Bank of Commerce & Trust Co. v. Strauss (In re Strauss)
| Citation | 523 B.R. 614 |
| Decision Date | 22 December 2014 |
| Docket Number | Bankruptcy No. 12 B 10839.,Adversary No. 12 A 943. |
| Court | United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois |
| Parties | In re John Paul STRAUSS, Debtor. Bank of Commerce & Trust Co., Plaintiff, v. John Paul Strauss, Defendant. |
James J. Long, Wichita, KS, Bradley R. Tengler, Rockford, IL, for Bank of Commerce & Trust Co.
Michael L. Ralph, Sr., David J. Schwab, Ralph, Schwab & Schiever, Chtd., Vernon Hills, IL, for John Paul Strauss.
AMENDED MEMORANDUM OPINION1
John Paul Strauss ran Banc Corp. USA, a company engaged in equipment lease financing. Some of the leases that it financed Banc Corp. sold to banks as investments. In 2002, Banc Corp. began financing leases of medical equipment to federal medical facilities, most of them operated by the Department of Veterans Affairs. Banc Corp. sold five of the federal leases to banks in Illinois and Texas, granting the banks security interests in the equipment. About a year later, Banc Corp. sold the same leases again to a Kansas bank, Bank of Commerce & Trust Company (“BOCT”), representing that the equipment was “free of all liens and encumbrances.” Banc Corp. went out of business. The money BOCT had paid for the leases, nearly $420,000, disappeared.
After BOCT obtained a default judgment against Strauss in a civil action in Kansas, Strauss filed a chapter 7 bankruptcy case in this district, and BOCT commenced an adversary proceeding against him. BOCT alleged in Count I of its three-count adversary complaint that Strauss owes BOCT a debt nondischargeable under section 523(a)(2)(A) of the Bankruptcy Code. The adversary proceeding went to trial earlier this year. The only two witnesses who testified were Strauss and Clint Lawrence, a BOCT officer.
For the reasons discussed below—constituting the court's findings of fact and conclusions of law under Rule 52(a) of the Federal Rules of Civil Procedure, Fed.R.Civ.P. 52(a) (made applicable by Fed. R. Bankr.P. 7052 )—judgment will be entered in favor of BOCT and against Strauss on Count I of the complaint, and Strauss's debt to BOCT will be declared nondischargeable. Count II of the complaint will be dismissed with prejudice. Count III will be dismissed for lack of jurisdiction.
The court has subject matter jurisdiction of this case under 28 U.S.C. § 1334(a) and the district court's Internal Operating Procedure 15(a). The claims in Counts I and II are core proceedings under 28 U.S.C. § 157(b)(2)(I). As to the claim in Count III, the court has jurisdiction to determine its jurisdiction. Bayo v. Napolitano, 593 F.3d 495, 500 (7th Cir.2010).
Strauss was president, chief executive officer, and sole shareholder of Banc Corp. USA located in Glenview, Illinois. Incorporated in 1994, Banc Corp. was engaged in commercial lease financing. Banc Corp's business grew rapidly, at least at first. Over the years, Banc Corp. was involved in more than 600 transactions involving $35–40 million. Despite the volume of its business, however, Banc Corp's profit margin was small, roughly 1%. In 2005 or so, growth was slowing, and the company owed more than $100,000 in employment taxes for the last quarter of 2004 and all of 2005, a liability assessed against Strauss as the responsible person. As far as the record shows, Banc Corp. ceased operations around 2007.
Banc Corp's business involved providing financing for equipment leases. As Strauss explained it, a vendor or distributor of certain costly equipment often seeks to sell the equipment to a business that cannot afford to buy it outright. In that situation, the vendor or distributor would seek out Banc Corp. to facilitate the sale. Banc Corp. would buy the equipment using its own line of credit and then would lease the equipment to the business in question. Banc Corp. would obtain insurance on the equipment and file a UCC–1 financing statement.2
Some of the lease transactions were what Strauss called “single event” leases, by which he meant one-shot deals. Other lease transactions involved a master lease: multiple pieces of equipment were leased to multiple businesses, and all of the transactions were subject to a single governing lease.
When a lease transaction involved $25,000 or less, Banc Corp. would retain the lease itself. When a lease transaction involved more than $25,000, Banc Corp. would sell the lease to a bank as an investment.3 Whether the lease was retained or sold, Banc Corp. would almost always be responsible for billing the buyer-lessee and would set up an automatic funds transfer, with the payments remitted either to Banc Corp. or directly to the investor bank.
