Anderson v. The Harbor Bank of Maryland
Filing
24
MEMORANDUM OPINION. Signed by Judge Theodore D. Chuang on 3/15/2019. (heps, Deputy Clerk)
UNITED STATES DISTRICT COURT
DISTRICT OF MARYLAND
INRE:
CLAUD ANDERSON
CLAUD ANDERSON,
Appellant,
Civil Action No. TDC-18-0977
v.
THE HARBOR BANK OF MARYLAND,
Appellee.
MEMORANDUM OPINION
Appellant Claud Anderson has appealed an Order of the United States Bankruptcy Court
for the District of Maryland ("the bankruptcy court") finding his debt to Appellee The Harbor
Bank of Maryland ("Harbor Bank") nondischargeable
in bankruptcy pursuant to 11 U.S.C.
S
523(a)(6). The Appeal is fully briefed and ripe for disposition. No hearing is necessary to resolve
the issues. See D. Md. Local R. 105.6. For the reasons set forth below, the bankruptcy court's
dischargeability determination is AFFIRMED.
BACKGROUND
I.
The 2008 Agreements
In 2006, Waterland
incorporated in Michigan.
Fisheries,
Inc. ("Waterland"),
a commercial
fish farm, was
Waterland was dissolved in 2016. At all times during that 10-year
period, Claud Anderson ("Anderson") was Waterland's President and Chairman of the Board of
Directors. In April 2007, Waterland purchased property located at 299 Nealson Street in Hurlock,
Maryland ("the Property").
In June 2008, Harbor Bank extended a $750,000 commercial
construction loan to Waterland. As security for that transaction, Waterland granted Harbor Bank
a lien on the Property, memorialized in a Deed of Trust ("Harbor Bank Deed"), the scope of which
included the land and the improvements to land. The Harbor Bank Deed required the maintenance
of an insurance policy on the Property and provided that any insurance proceeds must be paid
directly to Harbor Bank. The Harbor Bank Deed was recorded in the relevant county land records
in July 2008.
As part of the 2008 loan, Waterland also entered into a Security Agreement with Harbor
Bank (the "Harbor Bank Security Agreement") in which it gave Harbor Bank a secured interest in
certain business property ("the Collateral"), including Waterland's deposit accounts, and in the
"Proceeds and Products," defined as "the proceeds, including but not limited to insurance
proceeds, and all the products of' the Collateral.
The Harbor Bank Security Agreement also
required that Harbor Bank's security interest take priority over any other security interest, with the
exception of any prior security interest held by Harbor Bank through another loan. Also as part of
the loan transaction, Claud Anderson executed a Guaranty Agreement in which he personally
guaranteed the Harbor Bank loan through a lien on his personal property.
Harbor Bank's secured interest in the business property was memorialized in a V niform
Commercial Code ("VCC") Financing Statement ("Harbor Bank Financing Statement"), which
was recorded in the county land records in July 2008. In January 2009, a copy of the Financing
Statement bearing the land records recordation stamp was filed with the Michigan Secretary of
State.
Because the Property was encumbered by additional loans beyond the Harbor Bank loan,
a Subordination and Intercreditor Agreement ("Intercreditor Agreement") was also recorded at the
2
same time that the Harbor Bank Deed was recorded. The Intercreditor Agreement subordinated
other non-Harbor Bank outstanding loans on the Property to Harbor Bank's interest.
The
Intercreditor Agreement was signed by Claud Anderson on behalf of Waterland, by Harbor Bank,
and by a number ofWaterland's
other secured creditors.
Also in 2008, Waterland obtained a casualty, commercial liability, and property damage
insurance policy ("the Policy"), policy number S1586046, from Selective Insurance Company of
America ("Selective") for the Property. In February 2010, a storm caused damage to the Property.
Waterland submitted a claim for that damage under the Policy in May 2010, but the claim was
denied. In December 2012, the Property was again damaged by weather, and Waterland again
submitted a claim under the Policy-Claim
II.
21274371-which
was also denied.
The Joann Anderson Loan
In January 2013, Joann Anderson, Claud Anderson's wife, loaned $510,000 to Waterland.
Joann Anderson
was Waterland's
Secretary and Treasurer,
and she performed
voluntary
administrative duties for Waterland, such as paying Waterland's bills and making deposits into
bank accounts.
Pursuant to the loan, Waterland and Joann Anderson entered into a Security
Agreement (the "Anderson Security Agreement"), executed on January 16, 2013, that granted
Joann Anderson "a continuing security interest in, and lien upon, all of Debtor's right, title and
interest in, to, and arising under the Collateral," which was defined as all ofWaterland's
"personal
property and fixtures, tangible and intangible, real, personal and mixed, whether now in existence
or whether acquired or created at any time hereafter," including Waterland's "deposit accounts."
Anderson Security Agreement,-r,-r 1-2, ECF No. 15-2. On January 30, 2013, Joann Anderson filed
a DCC Financing Statement with the Michigan Secretary of State which defined the collateral in
3
which she had a secured interest in the same terms as the collateral described in the Anderson
Security Agreement.
At no point did Waterland request Harbor Bank's consent for, or did Harbor Bank give its
consent to, Joann Anderson's lien against Waterland's assets, and Harbor Bank did not learn of
Joann Anderson's
lien until late Mayor
early June 2015.
