Busey Bank v. Cosman (In re Cosman)

616 B.R. 358

IN RE Timothy COSMAN and Rebecca L. Cosman, Debtors.

Busey Bank, Plaintiff,

v.Timothy Cosman, Defendant.

Bankruptcy Case 16-81577

Adversary No. 17-96028

United States Bankruptcy Court, N.D. Illinois, Western Division.

Signed April 22, 2020

Matthew M. Hervin, Hinshaw & Culbertson, Rockford, IL, for Plaintiff.

Richard G. Larsen, Springer Larsen Greene, LLC, Wheaton, IL, for Defendant.

MEMORANDUM OPINION

Thomas M. Lynch, United States Bankruptcy Judge

In 2014 and 2015, Timothy Cosman (the "Debtor") procured a variety of loans from Busey Bank (the "Bank") in connection with his farming operation.¹ These loans were not repaid and, on February 26, 2016, a judgment was entered in favor of the Bank and against the Debtor in the amount of $5,513,242.71. In addition, on October 7, 2019, the Debtor was convicted of bank fraud in violation of 18 U.S.C. § 1344, following his plea agreement in which the Debtor admitted that these loans were obtained as part of a scheme to defraud the Bank. See United States v. Cosman , No. 18-CR-20020 (C.D. Ill. Oct. 7, 2019).

After the Debtor filed for relief under chapter 7 of the Bankruptcy Code, the Bank filed a four-count adversary complaint seeking a determination that the remaining amount due and owing from Debtor is non-dischargeable pursuant to 11 U.S.C. §§ 523(a)(2)(A), (a)(2)(B), (a)(4), and (a)(6). The Bank also seeks a judgment in its favor in the amount of $2,963,841.54 plus fees and costs.

Now before the court is the Bank's motion for summary judgment on all counts of its complaint. The Bank argues that there are no genuine issues of material fact for trial and that Debtor is barred from relitigating the issues raised in this case based on the doctrine of collateral estoppel and his conviction for bank fraud. For the reasons discussed below, the court finds that collateral estoppel does not fully resolve this litigation, but that Busey Bank is nevertheless entitled to summary judgment on its claim under § 523(a)(2)(B).

JURISDICTION

Discharge being a right expressly created by title 11, proceedings on an objection to a debtor's discharge or to the dischargeability of a debt arise in a case under title 11. Kontrick v. Ryan , 540 U.S. 443, 447-48, 124 S.Ct. 906, 157 L.Ed.2d 867 (2004). Accordingly, this court has jurisdiction to entertain this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. The determination of the dischargeability of a particular debt is a core proceeding under 28 U.S.C. § 157(b)(2)(I), and actions to determine the scope of a debtor's discharge is a fundamental part of the bankruptcy process. As such, this court possesses "constitutional authority to hear and finally determine what claims are non-dischargeable in a bankruptcy case." Muhammad v. Reed (In re Reed) , 542 B.R. 808, 815 (Bankr. N.D. Ill. 2015). See also, e.g. , Gasunas v. Yotis (In re Yotis) , 521 B.R. 625, 631 (Bankr. N.D. Ill. 2014) (citing Stern v. Marshall , 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) ).²

PROCEDURAL BACKGROUND

The Debtor filed his chapter 7 petition for relief on June 30, 2016. Thereafter, the Bank filed its Proof of Claim (Claim 17-1) alleging a secured claim in the amount of $4,370,907.90 based on the outstanding principal balance and interest on four different loans.³ Based on the attachments to the claim, this amount was derived primarily from a $475,000 loan dated March 16, 2015, and a $5,000,000 loan dated March 19, 2015.⁴ The Bank later withdrew its claim in the bankruptcy case pursuant to a settlement agreement that was reached with the Trustee in which Busey Bank received $1,100,000. (See ECF No. 216.) As part of the settlement agreement, the Bank "retain[ed] any and all of its rights under Sections 523 and 727 of the United States Bankruptcy Code ... as no such rights shall be released." (Id. )

On October 30, 2017, the Bank filed the instant adversary complaint alleging that the Debtor "borrowed substantial sums from Busey Bank in loans extended or renewed in reliance upon the personal financial statements and representations prepared by the Debtor and submitted to Busey Bank." (ECF No. 1 at 2.) The Bank further alleged that, after applying all amounts received since its claim was filed, including the $1,100,000 received pursuant to the settlement agreement, the Debtor still owed the sum of $2,963,841.54 under the notes. (Id. at 3.)

