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#2175 entered 10-23-95; order denying reconsideration 12-22-95 (appended)

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS





In Re:

CURTIS HANSEN,

BLANCHE HANSEN, NO. 85-41127-7

MARCIA HANSEN, NO. 85-41128-7

MELBA HANSEN, NO. 85-41131-7

DEBTOR(S)

CHAPTER 7

NORTH CENTRAL KANSAS PRODUCTION CREDIT ASS'N,

PLAINTIFF(S),

v.

CURTIS HANSEN, BLANCHE HANSEN,

DEFENDANT(S)

ADV. NO. 86-0005

NORTH CENTRAL KANSAS PRODUCTION CREDIT ASS'N,

PLAINTIFF(S),

v.

MARCIA HANSEN,

DEFENDANT(S)

ADV. NO. 86-0006

NORTH CENTRAL KANSAS PRODUCTION CREDIT ASS'N,

PLAINTIFF(S),

v.

MELBA HANSEN,

DEFENDANT(S)

ADV. NO. 86-0009

MEMORANDUM OF DECISION

These adversary proceedings arose from common operative facts and were consolidated for trial. The trial lasted three days and was supplemented by depositions. Thereafter, the parties submitted suggested findings of fact and conclusions of law along with memoranda in support of their positions. After several related appeals were decided which upheld the denial of discharge for certain related parties, these cases were inadvertently deleted from the Court's list of cases under advisement. They languished in unresolved limbo until a computer print out returned them to the Court's attention. The Court ordered a trial transcript, received it, and is finally prepared to rule on the objections to discharge filed by the North Central Kansas Production Credit Association (PCA). The PCA appeared by counsel J.B. King. The defendant-debtors all appeared by counsel Dan Turner.

PRELIMINARY ISSUE

Before determining the facts relevant to this decision, the Court must resolve an evidentiary question. After using up the time allotted on the Court's docket for the trial, the parties agreed to submit additional testimony through depositions. When Billy and Randy Hansen were deposed for that purpose, both claimed their privilege against self-incrimination. The PCA then offered into evidence a prior deposition of Billy and transcripts of testimony both men had given at prior court hearings, and the defendants objected. In their briefs, the defendants repeat their objection to the deposition, but have not mentioned the testimony from the prior hearings. Besides being relatives of the defendants as explained below, both these men were general partners of the defendants during the time period relevant to these proceedings. Although the defendants' counsel complains that he did not represent the men when they were previously deposed and testified, the men were represented by counsel at the time and the defendants were parties to the proceedings involved.

The Court concludes the deposition and trial testimony are admissible for a number of reasons. They are not hearsay and are admissible because they constitute statements made by the defendants' agents, their partners, concerning matters within the scope and during the existence of the partnership. Fed.R.Ev. 801(d)(2)(D). Since, as defined in Evidence Rule 804(a)(1), the declarants were not available as witnesses, the depositions and trial testimony are also fully admissible as former testimony under 804(b)(1), and are admissible as statements against interest under 804(b)(3) to the extent the testimony included such statements. Even if the materials are not admissible under any of those provisions, they might be admissible under Rule 804(b)(5) if the PCA gave the notice required by that provision. Having ruled the materials are otherwise admissible, the Court will not search the record for proof of such notice.

Because the deposition and prior trial testimony are admissible, the Court has considered them in determining the facts relevant to this decision.

FINDINGS OF FACT

Curtis and Blanche Hansen have four sons: Billy, Randy, Dennis, and Joe. At least during the time relevant to this decision, Billy was married to Merry Jo Hansen, Randy was married to Marcia Hansen, and Dennis was married to Melba Hansen. Joe was unmarried. As indicated by the caption, Curtis, Blanche, Marcia, and Melba are the defendants in these proceedings. Curtis, Blanche, their four sons, and the three married sons' wives were all partners owning equal proportionate shares of a business known as the Hansen Farms Partnership (the Partnership). The Partnership farmed some land which it leased from individual partners and other land which it leased from third parties.

