Judge Somers

06-07005 Frontier Farm Credit v. Norris et al (Doc. # 184)

Frontier Farm Credit v. Norris et al, 06-07005 (Bankr. D. Kan. Oct. 5, 2009) Doc. # 184

PDFClick here for the pdf document.

SIGNED this 05 day of October, 2009.

Dale L. Somers

Opinion Designated for Electronic Use, But Not for Print Publication


In Re:




CASE NO. 05-43551-7

ADV. NO. 06-7005


Case 06-07005 Doc# 184 Filed 10/05/09 Page 1 of 29

This proceeding was before the Court on January 24 and 25, 2008, for trial on the
Plaintiff’s claims against Defendant-Debtors Christopher Charles Norris and Mary Beth
Norris.1 Plaintiff Frontier Farm Credit, PCA (“Frontier”), appeared by counsel Richard
Petersen-Klein of Fisher, Patterson, Sayler & Smith, L.L.P., of Topeka, Kansas. The
Defendant-Debtors appeared by counsel Frederick R. Smith of Pittsburg, Kansas. At the
close of the evidence, the Court announced its decision that Frontier had failed to meet its
burden to prove that Defendant-Debtor Mary Beth Norris’s (“hereafter Debtor Spouse”)
personal liability on its claim against her should be excepted from her bankruptcy
discharge under either §§ 523(a)(2)(A), (a)(2)(B), or (a)(6) of the Bankruptcy Code, and
later entered a final judgment on that claim. The Court is now ready to rule on Frontier’s
remaining claims against the Defendant-Debtors.

Frontier’s claims arise from a secured line of credit it extended to the Debtors for
use in their farming operation. At the close of evidence, the Court ruled that Frontier
failed to show that Debtor Spouse committed any fraud in connection with the line of
credit. This written opinion therefore focuses on the allegations against Debtor
Christopher Norris (hereafter “Debtor”).

Frontier alleges Debtor should be denied discharge on its claim because he made
misrepresentations when he applied for the line of credit, and then used at least some of
the line for purposes other than the ones stated in the loan application. Frontier also seeks

1 The Plaintiff’s claims against Defendant Craig Norris have been severed for trial at a later time.

Case 06-07005 Doc# 184 Filed 10/05/09 Page 2 of 29

to have constructive trusts imposed on some of the Debtors’ exempt assets and a few
assets they transferred because of their allegedly improper actions. As explained below,
the Court concludes Frontier has failed to prove that the Debtor made any
misrepresentations, that Debtor submitted a false financial statement to Frontier with
intent to deceive Frontier, or that the Debtor intended to harm Frontier or its security
interests by any of his actions. Because Frontier has not established that the Debtors
committed any fraud against it or had any confidential relationship with it, Frontier is not
entitled to any constructive trust remedy.


1. Frontier’s claim.
Frontier filed a proof of secured claim in this case for $40,934.02, plus interest and
attorney fees. It identifies its collateral as livestock, farm equipment, accounts receivable,
inventory and proceeds, but states that the value of the collateral is uncertain due to fraud.
The claim is the amount of a prepetition default judgment entered against the Debtors for
payment of a the balance on a $150,000 line of credit granted to Debtors by Note-and-
Loan Agreement dated November 18, 2003.

2. Events before the Debtors applied for the line of credit with Frontier.
Before 2003, the Debtors earned income from a variety of sources. Most of the
Debtor’s earned income came from owning and operating a company called Cash Grain
of Weir, Inc., that sold seed, fertilizer, chemicals, and probably other farm supplies. Most
of Debtor Spouse’s income came from a job as an x-ray technician. The Debtor also


Case 06-07005 Doc# 184 Filed 10/05/09 Page 3 of 29

engaged in farming under the name JM Ranch, raising both cattle and crops.

For about four or five years before 2003, the Debtor and his son Craig ran a
commingled cattle operation. The Debtor explained this was an arrangement between a
father and son that they did not document in writing. The Debtor testified the
arrangement was to commingle cattle they each owned on pasture-land, and to share the
expenses of fattening them and the proceeds of selling them, roughly 80% for the Debtor
and 20% for his son.2 They did not formally organize this arrangement, and did not
report it as a partnership or other separate entity on tax returns or other documents. For
the most part, the Debtor and Craig had a man named Ronald “Ronnie” Davied buy
young cattle for them that they fattened and sold, usually within a year. At times, they
kept some cows that they bred, raising and selling the resulting calves. The cattle were
kept on the Debtor’s land.

Debtor had a cordial relationship with Bruce Thornton, the Frontier’s loan officer
who took the application for and approved the line of credit. To conduct business, Mr.
Thornton visited Debtor at the Cash Grain office. These meetings occurred every two or

2 Frontier contended that there was no partnership between Debtor and Craig for the cattle
operation, and the presence of a commingled cattle operation was a fiction used by Debtor to justify
payment to Craig for cattle sold on March 31, 2004. The evidence to support this contention was the
inclusion of the value of 266 head in the Debtors’ balance sheet, prepared by Frontier, and tax returns of
Debtors and Craig. On the Debtors’ 2004 tax return, they reported a sale on August 18 of 22 cow-calf
pairs, a total of 44 animals, for $15,639. These are the details of a sale by Craig on the same date. The
Debtor said the report of the sale on his and Debtor Spouse’s return was a “tax return error” caused by his
mistaken report of the sale to an accountant at a time when he was under a lot of stress. Frontier’s
attorney also challenged the Debtor to find the August 18, 2004, sale of cattle reported on Craig’s 2004
tax return, but he could not. The Court finds this evidence insufficient to disprove the existence of a
commingled cattle operation, as testified by Debtor.


