Cross Keys Bank v. WardCross Keys Bank v. Ward
Case Information
*1 SO ORDERED.
DONE and SIGNED June 1, 2021.
________________________________________ JOHN S. HODGE
UNITED STATES BANKRUPTCY JUDGE UNITED STATES BANKRUPTCY COURT WESTERN DISTRICT OF LOUISIANA MONROE DIVISION
IN RE: § Case Number: 20-30681
§
Karcredit, L.L.C. § Chapter 7 Debtor §
______________________________________ §
Cross Keys Bank §
Plaintiff § Adversary Proceeding § vs. § Case No. 20AP-03011
§
Ronnie D. Ward, et al §
Defendants §
Memorandum Ruling
This case involves the double-pledging of collateral. In a double-pledge scheme, a borrower or guarantor pledges the same collateral to different lenders. For the scheme to work, the lenders must be unaware that the same collateral is being used to secure separate loans.
In this case, an insider of Debtor used corporate stock as collateral to secure *2 different guarantees to different lenders. In Louisiana, a pledge of stock can be perfected by possession of the original stock certificate. Here, the double-pledge occurred after the issuer of the stock issued a replacement stock certificate. The result was two original certificates representing the same shares of stock.
Debtor’s insider pledged the original certificate to guarantee a loan to a non- debtor. After the replacement certificate was issued, the insider pledged it to a different lender to secure a separate loan made to Debtor. While Debtor shoulders the blame for instigating the double-pledge, the issuer of the stock is not blameless because it knew that both lenders held a security interest in the same stock.
The scheme was not detected until Debtor’s lender called the loan. Debtor was unable to pay nearly $3.2 million to satisfy the debt. When Debtor’s lender filed suit to enforce its security interest in the stock, it discovered that another lender claimed to hold the same collateral. Litigation ensued. The two lenders eventually agreed to a resolution: one bank would be recognized as the holder of a first ranking, valid and perfected security interest in the stock, while the other bank would seek a money judgment against the issuer of the stock.
The motion before the court seeks a money judgment against the issuer of the
stock, a remedy expressly allowed by Louisiana law in cases of “overissued”
corporate stock.
For reasons that follow, summary judgment is proper.
Background
The summary judgment evidence has not been disputed by any party. The court adopts by reference the Statement of Uncontested Facts filed as docket no. 195-7. The evidence is summarized below.
On July 17, 2020, Cross Keys Bank (“ CKB ”) filed an involuntary petition under Chapter 7 of the Bankruptcy Code against Karcredit, LLC (“ Debtor ”). Thereafter, this court entered an order for relief against Debtor.
Prior to the commencement of the bankruptcy case, Debtor was in the business of financing the purchase of used cars, including cars sold by JD Byrider of Monroe. To finance its business operations, Debtor obtained a loan in the form of a revolving line of credit from CKB in 2012. The loan was guaranteed by Ronnie Ward (“ Ward ”) and other insiders. CKB also made loans to Ward and other companies owned by him (the “ Ward Parties ”). In August 2019, Debtor owed CKB nearly $3.2 million and the Ward Parties owed nearly $2.8 million, for a total of approximately $6 million. By then, Debtor was in default and CKB called the loans.
Long before CKB made its initial loan to Debtor, Ward guaranteed a $683,825.00 loan made by Caldwell Bank & Trust Company (“ Caldwell Bank ”) to another entity that he owned, Radioactive Images, LLC. In conjunction with that loan, on August 23, 2006, Ward pledged to Caldwell Bank 3,175 shares of stock in Homeland Bancshares, Inc. (“ Homeland ”) represented by Certificate 253. On that date, Caldwell Bank perfected its security interest in the stock by taking physical possession of Certificate 253. Caldwell Bank has had continuous custody of that *4 certificate since then.
On September 27, 2010, Caldwell Bank loaned $424,670.66 to another entity owned by Ward, Ward Chevrolet-Olds, Inc. (“ Ward Chevy ”). In conjunction with that loan, Ward executed another pledge agreement which pledged the stock represented by Certificate 253 as collateral.
