Arvest Bank v. Byrd

• Decision Date: 26 August 2011
• Docket Number: No. 10–2004.,10–2004.
• Citation: 814 F.Supp.2d 775
• Parties: ARVEST BANK, Plaintiff, v. Preston E. BYRD, Donette L. Byrd, and Preston E. Byrd Irrevocable Insurance Trust, Defendants.
• Court: U.S. District Court — Western District of Tennessee

814 F.Supp.2d 775

ARVEST BANK, Plaintiff,

v.Preston E. BYRD, Donette L. Byrd, and Preston E. Byrd Irrevocable Insurance Trust, Defendants.

No. 10–2004.

United States District Court, W.D. Tennessee, Western Division.

Aug. 26, 2011.

David M. Rudolph, John J. Heflin, III, Bourland Heflin Alarez & Minor, Memphis, TN, for Plaintiff.

Preston E. Byrd, Collierville, TN, pro se.

Donette L. Byrd, Collierville, TN, pro se.Patrick G. Walker, Robert F. Miller, Farris Bobango Branan, PLC, Memphis, TN, for Defendants.

ORDER ON SUMMARY JUDGMENT MOTIONS

SAMUEL H. MAYS, JR., District Judge.

Before the Court is the September 8, 2010 Motion for Summary Judgment Against Defendant Preston E. Byrd for Conversion and Fraud in the Inducement and Motion for Summary Judgment on Defendant Byrd's Counterclaim filed by Plaintiff Arvest Bank (“Arvest”). (Pl. Arvest Bank's Mot. for Summ. J. Against Def. Preston E. Byrd for Conversion and Fraud in the Inducement and Mot. for Summ. J. on Def. Byrd's Countercl., ECF No. 41.) (“Arvest's Mots.”) Defendant Preston E. Byrd (“Preston Byrd”) responded in opposition on January 24, 2011. (Def. Preston E. Byrd's Resp. in Opp'n to Arvest Bank's Mot. for Summ. J. for Conversion and Fraud in the Inducement and in Supp. of Def. Byrd's Mot. for Summ. J. Against the Pl. Arvest Bank, ECF No. 59.) (“Byrd's Resp.”) Arvest replied on February 4, 2011. (Pl. Arvest Bank's Reply Mem. in Supp. of Mot. for Summ. J. Against Def. Preston E. Byrd, ECF No. 63.) (“Arvest's Reply”)

Also before the Court is the March 18, 2011 Second Motion for Summary Judgment Against Plaintiff Arvest Bank and in Opposition to Arvest Bank's Motion for Summary Judgment Against Defendant Preston E. Byrd for Conversion and Fraud in the Inducement filed by Defendants Preston Byrd and Donette L. Byrd (“Donette Byrd”). (Defs.' Preston E. Byrd and Donette L. Byrd Second Mot. for Summ. J. Against Pl. Arvest Bank and in Opp'n to Arvest Bank's Mot. for Summ. J. Against Def. Preston E. Byrd for Conversion and Fraud in the Inducement, ECF No. 66.) (“Byrds' Mot.”) Arvest responded in opposition on March 31, 2011. (Pl. Arvest Bank's Resp. in Opp'n to Defs.' Second Mot. for Summ. J. and Separate Statement of Material Facts, ECF No. 67.) (“Arvest's Resp.”) Preston Byrd and Donette Byrd replied on April 19, 2011. (Defs. Preston E. Byrd and Donette L. Byrd's Reply Mem. in Supp. of Their Second Mot. for Summ. J. Against Arvest Bank, ECF No. 68–3.)

For the following reasons, Arvest's motion for summary judgment against Preston Byrd for conversion and fraud in the inducement is DENIED. Arvest's motion for summary judgment on Preston Byrd's counterclaims is GRANTED. Preston Byrd and Donette Byrd's motion for summary judgment is DENIED.

I. Background ¹

According to Arvest, in 2006 and 2007, Horizon Holding Company, LLC (“Horizon Holding”) sought financing for the acquisition and construction of a multifamily low and moderate income housing facility to be known as the Lamar Crossing Apartments project (the “Lamar Crossing project”). ( See Pl. Arvest Bank's Separate Statement of Material Facts in Supp. of Mot. for Summ. J. Against Def. Preston E. Byrd for Conversion and Fraud in the Inducement, in Opp'n to Defs.' Mot. for Summ. J. and in Supp. of Mot. for Summ. J. on Def. Byrd's Countercl. ¶ 1, ECF No. 41–2.) (“Arvest's Statement of Facts”) The Lamar Crossing project transaction required the issuance of $8,100,000 in Multifamily Housing Revenue Bonds by the Health, Educational and Housing Facility Board of the City of Memphis to finance the renovation, construction, and improvement of the Lamar Crossing project. ( See id. ¶ 13.) Arvest was the primary lender and purchaser of the Lamar Crossing project bonds: it invested $8,219,576.81 in the Lamar Crossing project and owns all of the Lamar Crossing project bonds. ( See id. ¶ 14.)

