In re Montagne

• Decision Date: 13 November 2009
• Docket Number: Bankruptcy No. 08-10916.,Adversary No. 08-1023.
• Court: U.S. Bankruptcy Court — District of Vermont
• Parties: In re Michael F. MONTAGNE, Debtor. Ag Venture Financial Services, Inc., Plaintiff, v. Michael F. Montagne, John Montagne, Diane Montagne, Montagne Heifers, Inc., Patenaude Grain, Ltd., Bourdeau Brothers, Inc., Defendants.

421 B.R. 65

In re Michael F. MONTAGNE, Debtor.

Ag Venture Financial Services, Inc., Plaintiff, v. Michael F. Montagne, John Montagne, Diane Montagne, Montagne Heifers, Inc., Patenaude Grain, Ltd., Bourdeau Brothers, Inc., Defendants.

Bankruptcy No. 08-10916.

Adversary No. 08-1023.

United States Bankruptcy Court, D. Vermont.

November 13, 2009.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Jess Schwidde, Esq. Rutland, VT, and John Harrington, Esq., Concord, NH, for Debtor.

Tavian Mayer, Esq., South Royalton, VT, for Chapter 12 Trustee.

Jan Sensenich, Esq., Chapter 12 Trustee, White River Junction, VT.

Gary Franklin, Esq. and Douglas J. Wolinsky, Esq., Burlington, VT, for Ag Venture Financial Services, Inc.

MEMORANDUM OF DECISION

GRANTING DEBTOR'S MOTION TO DISMISS, DENYING DEBTOR'S REQUEST FOR DISGORGEMENT, AND OVERRULING CHAPTER 12 TRUSTEE'S OBJECTION TO CLAIM

COLLEEN A. BROWN, Bankruptcy Judge.

On May 12 and 13, 2009, the Court held a bench trial (the "mini-trial") on the causes of action in an amended complaint filed by Ag Venture Financial Services, Inc. ("Ag Venture"), related to a June 13, 2002 Commercial Promissory Note (the "Note") for $882,000 that it had entered into with Michael Montagne (the "Debtor") and his wife Diane Montagne. During the course of the trial, the Debtor and the chapter 12 trustee learned that the original Note had been lost. The Debtor made an oral motion to dismiss Ag Venture's cause of action on the Note on three grounds: (1) Ag Venture was required to show that it was the holder of the original Note and to present it at trial, and did not do so; (2) Ag Venture's proof of claim, related to loan # 321, was insufficient as it did not account for loss of the Note, and that failure could not be remedied at such a late date; and (3) Ag Venture had run afoul of the Vermont Licensed Lender Act ("LLA"), 8 V.S.A. § 2200 et seq., which made the loan unenforceable and required Ag Venture to disgorge all loan payments it had received on it (doc. # 282, pp. 20-25). The chapter 12 trustee joined in the motion to dismiss (id. p. 25), and put forth arguments in support of his objection to Ag Venture's amended proof of claim. Ag Venture argued against dismissal (id. pp. 26-28). The Court reserved decision on the motion to dismiss and objection to claim and the parties filed post-trial briefs. For the reasons set forth below, the Court finds that: (1) Ag Venture was the holder of the Note and could properly enforce it; (2) Ag Venture's proof of claim was sufficient; and (3) Ag Venture has violated the Vermont LLA, rendering its loan unenforceable, but the statute does not require Ag Venture to disgorge the sums it has already received under the Note.

JURISDICTION

The Court has jurisdiction over this adversary proceeding and the pending motion pursuant to 28 U.S.C. § 157(b)(2)(B), (C), and (K).

DISCUSSION

Because three separate grounds were asserted in support of the motion to dismiss, with three separate sets of facts examined under different statutes or rules, the Court will address each issue seriatim.

I. MAY AG VENTURE ENFORCE THE LOST NOTE UNDER THE VERMONT UNIFORM COMMERCIAL CODE?

The Debtor makes a number of related arguments that challenge whether Ag Venture can enforce the lost Note.

A. RELEVANT PROCEDURAL HISTORY AND FACTS

Ag Venture's amended complaint alleged, inter alia, that on June 13, 2002, Michael Montagne and Diane Montagne executed and delivered a promissory note to Ag Venture in the amount of $882,000 (doc. # 30, ¶ 12). In his answer, Michael Montagne "admitted that the note indicated was signed on or about June 13, 2002" (doc. # 113, ¶ 12). This commercial promissory note was payable to the order of Ag Venture and was designated as loan # 321 (doc. # 30, Ex. J). Also on June 13, 2002, Ag Venture signed a non-recourse loan participation agreement (the "Agreement") with First Community Bank regarding loan # 321. (Trial Ex. F, at AGV 00467-00475). In the Agreement, Ag Venture was denominated the "Originating Bank" and First Community Bank was designated the "Participating Bank." Id.

