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In re Blankenship

United States District Court, W.D. Tennessee, Eastern Division

October 21, 2019

IN RE JAMES TRENT BLANKENSHIP and WENDI DEANN BLANKENSHIP, Debtors.
v.
AGRIFUND, LLC, d/b/a AG RESOURCE MANAGEMENT, Appellee. JAMES TRENT BLANKENSHIP and WENDI DEANN BLANKENSHIP, Appellants, Adv. No. 17-5098

          ORDER AFFIRMING DECISION OF BANKRUPTCY COURT

          S. THOMAS ANDERSON, CHIEF UNITED STATES DISTRICT JUDGE

         Debtors James Trent Blankenship and Wendi Dean Blankenship (“Debtors”) appeal the decision of the United States Bankruptcy Court for the Western District of Tennessee that the crop loan made by Agrifund, LLC, d/b/a Ag Resource Management (“ARM”) to the Debtors for their 2016 crop was non-dischargeable under 11 U.S.C. § 523(a)(2)(B).[1] For the reasons set forth below, the bankruptcy court's decision is AFFIRMED.

         BACKGROUND

         The Debtors, who conducted a farming business under the name “Blankenship Farms, Limited Partnership, ” filed for Chapter 11 bankruptcy on April 27, 2016.[2] (See Agrifund d/b/a Ag Res. Mgmt. v. Blankenship (In re Blankenship), Ch. 7 Case No. 16-10839, Adv. No. 17-5098 (Bankr. W.D. Tenn. Jan. 2, 2019), ECF No. 1-2.) Because the Debtors needed money for the crops they intended to plant in 2016, the Debtors filled out and signed a Crop Loan Application with ARM on May 18, 2016. (Id. at 2.) Debtors listed the “applicant” as Blankenship Farms but signed the application individually. (Trial Ex. 1, Crop Loan Appl. 1, 3, ECF No. 9-24.)

         The Application included a warranty on the signature page:

This application and any schedule, explanations, or additional information attached, is submitted on behalf of the undersigned for the purpose of procuring, establishing and maintaining credit from time to time from ARM. The undersigned has carefully read the information contained herein and warrants it to be complete, true, and correct as [of] the dates set forth below and that ARM may continue to rely upon this application continuing to be true and correct until a written notice of change is given to you by the undersigned.

(Id. at 3.)

         “Crop Acres, ” Item 8 on the Application, asked the borrower (in this case the Debtors) to “list all Tillable Acres by individual farms.” (Id. at 2.) The Debtors wrote “See Attachment.” (Id.) The Debtors emailed ARM a list of land they intended to farm in 2016 on May 17 and 19, 2016. (See Compl. 2-3, ECF No. 9-1; Debtors' Resp. 2, ECF No. 9-6.) The list, titled “Blankenship Farms Land” (“Farm List”), was seven pages long and contained the addresses, acreage, and yearly rent prices for each parcel of land. (Crop Loan Appl. at 4-10.) The total acreage listed exceeded 8, 000, and the yearly rental costs totaled approximately $516, 902.32. (Id.)

         The Debtors needed permission from the bankruptcy court to proceed with the loan. Therefore, on May 25, 2016, the Debtors filed an Emergency Motion to obtain post-petition financing (“Crop Loan”) from ARM in the amount of $1, 949, 880.00 at a 9% interest rate and a proposed maturity date of January 15, 2017. (Emergency Mot. of Debtor 2, ECF No. 9-19.) The Debtors stated that they intended to use the financing to produce and harvest their 2016 soybean crop. (Id. at 3.)

         On June 2, 2016, the bankruptcy court conducted an interim hearing on the Debtors' application for financing. (Blankenship, at 3.) At that hearing, Mr. Blankenship testified that he was going to farm approximately 8, 200 acres in 2016. (Hr'g Tr., June 2, 2016.) He also testified that, before ARM would lend him any money, he would have to make a proposed budget for planting his 2016 crops. (Id. at 51.) According to his testimony at this hearing, the proposed budget submitted to ARM in support of the $1.9 million Crop Loan included rents for the land and the input costs associated with planting approximately 8, 200 acres of soybeans. (Id.) These costs included seed, fertilizer, chemicals, and labor. (Id.) The bankruptcy court entered an interim order on June 2, 2016, approving the Debtors' request to obtain $100, 000.00 in interim financing from ARM. (See Blankenship, at 3.) The court set a final hearing on the Debtors' motion for June 9, 2016. (Id.)

