Based on evidence that four loan guarantees were the product of forgery by the debtor’s wife, a bankruptcy judge has disallowed more than $2.3 million in claims by a bank that lent money to a now-defunct real estate investment firm.
The decision by U.S. Bankruptcy Judge Klinette H. Kindred describes an embezzlement scheme that came to light when Loudoun County accountant Lisa David took her life on Sept. 4, 2012. The mother of three apparently had misappropriated more than $3 million to pay creditors of her real estate company.
Although the financial chaos that en- sued drove husband Byron F. David into bankruptcy, he now tells the court he should be able to pay his remaining creditors in full.
Kindred’s Jan. 27 opinion is In re: David (VLW 020-4-001).
Tragedy exposes defalcation
Lisa and Byron David married in 1991, according to Kindred’s account. In 2012, the couple had children aged 15, 12 and 10, Lisa’s obituary said.
The couple appeared to enjoy business success. David was part owner of Blue Ridge Technical Services in Nokesville, Kindred said. From a home office, Lisa worked as an accountant, served as bookkeeper for her husband’s business and handled the family’s finances. She also was part owner of the real estate investment company David-Cantrall and Associates Inc.
From 2005 to 2012, Summit Community Bank loaned more than $3 million to the real estate firm and to companies con- trolled by that firm’s partners, according to Kindred’s opinion.
On Aug. 29, 2012, Byron David was alerted to irregularities in the family finances when a banker called to advise that a credit card had been overrun. After he confronted Lisa about that and other discrepancies, Lisa fatally shot herself in the front yard of the family home. She died later that day.
The next day, Blue Ridge discovered it could not make payroll and its checking account was empty. Moreover, the business had overrun a line of credit secured by personal guarantees bearing forged signatures.
A forensic accountant determined that Lisa had embezzled more than $3 million to pay Summit and other creditors. Hundreds of pages of other suspicious documents were found in Lisa’s home office.
Bank seeks to recover
Byron David said he was unaware of personal loan guarantees bearing his purported signature until bank officers came to his home to discuss his financial obligations and the upcoming foreclosure of his home, Kindred said.
Summit sued in Loudoun County Circuit Court in 2013 to collect on the defaulted loans. After foreclosing on the properties of the corporate borrowers, Summit sought redress against Byron David personally.
Byron denied signing any of the guarantees, saying his wife forged his signature without his knowledge or authority. Nevertheless, in the state court action, he formally admitted he signed a guarantee for one of the Summit loans. He claimed that his admissions were mistakes, but Kindred concluded he was bound by those admissions.
Both David and the bank hired forensic document examiners. The experts submitted similar reports, both agreeing that Byron David did not put pen to paper on any of the signature pages.
The document examiners were handicapped by the bank’s practice – now changed – of scanning loan documents and shredding the original paper versions. The bank’s own expert advised that the resulting digital copies are unreliable.
The notaries who signed off on the signatures also failed to support the bank’s contention that David personally signed the documents. One notary was equivocal about her practice to witness signatures, the other admitted she sometimes “bent her own rules” for Lisa David because of their long-standing relationship.
Kindred credited Byron David’s denials as to four of the guarantees. That and the other evidence “tends to show that some of the documents that serve as the bases for these claims are fabrications that may be forgeries created by Lisa David,” Kindred said.
That conclusion shifted the burden to the bank to prove validity, the judge concluded. The bank could not prove the photocopied guarantees were genuine copies of original documents signed by Byron David, Kindred decided.
Kindred said she was persuaded that the four claims in dispute were “based on fabricated photocopied documents, and that Lisa David had a history of committing forgery and fraud and had the opportunity, means and motivation to forge Byron David’s signatures on the guarantees supporting these claims.
“The weight of the evidence leads the Court to conclude that the documents supporting these claims are not genuine,” Kindred wrote.
Kindred rejected Byron David’s spoliation claim based on the bank’s document destruction.
“Summit destroyed the documents long before thoughts of litigation against Byron David arose,” the judge wrote.
Kindred rejected David’s claim that the bank was trying to enforce an unconscionable obligation. The judge said he failed to prove that any of the loans shock the conscience.
Kindred also rejected an argument that requiring David’s signature violated the Equal Credit Opportunity Act.
Promises of payments
Based on the prospect of recovering $290,000 in transfers from Byron David’s joint account with his current wife, Kindred on April 10 converted the case from Chapter 7 to Chapter 11.
In pleadings, David expressed the belief that, with recovery of the transfers, he would be able to pay his remaining creditors in full. Another hearing is scheduled for March 10.
At press time, it was not known if Summit would appeal the ruling disallowing the four claims. The bank is represented by Mark B. Callahan and Quinton B. Callahan of Harrisonburg. They were not available for comment.
David is represented by James P. Campbell and Matthew L. Clark of Leesburg. They declined to comment because of the possibility of appeal.
The trustee is represented by Donald F. King and Bradley D. Jones of Reston.