SHON HASTINGS, Bankruptcy Judge.
First Nebraska Bank ("Bank") filed a Complaint seeking denial of Debtors/Defendants Nolan Balfour's and Maegan Balfour's discharge under 11 U.S.C. §§ 727(a)(2) and 727(a)(4). Alternatively, the Bank requests that the Balfours' debt to the Bank be excepted from discharge under 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(2)(B). In its Complaint, the Bank alleges the Balfours sold or transferred collateral that serves as security for debt to the Bank but did not submit the proceeds to the Bank, misrepresented their financial condition and intentionally provided the Bank incorrect financial information on which the Bank relied in making its lending decisions. The Balfours filed an Answer to the Complaint, denying they intentionally provided the Bank false information and denying that the Bank relied on information they provided in making its lending decisions. Defendants denied other allegations as well. They seek an order dismissing the Complaint.
Nolan grew up in a family that farmed. In 2008, Nolan started his own farming operation. He began by farming a few hundred acres of land under a crop share arrangement using his grandfather's (Roger Balfour's) equipment. In 2010, Nolan began to rent land to grow crops. To finance the land rent and other farming expenses, Nolan secured financing from Heartland Community Bank in 2011 and 2012.
In 2012, Nolan and Maegan Balfour married. Nolan assumed exclusive responsibility for making decisions regarding the Balfours' farming operation. Maegan assisted with farming tasks such as moving trucks, "running the grain cart," and vaccinating cattle when asked. Although Maegan signed promissory notes, security agreements and some financial statements at the Bank's request after the couple married, she did not generate financial data for the Bank or provide financial information to the Bank until after the Bank began to pursue liquidation of its collateral. Maegan's role in managing their family finances related to paying household or "everyday living" expenses. She played little or no role in their farm business financing.
In the fall of 2012, Nolan signed a five-year agreement to rent land. To finance the Balfours' expanding farming operation, Nolan submitted an application for a 2013 operating line of credit to Heartland Bank. The Bank, successor to Heartland Community Bank, granted the loan to the Balfours. On March 4, 2013, the Balfours executed and delivered a promissory note to the Bank in the original principal amount of $1,160,000 (Note 1).
To secure Note 1, the Balfours signed Commercial Security Agreements granting the Bank security interests in personal property and assets, including farm products (such as livestock and crops), government payments and programs and "any and all personal property . . . whether such property is now existing or hereafter created, acquired or arising," including inventory, equipment, accounts and general intangibles.
Although the term of Note 1 extended from March 4, 2013, to December 31, 2017, the Bank provided financing under this note on an annual basis. According to Lydell Woodbury, President and Chief Executive Officer of the Bank, Note 1 required the Balfours to pay the sum advanced under the note in full at the end of each year or provide verification to the Bank that they owned assets sufficient to pay the debt in full if liquidated.
The general process the Bank used to decide whether to provide advances for the 2014, 2015, 2016 and 2017 operating seasons included a detailed review of the Balfours' financial information and meetings with Nolan about this information.
The financial information the Bank reviewed included a collateral analysis, cash flow statements, tax returns
Woodbury testified that Nolan and a loan officer began creating the Balfours' balance sheet in November and the parties often changed or supplemented it as late as April of the following year. Woodbury explained that the balance sheet is a financial document which shows a "snapshot" of a farmer's operation at a specific date and time. The Bank used market prices as part of this snapshot of the Balfours' farming operation. Nolan maintained that the Bank often obtained these market prices from FSA guidelines.
Nolan provided some of the information included on the balance sheets, including the number of bushels of grain and head of cattle. The parties dispute the extent of his contributions to some balance sheets, however. After the balance sheets were finalized, the Bank provided Nolan a copy of them.
Unlike in 2012 when Nolan's farm operation realized profit, the Balfours' farm operation suffered a loss in 2013. Nolan explained that the Balfours were committed to an expensive long-term land rent agreement and commodity prices were substantially lower than in 2012.