According to Harbor Bank, Joann
Anderson's lien constituted a default on the Harbor Bank loan.
In February 2013, Joann Anderson corresponded with Stanley Arnold, a commercial loan
officer with Harbor Bank, about consolidating the several loans Waterland had with Harbor Bank.
In a February 4,2013 email to Arnold with the subject line, "Waterland Non-Bank Loans," Joann
Anderson listed for Arnold Waterland's
outstanding non-Harbor Bank loans subordinated to
Harbor Banks interests, but did not reference her $510,000 loan, made the previous month. At
trial in the bankruptcy court, Joann Anderson provided no explanation for why she neglected to
include her $510,000 loan in the list of Waterland's non-bank loans that she emailed to Arnold,
but instead generally asserted that Harbor Bank was aware of her security interest.
III.
The 2013 Agreements
On July 25, 2013, Waterland consolidated its Harbor Bank loans into a single loan in the
amount of $1,049,365.45.
The consolidated promissory note incorporated
all of the 2008
agreements between Waterland and Harbor Bank. As part of the consolidation, Waterland signed
a Consolidated, Amended and Restated Deed of Trust, Assignment of Rents and Leases, and
Security Agreement ("the Amended Harbor Bank Deed"), which reaffirmed Harbor Bank's
previously recorded security interests in the Property and consolidated them into a single lien. The
Amended Harbor Bank Deed expressly provided that the lien extended to "[a]ll payments,
proceeds, settlements of other compensation heretofore or hereafter made, including any interest
4
thereon, and the right to receive the same from any and all insurance policies covering the Land or
the Improvements now or hereafter erected thereon."
Amended Harbor Bank Deed at 6,
S (k),
Trial Ex. 8. The Amended Harbor Bank Deed was recorded in the county land records in August
2013.
Waterland then entered into a Consolidated, Amended and Restated Security Agreement
("Amended Harbor Bank Security Agreement"), which continued Harbor Bank's security interest
in, among other things, "all cash and non-cash proceeds" from any insurance claim made in
relation to Waterland's Collateral. Amended Harbor Bank Security Agreement,-r 2, Trial Ex. 10.
Elsewhere in the Amended Harbor Bank Security Agreement, Waterland expressly assigned to
Harbor Bank the proceeds of any such insurance claim and "directs any insurer to make payments
directly to [Harbor Bank]." Id. ,-r3(G).
The Amended Harbor Bank Security Agreement again
defined the scope of the Collateral in which Harbor Bank had an interest to include, in relevant
part, all ofWaterland's
deposit accounts.
As part of the consolidation, Claud Anderson entered into a Consolidated, Amended and
Restated Guaranty ("Amended Harbor Bank Guaranty") in which he unconditionally affirmed his
obligations under all of the previous loan documents, including those entered into in June 2008.
On July 26,2013, Waterland obtained a $350,000 loan from the Maryland Small Business
Development Financing Authority ("MSBDF A") through the Maryland Department of Commerce
("the MSBDFA
loan").
Because of Waterland's
financial condition,
MSBDFA
required
Waterland to execute an Assignment of Insurance Proceeds ("Insurance Assignment")
as a
necessary condition of the loan. The Insurance Assignment assigned to MSBDF A "any and all
insurance proceeds ... that may be payable to the Borrower under insurance policy number
S1586046 ... issued by Selective Insurance Company ... , and resulting from the prior loss of or
5
damage to the inventory, building and equipment"
of Waterland located at the Property.
Assignment Ins. Proceeds ~ B, Appellant Brief Ex. C, ECF No. 15-3.
MSBDFA was aware of Joann Anderson's loan to Waterland, as evidenced by a July 26,
2013 Subordination
and Intercreditor Agreement ("Anderson
Subordination
Agreement")
in
which Joann Anderson agreed to subordinate all of her security interests in Waterland's collateral
to MSBDF A. In particular, the Anderson Subordination Agreement required that "so long as any
of' MSBDFA's
security interests in Waterland were entitled to priority over those of Joann
Anderson, Joann Anderson agreed not to take any action "to foreclose or enforce any liens on or
security interests in" Waterland's assets without MSBDFA's prior written consent.
Anderson
Subordination Agreement ~ 4, Appellant Brief Ex. E, ECF No. 15-5. Because of Waterland's
financial circumstances, the Anderson Subordination Agreement was a condition of the MSBDF A
loan.
Also on July 26, 2013, Waterland executed an Amended and Restated Subordination and
Intercreditor Agreement ("Amended Intercreditor Agreement"), which gave Harbor Bank's lien
priority over three other liens, including the MSBDF A lien pursuant to the MSBDF A loan, as to
Waterland's
real property and as to liens on insurance proceeds under claim 21274371.
Specifically, the Amended Intercreditor Agreement gave unqualified first priority to Harbor Bank
as to all of Waterland's
real property and gave Harbor Bank third priority as to Waterland's
personal property with the notable exception of "the Insurance Proceeds, with respect to which its
lien and security interest shall have a first priority." Am. Intercreditor Agreement ~ 4, Trial. Ex.
