Buckeye Retirement Co., L.L.C., Ltd. v. Kakde

UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF OHIO
WESTERN DIVISION AT DAYTON
In re: 	:
: 	Case No. 05-33193
SUHAS S. KAKDE, 	: 	Chapter 7
: 	Judge L. S. Walter
Debtor. 	:
:
Buckeye Retirement Co., LLC, Ltd., 	:
:
Plaintiff. 	:
: 	Adv. Pro. No. 05-3296
v. 	:
:
Suhas S. Kakde, 	:
:
Defendant. 	:
DECISION DENYING PLAINTIFF’S MOTION FOR
PARTIAL SUMMARY JUDGMENT
The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and
the standing General Order of Reference in this District. This matter is before the court on the
motion for partial summary judgment filed by Plaintiff Buckeye Retirement Co., LLC, Ltd.
This document has been electronically entered in the records of the United
States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
Dated: September 29, 2006
____________________________________________________________
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(“Buckeye”) [Adv. Doc. 33]; the responsive memorandum filed in opposition by Defendant
Suhas S. Kakde (“Mr. Kakde”) [Adv. Doc. 38]; and Buckeye’s reply memorandum [Adv. Doc.
40].
Buckeye requests summary judgment on Count I of its complaint seeking to deny
discharge of the debt owed by Mr. Kakde to Buckeye as assignee of Provident Bank
(“Provident”). The cause of action is based on 11 U.S.C. § 523(a)(2)(B) and essentially alleges
that Mr. Kakde facilitated loan advances to his corporation, U.S. Aeroteam, Inc. (“USAT”), by
means of intentional or reckless submission to Provident of certain false and misleading financial
statements. Because material facts remain to be determined, the court denies the motion.
FACT SUMMARY
Mr. Kakde was the President, Chief Executive Officer, and majority shareholder of
USAT. On or about November 2, 2000 (and extended in May and August of 2003), USAT and
Provident entered into an asset-based secured revolving loan transaction (“Loan”) with a credit
limit of the lesser of $2,500,000 or a borrowing base amount derived from a formula of
percentages of defined eligible inventory, eligible accounts receivable, and cash (“Borrowing
Base”). Mr. Kakde executed a guarantee of USAT’s obligations under the Loan.
In accordance with the Loan requirements, USAT periodically presented financial
statements to Provident containing daily, weekly, and monthly collateral reports (“Borrowing
Base Certificates”). These Borrowing Base Certificates were usually signed by John Busch
(“Mr. Busch”), the Chief Financial Officer for USAT, or by his assistant. On occasion, Mr.
Kakde signed the Borrowing Base Certificates. Provident made periodic advances to USAT
under the Loan, with maximum amounts adjusted in accordance with the Borrowing Base.
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Beginning in 2002, USAT began having financial difficulties and by early 2003 became
delinquent on the Loan. It filed for chapter 11 bankruptcy relief on December 24, 2003. On
December 30, 2003, Provident obtained judgment against Mr. Kakde on his guaranty in the
principal sum of $2,030,632.87 plus interest. Provident assigned its interest in the USAT Loan
and the judgment against Mr. Kakde to Buckeye on December 16, 2004.
Between August 1, 2003 and December 22, 2003, USAT submitted to Provident
Borrowing Base Certificates that inaccurately overstated the Borrowing Base. The inaccuracies
fall into three categories: (1) some reported accounts receivable from Delphi were subject to
setoff and therefore not “eligible” and some reported payables to Delphi were understated
(“Delphi Setoffs”); (2) beginning in August of 2003, USAT diverted some eligible receivables
into and out of an undisclosed account at Bank One, but continued to report the receivables to
Provident as uncollected and unpaid (“Receivables Diversion”); (3) USAT diverted its 2002 tax
refund in the amount of $43,499 into the undisclosed Bank One account (“Tax Refund
Diversion”).
SUMMARY JUDGMENT STANDARD
The appropriate standard to address the motion for summary judgment filed in this
adversary proceeding is contained in Fed. R. Civ. P. 56(c) and incorporated in bankruptcy
adversary proceedings by reference in Fed. R. Bankr. P. 7056. Rule 56(c) states in part that a
court must grant summary judgment to the moving party if:
the pleadings, depositions, answers to interrogatories, and admissions on file,
together with the affidavits, if any, show that there is no genuine issue as to any
material fact and that the moving party is entitled to a judgment as a matter of
law.