Later that year, the former Homeland Bancshares, Inc. merged with Homeland Interim Company, with the resulting entity also called Homeland Bancshares, Inc. The merger agreement required the cancellation of all former Homeland stock and the reissuance of stock in new Homeland to replace the cancelled stock in former Homeland. The merger agreement stated that only the “holder” of Certificate 253 could surrender the stock for replacement shares. Further, language on the face of Certificate 253 stated only the “holder” could surrender/transfer Certificate 253.
Since Ward had transferred custody of his stock to Caldwell Bank, he did not surrender the stock certificate to the new entity for reissuance. Instead, on November 21, 2011, Ward signed a lost stock affidavit falsely claiming he lost Certificate 253, and he asked Homeland to issue a replacement stock certificate. To be clear, Ward pledged Certificate 253 to Caldwell Bank on September 27, 2010, but on November 21, 2011, claimed that he had lost Certificate 253.
Without requiring Ward to post an indemnity bond, as permitted by
Following the merger, Caldwell Bank made two more loans using Certificate 253 as collateral. In 2013 and 2018, Caldwell Bank loaned $409,931.53 and $388,720.80, respectively, to Ward Chevy. In connection with each loan, Ward signed a pledge agreement in which he pledged Certificate 253 to secure Caldwell Bank’s loan to Ward Chevy. When Ward signed the pledge agreements, he failed to tell Caldwell Bank that he had previously stated under oath that Certificate 253 was lost, and that Homeland issued Certificate 495 to replace Certificate 253.
Since at least July 11, 2016, Homeland has had actual knowledge that Ward pledged his stock in Homeland to Caldwell Bank as security for a loan.
On April 15, 2019, Ronnie Darden (“ Darden ”), the President of Homeland, sent to Steve Richardson, the President of Caldwell Bank, an email providing the value of the stock so that Caldwell Bank could value the stock pledged by Ward as collateral for loans.
The very next day , on April 16, 2019, Darden emailed Sherry Harrell of CKB to provide her the value of the stock so that CKB could value the stock—which Homeland/Darden knew Ward proposed to pledge to CKB as collateral for a guaranty of a loan to Debtor. Darden knew that Ward planned to pledge his same stock to secure loans to Caldwell Bank and CKB, yet he neither did nor said anything to prevent or disclose the double-pledge.
On April 17, 2019, Ward signed a security agreement granting CKB a *6 security interest in his stock represented by Certificate 495 and delivered possession of Certificate 495 to CKB. Thus, by April 2019, Ward had pledged the same shares of stock to two different lenders to secure two different loans, without either lender knowing they were holding the same collateral.
As a result of the double-pledge, Caldwell Bank lost its first-priority security position in the stock, and CKB now has the superior ranking position. [1]
As of March 31, 2021, the stock had a value of $682,625.00 ($215/share). As of April 26, 2021, Caldwell Bank is owed $450,088.39 by Ward. [2] Thus, had it retained its first-priority rank, Caldwell Bank would have been fully secured. As a result of the loss of its ranking, however, Caldwell Bank now finds itself wholly unsecured.
This lawsuit was initially filed in state court by CKB against Debtor and its insider-guarantors to collect a promissory note and enforce commercial guaranties. Caldwell Bank intervened, asserting a superior security interest in the collateral *7 securing Debtor’s loan. After an involuntary bankruptcy petition was filed against Debtor, the suit was removed to federal district court and referred to this court for adjudication.
Conclusions of Law and Analysis
For reasons that follow, Homeland is liable to Caldwell Bank for damages arising from the breach of the merger agreement and its breach of the provisions of Certificate No. 253. Homeland is also liable to Caldwell Bank for liabilities imposed on a stock issuer by virtue of La. R.S. §§ 10:8-405(b) and 10:8:210(d).
A. Jurisdiction
As a threshold issue, the court must independently assess subject matter
jurisdiction.
Hertz Corp. v. Friend
,
The jurisdiction of bankruptcy courts is grounded in and limited by statute.
