B-Bar Tavern Inc. v. Prairie Mountain Bank (In re B-Bar Tavern Inc.)

• Decision Date: 18 December 2013
• Docket Number: Bankruptcy No. 12–60228–11.,Adversary No. 12–00043.
• Parties: In re B–BAR TAVERN INC, Debtor. B–Bar Tavern Inc, Plaintiff, v. Prairie Mountain Bank, Defendant.
• Court: United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Montana

506 B.R. 879

In re B–BAR TAVERN INC, Debtor.B–Bar Tavern Inc, Plaintiff,

v.Prairie Mountain Bank, Defendant.

Bankruptcy No. 12–60228–11.

Adversary No. 12–00043.

United States Bankruptcy Court, D. Montana.

Dec. 18, 2013.

James A. Patten, Billings, MT, Benjamin C. Tiller, The Law Offices of Benjamin C. Tiller, Helena, MT, for Plaintiff.

James Anthony Donahue, Gregory J. Hatley, Davis Hatley Haffeman & Tighe PC, John P. Paul, Great Falls, MT, for Defendant.

MEMORANDUM OF DECISION

RALPH B. KIRSCHER, Bankruptcy Judge.

In this adversary proceeding Plaintiff/Debtor B–Bar Tavern Inc. (“B–Bar Tavern”) objects to Proof of Claim No. 1 filed by creditor Prairie Mountain Bank (“PMB”) and seeks to invalidate the Trust Indenture (“TI”) securing PMB's debt and avoid PMB's lien on Plaintiff's property, and also seeks attorney fees. PMB answers that it honored all agreements with B–Bar Tavern, and PMB requests reformation of the TI based on mutual mistake, plus enforcement of the TI against its security which Plaintiff pledged under the TI and a Settlement Agreement. After trial of this cause and review of the record, the parties' briefs, and applicable law, for the reasons set forth below judgment shall be entered: (1) disallowing PMB's Proof of Claim No. 1 but otherwise dismissing Plaintiff's claims for relief, and (2) reforming the TI to correct mutual material mistakes on the TI, Exhibit 35. Each party shall be responsible for its own attorneys' fees and costs.

Plaintiff was represented at the trial by attorney James A. Patten (“Patten”) of Billings and Benjamin C. Tiller of Great Falls. PMB was represented by attorneys James Anthony Donahue (“Donahue”), Gregory J. Hatley (“Hatley”) and John P. Paul (“Paul”) of Great Falls. The following persons testified: Steven Potts (“Potts”), Laura Vukasin (“Vukasin”), Kimberly Hannah (“Hannah”), Jack Barnes (“Jack”), Richard Barnes (“Dick”), Michael Richards,¹ Heather Robbins (“Robbins”), and accountant Jim Koontz (“Koontz”). Plaintiff's Exhibits (“Ex.”) 1–through–49 were admitted into evidence without objection, as were Ex. 51, 52, and PMB's Ex. A–through–Z, AA, BB, CC, DD, and EE. Ex. 50 and 53 were admitted over PMB's objection. The Court took judicial notice of certain adjudicative facts enumerated in the Court's Order entered on July 30, 2013 (Document No. 93).²

At the conclusion of the parties' cases-in-chief the Court granted the parties time to file post-trial briefs, which have been submitted and reviewed by the Court along with the record and applicable law. This matter is ready for decision.

This Court has jurisdiction of the above-captioned Chapter 11 case and Debtor's Objection to PMB's Proof of Claim under 28 U.S.C. § 1334(a). Debtor's Objection to PMB's claim and request to avoid PMB's lien are core proceedings under 28 U.S.C. § 157(b)(2)(B) and (K). This Memorandum of Decision includes the Court's findings of fact and conclusions of law pursuant to F.R.B.P. 7052 (applying Fed.R.Civ.P. 52) in adversary proceedings.

PROCEDURAL HISTORY

Plaintiff B–Bar Tavern commenced this Chapter 11 case by filing a petition on February 27, 2012, signed by Richard Barnes, president. The petition states that Debtor is a small business debtor as defined at 11 U.S.C. § 101(51D). Debtor listed real property located at 616 10th Avenue South in Great Fall, Montana, described as its principal place of business on Schedule A with a current market value of $1,885,750.00, securing a claim in the amount of $823,681.41. Schedule D lists PMB as a creditor holding a contingent, unliquidated, disputed claim in the amount of $823,681.41 secured by Debtor's place of business. No priority claims are scheduled, and Schedule F lists a total of $0 in unsecured nonpriority claims.

PMB filed the only Proof of Claim in this case, Claim No. 1, on June 12, 2012, asserting a secured claim in the amount of $820,923.27, plus interest, fees, costs and expenses based on the TI. Claim 1 values the real estate security at $1,410,150.00. The amount of arrearage is stated in the amount of $156,791.00. On September 7, 2012, Debtor filed its Disclosure Statement and Plan of Reorganization. The Court approved the Disclosure Statement after a hearing held on October 22, 2012.