Beginning in late 2013 and extending through the spring of 2014, Nolan and a Bank representative met to discuss the Balfours' financial condition and to create the Balfours' 2013 year-end balance sheet. The Bank's analysis of the Balfours' 2013 financial information revealed that the Balfours did not possess sufficient grain inventory, livestock and other assets to either pay Note 1 in full or provide verification to the Bank that they owned collateral sufficient to pay the debt in full if liquidated. To cover this loss and enable the Balfours to maintain their operating line of credit, the Bank agreed to loan the Balfours additional funds.
On January 29, 2014, Maegan and Nolan executed and delivered a Promissory Note titled "Agricultural — Single Advance" in the sum of $103,069.00 (Note 2). Roger Balfour also signed Note 2. The purpose of this note was "to refinance carryover debt." Doc. 25 at 2. Note 2 provided a seven-year term, maturing on January 29, 2021. Note 2 is secured by the same assets that serve as security for Note 1.
In the summer of 2014, the Bank inspected the collateral that secured the Balfours' debt. During the collateral inspection, Nolan and a Bank representative drove around and looked at fields, machinery and livestock. The inspection revealed collateral consistent with the representations on the Balfours' January 9, 2014, FYE 2013 Balance Sheet, signed February 6, 2014.
In 2014, the Balfours suffered another operating loss due to high land rent and low commodity prices. Per the parties' typical practice, Nolan met with a Bank representative at the beginning of 2015 to discuss the Balfours' 2014 financial information. The Bank questioned the January 16, 2015, FYE 2014 Balance Sheet when a Bank representative found some discrepancies.
Crop year 2015 was no better for the Balfours than 2014. According to Nolan, the Balfours suffered a $400,000 loss. In the fall of 2015 or early 2016, the Bank suggested the Balfours had three options: petition for bankruptcy relief under Chapter 12, allow the Bank to accelerate the notes and liquidate their assets, or borrow $300,000 from Roger Balfour to cover some or all of the annual losses. Nolan opted for the third option, and Roger Balfour provided the funds to pay the Balfours' $300,000 debt.
To reduce the Balfours' financial burden, the Bank granted the Balfours a temporary reduction in interest rate. In March of 2016, Nolan and Maegan signed a Promissory Note Modification Agreement that temporarily lowered the interest rate on Note 1 from March 11, 2016, to December 31, 2016, after which the rate reverted to the original variable rate terms. Ex. 26.
Also in 2015, the Bank questioned the Balfours' financial statements and voiced concern to Nolan about the Balfours' crop yield and grain inventory. Nolan checked his records and provided adjustments. The Bank did not question his representations.
In late 2015 or early 2016, William Patrick Connors, Ag Specialist/Vice President, assumed responsibility for monitoring and managing the Balfours' loan with the Bank. Connors questioned some of the figures on the balance sheet. Specifically, Connors wondered why the Balfours held or stored so much grain from the previous year(s) compared to other farmers. Connors also requested Nolan provide the Bank with copies of leases and contracts and copies of checks and settlement sheets after each grain delivery.
In the summer of 2016, the Bank inspected its collateral at the Balfours' farm. Nolan testified that Connors conducted the inspection and that Nolan showed Connors the Balfours' fields of growing grain, machinery and grain bins. Nolan maintains that the grain bins he showed Connors stored only the Balfours' grain. Connors did not "climb on those grain bins" to view the grain; he simply drove by them.
Connors also inspected the cattle by driving through the pasture where the cattle were located. While the Bank did not obtain a highly accurate livestock count, there appeared to be no discrepancy between the 2015 year-end balance sheet and the 2016 collateral inspection.
Although Nolan worked a lot in 2016, both Nolan and Maegan worried that their farming operation was in jeopardy. Nolan testified that, by the fall of 2016, he "knew it was over with," suggesting that he knew the farm operation could not continue given the operating losses.
