In re Reuter

• Decision Date: 14 April 2010
• Docket Number: Adversary No. 08-02009.,Bankruptcy No. 07-21128-DRD-11.
• Citation: 427 B.R. 727
• Parties: In re Nathan Paul REUTER, Debtor. Tana S. Cutcliff, et al., Plaintiffs, v. Nathan Paul Reuter, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Missouri

427 B.R. 727

In re Nathan Paul REUTER, Debtor.

Tana S. Cutcliff, et al., Plaintiffs, v. Nathan Paul Reuter, Debtor.

Bankruptcy No. 07-21128-DRD-11. Adversary No. 08-02009.

United States Bankruptcy Court, W.D. Missouri.

April 14, 2010.

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Alan Jeffrey Misler, James F. B. Daniels, McDowell, Rice, Smith & Buchanan, PC, Kansas City, MO, for Debtor and Defendant.

David Gregory Brown, Brown Law Office, LLC, Columbia, MO, for Plaintiffs.

MEMORANDUM OPINION

DENNIS R. DOW, Bankruptcy Judge.

The issues pending before the Court are whether the proposed Chapter 11 Plan of Nathan Paul Reuter ("Debtor") should be confirmed, whether Debtor should receive a discharge and whether certain debts are nondischargeable. Debtor filed a voluntary petition for relief under Chapter 11 on July 27, 2007. Debtor also filed a Chapter 11 Plan wherein he proposed that Plaintiffs claims be deemed allowed and liquidated in certain amounts and that such claims would be satisfied through Plaintiffs exercise of their rights in assets consisting of 57.5% of the issued and outstanding common stock of Monarch Title Company; equity/equitable interest in Monarch Lake of less than 50% of total ownership; and equity/equitable interest in Monarch North of less than 50% of total ownership. He also proposed that not later than 90 days from the effective date, the assets would be liquidated and the net proceeds paid, pro rata to Plaintiffs in full payment and satisfaction of the allowed claims. Further, he proposed that on the 30th day of each month for a period of sixty months, he would pay, pro rata to Plaintiffs a sum which upon completion of such 60th monthly payment would be equal to the difference of all other property to be distributed under the Plan to the holders of claims and Debtor's projected disposable income.

Tana S. Cutcliff, James A. Fields, James D. Fields, Joshua P. Haeflinger, LaDonna S. Henderson (as trustee for LaDonna S. Henderson Living Trust), Patricia A. Reitz (as Trustee for Frances L. Reitz Trust), Terry J. Schippers, James D. Teegarden II, and Michael S. Trom (collectively the "Plaintiffs" or the "Investors") filed an Objection to Debtor's Second Amended Chapter 11 Plan pursuant to 11 U.S.C. § 1129.

Plaintiffs also filed an Adversary pursuant to 11 U.S.C. §§ 523 and 727 seeking a denial of Debtor's discharge and exception of Plaintiffs' debts from discharge. A trial was held on this matter in March of 2009 and the Court took the issues under advisement. This Court has jurisdiction over these proceedings pursuant to 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1). This is a core proceeding, pursuant to 28 U.S.C. §§ 157(b)(2)(I), (J) and (L) which this Court may hear and determine. The following constitutes my Findings of Fact and Conclusions of Law in accordance with Rule 52 of the Federal Rules of Civil Procedure as made applicable to these proceedings by Rules 7052 and 9014(c) of the Federal Rules of Bankruptcy Procedure. For the reasons set forth below, the Court finds that the Debtor's proposed Chapter 11 Plan is not confirmable pursuant to § 1129(a)(3), (a)(11) & (a)(7)(A). The Court further finds that Plaintiffs debts are nondischargeable pursuant to § 523(a)(2)(A) & (a)(19).¹

I. FACTUAL BACKGROUND

Debtor graduated from the University of Missouri in 1980 with a degree in agricultural economics. He started his career at a company by the name of Union Electric Ameren ("AmerenUE") where he was in charge of inventory control for a nuclear power plant. He was with AmerenUE for approximately fourteen years and then he changed careers. After leaving AmerenUE, Debtor got involved in the world of real estate development and mortgage finance. He started a mortgage finance company, Liberty Financial in Springfield, Missouri. Sometime in 2001, Debtor's ambitions grew and he moved Liberty Financial to Columbia, Missouri where he expanded his operation from providing mortgages to include insurance, investments and other finance opportunities. Debtor was introduced to Daryl Miles Brown ("Brown") while he was operating Liberty Financial. Brown was involved in a similar business at Primerica and referred some clients to Debtor.

