Order Granting, in Part, and Denying, in Part, Plaintiff Lorraine State Bank's Motion for Summary Judgment and Setting Case for Trial
JANICE MILLER KARLIN, Bankruptcy Judge.
Plaintiff/Creditor Lorraine State Bank ("Bank") seeks a determination that its claim against Defendant/Debtor Pat Allen Crenshaw ("Debtor") is nondischargeable under 11 U.S.C. §§ 523(a)(2)(B) and (a)(6).
Because Debtor, who is now proceeding without counsel, elected to not oppose the Bank's Motion for Summary Judgment
I. Findings of Fact
Debtor filed bankruptcy in April of 2016. At that time, he owned and operated a farm where he raised cattle and produced hay and alfalfa. From approximately May 2010 through August 2014, the Bank made a series of loans to Debtor so he could purchase farm equipment, inventory, and livestock and, later, refinance these earlier notes. He pledged farm equipment, livestock, and inventory as collateral to secure repayment of those loans.
The security agreements Debtor signed required him to "keep the property at [his] address," to "try [not] to sell the property," or, if Debtor did sell the property, to "receive written permission to do so" and "have the payment made payable to the order of you (the Bank) and me (Debtor)."
Throughout 2013 and 2014, Debtor sold his cattle at one of three businesses: Sylvan Sales Commission, Russell Livestock, or Farmers & Ranchers Livestock Commission. Debtor periodically sold fewer than 10 head of cattle at a time — though once or twice a year he sold between 12 and 65 head in a single transaction. Debtor admits that he sold cattle in small amounts so he could get a smaller check, cash it, and use the proceeds to pay for his "gambling or whatever."
Prior to foreclosing its security interest in 2015, the Bank received payment only from those transactions where Debtor sold 12 or more head of cattle (with one exception in December, 2014). The Bank identified sales of 111 head of cattle Debtor sold during this time for which they received no part of the proceeds. Unfortunately, the Bank has not calculated the total sales price to assist the Court in determining if those sales proceeds equaled or exceeded the balance due on its notes.
The Bank sought a collateral inspection in January of 2015, but Debtor refused to cooperate with scheduling or participating in that inspection (but admitted cattle numbers had dropped to 49). When the Bank ultimately performed an inspection on January 28, 2015, it learned of several discrepancies between Debtor's previous financial statements and the current state of his farm. It only found 44 cattle and noted some of Debtor's farm equipment was now located on a neighboring farm. As a result, the Bank sued Debtor in state court seeking to foreclose its security interest in Debtor's remaining collateral. When Debtor failed to answer the Bank's petition, the court granted default judgment to the Bank in the amount of $391,716.50 (plus interest, costs, and attorney fees).
Throughout 2015, Debtor apparently cooperated with the Bank by selling his remaining cattle, equipment, and farm products and turning over the proceeds to the Bank. But Debtor was unable to recover and sell several items listed in his 2014 financial statement, including a John Deere 4020 tractor, a tire repair machine, some cattle water tanks, a wire roller, assorted shop tools, "150-596" bales of hay,
By March 2016, Debtor had apparently sold any remaining pledged collateral he still owned, turning over the proceeds to the Bank for application on the judgment. The Bank then received an order setting its deficiency judgment at $188,574.19. The Bank timely filed this adversary proceeding, seeking a determination that this remaining judgment is nondischargeable under §§ 523(a)(2)(B) and (a)(6).
Debtor admitted, under oath in a deposition, that he deliberately sold cattle in small numbers so he could obtain smaller checks from some sale barns. He then used those proceeds for his own purposes without remitting them to the Bank as required by the security agreements.
While Debtor did not admit that he intended to harm the bank by withholding the proceeds of the sales, he clearly understood that the security agreements required him not to sell the property securing the Bank's loans without written permission and that they required him to request all sale proceeds be made payable jointly to himself and the Bank. Debtor estimated that he used at least half of the proceeds of the smaller sales to pay gambling debts.
The Bank's supporting affidavit clearly states it did not consent to the sale of the cattle for which it did not receive payment and that a Bank representative had numerous conversations with Debtor before he sold the collateral, emphasizing the need for Debtor to pay all cattle sale proceeds to the Bank for application on outstanding loans. Debtor also admitted that, previously, "every time [he] sold something, [he] took those checks in to the bank . . . because [the bank's] name was on" the check.
A. Motion for Summary Judgment
An adversary proceeding to determine the dischargeability of a debt is a core proceeding under 28 U.S.C. § 157(b)(2)(I), over which this Court may exercise subject matter jurisdiction.
Federal Rule of Civil Procedure 56 requires a court to grant summary judgment "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law."
