First Neb. Bank v. Balfour (In re Balfour)
| Decision Date | 24 January 2020 |
| Docket Number | Bankruptcy No. 18-81002-SKH,Adversary No. 18-8337-SKH |
| Parties | In Re: Nolan B. Balfour and Maegan L. Balfour, Debtors. First Nebraska Bank, Plaintiff, v. Nolan B. Balfour and Maegan L. Balfour, Defendant. |
| Court | U.S. Bankruptcy Court — District of Nebraska |
First Nebraska Bank ("Bank") filed a Complaint seeking denial of Debtors/Defendants Nolan Balfour's and Maegan Balfour's discharge under 11 U.S.C. §§ 727(a)(2) and 727(a)(4). Alternatively, the Bank requests that the Balfours' debt to the Bank be excepted from discharge under 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(2)(B). In its Complaint, the Bank alleges the Balfours sold or transferred collateral that serves as security for debt to the Bank but did not submit the proceeds to the Bank, misrepresented their financial condition and intentionally provided the Bank incorrect financial information on which the Bank relied in making its lending decisions. The Balfours filed an Answer to the Complaint, denying they intentionally provided the Bank false information and denying that the Bank relied on information they provided in making its lending decisions. Defendants denied other allegations as well. They seek an order dismissing the Complaint.
Nolan grew up in a family that farmed. In 2008, Nolan started his own farming operation. He began by farming a few hundred acres of land under a crop share arrangement using his grandfather's (Roger Balfour's) equipment. In 2010, Nolan began to rent land to grow crops. To finance the land rent and other farming expenses, Nolan secured financing from Heartland Community Bank in 2011 and 2012.
In 2012, Nolan and Maegan Balfour married. Nolan assumed exclusive responsibility for making decisions regarding the Balfours' farming operation. Maegan assisted with farming tasks such as moving trucks, "running the grain cart," and vaccinating cattle when asked. Although Maegan signed promissory notes, security agreements and some financial statements at the Bank's request after the couple married, she did not generate financial data for the Bank or provide financial information to the Bank until after the Bank began to pursue liquidation of its collateral. Maegan's role in managing their family finances related to paying household or "everyday living" expenses. She played little or no role in their farm business financing.
In the fall of 2012, Nolan signed a five-year agreement to rent land. To finance the Balfours' expanding farming operation, Nolan submitted an application for a 2013 operating line of credit to Heartland Bank. The Bank, successor to Heartland Community Bank, granted the loan to the Balfours. On March 4, 2013, the Balfours executed and delivered a promissory note to the Bank in the original principal amount of $1,160,000 (Note 1).1 Doc. 24. Note 1 (also titled "Agricultural - Revolving Draw") operated similarly to a line of credit. Under the terms of Note 1, the Balfours requested advances, which the Bank provided subject to the limitations and conditions provided in the note. Id. The purpose of the note was to finance the Balfours' farming operation from 2013 to 2017. The Bank also granted the Balfours access to $3,000 per month from the line of credit for a "living allowance."
To secure Note 1, the Balfours signed Commercial Security Agreements granting the Bank security interests in personal property and assets, including farm products (such as livestock and crops), government payments and programs and "any and all personal property . . . whether such property is now existing or hereafter created, acquired or arising," including inventory, equipment, accounts and general intangibles. See Docs. 27-32; Joint Stipulation of Uncontested Facts ¶ 12-16. The Bank perfected its security interests in these assets. Docs. 33-41; Joint Stipulation of Uncontested Facts ¶ 17-27.
Although the term of Note 1 extended from March 4, 2013, to December 31, 2017, the Bank provided financing under this note on an annual basis. According to Lydell Woodbury, President and Chief Executive Officer of the Bank, Note 1 required the Balfours to pay the sum advanced under the note in full at the end of each year or provide verification to the Bank that they owned assets sufficient to pay the debt in full if liquidated. See Doc. 24.
The general process the Bank used to decide whether to provide advances for the 2014, 2015, 2016 and 2017 operating seasons included a detailed review of the Balfours' financial information and meetings with Nolan about this information.2 It also conducted collateral inspections periodically.3
The financial information the Bank reviewed included a collateral analysis, cash flow statements, tax returns4 and balance sheets. It appears that the Bank generated the Balfours' balance sheets and cash flow statements by using data Nolan provided during the course of their financial relationship. The Bank provided a copy of these statements to Nolan, and Nolan supplemented, deleted or revised some of this information.
