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#2260 signed 8-15-96

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS

In Re:

WALTER BRADLEY BARNES,

JANET LEE BARNES, CHAPTER 7

DEBTOR(S).

92-40016-7

HOME STATE BANK,

DARCY D. WILLIAMSON, Trustee,

PLAINTIFF(S),

v.

WALTER BRADLEY BARNES,

JANET LEE BARNES,

DEFENDANT(S).

ADV. NO. 92-7114

MEMORANDUM OF DECISION

This proceeding resulted from three separate complaints objecting under 11 U.S.C.A. §727 to the debtors' discharge. One of the complaints has been dismissed as untimely filed, but the other two were tried to the Court in July 1996. Creditor Home State Bank appeared by counsel Brett D. Anders. Trustee Darcy W. Williamson appeared for herself. The debtors appeared pro se. The Court has considered the relevant evidence and the parties' arguments, and is now ready to rule.

The plaintiffs seek to deny the debtors' discharge based on allegations that the debtors concealed property, transferred estate property after the commencement of the case, made false oaths, and have had an unexplained loss of assets. Based on the evidence presented, the Court finds the following to be the relevant facts.

The debtors are lifelong residents of the Kansas City metropolitan area. For some time, they had lived on the Missouri side of the Kansas-Missouri border. Mr. Barnes was a partner in Barnes and Phillips Engineering until 1990 when the partnership encountered financial difficulties that caused its collapse. The Waldinger Company bought the partnership assets, and employed Mr. Barnes until it ceased operations in the Kansas City area in May of 1991. Thereafter, Mr. Barnes worked from time to time as a consultant and engineer, either independently or as an employee. In 1990, as a result of the financial distress caused by the failure of Mr. Barnes's business, the debtors lost their Missouri home through foreclosure. They were able to remain in the house under a lease until they were required to leave in mid-1991.

Also during 1990 and 1991, the debtors and Mr. Barnes's family began planning new living arrangements for his parents, who were growing infirm. The family decided to build a house with two living quarters, one handicapped-accessible for the parents, and the other for either Mr. Barnes and family or his brother and family to occupy so care could more easily be provided for their parents during their declining years. The parents established a revocable trust which loaned money to a sole proprietorship called W.K. Realty, which Mr. Barnes's brother owned, and W.K. Realty bought land at 15800 Ess Road in Kansas City, Missouri, on which to build this house, giving the trust a mortgage on the property. Mr. Barnes understood at least that he would receive something from the trust when his parents died, although he may not have known specifically that he and his brother were remaindermen under the trust.

By the time the debtors had to leave their foreclosed Missouri home, Mr. Barnes's father had passed away and the family had decided the debtors would be the ones to move into the Ess Road house with Mr. Barnes's mother. Construction had begun, under Mr. Barnes's supervision, but it was apparent the house would not be ready for occupancy until late 1991 or early 1992. At some point, the debtors loaned money to W.K. Realty to help with the construction costs, but that money was repaid and they spent it before they filed for bankruptcy.

Somewhat earlier, in March of 1991, the debtors signed a contract for deed to buy a condominium in Prairie Village, Kansas, for $55,000. They agreed to pay $20,000 down, an additional $25,000 late the next month, and the $10,000 balance through monthly installments of $275. About six months before they filed their chapter 7 bankruptcy case, having paid the initial $20,000, but already in default on the $25,000 payment, the debtors moved into the condo, planning to stay there and improve it until the Ess Road house was finished. They expected to sell the condo for a profit when they moved to Ess Road. The contract for deed provided that if the debtors defaulted, they would forfeit their downpayment as liquidated damages, but could rent the condo for $650 per month. Ultimately, the seller agreed to charge at least some of their rent obligation against the downpayment they had made.

