In re Shurley
| Decision Date | 24 November 2021 |
| Docket Number | 19-11278-tmd,Adversary 19-01091-tmd |
| Parties | IN RE: CLAYTON T. SHURLEY and ALEXANDRA C. SHURLEY DEBTORS v. CLAYTON T. SHURLEY ALEXANDRA C. SHURLEY Defendants MOODY NATIONAL BANK, Plaintiff |
| Court | U.S. Bankruptcy Court — Western District of Texas |
IN RE: CLAYTON T. SHURLEY and ALEXANDRA C. SHURLEY DEBTORS
MOODY NATIONAL BANK, Plaintiff
v.
CLAYTON T. SHURLEY ALEXANDRA C. SHURLEY Defendants
No. 19-11278-tmd
Adversary No. 19-01091-tmd
United States Bankruptcy Court, W.D. Texas, Austin Division
November 24, 2021
MEMORANDUM OPINION
TONY M. DAVIS UNITED STATES BANKRUPTCY JUDGE
The Debtors obtained two secured loans from Moody Bank. In the loan documents, the Debtors represented that there were no other liens on the collateral. This representation was false because the Debtors obtained a loan from another lender which placed a lien on the collateral that was superior to Moody Bank's lien. Moody Bank now seeks to except its claim from
discharge. The Court finds that the debts owed by the Debtors to Moody Bank are dischargeable, because Moody Bank failed to prove reliance, intent to deceive, and willful and malicious injury.
I. FACTS
Clayton "Tommy" Shurley owned and operated Shurley Brothers, a company formed in 2006 that created custom stocks for shotguns and rifles out of specialty wood.[1] To create these custom stocks, Shurley Brothers owned and leased various pieces of expensive equipment. [2] By 2017, Shurley Brothers was tight on cash and struggling to make payroll because of the monthly payments on its outstanding loans and equipment leases.[3]
After complaining to a client about the company's continuing cashflow problems, the client introduced Mr. Shurley to Jeff Hutchens at Moody Bank.[4] Following their April 2017 meeting, Mr. Hutchens and Mr. Shurley began negotiating a loan for Shurley Brothers from Moody Bank to refinance Shurley Brothers' current debts and thereby solve the cashflow issues.[5]
As part of the loan application process, Moody Bank asked Shurley Brothers to move its deposit accounts to Moody Bank.[6] Once this was done, Mr. Shurley believed that Mr. Hutchens was monitoring these accounts.[7] Moody Bank also required an appraisal of Shurley Brothers' property.[8] Shurley Brothers did not have enough funds in its account to pay for the appraisal.[9]After reviewing Shurley Brothers' deposit account, Mr. Hutchens alerted Mr. Shurley to the insufficient funds, Mr. Shurley deposited more money, paid the appraiser, and the appraisal
moved forward.[10] Ultimately, the appraisal opined that Shurley Brothers' inventory and equipment had a fair market value of $995, 000 and an orderly liquidation value of $665, 000.[11]
Between April and September 2017, the Shurleys signed three commitment letters for loans that were ultimately not approved.[12] The commitment letters contained representations and warranties including a condition that no liens could encumber the collateral other than those in favor of Moody Bank.[13] Even so, the first UCC search of June 15, 2017, showed many other liens, some of which would be paid off with the proceeds of the loans from Moody Bank.[14]
After several failed attempts to get the loan approved, Mr. Shurley and Mr. Hutchens elected a different strategy, to seek "two different loans each with different amounts and repayment terms, but with almost identical representations and obligations."[15] On September 7, the Shurleys executed commitment letters for the two-loan structure, loans 5701 and 5702, totaling $500, 000.[16] According to Mr. Shurley, these loans were again declined by Moody Bank on September 7, 2017.[17](Mr. Hutchens contends that Moody Bank actually approved the loans, but with terms that Mr. Shurley didn't find acceptable.)[18]
Exasperated by the failed loan, Mr. Shurley testified that he told Mr. Hutchens on September 7, 2017 that Shurley Brothers needed cash to cover the payroll, and Mr. Hutchens responded by suggesting that the company get a receivables loan to make ends meet.[19] But when questioned about whether he suggested that Shurley Brothers get a receivables loan, Mr.