Because this litigation did not arise under the Bankruptcy Code or in the bankruptcy case, the only potential basis for jurisdiction is that it is “related to” the bankruptcy case. The Fifth Circuit has summarized the test to determine “related *8 to” jurisdiction as follows:
It is well established that “[f]ederal courts have ‘related to’ subject matter jurisdiction over litigation arising from a bankruptcy case if the ‘proceeding could conceivably affect the estate being administered in bankruptcy.’ ” Lone Star Fund V (U.S.), L.P. v. Barclays Bank PLC,594 F.3d 383 , 386 (5 th Cir. 2010) (quoting In re TXNB Internal Case,483 F.3d 292 , 298 (5 th Cir. 2007)). “ ‘Related to’ jurisdiction includes any litigation where the outcome could alter, positively or negatively, the debtor’s rights, liabilities, options, or freedom of action or could influence the administration of the bankrupt estate.” Id. (citation omitted).
***
In analyzing jurisdiction over cases that are purportedly “related to” a bankruptcy case, we apply a broad “conceivable effect” test. See Fire Eagle L.L.C. v. Bischoff ( In re Spillman ),710 F.3d 299 , 304–05 (5 th Cir. 2013).
In re KSRP, Ltd.
,
Under the “conceivable effect” test, the court must determine whether the claims asserted in the complaint have any conceivable effect on the bankruptcy estate if they are successful. Id . at 267.
In this case, the lenders asserted claims to determine the validity of their security interests in collateral and to challenge the other party’s priority ranking. They also asserted third-party claims against the issuer of the stock, Homeland, to the extent their ranking is subordinated. Although both lenders asserted third- party claims against Homeland, only one of them can succeed on those claims as only one suffered a loss of its superior ranking.
These claims easily satisfy the broad “conceivable effect” test because if either
CKB or Caldwell Bank is successful in recovering money from a third party (such as
*9
Homeland) or from the liquidation of its collateral, it could result in a dollar-for-
dollar reduction of the amount of its claim against the estate. Any change in the
amount of a proof of claim could conceivably affect the estate being administered in
bankruptcy.
Randall & Blake, Inc. v. Evans (In re Canion),
The third-party controversies here have a close nexus to this bankruptcy
case. Success on the third-party claims will plainly benefit Debtor’s estate and its
creditors because it could lead to a reduction in liabilities owed by the estate.
Accordingly, this court concludes it has jurisdiction over this matter pursuant
to
B. Summary Judgment Standards
Summary judgment is proper when “there is no genuine dispute as to any
material fact and the movant is entitled to judgment as a matter of law.”
C. Caldwell Bank was damaged by Homeland’s breach of the merger agreement and the provisions of Certificate No. 253.
Caldwell Bank argues that it was damaged by Homeland’s breach of the
*11
merger agreement and the provisions of Certificate No. 253. Relying upon
Whitney
Nat. Bank v. Howard Weil Financial Corp
.,
In Whitney, a borrower pledged shares of his stock to secure a loan from the bank. Subsequently, the issuer of the stock merged with another entity. The merger agreement provided for the cancellation of the stock in the existing entity and the issuance of stock in the new entity. A new certificate was issued to the borrower for stock in the new entity. However, the borrower’s original certificates representing the shares pledged to the bank remained in the bank's possession and were never presented for cancellation. Subsequently, the bank tendered the certificates to the merged entity and requested that new certificates be issued in the borrower's name and returned to it. The new entity claimed that the borrower had already received a certificate for his shares and the stock retained by the bank had no value. The bank sought damages for the issuer’s wrongful refusal to register the transfer and exchange of certificates to it. The court held that the issuer was liable. Both the certificate and the merger agreement required "surrender" before transfer.
This case is nearly identical to Whitney . On October 28, 2010, pursuant to a *12 merger agreement, Homeland merged with Homeland Interim Company, with the surviving company also being called Homeland Bancshares, Inc. The “exchange procedures” in the merger agreement provided that, “[u]pon surrender to the exchange agent of a Certificate for cancellation, … the holder of such Certificates shall be entitled to receive in exchange … certificates representing the New Common Stock with the additional legends as provided therefore by the Shareholder’s Agreement, as applicable.”