The PCA loaned the Partnership and the individual partners money to fund the Partnership's farming operation. The loan was renewed on numerous occasions. It was secured by all of the Partnership's property, including livestock, growing crops, feed, machinery, equipment, and contract rights in government programs. It was also secured by all the real estate which the individual partners owned, except for the quarter-section where Curtis and Blanche resided. Beginning in October of 1984, and continuing thereafter, the PCA advised the Partnership that it must substantially reduce its debt to the PCA or find other financing. The PCA sent the Partnership a series of letters in this regard which the partners discussed among themselves. The loan matured on December 1, 1984. On December 12, the PCA granted the Partnership a brief extension, to January 2, 1985, so the partnership could develop plans for a major debt reduction or refinancing.(1) At that time, the balance due on the note was $730,287.36 in principal plus $2,956.27 in accrued interest. Additional interest was accruing at $294.56 per day. Early in January of 1985, some of the Partnership's partners met with the PCA's Board of Directors to seek further extensions of the loan. This request was denied.

The Partnership did not significantly reduce the debt and did not obtain alternative financing, so the PCA filed a foreclosure action in a Kansas state court on February 15, 1985, against the Partnership and the individual partners. The Partnership aggressively defended the action, and filed a counterclaim alleging, among other things, that the PCA had breached its contract with the Partnership, breached federal statutory duties, breached an alleged fiduciary duty to the Partnership, breached the covenants of good faith and fair dealing, failed to disclose material facts and made misrepresentations to the Partnership, and negligently handled the Partnership's account. Concerned with preserving its collateral while the action was proceeding, the PCA sought an injunction precluding the individual partners from disposing of any of the collateral. At a hearing, the state court orally granted the PCA's request, and a written order was entered on April 17, 1985, enjoining the partners from disposing of, or removing from the State of Kansas, any of the following property:

"Livestock: Livestock of every kind and description whether or not marked or branded.

"Equipment: Farm and ranch machinery and equipment of every kind and description.

"Farm Produce

and Feed: Grains, processed and unprocessed feed, and harvested crops.

"Crop: Annual and perennial crops of whatever kind and description which are now growing or are hereinafter planted, grown and produced."

All of the defendants in these adversary proceedings were defendants in the foreclosure suit, and were present at the injunction hearing in person or through counsel. Consequently, they were all aware of the injunction order. They were also all clearly informed that the PCA objected to any disposition of its collateral unless it received the proceeds.

As early as November 12, 1984, a field inspection reported that the Partnership had 134 less cattle on its premises than the PCA thought it should have. On May 3, 1985, another PCA field inspection reported a similar deficiency of 150 hogs. The defendants claimed at trial that these livestock shortages may have been due to the poor condition of the livestock, which reduced their ability to produce offspring. The May 3rd report also indicates that, for the first time, one or more of the partners informed the PCA that some livestock on the Partnership's premises purportedly belonged to Stacie, Dennis and Melba's nine-year-old daughter, and some to Greg, Billy and Merry Jo's thirteen-year-old son. At trial, Blanche said she believed that some of her grandchildren kept livestock on her homeplace, but her husband Curtis said he believed they did not. In fact, Curtis indicated he was not even aware his grandchidren owned large numbers of animals.

In February 1985, Melba opened a checking account for her daughter Stacie. This account was to receive proceeds of hogs sold in Stacie's name. Purportedly, Greg bought hogs for Stacie to care for and feed, and she obtained three sows herself for 4-H projects. Initially, on February 11, a check for $2,358.19 from the sale of hogs was deposited into the account. Thereafter, through May 13, 1986, $24,793.13, some from the sale of hogs and some from unexplained sources, was deposited into Stacie's account. Feed belonging to the Partnership was fed to the hogs that were sold as Stacie's property. The Partnership received no cash consideration for the feed; purportedly, Stacie provided services in return for it. The money in Stacie's account was used to pay expenses for the Partnership and its partners. For example, on February 15, 1985, personal property tax on a truck Curtis owned was paid. Insurance on the same truck was paid on November 12. Real property taxes of $1,277.59 were paid on property owned by Dennis and Melba. On March 28, 1985, funds from this account provided the initial paid-in capital for Salt Creek Farms, Inc., an entity which Melba established. None of the proceeds of the hogs or the feed were paid to the PCA, and none of them were turned over to the bankruptcy estates of the defendants, the Partnership, or the other related parties who filed for bankruptcy. The Court concludes that all or nearly all of the money that flowed through this account in 1985 actually belonged to the Partnership, not to Stacie.

