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IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS



In Re:

WILLIAM BRYAN ANDERSON,

DEBTOR(S)

NO. 90-42320-7

CHAPTER 7

FARM BUREAU MUTUAL INSURANCE COMPANY, INC.,

PLAINTIFF(S),

v.

WILLIAM BRYAN ANDERSON,

DEFENDANT(S)

ADV. NO. 91-7175

STATE FARM MUTUAL INSURANCE COMPANY,

PLAINTIFF(S)

v.

WILLIAM BRYAN ANDERSON,

DEFENDANT(S)

ADV. NO. 91-7176

MEMORANDUM OF DECISION

These adversary proceedings were consolidated for trial because they involve identical issues. The debtor is represented by Leland E. Cox of Topeka, Kansas. Plaintiff Farm Bureau Mutual Insurance Company, Inc. (Farm Bureau), is represented by N. Larry Bork of Goodell, Stratton, Edmonds & Palmer of Topeka, Kansas. State Farm Mutual Insurance Company (State Farm) is represented by Bryce D. Benedict of Topeka, Kansas. At times, Farm Bureau and State Farm together will be referred to as "the plaintiffs."

The issues presented are whether the debtor should be held personally liabile for debts incurred by a corporation which he owned and controlled, and, if so, whether he should be able to discharge those debts in bankruptcy. Thus, the plaintiffs are trying to impose liability on the debtor by piercing the corporate veil of his company, and to prove the resulting debts are nondischargeable under 11 U.S.C.A. §523(a)(2)(A), (a)(4) and (a)(6).

FINDINGS OF FACT

During the time relevant to this decision, the debtor was the sole or primary stockholder and only operating officer of a corporation known as the Topeka Storage Pool, Inc. (TSPI). He alone controlled the corporation's actions. Farm Bureau, State Farm and other insurance companies (the Companies) would hire TSPI to pick up and sell at auction damaged vehicles which the Companies had treated as total losses for insurance purposes. In practice, TSPI contracted with the Companies to pick up such vehicles from various storage places. TSPI would pay any towing fees and storage costs, move the vehicles to a central location, and auction them. The buyer at auction would pay TSPI for the vehicle, and TSPI would deduct the towing and storage costs it had paid when it obtained the vehicle, plus a fee for its services, and remit the balance to the proper insurance company.

At one time, TSPI's practice was to have the buyer make out two checks, one for TSPI's share of the proceeds and another for the balance to one of the Companies. In the later stages of their relationship, the Companies agreed TSPI could have the buyer give all the proceeds to TSPI. Under this arrangement, TSPI would deposit the money in its general account and about two weeks later, send a check to the proper company for its share of the proceeds.

From roughly 1980 to 1989, the debtor operated TSPI. From at least 1987 on, he was the major shareholder, the only active director or officer, and essentially the sole person making decisions for the company. According to the evidence presented, TSPI was undercapitalized, did not observe corporate formalities, and declared no dividends. The debtor alone ran the company and made substantial use of corporate assets for his personal benefit. In addition, certain purchases which he authorized at a time when the corporation was losing money, such as the purchase of a corporate plane and of imported marble used in offices, though appropriately billed to the corporation, demonstrate his unfettered and improvident control of corporate decisions.

TSPI apparently lost money from the time the debtor bought it in 1980, and it certainly suffered substantial losses during the late 1980's. The debtor kept it afloat by borrowing over $300,000 from banks and private sources. Under his ownership, TSPI grew from a two-person operation involving only the debtor and his wife to a fifteen-employee operation with six multi-car carriers and a tow truck in 1989.

From 1987 through 1989, TSPI had constant cash flow problems. At times, its bank accounts were overdrawn by hundreds of thousands of dollars. When the banks and private lenders refused to continue financing it, TSPI began to write insufficient funds checks which it could make good only by using all its current sale proceeds. Of course, the debtor was aware of this situation. Even aside from the bad checks, the debtor knew that the company was using the proceeds of current sales to pay the debts owed to the Companies on past sales and that future sales would be required to pay the Companies for the new debts arising from the current sales. Furthermore, he knew that the fees TSPI was charging were insufficient to cover its expenses, so that it was losing money on each vehicle it picked up and would lose more money if it picked up more vehicles. Nevertheless, during this time, the debtor tried to expand TSPI's business without cutting expenses; in fact, it appears he had the company spend increasing sums on non-essential items.