1. Mini-Trial Testimony

On the first day of the mini-trial, Ag Venture president Thomas Bellavance testified, over objection by both the Debtor and trustee, that the original signed Note did not appear in the loan file. In response to a query of where it would have gone, Mr. Bellavance answered: "Typically that note would have gone to our investor, First Community Bank" (doc. #281, p. 247). He added that Ag Venture "repurchased a hundred percent of participation" of the Note in February 2008 from Lake Sunapee Bank, the successor by merger with First Community Bank; it was then "wholly-owned" by Ag Venture and no other investor had any interest in that loan. Id. at 247-48. According to Mr. Bellavance, when Ag Venture repurchased the loan, it requested from Lake Sunapee Bank that the original loan packet be returned to it. What Ag Venture received was the original Agreement and a letter from the Bank's vice-president that the repurchase had taken place. Id. p. 248.

When the mini-trial resumed the next day, Ag Venture's counsel, Gary Franklin, Esq., asked Mr. Bellavance what steps Ag Venture had taken to locate the original Note. Mr. Bellavance responded that they had looked through their loan file and records, and had contacted Lake Sunapee Bank by e-mail and telephone, all to no avail (doc. # 282, pp. 8-9). Mr. Bellavance stated that they had first looked for the Note when Ag Venture initiated legal proceedings in state court against the Montagnes in January 2008. Id. pp. 9-10, 12. He went on to say that "usually" when Ag Venture repurchased participation certificates, the notes would "come back to us." Id. p. 11. It was not until "the latter part of 2008" that Ag Venture first made contact with Lake Sunapee Bank "asking for the original promissory note and documents to come back," and they redoubled their efforts to locate the Note as the mini-trial neared. Id. On cross-examination, the Debtor's attorney, John Harrington, Esq., inquired whether Mr. Bellavance had informed Ag Venture's attorney that he hadn't been able to find the Note before counsel filed the Ag Venture proof of claim. Mr. Bellavance answered that he had not. Id. p. 13. Mr. Harrington read a section of the Agreement (Trial Ex. F) that provided that if First Community Bank elected to accelerate payment of the loan upon the borrower's default, Ag Venture would "immediately forward the original Loan Documents including any note" to the Participating Bank, id. p. 14. He pointed out that that provision was different from "the other agreements that [Mr. Bellavance] had testified about, where [he] had to give the original note to the bank." Id. Mr. Bellavance agreed that this Agreement was not one of the "typical" ones where Ag Venture forwarded the original note to the participating bank. Id. pp. 14-15.

Tavian Mayer, Esq., the attorney for the chapter 12 trustee, also inquired about Ag Venture's efforts to find the Note. Mr. Bellavance repeated that they first began looking for it prior to filing the state court litigation and that they had made substantial, but unsuccessful, efforts over a long period of time to find it. Id. p. 16. Mr. Bellavance stated that Ag Venture's counsel advised them to produce the Note "but I don't think we ever told them until recently we could not find it." Id. p. 17. He concluded on "May 6th [2009], just this last week," when Ag Venture had a "final conversation" with a Lake Sunapee executive, that they could not find the Note. Id. Mr. Mayer pointed out another section in the Agreement where it provided that Ag Venture "has additionally provided the Participating Bank with copies of the loan documents," id. p. 18, indicating that it would therefore appear that the original Note remained with Ag Venture.

2. Findings of Fact

Based upon this testimony, the credibility of the witnesses, and the associated documents in the record, the Court finds the following facts:

1. Michael Montagne signed the promissory note for loan #321 on June 13, 2002. It was payable "to the order of Ag Venture Financial Services, Inc." Trial Ex. F at AGV 00476.

2. On June 13, 2002, Ag Venture executed the Agreement with First Community Bank, which later became Lake Sunapee Bank (together, the "Participating Bank") concerning that loan. In four different places, the Agreement indicated that Ag Venture would retain the original Note and/or forward copies of the original Note to the Participating Bank under certain conditions:

a. ¶ 4(a)(2) provided that "The Originating Bank has additionally provided the Participating Bank with copies of the Loan documents that were executed ... by the Borrower ..."

b. ¶ 9(C)(1) provided that, in the event of acceleration, "The Originating Bank unconditionally agrees to immediately forward the original Loan Documents (including, without limitation, the original of the Borrower's note or notes evidencing the Loan ... ) to the Participating Bank";

c. ¶ 12(D)(1)provided that, in the event the Originating Bank was in default, "The Originating Bank unconditionally agrees to immediately forward and assign the original Loan documents (including, without limitation, the original of the Borrower's note or notes evidencing the Loan and all security agreements and instruments thereof)";

d. ¶ 15(A) provided that, in the event of the Originating Bank's insolvency, "The Originating Bank unconditionally agrees to immediately forward and assign the original loan documents (including, without limitation, the original of the Borrower's Note or Notes evidencing the Loan and all security agreements and instruments therefor ..."

Trial Ex. F, pp. AGV 00467-475 (emphases added).

3. Ag Venture first realized that it could not locate the original Note in January 2008, and at that point, began to search for it. Mr. Bellavance did not consider that the Note lost as of that...