In re Harris
| Docket Number | 18-16598 |
| Decision Date | 21 January 2022 |
| Parties | In re: FREDERICK D. HARRIS & BERNICE R. HARRIS, Debtors. |
| Court | U.S. Bankruptcy Court — Northern District of Ohio |
On April 30, 2019, the debtors Frederick D. Harris ("Dr Harris") and Bernice R. Harris objected to claim number 19 filed by Synovus Bank ("Synovus"), as successor by merger to Global One Financial, Inc. ("Global One"). Synovus's claim stems from a loan that Dr Harris personally guaranteed to fund the purchase of life insurance. The debtors argue that Synovus's claim is unenforceable under 11 U.S.C. § 502(b) for various reasons, including because Global One and/or its agents allegedly fraudulently induced Dr. Harris to sign a personal guaranty. For the reasons that follow, the debtors' objection is overruled, and Synovus's claim for $122, 338.11 is allowed as filed.
This Court has jurisdiction over this objection. An objection to a claim is a core proceeding under 28 U.S.C. § 157(b)(2)(B). This Court has jurisdiction over core proceedings under 28 U.S.C. §§ 157(a) and 1334 and Local General Order No. 2012-7, entered by the United States District Court for the Northern District of Ohio.
On July 13, 2017, Synovus filed suit against Dr. Harris and Lonnie D Sloan in the United States District Court for the Northern District of Georgia. Case No. 1:17-cv-02635-AT. Synovus sued Mr. Sloan in his capacity as trustee for an irrevocable life insurance trust or ILIT called the Frederick D. Harris Irrevocable Trust ("the ILIT"). In the federal lawsuit in Georgia, Synovus alleged that it had made a loan to the ILIT for the purchase of a life insurance policy, that the ILIT had defaulted on the loan in February 2017, and that Dr. Harris had personally guaranteed the loan.
On November 1, 2018, the debtors filed for chapter 13 bankruptcy in this Court, thereby staying the federal lawsuit in Georgia before the district court could make any decision on the merits. On January 8, 2019, Synovus timely filed a proof of claim for $122, 338.11 allegedly due under Dr. Harris's personal guaranty of the loan Global One extended to the ILIT. On April 30, 2019, the debtors objected to Synovus's claim, arguing it was "highly speculative, improper, unliquidated and premature" (Docket No. 55). Synovus responded in opposition (Docket No. 62), the debtors supplemented their objection (Docket No. 77), and Synovus responded to the debtors' supplement (Docket No. 81). The parties filed several additional briefs (Docket Nos. 218, 223, and 224) before an evidentiary hearing, which took place on September 30 and October 1, 2021.
During the hearing, the Court heard testimony from Dr. Harris, Mr. Sloan, and Jonathan D. Rosen, the founder of Global One and then chief executive officer of Synovus's specialty finance division. Subject to further redaction under Bankruptcy Rule 9037, the Court received without objection Synovus's Exhibits 1 through 34 and the debtor's Exhibits A through ZZZ, except for the debtor's Exhibit P. The Court did not admit Exhibit P, an expert report prepared by Mr. Sloan. The parties orally stipulated to Synovus being a successor in interest to Global One with standing to assert its claim.
Sadly, only a week after the evidentiary hearing, Mr. Rosen died when a plane he was piloting crashed in Georgia. Also killed in the plane crash were Mr. Rosen's teenage daughter, a teenage friend of the daughter, and Mr. Rosen's executive assistant, Lauren Harrington, who had attended the evidentiary hearing with Mr. Rosen.
In light of these circumstances, the Court held a conference call with the attorneys and requested that the parties consider one last try at reaching a consensual agreement. After being advised on November 10, 2021, that the parties had agreed to mediation, the Court referred the matter to mediation before Chief Judge Mary Ann Whipple. On December 13, 2021, Chief Judge Whipple reported that the parties were unable to reach a consensual resolution.
The findings of fact in this memorandum of opinion reflect the Court's weighing of the evidence, including the credibility of the witnesses. "In doing so, the court considered the witnesses' demeanor, the substance of the testimony, and the context in which the statements were made recognizing that a transcript does not convey tone, attitude, body language, or nuance of expression." In re Parrish, 326 B.R. 708, 711 (Bankr.N.D.Ohio 2005). Even if not specifically mentioned in this opinion, the Court considered the testimony of all the witnesses and all the exhibits admitted into evidence. Unless otherwise indicated, the following facts were established by a preponderance of the evidence.
