McGraw v. Collier (In re Collier)

• Decision Date: 03 September 2013
• Docket Number: Bankruptcy No. 4:10–14769.,Adversary No. 4:10–AP–01205.
• Citation: 497 B.R. 877
• Parties: In re Christopher J. COLLIER, Debtor. Nancy McGraw and Pfeifer Sutter Family LLC, Plaintiffs v. Christopher Collier, Defendant.
• Court: U.S. Bankruptcy Court — Eastern District of Arkansas

497 B.R. 877

In re Christopher J. COLLIER, Debtor.Nancy McGraw and Pfeifer Sutter Family LLC, Plaintiffs

v.Christopher Collier, Defendant.

Bankruptcy No. 4:10–14769.

Adversary No. 4:10–AP–01205.

United States Bankruptcy Court,

E.D. Arkansas,

Western Division.

Sept. 3, 2013.

Frederick S. Wetzel, Frederick S. Wetzel, Little Rock, AR, for Debtor.

MEMORANDUM OPINION

JAMES G. MIXON, Bankruptcy Judge.

Christopher Collier (Debtor) filed a voluntary petition for bankruptcy relief under the provisions of Chapter 7 on July 2, 2010. Subsequently, Nancy McGraw and Pfeifer Sutter Family LLC (collectively, Plaintiffs) filed this adversary proceeding against the Debtor to determine the dischargeability of debt pursuant to Subsections 523(a)(2), (4), (6), and (19) of the United States Bankruptcy Code.

In their complaint, the Plaintiffs allege that the Debtor, their financial adviser, acted as a fiduciary in selling them certificates of deposit which he intentionally misrepresented as safe investments insured by the Federal Deposit Insurance Corporation (FDIC). They further allege that he violated securities laws and committed a defalcation in marketing the certificates of deposit in violation of Financial Industry Regulatory Authority warnings. The Plaintiffs also complain that the Debtor placed other of McGraw's monies into unsafe investments to increase his own compensation, further solicited funds from the LLC, and reinvested some of McGraw's money.¹ The Plaintiffs seek a money judgment of $112,000.00 for the LLC and $270,000.00 for McGraw. The Debtor answered the complaint, generally denying the allegations.

The Court conducted a trial on the merits on July 10, 2012, after which the parties submitted briefs and the case was taken under advisement. This matter is a core proceeding pursuant to 28 U.S.C. § 157(I), and the Court has jurisdiction to enter a final judgment in the case. This opinion constitutes the Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.

FACTS

The allegations in the complaint are based primarily on events occurring prior to the bankruptcy filing, between November 2006 and February 2009, and relate to the Debtor's role as a financial adviser to the Plaintiffs. Pamela Pfeifer and Luther Sutter, a married couple, and their three minor children own Pfeifer Sutter Family LLC, an entity established in 2005. (Tr. at 153, Pls.' Ex. 19.) Sutter is the LLC's managing member. During the relevant period, the Debtor's son was a friend and classmate of Pfeifer and Sutter's son at The Anthony School. The Debtor was also acquainted with Nancy McGraw because she taught violin at the school.

The Debtor became associated as a financial adviser with Stanford Group Company (Stanford) of Houston, Texas, in November 2006 when the company acquired the Little Rock investment firm StillPoint Wealth Management where he was employed. (Tr. at 16, Pls.' Ex. 1.) Prior to his association with Stanford and StillPoint, the Debtor had been associated with a succession of investment firms, and he eventually accumulated some 28 years as a financial adviser before surrendering his license in 2011. (Tr. at 97.)

At the time the Debtor advised the Plaintiffs, Stanford was part of a network of companies held by Stanford Financial Group. (Pls.' Ex. 6a.) The network included Stanford International Bank (SIB), a bank located in Antigua ² that offered certificates of deposit which the Debtor advised the Plaintiffs and some of his other clients to purchase. These CDs are the primary source of the Plaintiffs' allegations against the Debtor.

The record shows that participation in the certificate of deposit program with SIB ostensibly required the depositor to enter into a subscription agreement with Stanford International Bank after becoming qualified as a “U.S. Accredited Investor.” (See, e.g., Pls.' Ex. 18.) Individuals with an individual net worth or joint net worth with spouse of $1 million and legal entities with total assets of $5 million qualified as U.S. Accredited Investors. (Pls.' Ex. 18 at 5.)

The Debtor testified that it was Stanford's procedure for the investor to submit qualifying information regarding his or her net worth on a questionnaire, which was then forwarded by a Stanford financial adviser in Little Rock to a compliance office in Dallas, Texas, where the information was supposedly verified. He stated that if the information could not be verified, the purchase of a certificate of deposit could not be consummated. (Tr. at 91.) The Debtor stated that the Plaintiffs signed the required subscription agreements prior to their CD purchases and that their financial information was forwarded for a compliance review. The Plaintiffs take issue with this statement as will be discussed more fully below.