Billy and Merry Jo's son Greg had a checking account at least as early as January of 1983. Throughout 1983 and 1984, the account balance never reached as much as $400, and the largest check written was for $30. Early in January of 1985, the balance was $50.13. Beginning on January 11, after the Partnership's financial troubles with the PCA had become acute, through the end of 1985, $32,699.33 in proceeds from cattle and hog sales flowed through the account. Greg was unable to thoroughly explain or document how he obtained these hogs and cattle. He said only that he bought some number of them at some time for cash and that a number were what he called "trader cattle," which he defined to be cattle "on their last breath" that he bought for $90 or less. Once the large deposits began, much of the money in the account, like that in Stacie's, was used to pay bills for the Partnership and its partners. For example, on February 13, $894.75 from the account was used to pay a fuel bill for the Partnership. On February 14, $319.41 was used to pay for a water pump repair or replacement, though Greg owned no land and could not say whose water pump was involved. On February 28, $2,780.63 was used to pay the county treasurer for tags and taxes, though Greg owned no property subject to such charges. On March 15, $890 was used to pay an electric bill for Dennis and Curtis. That same day, $2,000 was paid to Billy Hansen for a "retainer fee," although Greg said he did not know whether that was for an attorney. On March 21, $1,000 was used to pay Doug Thompson,resenting Greg's parents and some of the other partners in the state court lawsuit. Later, on October 23, $600 was used to pay the filing fees for chapter 11 bankruptcy cases for Randy, Billy, and Dennis. None of the sale proceeds deposited in this account were remitted to the PCA. The Court concludes that all or nearly all of the money that flowed through this account in 1985 actually belonged to the Partnership, not to Greg.

The May 3rd PCA field inspection reported an excellent-looking wheat crop and the presence in the fields of tracks made by fertilization vehicles. The defendants claim that little or no fertilizer was used on the cropland, resulting in reduced crop production. Harold Stewart, who helped the Partnership harvest 149.3 acres of its wheat ground in 1985, filed a lien statement showing an average yield of 45.9 bushels per acre from that ground. This reported yield would exceed the PCA estimate and the average yield the Partnership had realized in the three previous years. Nevertheless, on September 23, 1985, a PCA field inspection reported that the Partnership claimed it had a 12,000 bushel wheat harvest, less than one-half of the average production of each of the previous three years and less than one-half of the expected yield.

After the PCA had filed the foreclosure action against the Partnership and the partners, each of the defendants in these proceedings attempted to transfer the Partnership's leases of their real property to BDR Farms, Inc. (BDR), a new entity formed by Billy, Dennis and Randy. Each defendant also helped BDR obtain transfers of the Partnership's leases of property owned by third parties. The PCA sued BDR, along with Billy, Dennis, and Randy, and in October 1985, the state court ruled, in effect, that BDR was the Partnership's alter ego and that the transfers did not affect the PCA's security interests in the leases. In the meantime, though, the transfers to BDR effectively (though not legally) shielded the proceeds of the Partnership's farming activities from the PCA.

In May 1985, the state court ordered the Partnership and its partners to sell all their livestock that were ready for sale and, unless appropriate arrangements could be made with the PCA for feeding the rest of their livestock, to sell them as well. The court ordered all proceeds of the sales to be deposited with the clerk of the court. That same month, in answer to the PCA's interrogatories, the defendants stated that the Partnership had maintained excellent records to the date of their answers.

The Partnership filed a chapter 11 bankruptcy petition on August 6, 1985. On February 10, 1986, the case was dismissed because during the chapter 11, the Partnership had used $100,000 of the PCA's cash collateral without the PCA's consent and without the court's authorization. The defendants have made no showing that the PCA's secured position was in any way protected against the resulting reduction in the value of its collateral. In addition, while the Partnership was in bankruptcy, each of the defendants received an assignment of a government farm payment from the Partnership's alter ego, BDR. As a part of obtaining these assignments, each defendant signed a document which was placed in BDR's records that said the assignment was not for the purpose of paying any pre-existing debt; in fact, they all applied the government payments to BDR's pre-existing rent debts to them. In this manner, Melba received $1,474.76, Marcia received $1,050, and Curtis and Blanche received $1,791.

The defendants all filed personal chapter 7 bankruptcy cases on October 9, 1985, in contemplation of a hearing regarding BDR's assets to be held the next day in the BDR suit in state court. The original schedules the defendants filed did not disclose the existence of their leases to BDR. At the October 10 hearing, the state court determined that BDR's property belonged to the Partnership and was subject to the bankruptcy court's jurisdiction over the Partnership's bankruptcy case. To preserve the property for the benefit of the Partnership's bankruptcy estate, the state court also entered an order providing that:

1. BDR Farms, Inc., and the individual defendants [Billy, Dennis, and Randy,] are enjoined from harvesting any crop except for sale at a commercial grain dealing facility such as a duly licensed grain elevator.