Nolan provided Connors with information the Bank compiled in the 2016 year-end balance sheet.
Despite Connor's continuing concern that the Balfours were holding or storing too much grain inventory, the Bank extended the Balfours' financing for crop year 2017. In the summer of 2017, Connors conducted another inspection of the Bank's collateral.
The maturity date on Note 1 was December 31, 2017. Doc. 24. Although the Balfours had not repaid the advances released under Note 1, they sought to renew this line of credit for the 2018 crop year and perhaps other years as well. According to Woodbury, the process to renew a line of credit is similar to the annual line of credit financing process.
Like previous years, Nolan provided information for the 2017 year-end balance sheet, including the number of livestock. Nolan testified that by the time he provided this information, he "knew everything was awful and just threw numbers together to not have a confrontation." He admitted that he intentionally provided inaccurate information to Connors to include on the 2017 year-end balance sheet. For example, the 97 head of market livestock and 124 head of breeding stock totals he provided to the Bank were inaccurate.
As part of the renewal process, the Bank attempted to verify the Balfours' assets. This effort extended into 2018. The Bank sent employees or contractors to inspect the Balfours' machinery and equipment and count their livestock. While gathering this information, Connors learned that B&H Cattle owned some of the livestock the Balfours raised and possessed.
During the asset verification process, the Bank also learned that Nolan sold grain without remitting the $95,989.69 in proceeds to the Bank. Specifically, Nolan sold grain to Southwest Iowa Renewable Energy (SIRE) and Bunge North America, Inc., at facilities in Council Bluffs, Iowa. SIRE and Bunge issued checks payable to Nolan
Nolan deposited nine of these grain proceeds checks in one of two accounts he held at Nehawka Bank.
At trial, Maegan conceded that she "kind of" understood that the proceeds of the sale of grain and cattle were to be paid to the Bank. She clarified her understanding by stating: "I mean it's common sense for grain but I didn't know about cattle." Despite this general understanding, Maegan testified that she believed that the Balfours were free to spend proceeds from the sale of livestock or grain if the Bank's name was not listed on the check for sale proceeds. Maegan admitted that the Balfours used grain proceeds to pay construction expenses and other general household living expenses, such as food, Verizon bills and student loan payments.
A summary of these checks follows:
As part of its asset verification process, the Bank hired Ronald Kenneth Lee, an adjuster for Great American Insurance Company who accepts independent contracts to measure grain. The Bank retained Lee to verify the number of bushels in the Balfours' grain bins. Lee estimated that the Balfours owned 58,803.40 bushels of corn and 850 bushels of beans stored "on the farm." Doc. 66. Although Nolan reportedly indicated to Lee that he owned approximately 23,360 bushels of corn stored at 4617 Van Dorn, Nolan later disputed this fact. At trial, Nolan admitted that he might have stored grain in the bins at 4617 Van Dorn at some point, but he claimed he had not stored grain at that location for years.
The Bank compared the results of Lee's inspections to the Balfours' 2017 year-end balance sheet showing 237,138 bushels of (nonsilage) corn and 30,179 bushels of soybeans. Doc. 68. The discovery of these discrepancies prompted Connors to request a meeting with Nolan.
Nolan and Connors met on March 17, 2018. During this meeting, Nolan told Connors that Nolan had been converting grain for two and a half to three years. Joint Stipulation of Uncontested Facts ¶ 50. Connors testified that Nolan admitted to selling grain under Roger Balfour's name. Nolan stated that he converted grain to help Roger Balfour and used the proceeds to pay people. Joint Stipulation of Uncontested Facts ¶ 50. Nolan also told Connors he thought he would probably go to jail. Joint Stipulation of Uncontested Facts ¶ 50.
