Parke Bank v. Kern (In re Kern)
| Decision Date | 07 September 2021 |
| Docket Number | Adv. 20-1560-ABA,20-18381-ABA |
| Parties | In Re: Charles Eric Kern, Debtor. v. Charles Eric Kern, Defendant. Parke Bank, Plaintiff |
| Court | U.S. Bankruptcy Court — District of New Jersey |
NOT FOR PUBLICATION
Chapter 12
Before the court is the Motion for Summary Judgment filed by Parke Bank ("Parke") against the debtor/defendant Charles Eric Kern ("Mr. Kern") Doc. No. 11. Parke requests summary judgment as to its Counts I and III, seeking nondischargeability pursuant to section 523(a)(2)(A) and/or (a)(6) for post-loan fraud and conversion in connection with Parke's collateral. Mr. Kern denies the allegations. The court finds that Mr. Kern's denials do not create genuine issues of material fact requiring trial, and that Parke is entitled to judgment as a matter of law on both counts.
In addition, Mr. Kern filed a Motion for Partial Summary Judgment (Doc. No. 18) that is wholly unconnected from Parke's Amended Complaint. Accordingly, it will be denied without prejudice.
This matter before the court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I), and the court has jurisdiction pursuant to 28 U.S.C. § 1334, 28 U.S.C. § 157(a) and the Standing Order of Reference issued by the United States District Court for the District of New Jersey on July 23, 1984, as amended on September 18, 2012, referring all bankruptcy cases to the bankruptcy court. The following constitutes this court's findings of fact and conclusions of law as required by Federal Rule of Bankruptcy Procedure 7052.
Parke filed a three-count adversary complaint on October 8, 2020 and an amended complaint on October 27, 2020. Doc. Nos. 1, 4. Mr. Kern answered the amended complaint on November 9, 2020. Doc. No. 5. Mediation was unsuccessful. Doc. No. 10.
On June 10, 2021, Parke filed a Motion for Summary Judgment on Counts I and III. Doc. No. 11. Mr. Kern filed opposition on June 28 2021. Doc. No. 14. Parke responded on July 1, 2021. Doc. No 16.
Mr. Kern filed a Motion for Partial Summary Judgment on July 2, 2021 seeking a declaratory order regarding the balances due on the various loans and lines of credit granted to him by Parke. Doc. No. 18. Parke filed responses on July 13 and 19, 2021. Doc. Nos. 20, 22.
Following a hearing held August 3, 2021, the court took this matter under advisement. This matter is now ripe for disposition.
Mr. Kern is a farmer who obtained loans and working capital from Parke. Thereafter, Parke alleges that Mr. Kern sold some of its equipment collateral and leased it back without Parke's consent. Mr. Kern hid this activity by lying to Parke representatives regarding the whereabouts of certain equipment and routing the proceeds of the sales through several bank accounts so that Parke would not identify the source of his loan payments. Parke alleges that this post-loan conduct constitutes fraud for purposes of section 523(a)(2)(A), and/or conversion, which constitutes willful and malicious injury for purposes of section 523(a)(6). Parke alleges that the injury to it consists of:
Mr. Kern responded that Parke alleged no facts supporting a finding of fraudulent intent at the time the loan was made. However, Mr. Kern misunderstands Parke's argument: it did not allege that Mr. Kern committed fraud when he entered into the loans, it argued that he committed fraud in 2018 when he fraudulently converted Parke's collateral. As to the willful and malicious count, Mr. Kern stated that there is no evidence that his actions were meant to cause willful and malicious injury to Parke: Parke received the proceeds from the transactions and later received additional funds from three of the four entities to which Mr. Kern had sold and leased back Parke's collateral. In addition, Mr. Kern questioned whether Parke had a valid perfected security interest in the items sold, particularly as concerns the collateral sold to Blue Bridge, the fourth entity with which Mr. Kern granted a security interest on Parke's collateral.
The following are the facts alleged by Parke and admitted to by Mr. Kern, except as otherwise noted.
Parke holds a money judgment against Mr. Kern, jointly and severally with his wife, Tara L. Kern ("T. Kern") and CEK Farms, LLC ("CEK") in the amount of $3 261, 900 ("Money Judgment"). Doc. Nos. 11-1 and 14-2, ¶ 1. The Money Judgment is based upon multiple defaulted loans executed in January 2017 by the Kerns:
Id., ¶ 2 (collectively, the "Loan Portfolio").
