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In re Anderson

United States District Court, D. Maryland

March 15, 2019




         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. § 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.


         I. The 2008 Agreements

         In 2006, Waterland Fisheries, Inc. ("Waterland"), a commercial fish farm, was incorporated in Michigan. 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 Uniform Commercial Code ("UCC") 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 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 of Waterland's other secured creditors.

         Also in 2008, Waterland obtained a casualty, commercial liability, and property damage insurance policy ("the Policy"), policy number SI586046, 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 21274371-which was also denied.

         II. 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 of Waterland'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 ¶¶ 1-2, ECF No. 15-2. On January 30, 2013, Joann Anderson filed a UCC Financing Statement with the Michigan Secretary of State which defined the collateral in 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 May or 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 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, § (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 ¶ 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. ¶ 3(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 of Waterland'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 ("MSBDFA") 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 MSBDFA "any and all insurance proceeds ... that may be payable to the Borrower under insurance policy number SI 586046 ... issued by Selective Insurance Company ..., and resulting from the prior loss of or 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 MSBDFA. 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 MSBDFA 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 MSBDFA lien pursuant to the MSBDFA 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.

         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 ...

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