In re Coleman

• Decision Date: 17 September 2002
• Docket Number: Bankruptcy No. 7-01-01199-WSB-11.,Adversary No. 7-01-00047.
• Citation: 285 B.R. 892
• Parties: In re Molly Jane COLEMAN, Debtor. Molly Jane Coleman, Plaintiff, v. Community Trust Bank, et al., Defendants.
• Court: U.S. Bankruptcy Court — Western District of Virginia

285 B.R. 892

In re Molly Jane COLEMAN, Debtor Molly Jane Coleman, Plaintiff, v. Community Trust Bank, et al., Defendants.

Bankruptcy No. 7-01-01199-WSB-11.

Adversary No. 7-01-00047.

United States Bankruptcy Court, W.D. Virginia, Roanoke Division.

September 17, 2002.

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John M. Lamie, Esq., Browning, Lamie & Gifford, Abingdon, VA, for Debtor.

Mark L. Esposito, Esq., Penn, Stuart & Eskridge, Bristol, VA, for Community Trust Bank.

Charles H. Keen, Esq., U.S. Department of Justice, Washington, DC, for Internal Revenue Service.

MEMORANDUM OPINION

WILLIAM F. STONE, Jr., Bankruptcy Judge.

In this adversary proceeding the Debtor, acting in her capacity as Debtor-in-Possession, seeks to avoid two deeds of trust which she and her husband, Roger Coleman, granted to the Defendant, Community Trust Bank ("the Bank"), to secure certain obligations of the husband and his business partner, Darrell Cook, on the ground that they were given to hinder and delay the collection efforts of the Internal Revenue Service. The Debtor has testified unequivocally that the only reason she signed the deeds of trust was to keep the properties they encumbered out of the hands of the IRS and claims that she was told by her husband that the attorney then representing the coal companies owned by Mr. Coleman and Mr. Cook in Chapter 11 bankruptcy cases had advised that such deeds of trust would be in fraud of creditors and could later be avoided. Determining whether these deeds of trust can be set aside in Mrs. Coleman's personal Chapter 11 case depends on the answer to a question made famous by Senator Howard Baker in a much more momentous context, "What did he [in this case, the Bank's loan officer] know and when did he know it?"

UNDISPUTED FACTS

Roger Coleman and Darrell Cook were the equal owners of a number of coal companies which apparently for some years had been quite successful and provided a very comfortable standard of living for Roger and Molly Jane Coleman. Unfortunately, this success proved to be fleeting and by 1994 several of these companies were in trouble and in November of that year filed Chapter 11 bankruptcy petitions in this Court. Furthermore, the Colemans as well as Mr. and Mrs. Cook were financially embarrassed because one of their other companies, namely, Faith Coal, had earned a large profit in 1993 which had been used to subsidize losses incurred in two of the other companies rather than being distributed to its owners. Because this company was subject to a "Subchapter S" tax election, which meant that its profits were taxed directly to its shareholders rather than being subject to tax at the corporate level, the Colemans and the Cooks faced large personal tax liabilities for income which they had not actually received. As a result they were not in a financial position to pay the resulting tax liabilities. During the time period which is critical to the issues in contention in this adversary proceeding, Mr. Coleman and Mr. Cook had two principal concerns, (i) their need to seek accommodations from the Bank, which was the principal secured lender to their companies in bankruptcy and to which they were liable not only on the loans to or incurred jointly for the companies but also upon certain unsecured loans to each of them individually, and (ii) their large personal tax liabilities to the IRS which affected not only them but also their respective spouses as well. Mr. and Mrs. Coleman owned jointly and apparently as tenants by the entireties two valuable parcels of real estate, one being their residence property located in Buchanan County, Virginia, and the other being located on Holston Lake in Sullivan County, Tennessee. Both properties were unencumbered and were at risk of IRS tax liens being filed against them. Other than an automobile owned by Mrs. Coleman, these properties constituted the only assets of substantial value in which she had an interest.