On January 3, 1992, the debtors filed for bankruptcy. They were still living in Prairie Village then and claimed Kansas exemptions, including claiming the condo as their homestead. At the end of January, the debtors moved to Ess Road under a lease agreement with W.K. Realty. They caused some confusion for their chapter 7 trustee and creditors by testifying later at the first session and some of the second session of the creditors' meeting held pursuant to 11 U.S.C.A. §341 that their home was in Prairie Village. About halfway through the second session, they finally disclosed that they had moved to Ess Road. They explained their earlier answers by saying they thought they were being asked about their address for bankruptcy filing purposes, rather than their current address.

A number of the trustee's and creditors' concerns and suspicions about the debtors were caused by poorly completed bankruptcy schedules, mainly through partial and complete omissions of relevant information. Their misleading statements at the creditors' meeting and later at examinations pursuant to Federal Rule of Bankruptcy Procedure 2004 heightened those suspicions. Rather than cataloguing all the problems with their schedules and testimony, the Court will simply note a number of examples.

The first item on the debtors' "Statement of Financial Affairs" shows income from two employers for Mr. Barnes and no income for Mrs. Barnes for calendar years 1991 and 1990 (since they filed on the first working day of 1992, no income for calendar year 1992 is shown). Schedule I, on the other hand, lists their current income of $2,550 per month as coming from Mr. Barnes's self-employment and Mrs. Barnes's job where she had worked for six months. Besides the income reported on the schedules, the debtors testified that during the same time periods, they both earned some income from W.K. Realty, Mr. Barnes did from Anthony Mechanical Contractors, and Mrs. Barnes did from Stephenson's Apple Orchard and several other temporary jobs. Item three on the statement of affairs indicates the debtors made no payments aggregating more than $600 to any creditor within 90 days of bankruptcy. Yet the current monthly expenditures listed on Schedule J show $650 for rent or home mortgage payment and $750 for auto installment payments, and the debtors' testimony disclosed other payments over $600 during that period. Item 10 on the statement of affairs indicates the debtors made no transfers within one year of bankruptcy, but answer 16 discloses the transfer in February 1991 of an interest in a partnership which owned rental property, and the debtors' testimony disclosed the transfer of an interest in a boat within one year of bankruptcy. Schedule G shows no executory contracts or leases while Schedules A, C, and D disclose the debtors were buying the Prairie Village home under a contract for deed, item 61 on Schedule F shows they had leased a Nissan automobile in 1990 and still owed $11,800 on it, and they disclosed in their testimony that they had a lease on the Ess Road property dated in 1991. Though the plaintiffs suggest that a number of these deficiencies support their case, the Court attributes those that are disclosed or hinted at in other parts of the schedules to poor draftmanship or oversight. In fact, except for two matters not yet mentioned, the Court believes the evidence is insufficient to justify denying the debtors' discharge under §727. Those two matters, however, are much more serious and require the Court to deny the discharge. The first of these is the debtors' failure to list Mr. Barnes's interest in his parents' revocable trust and to disclose their activities relating to the trust's property. The second is several statements made under oath which appear to have misled the trustee about the Prairie Village condo, a possible estate asset.

When they filed for bankruptcy, the debtors were aware that Mr. Barnes's parents had established a trust, and that Mr. Barnes would receive something from the trust when his parents died. They did not disclose this contingent interest in their schedules or during the creditors' meetings. They also failed to disclose that they both were paid for work they did for W.K. Realty, the fee owner of the Ess Road property which was mortgaged to the trust, in connection with the construction of the house on the property. In fact, Mr. Barnes supervised and participated in the construction of the house. The debtors also failed to disclose that they had a lease on the property dated in early 1991. For more than a month, the debtors delayed advising the trustee that they had moved to the Ess Road property; as late as March 6, 1992, they mailed a letter to the trustee which showed the Prairie Village condo as their return address even though they had moved in January.

