First Nat'l Bank of Omaha v. O'Brien (In re O'Brien)

• Decision Date: 25 August 2016
• Docket Number: Adversary No. 15-6089,Case No. 15-21184
• Court: United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Kansas
• Parties: In re: Lawrence Michael O'Brien, Debtor. First National Bank of Omaha, Plaintiff, v. Lawrence Michael O'Brien, Defendant.

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In re: Lawrence Michael O'Brien, Debtor.

First National Bank of Omaha, Plaintiff
v.
Lawrence Michael O'Brien, Defendant.

Case No. 15-21184
Adversary No. 15-6089

United States Bankruptcy Court, D. Kansas.

Signed August 25, 2016

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John T. Coghlan, Matthew L. Faul, Ryan Joseph Pulkrabek, Lathrop & Gage LLP, Kansas City, MO, for Plaintiff.

Courtney J. Whiteley, Whiteley Law Office, Gregory V. Blume, Overland Park, KS, for Defendant.

Memorandum Opinion and Order

Janice Miller Karlin, United States Chief Bankruptcy Judge

First National Bank of Omaha (“FNBO”) asks the Court to find its judgment against Defendant/Debtor Lawrence Michael O'Brien (“Debtor”) nondischargeable under either 11 U.S.C. § 523(a)(2)(A) or (B).¹ It claims that Debtor forged his wife's signature on several loan documents and overstated real property values on two personal financial statements, thereby inducing FNBO to loan money to Debtor's business. The Court enters judgment for Debtor in this adversary proceeding because FNBO failed to carry its burden to prove that Debtor's actions caused its damages under § 523(a)(2)(A) and failed to show under § 523(a)(2)(B) that Debtor used materially false written statements to obtain credit from FNBO.

I. Findings of Fact

Debtor and George Young, as co-owners of Superior Acquisition Group, Inc. (“Superior”), purchased La Superior Food Products, Inc., a Mexican food manufacturer located in Shawnee, Kansas, in 2003. Commerce Bank financed Superior's purchase of the business assets while the prior owners of the business, the Porters, financed Superior's purchase of the business real estate. By 2008, Superior's business had

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deteriorated at least in part due to high gas and corn prices, causing it to default on both loans. Commerce Bank and the Porters obtained judgments against both Superior and the guarantors of the loans, who included Debtor, Young and their respective spouses.

As a result, Debtor and Young began searching for financing not only to satisfy those judgments, but to enable Debtor and his wife to repay a promissory note they executed in January 2008 for $347,000 to The Private Bank. During 2011, Debtor and Young entered into negotiations with FNBO for the financing necessary to pay these outstanding debts and to solve Superior's cash flow problems.

Debtor and FNBO executed the first loan agreement in March, 2011. At trial, John Willis, who is now a director in charge of managing the commercial real estate loan portfolio at FNBO, described the loan approval practices used by FNBO in 2011.² The loan memorandum for that transaction states that FNBO's extension of a $30,000 line of credit to Superior was “a temporary financing solution to support working capital of La Superior until [the] pending loan request ha[d] been approved and funded.”³

To secure this bridge loan, Debtor agreed to assign FNBO an interest in a deposit account (“CD”) he and his wife jointly maintained at the bank. To consummate that agreement, FNBO required Debtor and Mrs. O'Brien to execute an “Assignment of Deposit Account” (“First Pledge Agreement”), which defined the collateral as “CD Account Number [redacted] 3774 with Lender.”⁴

According to the testimony of a highly credible handwriting expert, it is clear that Debtor signed both his name and his wife's name on the First Pledge Agreement for the CD. Mrs. O'Brien testified she did not give Debtor permission to sign her name. Mr. O'Brien testified he had never seen the First Pledge Agreement nor several of the other loan documents admitted at trial, though he admitted the documents contained his signature. Because his memory seemed faulty about his execution of the loan documents—and about the content of those documents and many other details surrounding the 2011 loans, Debtor's testimony was not particularly credible about how and whether loan documents were executed. For that reason, the Court adopts the conclusions of the handwriting expert regarding the signatures on the loan documents. Debtor signed his own name and his wife' name (without her authorization) on the First Pledge Agreement and on two other pledge agreements detailed below.