Hutchens testified that he didn't recall that conversation.[20] Mr. Hutchens's memory of the history of the transaction failed him on another occasion; he testified that he thought Shurley Brothers moved its bank accounts to Moody Bank right before closing in late September 2017.[21]And yet they had to have been moved prior to June 30, when the appraisal bill came due. Mr. Shurley's testimony about the receivables loan was detailed, credible, and unequivocal.[22]
On September 7, 2017, Mr. Shurley obtained an online loan for Shurley Brothers from Colonial Funding for $50, 000.[23] The record is void of detail on just exactly what Mr. Shurley signed when he obtained the Colonial Funding loan. He is adamant that he understood that he was getting a loan secured by receivables, which he thought would not conflict with the equipment and inventory loan from Moody.[24] Yet, Colonial Funding filed a UCC-1 reflecting a blanket lien on the assets of Shurley Brothers.[25] Perfection requires a security interest to have attached, [26] and attachment requires the debtor to sign a security agreement.[27] Here, Moody Bank did not offer a security agreement for Colonial Funding as an exhibit, and so there is no proof that Colonial Funding even had a perfected lien.
The next day, Moody Bank solicited a second UCC search.[28] But this UCC search had an effective date of August 31, 2017, so it did not show the lien in favor of Colonial Funding, and instead reflected the same filings as the earlier UCC search.[29] Mr. Shurley, assuming Mr. Hutchens was monitoring Shurley Brothers' accounts, also assumed Hutchens knew about the
new receivables loan based on the large deposit[30]
On September 28, 2017, the Shurleys executed amended commitment letters, security agreements, and personal guarantees for two loans.[31] The amended commitment letters provided that, "No liens or security interests shall be permitted against the Subject Property other than in favor of Bank."[32] The loan commitment letters also provided that, "Borrower and Guarantor shall keep Bank informed of all adverse events and all potential adverse events occurring concerning Borrower, Guarantor, the Subject Property, and all otherwise [sic] relating to any other information heretofore provided to Bank by or on behalf of Borrower or Guarantor."[33] And in the security agreements, the Shurleys represented and warranted that
Grantor holds good and marketable title to the Collateral, free and clear of all liens and encumbrances except for the lien of this Agreement. No financing statement covering any of the Collateral is on file in any public office other than those which reflect the security interest created by this Agreement or to which Lender has specifically consented.[34]
Moody Bank did not run another UCC search before the final versions of the loans were executed.[35]
Mrs. Shurley testified that at the loan signing, neither Mr. Hutchens nor the other Moody Bank employee present explained anything to the Shurleys about the representations or warranties in the documents they were signing.[36] According to Mrs. Shurley, Mr. Hutchens and the other employee just wanted to make sure that her Social Security number, address, and signature were on all the documents.[37]
On October 3rd, Moody Bank wired the proceeds of the loans to Horizon Bank and U.S. Bank Equipment Finance to pay off some of Shurley Brothers' existing debt as Mr. Shurley and Mr. Hutchens had discussed.[38] Shurley Brothers ended up making only one payment on the loans, and that payment was late.[39]
More than one year after Moody Bank funded the loan, it obtained another UCC search which revealed the superior lien of Colonial Funding.[40] When Moody Bank went to Shurley Brothers' facility, which, according to the appraisal, held nearly $1 million of assets, it found that it had been locked out by Shurley Brothers' landlord.[41] Nothing in the record reflects what happened to the collateral, which should have had enough value to satisfy both the Colonial Funding loan and the Moody Bank debts. Moody Bank sued the Shurleys and Shurley Brothers in state court.[42] When the Shurleys ultimately filed for bankruptcy in 2019, Moody began this adversary proceeding arguing that the Shurleys' personal guarantees are nondischargeable because they obtained the funds through fraud and misrepresentations.[43]
II. ANALYSIS
1. The discharge of the Shurleys' debt to Moody Bank cannot be denied under section 523(a)(2)(B) because Moody Bank did not reasonably rely on the Shurleys' written representations and the Shurleys had no intent to deceive.
Under section 523(a)(2)(B), an obligation for money loaned, an extension or renewal, or a refinancing of credit will not be discharged in an individual debtor's bankruptcy if it was obtained by use of a statement in writing that is
(1) Materially false;
(2)Respecting the debtor's or an insider's financial condition;
(3)On which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(4)The debtor caused to be made or published with intent to deceive.[44]
The first two elements are not in controversy. The documents signed by the Shurleys contained written statements that had a direct relation to or impact on their overall financial status -and so were "statements respecting the debtor's financial condition." And the documents represented that there were no other liens on the assets secured as collateral, and so were materially false. Only the latter two elements-reliance and intent to deceive-are in controversy.
A. Moody Bank did not establish reasonable reliance.
The Fifth Circuit has instructed bankruptcy courts to consider the reasonableness of a creditor's reliance in light of the totality of the circumstances.[45] In doing so, the court can consider whether there had been previous business dealings with the debtor that created a relationship of trust.[46] The court may also look at whether there were any...
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