2. The defendants are specifically enjoined from harvesting any grain and depositing it in either of the Harvestors owned by Hansen Farms.

3. The transfer of leases to BDR Farms, Inc., has no effect on PCA's lien on crops growing, ASCS payments or alfalfa.

4. The defendants are restrained from any further dealings between BDR Farms, Inc., and Hansen Farms, except as may be permitted through the bankruptcy court.

5. BDR Farms, Inc., is further restrained from using any machinery of Hansen Farms pursuant to any purported agreement.

6. The leases, crops and ASCS payments purportedly belonging to BDR Farms, Inc., are assets of Hansen Farms and jurisdiction over them is under the jurisdiction of the United States Bankruptcy Court and this Court will take no further jurisdiction of those matters until the Bankruptcy Court refuses to take jurisdiction or returns jurisdiction to this Court.

After filing for bankruptcy, the defendants continued to receive and retain benefits, including ASCS payments, under leases of their non-exempt property. Melba received $8,612.76 from these sources, Marcia received $4,653.75, and Curtis and Blanche received $7,836.77. These benefits and payments were property of the defendants' bankruptcy estates.

After October 9, Melba worked for an entity called Hilltop Pork (Hilltop) which her husband, Dennis, had created. Between October 21, 1985, and January 10, 1986, Hilltop sold hogs owned by the Partnership for a total of $19,298.92, spending the proceeds for its own benefit or giving them to Melba and Dennis, who used them for their personal benefit. Melba also continued to farm non-exempt property of her bankruptcy estate, hiding this fact by operating as Salt Creek Farms, Inc., the entity she had established with money from Stacie's bank account.

Not more than 10 days before the trial of these adversary proceedings, Marcia and her husband, Randy, created the M and R Trust, into which they tried to transfer redemption rights to real property that they had owned prepetition but which had become nonexempt property of their bankruptcy estates when they filed their bankruptcy petitions. That same day, Curtis and Blanche also created a trust and tried to make similar transfers to it. The defendants testified that the timing and similarity of the trust instruments and attempted transfers was coincidental.

In their original schedules, the defendants all stated that they had complete records. Nevertheless, Curtis and Blanche have failed to produce any of their records for 1985. Melba and Marcia have produced only partial records for 1985. The defendants produced no records for the Partnership, contending they do not have them. As partners, of course, they would be entitled to obtain the records and have not explained why they failed to do so.

The meetings of creditors in the defendants' bankruptcy cases pursuant to 11 U.S.C.A. §341(a) were all first set on the same date. The PCA's complaints commencing these proceedings were all filed less than sixty days after that date, and informed the defendants, essentially in the words of §727(a) and §523(a)(2) and (a)(4), why the PCA claimed they should be denied discharges and their debts to it should be nondischargeable. The defendants moved to dismiss the complaints for failing to state a claim for relief. At a hearing on that motion, the Court gave the parties time to brief the question whether insufficient complaints could be amended after the expiration of the time for objecting to the defendants' discharge and dischargeability. The PCA then moved to amend its complaints and filed a brief on post-bar-date amendment of such complaints. The defendants did not respond to the motion or the brief. The Court allowed the amendments, which were filed and served on the defendants' counsel on June 13, 1986. The defendants never asked for reconsideration of the order allowing the amendments. Later, following a pretrial conference, a pretrial order was entered setting forth the issues governing the future course of these actions. The defendants did not then raise the sufficiency of the PCA's original complaints or the timeliness of their amendment as issues to be resolved by the Court. Instead, the defendants first raised these issues in their post-trial brief.