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three months, or as often as once a month, depending on the season of the year. Debtors
had six prior loans with Frontier before applying for the line of credit at issue in this case.
Three of those loans were made in 1996, two in 1998, and one in 2000. One of these
loans was a line of credit which was open for four years. A bank document in the bank
file states, “Borrower is very good to work with and has always handle [sic] his account
as agreed.” Debtor referred some Cash Grain customers to Frontier. Debtor testified that
because of his prior relationship with Frontier, he thought the lender knew about his
commingled cattle arrangement with Craig.

Ronnie Davied bought 259 head of cattle for the Debtor in September and October
of 2003. The Debtor paid for them using money drawn on a line of credit he had with
Exchange State Bank and about $49,000 that Craig borrowed from another lender and
gave to his father for purchases. The new cattle all weighed between 400 and 500

3. The line of credit application and other documentation.
In mid-fall 2003, during a meeting at Cash Grain, Debtor and Thornton discussed
refinancing of Debtor’s cattle loan in the approximate amount of $100,000 then held by
Exchange State Bank. The discussions were for a loan of $150,000 to $200,000 to both
pay off the existing loan and provide funds for additional purchases of cattle. Thornton
obtained information from the Debtor about the Debtors and their assets. That
information included a balance sheet dated July 29, 2003, that someone other than Debtor
had compiled. Thornton made a note on the July balance sheet showing the number of


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calves the Debtor told him he had, 235. There is a second note reading “$150,000 200,000,”
with the first dollar amount circled. Thornton said the second note indicated he
and the Debtor had talked about a loan in that dollar range, with the circle indicating the
amount they settled on.

Thornton completed a Commercial Loan Application for Debtors to borrow
$150,000. The stated purposes were $100,00 to refinance cattle loan, $1,000 for PCA
stock, and $49,000 for cattle purchases. The application was signed by both Debtors.

Thornton prepared a Net Realizable Value Worksheet and a Personal Property
Valuation Report, both dated October 30, 2003, in connection with the Debtors’ loan. He
showed they had 266 head of cattle with a market value of $135,017, and a net realizable
value of $128,266 (95% of the market value number). Thornton also showed Frontier
would be taking equipment as additional collateral, listing five items with a total market
value of $13,200, and a net realizable value of $11,880 (90% of the market value
number). The NRV Worksheet reported the net realizable value of the assets securing
Frontier’s loan to the Debtors would be $141,146 while Frontier’s “investment” would be
$101,000, giving Frontier a net realizable value equity position of $40,146. Thornton
said Frontier took the equipment as additional collateral because the cattle did not provide
sufficient value for the line of credit.

Using the information supplied by Debtor, Frontier prepared a four page “Balance
Sheet-Member & Detail,” which was not signed by Debtors. This worksheet provides
detail concerning the numbers reported on the actual balance sheet. The third page


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reported Debtors owned one bull, 15 beef cows, 15 beef calves, 52 beef stocker heifers,
and another 183 beef stocker heifers,3 having a total value of value of $135,018. These
numbers are the same as on the NRV worksheet. The number of head equals 266.

Using the information from the worksheet, Thornton prepared a two page balance
sheet using the Frontier Credit format. It was printed on November 14, 2003. Debtors
signed the second page. The Debtor Spouse provided none of the information used to
create the balance sheet. The balance sheet showed the Debtors had total assets of $1.89
million and liabilities of $637,000, for a net worth of over $1.2 million. The Debtor’s
equity ownership of Cash Grain was reported to be worth $159,400, and he also had
preferred stock in the company valued at $10,000. The list of current assets included
$135,018 under the category “Purchases Held for Resale.” This is the value assigned to
266 head of cattle.

One of the issues in this case is the source and accuracy of the 266 head of cattle
used to compute the $135,018 value of “Purchases Held for Resale” stated in the balance
sheet. The Court cannot clearly determine the source of the 266 head number from the
evidence presented. Thornton testified that Debtor would have told him the number of
cattle he owned. Debtor did not dispute this fact, but he also did not testify as to the
number he reported to Thornton. The 266 head may have come from Debtor. It also
appears Thornton may have arrived at that figure by adding the number of cattle (235) he

3 The NRV worksheet identified these as 183 stocker steers.

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hand-wrote on the July 2003 balance sheet to the 15 cow-calf pairs and one bull already
reported on it. Thornton inspected the cattle only to satisfy himself that the number he
had been given was realistic, not to do an actual count of them. He said he had been
around cattle enough that he could tell the difference if 200 head were in a pasture rather
than 100. Assuming that 266 is the number of cattle that were in pasture, that those cattle
had the value computed by Thornton, and that Debtor owned only an 80% interest, the
value of the balance sheet should have been $108,014. The Debtor did not tell Thornton
that he and Craig were at the time of the inspection pasturing cattle together, but the
Debtor testified he thought Thornton would have known that as a result of his prior loans
and on-going relationship with Frontier.