At trial, Nolan admitted that he sold grain and did not forward the nine checks listed above to the Bank, but he denied selling the Balfours' grain under Roger Balfour's name. Nolan explained that he hauled some of his grandfather's grain to an elevator in early 2018 and informed the elevator that he was delivering grain for his grandfather.
On March 22, 2018, Nolan, Roger Balfour, Connors, Woodbury and other bank representatives met to discuss Nolan's admissions to Connors and the Balfours' financial situation.
On April 25, 2018, Connors and Mike Hansen
The Bank did not renew the Balfours' operating loan for the 2018 season. Due to a lack of financing, the Balfours did not farm in 2018. The Balfours defaulted on both Note 1 and Note 2.
After the Balfours defaulted on the promissory notes, they met with Bank representatives to discuss a liquidation plan.
The Balfours filed an "emergency" joint petition for bankruptcy relief on July 12, 2018. Given the exigent nature of their petition, they did not file schedules until August 6, 2018, almost a month later. On Schedule B, the Balfours disclosed 17 head of market cattle/feeders and 24 head of breeding cows valued at a total of $129,334.
Further investigation prompted the Balfours to amend their statements and schedules on several occasions. The Balfours did not revise the number of livestock or grain inventory on their amended schedules.
Several weeks after the Balfours petitioned for bankruptcy relief, the Bank filed a motion for relief from the automatic stay, seeking to repossess and liquate the Balfours' property that served as security for their debt to the Bank. In September 2018, the Court granted the Bank's motion for relief from the automatic stay. The Bank repossessed and sold the Balfours' machinery and equipment and 38 head of livestock. The Bank claims the Balfours owe it $870,711.41 on Note 1 as of March 20, 2019, and $79,430.57 on Note 2 as of March 20, 2019. Docs. 71, 72. The Bank submitted a loss claim to the FSA pursuant to its loan guarantee. As of the date of trial, the Bank was still waiting for final disposition of its application.
The Bank argues the Balfours falsely represented the number of livestock on their bankruptcy schedules. During the meeting of creditors and at trial, the Balfours testified that the schedules and statements they filed with the Bankruptcy Court were true and correct. Joint Stipulation of Uncontested Facts ¶ 55. When asked whether the livestock count listed in their bankruptcy schedules was true and correct to the best of her knowledge, Maegan answered "I think so." Nolan testified that he counted the livestock, "but not that closely."
The Bank also argues the Balfours should have disclosed grain inventory on their schedules. The Balfours maintain they properly disclosed their interests in grain and grain proceeds.
This adversary action is a core proceeding under 28 U.S.C. § 157(b)(2)(J). The Court has jurisdiction under 28 U.S.C. §§ 1334 and 157 and authority to enter a final order in this matter. This opinion constitutes findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
In the Complaint, the Bank seeks a denial of Nolan's and Maegan's discharge under 11 U.S.C. § 727(a)(2) and (a)(4). Section 727 of the Bankruptcy Code provides:
11 U.S.C. § 727(a).
Denying the debtor a discharge is a harsh remedy.
To prevail under section 727(a)(2)(A), the Bank must prove by a preponderance of the evidence: (1) Debtor's actions took place within one year before the petition date; (2) the act was that of Debtor; (3) the act amounted to a transfer, removal, destruction, mutilation or concealment of property; and (4) the act was done with an intent to hinder, delay or defraud a creditor or the Trustee.
Because a debtor rarely admits to fraudulent intent, a party seeking denial of discharge must generally rely on a combination of circumstances, or "badges of fraud," that suggest the debtor harbored the necessary intent.
The presence of a single badge is typically not sufficient to establish actual fraudulent intent.
The Bank offered evidence that, within one year before the Balfours petitioned for bankruptcy relief, Nolan sold grain that served as collateral for debt to the Bank, deposited the funds in an account to which the Bank had no access and spent the grain proceeds knowing that his agreements with the Bank required that he remit the proceeds to the Bank. Specifically, Nolan sold grain to SIRE on or about February 2, 2018, received a check for $13,314.71 listing Nolan as the only payee and deposited this check in the Nehawka Bank account he shared with his father.