DISCUSSION AND CONCLUSIONS

1. Sufficiency of Complaints and Timeliness of Amending of Them

In their brief, the defendants question the timeliness of the PCA's amended complaints. Federal Rule of Civil Procedure 16, made applicable here by Federal Rule of Bankruptcy Procedure 7016, provides that any pretrial order entered controls the subsequent course of the action unless modified by a subsequent order, and that an order entered following a final pretrial conference shall be modified only to prevent "manifest injustice." The sufficiency of the PCA's original complaints became moot when the Court permitted them to be amended. If they could have done so, the defendants have waived any questions about the timeliness of the amendments by failing to object when the PCA sought permission to file them, failing to seek reconsideration of the order granting that permission, and failing to include such questions in the pretrial order. Even though the timeliness under FRBP 4004(a) of complaints objecting to discharge or under FRBP 4007(c) of complaints seeking a determination of the dischargeability of a particular debt may be a jurisdictional, nonwaivable question, see Burger King Corp. v. B-K of Kansas, 73 B.R. 671, 674-75 (D.Kan. 1987) (FRBP 4007(c) time limits are jurisdictional and nonwaivable), "[a]n amendment of a pleading relates back to the date of the original pleading when . . . (2) the claim or defense asserted in the amended pleading arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading." FRCP 15(c), incorporated by FRBP 15. The amended complaints satisfied the test of Rule 15(c) to relate back to the filing of the original complaints, which were timely filed.

2. Denial of Discharge Under §727(a)

Although the PCA has asserted several other claims, the Court has considered only whether the PCA has established by a preponderance of the evidence that, in connection with their own bankruptcy cases or the Partnership's case, any of the defendants violated §727(a)(2), (3), (5), or (7). Subsections (2), (3), and (5) concern a debtor's own property, records, and bankruptcy estate, while subsection (7) makes the acts specified in those subsections a basis for denying the debtor's discharge if, during or within one year before his or her own bankruptcy case, the debtor committed them in connection with another bankruptcy case concerning an insider. The defendants are all insiders of the Partnership. §101(31)(A)(ii). In addition, a general partner may suffer a nondischargeability sanction even without actual knowledge of another partner's improper handling of the partnership's activities. See Strang v. Bradner, 114 U.S. 555, 561-62 (1885); Luce v. First Equip. Leasing Corp. (In re Luce), 960 F.2d 1277, 1281-83 (5th Cir. 1992); BancBoston Mort. Corp. v. Ledford (In re Ledford), 970 F.2d 1556, 1561-62 (6th Cir. 1992). Thus, all these defendants could suffer a loss of any discharge of debts even if they did not know of or participate in any activities which violated these provisions. The Court concludes, however, that each defendant personally performed acts which would preclude him or her from receiving a discharge of his or her debts, even without such vicarious responsibility.

a. §727(a)(2) & (7): Transferred or concealed property with intent to hinder, delay, or defraud

Section 727(a)(2) provides that the Court shall grant the debtor a discharge unless:

the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed--

(A) property of the debtor, within one year before the date of the filing of the petition; or

(B) property of the estate, after the date of the filing of the petition;

The Court concludes the defendants all performed, or are responsible for, acts described by this subsection relating to their own property and property of their own bankruptcy estates and which related to the Partnership's property and property of its bankruptcy estate.

Beginning in January 1985 and continuing thereafter, including throughout its chapter 11 proceeding, the Partnership attempted to hinder, delay, or defraud the PCA by transferring, removing, or concealing partnership property. The partners, including all the defendants in these proceedings, aided and abetted the Partnership in those efforts, both before and during their own chapter 7 cases. To varying degrees, each partner participated in the Partnership's farming operations. Each partner leased land to the Partnership, and during the Partnership's bankruptcy case, less than a year before filing their own bankruptcy cases, each partner participated in attempting to transfer their leases to BDR and helped get third parties to transfer their leases from the Partnership to BDR. These 1985 transfers were made in mid crop-year and caused the proceeds of the Partnership's farming operations to be channeled to BDR, eluding the PCA's security interests and enabling BDR and the defendants to use the proceeds for their own benefit. BDR received the proceeds directly while the defendants received from BDR, the Partnership's alter ego, money and assignments of rights to receive money. The defendants all allowed money belonging to the Partnership, subject to the PCA's liens, to be funneled through bank accounts belonging to children and to be used to pay debts for the Partnership and individual partners. During its chapter 11 case, the Partnership and its partners benefited by the unauthorized use of about $100,000 of the PCA's cash collateral. This use reduced the value of the PCA's collateral and led to the dismissal of the chapter 11.

Each defendant received assignments of government farm payments from BDR. To document these assignments in BDR's books, each defendant signed a document stating the payment was not being assigned to cover a pre-existing debt but a current one, when in fact each assignment was credited against BDR's past-due rent debt to the defendant receiving the assignment. The purpose of these falsifications appears to have been to try to protect the transfers from attack as preferences under §547 or unauthorized postpetition transfers under §549.

