National Bank of Commerce of El Dorado v. McMullan (In Re McMullan)

Citations: 196 B.R. 818; 29 U.C.C. Rep. Serv. 2d (West) 1063; 1996 Bankr. LEXIS 608; 1996 WL 288397Docket: Bankruptcy No. 94-11228M. Adv. No. 94-1516

Court: United States Bankruptcy Court, W.D. Arkansas; April 18, 1996; Us Bankruptcy; United States Bankruptcy Court

SummaryOriginalCytator Case TreatmentBackward CitatorAnalysis

EnglishEspañolSimplified EnglishEspañol Fácil

On December 20, 1994, L.D. and Nila McMullan filed a Chapter 11 voluntary bankruptcy petition and simultaneously removed a foreclosure action from state court to the U.S. Bankruptcy Court for the Western District of Arkansas. A trial regarding the foreclosure occurred on May 15, 1995, and the case is classified as a core proceeding under 28 U.S.C. § 157(b)(2)(B), granting the Court jurisdiction to issue a final judgment.

The Court's findings indicate that from February 1982 to December 1988, the McMullans engaged in multiple complex loan transactions with the National Bank of Commerce (NBC). NBC extended several loans secured by real estate in Union County, Arkansas, oil leases in Louisiana, and various oil field equipment. The McMullans are liable on four promissory notes: 

1. Note 87761 for $233,400, dated May 7, 1986.
2. Note 87762 for $206,550, dated May 7, 1986.
3. Note 89334 for $27,484.64, dated December 17, 1986.
4. Note 95049 for $150,000, dated December 14, 1988, co-executed with Ed and Ailene Cook.

The initial loan of $200,000 in early 1982 was intended for a working interest in oil properties. Due to declining oil prices and increased operational costs, the McMullans struggled with payments, prompting NBC to extend payment deadlines in exchange for additional collateral, including mortgages on oil production interests and an office building. The May 7, 1986, loans further secured by these mortgages were recorded shortly thereafter.

In December 1986, NBC extended a loan of $27,484.64 to the McMullans, evidenced by note number 89334, to cover payments on two existing oil field-related debts. In June 1987, L.D. McMullan informed NBC's president, James Cook, about the potential for bankruptcy, to which Cook responded that Nila McMullan would not need to file. Subsequently, on June 17, 1987, L.D. McMullan filed for Chapter 7 bankruptcy, listing NBC as a creditor with claims totaling $484,770.00, partially secured by various oil properties and a 50% interest in an office building. L.D. McMullan received a discharge on September 8, 1988, and the case closed on March 25, 1992.

In December 1988, L.D. McMullan sought another loan from NBC to improve the office building, resulting in a $150,000 loan secured by a mortgage executed by all involved parties on December 14, 1988, and recorded two days later. On October 12, 1989, the bankruptcy court granted NBC's motion to abandon property from the estate, declaring L.D. McMullan’s debt to NBC at $453,877.54, secured by multiple mortgages on properties in Louisiana and Arkansas. It was noted that the collateral's value had diminished significantly, and L.D. McMullan had no equity in it.

On November 13, 1992, NBC filed a foreclosure petition in Union County, Arkansas, regarding its security interests in properties, aiming to foreclose L.D. McMullan’s interest without seeking a personal judgment due to his discharge, but sought a personal judgment against Nila McMullan for $565,411.75 plus attorney's fees. The foreclosure action was later removed to federal court, with a trial held on May 15, 1995.

NBC must demonstrate that the debt is both matured and unpaid to obtain a judgment, as established in Rawhide Farms, Inc. v. Darby. NBC has provided evidence of the amounts owed on various notes, totaling significant sums, and confirmed that all notes are in default except for note 95049. However, note 95049 can still be accelerated due to a clause allowing acceleration for defaults on any obligation to NBC. This clause is valid, as upheld in Mitchell v. Federal Land Bank of St. Louis. Consequently, NBC has established a prima facie case for foreclosure on all notes.