In
Whitney
, the court noted: “A contracting party may stipulate a benefit for a
third person, not a party to the contract. La. C.C. Art. 1978. Such a stipulation,
generally referred to as a
stipulation pour autrui,
gives the third party beneficiary
the right to demand performance from the promisor. La. C.C. Art. 1981.”
Whitney
,
As in Whitney , the merger agreement in this case stipulated a benefit in favor of “holders” of Homeland stock. The holders of Homeland stock were third party beneficiaries of the merger agreement and thus had the right to enforce their rights under the agreement. Here, Caldwell Bank was the holder of Certificate 253 because it had physical possession of that certificate for more than four years before the merger agreement was executed on November 23, 2010. Only “holders” of Homeland stock were entitled to surrender their certificates and receive certificates for the identical number of shares in the new entity. In breach of its obligations to Caldwell Bank, a holder, under the merger agreement, Homeland issued Certificate 495 to Ward, a non-holder of Certificate 253, in exchange for Certificate 253. As *13 such, Homeland breached its duty to Caldwell Bank and thus is liable for the damages caused by its breach.
Likewise, Certificate 253 states that it was “transferable only on the books of
the Corporation by the holder hereof in person or by attorney upon surrender of the
Certificate properly endorsed.” As noted in
Whitney
, according to the face of
Certificate 253, only the “holder” could transfer it by surrender to Homeland. As in
Whitney
, Caldwell Bank, as the holder, had a right to rely on its physical possession
of Certificate 253 as protection from any erroneous exchange or transfer of the
shares of stock represented by it.
Whitney
,
Homeland breached the express provisions of Certificate 253 by issuing Certificate 495 as a replacement certificate for Certificate 253 to Ward without requiring either Ward or the holder (Caldwell Bank) to surrender Certificate 253.
With respect to Caldwell Bank’s damages caused by the breach of the merger agreement and breach of Certificate 253, it is entitled to lesser of the amount secured by Certificate 253 or the value of the stock. As of March 2021, the value of Homeland stock was $215 per share. Thus, as of March 2021, the value of the 3,175 shares of Homeland stock owned by Ward and pledged to both Caldwell and CKB was $686,625.00 ($215/share x 3,175 shares).
As of April 26, 2021, Caldwell Bank is owed $450,088.39. But-for the breach by Homeland of the merger agreement and Certificate, Caldwell Bank would be fully secured because the value of the stock ($686,625.00) is greater than the amount owed to Caldwell Bank. As a result, Caldwell Bank has been damaged by *14 Homeland’s breach in an amount equal to $450,088.39, plus interest, until paid, which is the lesser of the amount owed Caldwell Bank or the value of the stock. D. Homeland is liable pursuant to La. R.S. §§ 10:8-405 and 10:8-210.
(a) If an owner of a certificated security, whether in registered or bearer form, claims that the certificate has been lost, destroyed, or wrongfully taken, the issuer shall issue a new certificate if the owner: (1) so requests before the issuer has notice that the certificate has been acquired by a protected purchaser;
(2) files with the issuer a sufficient indemnity bond; and (3) satisfies other reasonable requirements imposed by the issuer. (b) If, after the issue of a new security certificate, a protected purchaser of the original certificate presents it for registration of transfer, the issuer shall register the transfer unless an overissue would result. In that case, the issuer's liability is governed by R.S. 10:8- 210 . In addition to any rights on the indemnity bond, an issuer may recover the new certificate from a person to whom it was issued or any person taking under that person, except a protected purchaser.
Pursuant to
Therefore, pursuant to
La. R.S. § 10:8 -303 defines “protected purchaser” as follows: (a) “Protected purchaser” means a purchaser of a certificated or uncertificated security, or of an interest therein, who: (1) gives value;
(2) does not have notice of any adverse claim to the security; and (3) obtains control of the certificated or uncertificated security.
(b) In addition to acquiring the rights of a purchaser, a protected purchaser also acquires its interest in the security free of any adverse claim.