In early 1989, the debtor met with as many of the Companies as would agree to attend meetings to inform them that TSPI was having financial problems but that he hoped they would continue their relationship with TSPI despite their receipt of insufficient fund checks. He advised the Companies that TSPI would devote part of its profits to reduce its obligations to them if they would continue to use its services. At trial, there was testimony that TSPI's fees were at the extreme high end of the range paid for such services. Consequently, TSPI could not raise its fees because the Companies would be unlikely to send it business if it did so. After these meetings, those of the Companies that supplied vehicles to TSPI were paid their share of the proceeds of the subsequent sales. TSPI, however, was still making no profit.

In March of 1989, the debtor sold his stock to a Melvin Gentry for one dollar and also gave him a note for $150,000, apparently to cover certain items shown on TSPI's books as loans to shareholders. These items were not actual cash loans but were for bills paid by TSPI which its outside accountant determined were actually for the debtor's personal benefit or were insufficiently documented to demonstrate any benefit to TSPI. The accountant therefore charged them to the debtor's shareholder account as loans. Gentry testified that the note was to cover the amounts then owed to the Companies from the sales of their vehicles. Gentry ran TSPI for a while and then closed the business in October of 1992.

Farm Bureau sued TSPI and obtained a judgment in May of 1992. As of the time of trial, the amount due on the judgment was $85,758. Though the documents submitted appear to suggest a somewhat greater loss, State Farm's witnesses testified the debtor's activities cost it $80,436.05.



DISCUSSION AND CONCLUSIONS

In these proceedings, the plaintiffs must first pierce the corporate veil of TSPI to make the debtor personally liable for the corporation's debts to them. Then, they must demonstrate by a preponderance of the evidence, Grogan v. Garner, 498 U.S. 279 (1991), that the debtor's actions in creating the debts to them were such that his obligations to them should be wholly, or at least partly, nondischargeable.

In deciding whether the debtor should be held liabile for TSPI's debts, the Court has considered the cases of Mackey v. Burke, 751 F.2d 322, 326-27 (10th Cir. 1984), Kilpatrick Bros. Inc. v. Poynter, 205 Kan. 787, 795-98 (1970), and Kvassall v. Murray, 15 Kan.App.2d. 426, 436-40, rev. denied 248 Kan. 996 (1991). Under those authorities, the following facts are relevant to this determination. The debtor had complete control of the corporation's affairs, and there were no other functioning officers or directors. TSPI was undercapitalized, did not adhere to corporate formalities, did not pay dividends, and spent substantial sums for the apparent benefit of the controlling shareholder-officer-director rather than the corporation. Under the circumstances of this case, to allow the debtor to be insulated from liability by the corporate structure would result in an injustice. The Court will therefore disregard the corporate entity and hold the debtor personally liable for TSPI's debts to the plaintiffs. Consequently, the Court must determine whether the debts should be nondischargeable under §523(a)(2)(A), (a)(4), or (a)(6).

The Court believes the plaintiffs have presented insufficient evidence to satisfy the requirements of §523(a)(2)(A). To support their claim under this subsection, the plaintiffs seem to contend that statements the debtor made at the early-1989 meetings qualified as false pretenses or false representations. However, at least one of the witnesses indicated that the plaintiffs suffered no further losses after those meetings. Certainly none of the witnesses testifying about those meetings identified any of the debtor's actions or statements which the Court believes constituted false pretenses or false representations.