In opposition, the McMullans assert five defenses: 
1. They claim an accord and satisfaction has extinguished their liability.
2. They argue that Nila McMullan did not sign certain documents, specifically notes 87761 and 87762, nor the May 7, 1986 mortgage.
3. They contend that prior mortgage clauses do not secure the specified notes against the El Dorado office building.
4. Nila McMullan states she was discharged from liability because NBC disposed of collateral without proper notice.
5. She also claims that requiring her to execute the notes and mortgages violated the Equal Credit Opportunity Act, as she had no ownership interest related to the secured loans.

The McMullans carry the burden of proof for the accord and satisfaction defense, needing to establish that an agreement was reached and fully performed, which entails acceptance of a lesser payment to settle the entire debt.

Accord and part performance cannot be deemed satisfaction, as they remain executory until all terms are fulfilled. The McMullans contend that two instances of accord and satisfaction exempt them from further liability to NBC: one regarding a December 1988 loan of $150,000 and another from December 1989 concerning oil and gas leases. 

For the December 1988 transaction, the McMullans assert that an accord and satisfaction took place. Testimony reflects that L.D. McMullan and Ed Cook sought a $50,000 loan for office renovations and personal use, respectively, amid McMullan's bankruptcy. A conditional agreement was reached with James Cook that if McMullan made a $50,000 payment, the bank would accept oil payments on mortgaged property until his debt was settled. On December 14, 1988, a $150,000 loan was issued, with $50,000 applied to McMullan’s discharged obligation. The McMullans argue that this transaction indicates an accord and satisfaction; however, evidence does not support this claim. None of the witnesses confirmed a mutual understanding that the $50,000 payment would clear the McMullans' entire debt. James Cook explicitly denied such an agreement, while Nila McMullan stated she never discussed an accord and satisfaction. L.D. McMullan's belief that his obligations were resolved lacks definitive testimony supporting a consensus among the parties.

The McMullans' claim of accord and satisfaction regarding a December 1988 transaction lacks evidential support, with a more plausible conclusion being that NBC agreed to forbear foreclosure in exchange for a $50,000 payment and continued collection from oil production proceeds. They did not meet the burden of proof for this defense.

In a separate claim related to a December 1989 transaction, the McMullans assert that they executed quitclaim deeds for their interests in specific oil and gas properties to NBC as full settlement of any claims. L.D. McMullan testified that his attorney advised him of NBC's agreement to settle in lieu of foreclosure, leading to the execution of three quitclaim deeds. However, his testimony revealed inconsistencies regarding the ownership of the properties. While he initially stated that the quitclaim deeds pertained to both the Manorado and Bobby Slack properties, he later contradicted this, indicating he still owned the Bobby Slack leases in 1992 and that he had reacquired it in December 1990.

Further complications arose from the tax returns of the McMullans, which suggested continued ownership of the Manorado properties, conflicting with their claims. NBC’s legal representatives acknowledged sending deeds in lieu of foreclosure but did not accept them as satisfaction of their claims, maintaining that they believed L.D. McMullan would fulfill his obligations without the need for property transfer. James Cook, an NBC representative, clarified that he only became aware of the quitclaim deeds shortly before the trial and did not agree to their acceptance as settlement.