14. The Amended Intercreditor Agreement makes no mention of Joann Anderson's loan.
6
Prior to closing on the July 2013 loan, Arnold checked to see what UCC financing
statements were on file for Waterland. In that process, he did not discover Joann Anderson's UCC
financing statement.
On August 1,2013, Waterland opened a business checking account with United Bank ("the
United Bank account").
Claud Anderson and Joann Anderson were each listed as authorized
signatories on the account.
The account agreement did not list Joann Anderson as a Waterland
secured creditor, and Joann Anderson did not have a bank account control agreement for the United
Bank account.
IV.
The Selective Suit
In February 2014, Waterland filed suit against Selective ("the Selective Suit") in the United
States District Court for the District of Maryland for the denied 2010 and 2012 insurance claims.
See Waterland Fisheries, Inc. v. Selective Ins. Co. of Am., No. 14-cv-0585-RDB (D. Md. 2014).
The parties agreed to mediate the matter. In May 2014, United States Magistrate Judge Jillyn K.
Schulze issued an Order scheduling mediation in August 2014.
"settlement
conference
process will be confidential
resolution communications is prohibited."
That Order stated that the
and disclosure of confidential
dispute
Order at 2, Waterland, No. 14-cv-0585 (D. Md. May
13,2014) (ECF No. 10). Although scheduled for mediation with Magistrate Judge Schulze, the
parties ultimately opted to pursue private mediation, which occurred before a retired Maryland
state court judge on July 18,2014.
In the meantime, prior to the mediation, Claud Anderson was providing updates to Stanley
Arnold at Harbor Bank approximately every other month in which he gave assurances that
Waterland would use the proceeds from the Selective Suit to payoff
the Harbor Bank loan.
Specifically, in June 2014, Claud Anderson sent a memorandum to Harbor Bank and other
7
creditors apprising them that the Selective Suit was scheduled for mediation, that Waterland was
claiming $3 million in damages, and that he hoped a settlement would be large enough to pay back
all of Waterland's secured creditors.
The memorandum made no mention of Joann Anderson's
loan. On July 3, 2014, less than two weeks before the mediation, Claud Anderson emailed two
Harbor Bank representatives, including Arnold, informing them of the scheduled mediation and
stating that "[w]e have every reason to believe that [Waterland] will receive sufficient funds from
Selective to payoff our secured creditors. We are still requesting forbearance from Harbor through
this scheduled mediation."
C. Anderson 7/3/14 Email, Trial Ex. 21. Again, the email made no
mention of Joann Anderson's secured interest in Waterland.
The July 18,2014 mediation, which both Claud and Joann Anderson attended, resulted in
a settlement under which Selective agreed to pay Waterland a total of $800,000 for the 2010 and
2012 claims. The settlement agreement was entered into by the parties on July 25,2014.
On July 30, 2014, Arnold emailed Claud Anderson asking him for an update on the
Selective Suit. Claud Anderson did not mention the settlement and instead responded, "We are
currently discussing the selling of the business to a couple of potential buyers."
In emails dated
August 5, 2014 and August 12,2014 to Arnold, Claud Anderson continued to reference efforts to
sell the business. In the August 12 email, he assured Arnold that by the end of the following week,
he would present Harbor with a plan to pay Waterland's debts. In none of these communications
did Claud Anderson mention the Selective Suit settlement. In the bankruptcy proceedings, Claud
Anderson testified that he believed that he was forbidden by Magistrate Judge Schulze's May 2014
Order from disclosing to any of his creditors that a settlement had been reached or disclosing the
terms of that settlement.
8
v.
The Insurance Proceeds
Selective's check for $800,000 was issued on July 29, 2014 and mailed to Waterland's
attorneys in the Selective Suit, Kramon & Graham, P.A. ("Kramon & Graham"). That same day,
Joann Anderson emailed Kramon & Graham and asked them to wire the funds to the United Bank
account and to inform her as soon as the money had been wired.
On August 11, 2014, Claud
Anderson signed a Kramon & Graham Settlement Memorandum ("Settlement Memorandum"),
which stated that $332,884.20 had been deducted from the settlement for attorney's fees and
expenses.
The Settlement Memorandum also stated that the remaining $467,115.80 would be
wired to Waterland's United Bank account, "per client's instructions." Settlement Mem., ECF No.
15-6. When he signed the Settlement Memorandum, Claud Anderson was aware that the funds
were being sent to the United Bank account, not to any of Waterland' s secured creditors.
His
concern at that point was "get[ting] the monies into the Waterland accounts," and Waterland's
obligations to Harbor Bank were "secondary."
3/20/17 Trial Tr. at 86 (Claud Anderson
Testimony), ECF No. 4-5. The wire transfer of $459,615.80 to the United Bank account was
executed on August 15,2014.
Having been in attendance at the settlement conference, Joann Anderson was aware that
the Selective Suit settlement was not going to yield enough funds to cover all ofWaterland's
bills,
and she discussed that fact with Claud Anderson. On August 15,2014, she wrote and signed on
behalf of Waterland a United Bank account check payable to herself in the amount of $439,000
("the Anderson Transfer"). The memo for the check states, "Repay Secured loan; ba1 owed
$71,000." Anderson Transfer Check, Trial Ex. 31. At that time, Waterland was not in default on
its payments to her, and she had not made a demand for payment. According to Joann Anderson,
she believed that as the only secured creditor with access to and control of the United Bank
9
account, she had a priority security interest in the proceeds of the Selective Suit settlement and
was therefore entitled to receive immediate and full payment of her outstanding loan balance. She
also claimed that her control over the United Bank account rendered her interest in that account
exempt from the Anderson Subordination Agreement. Joann Anderson reached these conclusions
based on advice from corporate restructuring consultants hired by Claud Anderson on behalf of
Waterland.
