- Arvest Bank v. Cook (In re Cook), Case No. 13-6014 (BAP 8th Cir., Jan. 9, 2014)
- The BAP did not disturb the finding of the bankruptcy court that the Arvest Bank judgment lien had priority over Empire Bank's judgment lien; the BAP held that the guaranty obligations owed to Empire Bank from certain real estate transactions were at least partially secured by the Empire Bank deed of trust prior to a settlement reached between Empire Bank and the debtors and, thus, the bankruptcy court's preference analysis regarding such settlement much change accordingly.
- Procedural context:
- Empire Bank appealed the judgment of the bankruptcy court declaring that Arvest Bank's judicial lien was superior to the liens asserted by Empire Bank and directing judgment in favor of the debtors on their preferential transfer claim against Empire Bank.
- The debtors were engaged in real estate development and condominium construction and owned various entities, including RWCK, LLC ("RWCK") and Table Rock Properties, LLC ("Table Rock"). Together with their entities, the debtors had lending relationships with both Empire Bank and Arvest Bank. The debtors owned real property in Taney County, Missouri, consisting of approximately 809 acres, and owned a smaller three acre parcel in the same county. In June 2007, the debtors and their entities, each executed and delivered a guaranty to Empire Bank, under the terms of which they guaranteed to Empire Bank the payment and performance of each and every debt and liability of every type and description which Table Rock may owe to Empire Bank. In August 2007 Table Rock executed a $315,000 promissory note in favor of Empire Bank, which note was secured by a deed of trust recorded in Greene County, Missouri. In November 2007, Table Rock executed a promissory note in favor of Empire Bank in the amount of $4.2 million, which note was also secured by a deed of trust recorded in the same county. Table Rock defaulted on the promissory notes and Empire Bank foreclosed on each of the deeds of trust. The litigation resulted in a confession of judgment executed by Table Rock, RWCK, and the debtors. Empire Bank filed the confession of judgment even though it had not yet been entered as a judgment signed by a judge. The Greene County Circuit Court subsequently accepted the confession and entered a signed judgment. Following Empire Bank's attempt to execute on the judgment, Empire Bank reached a settlement with the debtors under which the bank received an assignment of two promissory notes receivable from the debtors. in the meantime, Arvest Bank commenced a proceeding in Taney County, Missouri against the debtors and others, including RWCK, for liability on certain promissory notes and guaranty agreements. In December 2011, Arvest Bank obtained a judgment against the debtors, RWCK, and others for approximately $5.3 million. While the deed of trust expressly referred to a certain promissory note executed by RWCK, neither the original nor an executed copy of the note was offered as evidence. An unexecuted copy of the note and unexecuted copy of a line of credit agreement were received into evidence. In March 2012, Arvest Bank filed a petition for declaratory judgment against Empire Bank and the debtors, asserting that the Empire Bank deed of trust was not supported by valid consideration or any existing indebtedness and, therefore, is a nullity. Arvest Bank also asserted that its judgment lien was prior and superior to Empire Bank's judgment lien as against the property owned by the debtors in Taney County. In July 2012, the debtors filed their voluntary petition for relief under chapter 11 of the Bankruptcy Code. The debtors removed Arvest Bank's declaratory relief action to the bankruptcy court and asserted a cross-complaint against Empire Bank to set aside as a preferential transfer their pre-petition settlement with Empire Bank involving the transfer of the two promissory notes receivable. The debtors also sought a declaration that Empire Bank does not hold a valid deed of trust against their property in Taney County. Following trial and post-trial briefing, the bankruptcy court found (1) the Empire Bank deed of trust was not valid for lack of consdieration; (2) even assuming the deed of trust was supported by adequate consideration, it did not secure the obligations of the debtors pursuant to their guarantees signed in connection with the Table Rock transaction; (3) Empire Bank's recording of the confession of judgment prior to the actual entry of judgment by a court was a nullity; (4) Arvest Bank's judgment was filed prior to the filing of the signed confession of judgment and, accordingly, had priority over Empire Bank's judgment lien; and (5) the debtors' transfer to Empire Bank of their interest in the two promissory notes in exchange for Empire Bank's judgment was avoidable as a preferential transfer. Empire Bank first asserted that the bankruptcy court erred in holding that its deed of trust was invalid for lack of consideration. The court's reasons were (1) Empire Bank did not produce an executed copy of its line of credit note, and (2) the line of credit was