Debtor filed its complaint initiating this adversary proceeding on August 22, 2012, objecting to PMB's Proof of Claim, seeking a declaratory judgment that PMB's lien is invalid and seeking to avoid PMB's lien under § 544(a), and requesting costs and attorneys' fees. PMB filed its answer on September 20, 2012, including a counterclaim asking the Court to revise or reform the TI under MONT. CODE ANN. (“MCA”) § 28–2–1611 and other Montana statutes to correct a mutual mistake of the parties and include the name of Barnes, Inc., on the TI. Plaintiff filed a motion to amend its complaint and join attorney Steven T. Potts as a party, but that motion was denied. Trial was originally scheduled to commence in April 2013, but was continued until trial commenced on August 5, 2013.

FACTS

A brief summary of the facts is helpful in dealing with this complicated record. Plaintiff is owned by Dick Barnes who is Jack's brother. At Jack's request Dick agreed to sign a personal guaranty of a loan from PMB to Jack's company Barnes, Inc., and Dick agreed to pledge his company/Plaintiff's place of business as security for the loan. During the pendency of the loan Jack restructured his companies by transferring Barnes, Inc.'s properties to two new limited liability companies (“LLC's”). Barnes, Inc., defaulted on the loan, and PMB sought to enforce its rights against the security pledged by Plaintiff under the TI, Ex. 35.

The approved Pretrial Order sets forth the following agreed facts:

The following material facts are not in dispute:

1. Plaintiff owns real property situated at 616—10th Ave, South, Great Falls, MT.

2. Richard [“Dick”] Barnes is the President and sole owner of the B–Bar Tavern Inc. stock.

3. Richard Barnes' brother is Jack Barnes.

4. Jack Barnes was the President and sole shareholder of Barnes, Inc. In 2009, he became the President and sole member of two new entities, Prospector Land Company LLC and Prospector Catering Company LLC.

5. In 2007 a bar and restaurant owned by Barnes, Inc. named Prospector I was destroyed by fire.

6. In January, 2008, Barnes, Inc. borrowed, through a line of credit, $500,000 from Prairie Mountain Bank secured by the Barnes, Inc., real property on Smelter Ave.

7. In June, 2008, Barnes, Inc. entered into a construction loan agreement with Prairie Mountain Bank for the reconstruction of the bar, restaurant, and casino on its property on Smelter Avenue and secured the loan with a trust indenture on the Barnes, Inc., property on Smelter Avenue in Great Falls, Montana, and the Barnes Inc. real property on Third Ave. N.W., Great Falls, Montana [the “J–Bar T”].

8. In October, 2008, Barnes, Inc., borrowed $850,000 from Prairie Mountain Bank to complete the construction of the bar, restaurant, and casino on Smelter Ave. Jack Barnes and Richard Barnes guaranteed the $850,000 loan. B–Bar Tavern Inc, executed, as grantor, a Deed of Trust with Prairie Mountain Bank as beneficiary, for $850,000. At that time, Barnes Inc. still owned the real property on Smelter Ave.

9. As of December 31, 2008, Barnes Inc. had three loans outstanding with Prairie Mountain Bank in the principal amounts of $500,000, $1,800,000, and $850,000.

10. Great Falls attorney Steven Potts had represented Jack Barnes and Barnes, Inc., prior to April 1,2009. Attorney Potts represented Richard Barnes and B–Bar Tavern prior to April 1, 2009. Attorney Potts was a shareholder of Prairie Mountain Bank and represented Prairie Mountain Bank prior to April 1, 2009.

Additional facts are established by the testimony and exhibits.

Potts has been an attorney for 27 years, and practiced in Great Falls and briefly in New York. He testified that most of his legal work relates to economic matters such as contracts, business transactions, and estates. Potts was the registered agent for B–Bar Tavern until he resigned in 2012, and also was the registered agent for other Barnes family entities. Tr., p. 76. Dick testified that Potts represented B–Bar Tavern in a regulatory investigation by the State of Montana involving an alleged loan from Dick to another family corporation. Tr., pp. 308, 309. Potts also represented Dick in B–Bar Tavern's bar business for the last 15 years. Tr., pp. 308, 309.

Jack testified that Potts had been Jack's attorney, Barnes, Inc.'s attorney and attorney for every member of his family and their businesses for quite a few years. Tr., pp. 272–73. Potts testified that he did not obtain written conflict of interest waivers from Dick, Jack, B–Bar Tavern, Barnes, Inc., or PMB, even though they all were his clients. Tr., pp. 93, 94. Dick testified that he did not know that Potts was a lawyer for PMB and a shareholder of PMB when Dick signed the loan documents for his brother Jack in 2008 and 2009. Tr., p. 311.

PMB's president Vukasin testified that Potts provided PMB with legal services in 2008 and earlier, and she knew Potts had a relationship with the Barnes family but did not know that Potts was counsel for the Barnes family. Tr., pp. 124, 125.

Potts also represented Silver City Corporation, the principals of which were the spouses of Dick and Jack, Nancy Barnes and Colette Barnes, respectively. Potts testified that Silver City Corporation owned the liquor license which was operated in the Prospector I on Smelter Avenue owned and operated by Barnes, Inc. Jack disagreed, and testified that Barnes, Inc., owned the liquor license at the Prospector I. Tr., p. 298. Jack testified that he, Dick, and other family members worked with their parents in a family-held bar business, the Red Barn, until Jack acquired his parents' interests. The Red Barn became the Prospector I. Tr., pp. 257–259, 303.

B–Bar Tavern operates on 10th Avenue South in Great Falls under the name ...