She testified that although she did not consult Claud Anderson about the Anderson
Transfer, she informed him of it either just before or just after she effected it.
Around August 22, 2014, Claud Anderson met with Arnold to discuss the Harbor Bank
loan.
During that meeting, he again did not inform Arnold of the Selective Suit settlement.
Waterland did not inform Harbor Bank of the settlement until December 2014 and even then did
not provide any information about the settlement terms. Harbor Bank learned of the terms of the
settlement only after subpoenaing records from Selective in January 2015. At no point during this
time was Harbor Bank aware that the settlement proceeds had been transferred to Joann Anderson.
In a June 19,2015 letter, Waterland informed its creditors, including both Harbor Bank
and Joann Anderson, that it was surrendering to its creditors all of the collateral securing its various
loans, on the condition that the collateral was disposed of in a commercially reasonable fashion.
In detailing the collateral available for disposition, the letter reiterated the priority of interests
codified in the Amended Intercreditor Agreement but stated that only Joann Anderson had a
security interest in the United Bank account, into which the Selective Suit proceeds had been
deposited.
In support of this assertion, the letter appears to offer a quotation from an uncited
authority stating that under various provisions of the Uniform Commercial Code, a UCC financing
statement does not perfect a security interest in a deposit account, that such a security interest can
be perfected only by control, and that "a secured party has control of a deposit account if ... the
10
secured party is the bank with which the deposit account is maintained."
C. Anderson Letter at 3,
Trial Ex. 26.
Asserting that the United Bank account was not controlled by any creditor other than Joann
Anderson, and that Joann Anderson had "exercised her possessory lien as senior secured creditor"
as to the account, Claud Anderson informed the creditors that Joann Anderson had "seized all
insurance action proceeds," which amounted to about half of the $800,000 settlement. Id. at 4. It
was through this letter that Harbor Bank first learned that Joann Anderson had seized all of the
insurance proceeds.
The letter further stated that Joann Anderson had advanced Waterland $150,000 of those
proceeds to help it sustain its operations.
In the bankruptcy action, neither Claud Anderson nor
Joann Anderson were able to produce bank records substantiating this $150,000 loan.
VI.
The Bankruptcy Proceedings
The following week, on June 22, 2015, Claud Anderson filed a Chapter 7 bankruptcy
petition. In re Anderson, No. 15-18781 (Bankr. Md. 2015). He listed Waterland's Harbor Bank
loan on his Petition as an unsecured nonpriority claim in the amount of $1 ,050,000. Pet. at 16, In
re Anderson, No. 15-18781 (Dkt. No.1).
On January 2, 2016, Harbor Bank filed an adversary proceeding stemming from Claud
Anderson's bankruptcy petition. Harbor Bank of Maryland v. Anderson, No. 16-00002 (Bankr.
Md. 2016). That proceeding was later consolidated with an adversary proceeding filed by other
Waterland creditors.
See Consolidation Order, State of Maryland. v. Anderson, No. 15-00685
(Dkt. No. 24). In January 2017, Harbor Bank amended its Complaint. The Amended Complaint
states four causes of action, each asserting a different theory under which Anderson could not
discharge the Waterland debt to Harbor Bank in bankruptcy.
11
The first was an objection to
discharge pursuant to 11 U.S.C.
S 727(a)(2)(A),
which provides that a debt shall not be discharged
in bankruptcy if the debtor, "with intent to hinder, delay, or defraud a creditor ... has transferred,
removed, destroyed, mutilated, or concealed, or has permitted to be transferred,
removed,
destroyed, mutilated, or concealed property of the debtor, within one year before the date of the
filing of the petition."
The second was an objection pursuant to 11 U.S.C.
S
523(a)( 4), which
provides that bankruptcy does not discharge a debt incurred as the result of "fraud or defalcation
while acting in a fiduciary capacity, embezzlement, or larceny." The third was a claim pursuant
to 11 U.S.C.
S 523(a)(6),
which provides that bankruptcy does not discharge a debt incurred as the
result of "willful and malicious injury by the debtor to another entity or to the property of another
entity." Lastly, the fourth claim invoked 11 U.S.C.
S 523(a)(2)(A),
which provides that bankruptcy
does not discharge a debt incurred when the "money, property, services, or an extension, renewal,
or refinancing of credit" is obtained by "false pretenses, a false representation, or actual fraud,
other than a statement respecting the debtor's or an insider's financial condition."
The consolidated adversarial proceedings went to trial before the bankruptcy court in
March 2017. In March 2018, the bankruptcy court issued an Opinion and Order finding Claud
Anderson's debt to Harbor Bank nondischargeable under
S
523(a)(6) and entered judgment for
Harbor Bank on that claim. See Order, State of Maryland v. Anderson, No. 15-00685 (Dkt. No.
189). The bankruptcy court entered judgment in favor of Anderson on Harbor Bank's three other
causes of action.
