Ben Barry, United States Bankruptcy Judge.
On April 27, 2017, Bank of Gravett [the bank] filed the above-captioned adversary proceeding. In its adversary proceeding, the bank alleged that two debts owed by the debtor to the bank are nondischargeable under 11 U.S.C. §§ 523(a)(2), (a)(4), and (a)(6). On May 26, 2017, the debtor filed his answer. The Court held a trial on August 15, 2017.
The Court has jurisdiction over these matters under 28 U.S.C. § 1334 and 28 U.S.C. § 157, and they are core proceedings under 28 U.S.C. § 157(b)(2)(I) and (L). This order contains findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
From 2009 to early 2014, the debtor took out several loans with Bank of Gravett — some personal in nature and some agricultural. All of the debtor's loans with the bank were handled by Kevin Rieff [Rieff], a vice-president and loan officer at the bank from 2006 to the end of October 2015.
(Stip. Ex. 2) The 2014 schedule designated "Decatur Livestock" as the sole potential buyer of the debtor's cattle. On May 29, 2014, the bank sent a Notice of Security Interest to Decatur Livestock Auction [Decatur Livestock], notifying Decatur Livestock that the Bank of Gravett held a security interest in "all livestock" of the debtor and instructing Decatur Livestock to make checks jointly payable to the debtor and the bank. (Stip. Ex. 4) The debtor did not sell any cattle through Decatur Livestock in 2014, but sold approximately 100 head of cattle to individual buyers that he had located primarily through various internet sites. The debtor's 2014 federal income tax returns reflect income of $168,837 from "cattle sold." (Def. Ex. 3)
In June 2014, the debtor and Wyatt Arnold [Arnold] formed TNA Farms, LLC
On September 23, 2015, the debtor obtained a six-month loan from the bank in the amount of $72,116 [2015 loan]. The debtor combined the 2015 loan proceeds with $48,000 of his own money to purchase 60 black crossbred heifers for $120,000. As with the 2014 loan, Rieff was the loan officer assigned to the 2015 loan. To assist with the bank's evaluation of the debtor's loan application, the debtor gave Rieff his 2014 tax returns stating income of $168,837 from cattle sales. At trial, Rieff testified that he reviewed the debtor's tax returns before the bank extended the 2015 loan and acknowledged that the returns provided information about the extent of the debtor's cattle sales in 2014. However, Rieff did not recall asking the debtor if he had disclosed the buyers or received permission from the bank to sell cattle in 2014. Trial Tr., 40. If a loan exceeded certain parameters, the bank required Rieff to submit his recommendation to a committee for final approval or rejection of the loan. In recommending to the committee that the bank approve the debtor's 2015 loan, Rieff noted that
(Def. Ex. 2) Rieff also specified that the loan would "be secured by lien on the cattle to be purchased. The group consists of 60 black heifer bred in the 2nd trimester with calving dates from the [sic] Feb 1st to March 1st. LTV will be 60% of purchase price with value supported by comparable sales at local markets." (Def. Ex. 2). Although Rieff stated in his recommendation that the debtor would repay the loan from the sale of the cattle, he also recognized that the debtor had "satisfactory bank history and has demonstrated ability to service loans with this payment structure. Credit history is good and repayment capacity is adequate without additional income from the sale of this group of cattle. [L]oan maturity has been structured to coincide with identified source of repayment." (Def. Ex. 2) The bank approved
The Agricultural Security Agreement executed by the debtor and Rieff on September 23, 2015, provided, in relevant part:
(Stip. Ex. 6) The Collateral also encompassed
(Stip. Ex. 6) The Agricultural Security Agreement additionally provided as follows:
(Stip. Ex. 6) As with the 2014 loan, the debtor was required to execute a schedule of buyers [2015 schedule]. The 2015 schedule was signed by both the debtor and Rieff but, unlike the 2014 schedule, the 2015 schedule did not designate Decatur Livestock as a potential buyer of the debtor's cattle. In fact, the 2015 schedule did not designate any potential buyers but instead featured a blank space after the statement that "[t]he following is a list of those buyers, selling agents, and commission
After the debtor obtained the 2015 loan, he continued to sell cattle directly to cattle lots and corporate buyers, as well as to buyers that he had located through internet sites. Trial Tr., 125. He also continued to deposit funds from the sale of his cattle into the two LLC bank accounts, with most of the funds passing through the LLC account at the Bank of Gravett. At trial, the bank's attorney asked Rieff, Jarvis, and Johnson if they knew that the debtor had sold cattle upon which the bank had a lien under the name of TNA Farms. All three witnesses replied that they were unaware of any such sales. Trial Tr., 30, 65, 70. The debtor acknowledged that he had, in fact, sold cattle under both his own name and that of TNA Farms, but explained that the cattle that he had sold under his own name were his and the cattle that he had sold under the name of TNA Farms were owned by TNA Farms. Trial Tr., 137-38. He testified unequivocally that he had sold "not a single cow" upon which the bank had a lien under the LLC's name. Trial Tr., 104.