The moving party bears the initial burden of demonstrating — by reference to pleadings, depositions, answers to interrogatories, admissions, or affidavits — the absence of genuine issues of material fact.
This standard is "somewhat modified in an unopposed motion for summary judgment."
This Court's own local bankruptcy rules emphasize that "[t]he court will deem admitted . . . all material facts contained in the statement of the movant unless the statement of the opposing party specifically controverts those facts."
B. Nondischargeability under § 523(a)(2)(B)
This subsection excepts from discharge a debt "for money, property, services or an extension, renewal, or refinancing of credit,
To satisfy the first element of § 523(a)(2)(B), a financial statement must contain "`an omission, concealment or understatement as to any of the debtor's material liabilities,'" and "`paint an untruthful picture of a debtor's financial condition in such a light which would normally affect the decision on the part of a creditor to grant credit.'"
1. John Deere 4020 Tractor
The Bank claims Debtor submitted two financial statements that included property he did not own, thereby overstating his assets' value and deceiving the Bank into continuing to extend credit. Debtor does not contest that he listed a John Deere tractor, arguably co-owned with his neighbor,
But the Court's inquiry does not end there. The Bank must also show by a preponderance of the evidence that this inaccuracy was "material" — that, if the financial statements had been accurate (i.e., did not include this tractor), they would have painted an "untruthful picture"
Debtor valued the tractor for $12,000 and $10,000, respectively, on his 2013 and 2014 financial statements; this asset thus accounted for approximately 5% of Debtor's total net worth (total assets minus total liabilities).
The Court should make one other point. While the Bank's claim regarding the tractor fails under the first element of § 523(a)(2)(B), the Court also finds that the Bank failed to show, under § 523(a)(2)(B)(iii), that it reasonably relied on Debtor's purportedly false financial statements when determining Debtor's creditworthiness. The Bank annually inspected Debtor's farm to document the collateral securing its loan and on its April 29, 2013 collateral inspection report, it listed each piece of machinery found on Debtor's farm. Conspicuously absent from this list is the John Deere 4020 tractor. The tractor was again absent from the Bank's 2014 report. Accordingly, the Court also finds the Bank failed to meet its burden to show it reasonably relied on Debtor's purported ownership of a tractor that was absent from its own collateral report.
Finally, § 523(a)(2)(B) can only serve to render nondischargeable as much of the debt — "to the extent" — as the false statement actually caused. So even if this asset had been more than a de minimis part of Debtor's overall financial condition, and even if the Bank had met its burden to show reasonable reliance, it would not result in the nondischarge of the entire judgment. Instead, it would at most result in the nondischarge of the value of the misrepresented asset. The Court therefore denies, as a matter of law, the Bank's Motion for Summary Judgment on this point.
The Bank also argues that Debtor's failure to account for the sale of over 100 head of cattle on his financial statements constitutes a materially false statement under § 523(a)(2)(B).
The Bank's 2013 collateral inspection report, dated April 29, 2013, included 118 head of cattle on Debtor's property. Two months later, Debtor claimed 158 head on his financial statement — an increase of 40 head — which the Bank alleges is inaccurate. However, the Bank does not provide any affidavit, pleading, or deposition supporting this allegation, as required under D. Kan. LBR 7056.1(d).
The Bank's motion seems to suggest that, because Debtor periodically sold off cattle without its permission and used some of those proceeds to fund his gambling habit, his financial statements, by definition, could not be accurate. The Court is not persuaded by this argument for two reasons. First, the records upon which the bank relies show that Debtor's cattle sales began on August 5, 2013, a month after Debtor submitted his 2013 financial statement. Thus, that earlier financial statement cannot show how the number of cattle changed between April and July. Second, Debtor's cattle count increased between the collateral inspection and the date of the financial statement. So even if Debtor had been selling off cattle during that period, he was also replenishing his stock and therefore likely protecting the Bank's investment since it also claimed a security interest in any issue.
If, as the Bank insists, it is likely Debtor artificially inflated the number of cattle he owned to induce the Bank to extend credit, it is equally likely that Debtor purchased 40 head of cattle at some point between April and July, 2013. The Court therefore finds that there is a factual dispute regarding the number of cattle owned by Debtor on the date of his 2013 financial statement. The Court thus denies the Bank's Motion for Summary Judgment on this point.
Turning to the Bank's 2014 collateral inspection report, it counted 113 head of cattle at that April 30, 2014 inspection. Less than four months later, on August 18, 2014, Debtor submitted a financial statement claiming only 89 head of cattle — a decrease of 24 head. But during that same four month period, according to sales records the Bank provides, Debtor sold 29 head. This would mean Debtor overstated his herd by 5 head of cattle on the date he made the August 18, 2014 financial statement. Again, the Bank insists this shows Debtor's financial statement was materially false. Similar to the tractor analysis above, the Court does not find this difference so significant to Debtor's overall financial picture as to make the financial statement materially false.