Without the knowledge or permission of the relevant trustee or the court, each defendant used property that belonged to his or her chapter 7 bankruptcy estate to generate money and did not turn that income over or otherwise account to his or her chapter 7 trustee for the funds received. Melba formed Salt Creek Farms, Inc., which, much as BDR Farms did with the Partnership's property, continued to farm her nonexempt property as though Melba had not filed for bankruptcy. While this fact was clearly established, the evidence presented did not make it possible for the Court to calculate a specific amount of money thus siphoned from the bankruptcy estate. Curtis, Blanche, and Marcia all tried to place bankruptcy estate property in living trusts they created for themselves within 10 days of the trial of these proceedings, long after they filed for bankruptcy.

All these acts make it clear that from January of 1985 through the trial of these proceedings, the defendants ignored the law and, intending to hinder, delay or defraud the PCA, dealt with their assets, the Partnership's assets, and the assets of all their bankruptcy estates as if their creditors and trustees had no rights. Both in the Partnership's chapter 11 case and their own chapter 7 cases, they breached their duties to be accountable to and cooperate with their creditors and trustees.

b. §727(a)(3) & (7): Failure to keep or preserve records

Section 727(a)(3) provides that the Court shall grant the debtor a discharge unless:

the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case.

The Court concludes the defendants all performed acts or are responsible for acts or omissions described by this subsection relating to their own records and the Partnership's records.

The Partnership appears to have ceased maintaining records in 1985. As the Partnership's relationship with the PCA deteriorated, its record-keeping also deteriorated. Despite requests, neither the Partnership nor these defendants have produced any partnership records for the period between the end of 1984 and the Partnership's chapter 11 filing in 1985. The defendants appear to believe that they are not responsible for producing the Partnership's records even though they were among its general partners. Their attitude seems to be that they are not required to do anything more than produce any records of which they may have physical possession. That is not the law. Instead, all partners ordinarily have sufficient control of the partnership books to be able to produce them in response to discovery requests. See FRBP 2004, 9016, & 7034 (party may be required to produce documents in "possession, custody or control"); Chaveriat v. Williams Pipe Line, 11 F.3d 1420 (7th Cir. 1993) ("control" in FRCP 34 is defined as the legal right to obtain the document on demand); K.S.A. 56-319 (absent agreement to contrary, partner shall have access at all times to partnership books and may inspect and copy). The defendants have not argued they did not have "control" of the Partnership books or that the books do not exist, only that they did not have physical possession of them. As insiders of the Partnership, the defendants have violated §727(a)(7) by failing, without justification, to produce its records.

Despite requests, Curtis and Blanche have not produced their records for 1985. While Melba and Marcia have produced some of their records for 1985, those records contain gaps which have not been filled by supplemental records nor have Melba and Marcia explained why they cannot provide complete records. Thus, the defendants have also violated §727(a)(3) by failing, without justification, to keep or produce records from which their financial condition and business transactions might be ascertained.

c. 727 (a)(5) & (7): Failure to explain loss or deficiency of assets to meet liabilities

Section 727(a)(5) provides that the Court shall grant the debtor a discharge unless:

the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor's liabilities;

The Court concludes the defendants have all failed to explain satisfactorily both their own and the Partnership's loss of assets.

Before and during its bankruptcy case, the Partnership's assets diminished. The Partnership and the general partners, including these defendants, suggest that the poor condition of the livestock diminished their capacity to bear offspring, resulting in the shortages shown by the PCA inspection reports. The Partnership and partners also contend the deficiency in wheat harvested when compared to average yields for the past three years and the current year's expected yield was the result of their inability to fertilize the cropland due to a lack of funds. The Court finds the partners' explanations unpersuasive.

The more likely explanation for the reduced production the Partnership reported in 1985 for its livestock and cropland, the one the Court accepts as the truth, is that the partners simply diverted the livestock, crops, and their proceeds to other companies and to some of the partners' children. The PCA reports took into consideration some reduction in offspring due to the condition of the livestock, but the Partnership's herds were still well below the expected numbers. The relevant PCA report indicated the Partnership's land contained tire tracks from equipment that is used to fertilize crops and commented that in May 1985, the crop looked to be in excellent condition. In addition, the Partnership's average yield per acre in the 1982, 1983, and 1984 crop years was twice what the Partnership reported to the PCA for its 1985 harvest. Harold Stewart, who helped harvest 149.3 acres for the Partnership in 1985 and provided the only non-Partnership evidence of the actual yield, reported that land produced 45.9 bushels per acre, better than the average yield for the previous three years. If this is true, and the Court believes it is, it means the Partnership's reported harvest could be correct only if the rest of the Partnership's land produced about one-third of the prior three years' average yield, a possibility the Court rejects.