By letter dated November 18, 2003, Thornton informed Debtors of the approval of
the application for a revolving $150,000 line of credit “on a secured basis with a variable
rate of 5.50 %, drafting privileges and maturity date of December 1, 2004.” Debtors were
required to carry livestock insurance and a 20% margin on the loan. The collateral was
identified as “accounts, inventory, proceeds, livestock and equipment & accessions” as
defined in the Security Agreement. The letter requests Debtors to execute enclosed
documents, which presumably were the Note and Loan Agreement and the Security
Agreement prepared by Thornton.

So far as Thornton could remember, after he prepared these documents using
information the Debtor provided, he took them to the Debtor at his place of business, and
had him sign them. Thornton did not remember specifically how this signing went, but


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said his practice was to “flip through” the loan papers with a borrower like the Debtor,
giving him the opportunity to review them. The Debtor then took some documents home
for Debtor Spouse to sign, and returned them to Thornton. No one testified whether
Debtor Spouse read any of the documents or anyone went over them with her before she
signed them. Thornton must have forgotten to give the Debtor the loan application and
balance sheet to sign, because a letter in Frontier’s file shows those documents were
mailed to the Debtors on November 24, 2003, to get their signatures. This explains why
the loan application is dated November 14, 2003, but both the Debtors wrote “12-2-03”
on the date line following their signatures. The Debtors did not hand-date the balance
sheet when they signed it, but typed text on it states it was printed on November 25.
Since the letter says the balance sheet was mailed to the Debtors along with the loan
application, the Court concludes they signed it the same day they signed the loan
application. Frontier first paid out money on the line of credit on November 26, 2003,
before the Debtors signed either of these documents.

Frontier gave Debtors drafts they could use like checks to make draws against the
line of credit. Since Thornton thought of the line as a cattle loan, he indicated Frontier
expected the Debtors to use the line of credit to buy, feed, and otherwise maintain the
cattle. Labor charges could be paid with it if they were for “working” the cattle.
Debtor’s view of the intended purpose was larger, to include anything having to do with
his farming operation, including purchase of equipment. In the past, Thornton had
advised debtor to use a credit line rather than to apply for a new loan for purchases.


Case 06-07005 Doc# 184 Filed 10/05/09 Page 9 of 29

The three-page Security Agreement gave Frontier a lien on the Debtors’ livestock
and on five specific pieces of equipment. Other categories of collateral were listed as
well, but Thornton indicated he understood only cattle and the equipment secured the line
of credit, and the Debtor testified that was his understanding as well. The second page of
the agreement is labeled “Standard Provisions,” and the first paragraph on that page
included as one of eight numbered circumstances of default: “(5) if Borrower uses
disbursements for a purpose other than the stated purpose.” No specific purpose for
disbursements is stated on the Security Agreement. The Note-and-Loan Agreement
showed the loan was for a $150,000 revolving line of credit, with an expiration date of
December 1, 2004. Similar to the Security Agreement, the five-page Note-and-Loan
Agreement contained a “Standard Provisions” part on its second page that specified eight
things the borrowers were supposed to do, including “(4) utilize loan proceeds for the
stated purpose.” Further down on that page, a paragraph listed seven circumstances of
default, including “(5) Borrower fails to use loan proceeds for the stated purpose.”
Again, nothing in this document specified what the “stated purpose” was.

In addition to the “Standard Provisions” part of the Note-and-Loan Agreement, a
“Special Conditions” box was checked and a clause was added saying “Borrowers must
maintain a 20% margin on the stocker cattle loan.” When asked at trial, the Debtor said
he thought this condition meant he was supposed to maintain a 20% profit margin on his
cattle. Thornton explained it meant the value of the Debtor’s cattle was supposed to
remain 20% higher than the outstanding balance owed on the line of credit.


Case 06-07005 Doc# 184 Filed 10/05/09 Page 10 of 29

4. The Debtors’ use of the line of credit.
According to a note Thornton placed in Frontier’s records in 2005, the first use of
the line of credit occurred on November 26, 2003, when Frontier advanced $104,599.25
to pay off a prior lien on the Debtors’ cattle. From then through the end of February
2004, Debtors wrote four more drafts to JM Ranch, and one to Cash Grain for feed. Since
Thornton testified he thought feeding and caring for the cattle met the loan purposes,
nothing presented indicated any of these drafts violated his understanding of the loan

From December 2003, until November 2004, the Debtors wrote about 35 drafts on
the line for a total of just over $163,500. For the most part, they made the drafts payable
to JM Ranch, and then paid the money to others; however, some of the drafts were made
payable directly to others. According to a summary prepared based on the Debtors’
testimony at a continued meeting of creditors, that money was spent on the following
Cattle: 2,400.00
Feed: 13,950.00
House: 23,927.85
Tractor: 8,000.00
Hay: 14,572.23
Corn: 7,537.00
Wheat: 1,141.55
Bins: 11,245.00
Cash Grain: 50,000.00
Fuel: 1,284.65
remember: 29,450.00


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Together with Frontier’s payoff of the prior lien on the cattle, these drafts show the
Debtors borrowed a total of about $268,000 on the line of credit during a one-year period.
In September 2005, Frontier obtained a default judgment against them for $40,124.03,
indicating the Debtors had repaid it at least $228,000 of the money advanced on the line.

