550 B.R. 803
Bankr. D.N.D.2016Background
- Debtor Dean Borstad, a longtime farmer and Horizon Financial Bank customer, obtained a $1,000,000 2013 operating loan based on financial statements (FINPACK balance sheet, executive summary, collateral analysis) prepared with bank loan officer Bryan Anderson.
- The 2013 balance sheet overstated assets (misstated equipment, inventory, receivables) and omitted certain liabilities; Horizon did not verify many items, perform a farm inspection, or obtain recent tax returns, credit reports, or UCC searches before funding.
- In 2014 Debtor experienced divorce, auctioned most farm equipment (proceeds applied to Horizon), received $8,000 for a previously sold header and spent it, and made several transfers of property (e.g., mower to girlfriend; house to employee per prior agreement; transfers to trading partners to settle trade debts).
- Debtor filed Chapter 7 on Jan 21, 2015; initial schedules and SOFA omitted or misstated some transfers, creditors, and the Toro mower; amended schedules were filed after the first meeting of creditors.
- Horizon sued to: (1) deny discharge under 11 U.S.C. § 727(a)(2), (a)(3), (a)(4); and (2) except its debt from discharge under 11 U.S.C. § 523(a)(2)(B) and (a)(6).
- The bankruptcy court conducted a trial, heard testimony (including bank and expert witnesses), and dismissed all of Horizon’s claims with prejudice.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| 1) §727(a)(2) fraudulent transfers within one year | Borstad transferred assets (to Weisz, girlfriend) to hinder/defraud Horizon | Transfers were to settle trade debts, for rent, or pursuant to informal agreements; no intent to defraud | Denied — transfers not shown to be made with intent to hinder/delay/defraud creditors |
| 2) §727(a)(3) failure to keep or preserve records | Debtor’s records and inventories were inaccurate and missing, making financial condition unknowable | Debtor produced RCIS production reports, delivery sheets, handwritten accountings and adequately explained transactions | Denied — records were sufficient to ascertain financial condition under the circumstances |
| 3) §727(a)(4)(A) false oaths/omissions under oath | Multiple omissions/false statements in schedules, SOFA, and at creditors’ meeting indicate fraudulent intent | Omissions were errors, misunderstandings, or corrected by prompt amendments; debtor relied on counsel and attempted to cooperate | Denied — Horizon failed to prove Debtor knew falsity and acted with fraudulent intent |
| 4) §523(a)(2)(B) nondischargeability for materially false written statement | Debtor’s 2013 balance sheet was materially false and Horizon reasonably relied on it to extend credit | Bank did not reasonably rely: no evidence loan committee or board reviewed documents, bank failed to follow underwriting policies; relationship banking dominated decision | Denied — Horizon failed to prove reasonable reliance (and intent) |
| 5) §523(a)(6) willful and malicious injury (conversion) | Debtor converted bank collateral (sale proceeds, transfers) willfully and maliciously | Transfers and spending were not intended to injure Horizon; practices of ‘jockeying’ equipment were known/accepted; use of header proceeds was for necessities | Denied — injury was not shown to be willful and malicious |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (1991) (burden of proof for nondischargeability is preponderance of the evidence)
- Kawaauhau v. Geiger, 523 U.S. 57 (1998) ("willful" in §523(a)(6) requires deliberate or intentional injury)
- Bateman v. City Nat’l Bank of Ft. Smith, 646 F.2d 1220 (8th Cir.) (elements for §727(a)(2) fraudulent transfer claim)
- Armstrong v. Abbott Bank-Hemingford, 931 F.2d 1233 (8th Cir.) (gratuitous transfer presumption and burden shift on debtor)
- Soza v. Hill, 542 F.3d 1060 (5th Cir. 2008) (aggregate badges-of-fraud analysis for intent)
- In re Cecil, 542 B.R. 447 (8th Cir. BAP 2016) (denial-of-discharge standard and strict construction in favor of debtor)
- In re Lindsey, 443 B.R. 808 (8th Cir. BAP 2011) (§523 and §727 evidentiary standards and reliance analysis)