BMO Harris Bank, N.A. v. Richert (In re Richert)

• Decision Date: 21 July 2021
• Docket Number: Case No. 6:19-bk-00179-KSJ,Adversary No. 6:19-ap-00260-KSJ
• Citation: 632 B.R. 877
• Parties: IN RE Dwight Donald RICHERT and Holly Berry Richert, Debtors. BMO Harris Bank, N.A., Plaintiff, v. Dwight Donald Richert, Defendant.
• Court: U.S. Bankruptcy Court — Middle District of Florida

632 B.R. 877

IN RE Dwight Donald RICHERT and Holly Berry Richert, Debtors.BMO Harris Bank, N.A., Plaintiff,

v.Dwight Donald Richert, Defendant.

Case No. 6:19-bk-00179-KSJ

Adversary No. 6:19-ap-00260-KSJ

United States Bankruptcy Court, M.D. Florida, Orlando Division.

Signed July 21, 2021

Juliane M. Brumbaugh, Michael A. Nardella, Nardella & Nardella, PLLC, Orlando, FL, William J. Dorsey, Blank Rome, Chicago, IL, for Plaintiff.

Robert C. Furr, Jason S. Rigoli, Furr & Cohen, P.A., Boca Raton, FL, for Defendant.

MEMORANDUM OPINION FINDING DEBT NOT DISCHARGEABLE

Karen S. Jennemann, United States Bankruptcy Judge

Debtor and Defendant, Dwight Richert, is a self-reliant and confident businessman who started an accounts receivable factoring company called Richert Funding, LLC ("R/Funding"). Debtor was the 100% owner and made every important operational decision for R/Funding. Its largest customer was A.B.L. Farms ("ABL"), a watermelon broker. Over a short period, ABL's debt to R/Funding climbed from $50,000 to over $8 million. When ABL acknowledged it could not pay its debts, Richert colluded with ABL's insiders to convince Plaintiff, BMO Harris Bank, N.A. ("BMO"), to lend ABL almost $5 million, most of which was used to pay R/Funding's debt. BMO approved this loan justifiably relying on the intentionally false representations made by Richert—that ABL's accounts receivable were current and plentiful, and that the BMO loan would pay R/Funding in full.

After ABL's watermelon business spectacularly failed in less than one year, just as Richert anticipated, BMO suffered a multimillion-dollar loss which they argue in this adversary proceeding is attributable to Richert's back-room manipulations and direct lies and is not dischargeable in this Chapter 7 bankruptcy case under § 523(a)(2)(A), (4), and (6) of the Bankruptcy Code.¹ I agree that under § 523(a)(2)(A) Richert remains liable to BMO and will enter a nondischargeable judgment against him for the amount of $6,068,896.68, plus post-judgment interest.

Richert Loans ABL $8 million

Richert owned 100% of R/Funding, an accounts receivable factoring business, and made every important decision for the business.² The factoring business gives businesses with limited financial histories and big cash needs a way to operate, optimistically to bridge the gap between imminent failure and profitability. R/Funding was a typical factoring company buying customers’ accounts receivable (i.e., invoices) at a discount³ and advancing a percentage of the face value of the invoice to the client. When each invoice is paid, R/Funding receives the payment, subtracts a fee, and then sends the remaining balance to the client.⁴ Generally, factoring accounts receivable is one of the most expensive ways to borrow monies.

Debtor was involved in every aspect of R/Funding's operations. R/Funding had few employees, including Bart Garbrecht, Vice President of Sales, and Laura Jessee, all of whom reported directly to Richert. Debtor made every significant decision for R/Funding.⁵

In 2011, Garbrecht got a tip to call ABL as a potential client.⁶ ABL was a wholesale watermelon broker buying watermelons from producers and selling them to larger retailers.⁷ Two brothers ran ABL—Aaron Letsinger was the owner and President of ABL;⁸ "Danny" Letsinger was Vice President and managed ABL's daily operations.

⁹ As will become more important in ABL's collapse, Danny Letsinger also owned a separate company, Southern Melon Distributors, Inc. ("Southern Melon"), an affiliate of ABL that purchased and sold watermelons to ABL and other companies.¹⁰

Garbrecht convinced the Letsinger brothers to factor ABL's accounts receivables with R/Funding. In October 2011, R/Funding and ABL signed their first Factoring and Security Agreement (the "2011 Factoring Agreement").¹¹ R/Funding took an ownership interest in ABL's accounts receivables and a security interest in the business's other collateral.¹² Under the agreement, R/Funding also provided ABL with other financing including purchase order funding and grower advances.¹³ R/Funding properly perfected its ownership interest in the purchased accounts and its first priority security interest in all collateral by filing a UCC-1 Financing Statement.¹⁴

So, in 2011, R/Funding owned all of ABL's accounts receivable and had a first position blanket lien on its other assets. R/Funding also performed accounting services for ABL keeping financial records on ABL's receivables, essentially acting as the "back office."¹⁵ R/Funding (not ABL) would create reports tracking the creation and collection of ABL's receivables, including preparing critical aging reports.¹⁶ These aging reports determined how much R/Funding would advance to ABL and reflected outstanding invoice amounts, the advance date, and the age of the invoice.¹⁷ As we will learn later, in September 2014, R/Funding falsified the information on these aging reports it prepared to convince BMO to lend monies to ABL.