In addition to its efforts to show that the debtor had sold his own cattle under the LLC's name — which Rieff, Jarvis, and Johnson all agreed would have been a breach of the security agreements, had it happened — the bank directed much of its evidence toward establishing that the debtor had breached the security agreements in other ways, including: selling cattle to buyers other than Decatur Livestock — the entity designated as a potential buyer of the debtor's livestock on the 2014 schedule; failing to provide the bank with updated schedules or written lists identifying prospective buyers fourteen days prior to each sale; failing to ensure that buyers made checks jointly payable to the debtor and the bank; commingling sale proceeds from the sale of cattle upon which the bank had a lien with other funds by depositing the proceeds into the LLC bank accounts; and failing to remit proceeds of the cattle sales to the bank.
In response, the debtor testified that he believed that his sales, which were conducted in the ordinary course of his cattle business, fell outside the scope of the stringent requirements listed most specifically under "Sale of Collateral" in the 2015 Agricultural Security Agreement. The debtor based this belief on the two preceding sections in the agreement entitled "Removal of Collateral" and "Transactions Involving Collateral," which the debtor interpreted to exclude sales conducted in the ordinary course of business from many of the requirements that followed.
According to the debtor, "the cattle market took a fairly large dip" from November 2015 to March 2016. Trial Tr., 106. The debtor testified that due to the market downturn, he began selling cattle at a loss and realized that he would be unable to pay off the $50,000 balance of the 2015 loan when it matured on March 23, 2016. As a result, the debtor contacted the bank prior to the 2015 loan's maturity date to request a six-month renewal of the loan. When Rieff left the bank in late October 2015, the debtor's loans were assigned to loan officer Rhonda Jarvis. According to Jarvis, a loan renewal required a 10% principal-reduction payment, a payment sufficient to bring the interest current on the loan, the payment of a renewal fee, and a satisfactory inspection of the collateral securing the original loan.
On March 7, 2016, the bank sent Rickie Stark [Stark] to inspect the debtor's cattle. Stark noted in his inspection report that the debtor had 67 head of cattle comprised of 50 bred cows, 9 pairs, 3 bulls, and 5 replacement heifers. Although Stark's report was devoid of any reference to the 60 black crossbred heifers securing the 2015 loan, Jarvis deemed the inspection results sufficient for the renewal because the bank was "still adequately collateralized." Trial Tr., 61.
The debtor testified that in early August 2016, he realized that he would not be able to pay the $50,000 balance of the 2015 loan when it became due on September 8, 2016. At least thirty days before the 2015 loan matured, the debtor met with Jarvis about extending the maturity date for an additional six to twelve months or obtaining a new line of credit until the cattle market improved — which the debtor expected, at that point, to happen within six to twelve months based upon the fact that the market had by then been on a downward trend for eight months. He testified that "one good month" would have allowed him to get back on track because he sometimes made $30,000 in a single month. Trial Tr., 110. The debtor testified that his cattle inventory had dwindled to the point that he could not offer the bank cattle as collateral for the extension or line of credit and "needed to offer them something else." Trial Tr., 109. The debtor said that he offered the bank approximately $20,000 worth of tractors and farm equipment as security for the extension or line of credit that he sought from the bank in August 2016. Based upon his discussions with the bank about the type of collateral that he could pledge for an extension or line of credit, the debtor testified that the bank was "fully aware" by August 2016 that he had few cattle left. Trial Tr., 109. Jarvis testified that the bank denied the debtor's application for a new loan or line of credit because the debtor had "excess debt against what his income was." Trial Tr., 56. The debtor had not anticipated the bank's denial of his request for more time to pay the 2015 loan or a line of credit, testifying that
Trial Tr., 110.