Furthermore, the Court is convinced much of the Partnership's livestock shortage arose because the missing animals were sold and the proceeds deposited into the bank accounts of two children, nine-year-old Stacie and thirteen-year-old Greg. These children had little, if any, record of owning, feeding, breeding, or selling livestock until 1985, the year their parents' partnership ran into serious financial trouble, when the youngsters suddenly developed herds that, in a little over one year, generated over $50,000 in proceeds from livestock sales, without any record of significant expenses for feeding the herds and little explanation of the source of the animals. The PCA's field agents were not told until May of 1985 that these children owned some of the livestock on the Partnership's land. Probably those animals (and perhaps others) were fed with some of the missing crops, thus accounting for the children's lack of recorded feed expenses as well as some of the underreported wheat harvest. Much of the money deposited into the children's accounts, supposedly from sales of their own livestock, was used to pay bills owed by their parents, uncles, aunts, or grandparents. The fact the livestock did not really belong to the children probably accounts for Curtis and Blanche's disagreement about whether the children kept livestock on their land, as well as Curtis' failure to be aware that the children purportedly owned large numbers of animals.

3. Summary

The PCA's original complaints were timely filed and, even if they were insufficient, the amended complaints relate back to the date the originals were filed.

The Partnership and its partners engaged in a shell game, trying to hide many peas (in the form of crops and livestock) and admitting their ownership only of those peas the PCA managed to find. These defendants participated in the game, hiding the peas in corporate shells named BDR, Hilltop Pork, and Salt Creek Farms (and perhaps others), and in bank account shells in their children's names. These activities compel the Court to deny each defendant's discharge, pursuant to §727(a)(2), (3), (5), and (7).

Since these conclusions are sufficient to deny each of the defendants a discharge of all his or her debts, the Court deems it unnecessary to determine whether the discharges should also be denied under §727(a)(4) or whether the defendants' debt to the PCA would be nondischargeable under §523(a).

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 October, 1995.













_________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS





In Re: )

)

CURTIS HANSEN, )

BLANCHE HANSEN, ) NO. 85-41127-7

MARCIA HANSEN, ) NO. 85-41128-7

MELBA HANSEN, ) NO. 85-41131-7

) CHAPTER 7

DEBTOR(S). )

) NORTH CENTRAL KANSAS )

PRODUCTION CREDIT ASS'N, )

)

PLAINTIFF(S), )

v. ) ADV. NO. 86-0005

)

CURTIS HANSEN, )

BLANCHE HANSEN, )

)

DEFENDANT(S). )

)

NORTH CENTRAL KANSAS )

PRODUCTION CREDIT ASS'N, )

)

PLAINTIFF(S), )

v. ) ADV. NO. 86-0006

)

MARCIA HANSEN, )

)

DEFENDANT(S). ) )

NORTH CENTRAL KANSAS )

PRODUCTION CREDIT ASS'N, )

)

PLAINTIFF(S), )

v. ) ADV. NO. 86-0009

)

MELBA HANSEN, )

)

DEFENDANT(S). )

JUDGMENT ON DECISION

These adversary proceedings arose from common operative facts and were consolidated for trial. The North Central Kansas Production Credit Association (PCA) appeared by counsel J.B. King. The defendant-debtors all appeared by counsel Dan Turner. The PCA objected, pursuant to 11 U.S.C.A. §727(a)(2), (3), (4), (5), and (7), to all the defendants' discharges and questioned, pursuant to §523(a)(4) and (6), the dischargeability of the defendants' debt to it.

