In re Johnson, Bankruptcy No. 86 B 18392
| Decision Date | 27 July 1988 |
| Docket Number | Adv. No. 87 A 00140.,Bankruptcy No. 86 B 18392 |
| Citation | 98 BR 359 |
| Parties | In re Percy & Gloria JOHNSON, Debtors. SOFT SHEEN PRODUCTS, INC., and Luster Products, Plaintiffs, v. Percy & Gloria JOHNSON, Defendants. |
| Court | U.S. Bankruptcy Court — Northern District of Illinois |
Michael J. Philippi, Gregory A. Friedman, Coffield Ungaretti Harris & Slavin, Chicago, Ill., for plaintiff Soft Sheen Products, Inc.
Louis B. Christopher, Christopher, White & Associates, Chicago, Ill., for defendants Percy & Gloria Johnson.
This adversary proceeding comes before the Court on the amended complaint of Soft Sheen Products, Inc. ("Soft Sheen") and Luster Products ("Luster") objecting to the discharge of debtor/defendants Percy Johnson and Gloria Johnson for violations of Sections 727(a)(4)(A), (a)(5) of the Bankruptcy Code.1 For the reasons set forth below, the Court having considered all the pleadings, evidence adduced at trial by way of testimony and exhibits, does hereby sustain Soft Sheen's objections to discharge against Percy Johnson but denies the objections to discharge and hereby grants discharge to Gloria Johnson.
The Court has jurisdiction to entertain this adversary proceeding pursuant to 28 U.S.C. § 1334 and General Orders of the United States District Court for the Northern District of Illinois. This adversary proceeding constitutes a core proceeding under 28 U.S.C. § 157(b)(2)(I), (J).
Soft Sheen is engaged in the manufacture and sale of beauty and hair care products. Luster is engaged in the business of distributing beauty and hair care products. Percy Johnson and Gloria Johnson are husband and wife who resided in the City of Chicago. Both were owners of Southwest Beauty Supply, Inc., ("Southwest"), which engaged in the sale and distribution of beauty supply and hair care products, both at wholesale and retail from several locations in Chicago. Percy Johnson and Gloria Johnson were sole shareholders and officers of Southwest. Southwest filed a separate, but related, Chapter 7 proceeding in 1985. Soft Sheen was the holder of a state court judgment entered on June 18, 1985, against Southwest, Percy Johnson and Gloria Johnson in the amount of $389,525.09 plus costs and attorneys' fees. Luster was an unsecured creditor of Percy Johnson and Gloria Johnson, holding a claim in the amount of $47,237.02. Percy Johnson and Gloria Johnson filed their individual Chapter 7 bankruptcy petition on November 21, 1986. On February 17, 1987, Soft Sheen and Luster filed an adversary proceeding against Percy Johnson and Gloria Johnson objecting to discharge under section 727(a)(4)(A).
The substance of the original complaint was that Southwest was the alter ego of Percy Johnson and Gloria Johnson. The complaint further alleged that from 1980 to the date of the filing of the petition, Percy Johnson and Gloria Johnson purchased on account from Soft Sheen a wide array of beauty and hair care products which they resold to the public. Soft Sheen alleged that the purchases on credit were never intended to be repaid by Percy Johnson and Gloria Johnson; that Percy Johnson and Gloria Johnson converted proceeds of sale of the goods from Soft Sheen and diverted proceeds to other family members for the purpose of defrauding Soft Sheen and other creditors of Percy Johnson and Gloria Johnson; and that Percy Johnson and Gloria Johnson knowingly and fraudulently provided misleading and false information in connection with the instant bankruptcy proceeding regarding their assets.
On March 21, 1988, an amended complaint was filed adding a count based on section 727(a)(5) claiming that the debtors, despite repeated requests, failed to explain the loss of over $400,000.00 worth of beauty supply products which they obtained from Soft Sheen. Percy Johnson and Gloria Johnson, in both their original answer and answer to the amended complaint, denied the substantive allegations relating to the objections to discharge. The case was tried and evidence taken on June 2 and 3, 1988.