Mr. McMullan indicated he would work to resolve the loan situation related to his collateral, which he continues to leverage for tax benefits. NBC's internal records reference deeds associated with a loan review from May 14, 1991, noting that quitclaim deeds executed on December 20, 1989, transferred oil production ownership to NBC due to bankruptcy proceedings. A subsequent review on July 10, 1992, raised questions about the $110,000 valuation McMullan assigned to his oil production share, citing abandonment of properties to the bank and lack of recorded deeds due to environmental risks. Evidence shows that NBC owned the oil property described in the quitclaim deeds, but the deeds created confusion regarding their applicability to the Manorado and Bobby Slack properties. Documentation of a new lease or mortgage securing any debt was absent, and NBC's records countered Cook's claims of ignorance about the quitclaim deeds. The unacknowledged and unrecorded quitclaim deeds mean the transfers lacked perfection under Louisiana law. Both NBC and the McMullans continued business as if no transfer had occurred, suggesting they were pursuing a voluntary transfer of oil leases rather than foreclosure. However, accepting collateral in lieu of foreclosure does not discharge the debt without a formal accord and satisfaction agreement. Even if an agreement existed, the lack of acknowledgment and recording of the deeds failed to fulfill the necessary conditions for such an agreement. Consequently, the McMullans could not prove their affirmative defense of accord and satisfaction regarding the December 1989 transaction. Additionally, the McMullans allege forgery of signatures on mortgage documents; L.D. McMullan asserts that both he and his wife did not sign a May 7, 1986, mortgage on an office building, despite acknowledging signing the related notes. Nila McMullan confirmed she did not sign the mentioned mortgages, even though she signed copies of the notes.

The McMullans did not provide additional evidence to support their claims of forgery and acknowledged that the loan proceeds were utilized for their benefit. NBC engaged a handwriting expert, who confirmed that the signatures in question were authentic. The Court found no significant differences between the questioned signatures and those on other verified documents, such as the bankruptcy petition. L.D. McMullan's 1987 Chapter 7 petition listed claims tied to the notes he now claims are forgeries, leading the Court to conclude that the McMullans' testimonies were deceptive and all signatures were genuine.

Regarding the validity of the mortgages, the McMullans executed four mortgages on their half-interest in an office building, which NBC argues secures specific notes under several mortgages due to future advance clauses. The McMullans contend that these clauses do not extend to the debts represented by the notes since they are not of the same type as the mortgage-related debt. The 1982 mortgage explicitly secured all future advancements by NBC, regardless of whether they were similar to the initial debt. The 1986 and 1988 mortgages contained similar language. Legal precedents indicate that a mortgage can secure both existing and future debts if agreed upon by the parties, though typically, a mortgage does not extend to other debts unless they are of the same class or related. However, in Union National Bank v. First State Bank, the court ruled that the future advance clause clearly extended the mortgage lien to all subsequent advances, regardless of their relation to the primary debt.

The 1982 mortgage explicitly secures all future advancements, regardless of the nature of the debt, and the 1986 mortgages similarly affirm this intent, covering debts of all kinds both present and future. Courts have validated such language as enforceable when unambiguous. The 1988 mortgage concerning Nila McMullan's interest in an office building is valid, but the same mortgage regarding L.D. McMullan's interest is problematic because the property was part of his Chapter 7 bankruptcy estate at the time it was executed, leaving him without the authority to convey it. Only the bankruptcy trustee could legally convey estate property, and such actions without court approval could violate bankruptcy protections. Thus, the 1982 mortgage extends to future loans, the 1986 mortgages cover both prior and subsequent debts, and the 1988 mortgage secures Nila McMullan's debts. 

Nila McMullan claims she was discharged from personal liability on note 87762 for $206,550 due to NBC's alleged disposition of collateral without notice. The collateral included a mortgage lien on an oil and gas lease and a security interest in related equipment. After L.D. McMullan’s Chapter 7 discharge, he and NBC entered into a new lease, which the McMullans argue constituted a disposition of personal property without the required notice under Arkansas law. They assert that this failure to notify discharges Nila McMullan's liability on the note. Per Arkansas law, a secured party can repossess and sell collateral after default, provided they give reasonable notice to the debtor regarding the sale.

Compliance with the specified section is crucial for a creditor's entitlement to a deficiency judgment; without it, the creditor must demonstrate that the collateral's reasonable value was less than the debt owed. In Marks v. Powell, it was established that a secured party's failure to comply results in limitations on pursuing deficiency judgments. The case Bank of Bearden v. Simpson clarifies that if a creditor sells collateral in violation of the law, they can still seek to recover the remaining debt through foreclosure on real property, but the deficiency amount is capped at the difference between the collateral's reasonable value and the debt at the time of sale.