When Banc Corp. sought to sell a lease to a bank, it would do so through Lance Dominique, a broker in Barrington, Illinois. Precisely who Dominique represented in these transactions is unclear.4
One of the investor banks that bought leases from Banc Corp. as investments was BOCT. BOCT is a small bank with thirteen employees located in Wellington, Kansas, a town of around 7,500 people south of Wichita.5 From 1998 through 2005, BOCT purchased more than twenty leases from Banc Corp.
Sometime in 2002, BOCT introduced Banc Corp. to a new vendor, International Remote Imaging Systems, Inc. (“IRIS”). IRIS manufactured automated urinalysis machines and related equipment that it sold to federal government medical facilities. IRIS had sold its machines and equipment to the government through lease financing, and banks had bought the IRIS leases as investments. These banks included BOCT: BOCT bought its first IRIS lease in 1999.
In November 2002, Banc Corp. and IRIS entered into a “Master Purchase Agreement.” Under the Master Purchase Agreement, IRIS would lease urinalysis machines and related equipment to the government and then would sell the equipment and sell and assign the lease payments (each of the leases had a sixty-month term) to Banc Corp. IRIS agreed to provide Banc Corp. with all necessary documentation for the transaction, including the “federal lease agreement,” properly executed. IRIS agreed to grant Banc Corp. a security interest in the leased equipment. And IRIS agreed to pay Banc Corp. the balance due under the lease if the lessee defaulted in certain ways. Banc Corp, in turn, was made responsible for invoicing the lessee. Banc Corp. was also given the right to reassign its rights in the equipment, the lease, and the lease payments.
All told, Banc Corp. did ten to fifteen IRIS lease transactions. Because the transactions involved larger dollar amounts, however, Banc Corp. did not retain any of the leases. All were sold to investor banks.
Banc Corp's sale of IRIS leases—at least the five leases involved here—followed the same general pattern. Strauss would have detailed discussions with Dominique about the lease to be sold, the placement for sale occurring only as “the culmination of numerous discussions.” At the conclusion of those discussions, Banc Corp. would send a fax to Dominique describing the lessee, leased equipment, lease terms, and commission to Dominique, and submitting the lease for placement. Dominique would then send to potential investor banks a document entitled “Federal Offering.” The Federal Offering again described the lessee, leased equipment, and lease terms. When a bank expressed interest in the offering, Dominique would send the bank a letter (a copy of which was also sent to Banc Corp) confirming “the lease opportunity” and noting that the transaction was subject to the bank's acceptance of the “closing documentation.”
Banc Corp. would then send the investor bank what Strauss called a “funding letter.” The funding letter forwarded the documents for the sale of the lease and instructed the bank upon its review and approval of the sale to wire funds in a designated amount to Banc Corp's account at The Northern Trust Company. Although there was some variation from sale to sale, the documents listed in the funding letter included a document described as an “Agreement” with a reference number and a document described as a “Contract” with another reference number. (Which of these was the actual lease is unclear; none of the Agreements or Contracts is in the record.) The documents also included an assignment of the lease from IRIS to Banc Corp, an assignment of the lease from Banc Corp. to the investor bank, and either a UCC–1 financing statement listing the investor bank as the secured party (since the assignment from Banc Corp. also granted the bank a security interest in the leased equipment) or proof that Banc Corp. had filed the UCC–1.
Payments under the IRIS leases worked differently from payments under other leases Banc Corp. sold to investor banks. In other transactions, there were no invoices. Payments were automatically transferred electronically from the lessee to Banc Corp., and Banc Corp. remitted the payments electronically to the investor bank. Under the IRIS leases, Banc Corp. also received the lease payments and remitted them, but the payments varied depending on the number of tests run with the leased machine. Consequently, Banc Corp. invoiced the government manually, and no invoice could be generated until the particular medical center reported the number of tests. Complicating matters further, Banc Corp. remitted only part of the lease payment to the investor bank. The rest Banc Corp. remitted to IRIS as reimbursement for “consumables”—materials IRIS supplied with the machine that were used up during the testing.
In September 2003, Banc Corp. placed for sale through Dominique an IRIS lease with the V.A. Medical Center–Salt Lake in Utah. In February 2004, Banc Corp. sent a funding letter in connection with the Salt Lake lease to People's National Bank of Kewanee in Kewanee, Illinois (the “Kewanee Bank”). Enclosed with the funding letter was an assignment from IRIS to Banc Corp. of the Salt Lake lease. Apparently, no...
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