McIntyre Land Co. v. Branch Banking & Trust Co. (In re McIntyre Bldg. Co.)

In re McINTYRE BUILDING COMPANY, INC., Debtor.McINTYRE LAND COMPANY, INC., and SERVISFIRST BANK, Plaintiffs,

v.BRANCH BANKING AND TRUST COMPANY and SUSAN S. DePAOLA, TRUSTEE, Defendants.

Case No. 10-30558-WRS

Adv. Pro. No. 10-3029

UNITED STATES BANKRUPTCY COURT MIDDLE DISTRICT OF ALABAMA

Done this May 30, 2012

PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW

These proposed Findings of Fact and Conclusions of Law are made by the undersigned Bankruptcy Judge pursuant to 28 U.S.C. § 157(c)(1). This Adversary Proceeding came before the Bankruptcy Court for trial on January 26, 2012. At the conclusion of the trial, the Court requested briefs, which have been filed, (Docs. 142, 143, 145, 146, 147). On April 23, 2012, further proceedings were held and the Court offered the parties an opportunity to file additional briefs. (Doc. 149, 152, 153). The issues here are framed in two pleadings: (1) the Amended Complaint of McIntyre Land (Doc. 100); and (2) the Answer, Counterclaim, and Crossclaim of BB&T (Doc. 34). For the reasons set forth below, the undersigned recommends that the District Court: (1) dismiss the claims of Plaintiff McIntyre Land, with prejudice; and (2) enter judgment in favor of Defendant BB&T, declaring that it has a valid mortgage on the Prattville Square Shopping Center pursuant to its mortgage dated February 27, 2006.

I. FINDINGS OF FACT

Discussion of the facts is divided into four parts. Part A identifies the key players, the relevant parcels of real property, and their relationships to one another. Part B describes the loan agreement and mortgage made February 27, 2006, involving Colonial Bank, McIntyre Building, and McIntyre Land. Part C describes the events surrounding the purported "collateral swap." Part D considers McIntyre Land's claims of fraud, misrepresentation, and inequitable conduct.

A. The Key Players and Properties

The central character in this cast of players is a man named Innes McIntyre, who is not a party to this Adversary Proceeding. For simplicity sake he will be referred to as Innes. He was in the home building business for many years and then advanced to real estate development. Innes was the sole owner of McIntyre Building Co., Inc. ("Building"). Innes is married to Mitzi McIntyre, who owns all of the stock in McIntyre Land Co., Inc. ("Land").¹ Thus, Innes owns 100% of Building and Mitzi owns 100% of Land.

Building filed a petition in bankruptcy pursuant to Chapter 11 of the Bankruptcy Code on March 6, 2010, initiating Case No. 10-30558. Two days later, on March 8, 2010, Innes filed a petition in bankruptcy of his own, also pursuant to Chapter 11, initiating Case No. 10-30570. OnSeptember 20, 2010, both cases were voluntarily converted to cases under Chapter 7.² Shortly thereafter, Susan S. DePaola was appointed as Chapter 7 trustee in both cases; however, Daniel G. Hamm was later substituted as trustee in Innes's Chapter 7 case, leaving DePaola as trustee only in Building's case. To summarize, Innes and Building are in insolvent and in bankruptcy, while Land and Mitzi are solvent and are not in bankruptcy.

To further complicate matters, Innes and Building were not the only parties to go broke. Colonial Bank became insolvent in 2009 and was taken over by the Federal Deposit Insurance Corporation ("FDIC"), which acquired the loan owed by Building and then transferred it to Defendant Branch Banking and Trust Company ("BB&T"). (Pl. Ex. 26). Thus, BB&T is the successor in interest to Colonial Bank with respect to the loan to Building. ServisFirst Bank lent money to Land under a separate agreement, which was secured by a mortgage on the Prattville Square Shopping Center. (Case No. 10-3084, Docs. 3, 4).³ ServisFirst and BB&T each contend that they have a first mortgage on the Prattville Square Shopping Center.⁴

In addition to the players, there are three separate parcels of real property involved in these proceedings. First, there is a 90 acre parcel in Fairhope, which was purchased by Building with the proceeds of the $3.1 million loan at issue and which was to be developed into residential housing. Second, there is the Prattville Square Shopping Center, that consists of an existing shopping center in Prattville, Alabama and is owned by Land. Third, there is a 165 acre parcel of unimproved land in Autauga County, Alabama, outside of Prattville previously owned by Building. In short, Building owned the 90 acres in Fairhope and 165 acres in Prattville and Land owns the Prattville Square Shopping Center.