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Fed. R. Civ. P. 56(c). In order to prevail, the moving party, if bearing the burden of persuasion
at trial, must establish all elements of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331
(1986). If the burden is on the nonmoving party at trial, the movant must: 1) submit affirmative
evidence that negates an essential element of the nonmoving party’s claim; or 2) demonstrate to
the court that the nonmoving party’s evidence is insufficient to establish an essential element of
the nonmoving party’s claim. Id. at 331-32. Thereafter, the opposing party “must come forward
with ‘specific facts showing that there is a genuine issue for trial.’” Matsushita Elec. Indus. Co.
v. Zenith Radio Corp., 475 U.S. 574, 586-87 (1986) (citations omitted); Anderson v. Liberty
Lobby, Inc., 477 U.S. 242, 249-251 (1986). All inferences drawn from the underlying facts must
be viewed in a light most favorable to the party opposing the motion. Matsushita, 475 U.S. at
586-88.
LEGAL ANALYSIS
To determine a debt to be nondischargeable under § 523(a)(2)(B), Buckeye must prove
that Mr. Kakde obtained a loan or extension of credit from Buckeye by:
(B) use of a statement in writing–
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial condition;
(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[.]
11 U.S.C. § 523(a)(2)(B). The creditor carries the burden of proving each of the elements by a
preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 291 (1991); National City
Bank v. Plechaty (In re Plechaty), 213 B.R. 119, 123 (6th Cir. B.A.P. 1997).
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Because the elements essential to establishing a case under 11 U.S.C. § 523(a)(2)(B) are
highly fact-sensitive, it is a difficult subject for summary judgment. See Kand Medical, Inc. v.
Freund Medical Products, Inc., 963 F.2d 125, 127 (6th Cir.1992) (generally summary judgment
is inappropriate where the issue of intent is involved); In re Jones, 298 B.R. 451, 463 (Bankr. D.
Kan. 2003). As discussed below, some key elements necessarily require an analysis based on the
“totality of the circumstances.” 	In the context of this motion for summary judgment, the court
does not have before it the “totality of the circumstances,” but rather a discreet set of undisputed
facts. The court’s analysis of such elements as “reasonable reliance” and “intent to deceive” is
necessarily handicapped by the absence of a complete record.
It is unnecessary here to exhaustively analyze all of the elements that Buckeye must
prove under § 523(a)(2)(B) because it is clear that material facts remain in dispute as to two of
those elements: (1) the reasonable reliance of Buckeye; and (2) Mr. Kakde’s intent to deceive.
The statute does not define “reasonable reliance” but courts have required proof that the
creditor actually relied on the false statement in extending the loan and that the reliance was
objectively reasonable. Plechaty, 213 B.R. at 125; John Deere Co. v. Myers (In re Myers), 124
B.R. 735, 742 (Bankr. S.D. Ohio 1991); I. H. Mississippi Valley Credit Union v. O’Connor (In
re O’Connor), 149 B.R. 802, 809 (Bankr. E.D. Va. 1993). As with the other factors, Buckeye
carries the burden of proof as to its actual and reasonable reliance on the allegedly false
statements.
Consequently, to prove actual reliance, a subjective standard, the creditor must prove that
the false financial statement was a “substantial factor” in the creditor’s decision to extend credit.
O’Connor, 149 B.R. at 810 (noting that a creditor does not meet the subjective reliance test by
merely having glanced at the financial statement at issue). Even if the creditor can show actual
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reliance on the false financial statement, the reasonableness of that reliance remains at issue.
Generally, courts have held that “reasonable reliance” is a question of fact to be determined in
light of the totality of the circumstances. In re Ledford, 970 F.2d 1556, 1560 (6th Cir.1992), cert.
denied, 507 U.S. 916, 113 S.Ct. 1272, 122 L.Ed.2d 667 (1993); In re Woolum, 979 F.2d 71, 75-
76 (6th Cir.1992), cert. denied, 507 U.S. 1005, 113 S.Ct. 1645, 123 L.Ed.2d 267 (1993); Matter
of Coston, 991 F.2d 257, 261 (5th Cir.1993).
In his affidavit, Mr. Burk asserts in conclusory fashion that Provident made advances to
USAT “in reliance upon the certification of USAT and Mr. Kakde of the accuracy and
completeness” of the information contained within the Borrowing Base Certificates. However,
Mr. Kakde argues, with some support from the affidavit of Mr. Busch, that Provident was well
aware of USAT’s financial problems, that accounting practices employed by USAT with respect
to the Delphi Setoffs were contemporaneously disclosed to agents of Provident, and that
Provident regularly received financial information from USAT and conducted periodic audits.
Depending upon the specific information available to Provident, blind reliance on the Borrowing
Base Certificates may have been unreasonable. The facts surrounding what supporting
information was available to Provident and when it was available is either in dispute or is not
before the court. This evidence is material and prevents this court from determining the
reasonableness of Provident’s reliance. Buckeye makes a stronger case with respect to the Tax
Refund Diversion and the Receivables Diversion, but those matters largely turn on Mr. Kakde’s
intent.