Frontier complains that certain of the draws were for purposes other than those
stated in the loan application. Debtors wrote a draft for $8,000 on the line of credit in
April 2004 and used about $7,300 of that to pay off a lien on a tractor which they later
sold for $5,000 and applied the proceeds to a lien on a Ford truck they owned. They sold
the tractor in July 2005, and paid the proceeds on the lien the next month. Frontier also
complains that in November 2004, with another draft, the Debtors bought wheat seed that
they planted, then harvested and sold the next summer, but they applied the proceeds to
the lien on the truck in August 2005.

Frontier complains about money from the line of credit that the Debtors deposited
into their JM Ranch checking account and then spent on a home they were having built.
In May 2004, they paid $13,270 to a bank for construction costs. In June 2004, they paid
$6,722.84 to the contractor that was building the home. Debtor did not make these draws;
Debtor Spouse wrote the drafts that transferred these amounts to JM Ranch. In July 2004,
the Debtors paid $300 for an appraisal on the home. Frontier successfully traced these
payments, a total of $20,292.84, to money drawn on the line of credit.

At trial Frontier complained about a net $36,000 draw from the line of credit for
JM Ranch that was paid to Cash Grain. The Debtor testified that when he transferred


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money to Cash Grain, he would have been paying for seed, fertilizer, or chemicals he was
buying for his farm operation. He implied he would not have used money from Frontier’s
line of credit to invest in Cash Grain.

Thornton explained that when the Debtors wrote a draft, the draft number and
amount would come to Frontier’s accounting department, where it would be applied to
the line of credit and paid so long as the balance owed did not exceed the $150,000 limit
on the line. Thornton would get a daily report showing the draft number and amount but
not the use of the funds. He would have access to copies of the drafts the next day, but
would not look at them unless he believed he had a need to.

Thornton did not look at the Debtors’ drafts until after they had sold all their cattle
and he realized Frontier had insufficient remaining collateral to secure the balance the
Debtors owed. Then he looked through the drafts and the monthly statements Frontier
had sent to the Debtors in an effort to reconcile the drafts with their use of the proceeds of
sales of the cattle. There was no evidence that Thornton, or anyone else on behalf of
Frontier, after the loan was approved inspected Debtor’s cattle, notified any sale barns of
its interest in the cattle, or otherwise monitored the collateral.

5. Sales of cattle by the Debtor and his son, Craig.
During 2004, cattle were sold in both the Debtor’s and Craig’s names through
Parsons Livestock Market (“Parsons”). On March 31, 2004, the Debtor sold 198 head of
cattle there. Parsons issued two checks for the proceeds of that sale, one for $106,174.05


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payable to the Debtor and his prior cattle lender,4 and one for $25,000 payable to Craig.
The Debtor later paid Frontier $100,000 from the proceeds he had received. He also paid
Craig another $5,600 he agreed would have come from the remaining $6,174.05 of the
proceeds he had received. Thus the proceeds were split approximately 24% to Craig and
76% to Debtor.

On August 18, 2004, Craig sold eight calves, one bull, 14 cows, and one cow-calf
pair, a total of 25 animals, through Parsons. Parsons issued one check for the proceeds of
this sale for $15,187.54, payable to Craig. On August 25, 2004, the Debtor sold 8 more
stocker cattle through Parsons. The proceeds of $6,199.40 were all paid to Frontier. On
December 8, 2004, he sold 45 cows through Parsons. The proceeds of $40,723.60 were
all paid to Frontier.

In total, Frontier’s evidence showed that the Debtor and Craig sold 275 cattle
through Parsons during 2004. The Debtors produced documents showing the Debtor
made a few other cattle sales as well that did not go through Parsons. On September 9,
2004, he sold two bulls and two bins and paid the proceeds to Frontier. On December 3,
2004, he sold another bull and paid the proceeds to Frontier. This brings the total
documented number of cattle sold to 278.

Although neither the Debtor nor Thornton thought Frontier had a lien on his crops,
the Debtor paid Frontier $26,356.56 on October 19, 2004, from the sale of a corn crop.

4 It is not clear why this check was made payable to the prior lender rather than to Frontier, but
the Debtor was able to deposit the check and use the proceeds without giving any of them to the prior


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Frontier also received the $5,736.93 proceeds of another crop received in the form of the
buyer’s check dated February 14, 2005, that was made out to both Frontier and the
Debtor. The amount paid from the proceeds of crops was thus in excess of the total of
approximately $31,000 which Craig received from the March 31, 2004 sale of livestock,
when the proceeds were split approximately 76% to Debtor, which was paid to Frontier,
and 24% to Craig.

6. Significant events occurring after the Debtor had sold most of his cattle.
In November 2004, all the banks that had been working with the Debtor in his
Cash Grain business decided “to freeze everything,” putting him out of his main job and
under a lot of stress.

