In re Harwood
| Decision Date | 30 January 2009 |
| Docket Number | Bankruptcy No. 05-61254.,Adversary No. 05-6064. |
| Citation | 401 B.R. 782 |
| Parties | In re David S. HARWOOD xxx-xx-6244, 8452 CR 2301, Arp, Texas 75750, Debtor. FNFS, Ltd and B & W Finance Co., Inc., Plaintiffs v. David S. Harwood, Defendant. |
| Court | U.S. Bankruptcy Court — Eastern District of Texas |
J. Keith Mayo, Michael J. McNally, Mayo Mendolia & Starr, L.L.P., Tyler, TX, for Defendant.
Scott Alan Ritcheson, Ritcheson, Lauffer, Vincent & Dukes, P.C, Tyler, TX, for Plaintiffs.
This matter is before the Court to consider the "Complaint Asserting Trusts, Objecting to Discharge of Debtor Pursuant to § 727 and Objecting to Dischargeability of Debts Pursuant to 11 U.S.C. § 523(a)" (the "Complaint") filed by FNFS, Ltd. ("FNFS") and B & W Finance Co. Inc. ("B & W") (collectively, the "Plaintiffs") through which they seek to deny the entry of a Chapter 7 discharge in favor of the Debtor, David S. Harwood (hereinafter "Debtor" or "Harwood"), pursuant to 11 U.S.C. § 727(a)(2)(A) or § 727(a)(2)(B). The Plaintiffs alternatively seek a determination that the debts owed to them by the Debtor are excepted from discharge pursuant to § 523(a)(2)(A) and (B), § 523(a)(4), or § 523(a)(6). Consolidated for consideration with the complaint were requests for ancillary relief and the Plaintiffs' various objections to certain exemptions claimed by the Debtor. At the conclusion of the trial, the Court took the matter under advisement. This memorandum of decision disposes of all issues before the Court.1
The Debtor, David S. Harwood, has been active in the banking and lending industry since 1975. He has successfully served in various officer and director positions for commercial banks and claims to have pioneered the idea of offering financial planning services within a commercial banking environment in Texas.3 He has held prominent positions in various trade organizations supporting the lending industry and has been significantly involved in the legislative programs initiated by such organizations.4 He is clearly sophisticated and experienced in financial dealings.
In 1991, the Debtor, along with a gentleman named Wayne McKinney, purchased a consumer lending business known as B & W Finance. This business was offering small consumer loans primarily to the Hispanic community, and McKinney and Harwood sought to expand B & W's operations beyond its rather limited geographic scope. McKinney brought substantial financial means to the enterprise, but left the day-to-day operations in the hands of the experienced banker, Harwood. In 1996, the activities of the various entities holding pieces of the B & W Finance puzzle were merged into a new organizational structure whereby a new subchapter S corporation, B & W Finance Co., Inc., was formed, with Harwood and McKinney each owning 50% of the issued and outstanding stock. A new limited partnership, FNFS, Ltd.,5 was also created in which the new B & W corporation would own a 51% interest and serve as the sole general partner. All existing B & W lending operations6 were transferred to the new limited partnership, which subsequently conducted business as B & W Finance under the new corporation's managerial control, and limited partnership interests in FNFS, Ltd. were issued to the holders of prior corporate debentures and sold to subsequent purchasers. Eventually there were 25 limited partners in FNFS, Ltd.
Under his designation as the President and Chief Operating Officer of B & W, Harwood supervised and controlled the day-to-day operations of B & W. However B & W did not actually engage in any business operation other than supplying executive and managerial services to FNFS and its lending branches, and Harwood exercised virtually all executive power over FNFS operations on a daily basis. He often referred to himself as the "president" of FNFS7 which, while not technically accurate, was practically true in every sense. He planned and supervised the growth and expansion of the FNFS lending locations. He controlled the hiring, evaluation, promotion, and termination of FNFS employees, the number of which soon exceeded 100 at 25 B & W Finance locations. No one with daily involvement in the company's affairs could challenge Harwood's authority or decision-making. He managed all FNFS operations from the central office in Tyler. He also managed to access substantial amounts of money from FNFS for his own individual use.