Although the financial skies were darkening for the Colemans and the Cooks as 1994 neared its end, they were not at all without hope that better times were around the corner. For one thing, Mr. Coleman and Mr. Cook believed that they could move coal mining equipment which served as collateral for the Bank's loans to other mines and soon return to profitability. To be able to do that they needed, or at the very least wanted, to get the Bank's consent to such proposal. For another thing, their companies' bankruptcy counsel had assisted them in securing new professional accounting and legal help with a view to filing consolidated tax returns for their companies so that losses could offset profits and amended returns could be filed which would relieve them of their personal tax liabilities. In short, both corporately and personally, they needed time to deal with their business and tax problems because they were not then in a position to meet either their companies' or their personal debt service obligations to the Bank or to pay the amounts currently owed to the IRS. A contemporaneous record provides insight into the situation which they faced. A "Call Report" was prepared by Steve Belcher, the Bank's loan officer for the Coleman and Cook accounts, on November 17, 1994 concerning news which he had received that date from Mr. Cook and Mr. Coleman concerning the Chapter 11 bankruptcy filings of Big Fist Coal Company and its subsidiaries "as a result of adverse business conditions and certain IRS tax liens." At that time Big Fist owed $263,704 to the Bank with a monthly payment obligation of $12,155. This loan was secured by equipment which had been appraised as being worth $614,500. A second loan to Coleman and Cook was in the amount of $707,890 and was secured by equipment which had been valued as being worth $1,615,400 in April of the preceding year and by the guaranty of Big Fist and Magic Mining, one of the former company's subsidiaries. In addition to these joint obligations Mr. Coleman had an unsecured loan from the Bank in the amount of $84,626 then owing and Mr. Cook had a similar unsecured loan having a then balance of $85,678. At that time the personal statements of Coleman and Cook on file with the Bank showed "cash assets and a strong net worth." According to the Call Report, Coleman and Cook reported that all of their existing mines were profitable and that they intended "that these accounts are to be maintained current." The Report stated that Coleman and Cook wanted to sell the equipment owned by Big Fist and pay the Bank and "that their primary goal and concern is seeing that the bank is paid in full." The situation had changed somewhat, however, by December 7, 1994 when Mr. Belcher met at the Big Stone Gap Courthouse with Mr. Coleman, Mr. Cook, the companies' bankruptcy counsel, Mr. Copeland, and the Bank's attorney, Mr. Esposito. The parties did discuss again the sale of certain equipment, the proceeds of which would come to the Bank, but they also discussed Coleman's and Cook's wish to move certain equipment from "the Appalachia Big Fist mines" to certain other mines. According to the representations made at that meeting and recorded in a memo prepared by Mr. Belcher (which was dated December 9 rather than the actual date of the meeting), the planned asset sales would reduce the balance on the large Coleman and Cook loan from $707,890 to approximately $400,000, which Mr. Copeland "stated that his clients would like to repay ... [in] monthly payments beginning February, 1995." Mr. Copeland "also requested that the Bank consider reamortizing the new balance over the remaining term of the note so as to reduce the payment structure." During this meeting the participants also discussed the IRS problems. Because of its importance to the issues raised in this adversary proceeding, the relevant passage of the memo will be quoted in full:

Mr. Copeland expressed that the main reason for the filing of the Chapter 11 Bankruptcy by Big Fist Coal was to eliminate the pressure that the IRS was placing on his clients. Through the reorganization, as long as post taxes are paid, the companies will be free to operate. Prior taxes that are due, hopefully, can be worked out and eliminated through the net operating loss carry forward from the previous companies. Mr. Copeland states that the IRS problem arose when one of the companies known as Faith Coal which was an S-corporation had profits in excess of $1,000,000.00. The profits from Faith Coal was expended to Big Fist and Raider to help start up and maintain their operations. When the IRS audited Faith and related companies, they said that this money was direct income to Coleman and Cook which resulted in both Coleman and Cook having tax liabilities in excess of $375,000 for the year. Mr. Copeland was confident that the filing of the Chapter 11 would allow the CPA firm (Management Accountant Solutions of Roanoke, VA) recently hired by Coleman and Cook to consolidate all of the companies under the heading of Big Fist Coal. Upon this consolidation, they would be able to utilize the net operating loss of Big Fist and Raider to offset prior taxes due.

The meeting also covered Coleman's and Cook's unsecured obligations to the Bank and they "expressed their willingness to maintain their personal obligations in a timely manner." At that point Mr. Esposito, Bank's counsel, "requested possible collateralization of the unsecured loans" as to which "all parties were agreeable". They specifically discussed a pledge of stock of Empire Coal, which was another company owned by Coleman and Cook and which was represented to have "in excess of $1.1 million in receivables from Big Fist, Raider and related companies." The memo does not record any conversation concerning any possible deeds of trust against the real estate owned by the Colemans and the Cooks. It did recite in detail the specifics of what equipment would be moved to which new locations and concluded with the...