In order for Mr. Kakde’s debt to be determined nondischargeable, Buckeye must prove
that the financial statements were “caused to be made or published with intent to deceive.” 11
U.S.C. § 523(a)(2)(B)(iv). To meet this element, Buckeye must demonstrate that Mr. Kakde
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intended to deceive Buckeye with the allegedly false information contained in the Borrowing
Base Certificates. See American General Finance, Inc. v. Steinbrunner (In re Steinbrunner), 149
B.R. 484, 488-89 (Bankr. N.D. Ohio 1992). The standard for determining intent includes actual
intent to deceive as well as recklessness, indifference and disregard for accuracy. Steinbrunner,
149 B.R. at 489; AmSouth Financial Corp. v. Warner (In re Warner), 169 B.R. 155, 162 (Bankr.
W.D. Tenn. 1994). A determination of intent to deceive focuses on circumstantial evidence and
is generally “inferred if the totality of the circumstances presents a picture of deceptive conduct
by the debtor which indicates an intent to deceive or cheat the creditor.” Myers, 124 B.R. at 741;
In re Cohn, 54 F.3d 1108 (3rd Cir. 1995).
The initial hurdle for Buckeye is to hold Mr. Kakde responsible for Borrowing Base
Certificates prepared, signed, and submitted by others. It is undisputed that Mr. Busch had
primary responsibility for generating and signing the Borrowing Base Certificates and that Mr.
Kakde rarely signed them. Buckeye argues that because Mr. Kakde was a sophisticated business
man and the CEO to whom Mr. Busch and others reported, he must therefore be held responsible
for the intentional or reckless submission of the false information submitted to Buckeye. Mr.
Kakde, on the other hand, asserts that he was not aware of the inaccuracies in the Borrowing
Base Certificates, that he justifiably relied completely on Mr. Busch, and that he insisted upon
appropriate professional behavior by Mr. Busch and other staff members. In short, there remains
a dispute as to the degree of Mr. Kakde’s knowledge and control of the information submitted to
Buckeye.
Even assuming that Mr. Kakde could be held responsible for the Borrowing Base
Certificates prepared by others, there remain disputed facts that preclude summary judgment.
Focusing first on the inaccuracies in the Borrowing Base Certificates stemming from the Delphi
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Setoffs, it is unclear whether Provident was already aware of the accounting for these setoffs at
the time the Borrowing Base Certificates were submitted. As mentioned above, Mr. Kakde and
Mr. Busch indicate that Provident had other financial information available to it and that these
matters were contemporaneously disclosed to various agents of Provident during routine audits.
If Mr. Kakde believed Provident was already aware of the accounting, he could not have had an
intent to deceive, nor would his submission of the Borrowing Base Certificates to Provident have
been reckless.
Similarly, the requisite recklessness or intent to deceive may be lacking to the extent
inaccuracies in the Borrowing Base Certificates were due to the complicated reciprocal supply
arrangements between USAT and Delphi, Delphi’s assumption of USAT debts to suppliers,
and/or the anomalous setoffs that resulted from settlement of two partial contract cancellations
by Delphi. In other words, if the allegedly false information was actually the result of an
accounting method used by USAT to address unorthodox circumstances, a method that simply
did not coincide with Provident’s expectations, then the intent of Mr. Kakde or USAT may not
have been to deceive and their actions may not have been reckless.
As for the Tax Refund Diversion and Receivables Diversion, a significant dispute
remains as to whether USAT’s counsel, Mr. Noland, advised his client to divert these funds.
While Buckeye acknowledges the existence of an email message from Mr. Noland in which he
admits to giving such advice, Buckeye nevertheless questions the extent of that advice. If Mr.
Noland indeed advised USAT with respect to the Bank One Diversion, the court’s determination
might be impacted by the exact nature of that advice and the degree to which that advice was
followed. The facts pertaining to this aspect of the case remain disputed and unclear and the
parties have not fully addressed the legal significance of this issue.
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CONCLUSION
For the foregoing reasons, Buckeye’s Motion for Partial Summary Judgment is hereby
DENIED.
IT IS SO ORDERED.
Copies to:
Eliot G. Bastian, Attorney for Plaintiff, 201 East Fifth Street, Suite 2200, Cincinnati, OH 45202
Jeffrey S. Rosenstiel, Attorney for Plaintiff, 201 East Fifth Street, Suite 2200, Cincinnati, OH
45202
John Paul Rieser, Attorney for Defendant, 130 West Second Street, Suite 1520, Dayton, OH
45402-1519
Patricia J. Friesinger, Attorney for Defendant, 130 West Second Street, Suite 1520, Dayton, OH
45402-1519
Office of the U.S. Trustee, 170 North High Street, Suite 200, Columbus, OH 43215
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