The Court has now issued its Memorandum of Decision resolving the proceedings. For the reasons stated therein, judgment is hereby entered denying each of the defendants, Curtis, Blanche, Marcia, and Melba Hansen, a discharge of their debts, pursuant to §727(a)(2), (3), (5), and (7). Judgment is hereby entered denying the PCA's other claims as moot.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of October, 1995.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

2175 entered 12-22-95

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS





In Re: )

)

CURTIS HANSEN, )

BLANCHE HANSEN, ) NO. 85-41127-7

MARCIA HANSEN, ) NO. 85-41128-7

MELBA HANSEN, ) NO. 85-41131-7

) CHAPTER 7

DEBTOR(S). )

) NORTH CENTRAL KANSAS )

PRODUCTION CREDIT ASS'N, )

)

PLAINTIFF(S), )

v. ) ADV. NO. 86-0005

)

CURTIS HANSEN, )

BLANCHE HANSEN, )

)

DEFENDANT(S). )

)

NORTH CENTRAL KANSAS )

PRODUCTION CREDIT ASS'N, )

)

PLAINTIFF(S), )

v. ) ADV. NO. 86-0006

)

MARCIA HANSEN, )

)

DEFENDANT(S). ) )

NORTH CENTRAL KANSAS )

PRODUCTION CREDIT ASS'N, )

)

PLAINTIFF(S), )

v. ) ADV. NO. 86-0009

)

MELBA HANSEN, )

)

DEFENDANT(S). )

ORDER DENYING MOTION TO RECONSIDER OR TO ALTER OR AMEND

These adversary proceedings are before the Court on the defendant-debtors' motion to reconsider or to alter or amend the judgment which denied their discharges. The debtors all appear by counsel Dan E. Turner and Philip L. Turner. The North Central Kansas Production Credit Association (PCA) appears by counsel J.B. King.

The debtors base their motion on four grounds. They contend: (1) their motions to dismiss, filed in February 1986, were unopposed and never ruled on, and should now be granted; (2) the delay between trial of these proceedings and the Court's decision have prejudiced them so they should be granted discharges; (3) part of the Court's decision "is a direction contradiction" of a Kansas Supreme Court decision issued before the trial; and (4) the dismissal of a state court case the PCA brought against some of the debtors' children made it incorrect for this Court to "assert" that the debtors should be denied discharges because they converted assets with the help of their children. The Court will address each ground in turn.

The debtors' first argument is based on a simplistic interpretation of the pleadings and orders filed in these cases. It is true that the PCA did not file any pleadings labelled as objections to the motions to dismiss and the Court never entered orders explicitly denying those motions. However, as indicated in the Memorandum of Decision, a hearing was held which concerned the substance of the motions, namely that the complaints did not adequately state claims for relief. At that time, the Court gave the parties time to brief the question whether insufficient complaints could be amended after the expiration of the time for objecting to the defendants' discharges and to dischargeability. When the Court later allowed the PCA to amend its complaints, the debtors' motions to dismiss were effectively though not expressly denied, or at least became moot. The Court will not change its judgment based on this ground.

The debtors' second argument is supported by no authority and makes no sense. As the Pn to deny the debtors' discharges, any prejudice resulting from the delay in deciding these cases fell on the PCA, not on the debtors. Equity hardly requires penalizing the PCA for delay it did not cause. The Court will not change its judgment based on this ground.

The debtors' third argument appears to be based on a misinterpretation of the Court's decision. The Court did not rule that the PCA had an effective security interest in ASCS payments, but instead that some of the payments were property of the Hansen Farms Partnership's bankruptcy estate and some were property of the debtors' personal bankruptcy estates. The debtors then violated §727(a)(2) and (7) by improperly diverting the payments from the bankruptcy estates to themselves. It is true that the Court found the debtors also participated in the Partnership's unauthorized use of the PCA's cash collateral, but the decision did not indicate that collateral included the ASCS payments. The Court will not change its judgment based on this ground.

The debtors' fourth argument seems to rely on certain unstated assumptions. They reason thus: the PCA sued the debtors' children in state court (apparently in 1986); the PCA dismissed that suit in 1990; therefore, this Court could not find that the debtors converted assets with the help of their children. The only way the argument can make any sense is to assume that the state court suit against the children was based on the same activities as this Court's ruling and that the PCA's dismissal came after the state court determined those activities did not occur. Even if these assumptions are correct, however, the state court suit would not affect this Court's decision because it involved different parties. The debtors do not contend they were parties to that suit. The Court will not change its judgment based on this ground.

For these reasons, the debtors' motion to reconsider or to alter or amend is hereby denied.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this 22d day of December, 1995.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

1. 1The PCA's proposed findings, with which the defendants agree, state the extension was granted to June 2, 1985, referring to Exhibit 5. That exhibit, however, shows the extension was only to January 2. The Court concludes the exhibit is correct.

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