Cross Keys Bank v. Ward (In re Karcredit, L.L.C.)

630 B.R. 14

IN RE: KARCREDIT, L.L.C., Debtor

Cross Keys Bank, Plaintiff

v.Ronnie D. Ward, et al, Defendants

Case Number: 20-30681

Adversary Proceeding Case No. 20AP-03011

United States Bankruptcy Court, W.D. Louisiana, Monroe Division.

Signed June 1, 2021

Patrick L. McCune, Wiener, Weiss, & Madison, Baton Rouge, LA, Seth Moyers, R. Joseph Naus, Wiener, Weiss & Madison, Shreveport, LA, for Plaintiff.

James A. Rountree, Rountree Law Office, Monroe, LA, for Defendants.

Memorandum Ruling

JOHN S. HODGE, UNITED STATES BANKRUPTCY JUDGE

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 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. La. R.S. § 10:8-210(d). No material facts are in dispute. The moving party is entitled to judgment as a matter of law.

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 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 La. R.S. § 10:8-405(a)(2), Homeland cancelled Certificate 253 and issued to Ward Certificate 495 for the same number of shares to replace Certificate 253. Caldwell Bank had no knowledge that Certificate 253 had been cancelled and replaced by Certificate 495 until late May 2019.

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 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 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 , 559 U.S. 77, 94, 130 S.Ct. 1181, 175 L.Ed.2d 1029 (2010) (citing Arbaugh v. Y&H Corp. , 546 U.S. 500, 514, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006) ) ("Courts have an independent obligation to determine whether subject-matter jurisdiction exists, even when no party challenges it.").

The jurisdiction of bankruptcy courts is grounded in and limited by statute. 28 U.S.C. § 1334(b) provides that "the district courts shall have original but not exclusive jurisdiction of all civil proceedings arising under title 11, or arising in or related to cases under title 11." The district courts may, in turn, refer "any or all proceedings arising under title 11 or arising in or related to a case under title 11 ... to the bankruptcy judges for the district." 28 U.S.C. § 157(a).

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 to" jurisdiction as follows:

It is well established that "[f]ederal courts have ‘related to’

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