The documents related to the oil and gas field equipment convey interests, but the debtors contest Nila McMullan's ownership claim. The Bobby Slack oil lease, located in Webster Parish, Louisiana, is mentioned, but no record of its conveyance exists, and there’s insufficient evidence of McMullan's ownership or unauthorized use of her property by NBC. Testimony indicates that the equipment was used in a cooperative venture, suggesting her implied consent, as she did not contest this claim in her testimony.

Plaintiff L.D. McMullan confirmed that after deeding the Bobby Slack property back to the bank, the bank lost the lease, which subsequently was re-leased jointly between himself and NBC. The same equipment from the previous lease was being used for the new lease operations. No notice was provided to Nila McMullan regarding the bank's use of the equipment. McMullan could identify the equipment but could not confirm its possession by NBC beyond observation. The interrelationship between the individuals involved in the operations raises questions about the ownership and use of the equipment in the context of the bank's actions.

The Court is examining whether the National Bank of Commerce (NBC) had possession of certain property through its chairman, Mr. James Cook, and whether he acted as an agent for the bank in that capacity. Mr. McMullan confirmed he did not personally see Cook physically possess the property but acknowledged that Cook, as chairman, would have had control over it. The questioning then shifted to the McMullans’ claim that NBC violated the Equal Credit Opportunity Act (ECOA) by requiring Nila McMullan to sign loan notes related to L.D. McMullan's business, despite her lacking ownership of the collateral. The evidence presented contradicts their argument, as the ECOA permits lenders to require both spouses' signatures in creating valid liens or waiving property rights. Relevant case law supports this practice, indicating that lenders can require both spouses' signatures under certain circumstances. L.D. McMullan testified that although Nila's name appeared on some documents, she had no ownership interest in the properties in question.

An unmarried individual is identified by their status, while a widow must have the deceased woman's name specified in Louisiana legal documentation. The McMullans hold interests in oil and gas leases and personal property through nine assignment documents, which detail the property and the involved parties. The grantees are primarily identified as L.D. and Nila McMullan, either jointly or individually. Testimony regarding their interest in the Bobby Slack property was vague, and the instrument of conveyance for these properties was not provided. Under Louisiana law, oil and gas leases are classified as real property, while oil production equipment is personal property. Although the McMullans reside in Arkansas, Louisiana law governs the real property, while personal property is defined by Arkansas law. In Louisiana, a conveyance of real property to spouses establishes co-ownership, and property acquired during marriage is considered community property unless exceptions apply. The McMullans did not demonstrate that L.D. McMullan acquired the leases using separate property; thus, the oil and gas leases are deemed community property, granting Nila McMullan an undivided one-half interest in all leases acquired during their marriage.

The McMullans' community is liable for debts from leases acquired by either spouse, as established in Cabral v. Cabral, where the husband's failed real estate venture created obligations for the community. Under Arkansas law, personal property conveyed to a husband and wife forms a co-tenancy, either as a tenancy by the entirety or a tenancy in common. Nila McMullan's co-ownership of L.D. McMullan's collateral justified NBC's requirement for her to sign notes and mortgages, aligning with the Equal Credit Opportunity Act, thus NBC did not violate this Act.

NBC seeks a personal judgment against Nila McMullan and a foreclosure judgment on oil and gas leases and related personal property. NBC claims a mortgage on a lease of Bobby Slack oil production, with both NBC and L.D. McMullan owning fifty percent interests. No lease or mortgage from L.D. McMullan to NBC is recorded, and the legitimacy of a mortgage executed during L.D. McMullan's bankruptcy is questionable.

The litigation history indicates that NBC filed for foreclosure on November 13, 1992. Following a series of continuances requested by the McMullans, a trial set for January 3, 1994, was postponed to February 11, 1994, and further delayed due to NBC's lack of timely record production. The trial was rescheduled for May 27, 1994, but was complicated by the McMullans filing a counterclaim and changing counsel multiple times. On August 19, 1994, shortly before the trial, Nila McMullan filed for Chapter 13 bankruptcy, reporting minimal assets, significant unsecured liabilities, low monthly income, and high monthly expenses. On the same day, she also removed the chancery court case to federal court.