The debtor did not pay the balance of the 2015 loan when it matured on September 8, 2016. Jarvis testified that ten days after the loan matured, she tried to contact the debtor but was initially unsuccessful. Trial Tr., 57. Subsequently, the bank determined that there was a potential problem with the payment of the debtor's 2015 loan and assigned loan officer Katherine Johnson to the debtor's loans. On three occasions — October 11, 2016, October 13, 2016, and November 3, 2016 — Johnson and Jarvis went to the debtor's property and attempted to inspect his cattle. On the
At trial, the debtor confirmed that he told Jarvis and Johnson on November 3 that the cattle were on feed lots, but reiterated that he had already told the bank in August 2016 that he had sold most of the cattle and, as a result, could not offer cattle as collateral for the line of credit that he was seeking at that time. He maintained, however, that his statements to the bank in August and on November 3 were both true and were consistent with one another due to the way a contract to sell cattle to a lot is structured.
Trial Tr., 96-7. Operating under this contractual framework, the debtor testified that he had set aside $3000 in anticipation of owing the cattle lot money when he fulfilled the Spring 2016 contract because of the depressed market. Trial Tr., 113-14.
The debtor said that at the end of the November 3 discussion, he told Jarvis and Johnson that he would pay the bank what he owed but could not pay it all immediately and needed to work something out with the bank. He testified that he believed that Jarvis and Johnson were going to go back to the bank and "see what deal they could do." Trial Tr., 112. Because he heard nothing further from the bank after November 3, the debtor telephoned Johnson at the end of November, at which time Johnson offered to let him pay interest on the loan immediately and the remaining balance of the loan in 30 days. The debtor said that he could not come up with $50,000 within 30 days. The bank offered no further accommodation.
At the time the debtor fulfilled the Spring 2016 sale contract with the cattle lot, the market suddenly improved enough to release the debtor from his anticipated contractual obligation to pay the lot $3000 pursuant to the sliding scale.
In its adversary proceeding, the bank seeks a determination that the debts resulting from the 2014 and 2015 loans are excepted from discharge pursuant to § 523(a)(2)(A), (a)(4), and (a)(6). However, because § 523(a)(6) is not applicable in chapter 13 cases, the Court finds that the bank is not entitled to relief under subsection (a)(6) and denies that portion of the bank's complaint. See 11 U.S.C. § 1328(a)(2); see also Handeen v. LeMaire (In re LeMaire), 898 F.2d 1346, 1348 (8th Cir. 1990). Courts must construe exceptions to discharge "strictly and narrowly against the creditor and liberally in favor of the debtor to facilitate the debtor's fresh start." Hernandez v. Sullier (In re Sullier), 541 B.R. 867, 877 (Bankr. D. Minn. 2015) (citing Reshetar Sys. Inc. v. Thompson (In re Thompson), 686 F.3d 940, 944 (8th Cir. 2012)); see also Arvest Mortgage Co. v. Nail (In re Nail), 680 F.3d 1036, 1038 (8th Cir. 2012) (citing Belfry v. Cardozo (In re Belfry), 862 F.2d 661, 662 (8th Cir. 1988)). Therefore, the debts in question will not be excepted from discharge unless the bank proves each element
Section 523(a)(2)(A) provides, in relevant part, that a discharge under § 1328(b) does not discharge an individual debtor from any debt
11 U.S.C. § 523(a)(2)(A). To prove its case under § 523(a)(2)A) based upon a false representation, the bank must prove that the debtor: (1) made a representation; (2) with the knowledge of its falsity; (3) deliberately for the purpose of deceiving the bank; (4) who justifiably relied on the representation; and which (5) proximately caused damage to the bank. See Hernandez v. Gen. Mills Fed. Credit Union (In re Hernandez), 860 F.3d 591, 602 (8th Cir. 2017) (citation omitted).
Regarding the first element, the Court finds that the bank proved that the debtor made the following representations:
(1) on May 29, 2014, and September 23, 2015, the debtor signed promissory notes, security agreements, and schedules of buyers, representing to the bank that he would abide by the terms contained within those documents;
(2) on March 7, 2016 — the day before the bank approved the renewal of the 2015 loan — the debtor represented to Stark, the bank's cattle inspector, that he was the sole owner of the cattle and that there were no encumbrances or liens on the cattle except for the bank's;
(3) on March 8, 2016, the debtor signed a promissory note in connection with the bank's renewal of the 2015 loan, representing that he would repay the loan by September 8, 2016;
(4) on November 3, 2016 — approximately six weeks after the debtor defaulted on the 2015 loan — the debtor represented to Jarvis and Johnson that the cattle were on a feed lot waiting to be sold;
(5) on January 12, 2017 — after the bank had sued the debtor in state court — the debtor represented to a deputy sheriff that he had sold the last of the cattle in August.