In assessing Harbor Bank's
S
523(a)(6) claim, the bankruptcy court first defined the
statute's "willful and malicious injury" requirement.
The bankruptcy court noted that under
Kawaauhau v. Geiger, 523 U.S. 57 (2014), nondischargeability
under
S
523(a)(6) requires "a
deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury." Id
12
at 61. Accordingly, it concluded that an injury is willful and malicious for purposes of
S 523(a)(6)
when "the debtor acted with 'substantial certainty that harm would result or a subjective motive to
cause harm.'" In re Parks, 91 F. App'x 817, 819 (4th Cir. 2003) (unpublished) (quoting In re
Miller, 156 F.3d 598, 604 (5th Cir. 1998)).
Because the Geiger framework
sounds
III
tort, the bankruptcy
court examined its
applicability when the alleged injury was a breach of contract and concluded that the breach must
be accompanied by "some conduct that is legally wrong or tort[i]ous" in order to support a
S
523(a)(6) claim. Bankr. Mem. Gp. at 37 (citing Webb v. Isaacson (In re Isaacson), 478 B.R. 763,
781 (Bankr. E.D. Va. 2012)).
The bankruptcy court noted that other courts have found that
deliberately and intentionally refusing to tum over funds that the debtor had specifically agreed to
earmark for payment of a particular debt amounted to independently wrong or tortious conduct"
so as to satisfy
S 523(a)(6)'s
"willful and malicious injury" requirement. Id. at 38. See, e.g., Alessi
v. Alessi (In re Alessi), 405 B.R. 65, 68 (Bankr. W.D.N.Y. 2009).
With this legal framework, the bankruptcy court turned to the facts of the case.
The
bankruptcy court found first that Harbor Bank had been injured by the Anderson Transfer because
it, not Joann Anderson, had a priority security interest in the Selective Suit proceeds.
In so
concluding, the bankruptcy court rejected Claud Anderson's claim that Joann Anderson's control
of the United Bank account made her a first priority secured creditor for purposes ofthe Selective
Suit settlement funds. Bankr. Mem. Gp. at 39.
The bankruptcy court found that where Joann
Anderson had no deposit account control agreement with Waterland as to the United Bank account,
her access to that account was only in her capacity as Waterland's Secretary and Treasurer, not as
a secured creditor. It also ruled that Joann Anderson, in her capacity as a secured creditor, had no
13
claim to priority by virtue of the Anderson Subordination Agreement, which subordinated all of
her interests in Waterland to MSBDF A.
Instead, the bankruptcy court found that Harbor Bank had a first-priority claim to the
Selective Suit insurance proceeds by virtue of the Insurance Assignment, which expressly assigned
Waterland's interest in the Selective Suit proceeds to MSBDFA, and the Amended Intercreditor
Agreement, which then gave Harbor Bank a first-priority interest in those insurance proceeds. The
bankruptcy court further concluded that the insurance proceeds had not been converted into
another form of capital, and thereby no longer governed by the Insurance Assignment and
Amended Intercreditor Agreement, simply by being deposited in the United Bank account. The
bankruptcy court thus found that Harbor Bank, as the first-priority interest holder in the Selective
Suit proceeds, had been injured by the Anderson Transfer.
As for whether the injury was willful and malicious, the bankruptcy court found that the
preponderance of the evidence established that Claud Anderson's intent was to put the Selective
Suit proceeds "outside of Harbor Bank's reach in order to give Joann Anderson access to the
funds." Bankr. Mem. Op. at 40. In reaching this conclusion, the bankruptcy court relied on Claud
Anderson's testimony that in signing the Settlement Memorandum, he instructed his attorneys to
transfer the settlement proceeds to Waterland's United Bank account, not Harbor Bank, because
his goal was to get the money to Waterland, and he considered Harbor Bank's right to the money
to be secondary.
The bankruptcy court found that Claud Anderson knew that Joann Anderson
claimed a superior interest to the funds in that account based on the advice of restructuring experts
and rejected the testimony that Joann Anderson made the Anderson Transfer without consulting
Claud Anderson, because the court did "not believe that the Defendant and Joann Anderson, who
have been married for more than 50 years and worked together at Waterland at the time, did not
14
discuss Joann Anderson's intentions to take the Insurance Proceeds."
Id. The bankruptcy court
further noted that at the very latest, Claud Anderson learned from Joann Anderson of the Anderson
Transfer soon after she had effected it, and yet he took no action to undo the transfer. Instead, he
actively concealed it. Although Claud Anderson communicated with Stanley Arnold of Harbor
Bank both before and after the Anderson Transfer, at neither point did he tell Arnold that the
Selective Suit had settled.
The bankruptcy court rejected as "stretch[ing]
credulity" Claud
Anderson's explanation of his silence as required by settlement confidentiality requirements.
Id.
at 41. Based on these factual findings, the bankruptcy court concluded that Claud Anderson
willfully and maliciously caused injury to Harbor Bank by depriving it of the insurance proceeds.
Accordingly, the bankruptcy court concluded that Claud Anderson's debt to Harbor Bank
as guarantor for Waterland was not dischargeable in bankruptcy because it was the result of
"willful and malicious injury by the debtor to another entity or to the property of another entity."