The Bank claims that the Debtor submitted several materially false financial statements in order to induce Busey Bank to extend these loans. These include financial statements for years 2011 through 2014 which "grossly inflated the amount and value of the Debtor's farm equipment, grain and other assets" and lists of land farmed that "grossly misstated amount of acreage being farmed by Debtor to inflate the value thereof." (Id. ) Based on these allegations,⁵ the Bank asserts that the Debtor's remaining debt is non-dischargeable under: (1) section 523(a)(2)(A) based on the Debtor's false statements relating to the farm lists; (2) section 523(a)(2)(B) based on the Debtor's false financial statements; (3) section 523(a)(4) based on the Debtor's larceny; and (4) section 523(a)(6) based on the willful and malicious injury to the Bank's cash collateral.

While this adversary proceeding was pending, the Debtor plead guilty and was convicted of bank fraud in violation of 18 U.S.C. § 1344. On October 7, 2019, the Debtor was sentenced to 36 months' imprisonment, 60 months of supervised release, and ordered to pay restitution to Busey Bank in the full amount of its damages of $2,963,841.54. Despite this criminal judgment and the Debtor's purported acceptance of responsibility at the time of sentencing, the Debtor elected to continue to defend this adversary case. As a result, on December 16, 2019, the Bank filed this motion and its supporting materials. (See ECF Nos. 107-110.) The motion argues that the Bank is entitled to judgment on each of its counts as a matter of law based on the doctrine of collateral estoppel because all of the necessary elements for its claims of non-dischargeability were established by the defendant's guilty plea and conviction. By application of the doctrine, the Bank contends that the Debtor should be barred from re-litigating those issues in this case. In response, the Debtor contends that collateral estoppel is not appropriate and that genuine issues of material fact remain on the issues of reliance and damages. (See ECF Nos. 112-114.)

FACTS

The following facts are based on the court's careful review of the parties' respective statements of facts and responses pursuant to Local Rules 7056-1 and 7056-2 and are either undisputed or have been deemed admitted based on the Debtor's failure to properly controvert the facts as required by Fed. R. Bankr. P. 7056(c)⁶ and Local Rule 7056-2.

On February 28, 2014, the Debtor obtained a line of credit in the amount of $4,000,000 from the Bank to be used for the Debtor's farming business (Loan 17415). This loan was subsequently replaced on March 6, 2015, with a new loan in the amount of $4,250,000, and then replaced again on March 19, 2015, with a $5,000,000 loan. In each instance, the Debtor executed a promissory note in favor of Busey Bank that was secured by, among other things, the Debtor's inventory and crops. On March 16, 2015, the Debtor obtain an additional loan from the Bank in the amount of $475,000 for the stated purchase of 250 heifers (Loan 20375), but the Debtor never purchased the cattle with these proceeds.

Before the Debtor obtained from the Bank the initial $4,000,000 line of credit reflected in Loan 17415, he prepared and submitted a materially false financial statement purporting to show his assets and liabilities as of December 26, 2013. In the December 2013 statement, the Debtor falsely stated that he had a 20 percent ownership interest in Cosman Farms, LLC, valued at $2,000,000, and a 20 percent ownership interest in Cosman Family Limited Partnership valued at $1,000,000. In fact, the value of his ownership interests was substantially below the amount represented. (See ECF No. 110, Ex. 2 at 10-11.) The December 2013 statement also included an itemized list of farming machinery, equipment, and trucks purportedly owned by the Debtor, but the Debtor did not own every item listed.⁷

In March 2015, the Debtor submitted another materially false financial statement showing his assets and liabilities as of December 30, 2014. In the December 2014 statement, the Debtor falsely claimed 20 percent ownership interests in Cosman Farms, LLC, and Cosman Family Limited Partnership that were valued at $2,106,000 and $1,197,000, respectively, even though the actual values were substantially lower. (See ECF No. 110, Ex. 2 at 11.) The December 2014 statement also falsely stated that the Debtor was the beneficiary of a promissory note executed by the Debtor's father in the amount of $1,500,000. In addition, the December 2014 statement included lists of land being farmed by the Debtor which grossly misstated the amount of acreage farmed.⁸

In his plea agreement in the criminal case, the Debtor admitted that the false financial statements discussed above were part of a "scheme to defraud Busey Bank and obtain money from the business loans." (ECF No. 110, Ex. 2 at 10-11.) It was further part of the scheme to defraud that the Debtor "represented to the Bank that [he] had sufficient collateral to secure the loans." (Id. at 10.) The Debtor's "representations as to [his] assets and the purpose of his loans were material in that Busey Bank was influenced by the [Debtor's] representations when lending money to the [Debtor]." (Id. ) The Bank relied on the information provided by the Debtor stating his assets and liabilities and would not have loaned any of the money to the Debtor had it known the Debtor's true financial circumstances and the false representations that were made...