In re Long., Case No. 07-60011-7 (Bankr.Mont. 6/17/2008)
| Decision Date | 17 June 2008 |
| Docket Number | Adv No. 07-00026.,Case No. 07-60011-7. |
| Parties | In re MICHAEL ANDREW LONG, Debtor. MOUNTAIN WEST BANK, N.A., Plaintiff, v. MICHAEL ANDREW LONG, Defendant. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — District of Montana |
In this adversary proceeding the Plaintiff Mountain West Bank, N.A. ("MWB") seeks exception from the Defendant/Debtor Michael Andrew Long's ("Long") discharge of its claim for a defaulted loan under 11 U.S.C. §§ 523(a)(4) and 523(a)(6), and objects to Long's discharge under 11 U.S.C. §§ 727(a)(3) and 727(a)(4)(A). Long opposes exception from or denial of his discharge, and counterclaims for his attorney fees and costs based on provisions of the loan agreements. Trial of this adversary proceeding was held at Missoula on January 28, 2008, and the parties have filed briefs which have been reviewed by the Court together with the record and applicable law. For the reasons set forth below judgment will be entered dismissing MWB's claims for relief against Long, and dismissing Long's counterclaim for attorney's fees and costs.
MWB was represented at trial by attorneys Jonathan Motl ("Motl") and Amy Randall ("Randall") both of Helena, Montana. Long appeared and testified represented by attorney James H. Cossitt ("Cossitt") of Kalispell, Montana. MWB's president and director Richard E. Hart ("Hart") testified, as did the Trustee Richard J. Samson ("Samson"). Both sides offered exhibits ("Ex."), most of which were admitted without objection.1 At the conclusion of the Plaintiff's case-in-chief Long moved for a directed verdict or for judgment dismissing MWB's objection to discharge based on § 727(a)(3) for failure to maintain records. The Court heard argument from counsel, then took Long's motion for a directed verdict under advisement. At the conclusion of Long's case-in-chief MWB moved for an immediate dismissal of Long's counterclaim for attorney's fees, which the Court denied.
The agreed Pretrial Order submitted by the parties on January 23, 2008, was approved by the Court and supercedes the pleadings. The Pretrial Order provides that this Court has jurisdiction of this cause under 28 U.S.C. § 1334 and 28 U.S.C. § 157. MWB's claims for relief are core proceedings to determine dischargeability of a particular debt and objections to discharge under § 157(b)(2)(I) and (J). This Memorandum of Decision contains the Court's findings of fact and conclusions of law.
The parties agreed to the following facts in the approved Pretrial Order (Docket No. 49):
1. Long was the owner and manager of AboutMontana.net, Inc., ("AboutMontana"), a Montana for-profit corporation. AboutMontana operated as an internet service provider ("ISP") in the Kalispell, Montana, area.
2. On November 29, 2004, AboutMontana borrowed $100,000 from MWB. The MWB loan number was 660000139 ("Loan").
3. As part of the Loan AboutMontana signed a security agreement giving MWB a security interest in all assets of AboutMontana, including inventory, accounts, equipment and general intangibles. Long also signed a personal guarantee of the Loan.
4. MWB has acted to default and collect on the Loan. Long now owes on the Loan through his personal guarantee of the Loan.
5. Long has listed his obligation on the Loan as a debt he seeks to discharge in bankruptcy.
6. On June 2, 2005, AboutMontana sold some of its assets for the amount of $141,733.10. The AboutMontana assets sold were pledged as security for the Loan. The AboutMontana sale documents were signed by Long.
7. The amounts of money AboutMontana received from the June 2, 2005, sale of assets were deposited into an AboutMontana checking account maintained at MWB. The deposits were made through a deposit of $30,000 made on June 24, 2005, and a deposit of $111,733.10 made on July 1, 2005.
8. The ending monthly balances in the AboutMontana MWB checking account were $91,393.18 (July, 2005), $78,216.84 (August, 2005), $64,556.79 (September, 2005), $51,542.79 (October, 2005), and $3,11.542 (November, 2005).
9. In November of 2005 the AboutMontana MWB checking account was effectively depleted by a $30,000 transfer from the AboutMontana MWB checking account into a new checking account Long had established in his own name at a Wells Fargo bank in Kalispell.
10. AboutMontana ceased making payments on the Loan in February of 2006 causing the loan to be defaulted.
Additional and supplemental facts were established from the testimony and exhibits admitted at trial.