11 U.S.C.
S 523(a)(6).
Anderson has now appealed that determination to this Court.
DISCUSSION
On appeal, Anderson argues that the bankruptcy court erred in finding that he willfully and
maliciously caused injury to Harbor Bank because once the Selective Suit proceeds were deposited
into the United Bank account, Harbor Bank lost any secured interest in them, and Joann Anderson
became the first-priority lien holder over those proceeds due to her control over the United Bank
account. Anderson also argues that the bankruptcy court erred in determining that any injury to
Harbor Bank was willful and malicious, and that Harbor Bank's claims are barred by the doctrine
of res judicata.
15
I.
Standard of Review
The Court has jurisdiction over the Appeal because the bankruptcy court's order resolving
Anderson's Motion to Dismiss and finding the Waterland debt to Harbor Bank nondischargeable
is a final order. 28 U.S.C.
S 158(a)(I)
(2012); see Gold v. Guberman (In re Computer Learning
Ctrs., Inc.), 407 F.3d 656, 660 (4th Cir. 2005) (stating that "orders in bankruptcy cases may be
immediately appealed if they finally dispose of discrete disputes within the larger case") (quoting
In re Saco Local Dev. Corp., 711 F.2d 441, 444 (Ist Cir. 1983)). A district court reviews the
bankruptcy court's legal conclusions de novo and its findings of fact for clear error. Canal Corp.
v. Finnman (In re Johnson), 960 F.2d 396, 399 (4th Cir. 1992). The district court reverses a
bankruptcy court order only when it "has a definite and firm conviction that the court below
committed a clear error of judgment in the conclusion it reached upon a weighing of the relevant
factors." Westberry v. Gislaved Gummi AB, 178 F.3d 257, 261 (4th Cir. 1999) (quoting Wilson v.
Volkswagen of America, Inc., 561 F.2d 494,506 (4th Cir. 1977)); Yankah v. Yankah (In re Yankah),
514 B.R. 159, 164 (E.D. Va. 2014).
II.
Injury
Anderson's core assertion on this appeal is that "whatever character the insurance proceeds
had prior" to being deposited into the United Bank account, once there, "any lien held by Harbor
or another creditor became subordinate" to the lien held by Joann Anderson.
Appellant Brief at
19, ECF No. 15. Anderson is thus primarily challenging the bankruptcy court's conclusion that
Harbor Bank was injured by the Anderson Transfer, based on his contention that Harbor Bank had
no entitlement to the proceeds of the Selective Suit. Anderson's authority for this proposition is
UCC
S 9-104,
codified in Maryland, which states:
(a) A secured party has control of a deposit account if:
16
(1) The secured party is the bank with which the deposit account is
maintained;
(2) The debtor, secured party, and bank have agreed in an authenticated
record that the bank will comply with instructions originated by the
secured party directing disposition of the funds in the deposit account
without further consent by the debtor; or
(3) The secured party becomes the bank's customer with respect to the
deposit account.
(b) A secured party that has satisfied subsection (a) has control, even ifthe debtor
retains the right to direct the disposition of funds from the deposit account.
Md. Code Ann., Com. Law
S 9-104
(West 2013). Here, the bankruptcy court found that Joann
Anderson did not have "control" ofthe United Bank deposit account within the meaning of section
9-104 based on the absence of any account control agreement between Joann Anderson,
Waterland, and United Bank. Nor was the bankruptcy court persuaded that Joann Anderson's
access to the United Bank account as an authorized signatory amounted to "control" of that account
within the meaning of section 9-104, rejecting such a conclusion as a "red herring." Bankr. Mem
Op. at 39. To the extent that the bankruptcy court's conclusion rests on certain findings of fact,
the Court sees no clear error in such findings.
Considering that factual universe and conducting a de novo legal review, the Court reaches
the same conclusion as the bankruptcy court. Anderson identifies no specific provision of section
9-104 that he believes to apply to the facts here. The only one that seems possibly relevant is
section 9-104(a)(3), which states that a secured party has control ofa deposit account if the party
becomes the bank's customer with respect to that account. However, the record establishes only
that Joann Anderson was an authorized signatory on the United Bank account, and Anderson
provides no authority for the claim that an authorized signatory is equivalent to a customer for
purposes of this provision.
Rather, the commentary to section 9-104 compels the contrary
conclusion, as it states that, pursuant to section 8.12 of the Restatement of Agency, determining
whether a particular person has control requires application of traditional agency principles.
17
Section 8.12 of the Restatement of Agency, in tum, emphasizes that an agent has a duty "not to
deal with the principal's property so that it appears to be the agent's property," and that an agent's
control of the property of the principal is tantamount to control by the principal.
(Third) of Agency
S 8.12
Restatement
(Am. Law. Inst. 2006). Thus, when Joann Anderson acted with regard
to the United Bank account, she did so solely in her capacity as an authorized signatory and
employee ofWaterland, not in her role as one ofWaterland's
secured creditors.
Anderson's citation to In re WEB2B Payment Solutions, Inc., 488 B.R. 387 (8th Cir. RA.P.
2013), does not provide a basis to alter this conclusion.