The more difficult question is whether Nolan transferred $13,314.71 in grain proceeds with intent to hinder, delay or defraud the Bank. The Bank established that Nolan's transfer of $13,314.71 in grain proceeds to a joint account with his father to which the Bank had no access without the knowledge or consent of the Bank and his subsequent transfer to other creditors was not an isolated incident. In its closing argument, the Bank highlighted evidence showing that Nolan failed to deliver to the Bank a total of nine checks for grain proceeds which served as security for debt to the Bank. It also established that Nolan and Maegan spent the proceeds on home construction and other personal expenses. Accordingly, the Bank offered evidence showing several badges of fraud, including family relationship between the transferor and transferee; retention of benefit or use of the property in question; financial condition of the transferor prior to and after the transaction; secrecy of the conveyance; existence or cumulative effect of pattern or series of transactions or course of conduct; voluntary gift to family member; and general chronology of events and transactions under inquiry.
To rebut the presumption, the Balfours argue that Nolan used some of the grain proceeds during the spring when the Bank had not yet decided whether it would fund an operating line of credit for the Balfours. Nolan testified that the Balfours did not have access to the $3,000 monthly advance from the operating line of credit for family living expenses between January and the date the Bank approved financing for the operating line of credit, which was typically in March or April after the parties finalized the balance sheet. The Balfours claim "[i]t was out of necessity that Defendant Nolan Balfour converted grain proceeds to his own name." Doc. 126 at 2.
The Court is not persuaded by this argument for several reasons. First, while Nolan testified that his family was in "dire straits" in the months before the Bank approved the Balfours operating loan, he did not testify that he had no source of income available in February 2018 when Nolan cashed the $13,314.71 check for grain proceeds. In fact, he did not specifically testify that any of the checks he converted were "out of necessity." Second, more than half of the checks Nolan concealed and transferred to joint accounts for personal use were cashed in August through November, when the $3,000 per month family allowance was available to the Balfours. Finally, the Balfours' use of the grain proceeds to pay household expenses rather than the Bank does not negate Nolan's intent to hinder, delay or defraud the Bank.
The Bank also devoted much of its closing argument to summarizing substantial discrepancies between the grain inventory and livestock Nolan represented the Balfours owned in 2017 and 2018 and the actual grain inventory and livestock the Balfours owned. While the Court is not convinced that the Bank established that the Balfours transferred or concealed grain or livestock (other than the nine grain proceeds checks previously discussed),
Accordingly, the Court finds that the Bank met its burden of showing that Nolan transferred, concealed and spent grain proceeds which served as security for debt to the Bank with intent to hinder, delay or defraud the Bank. The Balfours failed to offer evidence sufficient to rebut the presumption. Accordingly, the Bank met all of the elements of its section 727(a)(2) cause of action. Nolan's discharge is denied under 11 U.S.C. § 727(a)(2).
To meet its burden under section 727(a)(2), the Bank must show that Maegan transferred, removed, destroyed, mutilated, or concealed property. It may not rely solely on Nolan's conduct to deny Maegan a discharge simply because she is Nolan's spouse and jointly obligated to pay the Balfours' debt to the Bank. Her conduct is analyzed separately under section 727.