However, not every representation — even if false — is germane to a dischargeability analysis under § 523(a)(2)(A). Marcusen v. Glen (In re Glen), 427 B.R. 488, 494 (8th Cir. BAP 2010). Rather, in order for a representation to be relevant in the context of subsection (a)(2)(A), the debtor must have made the representation during a certain time frame — specifically, either prior to or contemporaneously with the
Because the debtor obtained no new loans or renewals on November 3, 2016, or January 12, 2017 — and because common sense dictates that the debtor could not have "obtained" the May 29, 2014 loan, the September 23, 2015 loan, or the March 8, 2016 renewal as a result of representations that he made to the bank months later on November 3, 2016, and January 12, 2017 — the Court finds that the debtor's November 3, 2016 and January 12, 2017 representations are not relevant to its analysis under subsection (a)(2)(A). Therefore, the Court will not consider those two representations further in relation to this subsection. The Court does find, however, that the debtor's representations on May 29, 2014, September 23, 2015, March 7, 2016, and March 8, 2016, fall within the relevant time frame and therefore satisfy the first element required for a finding of nondischargeability under subsection (a)(2)(A).
To meet the second element under (a)(2)(A), the Court must find that the debtor made a representation with the knowledge that it was false. The Court will examine the debtor's representations on May 29, 2014, September 23, 2015, March 7, 2016, and March 8, 2016, in turn below.
On May 29, 2014, the debtor obtained the 2014 loan. On that date, he signed a Note, Disclosure, and Security Agreement that required him to obtain written permission from the bank prior to selling collateral for the loan and also required the debtor to deliver any "proceeds and products" of the collateral to the bank upon receipt. The 2014 security agreement contained no exception for sales conducted in the ordinary course of business. Also on May 29, 2014, the debtor executed the 2014 schedule designating Decatur Livestock as the only potential buyer of the debtor's cattle. At trial, the debtor did not dispute that he failed to seek the bank's permission prior to selling cattle upon which the bank had a lien. Similarly, the debtor acknowledged that he used sale proceeds to buy more cattle instead of delivering the proceeds to the bank. However, the relevant inquiry for the "knowledge of falsity" element in this instance is not whether the debtor subsequently breached the agreement but whether the debtor knew that he was going to do so when he signed the documents. The Court finds that the bank did not carry its burden of proving that the debtor knew that his May 29, 2014 representations were false at the time that he made them.
As of May 29, 2014, the debtor had bought and sold cattle on a small scale but had not yet attempted to sell cattle in volume as his sole source of income. Additionally, although the debtor had taken out one loan from the bank prior to May 29, 2014, that he used, in part, to buy cattle, the Court has no evidence regarding the terms of that prior agreement — specifically, whether it required the debtor to seek the bank's permission prior to selling cattle or dictated what the debtor could do with sale proceeds. Further, the Court has no evidence regarding the methods that the debtor employed to buy and sell cattle prior to making cattle sales his full-time occupation. There is no question, however, that the debtor began selling cattle in volume only after he obtained the 2014 loan on May 29, 2014. Due to the debtor's inexperience in high-volume cattle sales prior to May 29, 2014, the Court finds it unlikely
On September 23, 2015, the debtor obtained the 2015 loan. On that date, he signed a promissory note, the Agricultural Security Agreement, and the 2015 schedule. In contrast to the 2014 loan, which was consummated on commercial loan documents, the parties executed the 2015 loan on documents tailored specifically to agriculture loans. As a result, the Agricultural Security Agreement executed with the 2015 loan contained significantly expanded provisions governing the debtor's sale of livestock and the parameters within which the debtor was allowed to handle and use sale proceeds. Also on September 23, 2015, the debtor executed the 2015 schedule. This time, the debtor made no representation that he would sell cattle to Decatur Livestock, but instead signed a blank schedule. As with the 2014 loan, whether the debtor breached at least some of the terms of the Agricultural Security Agreement is not in serious controversy at this point. The Court finds that the debtor did not strictly adhere to his contractual duties to supply the bank with names of buyers and updated schedules of buyers prior to sales, obtain the bank's written permission prior to sales, remit sale proceeds to the bank, and segregate sale proceeds separate from other monies. However, the Court finds that the debtor did not know when he signed the agreement on September 23, 2015, that he would operate his business in violation of its terms.