B. The February 27, 2006 Mortgage

In February 2006 Innes, acting through his corporation Building, purchased 90 acres of undeveloped land in Fairhope, Alabama. Innes' intended to build residences on the property. On February 27, 2006, a Construction Loan Agreement in the amount of $3,105,000 was entered into between Colonial Bank and Building. (Pl. Ex. 7). Also on February 27, 2006, a mortgage was executed in favor of Colonial Bank by both Building and Land to secure the Construction Loan. (Pl. Ex. 3). The mortgage encumbered two parcels of land. The first was the 90 acres in Fairhope owned by Building and the second parcel was the Prattville Square Shopping Center. A single mortgage was executed by Innes, acting as President for both Building and Land. (Pl. Ex. 3).

Bill Renfroe, the Colonial Loan Officer who had primary responsibility for the loan, and his supervisor, Robert Hertenstein, gave testimony explaining the various loans to Building. They explained that federal regulations require a specified loan to value ratio on loans such asthis. For example, if the regulations permit a bank to lend 85% of the value of the project, the borrower must either make a down payment of 15% of the loan or it must pledge additional collateral to meet the ratio. The value of the 90 acre parcel in Fairhope was not sufficient by itself to satisfy the condition; so, Innes and Mitzi decided to secure the loan with a second mortgage on the Prattville Square Shopping Center, which was owned by Land and not by Building. In other words, Building borrowed $3.1 million from Colonial, using both the 90 acres in Fairhope as well as the Colonial Square Shopping Center in Prattville to secure the loan and thereby satisfy the regulation. Land did not benefit directly from the $3.1 million loan, rather the mortgage was an accommodation made by Land for the benefit of Building.

C. The Collateral Swap

In the latter part of 2006 Innes contacted Renfroe and asked if the mortgage on Prattville Square could be released and in its stead substitute a 165 acre parcel of unimproved land in Autauga County, Alabama owned by Building. The purpose of this collateral swap was to free Prattville Square, owned by Land, from the mortgage securing the debt owed by Building. In response, Renfroe wrote Innes a letter dated December 22, 2006, as follows:

Dear Innes:

This is to advise that Colonial Bank (Colonial) has agreed to release the Prattville Square Shopping Center as collateral on the referenced loan and replace it with 140 acres of land in Prattville. This is subject to a new appraisal being ordered to confirm that the proper loan to value on the property will be maintained. By signing this letter you agree to pay for the appraisal on the 140 acres.

Sincerely,

/s/ Bill R. Renfroe

Vice President

BY: _________________

Innes McIntyre Date

The full text of the December 22, 2006 letter is set out above and a copy was admitted into evidence as Plaintiff's Exhibit 4. While the letter refers to a 140 acre parcel in Prattville, it was clear from the evidence that the letter meant the 165 acre parcel of unencumbered and unimproved land in Autauga County, outside the Prattville city limits, that was owned by Building. Building did not own any other acreage in Autauga County. The letter was signed by Renfroe and was on Colonial Bank stationary. There was a signature block for Innes McIntyre, but the evidence offered at trial established that Innes did not sign the letter.

Renfroe testified that an appraisal was done and that he determined that the 165 acre parcel was of sufficient value to maintain the necessary loan to value ratio. (Pl. Ex. 29). Renfroe, Hertenstein, and Innes all testified that they intended to proceed with the collateral swap as outlined in Renfroe's December 22, 2006 letter to Innes. The evidence was both clear andundisputed that no mortgage was ever prepared, executed, or recorded on the 165 acre parcel; nor was a release of the mortgage on Prattville Square ever made.⁵

The Court heard several hours of testimony and a wealth of documents were offered concerning what happened subsequent to December 22, 2006. Land offered a "Colonial Bank Montgomery Region Loan Committee Memorandum" authored by Renfroe and dated February 5, 2007. (Pl. Ex. 5). The five-page memorandum details the status of the outstanding loans to Building. Land noted a passage in the memorandum concerning the collateral swap, which provides as follows: "The loan was previously secured by a 1st REM [real estate mortgage] on the Prattville Square Shopping Center, however that collateral has since been released with the 165 acres in Prattville taking its place and relieving the previous Regulation H violation." (Pl. Ex. 5). This passage indicates that Colonial was under the impression that the collateral swap proposed in Renfroe's December 22, 2006 letter had in fact been accomplished. This memorandum was prepared in connection with a 90-day extension of the $3.1 million loan agreement, which had come due.

Renfroe wrote Innes on May 24, 2007 in connection with the again expiring loan agreement. (Pl. Ex. 8). Land noted another passage in May 24 letter that again makes reference to the collateral swap. (Pl. Ex. 8, p. 2). On December 30, 2008, Innes and Colonial entered into a "Credit Agreement" consolidating several outstanding loans. (Pl. Ex. 18). Paragraph 1.14(7) provides property descriptions which again suggest that Colonial was under the impression...