Doeling v. Gapp (In re Gapp)

• Decision Date: 29 July 2019
• Docket Number: Bankruptcy No. 17-30536,Adversary No. 18-07009
• Citation: 604 B.R. 371
• Parties: IN RE: Wayne A. GAPP, f/d/b/a Farming (EIN: 45-0428251) Debtor. Gene W. Doeling, as Bankruptcy Trustee, Plaintiff, v. Wayne A. Gapp, Defendant.
• Court: U.S. Bankruptcy Court — District of North Dakota

604 B.R. 371

IN RE: Wayne A. GAPP, f/d/b/a Farming (EIN: 45-0428251) Debtor.

Gene W. Doeling, as Bankruptcy Trustee, Plaintiff,

v.Wayne A. Gapp, Defendant.

Bankruptcy No. 17-30536

Adversary No. 18-07009

United States Bankruptcy Court, D. North Dakota.

Signed July 29, 2019

Gene W. Doeling, Fargo, ND, pro se.

Jon R. Brakke, Vogel Law Firm, Fargo, ND, for Defendant.

MEMORANDUM AND ORDER

SHON HASTINGS, JUDGE

I. INTRODUCTION

Gene W. Doeling, Chapter 7 Trustee, filed a Complaint seeking denial of Debtor/Defendant Wayne A. Gapp's discharge under 11 U.S.C. §§ 727(a)(2) and (4). In his Complaint, Trustee alleges that Debtor transferred $29,465.80 from the sale of a home in Arizona to his non-filing spouse with the intent to hinder, delay or defraud creditors.¹ The Trustee also alleges Debtor knowingly and fraudulently made false oaths in connection with his bankruptcy case by undervaluing certain assets and failing to disclose certain assets and transfers on his bankruptcy schedules and statement of financial affairs ("SOFA").

Debtor filed an Answer to the Complaint, asserting that the proceeds from the sale of the Arizona Property were derived from the one-half interest of his non-filing spouse, and therefore, the sale of the property did not result in a transfer from Debtor to his spouse. Doc. 4. Debtor denies that he intentionally undervalued assets. Doc. 4. He also denies that he omitted any assets or transfers with intent to hinder, delay or defraud creditors. Doc. 4.

For the following reasons, the Court finds in favor of the Trustee and denies Debtor a discharge under section 727(a)(2)(A).

II. BACKGROUND

A. Debtor's Farming Operation and Financial Difficulties

From 1980 to 2016, Debtor worked as a self-employed crop farmer. He farmed with his father for twelve years before taking over the family farm. Debtor's son, Colton, began working with him on the family farm in 2011. Debtor was primarily responsible for making decisions about the farm operations, including which crops to grow, the types of inputs to use and applying for government programs. At the height of his operation, Debtor farmed 4,500 acres. Debtor ceased operating his farm in 2016. At the time of trial, Debtor worked for Meyer's Farm.²

In 2014, Debtor began to feel the effects of a depressed farm economy. Commodity prices fell, the cost of inputs rose and Debtor struggled to make the farm cash flow. These economic trends and Debtor's corresponding financial difficulties continued into 2016.

By the spring of 2016, Debtor owed large debts to several agricultural suppliers, including J.R. Simplot, Wilbur Ellis Company and Bob's Ag Service, Inc. Specifically, he owed the following sums to the suppliers for inputs for the 2015 and 2016 growing seasons:

• J.R. Simplot—$334,253.96;

• Wilbur Ellis Company—$90,636.86;

• Bob's Ag Service—$34,425.

Debtor received bills every month requesting payment from these suppliers. He had been in contact with J.R. Simplot multiple times regarding his debt to the company. Debtor did not have the financial resources to pay these bills in the spring of 2016.

In May 2016, Debtor learned that AgCountry Farm Credit Services, his secured agricultural lender, would no longer provide financing for his farming operation. As a result, Debtor began planning for an auction at the end of the 2016 season. Debtor planned to sell real estate to pay AgCountry and farm machinery and equipment to pay his other creditors.

Around the same time, Debtor began consulting Attorney Scott Stewart about his financial situation.³ Reportedly, Attorney Stewart advised Debtor to transfer certain property to Debtor's father and daughter. Consistent with this advice, Debtor transferred title to his 40-acre homestead (the "Homestead Property") to his father, Arthur Gapp, in May or June 2016.⁴ Debtor and his wife, Roxanne Gapp, continued to reside on the Homestead Property. In June 2016, Debtor also transferred a home in Pinal County, Arizona (the "Arizona Property"), to his daughter and son-in-law, Courtney and Dustin Krump. Neither Debtor's father nor the Krumps provided consideration for the transfers. Ex. T-2 at T-0051.

Debtor explained that he and his wife were no longer using the Arizona Property when they decided to transfer it to the Krumps. After Debtor transferred the property to the Krumps, he continued to pay the property taxes and "upkeep" expenses on the Arizona Property because he expected that he and his wife would later "get the property back in [their] names."