The district court remanded the case against L.D. McMullan to chancery court for a trial set on December 22, 1994, while the case against Nila McMullan was referred to the appellate court. Following a recommendation from this Court, the Chapter 13 case was dismissed, leading both L.D. and Nila McMullan to file for Chapter 11 protection. The case against L.D. was subsequently consolidated with Nila's, with a trial scheduled for May 15, 1995. A motion for continuance by the McMullans was denied, and they have defaulted on obligations to NBC for over eight years, indicating a pattern of delay in proceedings.

Nila McMullan's Chapter 13 filing raised significant concerns of bad faith, as her unsecured debts of $467,434.64 exceeded the $100,000 jurisdictional limit for Chapter 13 cases, violating 11 U.S.C. 109(e). Despite her counsel's argument that the debts were contingent due to being disputed, this lacked legal support. Additionally, Nila did not meet the income requirement for Chapter 13 eligibility, having reported no income in the two years before filing and only recently claiming a $400 monthly salary, which was insufficient to cover her household expenses that exceeded her income by $4,549.40 monthly. The Court deemed the reported salary a contrivance, asserting Nila acted in bad faith.

The defenses presented by the McMullans were described as mostly frivolous, particularly the claim regarding a co-ownership interest in an oil and gas assignment. The Court concluded that it was time to liquidate the property in question and distribute the proceeds according to legal standards, clarifying that property sales under the Bankruptcy Code follow 11 U.S.C. 363, not foreclosure procedures.

A trustee has been appointed to oversee the administration of this case and a related case. The trustee is tasked with liquidating the McMullans' interests in an office building and oil and gas assets using methods deemed appropriate, including selling interests of non-debtors. NBC, the creditor, is prohibited from offsetting its claimed liens during any sale due to the unresolved status of those liens. All sales will occur free and clear of liens, with claims attaching only to the sale proceeds, which will be distributed according to the Bankruptcy Code at the request of interested parties.

The Court has assessed NBC's claims against Nila McMullan at $639,042 and against L.D. McMullan at $29,248.36. The remaining claim against L.D. McMullan will only be secured to the extent of any perfected mortgage lien or security interest in the estate's property. 

Additionally, the defendants did not challenge the jurisdiction of the chancery court regarding foreclosure in Louisiana. L.D. McMullan's personal liability to NBC was previously discharged in a Chapter 7 proceeding, and any current demand for payment on that discharged debt is not before the Court. The description of the property in question is attached to relevant deeds, and various mortgages have been recorded over the years. The McMullans argue regarding the nature of the mortgages and their validity, but previous findings reject claims of forgery. There is a legal debate regarding the characterization of actions taken in violation of automatic stays, with the majority opinion leaning towards categorizing such acts as void.

The majority of circuit courts recognize that acts violating a bankruptcy stay can be retroactively validated under limited circumstances, as illustrated by Easley v. Pettibone Michigan Corp. The minority view holds that such actions are merely voidable. The Eighth Circuit has not yet directly addressed this matter. The McMullans' brief is ambiguous regarding whether they claim the bank disposed of the oil and gas equipment related to the Manorado lease. They assert that Nila McMullan has no property interest in the leases and equipment, that she conveyed her interest to NBC, and that NBC disposed of her interest without proper notice. Additionally, the removal petition must be filed in the bankruptcy clerk's office, not the district court clerk's office, according to relevant statutes and local rules. The jurisdictional limit for unsecured debts was raised to $250,000 under the Bankruptcy Reform Act of 1994. It is established that merely disputing a claim does not classify it as a contingent debt. The related case is Case No. 87-11087 in the Western District of Arkansas. During this case, NBC obtained an order of abandonment for the Manorado properties, excluding them from sale. While the parties assumed perfection under Arkansas law, perfection concerning leasehold equipment and oil and gas leases for the Bobby Slack property will be determined under Louisiana law.