That case establishes only that when a
party transfers a debtor's funds to another entity without requesting adequate protection of its
possessory lien, it relinquishes that lien. In re WEB2B Payment Solutions, 488 RR. at 394. Here,
Harbor Bank never had actual possession of the Selective Suit proceeds, as it was Waterland's
attorneys, at the direction of Claud Anderson, who transferred the funds into the United Bank
account. The In re WEB2B Payment Solutions court's citation in a footnote to section 9-104 does
not advance Anderson's claim, as it refers only to the wholly inapplicable subsection 9-104(a)(1).
In re WEB2B Payment Solutions, 488 RR. at 391 n.8. In re WEB2B Payment Solutions also
provides no basis to support Anderson's claim that because the Selective Suit proceeds were
transferred into the United Bank account by Waterland's
attorneys, not by Claud or Joann
Anderson, the funds were thereby stripped of any lien held by any creditor.
The Court therefore finds no basis to conclude that Joann Anderson, in her capacity as a
secured creditor, had control of the United Bank account within the meaning of section 9-104 by
virtue of her access to that account as an authorized signatory for Waterland, and it affirms the
bankruptcy court's factual findings and legal conclusions on this point.
18
Anderson also argues that, pursuant to section 9-1 09( d)(8) of the UCC, as codified in the
Commercial Law Article of the Maryland Code, Harbor Bank's interest in the Selective Suit
proceeds was an unsecured one that could not trump Joann Anderson's interest. That provision
states that "[a] transfer of an interest in or an assignment of a claim under a policy of insurance"
is exempt from the provisions ofthe UCC, but further provides that UCC provisions governing the
creation of secured party rights and the priority of security interests do apply to "proceeds and
priorities in proceeds." Md. Code Ann. Com. Law
S 9-109(d)(8).
The cases interpreting the scope of section 9-1 09(d)(8) have tracked this statutory
distinction between interests in insurance claims and interests in proceeds. In In re Montreal, Main
& Atlantic Railway, Ltd., 799 F.3d I (1st Cir. 2015), cited by Anderson, the United States Court
of Appeals for the First Circuit specifically stated that "[b]y its terms, the [section 9-109(d)(8)]
exclusion applies to the use of an insurance policy as original collateral or to any assignment of a
claim under an insurance policy," including a "transfer of rights under an insurance policy," but
made no reference to a transfer of insurance proceeds.
Id. at 6 (emphasis added). At least one
bankruptcy court has reached a similar conclusion. In In re Holtslander, 507 B.R. 779, 783 (Bankr.
N.D.N.Y. 2014), the court explained, in the context of analyzing section 9-109(d)(8), that "[a]
perfected security interest in the collateral will give the secured party a perfected security interest
in the proceeds upon damage to or destruction of the collateral. Under Article 9, the secured party
therefore does not have to be a named payee in order to have its security interest in the proceeds
recognized."
Id. at 783. The court thus found that a creditor with a perfected secured interest in
the debtor's vehicle was entitled to the insurance proceeds paid out upon damage to or destruction
of that vehicle. Id.
19
Here, the original collateral for Harbor Bank's security interest in the insurance proceeds
obtained through the Selective Suit was not Waterland's insurance policy. It was Waterland's real
property, in which Harbor Bank had an undisputed, properly secured, first-priority interest. See
Amended Harbor Bank Deed at 3-6 (as to secured interest); Amended Intercreditor Agreement at
5 (as to priority)~ In apparent recognition of Harbor Bank's priority interest in Waterland's real
property, the Amended Intercreditor Agreement granted Harbor Bank first priority over the
Selective insurance proceeds.
See Amended Intercreditor Agreement at 5 (defining "Insurance
Proceeds" to include proceeds under Selective claim 21274371); id. at 9 (granting first priority
over the Insurance Proceeds to Harbor Bank).
By defining the interest as rights to "insurance
proceeds paid," id. at 5, the Agreement squarely placed that interest within the ambit of
S
9-
109(d)(8)'s "proceeds and priorities in proceeds," which can be secured and prioritized under the
UCC.
Md. Code Ann. Com. Law
S 9-109(d)(8).
Because Harbor Bank's original collateral was
not any insurance policy or claim, but rather Waterland's property, this case precisely tracks In re
Holtslander, the reasoning of which the Court will apply here. This allegation of error is rejected.
Nor is the Court persuaded by Anderson's other arguments for error on the issue of injury.
Anderson asserts that Harbor had no claim to the Selective Suit proceeds because the Selective
policy did not list Harbor Bank as a loss payee. Harbor Bank's claim, however, is based not on its
status as express beneficiary under an insurance policy, but on its status as the holder of a firstpriority secured interest in Waterland's
real property and insurance proceeds.
See In re
Holtslander, 507 RR. at 783.
Anderson also argues that because Waterland was not in default on the Harbor Bank loan
at the time the proceeds were transferred to the United Bank account, "the insurance proceeds were
not trust property" as defined in the Amended Harbor Bank Deed. Appellant Brief at 15. Beyond
20
the fact that a Harbor Bank representative
testified that Waterland was actually in default,
Anderson's argument is flawed because he appears to confuse the concept of trust property with
Harbor Bank's right to foreclose on that property, a right that would be triggered by Waterland' s
default. Under the Amended Harbor Bank Deed, however, Trust Property is expressly defined to
include insurance proceeds for policies covering the Property. Amended Harbor Bank Deed at 6.
