy.

But the court’s declining to fashion a remedy does not sit well with Thomas Olejniczak, who represents Olsen’s Mill.

While Olejniczak said the result was good in that it provides clarity in Chapter 128 proceedings, he said, “It will be a mess to figure out on remand. The opinion does nothing for the parties in this case, from a practicality standpoint.”

What the Court Held

Case: BNP Paribas v. Olsen’s Mill, Inc., No. 2009AP1007

Issue: Can collateral be sold in a Chapter 128 receivership, without the lienholder’s consent?

Holding: No. Unlike bankruptcy, there are no nonconsensual cramdowns in receivership.

Attorneys: For Plaintiff: Brady C. Williamson, Katherine Stadler, Patricia L. Wheeler, Joseph L. Wielebinski; For Defendant: Thomas M. Olejniczak, Colleen M. Kelly, Patrick M. Blaney

David Ziemer can be reached at [email protected].