Similarly, the Court does not believe the plaintiffs have proven their claims under §523(a)(4). They have not shown the debtor was a fiduciary for them. No written agreement required TSPI to segregate the plaintiffs' proceeds from the sales of the vehicles, nor was there any requirement or even expectation that all the Companies' proceeds would be held in a segregated account. In fact, the plaintiffs' witnesses did not know whether any of the parties they deal with under similar agreements segregate the plaintiffs' share of the sales proceeds, and did not seem concerned that other companies in TSPI's line of work probably commingle their fees with the Companies' proceeds. Even after TSPI's financial problems were disclosed to the plaintiffs through their receipt of bad checks and their meetings and discussions with the debtor, the plaintiffs did nothing to require TSPI to segregate their proceeds into separate accounts. The plaintiffs presented no evidence of embezzlement or larceny, nor was either type of wrongdoing likely to exist under the circumstances of this case. Instead, the plaintiffs seem to rely on some sort of duty they feel the debtor had to advise them that they would not be paid. They have cited no authority establishing the existence of such a duty under the facts of this, or any similar, case. Such a duty to inform suppliers they will probably not be paid would be tantamount to a requirement that merchants having financial problems turn away wholesalers and close their doors when they are not sure that they will be able to pay for the goods supplied. If this duty existed, few merchants would be able to discharge any debts.

However, the Court is convinced that the debtor did willfully and maliciously injure the plaintiffs' property, in violation of §523(a)(6). Under that subsection, a debt is nondischargeable if the debtor knowingly, as opposed to accidentally or unintentionally, performed an act and either (1) the debtor knew that the act would cause injury to the creditor's property or (2) such injury was reasonably forseeable. In re Posta 866 F.2d 364, 367 (10th Cir. 1989). The debtor knew that the plaintiffs could not be paid from current sale proceeds if TSPI's expenses and fees were paid first. He also knew that the fees TSPI was charging for its services were insufficient to pay the cost of providing them. He therefore knew that TSPI was constantly becoming less able to pay the plaintiffs and at least should have known it would ultimately be impossible for TSPI to service its

debt. He knew any money TSPI spent on its own expenses could not be recovered and paid to the plaintiffs unless TSPI made a profit on future transactions. He knew that fees would have to be raised to make any profit possible, and that if the fees were raised enough for TSPI to make a profit, the Companies would not likely give it enough business for it to continue to operate. As a result, the debtor knew that commingling TSPI's money with the Companies' proceeds in a single account and then paying TSPI's expenses, fees, and other bills first would cause irreparable harm to the Companies' property, including that of the plaintiffs.

For these reasons, Farm Bureau and State Farm are entitled to judgments making the debtor liable on TSPI's debts to them and declaring his debts to them to be nondischargeable. The amount of Farm Bureau's damages was determined by the judgment it obtained against TSPI, and the Court accepts the testimony of State Farm's witnesses as establishing the amount of its damages.

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 November, 1993.











_________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE











IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS











In Re: )

)

WILLIAM BRYAN ANDERSON, ) NO. 90-42320-7 ) CHAPTER 7

DEBTOR(S). )

)

FARM BUREAU MUTUAL INSURANCE )

COMPANY, INC., )

)

PLAINTIFF(S), )

v. ) ADV. NO. 91-7175

)

WILLIAM BRYAN ANDERSON, )

)

DEFENDANT(S). )

)

STATE FARM MUTUAL INSURANCE )

COMPANY, )

PLAINTIFF(S), )

v. ) ADV. NO. 91-7176

)

WILLIAM BRYAN ANDERSON, )

)

DEFENDANT(S). )

JUDGMENT ON DECISION

These adversary proceedings were consolidated for trial because they involved identical issues. The debtor was represented by Leland E. Cox of Topeka, Kansas. Plaintiff Farm Bureau Mutual Insurance Company, Inc. (Farm Bureau), was represented by N. Larry Bork of Goodell, Stratton, Edmonds & Palmer of Topeka, Kansas. State Farm Mutual Insurance Company (State Farm) was represented by Bryce D. Benedict of Topeka, Kansas.

For the reasons stated in the Memorandum of Decision issued on this date, Farm Bureau is hereby granted a nondischargeable judgment against the debtor in the amount of $85,758, and State Farm is hereby granted a nondischargeable judgment against the debtor in the amount of $80,436.05.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this _____ day of November, 1993.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

 

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