Continuing a seductive practice of withdrawing funds from the finance company whenever his personal needs so dictated, a habit that had begun with the predecessor companies in the years prior to the formation of FNFS, Ltd. in 1996, Harwood soon began to appropriate FNFS funds for his own use. A substantial portion of the advances were used to acquire or to improve his personal assets. Some of the withdrawals financed large acquisitions. For example, in 1997, he borrowed $200,000 in unsecured funds from FNFS in order to construct a large steel-framed gymnasium (referenced in the documents as a "multipurpose office complex") on his separate property located at 8452 CR 2301 in Arp, Texas (the "Arp Property").8 Yet many of the other advances Harwood withdrew from FNFS occurred on a more systematic basis—occurring monthly or bimonthly, usually in $5,000, $10,000 or $15,000 increments.9 He eventually documented those withdrawals of cash in June 1998 by issuing two promissory notes to FNFS, Ltd.—one known as the "Master Note" in the amount of $700,000 due upon demand and regarding which Harwood supposedly tendered to Wayne McKinney a deed of trust lien in favor of FNFS upon the 20-acre Arp Property as security (though no such lien was never recorded)10 —and a second note known as the "Frazier Note" in the amount of $125,000,11 also purportedly accompanied by an unrecorded second-lien deed of trust in favor of FNFS upon a residential rental property located at 527 E. Frazier in Tyler (the "Frazier Property").12 These promissory notes and security documents in favor of FNFS were completed on commercially-printed forms in Harwood's handwriting, signed by Harwood, booked by Harwood as assets of FNFS, but kept in a personal "loan file" that was kept in Harwood's desk.13 Notwithstanding his considerable experience in the banking industry, Harwood admits that, despite his status as an officer and director of the corporate general partner and his direct managerial control over FNFS operations, he never filed the deeds of trust which he individually executed in favor of FNFS in the public records.
From June 1998, Harwood continued to withdraw thousands of dollars from FNFS for his own individual use. Such actions directly violated the FNFS Handbook regarding employee loans.14 Many of the advances were used to finance improvements to his Arp property,15 but other personal financial obligations were also met, including procuring a $38,812 down payment, as well as draws for subsequent interest payments, on his family's residence in the prestigious Hollytree subdivision in Tyler. In one instance, Harwood procured a $45,000 advance from FNFS to purchase a new Tahoe automobile in his name for $38,743 in cash.16 Though FNFS funds played a significant role in the acquisition of those personal assets, Harwood never granted a lien to FNFS on any of those purchased assets to secure repayment of those advances. In another instance, he directed his staff to tender to him a check for almost $10,000 as "mileage reimbursement for 30,000 miles" with no supporting documentation.17 To further supplement his stream of income from the company, Harwood also placed his wife, Sherry Harwood, on the B & W corporate payroll from 1997 through the time of their separation in 2004 in the amount of $500 bi-weekly,18 although she admittedly performed no tangible service for the company.19 He flew the company's airplane at company expense, utilized its credit cards, and offered only limited efforts to differentiate between personal and business expenses.20
There was no formal procedure for Harwood to obtain all of these financial benefits from FNFS. He was in day-to-day control of both B & W and FNFS. He merely gave oral demands for advances or for expense reimbursement to subordinate employees which were immediately satisfied.21 He considered the payments as advances under the Master Note, although he exceeded any purported debt ceiling with impunity, often issuing individual notes to FNFS when his needs would cause the aggregate amount of indebtedness to exceed the amount of the Master Note.22 The Master Note would then be "extended and renewed" to incorporate all of the advances, the last such extension having been executed in January 2003,23 along with the final extension of the Frazier Note.24
For years there was never any inquiry regarding the propriety of, or the threat posed by, the burgeoning Harwood indebtedness to FNFS. Disbursements and repayments were never tracked on an amortization sheet. Indeed, Harwood never made any significant net reductions in the principal amount of the obligations, nor did he ever provide, nor was he ever asked to provide, a personal financial statement to the company in an effort to demonstrate that he was, in fact, capable of repaying the increasing debt. Harwood acknowledged that he made only intermittent payments on the obligations, and failed to pay interest on a quarterly basis as required by the Notes. There were, in fact, episodes in which Harwood, in order to create the illusion of servicing the Notes, made "interest payments" to FNFS from deposits to his personal checking account derived by simply drawing another advance from the company's own pockets.25
Harwood claims...
To continue reading
Request your trial