The Bank's loans continued to be secured by Debtor's equipment, farm products, and livestock — assets totaling $599,120. At most, the unaccounted for cattle were worth $22,500 or approximately 3.8% of the value of the total assets, and more likely only 1.2% of total assets based on actual sale prices.
In conclusion, the Court denies the Bank's Motion for Summary Judgment on its § 523(a)(2)(B) count both as a matter of law — as to the tractor and the 2014 financial statement — and because the Bank's own summary judgment documents present a factual dispute concerning the number of cattle owned by Debtor on the date of his 2013 financial statement.
C. Nondischargeability under § 523(a)(6)
This subsection excepts from discharge "any debt . . . for willful and malicious injury by the debtor to another entity or to the property of another entity."
The Bank argues Debtor intentionally converted the Bank's property when he failed to turnover proceeds he received from multiple sales in spite of his knowledge that he was required to do so. In order to except a debt from discharge due to conversion of collateral, the Bank must show (1) Debtor committed a wrongful and intentional act; (2) the act necessarily caused injury to the Bank; (3) the act was without just cause or excuse; and (4) Debtor acted with the specific intent to cause injury to the Bank or knew or believed injury to the Bank was substantially certain to occur as a result of his actions.
The Bank's evidence proves the first three of these elements. Debtor knowingly sold some of the Bank's collateral out of trust for his own purposes (which, at least in part, was to fuel his gambling habit), Debtor failed to remit the proceeds of many of those sales to the Bank and therefore did not apply the proceeds to his outstanding obligation as he was required to do, and Debtor damaged the Bank to the extent of the conversion. Because Debtor does not controvert this evidence, the Court finds the Bank has met its burden of proof for the first three elements of the § 523(a)(6) test.
As to the fourth element, the Bank argues that Debtor's process of repeatedly selling his cattle in small numbers while concealing these sales from the Bank (while simultaneously continuing to make larger sale payments to the Bank to deceive it into thinking it was receiving all sale proceeds) conclusively demonstrates that Debtor knew or believed injury to the Bank was substantially certain. The Bank has established that the Debtor knew he was obligated to turnover any proceeds from sales of collateral to the Bank, and the Bank has demonstrated that the Debtor acknowledged in a sworn deposition that, at a minimum, most of the proceeds from the smaller cattle sales were not paid to the Bank. Thus, the Court finds Debtor knew injury to the Bank would occur when he sold the Bank's collateral and elected to convert those proceeds instead of remitting them to the Bank. Thus, the Bank has established the fourth element of the § 523(a)(6) test.
The Bank claims Debtor caused it damages in the amount of its entire deficiency judgment — $188,574.19 — when he sold collateral without remitting the proceeds. This amount apparently represents the principal amount remaining on Debtor's promissory note after the sale of all recovered collateral. The Bank claims the following collateral was never recovered, and the Court has used the Bank's values except as it relates to the hay:
Regarding the hay value, however, the Bank's own records only demonstrate a loss of $6,840.12 for unrecovered farm products — as opposed to the $23,840 figure the Bank attributes to 596 bales of hay. The Court is also unable to determine how the Bank arrived at the higher number of bales, so its claimed loss is not supported by the uncontroverted facts. Further, Debtor claimed $48,000 of farm products on his 2014 financial statement.
Because the Bank's evidence only demonstrated that Debtor's willful and malicious conduct caused it $150,593.66 in damages, the Court finds that $150,593.66 of the Bank's claim is excepted from discharge under § 523(a)(6).
In sum, on its § 523(a)(2)(B) claim, the Court finds that because there remains a factual dispute regarding the number of cattle listed on Debtor's 2013 financial statement, the Court must deny summary judgment to the Bank on that claim. The Court also finds that the Bank failed to show it is entitled to judgment as a matter of law regarding certain inaccuracies on Debtor's 2013 and 2014 financial statements. As a result, the Court also denies summary judgment to the Bank on that portion of its § 523(a)(2)(B) claim. It thus sets the Bank's § 523(a)(2)(B) claim to trial.
The Court also finds the Bank did meet its burden of proof under § 523(a)(6) up to the amount of $150,593.66. As a result, the Court grants summary judgment to the Bank, in part, holding that $150,593.66 of its claim is denied discharge. The Court denies summary judgment to the Bank on its § 523(a)(6) claim to the extent it seeks a judgment that the rest of its claim is nondischargeable. To the extent the Bank wishes to present evidence that Debtor's willful and malicious actions caused it damages exceeding $150,593.66, it will be allowed to do so.