Dr. Harris is a physician who graduated from Case Western Reserve University School of Medicine in 1985. Since 2005, he has practiced at the Cleveland Clinic as a salaried primary care physician. His salary in 2013 was approximately $390, 000 per year. By 2014, despite his income, Dr. Harris was struggling financially. He was behind on his mortgage, carrying a lot of debt, and paying for several of his seven children to attend college.
In early 2014, one of Dr. Harris's friends introduced him to Byron Holley at Legacy Point Capital ("Legacy Point"), an investment banking and advisory firm. Bryon Holley jointly owned and managed Legacy Point with John Loudon. While Dr. Harris already had approximately $5, 000, 000 in whole life insurance, he was attracted to Legacy Point's premium financed life insurance product as a retirement tool. Having an ILIT hold the life insurance policy would result in tax advantages, and, by financing the premiums, he would pay relatively little up front. Also, Dr. Harris had been a licensed insurance agent since January 2013. Legacy Point promised that if he helped sign up other physicians and people he knew, he could share in insurance commissions to cover the cost of insuring his own life. After shopping two other lenders, Legacy Point identified Global One as a potential lender and began working with Global One's marketing arm, Global Financial Distributors ("Global Distributors"), to purchase the premium financed life insurance policy.
One of the advantages to the proposed financing of this particular life insurance product was that the outstanding principal owed on the loan would never exceed the cash surrender value of the insurance policy. For the ILIT and Dr. Harris, this meant that there would be little risk of potentially owing more money on the loan in the event of a default, as the lender would use the cash surrender value to pay back the entire outstanding principal. For the lender, Global One, this meant that there was little risk of losing any principal on the loan in the event of a default, as the cash surrender value would always exceed the outstanding principal. Even if Global One never collected another penny from the ILIT or Dr. Harris, the outstanding principal was never at risk.
On the other hand, there was still the possibility of prepayment penalties, interest, and fees associated with early termination of the loan. Dr. Harris testified that Legacy Point assured him that Global One would waive any such penalties, interest, and fees in consideration for Dr. Harris's efforts at referring other physicians and acquaintances to purchase similar insurance. The Promissory Note and Security Agreement ("the note") and the personal guaranty contain no hint of any such waiver and the note expressly rejects any oral representations to the contrary. Exhibit 1, ¶ 12(f).
In June 2014, Global Distributors first proposed making the loan to Dr. Harris's ILIT, which would require a personal guaranty from Dr. Harris. Dr. Harris rejected this first proposal in September 2014 specifically because he did not want to sign a personal guaranty. Global Distributors understood that it was "very important" for Dr. Harris to not "put up a personal guarantee." Exhibit T. Around this time, Global Distributors and Legacy Point agreed that they would share the commission earned on the sale of the life insurance policy.
As a workaround, Dr. Harris and Legacy Point proposed that Global One make the loan to an existing corporation that Dr. Harris controlled. Global Distributors represented that making the loan to a corporation would not require a personal guaranty from Dr. Harris. When loaning to Dr. Harris's existing corporation proved unworkable, Legacy Point next proposed that Dr. Harris create a new corporation to take out the loan. Dr. Harris formed a new corporation and named it Galaxy Investors, Inc. This too was fruitless. In November 2014, the insurer, Lincoln Financial Group ("Lincoln Financial"), declined to issue the life insurance policy with Galaxy Investors, Inc. as the signatory on the loan.
Consequently Global Distributors, Legacy Point, and Dr. Harris were back at square one. On November 13, 2014, Global Distributors sent Legacy Point a draft personal guaranty that Dr. Harris would need to sign to satisfy Lincoln Financial. The ILIT would again be the borrower. On November 24, 2014, Mr. Sloan signed an ILIT Borrower Loan Underwriting Form ("underwriting form"), detailing Dr. Harris's assets-in particular, listing $7, 500, 000 in "business value." Exhibit 21. On November 26, 2014, Global Distributors sent Legacy Point thirteen documents, two of which are of particular importance: first, the note, which Mr. Sloan signed as trustee of the ILIT, and, second, the personal guaranty Dr. Harris was to sign. On December 1, 2014, Dr. Harris signed the personal guaranty at his office. Legacy Point did not explain the personal guaranty to him or bring it to his attention. Nor did Dr. Harris read the documents,...
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