Debtor repeatedly testified that he did not understand why he transferred the property at the time. He simply maintained that he transferred the property on the advice of Attorney Stewart. In fact, Debtor characterized the decision to transfer property to his father and the Krumps as Attorney Stewart's decision. Debtor admitted that he had received "large bills" from creditors that were unpaid at the time he transferred the property, but he denied seeking attorney advice to protect or hide assets, explore bankruptcy or avoid creditors. Debtor testified he "talked to [Attorney Stewart] all the time," but he did not understand why his attorney suggested he transfer the property. Debtor also claimed Attorney Stewart did not discuss the potential negative repercussions of the property transfers. While Debtor admitted to having some financial troubles, he insisted he was not insolvent at the time of the transfers to Arthur Gapp and the Krumps.

In June 2016, Debtor also began selling other assets to keep the farm operating. He sold a 2011 Camaro to his daughter and a 2004 Cadillac Escalade to a neighbor. Ex. T-05 at T-00112.

Debtor worked with AgCountry throughout the spring and summer of 2016 to develop a financial plan. He testified that the farm "cash flowed" well into the spring of 2016. Debtor's net worth, which he claimed totaled $1.1 million in May 2016, included land valued at $2,482,600 and his personal residence valued at $447,000. Ex. T-19. Debtor believed that, with land, machinery and equipment sales and his planted crops, "the numbers looked good." At this point, Debtor was hopeful that he would be able to pay his entire debt to AgCountry and his agricultural suppliers.

Everything changed in July 2016 when a hail storm "wiped out" Debtor's net worth. The storm devastated 3,000 acres of Debtor's crop. Debtor estimated he lost $927,000 as a result of the storm. The storm jeopardized Debtor's plan to pay creditors with crop, land, machinery and equipment sale proceeds.

Debtor borrowed $100,000 from Arthur Gapp in August 2016. Debtor granted Arthur Gapp a mortgage on 40 acres of his property in Cavalier County, North Dakota, as security for this debt. Ex. 2, T-0024. Debtor never repaid the loan. Arthur Gapp is listed as a secured creditor on Schedule D of Debtor's bankruptcy filings. Ex. T-2 at T-0024.

In the fall of 2016, Debtor learned that J.R. Simplot initiated a lawsuit to collect the sum Debtor owed it for 2015 and 2016 inputs. The state court entered a judgment in favor of Simplot in the sum of $334,253.96 on or about October 24, 2016. Ex. T-5 at T-108.

On November 9, 2016, Steffes Auctioneers held an auction sale at which Debtor sold substantially all of his farm machinery and equipment. In his SOFA, Debtor disclosed that he received $1,174,658 for this property. Ex. T-2 at T-52. Debtor also sold numerous parcels of land at the auction sale for $1,829,000 to $2,800,000.⁵ The sales closed in either December 2016 or January 2017. Debtor used the proceeds from the auction sale to pay his secured debt to AgCountry, but the sale did not garner sufficient proceeds to pay Debtor's other creditors. Ex. T-2 at T-0050. Debtor received $115,000 in sale proceeds after paying AgCountry in full. According to Debtor, he forwarded this money to Attorney Stewart, who deposited it in his trust account.

Also in December 2016, Debtor hired new counsel to assist him with financial matters. At the direction of new counsel, Debtor arranged for the transfer of both his Homestead Property and the Arizona Property back to him to "reverse the poor decision" suggested by Attorney Stewart.⁶

B. Debtor's Transfer of the Arizona Property

In April 2017 (approximately 10 months after Debtor transferred the Arizona Property to the Krumps), the Krumps transferred the Arizona Property back to Debtor and Roxanne. Ex. T-2 at T-0051. Debtor and Roxanne sold the Arizona Property to Jeffrey and Renae Carpenter on April 12, 2017. Ex. T-2 at T-0051. Renae Carpenter is Roxanne's sister and Debtor's sister-in-law. The Carpenters paid Debtor and Roxanne $180,225.46 for the Arizona Property, which had been recently appraised at $160,000. Ex. T-2 at T-0051. At the advice of new counsel, all of the sale proceeds were deposited into a bank account held solely in Roxanne's name. Roxanne arranged for a cashier's check in the sum of $116,511.66 to be issued to the Internal Revenue Service for Debtor's and Roxanne's joint 2016 tax liability; a cashier's check in the sum of $29,248 to be issued to the North Dakota Office of State Tax Commissioner for Debtor's and Roxanne's joint 2016 North Dakota income tax liability; and a payment to the Gapps' recently-hired counsel in the sum of $5,000.⁷ Ex. T-2 at T-0052; Ex. D-4 at D-190. The balance of sale proceeds—$29,465.80—remained in Roxanne's account.

In his SOFA, Debtor represented that proceeds of the sale, $180,225.46, were "paid to tax liability for 2016." Ex. T-2 at T-0052. At trial, Debtor testified that this representation referred to his share of the proceeds only, not the entire sum.⁸

Debtor and Roxanne owned the Arizona Property jointly when they sold it. Both considered half of the proceeds from the sale to be Debtor's and half to be Roxanne's. Debtor testified that he used his half of the proceeds—approximately $90,000—to pay Debtor's and Roxanne's joint tax liability.⁹ Roxanne used a portion of her half of the proceeds, roughly $60,000, to pay the couple's joint tax liability. Roxanne...