Nor is the definition of Trust Property in any way limited or made contingent on a declaration of
default. See id. at 4-6 (defining Trust Property).
The Court therefore rejects this argument and
concludes that the bankruptcy court correctly determined that Harbor Bank sustained an injury
from the transfer of the Selective Suit proceeds to the United Bank account.
III.
Willful and Malicious
Anderson also asserts that the bankruptcy court erred in finding that the injury he caused
was "willful and malicious" under 11 U.S.C.
S 523(a)(6).
To the extent that Anderson asserts that
his actions were neither willful nor malicious because Harbor Bank had no entitlement to the
insurance proceeds, the Court rejects that argument because, as discussed above, Harbor Bank was
entitled to the insurance proceeds.
The Court is further satisfied that the bankruptcy court correctly found that the injury to
Harbor Bank was "willful and malicious." In reaching that conclusion, the bankruptcy court found,
as a matter of fact, that Claud Anderson was aware that the Selective Suit proceeds were being
transferred to the United Bank account, not to Harbor Bank; that it was highly unlikely that he was
unaware at the time of the transfer that his wife, Joann Anderson, was planning to effect the
Anderson Transfer; and that after Joann Anderson effected that transfer, Claud Anderson
repeatedly failed to inform Harbor Bank either of the Selective settlement or of the existence of
the settlement proceeds.
On this last point, the bankruptcy court rejected Claud Anderson's
21
proffered explanation of his silence as something he believed to be required by confidentiality
provisions referenced by a United States Magistrate Judge who did not actually conduct the
mediation, which was conducted by a private mediator. This Court finds no clear error in these
factual determinations.
Based on these findings of fact, the Court concludes, upon its own review, that the willful
and malicious requirement of
S
523(a)(6) was satisfied by a preponderance
Grogan v. Garner, 498 U.S. 279, 286-87
dischargeability exceptions under
S
of the evidence.
(1991) (holding that the standard of proof for
523(a) is preponderance of the evidence).
A willful and
malicious injury requires "a deliberate or intentional injury, not merely a deliberate or intentional
act that leads to injury." Kawaauhau, 523 U.S. at 61. To meet this standard, the debtor must have
acted "with substantial certainty that harm would result" or with "a subjective motive to cause
harm." In re Parks, 91 F. App'x at 819 (quoting In re Miller, 156 F.3d at 603). Where Claud
Anderson directed that the Selective Suit proceeds be transferred into the United Bank account,
understood that Joann Anderson would remove those funds for herself, and deliberately kept
information about the Selective Suit settlement away from Harbor Bank following the transfer, the
facts support the conclusion that he acted with substantial certainty that his efforts would leave
Harbor Bank with none of those settlement proceeds.
The Court therefore concludes that
Anderson's effort to deprive a first-priority creditor of its rightful monies was independently wrong
and tortious, such that
S 523(a)(6)'s
"willful and malicious injury" requirement has been satisfied.
Webb v. Isaacson (In re Isaacson), 478 RR. 763, 781 (Bankr. E.D. Va. 2012); Alessi, 405 RR. at
68.
22
IV.
Res Judicata
Finally, after including a series of other sections in his brief that are completely irrelevant
to this case and acknowledging that they were "extracted from filings in Dorchester County Court,"
Appellant Brief at 11 n.l, Anderson argues that many of Harbor Bank's claims are barred by the
doctrine of res judicata as a result of that prior case. The case in the Circuit Court for Dorchester
County, Maryland, Harbor Bank v. Kramon & Graham, No. C-15-22885 (Md. Cir. Ct. Dorchester
Cty. 2015), was a state-law action filed by Harbor Bank against Waterland and Kramon & Graham,
Waterland's
attorneys in the Selective Suit, alleging claims for conversion, conspiracy, and
tortious interference with contractual relations. The court granted Kramon & Graham's Motion to
Dismiss in that case, and the Court of Special Appeals in Maryland affirmed that ruling.
Under the doctrine of res judicata, a final judgment on the merits in an earlier decision
precludes the parties from relitigating claims that were raised or could have been raised during that
action. Pueschel v. United States, 369 F.3d 345,354 (4th Cir. 2004). This doctrine applies when
there is: (1) a final judgment on the merits in a prior lawsuit; (2) an identity of cause of action in
both the earlier and later suits; and (3) an identity of parties or their privies in the two suits. Id. at
354-55. Neither the second nor third requirement is satisfied here. As to the second requirement,
because federal district courts have exclusive jurisdiction over bankruptcy cases, see 28 U.S.C. ~
1334(a), Harbor Bank's bankruptcy claims could not have been raised in the Dorchester County
action. As to the third requirement, the final judgment referenced by Anderson resolves only
Harbor Bank's claims as to Kramon & Graham, which is not a party to the bankruptcy action, so
there is no identity of parties. The Court rejects res judicata as a basis for error.
23
CONCLUSION
For the foregoing reasons, the bankruptcy court's Order that Anderson's debt to Harbor
Bank is nondischargeable
DISMISSED.
under 11 U.S.C.
S
523(a)(6) is AFFIRMED.
A separate Order shall issue.
Date: March 15,2019
THEODORE D. CHUANG
United States District Jud e
24
The Appeal is
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