In April 2005, the Debtors had their attorney contact Frontier to say they wanted to
sell Craig four pieces of equipment that were Frontier’s collateral. Sometime earlier,
Thornton had reviewed the items and concluded Frontier could get a net recovery of
$8,600 if it had to foreclose on them. Negotiations followed, and Frontier agreed to
release its lien on the items in return for $10,000, the price Craig was allegedly paying for
them. The money was paid to Frontier, and it released its lien on the four items. During
an examination conducted pursuant to Federal Rule of Bankruptcy Procedure 2004, Craig
allegedly testified he paid the $10,000 for just one of the items, a tractor. Frontier was
unable to subpoena Craig to testify at trial, and the Court ruled that despite his absence,
his prior testimony was not a type that was admissible. Frontier did present a
depreciation schedule contained in Craig’s accountant’s records that showed Craig


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acquired a tractor in 2005 at a cost of $10,000, the year of the purchase from the Debtors
and Frontier, but did not show his acquisition of the other three pieces of equipment. The
accountant said he would assume the cost should have been apportioned among all the
components Craig was purchasing if he had bought more than just the tractor with the
$10,000, and agreed the different components might have had different depreciation lives.

In July 2005, Frontier sued the Debtors for the remaining balance due on the line
of credit. The Debtors did not oppose Frontier’s complaint, and judgment was entered on
September 9, 2005, for $40,124.03, plus interest. The judgment also declared Frontier
had a first and prior lien on the Debtors’ farm products, accounts, inventory, and a
specified bush hog.

The Debtors filed their Chapter 7 bankruptcy petition on October 5, 2005.
According to their schedules, the Debtor had been working in insurance sales for six
months by then, as well as continuing to work as a farmer-stockman. He also drew some
unemployment compensation during 2004 and 2005. Nothing in the evidence suggested
Debtors owned any cattle during 2005.

7. The Debtor’s credibility.
The Debtor testified, but Debtor Spouse did not. The Court generally found the
Debtor’s testimony to be credible. He appeared to answer the questions posed by
Frontier’s attorney truthfully to the extent he could still remember events that mostly
occurred three to four years before the trial. He usually conceded transactions recorded in
various different places were related when they involved similar amounts of money and


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dates that were close together, even though he usually seemed not to have an actual
memory of the transactions occurring and the records were typically insufficient by
themselves to establish the relationships between the transactions.


In this proceeding, Frontier’s remaining claims are one against the Debtor to
except his debt from discharge under §§ 523(a)(2)(A), (a)(2)(B), or (a)(6), and one
against both Debtors to have constructive trusts imposed against their homestead, their
Ford pickup truck, and three pieces of equipment they transferred to Craig.

1. Exception from discharge for fraud under § 523(a)(2)(A).
Section 523(a)(2)(A) of the Bankruptcy Code excepts from discharge any debt “for
money, property, services, or an extension, renewal, or refinancing of credit, to the extent
obtained by — (A) false pretenses, a false representation, or actual fraud, other than a
statement respecting the debtor’s . . . financial condition.” In order to succeed under
§ 523(a)(2)(A), Frontier had the burden to establish the following elements by a
preponderance of the evidence:

 1) the debtor knowingly committed actual fraud or false pretenses, or made a
false representation or willful misrepresentation; 2) the debtor had the intent to
deceive the creditor; and 3) the creditor relied on the debtor's representation.
Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir.1996). The
creditor's reliance must have been justifiable, Field v. Mans, 516 U.S. 59, 74-75
(1995), and the creditor must have been damaged as a result, Young, 91 F.3d at

5 State of Missouri ex rel. Nixon v. Audley (In re Audley), 275 B.R. 383, 388 (10th Cir. BAP


Case 06-07005 Doc# 184 Filed 10/05/09 Page 17 of 29

Frontier suggests the Debtor defrauded it by: (1) falsely promising to use the line of
credit strictly to fund his cattle operation; and (2) either falsely claiming he and his son
operated a commingled cattle operation in order to justify giving his son some of the
proceeds from his cattle sales, or failing to disclose that his son owned some of the cattle
that were in the herd on the Debtor’s land. The evidence fails to convince the Court that
the Debtor did anything fraudulent, made any deliberate misrepresentation, or otherwise
acted by trickery or deceit, or that he took any action intending to deceive Frontier.6

a. Frontier’s claim is not excepted from discharge under § 523(a)(2)(A)
because of false representations regarding use of the loan proceeds made when the
loan was originated.
Frontier asserts the Debtor falsely promised to use the line of credit solely to fund
his cattle operations. The Court finds that Debtor’s representations regarding use of the
loan proceeds made at the time to loan was originated are not a basis to deny discharge.
First, the Court notes it is unclear exactly what Frontier contends the Debtor promised to
do with the line of credit. The Commercial Loan Application states the purposes of the
line were to refinance a prior lien on the Debtors’ cattle, buy stock in Frontier, and to
purchase more cattle. But Thornton conceded the Debtor could also properly use the line
to pay to feed, care for, and “work” the cattle. Debtor testified that he understood the
loan purpose more broadly, that it was intended to fund his cattle and farming operation.

6 See 4 Collier on Bankruptcy, ¶ 523.08[1][e] at 523-45 (Resnick & Sommer, eds.-in-chief, 15th
ed. rev. 2008) (“Actual fraud . . . consists of any deceit, artifice, trick, or design involving direct and
active operation of the mind, used to circumvent and cheat another — something said, done or omitted
with the design of perpetrating what is known to be a cheat or deception”).