Woodbury testified that Nolan and a loan officer began creating the Balfours' balance sheet in November and the parties often changed or supplemented it as late as April of the following year. Woodbury explained that the balance sheet is a financial document which shows a "snapshot" of a farmer's operation at a specific date and time. The Bank used market prices as part of this snapshot of the Balfours' farming operation. Nolan maintained that the Bank often obtained these market prices from FSA guidelines.5 The Bank also included information about the Balfours' debt to the Bank on the Balfours' balance sheets and added debts to other banks and creditors.
Nolan provided some of the information included on the balance sheets, including the number of bushels of grain and head of cattle. The parties dispute the extent of his contributions to some balance sheets, however. After the balance sheets were finalized, the Bank provided Nolan a copy of them.6 The Bank used the balance sheets, cash flow statements, collateral analysis and inspection reports (if available) to decide whether to extend credit to the Balfours for the following operating season. The Bank typically completed this analysis in March or April. It did not advance funds on the operating line of credit (which included the $3,000 per month living allowance) from January until the date the Bank approved financing.7
Unlike in 2012 when Nolan's farm operation realized profit, the Balfours' farm operation suffered a loss in 2013. Nolan explained that the Balfours were committed to an expensive long-term land rent agreement and commodity prices were substantially lower than in 2012.
Beginning in late 2013 and extending through the spring of 2014, Nolan and a Bank representative met to discuss the Balfours' financial condition and to create the Balfours' 2013 year-end balance sheet. The Bank's analysis of the Balfours' 2013 financial information revealed that the Balfours did not possess sufficient grain inventory, livestock and other assets to either pay Note 1 in full or provide verification to the Bank that they owned collateral sufficient to pay the debt in full if liquidated. To cover this loss and enable the Balfours to maintain their operating line of credit, the Bank agreed to loan the Balfours additional funds.
On January 29, 2014, Maegan and Nolan executed and delivered a Promissory Note titled "Agricultural - Single Advance" in the sum of $103,069.00 (Note 2). Roger Balfour also signed Note 2. The purpose of this note was "to refinance carryover debt." Doc. 25 at 2. Note 2 provided a seven-year term, maturing on January 29, 2021. Note 2 is secured by the same assets that serve as security for Note 1. See Docs. 27-32; Joint Stipulation of Uncontested Facts ¶ 12-16; Ex. 33-41. The Bank filed the documents necessary to perfect or maintain its secured status.
In the summer of 2014, the Bank inspected the collateral that secured the Balfours' debt. During the collateral inspection, Nolan and a Bank representative drove around and looked at fields, machinery and livestock. The inspection revealed collateral consistent with the representations on the Balfours' January 9, 2014, FYE 2013 Balance Sheet, signed February 6, 2014. See Doc. 104.
In 2014, the Balfours suffered another operating loss due to high land rent and low commodity prices. Per the parties' typical practice, Nolan met with a Bank representative at the beginning of 2015 to discuss the Balfours' 2014 financial information. The Bank questioned the January 16, 2015, FYE 2014 Balance Sheet when a Bank representative found some discrepancies. See Doc. 105. At trial, Woodbury could not recall the specifics of the discrepancies. When a Bank representative confronted Nolan about the inconsistency, "Nolan said he would check his records" and provide a response. Woodbury testified that Nolan provided a reasonable response. According to Woodbury, the Bank inspected its collateral at the Balfours' farm in 2015. He testified that the 2015 collateral inspection was consistent with the 2014 year-end balance sheet. The discrepancies were not reflected in this collateral inspection.
Crop year 2015 was no better for the Balfours than 2014. According to Nolan, the Balfours suffered a $400,000 loss. In the fall of 2015 or early 2016, the Bank suggested the Balfours had three options: petition for bankruptcy relief under Chapter 12, allow the Bank to accelerate the notes and liquidate their assets, or borrow $300,000 from Roger Balfour to cover some or all of the annual losses. Nolan opted for the third option, and Roger Balfour provided the funds to pay the Balfours' $300,000 debt.
To reduce the Balfours' financial burden, the Bank granted the Balfours a temporary reduction in interest rate. In March of 2016, Nolan and Maegan signed a Promissory Note Modification...
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