Soft Sheen's principal witness was Chondus Smoot ("Smoot") its credit manager, who met with Percy Johnson on July 12, 1983. Smoot requested the meeting with Percy Johnson to reevaluate the account for credit worthiness, generally observe the establishments and the business in operation. Smoot and Percy Johnson went to several locations in Chicago. According to Smoot's testimony, Percy Johnson represented that he owned three of the facilities visited plus another location. Percy Johnson advised Smoot that he was expanding his business and intended to purchase additional locations. Pursuant to Smoot's request, Percy Johnson furnished a Southwest financial statement, dated May 31, 1983. Smoot did not take subsequent action to verify the accuracy of the unaudited financial statement. Based on Smoot's observations at the various locations, Percy Johnson's oral representations, and Southwest's financial statement, Soft Sheen continued to ship merchandise on open account in excess of $364,000.00. Smoot testified that in his opinion had he known that Percy Johnson and Gloria Johnson owned only two stores, Soft Sheen would not have given the amount of credit that was extended. In Smoot's opinion two stores could not generate the volume of business required to service the Soft Sheen indebtedness. Smoot also testified that he was advised by Percy Johnson that Southwest was doing three times the volume of any other Soft Sheen customer.
Percy Johnson testified as an adverse witness during Soft Sheen's case in chief. He had been in the beauty supply business since 1974 and approximately one month before trial got out of the business and surrendered the premises commonly known as the "Beauty Hut" to its landlord together with what small remaining inventory was then on hand. The Beauty Hut business was not referenced in the original schedules and statement of affairs filed by the Johnsons. The Beauty Hut was disclosed in an amended schedule of assets filed in March 1987 after the first meeting of creditors. He recalled the substance of the Smoot inspection in July of 1983 but did not recall discussion of credit terms. He testified that one of the store locations subsequently burned down in December 1983. He further testified that another store location was sold to his daughter sometime after Smoot's visit in 1983. He did not remember discussing any expansion plans at the July meeting with Smoot and had no business records because same had been stolen from one of the business locations after Southwest filed bankruptcy in 1985.
Percy Johnson admitted that the bankruptcy schedules filed in the instant case listed in excess of one million dollars in debt for unsecured claimants, but testified that he could not have owed that much and that some of the scheduled liabilities were not correctly listed. Moreover, he testified that the value of the inventory and the amount of liabilities were not correctly listed on Southwest's schedules. He stated that the remaining inventory on hand when the Southwest petition was filed was sold by the trustee. Johnson testified that after Soft Sheen refused to extend further credit in 1984, he sold off the remaining inventory and paid other creditors.
He testified further that the Beauty Hut location had been opened in 1982 or 1983. Johnson claimed that the Soft Sheen inventory was not given to either his son, who operated the Beauty Hut with him until approximately one month before trial, nor to his daughter to whom he sold one of the disclosed store locations in 1983. He admitted that the aggregate liability of both himself, Gloria Johnson and Southwest in July 1983 was around one million dollars in contrast to the May 31, 1983, balance sheet for Southwest listing same slightly in excess of $189,000.00. He also admitted that at the time the financial statements were furnished to Smoot no disclosure was made of the aggregate one million dollar liability.
David R. Herzog ("Herzog") testified for Soft Sheen. Herzog was appointed trustee in the Southwest case in September 1985. After the various Southwest premises were secured, Herzog related that same were burgled. Herzog had the existing inventory of Southwest inspected and appraised. During the course of a second burglary after which some stolen inventory was returned, all business records on the premises were stolen and never recovered. Herzog testified that this made it impossible for him as trustee of Southwest to fully and properly investigate its assets, liabilities and to determine whether or not appropriate actions to recover assets of debtors' estate should be filed.
Herzog testified relative to a third burglary of one of the premises which prompted an emergency auction sale which produced in excess of $29,000.00 of sale proceeds from the inventory then on hand. He further testified that the schedules of assets and liabilities in the Southwest case appeared to be identical to those filed by the individual debtors in the case at bar. Although Herzog had suspicions, there was no proof that the missing records or burglary were attributable to Percy Johnson, Gloria Johnson, or former employees of Southwest. On cross-examination, Herzog admitted that the various locations were in a high crime area. In Herzog's experience, it was unusual for thefts to occur of business records as opposed to salable inventory.
The only witness who testified for the defense was Percy Johnson. He testified that the principal focus of the Southwest business had been wholesale sales and that whatever he had ordered on credit from Soft Sheen had been sent as requested prior to his conference with Smoot. He was the largest customer of Soft Sheen or at least among their top ten customers with principal sales in Chicago. He last...
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