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Second, the loan documentation signed by Debtor does not expressly limit the use of loan
proceeds. The only possible representation is in the Commercial Loan Application which
states the purpose of the loan; there is no express limitation in the Note-and-Loan
Agreement or the Security Agreement. The draw “checks” included no requirement as to
how the proceeds would be used. Third, to the extent that the Loan Application, which
Debtors signed, and Debtor’s conversations with Thornton constituted a representation
that Debtors would use of the line of credit only for cattle and farming operations, there is
absolutely no evidence that this representation was false when made in the fall of 2003 or
that Debtor at that time had any intent to deceive Frontier regarding the use of the

Although Frontier does not expressly contend that the Court should apply the
standards for nondischargeability under § 523(a)2)(A) to each draw as a separate
transaction, this approach appears correct since each draw constitutes a separate extension
of credit and receipt of money. However, under this analysis, which considers the
representations made when each draw was received, Frontier has failed to sustain its
burden of proof. Frontier complains about three categories of draws: funds used to pay
the lien on a tractor, which was later sold; funds used to pay bills for construction of
Debtors’ home; and a net $36,000 in draws for JM Ranch which was paid to Cash Grain.

The tracing of loan draws to payments on liens on a tractor, and later a truck, are
stated in the findings of fact and will not be repeated here. Tracing of loan proceeds does
not satisfy a creditor’s burden of proof to except a claim from discharge. As to these


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transactions, the Court finds lack of evidence that Debtor made a willful
misrepresentation and had intent to deceive. Debtor testified that he understood the loan
to be for purposes associated with his ranching and farming operation, including
purchases of equipment. There is no evidence that the tractor was not used for these
purposes, so Debtor could not have made a misrepresentation when making draws for the
purpose of paying off the lien on the tractor. Likewise, there is no evidence that Debtor
intended to deceive Frontier when paying off the lien on the tractor, then selling the
tractor (which was not listed in the items of collateral pledged to Frontier), and using the
proceeds to pay off the lien on a truck, which may have also been used for farming and
ranching. The additional suggestion that discharge should be denied because funds were
drawn from the line of credit for seed and the proceeds of the crops applied to the
payment of the lien on the truck is totally without merit. Again there is not basis to find a
misrepresentation of intent to deceive. Use of funds for seed was within the loan
purposes as understood by Debtor. Frontier had no security interest lien in crops.

 As to the funds invested in the Debtor’s home, a purpose which in Debtor’s view
was not contemplated when the loan was originated, the evidence is that these draws were
made by Debtor Spouse, not by Debtor. There was no evidence that Debtor was involved
in these draws and therefore no basis to find Debtor made a misrepresentation or had
intent to deceive Frontier.

Finally, the evidence concerning the $36,000 net draws deposited to JM Ranch
was sketchy, and the Court finds no misrepresentation and no intent to deceive. Debtor’s


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farming and ranching was conducted through JM Ranch. Frontier’s speculation, not
supported by any evidence, that the funds were transferred by JM Ranch to Cash Grain,
was refuted by Debtor.

b. Frontier’s claim is not excepted from discharge because of a false
representation that Debtor conducted a cattle operation with his son or because of
failure to disclose that a portion of the cattle in Debtor’s herd was owned by his son.
The Court does not accept Frontier’s contention that Debtor made a
misrepresentation that he and Craig commingled their cattle. As stated in the findings of
fact, the Court concludes, based upon the record as a whole, that Debtor and Craig for
several years prior to the events in issue had an informal arrangement to commingle their
cattle operations. Hence, Debtor made no misrepresentation when proceeds of cattle sales
were distributed in part to Craig based upon the existence of such an arrangement.

This leaves Frontier’s alternative argument that the Debtor defrauded Frontier by
failing to disclose that his son owned some of the cattle he offered as collateral for the
line of credit he obtained from Frontier in November 2003. The Court denies this
position for two reasons. First, this contention relates to the accuracy of the Balance
Sheet prepared by Frontier which included the value of cattle as owned by Debtor.
Section 523(a)(2)(A) expressly excludes “a statement respecting a debtor’s or insider’s
financial condition” from the misrepresentations that can be the basis for denial of
discharge under the subsection. Denial of discharge based upon a materially false
financial statement is addressed by § 523(a)(2)(B) and is discussed below.


Case 06-07005 Doc# 184 Filed 10/05/09 Page 21 of 29

Second, the record contains no evidence from which the Court could conclude that
Debtor intended to deceive Frontier when he failed to disclose Craig’s interest in the herd
during the loan application process. Debtor testified he assumed, because of his long
relationship with Thornton, that Frontier was aware that of the commingling of cattle.
There is no reason to question the veracity of this statement. In addition, there is no
evidence from which the Court can infer intent to deceive. The record reflects that
Frontier, for good reason, trusted Debtor and was not aggressive when inquiring about the
cattle operation. Under such circumstances, Debtor cannot be denied a discharge.

Frontier failed to satisfy its burden to prove the Debtor obtained the line of credit
or made draws on the line of credit through false pretenses, a false representation, or
actual fraud. Consequently, the Debtor’s obligation to Frontier is not excepted from
discharge by § 523(a)(2)(A).