About 15 months after the Plaintiffs purchased CDs, SIB, along with the other companies of Stanford Financial Group, was placed in receivership, the CDs proved worthless, and the Plaintiffs lost all their invested funds. In opening statements, counsel for the parties impliedly stipulated that the certificates of deposit turned out to be part of a Ponzi scheme perpetrated by SIB and its principal shareholder that resulted in CD investors losing an approximate total of $7 billion. (Tr. at 9, 11.)

At trial, McGraw, Pfeifer, and Sutter each testified repeatedly that they did not know the CDs represented deposits in an offshore bank and that they invested in the SIB CDs because the Debtor assured them the instruments were low risk and were FDIC-insured. On the other hand, the Debtor testified repeatedly that he expressly informed the Plaintiffs the CDs were not insured by the FDIC and that the issuer was a foreign bank. He conceded he told the Plaintiffs the investments were safe because he believed they were.

NANCY MCGRAW'S INVESTMENTS

McGraw was awarded a recovery of $350,000.00 in a civil lawsuit and subsequently opened an account in her name at StillPoint where she deposited the proceeds in June 2006. (Tr. at 189–90, Pls.' Ex. 9, Statement period 06/01/2006–06/30/2006.) The account became a Stanford cash account when Stanford acquired StillPoint in November 2006. (Pls.' Ex. 9, Tr. at 192.)

After the account was established under the Debtor's management, McGraw began to meet with the Debtor to develop a long range financial plan and consider investment recommendations. (Tr. at 38.) Some of the meetings also included her husband, Rick McGraw, whom the Debtor separately advised as well. (Tr. at 233; Def's Ex. 13, Weekly Tracking Diary at August 6, October 1, October 15, November 19, 2007.) Among the Debtor's investment proposals were the purchases of the certificates of deposit at issue in this proceeding, which McGraw said the Debtor assured her were the safest, if not the highest yielding option. (Tr. at 224.)

Two client agreements were entered into on November 2, 2007, between Stanford and Nancy McGraw. (Pl.'s Ex. 7 & 8.) These concerned investing $100,000 in a Stanford Allocation Strategy (SAS) account aimed at “balanced growth” (a mutual fund investment) and approximately $26,000 in an SAS Individual Retirement Account. (Pls.' Ex. 7 & 8, Tr. at 40–41.) These accounts are not directly related to the CDs purchased by McGraw and are apparently not a source of contention between the parties. See Tr. at 40–41.

The two agreements included a confidential Stanford Investment Policy Questionnaire computing McGraw's individual net worth at $1,812,000. McGraw said the figure was inaccurate because it represented the net worth of assets belonging jointly to her and her husband. (Tr. at 202.) She said her husband must have provided the Debtor with the information to compute net worth because “I don't know any of this stuff....” (Tr. at 202.)

The last page of each client agreement includes the following wording in capital letters: “The information provided in this document is complete and accurate to the best of my knowledge....” (Pls.' Ex. 7 & 8.) Immediately below the capitalized letters are the signatures of Nancy F. McGraw, the Debtor, and the managing director of Stanford Capital Management LLC.

The Debtor said every financial decision was made jointly by the two spouses, and all accounts, both his and hers, listed the same assets. He stated that he devised a financial plan for McGraw based on all the financial information supplied to him by both Nancy and Rick McGraw. (Tr. at 43–44.) For these reasons, the Debtor considered the McGraws' joint income in making his investment recommendations individually to Nancy McGraw.

Contemporaneously with creating the mutual fund and IRA accounts, McGraw decided to invest $150,000 in the certificates of deposit in SIB. On November 13, 2007, $150,000 was transferred from her Stanford cash account to Bank of America to purchase the CDs. (Pl.'s Ex. 10, Statement Period 11/01/2007–11/30/2007, Tr. at 62, 197.)

The record does not contain any type of subscription agreement or questionnaire related to the purchase of the CDs that is comparable to Plaintiffs' Exhibits 7 and 8 that document McGraw's agreements to invest in the mutual fund and IRA accounts. McGraw testified that Plaintiffs' Exhibits 7 and 8 were her records, but she had no corresponding subscription agreement. She said she never signed any such agreement regarding the CDs, although she acknowledged that she intended to make the purchase. (Tr. at 197, 206.)

However, the Debtor testified that a signed subscription agreement was required by Stanford's compliance department and that he distinctly remembers McGraw signing the document which he brought to her in her classroom at the Anthony School. (Tr. at 233.) His statement is corroborated by an entry in his Weekly Progress Tracking Sheet dated the week of November 5, 2007, “Nancy McGraw-final signatures on all SAS/SIB papers.” ³ (Def.'s Ex. 13.)

McGraw purchased three certificates of deposit for $50,000 each for terms of 12...