AgHeritage Farm Credit Servs., PCA v. Durham (In re Durham)

639 B.R. 504

IN RE: William Sloan DURHAM and Dina Gail Durham, Debtors.

AgHeritage Farm Credit Services, PCA, Plaintiff

v.William Sloan Durham and Dina Gail Durham, Defendants

Case No. 3:19-bk-15221J

AP No. 3:20-ap-01028

United States Bankruptcy Court, E.D. Arkansas, Northern Division.

Signed March 29, 2022

G. Mike DeLoache, DeLoache Law Office, Jonesboro, AR, for Joint Debtor Dina Gail Durham, Debtor William Sloan Durham.

MEMORANDUM OPINION

Phyllis M. Jones, United States Bankruptcy Judge

In this adversary proceeding, AgHeritage Farm Credit Services, PCA ("AgHeritage ") alleges that William Sloan Durham ("Mr. Durham ") and Dina Gail Durham ("Dina Durham ") (collectively, the "Durhams ") provided false financial information to AgHeritage to induce it to extend loans to the Durhams; sold collateral without the consent or knowledge of AgHeritage; diverted the sale proceeds of collateral to their own use; and failed to keep or preserve financial information from which their business transactions can be determined. As a result of these alleged actions, AgHeritage seeks to have the debt owed to it by the Durhams declared nondischargeable under 11 U.S.C. § 523(a)(2)(A), (a)(2)(B), and (a)(6). It also objects to the Durhams’ discharge under 11 U.S.C. § 727(a)(2) and (a)(3). The Durhams deny that any of the relief sought should be granted.

A trial was held in Jonesboro, Arkansas, on September 9, 2021. Ralph W. Waddell of the firm Waddell, Cole & Jones, PLLC, appeared on behalf of AgHeritage. Two representatives of AgHeritage, Alan Brannon and Gary Grosdidier, appeared and testified on its behalf. G. Mike DeLoache of the DeLoache Law Office appeared on behalf of the Durhams. The Durhams appeared in person and testified on their own behalf. After the trial, the Court took the matter under advisement.

For the reasons stated below, the Court finds that judgment should be entered in favor of the Durhams on all counts.

I. Jurisdiction

The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 1334 and 157. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and (J). The following shall constitute the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

II. Facts

A. General Background

Mr. Durham began ranching at a young age and has managed farm operations most of his life. His operations have included both row crop farming and livestock operations. Mr. Durham's parents, two brothers, and his son are also engaged in farming operations. Dina Durham, Mr. Durham's wife, testified that she has never participated in the daily farming operations.

The Durhams maintained a bank account at the Bank of Cave City. It was a joint account for several years and at some point not clear from the record the account was changed to Mr. Durham's name only. The Durhams used the account at the Bank of Cave City for everything: the row crop operation, the cattle operation, and for household expenses. Dina Durham wrote checks on the account, including some for living expenses and personal expenses.

For many years AgHeritage financed the Durhams’ row crop and livestock operations. Alan Brannon, an Agricultural Lending Officer with AgHeritage, was the loan officer for several of the Durhams’ loans. He testified that he has known the Durhams his entire life and was familiar with Mr. Durham's farming and cattle operations.

Mr. Durham explained that he suffered significant losses in his row crop operation in 2011 and subsequent years. In 2011, the crop was destroyed by hail damage. The damage was not covered by Mr. Durham's catastrophic insurance policy. Then, in two subsequent years, floods destroyed between twenty and thirty percent of his soybean crop. Mr. Durham testified that the damages resulting from the hail and floods exceeded $500,000.00.

Mr. Durham discontinued his row crop farming operation at the end of 2015. Mr. Durham testified this decision was "not by choice," but AgHeritage refused to renew his crop loan for 2016. (Tr. at 69, 128). The reason for AgHeritage's decision not to renew the loan is unclear from the record.

Mr. Durham's livestock operation was a cow/calf operation where cows are bred with bulls and the calves are sold to generate income. Mr. Durham handled his cattle operation personally, raising the cattle from birth and even naming some of them. He testified that he did not experience the same losses in his cattle operation as he did in farming.

Sometime prior to February 2016, Mr. Brannon approached Mr. Durham and said, "Your cash flow looks good. All your numbers [are] good. We need more collateral." (Tr. at 128). This conversation was followed by the initiation of what was referred to as the "bullet loan." Mr. Brannon explained that a bullet loan is "like a declining balance operating loan or a balloon note" used to "restructure [a customer's] debt or to do a workout." (Tr. at 48). The loan usually has a one-year maturity and allows the customer time to sell assets and pay down debt.