All three loans were secured by mortgages (collectively "Mortgages") on certain real property parcels that were recorded. Id., ¶¶ 3, 4. The $1.399 Loan was guaranteed by the United States Department of Agriculture ("USDA Guaranty"). Id., ¶ 5. Pursuant to the USDA Guaranty, Parke, as the lender, may not pay down the unguaranteed portion of the loan first. Id., ¶ 6.
Mr. Kern also executed an Assignment of Leases, Rents and Other Agreements, granting to Parke an absolute assignment of all leases, security deposits, books and records, and any other agreements related to the lease of the real properties. Id., ¶ 7. The mortgages and the assignment of rents were released, as the real properties have all been sold, and Parke no longer holds liens on any of the Kern's real estate. Id., ¶ 8.
The Loan Portfolio was evidenced by certain promissory notes executed by Mr. Kern and his wife for each loan ("Notes"). Id., ¶ 9. The Loan Portfolio was also secured by a lien on all assets of Mr. Kern, including machinery, equipment, inventory, accounts, money, and other business assets, as evidenced by the separate security agreements executed in connection with each loan ("Security Agreements"). Id., ¶ 10. The Security Agreements each granted Parke a security interest in, among other things, equipment, "excluding CLAAS Combine and Case IH 225." Id., ¶ 11.
The security interest in all assets was also set forth at length in the Commercial Security Agreement applicable to the entire Loan Portfolio, also executed by the Kerns on January 13, 2017 ("Blanket Security Agreement"). Id., ¶ 12. The Blanket Security Agreement, signed by the Kerns, provides, unequivocally, that the Kerns "shall not sell, offer to sell, or otherwise transfer or dispose of" Parke's collateral." Id., ¶ 13. The Blanket Security Agreement further provides that the Kerns "shall not pledge, mortgage, encumber or otherwise permit" Parke's collateral "to be subject to any lien, security interest, encumbrance, or charge" other than Parke's lien. Id., ¶ 14. The Blanket Security Agreement grants Parke a security interest in "the following described property of Debtor … whether now owned or hereafter acquired, whether now existing or hereafter arising, and wherever located, together with all Proceeds thereof and all insurance proceeds pertaining thereto: Accessions, Accounts, Deposit Accounts, Inventory, Equipment excluding CLAAS Combine and Case IH 225, Fixtures, Books and Records, Chattel Paper, Documents, Farm Products, Goods, General Intangibles, Instruments, Investment Property, Money, Payment Intangibles, Promissory Notes, Securities, Software and Supporting Obligations." Id., ¶ 15.
To perfect its lien on personal property, Parke filed a UCC-1 Financing Statement on January 20, 2017 ("UCC"). Id., ¶ 16. The UCC describes the collateral as follows: "All of the Debtor's now owned or hereafter acquired personal property, including all 'Accessions', 'Accounts', 'Deposit Accounts', 'Inventory', 'Equipment', 'Fixtures', 'Books and Records', 'Chattel Paper', 'Documents', 'General Intangibles', 'Instruments', 'Investment Property', 'Money', 'Payment Intangibles', 'Promissory Notes', 'Securities', 'Software' and 'Supporting Obligations' as defined in the New Jersey Uniform Commercial Code… including all cash and non-cash proceeds thereof." Id., ¶ 17.
Mr. Kern pointed out that the UCC does not include "machinery." Doc. No. 14-2, ¶ 17. But he admitted that during the underwriting stage of the Loan Portfolio, on October 25, 2016, Parke obtained a desktop appraisal of all equipment he owned based upon a list provided by him ("Desktop Appraisal"). Doc. Nos. 11-1 and 14-2, ¶ 18. The Desktop Appraisal listed 65 pieces of equipment, including 13 items pertinent to Parke's adversary proceeding. Id., ¶ 19. Thus, there is no genuine issue of material fact that Mr. Kern knew that Parke's Security Agreement covered his machinery. Whether the UCC reflected, and the court makes no statement either way, that does not change Mr. Kern granted a security interest in that machinery, and that the Blanket Security Agreement prohibited him from disposing or encumbering the machinery.
Parke alleged that the total appraised fair market value of the Equipment as of October 2016 was $411, 458. Doc. No. 11-1 ¶...
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