Mr. Willis also testified that FNBO requires applicants to submit personal financial statements (“PFS”s) to enable it to assess the creditworthiness of loan guarantors—in this case Debtor and George Young. Although the evidence was unclear how or when FNBO came to receive it, the loan file contained a PFS dated November 11, 2009. It seems likely that Debtor and his wife initially provided this PFS to

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Commerce Bank in conjunction with an attempt to work out that loan default.⁵

The 2009 PFS reflected Debtor's interest in three tracts of real property—his jointly owned residence located in Leawood, Kansas valued at $985,000 and two properties in Missouri he owned with his wife as tenants by the entirety: one a “rental” property in Kansas City, Missouri valued at $290,000 and the other a “lake home” in Lake Lotawana, Missouri valued at $575,000.⁶ Altogether, the PFS approximated that Debtor and his spouse had a net worth of $3,205,100 in November, 2009. Debtor signed his name and his wife's name on the PFS without her permission to do so.

FNBO approved an increase in Superior's line of credit in April, 2011, from $30,000 to $50,000. Similar to the previous loan's approval, Debtor executed an “Assignment of Deposit Account” (“Second Pledge Agreement”), which was identical to the First Pledge Agreement except for increasing FNBO's security interest in the CD from $30,000 to $50,000. Again, Debtor signed both his and his wife's name to the assignment without her authorization.

These lines of credit provided operating capital for Superior during the time FNBO analyzed the creditworthiness of the business and its owners before making the ultimate, much larger loan Superior needed. The ultimate loan was actually three separate financing agreements totaling $1.9M; it closed in May, 2011.

The ultimate loan consisted of a $300,000 line of credit, to mature in twelve months, and two $800,000 term loans, to mature in sixty months (together “the Superior Loans”). Of the $1.9M, $225,481 paid off the Porter judgment, $1,125,000 paid off the Commerce Bank judgment, $319,386 satisfied The Private Bank loan, and $43,896 paid off FNBO's bridge loan.⁷ The Superior Loans were cross-collateralized and secured by the following:⁸

1. a first mortgage on Superior's business real property that FNBO's loan memorandum indicated had recently been appraised, presumably by it, at $1M;

2. a first lien on Superior's business equipment that had recently been appraised, presumably by FNBO, at $1,678,000;

3. the O'Briens' CD, valued at $100,282;

4. an all-business-asset UCC filing to cover inventory and raw materials that FNBO valued at $166,981; and

5. the guaranties of Debtor and Young, which were not separately valued in the loan memorandum.

Thus, without ever looking to either guaranty, FNBO believed it had over $2.8M in business assets (plus the CD) to secure its $1.9M loan. On page four of its loan memorandum, FNBO then evaluated the expected liquidation value of the collateral in the event of default and concluded there was

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“Excess Marginal Collateral” of $163,078⁹ —again, without attributing any specific monetary value to either guaranty.

FNBO again required Debtor and his wife to sign an agreement pledging the CD as security for all three loans (“Superior Loans Pledge Agreement”). According to the agreement, FNBO could take possession of the CD upon default of any of the three loans. Debtor admitted that the signature on the final page of the Superior Loans Pledge Agreement (dated May 19, 2011) is his, but testified that he never intended to pledge the CD as collateral for the business loans because he believed the CD belonged exclusively to his wife.¹⁰ In fact, Debtor testified that he's not sure how or when the Superior Loans Pledge Agreement was signed by either himself or his wife, noting his wife was not at the closing for the business loans. He even claimed he had never seen the document prior to his former attorney showing it to him during FNBO's foreclosure action against Superior—sometime in 2013. Again, Debtor was not a credible witness regarding execution of the loan documents.

Conversely, the handwriting expert very credibly testified that it was Debtor's own signature on the Superior Loans Pledge Agreement (compared from a “known”/admitted handwriting sample) and that Gloria's signature was also authentic. In other words, it was not one of the seven documents on which Gloria's signature had been forged by Debtor. As a result, the Court finds both Debtor and his spouse signed this Superior Loans Pledge Agreement, pledging their jointly owned CD as collateral for the Superior Loans.

A month after the Superior Loans were made, in June 2011, Debtor and his wife opened a money market account at FNBO. Shortly thereafter, they transferred the balance of the pledged CD to the newly formed account. Because the CD was...