Preston Byrd served as agent and chief manager for Horizon Holding in the Lamar Crossing project. ( See id. ¶ 2.) Preston Byrd represented to Arvest and other entities involved in the Lamar Crossing project transaction that his only role was as chief manager and that Orson Sykes (“Sykes”) and James Hutton (“Hutton”) were the sole members and owners of Horizon Holding. ( See id. ¶¶ 3, 6–7.) After conducting credit and background investigations of Sykes and Hutton, Arvest agreed to proceed with the transaction. ( See id. ¶ 4.) Because Preston Byrd represented that he was not a member or owner of Horizon Holding, Arvest did not investigate his background, credit, and finances. ( See id. ¶ 5.) Arvest proceeded with the transaction without knowing that Preston Byrd is a convicted felon, having pled guilty to wire fraud in the United States District Court for the District of North Dakota in 2003. ( See id.)

Despite Preston Byrd's representations, Sykes and Hutton were not the only members and owners of Horizon Holding in June 2007. ( See id. ¶ 37.) Pursuant to a March 17, 2006 Membership Interest Transfer Agreement, Sykes had transferred an 80.05% majority membership interest in Horizon Holding to Horizon Financial Group, LLC (“Horizon Financial”). ( See id.) Sykes retained a 19.95% membership interest in Horizon Holding. ( See id.) Preston Byrd was initially the majority owner of Horizon Financial. ( See id. ¶ 38.) On January 5, 2006, Preston Byrd transferred his majority interest in Horizon Financial to Donette Byrd for no consideration. ( See id.) Because of the membership interest transfers in 2006, Donette Byrd was the undisclosed majority owner of Horizon Holding. ( See id. ¶ 39.) Preston Byrd and Donette Byrd never disclosed to Arvest or any other entity in the Lamar Crossing project transaction that Donette Byrd was Horizon Holding's true majority owner. ( See id. ¶ 40.) Because of Preston Byrd's recent conviction and sentence for a crime involving dishonesty and fraudulent activity, Arvest would not have agreed to participate in, finance, and purchase the bonds for the Lamar Crossing project transaction if Donette Byrd's secret majority interest in Horizon Holding had been disclosed to Arvest. ( See id. ¶ 41.)

Arvest required individual guarantees from the members and owners of Horizon Holding to proceed with the transaction. ( See id. ¶ 10.) Sykes and Hutton entered into a Guaranty and Suretyship Agreement, guaranteeing the indebtedness of Lessee Lamar Crossing Apartments, LP (“Lessee”) under the lease documents and all other amounts due or to become due under the lease agreement and other lease documents. ( See id. ¶ 8.) Sykes and Hutton also entered into a Guaranty of Completion Agreement, guaranteeing the full and complete construction of the property improvements, payment of development costs, and all costs and expenses of the significant bondholder in enforcing the Lessee's obligation to complete construction of the property improvements. ( See id. ¶ 9.) If Arvest had known that Donette Byrd was a member and owner of Horizon Holding, she would have been required to guarantee the transaction as well. ( See id. ¶ 41.) Arvest and other entities would have conducted a background investigation and performed due diligence of Preston Byrd and Donette Byrd and, on discovering Preston Byrd's felony conviction for wire fraud, Arvest would not have gone forward with the transaction. ( See id.)

As part of the Lamar Crossing project transaction, Lessee, Horizon Holding, The Bank of New York Trust Company, N.A. as trustee (“BNYM”), Investor Limited Partner Boston Capital Corporate Tax Credit Fund XXVI (“Boston Capital”), and Arvest entered into a disbursement agreement on June 1, 2007. ( See id. ¶ 15.) Preston Byrd signed the disbursement agreement on behalf of Lessee and Horizon Holding. ( See id.) The disbursement agreement established the disbursement procedure for the financing provided by Arvest and Boston Capital for the Lamar Crossing project. ( See id. ¶ 16.) Lessee was required to submit construction reports and other documentation and receive Arvest's approval on draw requests before submitting draw requests to trustee BNYM. ( See id.) When trustee BNYM received Arvest's approval of a draw request, BNYM was to pay the contractor and subcontractors the amount approved in the draw from the construction funds. ( See id. ¶ 17.)

The Lamar Crossing project transaction closed on June 14, 2007, and construction began. ( See id. ¶ 18.) After the transaction closed, Arvest continued to require updated financial statements and tax returns from corporate guarantor Horizon Holding and individual guarantors Sykes and Hutton. ( See id. ¶ 19.) On December 27, 2007, Preston Byrd provided a copy of Horizon Holding's 2006 United States Return of Partnership Income to Arvest. ( See id.) As part of the tax return, Preston Byrd attached the Schedule K–1 forms for Sykes and Hutton, which showed that Horizon Holding reported to the Internal Revenue Service that Sykes owned 87% of Horizon Holding and Hutton owned 13% of Horizon Holding. ( See id.)

Between August 2007 and March 2007, Preston Byrd submitted requisition requests to Arvest on behalf of Lessee listing vendors to whom payment was due, descriptions of expenses, and amounts owed. ( See id. ¶ 20.) Arvest reviewed and approved the requisition requests, and Lessee submitted them to trustee BNYM. ( See id.) Instead of paying general contractor Patton & Taylor Enterprises, LLC (“Patton Taylor”) and other vendors directly as required under the disbursement agreement, trustee BNYM erroneously paid Lessee directly for the requisition requests, and Preston Byrd received wire transfers from BNYM of $5,553,749.06. ( See id. ¶ 21.) Preston Byrd did not forward the proceeds to Patton Taylor and other vendors. ( See id. ¶ 22.) Lessee and Preston Byrd kept the money and delayed paying vendors until they had received funds from subsequent requisitions. ( See id.)

From September 2007 to May 2008, Preston Byrd transferred and diverted $1,280,000 in proceeds from the requisitions BNYM had...