never used, so there was never a balance due. The BAP held that under the unique circumstances of this case, Empire Bank was not required to produce an executed note, so its failure to do so did not mean the note was never executed or that it did not exist. The pleadings allege a lack of consideration but note allegations were based on the lack of any loan balance due to Empire Bank. The pleadings do not allege that the underlying note was never executed or did not exist. Further, at no time did anyone testify that the note did not exist or was not properly executed by RWCK. The testimony was that the deed of trust expressly referred to the note and further stated that it was for valuable consideration. There was no evidence to the contrary. In addition, the court observed that requiring a balance due on a line of credit before the deed of trust securing the line becomes valid would defeat the very essence of a secured line of credit. The promise to loan money under a line of credit is itself consideration, regardless of whether the line is ever used. Thus, the debtors failed to meet their burden and the bankruptcy court erred holding that the Empire Bank deed of trust was invalid for lack of consideration. Next, Empire Bank asserted that the bankruptcy court had erred in hold that, even assuming the deed of trust was supported by adequate consideration, it did not secure the obligations of the debtors pursuant to their guarantees. This argument maintains that the deed of trust defines "secured debt" to include all "future obligations of Grantor to Lender" and "all obligations Grantor owes to Lender, which now exist or mater later arise ..." The bankruptcy court had found a latent ambiguity when the language of the Empire Bank deed of trust was considered with the surrounding circumstances and determined that the guaranty obligations were not secured by the deed of trust. The BAP observed that while such "dragnet clauses" are not favored and strictly construed, Missouri courts will enforce a well drafted, property perfected dragnet clause. There seemed to be an agreement that the cross-collateralization clauses in the Empire Bank deed of trust were not patently ambiguous - the deed of trust clearly stated that is secures "all ... other future obligation of Grantor to Lender under any promissory note, contract, guaranty, or other evidence of debt existing now or executed after this Security Instrument whether or not this Security Instrument is specifically referenced" and "all obligations Grantor owes to Lender, which now exist or may later arise." The court noted that those clauses may be broad, but they are not patently ambiguous. Noting the rules of contract construction applicable to loan documents, the court observed that "a latent ambiguity exists when a writing on its face is unambiguous but surrounding circumstances make it capable of multiple interpretations." The BAP disagreed with Arvest Bank's and the debtors' argument that a latent ambiguity existed because the guaranty documents (upon which the Empire Bank judgment is based) state that they were "unsecured" and were not identified when the deed of trust was later signed. Certainly, the guarantee documents were unsecured when they were signed. It was only later that the deed of trust was signed and secured the guaranty obligations through the cross-collateralization clause. The deed of trust did not limit its security to only those obligations that expressly state they are secured by the deed of trust. In fact, the deed of trust stated just the opposite. The status of the guarantees as unsecured changed when the deed of trust was signed - extending its security to other debts such as the guarantees - but that change in the status of the guarantees is not an ambiguity in the Empire Bank deed of trust. In the event of a conflicting agreement between the same parties, the later agreement controls. The BAP further noted that although there is no specific reference to the guaranty obligations in the deed of trust, the clear purpose of the broad cross-collateralization clause is to cover all debt with that single security interest, without having to list each debt separately. It would defeat the clear purpose of the clause to declare the document ambiguous for failure to specifically identify the debt. Even if the debtors were not aware that the deed of trust might secure other obligations, that did not make the language in the deed of trust uncertain or subject to more than one meaning. Thus, the BAP agreed with Empire Bank that the language used in the deed of trust - "all obligations Grantaor owes to Lender, which now exist or may later arise" - is not subject to multiple interpretations or uncertain meaning and is not latently ambiguous. Finally, since the BAP had determined that the guaranty obligations owed to Empire Bank from the Table Rock transactions were at least partially secured by the Empire Bank deed of trust prior to the settlement between Empire Bank and the debtors, the bankruptcy court's preference analysis must change accordingly.
- Saldino, Nail, and Shodeen
3061 in the system
0 Being Processed