NCC Financial v. Investar Bank

Case Type:
Case Status:
21-30291 (5th Circuit, Apr 14,2022) Not Published
In a per curiam opinion, like the United States District Court for the Middle District of Louisiana (DC), the U.S. Court of Appeals for the Fifth Circuit (Circuit) affirmed the decision of the U.S. Bankruptcy Court for the Middle District of Louisiana (BC) to disallow a proof of claim (POC) filed in the bankruptcy case of W Resources L.L.C. (DR) by a creditor, NCC Financial L.L.C. (NCC), whose mortgage on certain DR properties, its POC's very basis, secured debts that the DR never ended up procuring regardless of the substantial debt that the DR's manager owed under a separate contract.
Procedural context:
NCC had waited. The DR, a Louisiana limited liability company, had filed its petition for chapter 11 bankruptcy on July 23, 2018 (the Petition Date). In December 2018, NCC, a counterparty to a prepetition mortgage contract with the DR (the Mortgage) for which the DR specifically owed no payment up to the Petition Date as well as a personal loan agreement (the Loan Agreement) and promissory note (the Note) with Michael Worley, the DR's sole member and manager, pursuant to which Michael Worley (Worley), identified as the "individual" borrower, borrowed $8 million, submitted the POC. For over $8 million, the POC was supported by the Mortgage, which was with the DR, and the Loan Agreement and Note, which were with Worley. The POC was challenged in the spring of 2019. Investar Bank, N.A. (Investar), which held a secured interest in the same DR-owned properties in and around East Baton Rouge Parish covered by the Mortgage (the Mortgaged Properties), initiated an adversary proceeding seeking a determination that its mortgages were entitled to first priority. Later, Investar, joined by the W Resources Liquidating Trust (the Trust) and Investar Bank, N.A. (Investar), sought summary judgment rejecting NCC's unsecured and secured claims. Essentially, because the DR never owed NCC anything, Investar argued, the Mortgage between the DR and NCC secured nothing, rendering it unenforceable as a matter of law. And because the Mortgage was invalid, Investar concluded, NCC had no claim against the DR. Accordingly, Investar and the Trust asked the BC to disallow the POC and declare NCC's mortgage on the DR's real property invalid and unenforceable. The BC agreed with Investar and the Trust, not only rejecting rejected NCC's efforts to introduce parol evidence to clarify or reform the mortgage but also finding it unenforceable for a lack of any underlying indebtedness. NCC timely appealed to the DC, which affirmed on state law grounds, and then the Circuit.
As is standard, the contracts were executed on the same day. In the fall of 2015, Worley executed the Loan Agreement and Note, both in favor of NCC, in return for $8 million. Notably, the DR was not a borrower or signatory under either document, and each agreement identifies the borrower, Worley, as "an individual." Separately, the DR had entered into an mortgage agreement with NCC to secure debt to NCC with a mortgage on properties owned by the DR. This mortgage identified the DR as the "Mortgagor," defined the term "indebtedness" to mean "all obligations and liabilities of Mortgagor," and purported to encumber the Mortgaged Properties, all legally owned by the DR alone; additionally, the DR was the sole signatory to the mortgage. Over the next three years, even as Worley's full debt remained unpaid, the DR itself never incurred any debt to NCC under this mortgage accord. When the DR-but not Worley--turned to chapter 11 for relief, NCC filed the POC, its claim, though technically predicated on a debt owed by Worley as an "individual" under the Loan Agreement and Note, bootstrapped to the Mortgage in the DR's bankruptcy.
Edith H. Jones; Stephen A. Higginson; and Kyle S. Duncan

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