The Bank offered no evidence that Maegan transferred, removed, destroyed, mutilated, or concealed property with intent to hinder, delay or defraud the Bank. Rather, the evidence shows that Nolan assumed exclusive responsibility for making decisions regarding the Balfours' farming operation. Although Maegan signed promissory notes, security agreements and some financial statements, she did not generate financial data for the Bank or provide financial information to the Bank until after the Bank began to pursue liquidation of its collateral. Maegan did not attend meetings with Bank representatives until after the Bank discovered Nolan's misrepresentations. She did not sell the grain the Bank claims the Balfours converted, and she was not listed as payee on grain proceeds checks. There is no evidence that she transferred property that serves as security for debt to the Bank. While the Bank offered evidence that Maegan knew that Nolan deposited a number of grain proceeds checks into a joint account with her, and the Balfours spent these proceeds on home construction expenses, most of these deposits took place more than a year before the Balfours petitioned for bankruptcy relief and are not actionable under section 727(a)(2). Likewise, the Bank established that Maegan knew that Nolan deposited the February 2, 2018, $13,314.71 grain proceeds check from SIRE in the joint savings account with his father and then withdrew or spent some of these funds on household living expenses, but the Bank did not offer evidence that she was complicit in these transactions or that she conspired to hinder, delay or defraud the Bank. At most, it established that Maegen knew the source of the funds, knew Nolan used the money for credit card bills and other household expenses and did not report it to the Bank. This evidence is not sufficient to deny her a discharge under section 727(a)(2).
The Bankruptcy Code bars the entry of discharge if a debtor knowingly and fraudulently made a false oath or account in or in connection with a bankruptcy case. 11 U.S.C. § 727(a)(4)(A). To meet its burden under this subsection, the Bank must prove, by a preponderance of the evidence: (1) Nolan and Maegan made a statement under oath; (2) the statement was false; (3) they knew the statement was false; (4) they made the statement with fraudulent intent; and (5) the statement materially related to the Balfours' bankruptcy case.
The proper functioning of the bankruptcy process depends upon the debtor providing complete, accurate and reliable information in the petition and other documents submitted with the petition so that parties in interest may evaluate a debtor's assets and liabilities and appropriately administer the case.
"Grounds for the denial of a discharge do not exist where a debtor completes his bankruptcy papers to the best of his abilities and attempts to be complete and accurate."
The Bank argues that information included in the Balfours' bankruptcy schedules is not accurate. Specifically, the Bank alleges that the Balfours represented that they "did not own any grain," when their financial statements suggest that they "should have had, at a minimum, 7,457.33 bushels of corn." Doc. 124 at 24. The Bank also asserts that the Balfours represented that they "owned 41 head of livestock" when the Bank recovered only 38 head of livestock. Doc. 124 at 24. The Bank claims the Balfours knowingly made these false statements with intent to defraud the Bank. Doc. 1.
A debtor's signature on the petition, made under penalty of perjury, is a declaration which has the force and effect of an oath of the kind contemplated by section 727(a)(4)(A).
The Balfours did not list grain inventory on their original and amended Schedule B. The Bank alleges this is a false representation because "the Balfours should have had, at a minimum, 7,457.33 bushels of corn remaining on farm, and more likely should have had 30,817.33 bushels of corn on farm when they filed bankruptcy." Doc. 124 at 24. The Bank offered no evidence that the Balfours owned grain they did not disclose. Rather, they rely on the Balfours' failure to explain the discrepancy between the Balfours' representations on financial statements and their representations on bankruptcy schedules. This discrepancy is not sufficient to prove a claim under section 727(a)(4) of the Bankruptcy Code under the circumstances of this case without evidence that the Balfours still owned grain.
The Bank also claims that the livestock number the Balfours listed on their schedules is incorrect. On the amended Schedule B, the Balfours listed 41 head of livestock. After the Court granted relief from the automatic stay, the Bank took possession of 38 head of livestock. The Bank alleges that "the Baflours presented no credible evidence at trial about what happened to the additional missing livestock." Doc. 124.
At trial, Nolan denied selling livestock after the Balfours petitioned for bankruptcy relief. Consequently, it appears that the Balfours disclosed three more head of livestock than they actually owned. Maegan and Nolan testified that they counted their livestock. Maegan testified that she thought the livestock number was correct to the best of her knowledge. Nolan testified that he counted the livestock, "but not that closely." Based on the Balfours' testimony, they were not confident that their livestock count was accurate. Consequently, the Bank established that the number of livestock listed on the Balfours' Schedule B is incorrect.
