Arvest Bank v. Cook (In re Cook)

No. 13-6014 (B.A.P. 8th Cir. Jan. 9, 2014)
Reversing the order of the bankruptcy court (“BC”), the Bankruptcy Appellate Panel for the Eighth Circuit (“BAP”) held that a deed of trust was not void for lack of consideration and that a cross-collateralization clause in the deed secured previously unsecured guaranty obligations. First, the debtors failed to prove, by a preponderance of the evidence, that a deed of trust held by Empire Bank was invalid for lack of consideration. The deed of trust specifically stated that it was given for valuable consideration and to secure a note. The debtors neither denied the existence of the note nor contended that the note was improperly executed. Instead, the debtors argued that no consideration for the deed of trust was given because they never drew on the line of credit referenced in the document. The BAP held that the promise to loan money under a line of credit is itself consideration, regardless of whether the line is ever used. Second, the BAP held that the deed of trust secured certain guaranty agreements previously signed by the debtors. The deed of trust contained a cross-collateralization or a “dragnet” clause securing all present and future obligations of the debtors. Through the dragnet clause, the debtors unsecured guaranty agreements became secured. The change in status of the guaranties was not a latent ambiguity in the deed of trust. Therefore, the BC’s resort to extrinsic evidence and the intention of the parties was improper. Lastly, because the guaranty obligations owed to Empire Bank were at least partially secured by the deed to trust, the BAP remanded the case back to the BC to change a related preference determination.
Procedural context:
The bankruptcy court held, among other things, that: (1) Empire Bank’s deed of trust was not valid for lack of consideration; (2) even if the deed of trust was valid, it did not secure the debtors guaranty obligations because a latent ambiguity in the document existed; (3) Arvest Bank’s judgment lien had priority over Empire Bank’s judgment lien; and (4) the transfer of two promissory notes by the debtors in exchange for satisfaction of Empire Bank’s judgment was avoidable as a preferential transfer. Empire Bank appealed determinations one, two, and four.
The debtors guaranteed all obligations that Table Rock, an entity engaged in real estate development, might owe to Empire. Subsequently, Table Rock executed two promissory notes in favor of Empire which were separately secured by deeds of trust. When Table Rock defaulted on the notes, Empire foreclosed on the deeds. Empire then sued the debtor-guarantors for the deficiency, and the debtors executed a confession of judgment. Empire filed the confession of judgment in the county clerk’s office before it had been entered by the court. Eventually, the confession of judgment was entered, but not before Arvest obtained its own judgment against the debtors. In full satisfaction of its judgment, Empire reached a settlement with the debtors pursuant to which they assigned promissory notes receivable. Meanwhile, Arvest commenced a declaratory judgment action against Empire and the debtors asserting that one of its deeds of trust was void and further contending that its judgment lien was superior to Empire’s judgment lien. After filing a chapter 11 petition, the debtors removed the declaratory judgment action commenced by Arvest from state court to bankruptcy court. The debtors also filed a cross-complaint against Empire, seeking to set aside as a preferential transfer the assignment of the promissory notes receivable. Furthermore, they sought a declaration that a certain deed of trust held by Empire Bank was invalid.
Saladino, Nail and Shodeen, Bankruptcy Judges.

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