By September 23, 2015, the debtor was a more seasoned participant in the cattle business than he had been when he executed the 2014 loan documents — making over $168,000 in 2014 from cattle sales to various buyers that, notably, did not include Decatur Livestock. Based upon his prior success using the internet to sell cattle, the Court finds it more likely than not that the debtor knew on September 23, 2015, that he would continue to sell cattle on short notice to internet-based buyers without obtaining the bank's prior permission, without supplying the names of the buyers to the bank before the sales, and without delivering the proceeds of the sales to the bank for application to his loan balances. However, the Court also finds that the debtor believed that these practices — which were by then in the ordinary course of his business — were allowed under the Agricultural Security Agreement, which — unlike the 2014 security agreement — contained at least a colorable exception for sales conducted in the ordinary course of business. Additionally, prior to the bank's approval of the 2015 loan, the debtor had provided his 2014 tax returns to Rieff — returns that clearly indicated that the debtor had sold a substantial number of cattle in 2014. Yet, the bank asked the debtor no questions about his lack of compliance with the 2014 security agreement or 2014 schedule before approving the 2015 loan. The debtor had transacted sales through the internet for over a year when he signed the 2015 agreement and had no reason to think on September 23, 2015, that the bank was opposed to the way that he was conducting his business. Further, the fact that Rieff signed off on the debtor's blank buyers' schedule on September 23, 2015, could conceivably have been interpreted by the debtor as another indication
On March 7, 2016, the debtor represented to Stark, the bank's cattle inspector, that he was the sole owner of the 67 cattle noted on Stark's inspection report and that there were no encumbrances or liens on the cattle except for the bank's. Although the debtor later sold the cattle — at least in part pursuant to the Spring 2016 contract that the debtor entered into in late March or early April 2016 — there is no evidence that on March 7, 2016, the debtor's representation to Stark was false. As a result, the Court has no basis for finding that it was knowingly false and will not further consider the debtor's March 7 representation in relation to subsection (a)(2)(A).
On March 8, 2016, the bank approved the renewal of the 2015 loan. On that date, the debtor signed a new promissory note, but did not sign a new security agreement — despite the bank's erroneous reference to a March 8, 2016 security agreement in the promissory note. Therefore, the only representation that the debtor made on March 8, 2016, was that he would repay the 2015 loan on its new maturity date of September 8, 2016. The Court finds that there is no evidence that the debtor knew on March 8, 2016, that the cattle market would remain depressed and that he would be unable to pay the bank the $50,000 balance of the 2015 loan on September 8, 2016 — particularly when the debtor sometimes made more than half of that amount in a single month.
Section 523(a)(4) provides that a discharge under § 1328(b) "does not discharge an individual debtor from any debt... for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny." 11 U.S.C. § 523(a)(4). Here, the bank alleges that the debtor is not entitled
In the instant case, the bank has not directed the Court to a state statute, common law tenet, or specific contractual provision that it believes created a trust of which the debtor became trustee — and the Court finds none. However, to the extent the bank relies on the provision in the Agricultural Security Agreement that states "[u]nless waived by Lender, all proceeds from any disposition of the Collateral (for whatever reason) shall be held in trust for Lender...." the Court finds that the provision did not create the type of trust falling within the scope of subsection (a)(4). Although the document references the word "trust," "`[i]t is the substance of a transaction, rather than the labels assigned by the parties, which determines whether there is a fiduciary relationship for bankruptcy purposes.'" In re Nail, 680 F.3d at 1040 (citing Barclays Am./Bus. Credit, Inc. v. Long (In re Long), 774 F.2d 875, 878-79 (8th Cir. 1985)). In addition, "[m]ost secured lending agreements impose duties on the borrower in dealing with the creditor's collateral, but those duties seldom create a § 523(a)(4) fiduciary capacity." In re Nail, 680 F.3d at 1040. In In re Nail, the Eighth Circuit stated:
Id. Based upon the Eighth Circuit's historical reluctance to construe a contract between a secured lender and a debtor as a trust for purposes of (a)(4), regardless of the language used by the parties — and absent any direction from the bank regarding the basis for its allegation that the debtor committed fraud or defalcation while acting in a fiduciary capacity — the Court finds that the debtor's duties to the bank were contractual rather than fiduciary in nature. Therefore, the Court finds that the bank failed to carry its burden of proof under subsection (a)(4) and denies the bank's complaint as to § 523(a)(4).
For all of the above stated reasons, the Court finds that Bank of Gravett failed to prove by a preponderance of the evidence that the debts owed to the bank are nondischargeable. As a result, the Court denies Bank of Gravett's complaint in its entirety.
IT IS SO ORDERED.
7 U.S.C.A. § 1631(h).
(Compl. ¶ 26.)