The Court is not convinced, however, that the Balfours knew this number was incorrect when they listed it or that they listed a higher number on their schedules than they actually owned with fraudulent intent. Given the testimony from both parties regarding how difficult it is to accurately count cattle in a pasture, it appears that missing one, two or even three head is possible. Although Nolan admitted to selling livestock and keeping the proceeds on several occasions in 2014-2018 and to providing the Bank incorrect information regarding the Balfours' assets in 2017 and early 2018, the Bank offered no evidence that either Nolan or Maegan intentionally misrepresented their assets on or after the date they petitioned for bankruptcy relief. By July 2018, the Bank investigated and discovered an accurate profile of the Balfours' financial distress. The evidence shows that both Nolan and Maegan were worried about the Bank repossessing property owned by third parties in June through September 2018, but Nolan testified that the Balfours were willing to turnover the property they owned. The Bank did not offer evidence sufficient to show fraudulent intent. Accordingly, the Bank did not meet its burden of proving its claims under section 727(a)(4).
The Bank also seeks an order and judgment excepting its debt from discharge under 11 U.S.C. § 523(a)(2)(A) and (a)(2)(B). Section 523 provides that a debt is excepted from discharge:
11 U.S.C. § 523(a)(2). The Bank must prove each element of a section 523 nondischargeability claim by a preponderance of the evidence.
Since the Court denied Nolan's discharge under section 727, it is not necessary to analyze the Bank's section 523 claims against Nolan.
The Bank seeks an order and judgment excepting Maegan's debt to it from discharge under 11 U.S.C. § 523(a)(2)(B). To meet its burden under section 523(a)(2)(B), the Bank must prove that Maegan obtained money by (1) use of a statement in writing that was materially false; (2) that pertained to his or her business's financial condition; (3) on which the plaintiff reasonably relied; and (4) that the debtor made with the intent to deceive the plaintiff.
The Bank did not meet its burden of proving its claim under section 523(a)(2)(B) against Maegan. Specifically, it failed to show that Maegan prepared and delivered a materially false written statement to the Bank. Nolan was the only Debtor who signed the January 10, 2017, FYE 2016 Balance Sheet. The evidence confirms that he provided the data included on the Balance Sheet and only Nolan met with Bank representatives to discuss it. Maegan did not generate financial data for the Bank or provide financial information to the Bank until after the Bank began to pursue liquidation of its collateral. Accordingly, the Bank's cause of action against Maegan under section 523(a)(2)(B) is dismissed.
The Bank also asserts that Maegan's debt to it should be excepted from discharge under section 523(a)(2)(A) because the Balfours obtained money, property, services, or an extension or renewal of credit by false representations and actual fraud. As to the Balfours' allegedly false representations, sections 523(a)(2)(A) and (a)(2)(B) are mutually exclusive.
To the extent the Bank claims that the Balfours obtained proceeds from the sale of grain, deposited the proceeds in an account to which the Bank had no access and spent these funds without receiving the Bank's authorization to do so—depriving the Bank of its interest in these proceeds—this claim arguably falls within the scope of section 523(a)(2)(A). In a 2016 decision, the United States Supreme Court found that the definition of "actual fraud" in the context of section 523(a)(2)(A) encompasses fraud that does not involve a misrepresentation from a debtor to a creditor, such as a fraudulent conveyance scheme.
The evidence shows that Nolan sold grain, received nine checks totaling $95,989.69 from SIRE or Bunge listing his name as the sole payee and deposited these checks in accounts to which the Bank had no access. Although the Bank established that Nolan deprived the Bank of its interest in the grain proceeds with wrongful intent and specific acts to transfer and conceal these grain proceeds, this evidence is not sufficient to show Maegan is liable for actual fraud under section 523(a)(2)(A).