R/Funding initially advanced $50,000 to ABL,¹⁸ but that amount soon swelled; by July 2014, ABL owed R/Funding over $8 million.¹⁹ Because R/Funding kept ABL's financial records and controlled ABL's cash flow,²⁰ Richert also knew ABL was failing and could not repay this huge debt of $8 million.

Richert knew ABL was not collecting its accounts receivable promptly.²¹ Receivables should typically be collected within 30 days; however, the average age of ABL's receivables was 37 days old and only 19-20% were collected within 30 days; it also appeared that most receivables "were not valid [i.e., collectible]."²² On July 9, 2014, Danny Letsinger directly told Richert that ABL was "flat broke."²³

Richert rightfully was concerned ABL could not repay R/Funding. ABL was financially failing, perhaps in part due to the cost of borrowing monies from R/Funding. Richert told the Letsinger brothers he would "help" them be more successful by getting a conventional line of credit from a traditional lender.²⁴ ABL started exploring refinancing options, including getting a loan from BMO.²⁵ From there, ABL and Defendant concocted a well-planned and executed scheme to make sure that ABL received a loan that would repay R/Funding some (but not all) of these amounts due.

Richert Colludes with ABL to Convince BMO to Extend Loan

In late 2013, Brian Wickman, the BMO officer who originally referred ABL to R/Funding, resumed talks about BMO extending a loan to ABL.²⁶ Wickman started ABL's application process for a $5 million loan from BMO in early 2014.²⁷ Richert coached Danny Letsinger through these conversations with BMO's representatives so ABL could get enough money for a "partial pay-down" to R/Funding.²⁸ Richert was laser focused on getting ABL fresh capital, primarily to pay R/Funding.

At first, BMO turned downed ABL's loan request. Although Wickman and David Maraman, Wickman's supervisor and a regional BMO manager, recommended the ABL loan,²⁹ Gary Nowak, a credit manager for BMO, said "no."³⁰ Maraman challenged this answer going directly to Nowak's supervisor, Jack Yong, BMO's senior credit manager for business banking, for approval.³¹ Yong agreed with Nowak. BMO rejected ABL's first loan application.³²

Yong, however, suggested the parties explore another financing option using a Small Business Administration ("SBA") loan, where the federal government would guarantee 75% of the loan.³³ ABL agreed to pursue a SBA loan.

Richert directly assisted in this process. He or his staff at R/Funding worked with ABL to ensure ABL's financial information on this second loan application appeared more positive. This is the step where Richert went from merely coaching the Letsinger brothers, hoping to get R/Funding repaid, to actively falsifying the information that he, R/Funding, and ABL gave to BMO. Richert realized ABL needed to show BMO a rosier financial future to get the new money; Richert delivered this sunnier package, as I will discuss in the next section, and Yong/ BMO ultimately approved the loan.³⁴

Richert Falsified ABL's A/R Aging Reports to Deceive BMO

BMO agreed to lend ABL about $5 million as an asset-based loan taking ABL's accounts receivable ("A/R") as collateral.³⁵

In an asset-based loan, a borrowing base is the floor for how much money a lender will loan a company based on the value of the collateral.³⁶ Newer A/R are worth more than older, disputed, or uncollectible A/R. So, the accuracy of the information about a borrower's A/R (as certified by the borrower) is critical to determine how much money a lender advances.³⁷ Aging reports help lenders verify the computation on the borrowing base certificate and assess whether the A/R qualify as eligible collateral.³⁸

To get BMO's approval for the loan, ABL had to establish its borrowing base through aging reports listing outstanding A/R and that its customers were timely paying these invoices. Richert and his staff at R/Funding prepared these aging reports for ABL, and, without doubt, Richert and his people manipulated ABL's aging reports to present BMO with a more promising financial picture for ABL than existed.

Danny Letsinger told Wickman that R/Funding would prepare the aging reports BMO needed because R/Funding had the most up-to-date and accurate information.³⁹ Two aging reports were provided to BMO: one dated September 22, 2014,⁴⁰ prepared by R/Funding; and one dated September 30, 2014, whose origin is unclear but was based on the aging report of September 22, 2014.⁴¹

I note that on the same day R/Funding was preparing the fictitious aging reports for BMO, Richert was telling Danny Letsinger to apply incoming customer payments to older disputed invoices rather than to the current invoices the customer agreed was due.⁴² The effect of this deception is to make ABL's overall A/R appear more current and valuable when calculating the borrowing base for BMO's anticipated loan.

Using the aging report of September 30, 2014,⁴³ BMO prepared its borrowing base certificate and agreed BMO initially would lend ABL...