In re Chambers

419 B.R. 652

In re Jimmy D. CHAMBERS, Debtor Jimmy Chambers, Mary Ann Chambers, and Mark Weisbart, Plaintiffs, v. First United Bank & Trust Co., Defendants.

Bankruptcy No. 07-42055.

Adversary No. 07-4210.

United States Bankruptcy Court, E.D. Texas, Sherman Division.

September 30, 2009.

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Christopher J. Moser, Quilling, Selander, Cummiskey & Lownds, Dallas, TX, for debtor.

Janna L. Countryman, Plano, TX, Mark A. Weisbart, Law Offices of Mark A. Weisbart, Dallas, TX, Trustees.

MEMORANDUM OPINION

BRENDA T. RHOADES, Bankruptcy Judge.

In this adversary proceeding, the Plaintiffs are seeking a free house. This proceeding is before the Court following a trial on a portion of the First Amended Complaint filed by the Plaintiffs. In particular, at the trial of this adversary proceeding, the Court heard evidence and argument regarding the validity of First United Bank & Trust Co.'s alleged lien on Jimmy and Mary Ann Chambers' spacious home and the surrounding real property, which Mr. Chambers valued at $700,000 in his bankruptcy schedules. This Memorandum Opinion embodies the Court's findings of fact and conclusions of law. See FED. R. BANKR.P. 7052.¹

I. RELEVANT PROCEDURAL HISTORY

This adversary proceeding began as a petition filed by Jimmy and Mary Ann Chambers against the Defendant, among others, in Texas state court. After Mr. Chambers filed a voluntary petition for relief under Chapter 13 of Title 11 of the United States Code (the "Bankruptcy Code"), he removed the state court action to this Court. Mr. Chambers subsequently converted his bankruptcy case to Chapter 7, and the Court appointed Mark Weisbart as the Chapter 7 trustee. In this adversary proceeding, the Chapter 7 trustee sought and obtained authority to file a First Amended Complaint in which, among other amendments to the original complaint, the Chapter 7 trustee was added as a Plaintiff.

On December 14, 2007, the Defendant filed a motion requesting that this Court abstain and remand the entire action back to state court. On February 12, 2008, following a contested hearing on the Defendant's motion, the Court entered an order regarding the Defendant's request. The Court's order provided that, after determining the validity of the Defendant's alleged lien on Mr. Chambers' homestead, the Court would remand the remaining claims to state court.

On May 8, 9 and 20, 2008, the Court conducted a trial on the validity of the Defendant's lien on the Chambers' home and the surrounding real property. Jimmy and Mary Ann Chambers testified in support of the First Amended Complaint. In addition, the Defendant presented the testimony of Vaughn Andrus, Mary Ann Edelman and Tim Smith, among others. At the conclusion of the parties' evidentiary presentations, the Court invited the Plaintiffs and the Defendant to submit their closing arguments in the form of briefs to the Court and took the matter under advisement.

II. RELEVANT FACTUAL BACKGROUND

Jimmy and Mary Ann Chambers married in 1988. They have four children, whose ages ranged from 15 to 35 at the time of trial. They reside in a spacious home in Pilot Point, Texas, which consists of 6,142 square feet of living space and is situated in the approximate center of 3.27 acres of real property. The 3.27 acres of real property includes all of Lots 25 and 26 of Scenic Acres Addition in Denton County, Texas.

Since their marriage, the Chambers have operated numerous businesses and have done business with a number of banks. Mr. Chambers managed some real estate investments, among other things, and he testified that he has "borrowed lots of money" in connection with his businesses. At one time, one of the Chambers' businesses, referred to by the parties as JIMAC, owned all or nearly all of the lots in Scenic Acres Addition.

Mrs. Chambers' father, Larry Harwell, transferred ownership of a business called Today's Signs to the Chambers after their marriage. In 1996, the Chambers formed another business called Gravity Enterprises. At around the same time, Mr. Chambers' father, Walter, formed the M & J Trust for the ostensible benefit of his four grandchildren. The M & J Trust, which consists of four separate trusts, held all the shares of Gravity Enterprises. In addition, JIMAC conveyed all of Lots 25 and 26 to the M & J Trust in exchange for nominal consideration.

The Chambers began doing business with the Defendant's predecessor-in-interest, Farmers & Merchant State Bank ("FMSB"), in 1988. Over the years, the Chambers developed a personal, friendly relationship with Marianne Edelman, an FMSB employee who assisted Vaughn Andrus. The Chambers also developed a personal friendship with Mr. Andrus, who was employed as the Chairman and CEO of FMSB.