2. False financial statement under § 523(a)(2)(B).
Frontier has not clearly argued that its claim against the Debtor should be excepted
from discharge by § 523(a)(2)(B). However, it has quoted the provision in its trial brief
and contends misrepresentation when the balance sheet prepared by Thornton dated
November 15, 2003, included the value of 266 head, even though Craig had an interest in
the same asset. The Court will therefore address denial of discharge under this

As relevant here, § 523(a)(2)(B) excepts from discharge a debt:


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(2) for money, property, services, or an extension, renewal, or
refinancing of credit, to the extent obtained by —

(B) use of a statement in writing —
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial
(iii) on which the creditor to whom the debtor is
liable for such money, property, services, or credit
reasonably relied; and
(iv) that the debtor caused to be made or published
with intent to deceive.
To succeed on its claim under this provision, Frontier must prove each element under
§ 523(a)(2)(B) by a preponderance of the evidence.7 The Court finds the balance sheet
prepared in connection with the line of credit was the only document presented that gave
a picture of the Debtor’s overall financial health and could therefore qualify as the written
statement respecting the Debtor’s or an insider’s financial condition that is required for a
debt to be excepted from discharge under this provision.8
Frontier has not explicitly directed the Court to any representation in the balance
sheet that it contends was false. Much of its evidence, however, seemed to be aimed at
showing the Debtor did not personally own 266 cattle in October 2003 when he told
Thornton he did, but instead owned some lesser amount because he and Craig had a

7See Grogan v. Garner, 498 U.S. 279, 286-87 (1991); see also 4 Collier on Bankruptcy ¶ 523.04
at 523-23 to -24 .

8See Cadwell v. Joelson (In re Joelson), 427 F.3d 700, 704-14 (10th Cir. 2005) (§ 523(a)(2)(B)
applies only to statements that give picture of debtor’s overall financial health).


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commingled herd.9

Turning to the elements required for the exception to discharge, the Court finds
that Frontier has not satisfied its burden of proof. First, the Court finds that the inclusion
of the value of $135,018 for the cattle instead of 75 % or 80% of that value was not
materially false with respect to Debtors’ creditworthiness. Debtors’ net worth reported on
the statement was $1,256,423; a reduction of $33,750 or $27,000 would not have been
significant. Had Frontier taken into account Craig’s ownership it could have requested a
security interest in Craig’s interest in the cattle or taken a security interest in other assets
of Debtors, such a growing crops, marketable securities (valued at $253,759), or
additional machinery/equipment.

More importantly, even if the statement of the value of the livestock was
materially false, the Court finds that discharge cannot be denied because there is no
evidence that “debtor caused [the statement] to be made or published with intent to
deceive.” The balance sheet, although signed by Debtor and Debtor Spouse, was
prepared by Thornton, based in part upon a balance sheet as of July, 2003, prepared by
someone other than the Debtor, and information supplied by Debtor to Thornton. At the
time it was prepared, Thornton and Debtor had a good working relationship. Debtor was
forthright in his testimony at trial, and there is no evidence that he was other than

9 Frontier suggested as an alternative to a commingling of Debtor’s and Craig’s cattle, the
circumstance that Debtor owned 100% of the cattle, because the $47,000 borrowed by Craig and used to
fund a portion of the cost of the cattle purchased in the fall of 2003, was a loan from Craig to Debtor. If
this were true, the balance sheet would be inaccurate because it omitted Debtor’s obligation to Craig.


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forthright when dealing with Thornton. Debtor testified that based upon his long
relationship with Thornton, he assumed that Thornton knew that Debtor and his son
operated a joint cattle operation.

The evidence did not convince the Court that Debtor was even aware of the
number of head of cattle used by Frontier when calculating the value of the herd or had
any reason to believe that the value ascribed to his interest in cattle was not correct. The
number of head is not on the balance sheet signed by Debtor. The total number of cattle

(266) is not even stated on the worksheet used to prepare the balance sheet, although the
number of cattle in each category is stated. However, Debtor did not sign the worksheet,
and there is no evidence that he reviewed it. Even as to those documents that were
signed, the evidence suggests that Debtor’s review was cursory.
The Court rejects Frontier’s contention that Debtor’s discharge should be denied
under § 523(a)(2)(B). Frontier has not carried its burden of proof. The Court questions
whether the error in the value of Debtor’s interest in livestock was materially false. More
importantly, even assuming it was, Frontier has not sustained its burden of proof because
there is not evidence that Debtor intended to deceive Frontier when he approved the
statement prepared by Thornton.

3. Willful and malicious injury under § 523(a)(6).
Section 523(a)(6) of the Bankruptcy Code excepts from discharge any debt “for
willful and malicious injury by the debtor to another entity or to the property of another


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entity.” In Kawaauhau v. Geiger, the Supreme Court ruled that this provision applies
only to a deliberate or intentional injury, not merely a deliberate or intentional act that
leads to injury,10 explaining that this means the debtor must have intended the
consequences of the act he or she performed, not simply the act itself.11 Frontier does not
provide the Court with any specific acts which it contends constitute willful and
malicious injuries within the meaning of § 523(a)(6). This exception to discharge is
applicable to willful and malicious conversions of collateral,12 so the Court will assume
that this is Frontier’s contention.