In August of 2003, Debtor, Brown and Chuck Bowman ("Bowman"), who was an associate of Debtor's at Liberty Financial, decided to go into business together and formed Vertical Mortgage LLC ("Vertical") by filing Articles of Organization with the Missouri Secretary of State. At that same time, Debtor formed a series of Vertical Group subsidiaries: Vertical Securities, LLC, Vertical Protection, LLC and Vertical Mortgage Banc, LLC. He later formed additional subsidiaries: Vertical Financial Services, LLC, VACA, LLC and Vertical Market, LLC. Vertical's Website (the "Website") represented that it was a wholly owned company with subsidiaries. The Website stated, among other things, that Vertical Group was "a worldwide lender to corporations and corporate owners of significant stock portfolios or vested stock options seeking to refinance existing debt to better rate and terms, or expand their businesses through internal growth or acquisition."

Debtor was impressed by Brown's entourage of followers from Primerica, which was described as a consumer insurance/investment banking operation, his alleged experience and wild stories of success in the securities investment business, his relationship with an alleged Citigroup investment banker named Al Christy, and his purported rights to trade the assets or leverage the assets to secure securities, of Mr. Christy's $500 million to $600 million dollar Unit Investment Trust, sometimes referred to by Plaintiffs as the Patriot Trust, (hereinafter the "Trust").² Brown represented himself as having designations and licenses from the NASD, the SIPC and the SEC, which allegedly allowed him not only to conduct himself as a broker and dealer of securities, but also to be an advisor of sorts to unlicensed securities sales representatives.

Ricky D. Williams ("Williams") came to be employed by Vertical through his prior relationship with Brown. They worked together at Primerica for a short period of time. Prior to being hired by Debtor as Vertical's "National Sales Director," Williams was doing construction and selling power tools. He has no college education. He is not licensed to sell securities. He has no background in handling investments. He never submitted a resume' or references to Debtor or anyone else at Vertical. Debtor hired him based solely on his half hour interview and Brown's recommendation.

Vertical's offices were located in what was described by one of the Plaintiffs as an impressive, million dollar building, in Columbia, Missouri, which Debtor and his spouse purchased a few years prior to Debtor forming Vertical.³ Debtor was the founder and Chief Executive Officer, Brown was the Chairman of the Board and Bowman was the Chief Operations Officer. There were many aspects to Verticals intended business including mortgages, wealth management, investment services, low-interest refinance and insurance. According to Bowman, although Debtor's practical day-to-day work at Vertical was working the investment side of the shop with Williams,⁴ he was at the top of the hierarchy of all branches, he was the man in charge, and there was no one at Vertical who could tell Debtor what to do.⁵

There were a number of failed investments that are relevant to this case, but with regard to Plaintiffs' Adversary, there were essentially two rounds of investments that are specifically at issue in this case. The first round occurred in late 2004 and involved two investors; Debtor and Mike Trom. The second round of investments occurred between late January and early March of 2005, and involved the remaining eight Plaintiffs: Cutcliff, James A. Fields ("J. Fields"), James D. Fields ("T. Fields"), Haeflinger, Henderson, Reitz, Schippers, and Teegarden. Although the investments occurred at different times, the basic mechanics were the same. In each round, the Plaintiffs were induced to transfer money into an escrow account. The were told that they were participating in an exclusive, high-yield, investment program, where their principal investment would be 100% safe, and they would start receiving returns in as early as fourteen to thirty days after they invested. The specifics related to how their investments were suppose to remain in the escrow account and create such fantastic returns are obtuse, however, the evidence is essentially that Plaintiffs thought their principal investment was going to be leveraged against, or be used to acquire, standby letters of credit, which would somehow generate the incredible returns. The fact is, however, that because Brown, and his cohorts Bud Wofford and Sylvestor Mitchell were criminals, Plaintiffs never received their principal investment back or a single penny of the promised returns.⁶ After all of Plaintiffs' investments had failed and after the FBI conducted its investigation and concurrent with the filing of several civil lawsuits, Brown, Mitchell and Wofford were ultimately indicted and convicted of numerous crimes related to the investment scam. The evidence establishes that there was no "Unit Investment Trust" or "Patriot Trust" worth millions of dollars which Brown had control of and Al Christy was actually a small-time investor from the suburbs in Indianapolis. Debtor was not criminally prosecuted for the investment scam.

With the exception of Trom, all of the other Plaintiffs wired their investment money to an escrow agent named Dennis Cole in Florida. Brown was responsible for setting up this account and did so under the name of Cerberus, Inc., a company which he incorporated, but did not formally maintain....