In the case of the Durhams, AgHeritage did not anticipate future business with the Durhams and entered into a bullet loan as a workout arrangement in 2016 (the "Bullet Loan "). The Bullet Loan administratively consolidated several of the Durhams’ existing loans with AgHeritage into one loan. Following this consolidation, four loans remained between the Durhams and AgHeritage: the Bullet Loan (Loan No. 2700), an operating loan (that AgHeritage had frozen) (Loan No. 5500), an equipment refinance loan (Loan No. 9900), and a real estate refinance loan (Loan No. 2900).¹

B. Bullet Loan

(1) February 2016 Balance Sheet and Inspection Report

The Bullet Loan process began in February 2016. The Durhams signed a loan application related to the loan restructuring agreement with AgHeritage. (Pl.’s Ex. 1, at #001).² In connection with this loan application, Mr. Durham also signed a balance sheet dated February 4, 2016 (the "February 2016 Balance Sheet "). (Pl.’s Ex. 1, at #002). Dina Durham did not sign this balance sheet. The February 2016 Balance Sheet included a certification that the information was "a true, correct and complete statement" of Mr. Durham's "financial condition as of the date shown." (Pl.’s Ex. 1, at #002). The balance sheet reflected $4,600,033.00 in total assets and $3,570,561.00 in total liabilities for a total equity of $1,029,472.00.

The loan schedule on the February 2016 Balance Sheet reflected nine outstanding loans with AgHeritage, one loan with the Bank of Cave City, and one third-party owner financed loan. The AgHeritage loans had been made for various purposes including operating expenses, grain inventory, cattle purchases, equipment, and real estate purchases. The principal balance on the nine AgHeritage loans totaled $3,179,644.00. The loan with the Bank of Cave City was for the purchase of thirty head of cattle and was listed with a principal balance of $30,114.00. The third-party owner financed loan was for the purchase of 160 acres of real property and was listed with a principal balance of $197,746.00.

The asset portion of the February 2016 Balance Sheet reflected, among other things, 312 larger calves³ valued at $1,100.00 a head for a total value of $343,200.00; 350 smaller calves valued at $750.00 a head for a total value of $262,500.00; 20 bulls valued at $2,500.00 a head for a total value of $50,000.00; and 450 "momma cows"⁴ valued at $1,750.00 a head for a total value of $787,500.00. The values given reflected the market values as of the balance sheet date. A later sale price for the cattle may not equal the balance sheet amount. At trial, counsel for AgHeritage asked Mr. Durham on direct examination, "AgHeritage relied on [the February 2016 Balance Sheet], didn't it?" (Tr. at 87). Mr. Durham responded, "Yes." (Tr. at 87).

In accordance with AgHeritage's procedures, the information for the number of cattle on this and future balance sheets came from AgHeritage's inspection reports. Both Mr. Durham and Mr. Brannon testified about how the inspections were conducted. Mr. Brannon testified that he and Mr. Durham would drive to the different farms to count heads of cattle; the cattle were usually separated by type such as Angus and Charolais. Mr. Durham also grouped a certain number of momma cows with each bull, and they would count these groups in the various fields. Mr. Brannon testified that he and Mr. Durham would be in the truck for "quite a while going from farm to farm." (Tr. at 54).

When asked if it was correct that "you pull up to a field with a few hundred black cows in there, you're—you're trying to count every head that's there," Mr. Brannon stated that was correct. (Tr. at 49). He acknowledged that "[i]t's hard to count," adding he was not "going to say [he] counted every head, but [he] ... got a number from [Mr. Durham], or the hired hand, and that's what [he] used." (Tr. at 48–49).

Mr. Durham testified that he kept records of the number of cattle in a notebook, and he would give those numbers to Mr. Brannon during the inspections. He testified he would tell Mr. Brannon those were the numbers "more or less, because ... [he would] have a few to die." (Tr. at 122). As an example of the types of records maintained by Mr. Durham and his family, Mr. Durham introduced a handwritten "cow count" prepared by his hired hand. (Defs.’ Ex. 11). The record included the number, type, and location of the cattle and was typical of the records kept on the farm for the cattle operation.

The livestock numbers on the February 2016 Balance Sheet were derived from an inspection conducted on February 4, 2016, by Mr. Brannon with Mr. Durham present.

Mr. Brannon prepared an inspection report following the inspection (the "February 2016 Inspection Report "). (Pl.’s Ex. 2). The numbers on the February 2016 Balance Sheet are consistent with the numbers on the February 2016 Inspection Report. Mr. Brannon noted on the February 2016 Inspection Report that "[a]ll cattle are in good...