AboutMontana was incorporated in early 2000. Long became the controlling shareholder in 2003 when he bought out a partner. AboutMontana was in the internet dial-up and wireless business until it sold its assets in June of 2005. Prior to the sale, Long testified, AboutMontana was in the business of selling website design, database formats, and marketing.
Ex. 3 is an "Agreement and Release" between Long and his common law wife Leann S. Devine ("Devine"), who was an employee of AboutMontana, terminating their common law marriage and dividing assets, dated October 8, 2003. Long testified that Ex. 3 addressed both his and Devine's business ties as well as their personal obligations.
Ex. 3 required Long to continue making lease payments on Devine's Honda vehicle used for AboutMontana business purposes in the amount of $506.25, and to guarantee Devine's employment and pay Devine's salary until November, 1, 2005. Paragraph 4 of Ex. 3 required Long to pay Devine a consulting fee each month for three years in addition to her salary. Long testified that Devine wanted the business in addition to personal assets and their house, and that he has paid off his obligation to Devine owed under Ex. 3.
The MWB Loan.
Hart testified that MWB usually requires current financial information as part of its loan process, including a financial statement and the past few years of tax returns. Long submitted a personal financial statement, Ex. 1B, and an AboutMontana business plan, Ex. 1C, to MWB in support of AboutMontana's loan application. The Executive Summary, Part 1.0 of Ex. 1C, describes AboutMontana's business plan to expand beyond its dial-up internet service to provide free high speed broadband internet service to residences in the Whitefish community, and eventually franchise its sales and marketing model. Ex. 11, p. 3, 1. 28. Part 2.2 of Ex. 1C summarizes AboutMontana's assets, liabilities and capital.
Hart testified that AboutMontana's business plan provides that an equipment note held by First Interstate Bank ("FIB") would be satisfied by the loan being sought by AboutMontana from MWB. Ex. 1C, Part 8.0. Under cross examination Hart admitted that a prior perfected lien on collateral would have priority over subsequent liens, which can be determined by a UCC lien search with the Montana Secretary of State. He testified that if MWB had performed a lien search at the time of the Loan it would have done more due diligence, and would have requested more collateral for the Loan because of FIB's prior lien.
Ex. 2A is the promissory note for $100,000 naming AboutMontana as borrower. The default provisions of Ex. 2A include as an "Event of Default," in addition to failure to make payments when due under the note, "[a] material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of this Note is impaired." Another catchall provision under Default states: Ex. 2A provides for a right of setoff against the Borrower's accounts at MWB, and authorizes MWB "to charge or setoff all sums owing on the indebtedness against any and all such accounts, and, at Lender's option, to administratively freeze all such accounts to allow Lender to protect Lender's charge and setoff rights . . . ."
Ex. 2B is the commercial security agreement whereby AboutMontana pledged all its inventory, chattel paper, accounts, equipment and general intangibles to secure the Loan. Ex. 2B provides that "Collateral" includes all proceeds from the sale of any collateral. Hart testified that the major assets securing the Loan were AboutMontana's accounts. Long confirmed that he understood that MWB had a security interest in all of AboutMontana's assets. Hart testified that MWB would not have made the Loan to AboutMontana as an unsecured loan because it was a term loan of 15 years with a 5 year balloon, and MWB would not make an unsecured loan with such a term.
Hart testified that Ex. 2B required the proceeds from any disposition of MWB's security to go first to MWB and then to FIB, and that Long was not entitled to spend proceeds from the sale of collateral. On page 2 Ex. 2B provides:
Transactions involving Collateral. Except for inventory sold or accounts collected in the ordinary course of Grantor's business, or as otherwise provided for in this Agreement, Grantor shall not sell, offer to sell, or otherwise transfer or dispose of the Collateral. While Grantor is not in default under this Agreement, Grantor may sell inventory, but only in the ordinary course of its business and only to buyers who qualify as a buyer in the ordinary course of business. A sale in the ordinary course of Grantor's business does not include a transfer in partial or total satisfaction of a debt or any bulk sale. Grantor shall not pledge, mortgage, encumber or otherwise permit the Collateral to be subject to any lien, security interest, encumbrance, or charge, other than the security interest provided for in this Agreement, without the prior written consent of Lender. This includes security interests even if junior in right to the security interests granted under this Agreement....
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