Mr. Andrus served as the trustee for the M & J Trust from its inception and, under the terms of the Trust Agreement, had the sole power to appoint a successor in the event he should fail or cease to act as the trustee for the M & J Trust. Mr. Andrus' good faith was "conclusively presumed" under the Trust Agreement. Section 2.0.1 of the Trust Agreement addressed the distribution of corpus and income from the trust estate as follows:

The Trustees [sic] may accumulate or retain income from the Trust Estate, in whole or in part, and from time to time, distribute or pay to or for any then beneficiary thereof such amounts of income or corpus, including the total amounts of such income and/or corpus, as the Trustee deems advisable.

The Trust Agreement granted Mr. Andrus "broad and unlimited powers" in addition to the powers and privileges specified in the Trust Agreement.

Gravity Enterprises was one of FMSB's largest customers. FMSB allowed large overdrafts of up to $200,000 on Gravity Enterprise's account. Mr. Andrus approved these overdrafts as they occurred. Mr. Chambers testified that the overdrafts effectively served as unsecured lines of credit from FMSB.

In addition to extending credit to Gravity Enterprises, FMSB loaned money to another business owned by the Chambers, which was referred to by the parties in this proceeding as SMLA. FMSB also loaned money to several family members of the Chambers, including Brian Chambers, Corey Chambers, Walter Chambers, and John Lewis, from time to time. It is clear from the record that the Chambers and their businesses received extremely favorable and personalized treatment from FMSB. Mr. Andrus' father, Garth Andrus, even made a personal loan of money to Mr. Chambers.

US Tobacco provided Gravity Enterprises with approximately 95% of its business. In or around 1999, U.S. Tobacco ended its business relationship with Gravity Enterprises and, among other things, refused to pay for services already provided by Gravity Enterprises. Gravity Enterprises filed suit against U.S. Tobacco in July 1999.

In August 1999, R.K. Co. provided what Mr. Chambers described in his testimony to this Court as a "personal loan" to Gravity Enterprises. R.K. Co. is a Texas general partnership owned by Harold Rogers, the attorney who assisted with the creation of the M & J Trust. In exchange for the "personal loan," the M & J Trust granted R.K. Co. a lien on Lots 25 and 26 of Scenic Acres Addition.

Additionally, on August 30, 1999, the Chambers obtained a home equity loan from FMSB in the original principal amount of $264,200. The 1999 loan required the Chambers to make monthly payments of $2,351.21 each (to be modified annually as the prime interest rate changed) on the 29th day of each month beginning on September 29, 1999 and ending on August 29, 2029. A portion of the loan proceeds, $126,161.74, was used to satisfy an outstanding obligation owed by JIMAC to FMSB, and FMSB paid the remaining proceeds to the Chambers in the form of a cashiers check. Mr. Chambers testified that they needed the money to pay for their living expenses during their suit against U.S. Tobacco.

Prior to the loan, the Chambers' residence was situated on a 3.27 acre parcel titled in the name of the M & J Trust. Mr. Chambers obtained a survey of Lots 25 and 26 and carved out a one-acre parcel on which their home was situated to use for collateral. Mr. Chambers testified that he understood that one acre was all he was allowed to pledge for a home equity loan under Texas law at that time. Prior to the closing of the home equity loan, on August 17, 1999, Mr. Andrus, as the trustee for the M & J Trust, executed a Warranty Deed transferring the one acre upon which the Chambers' home is located from the M & J Trust to the Chambers so that the Chambers could then pledge the one acre as security for the home equity loan.

FMSB obtained an appraisal valuing the Chambers' home at $450,000 as of July 5, 1999 based on a sales comparison approach.² Following the transfer of the one acre to the Chambers, the Chambers designated the one acre as their homestead and paid property taxes on the one acre to the relevant taxing authority. The Chambers' home address was "15021 Scenic Drive" according to the 1999 loan documents and the subsequent property tax statements relating to their homestead. The property tax records describe "15021 Scenic Drive" as a portion of Lots 25 and 26 of Scenic Acres Addition.

The Chambers did not keep up with the payments required by their home equity loan agreement. Their payments were sporadic. FMSB, however, did not seek to foreclose. The Chambers and FMSB entered into a modification, renewal and extension of the 1999 loan agreement in November 2000, wherein the Chambers acknowledged an outstanding balance in the amount of $266,428 secured by a lien on their homestead. The Chambers made their required mortgage payments for the next several months and then, once again, fell behind.

Beginning in 2003, the M & J Trust account was the only account the Chambers maintained at FMSB or any other bank. Mary Ann and Jimmy Chambers were the only...