Subsection (a) of
To qualify as a protected purchaser, a purchaser must give value, take
*16
without notice of any adverse claim, and obtain control. Value is used in the broad
sense defined in
Both CKB and Caldwell Bank meet the requirements of
Second, neither CKB nor Caldwell bank had “notice of any adverse claim to the security” when they acquired their security interest in the stock. CKB filed a declaration that it had no notice of Caldwell Bank’s competing claim in the stock when it acquired a security interest in the stock represented by Certificate 495. Caldwell Bank likewise filed a declaration attesting to the fact that because CKB did not acquire its security interest in the stock until after Caldwell Bank acquired its interest, Caldwell Bank had no notice of CKB’s competing claim. These facts have not been controverted and the court finds the declarations to be competent summary judgment evidence to this point.
Third, both CKB and Caldwell Bank obtained control of the stock certificates.
*17
Ward delivered physical possession of Certificate 459 to CKB on April 25, 2019, and
CKB has maintained consistent custody, control and physical possession of
Certificate 495 since that time. Ward delivered physical possession of Certificate
253 to Caldwell Bank on August 23, 2006, and Caldwell Bank has maintained
consistent custody, control and physical possession of Certificate 253 since that
time. CKB’s interest in the stock represented by Certificate 495 and Caldwell
Bank’s interest in the stock represented by Certificate 253 are in the same shares of
Homeland stock. Thus, this court finds that both CKB and Caldwell Bank are
“protected purchasers” pursuant to
Additionally, when the original and newly issued stock certificates were both
pledged to “protected purchasers,” as they were in this case, the issuer is required to
honor both certificates “unless an overissue would result”.
The requirements to establish Homeland’s liability as the erroneous over-
issuer of duplicate stock to “protected purchasers” pursuant to
When an issuer of stock is required to honor both the original certificate of
stock and the new certificate of stock because they have both been pledged to
“protected purchasers” but the issuer cannot as it would result in an overissue, the
*18
“protected purchaser of the original certificate” has “an action for damages.”
The “protected purchaser” of the original certificate is Caldwell Bank. As the
original “protected purchaser,” Caldwell Bank suffered damages as a result of
Homeland’s reissuance of Certificate 495 to Ward, which resulted in CKB acquiring
a first ranking security interest in the stock. As such, the “person entitled to issue
or validation [Caldwell Bank] may recover from the issuer [Homeland] the price the
person or last purchaser for value paid for it with interest from the date of the
person’s demand.”
See
,
The measure of damages to determine how much Caldwell Bank paid for its interest in Homeland stock is established by Whitney . Using the Whitney standard, the appropriate measure of damages is the lesser of the amount owed by Ward Chevy and Ward to Caldwell Bank or the value of the stock. The value of the Homeland stock has been established to be $686.625.00. The amount Caldwell Bank is owed via the consent judgment against Ward Chevy and Ward is $450,088.39. Thus, because the value due is lesser than the value of the stock, Homeland is liable to Caldwell Bank in the amount of $450,088.39, plus interest from and after April 27, 2021.
E. Court does not reach any other issue in the motion.
The motion for summary judgment presented other issues, including a claim *19 against Homeland for negligence. Because this court has determined that Homeland is liable for reasons previously stated, the court pretermits consideration of any other issues raised in the motion.
Conclusion
Based on the uncontroverted evidence and viewing in a light most favorable
to the non-moving party, “no reasonable factfinder” could find for the party opposing
summary judgment.
Maddox v. Townsend & Sons, Inc.
,
Accordingly, for reasons given, this court GRANTS the motion for summary judgment. A separate order in accordance with this ruling will follow.
###
Notes
[1] In Louisiana, a secured party may perfect a security interest in investment property
through filing a financing statement or through control of the investment property. La. R.S.
§§ 10:9-312, 9-314. Here, Caldwell Bank perfected its security interest by taking possession
of Certificate No. 253. It did not file a UCC-1 financing statement. Cross Keys, on the other
hand, perfected its security interest in Certificate No. 495 by taking possession of it and by
filing a UCC-1 financing statement. Conflicting security interests held by secured parties,
each of which has control, rank according to priority in time of obtaining control.
[2] Ward and Ward Chevy stipulated to the entry of a consent judgment which made them liable, in solido , to Caldwell Bank for $442,348.15, plus interest. See docket no. 144.