         At the final hearing on June 9, 2016, Mr. Blankenship testified that only two of the landowners listed on the Farm List had refused to lease farmland to him for the 2016 growing season. (Hr'g Tr., June 9, 2016, ECF No. 9-10.) Blankenship testified that these two farms totaled approximately 100 acres. (Id.) When asked if he had any reason “to believe that [he had] a dramatically different acreage, ” Blankenship answered, “No.”[3] (Id.) Mr. Blankenship again testified that he anticipated farming “a little bit over 8, 000” acres in 2016. (Id. at 12, 30-33.) Based on these figures, Mr. Blankenship testified that he anticipated earning “around” $4 million for his 2016 crop. (Id. at 16.)

         On June 10, 2016, the bankruptcy court entered an order granting the Debtors' motion to obtain financing for their 2016 crop. (Final Order Authorizing Post-Pet. Financing, ECF No. 9-22.) The order authorized the Debtors to obtain post-petition financing from ARM in the amount of $1, 949, 880.00. (Id. at 3.) The Debtors executed a Guaranty of Certain Demand Promissory Note and Agricultural Security Agreement wherein the Debtors granted ARM first priority security interests in their 2016 crops and their farm products, inventory, and farm equipment.[4] (ARM Crop Loan Docs. 5-12.) ARM perfected this security interest by filing a UCC-1 with the Tennessee Secretary of State on June 3, 2016. (Id.)

         On June 20, 2016, Blankenship Farms filed an omnibus motion to assume land leases (“Omnibus Motion”) in its bankruptcy case. (Omnibus Mot. to Assume Land Leases, ECF No. 9-23.) Blankenship Farms listed the leases it sought to assume on an attachment to the motion. (Omnibus Mot. Ex. 1, ECF No. 9-24.) The leases totaled 8, 267 acres. (Id.) At the hearing on July 21, 2016, the Omnibus Motion was granted in part, denied in part, and continued in part. (Order Partially Granting Omnibus Mot., ECF No. 9-29.) The order permitted Blankenship Farms to assume all the leases, except the three tracts, [5] upon payment of any cure amount listed in the Omnibus Motion. (Id.)

         The Debtors defaulted on the Crop Loan. On July 25, 2017, their case was voluntarily converted to a Chapter 7 case. (Blankenship, at 4.)

         On October 20, 2017, ARM filed an adversary proceeding against the Debtors, alleging that they failed to pay $378, 809.00 of the $1.9 million Crop Loan. (Id.) ARM contended that the balance was non-dischargeable on three counts: Count I - False Pretenses, False Representations, and Actual Fraud under 11 U.S.C. § 523(a)(2)(A); Count II - Use of False Statement in Writing under 11 U.S.C. § 523(a)(2)(B); and Count III - Willful and Malicious Injury under 11 U.S.C. § 523(a)(6). (Id.) ARM alleged that:

The Crop Loan Application was false in that the Defendants described leases that they did not have and did not plant with crops during the 2016 crop year. Defendants also falsely inflated figures for arable acreage owned and leased by Defendants. At the time the Crop Loan Application and listing of Crop Acres was tendered to Plaintiff, Defendants knew that much of the information contained in it was false. Further, Defendant Trent Blankenship falsely represented to ARM on multiple occasions that he was planting, and had planted and harvested, approximately 8, 000 acres of soybeans, when in fact he planted and harvested approximately three thousand acres less than that amount.

         (Adv. Compl. 3, ECF No. 9-1.) ARM also alleged that “[a]fter the conclusion of the subject harvest, the [Debtors] failed to pay the debt owed to ARM.” (Id. at 4.) ARM further alleged that it reasonably relied on the Crop Loan Application and attachments thereto, as well as the testimony of Trent Blankenship from the June 9, 2016 hearing. (Id. at 5.)

         On November 14, 2018, the bankruptcy court conducted a trial in this proceeding. (Blankenship, at 6.) ARM presented the following evidence to support its allegation that the Debtors, through the Farm List, represented that they would be farming approximately 8, 200 acres of land during the 2016 crop year. (Id. at 2-3.)

         During Mr. Blankenship's deposition he testified that the Farm List was part of the Crop Loan Application. (Trial Ex. 10, Dep. Trent Blankenship 34.) He also testified that Mrs. Blankenship prepared the Farm List that was submitted to ARM at the time of applying for the Crop Loan. (Id. at 34, 38.) Mr. Blankenship admitted that some of the landowners identified on the Farm List refused to lease land to him for the 2016 crop year (Id. at 40-50) and that he had withheld this information from ARM:

Q. Did you ever update this list to ARM to provide them with -
A. With the signed leases?
Q. Did you ever let them know specifically that some of these leases that were listed in this [A]pplication were not ...

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