When Debtor paid Craig a portion of the proceeds from the sale of cattle, there is
no evidence that he did not do so as a deliberate act to injure Frontier. Craig was paid
because of his interest in the commingled cattle. Acts done without malice and intent to
injure are not sufficient to except a debt from discharge, even though they result in less
than full repayment of a loan. Rather than intending to harm Frontier by diverting
collateral, the Court finds that Debtor intended to satisfy his obligation to Frontier.
Debtor made substantial payments to Frontier from sales of crops, assets neither he nor
Thornton thought were covered by Frontier’s security interest. Debtor, through his
attorney, also arranged for sale of collateral so the proceeds could be applied to the loan

10 523 U.S. 57, 60-64 (1998).

11 Id. at 61-62.

12 4 Collier on Bankruptcy ¶ 523.12[3].


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Frontier has failed to satisfy its burden to prove the Debtor intentionally injured it

or its property, so the Debtor’s obligation to Frontier is not excepted from his discharge

by § 523(a)(6).

4. The grounds for constructive trust are not present.
Frontier asks the Court to impose a constructive trust on the Debtors’ homestead

and on their Ford truck, and to impose a constructive trust on three pieces of equipment

the Debtors allegedly transferred to Craig as gifts. The Kansas Supreme Court has

adopted a lower court’s explanation that either actual or constructive fraud must be shown

for the constructive trust remedy to be available:

“A constructive trust arises wherever the circumstances under which property was
acquired make it inequitable that it should be retained by the person who holds the legal
title.” Logan v. Logan, 23 Kan. App. 2d 920, syl. ¶ 6, rev. denied 262 Kan. 961 (1997).
To prove a constructive trust, there must be a showing of one of the two types of fraud:
actual or constructive. 23 Kan. App. 2d 920, syl. ¶ 7.

Actual fraud is not at issue in this case. “Constructive fraud is a breach of a legal
or equitable duty which, irrespective of moral guilt, the law declares fraudulent because
of its tendency to deceive others or violate a confidence, and neither actual dishonesty or
purpose or intent to deceive is necessary.” 23 Kan. App. 2d 920, syl. ¶ 7. Two additional
elements also must be proved: “[T]here must be a confidential relationship [, and] the
confidence reposed must be betrayed or a duty imposed by the relationship must be
breached.” 23 Kan. App. 2d 920, Syl. ¶ 8.13

The Court concluded at the end of the trial that Frontier failed to show the Debtor

Spouse committed any fraud, and has now concluded in this opinion that Frontier failed

to establish that the Debtor committed any fraud in connection with the line of credit, so

13 Garrett v. Read, 278 Kan. 662, 673-74 (2004).

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the actual fraud ground for imposing a constructive trust against any of the Debtors’
assets arising from draws on the line of credit does not exist. The Court further concludes
Frontier has failed to establish that the Debtors gave Craig three of the four pieces of
equipment involved in the deal their attorney arranged with Frontier for no consideration
and sold him the tractor alone for the $10,000 he paid to Frontier. The depreciation
schedule Craig’s accountant had in his files is simply not enough to convince the Court
the Debtors intended to defraud Frontier in this transaction. Frontier’s own estimate of
the value of the four pieces of equipment was less than the amount it received.

Since the Court has found the Debtors committed no actual fraud, this leaves only
the constructive fraud ground for imposing a constructive trust on any of their property,
which requires a breach of a confidential relationship. The Kansas Court of Appeals

has defined a confidential relationship “ ‘ “as any relationship of blood, business,
friendship, or association in which one of the parties reposes special trust and confidence
in the other who is in a position to have and exercise influence over the first party.” ’
[Citation omitted.]” Heck v. Archer, 23 Kan. App. 2d 57, 63, 927 P.2d 495 (1996). The
mere relationship between a parent and a child does not raise a presumption of a
confidential and fiduciary relationship. Curtis v. Freden, 224 Kan. 646, 651, 585 P.2d
993 (1978).14

So the type of relationship necessary to support a finding of constructive fraud is one
which would have enabled the Debtors to exercise improper influence over Frontier. This
clearly excludes an ordinary lender-borrower relationship like Frontier had with the
Debtors. Since the Debtors committed no actual fraud and did not have any confidential

14 Nelson v. Nelson, 38 Kan. App. 2d 64, 78 (2007).

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relationship with Frontier, Frontier’s claim to have a constructive trust imposed on the
Debtors’ homestead, their Ford truck, or the three items they transferred to Craig must


For these reasons, the Court concludes: (1) Frontier has failed to prove that its
claim against the Debtor should be excepted from his discharge by §§ 523(a)(2)(A),
(a)(2)(B), or (a)(6). Frontier’s evidence was largely a story of a line of credit that at the
end of the day was not adequately secured where the creditor could trace some draws to
purposes for which the loan was not intended. The story failed to include intentional
misrepresentations, fraud, deceit, malice, and intent to harm, the circumstances which are
necessary to deny a Debtor the right of discharge. Excepting a debt from discharge can
significantly affect a debtor’s fresh start, and accordingly the exceptions on which
Frontier relied are strictly construed in favor of the debtor and strictly construed against
the creditor, who has he burden of proof. In this case, Frontier simply did not satisfy its
burden of proof under §§ 523(a)(2)(A), (a)(2)(B), or (a)(6). Frontier has also failed to
prove that a constructive trust should be imposed against the Debtors’ homestead, their
Ford truck, or any of the four pieces of equipment they transferred to Craig.

This Opinion will not become a final judgment on Frontier’s claims against the
Debtors until Frontier’s claims against defendant Craig Norris are resolved.


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