Although the trust was revocable, it was nevertheless an asset of the debtors and so, of their bankruptcy estate. It is the trustee's duty, not the debtors', to determine whether an estate asset has value. Had they succeeded in keeping the trust secret, the debtors would likely have obtained a share of the trust assets even though Mr. Barnes's interest would still have been an estate asset since the trustee does not abandon undisclosed and undiscovered assets. 11 U.S.C.A. §554(d); 4 Collier on Bankruptcy, ¶554.03 (15th ed. 1996). The debtors' failure to disclose their trust interest, their lease of the Ess Road property, their employment connected to that property, and their move to the house there leads the Court to conclude that they were trying to keep the trustee from learning of the Ess Road property and their involvment with it. Their actions concerning the trust justify denying their discharge under §727(a)(2) and (4). See 4 Collier, ¶¶727.02[6][b] & 727.04[1].

The debtors also made misleading statements concerning the Prairie Village property. Soon after the first session of the meeting of creditors, the trustee objected to the debtors' exemption of the Prairie Village condo as their homestead. Early in 1991, the debtors had made a downpayment on the condo which constituted 36% of its purchase price. During the creditors' meeting, the debtors testified that after they realized they would be unable to make the payments called for by the contract for deed, they arranged for a refund of part of their downpayment. They told the trustee and creditors that they had used some of the refunded money for living expenses but also indicated either that they still had some of it or that the sellers would be returning more to them. During the creditors' meeting, the trustee directed the defendants not to spend any more of the money and to account for all of it. At that time, the debtors said they were paying $650 per month on the condo, but they had not yet supplied a copy of the contract for deed and did not disclose that they were operating under the default provision. At trial, the debtors testified that the sellers had not returned any cash to them but had only given them a credit toward rent owed on the condo. The debtors said this was done under the default provision in the contract for deed which allowed them to remain in the condo after default if they paid $650 per month in rent. They indicated they forfeited over $13,000 of their downpayment as liquidated damages, and received rent credit for the rest. Having contested the exemption, the trustee properly expected the debtors to comply with her direction to retain the balance of the reported refund, and had a reasonable expectation that the debtors would not simply forfeit, without notice, their interest in the downpayment and condo, potential estate assets at that time. In reality, however, the debtors had already forfeited their interest in the property at least before the second session of the creditors' meeting, if not before the first. Despite knowing the trustee had objected to their exemption and claimed the condo was estate property, the debtors misled the trustee and their creditors about the true status of the contract for deed. Had they disclosed the true status at that time, the trustee might have been able to salvage some of the condo's value for the estate. The postpetition forfeiture under the contract for deed constituted an unauthorized transfer of estate property since the exemption question was unresolved, and the trustee might have been able to avoid the transfer under §549 to the benefit of the estate. Instead, the debtors' misleading testimony precluded this possible avenue of recovery. Their actions concerning the condo justify denying their discharge under §727(a)(2) and (4). See 4 Collier, ¶¶727.02[6][b] & 727.04[1].

For these reasons, the debtors must be denied a discharge.

The foregoing constitutes Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure and Rule 52(a) of the Federal Rules of Civil Procedure. A judgment based on this ruling will be entered on a separate document as required by FRBP 9021 and FRCP 58.

Dated at Topeka, Kansas, this ____ day of August, 1996.













_________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS



In Re: )

WALTER BRADLEY BARNES, ) NO. 92-40016-7

JANET LEE BARNES, ) CHAPTER 7

DEBTOR(S). )

)

HOME STATE BANK, )

DARCY D. WILLIAMSON, Trustee, )

PLAINTIFF(S), )

v. ) ADV. NO. 92-7114

WALTER BRADLEY BARNES, )

JANET LEE BARNES, )

DEFENDANT(S). )

JUDGMENT ON DECISION

This proceeding resulted from three separate complaints objecting under 11 U.S.C.A. §727 to the debtors' discharge. One of the complaints was dismissed as untimely filed, but the other two were tried to the Court in July 1996. Creditor Home State Bank appeared by counsel Brett D. Anders. Trustee Darcy W. Williamson appeared for herself. The debtors appeared pro se. The Court considered the relevant evidence and the parties' arguments, and has issued its Memorandum of Decision.

For the reasons stated in the Memorandum, judgment is hereby entered denying the debtors' discharge, pursuant to 11 U.S.C.A. §727(a)(2) and (4).

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of August, 1996.







__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

 

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