To meet its burden of showing that Maegan's debt to the Bank is excepted from discharged under section 523(a)(2)(A), the Bank must show that Maegan defrauded the Bank, that she authorized Nolan's conduct as her agent or that she was Nolan's partner in their farm operation and knew or should have known of Nolan's fraud.
The evidence shows that Nolan and Maegan both entered into the loan agreements with the Bank. Maegan understood that these agreements required that all proceeds from the sale of grain must be paid to the Bank, but she testified that she believed that the Balfours were free to spend proceeds from the sale of livestock or grain if the Bank's name was not listed on the check for sale proceeds.
The Court considered all other arguments and finds them unpersuasive or unnecessary to discuss.
For the reasons stated above, the Bank met its burden of proving Nolan transferred the Balfours' property, within one year of bankruptcy, with intent to hinder, delay, or defraud a creditor. Nolan's discharge is denied under 11 U.S.C. § 727(a)(2).
The Bank did not satisfy its burden of proving Maegan transferred her property, within one year of bankruptcy, with the intent to hinder, delay, or defraud a creditor. Its cause of action against Maegan under 11 U.S.C. § 727(a)(2) is dismissed.
The Bank did not prove that the Balfours knowingly and fraudulently made a false oath in connection with a case under 11 U.S.C. § 727(a)(4). This claim and cause of action against both Nolan and Maegan is dismissed.
Since the Court denied Nolan's discharge under section 727, it is not necessary to analyze the Bank's section 523 claims against Nolan.
The Bank did not meet its burden of showing Maegan's debt to it should be discharged under section 523(a)(2)(A) or (B). These claims and causes of action are dismissed.
Nolan and Maegan offered an explanation for spending grain proceeds to pay construction expenses, which they suggest justifies this conduct. Specifically, Nolan testified that the Balfours deposited $100,000 in proceeds from the sale of their previous residence in 2013 or 2014 into this joint "construction account." The couple intended to use these funds to finance the construction of their house. Contrary to this plan, Nolan delivered these funds to the Bank to pay for part of the farm operation shortfall at the end of 2015. Presumably Maegan did not consent to this payment. Nolan testified that Maegan was "not happy" and "had a lot of questions" when she learned that Nolan spent the funds they intended to use to build their new home.
Similar to the alleged transfer or concealment of grain, the Bank established a large discrepancy between the 221 head of livestock Nolan reported to the Bank for the January 10, 2018, FYE 2017 balance sheet, the 109-110 cattle reported on the April 2018 Agricultural Collateral Inspection Report Nolan signed and the 38 head of livestock the Bank ultimately repossessed and sold on October 6, 2018. Nolan admitted that the livestock numbers he provided the Bank for the 2017 year-end balance sheet were exaggerated. Similarly, Nolan maintains that the collateral inspection report does not reflect the number of cattle the Balfours actually owned. Both Connors and Nolan testified that that the livestock inspection did not result in a completely accurate count. Additionally, the Balfours offered evidence that B&H Cattle and the Balfours' relatives owned some of the livestock in their possession during the Spring of 2018. The Bank maintains that, even if the Court subtracts the livestock owned by third parties, there is a "substantial" discrepancy between 109-110 head of livestock listed on the collateral inspection report and the actual number of livestock the bank liquidated—approximately 43 to 46 head. While the Bank established that the Balfours offered no explanation or accounting for 43 to 46 head of livestock, it offered no evidence of a specific transfer, removal, destruction, mutilation or concealment of livestock. The imprecise inspection together with Nolan's repeated admissions that he exaggerated livestock numbers and grain inventory make it plausible that the Balfours never actually owned as many head of livestock as Nolan claimed. The Court declines to infer Nolan concealed or transferred livestock without evidence of this conduct. Accordingly, the Bank failed to meet its burden of showing, by a preponderance of the evidence, that Nolan transferred, removed or concealed livestock with intent to hinder, delay and defraud the Bank.