In re Littell

• Decision Date: 14 April 1989
• Docket Number: Adv. No. 88-6067.,Bankruptcy No. 88-60362
• Citation: In re Littell, 109 B.R. 874 (Bankr. N.D. Ind. 1989)
• Parties: In re Larry G. LITTELL, Judith Diane Littell aka Diane Littell d/b/a Tri-L Sports, Debtors. AUTO OWNERS INSURANCE COMPANY, Plaintiff, v. Larry G. LITTELL, Judith Diane Littell aka Diane Littell d/b/a Tri-L Sports, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Indiana

109 B.R. 874 (1989)

In re Larry G. LITTELL, Judith Diane Littell aka Diane Littell d/b/a Tri-L Sports, Debtors AUTO OWNERS INSURANCE COMPANY, Plaintiff, v. Larry G. LITTELL, Judith Diane Littell aka Diane Littell d/b/a Tri-L Sports, Defendants.

Bankruptcy No. 88-60362, Adv. No. 88-6067.

United States Bankruptcy Court, N.D. Indiana, Hammond Division at Gary/Lafayette.

April 14, 1989.

Terry E. Johnston, Portage, Ind., for debtors.

Richard M. Davis, Valparaiso, Ind., for plaintiff. Findings of Fact Conclusions of Law and Judgment¹

KENT LINDQUIST, Chief Judge.

This adversary proceeding came before the Court on April 12, 1989 for bench trial pursuant to Order of Court of March 12, 1987 and pre-trial Order of September 22, 1988.

The Plaintiff's complaint filed May 31, 1988 alleges that it executed a bond as surety with the Defendant Diane Littell, as principal, (hereinafter: "Defendant Diane") to secure the faithful performance of the duties of the Defendants d/b/a Tri-L Sports (hereinafter: "Tri-L") in acting as agents for the State of Indiana (hereinafter: "State") in selling hunting and fishing licenses (hereinafter: "licenses"); that during 1983 "Tri-L" owed the State $17,140.00 for licenses sold, the proceeds of which had not been remitted to the State; that the Plaintiff paid the State said sum pursuant to the bond; and, that by wrongfully using said monies for their own use said conduct constitutes fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny pursuant to 11 U.S.C. § 523(a)(4), and/or obtaining money by false pretenses, false representation or actual fraud in contravention of 11 U.S.C. § 523(a)(2)(A).

The Plaintiff further alleges that the Defendant Larry Littell (hereinafter: "Defendant Larry") executed a promissory note in favor of the Plaintiff in the sum of $17,140.00 as to said debt incurred to the Plaintiff as a result of it paying the State under the bond, and that a judgment was entered in the sum of $14,440.00 plus interest against the Defendant Larry on said note in the Porter Superior Court under Cause No. 64D01-8707-CP1943B.

The Defendants filed their answer on July 22, 1988, and in addition to denying that they committed any act of defalcation while acting in a fiduciary capacity, embezzlement or larceny, or fraud, the Defendants also assert as an affirmative defense that the note by the Defendant Larry to the Plaintiff was executed to extinguish any indebtedness on the bond by the Defendant Diane, and that any indebtedness by the Defendant Larry to the Plaintiff is premised solely on the execution and the default judgment entered in the State Court therein. Thus, the Defendants assert the Plaintiff is now barred by estoppel principles or res judicata from asserting that any debt arising out of the failure to remit the license fees to the State and in turn on the bond is nondischargeable under § 523(a)(2)(A) or § 523(a)(4), because the Plaintiff elected to accept the promissory note from the Defendant Larry after the Plaintiff had paid the State on the bond, and thereafter took a judgment thereon in the State Court — no allegations of breach of fiduciary duty or fraud having been made by the Plaintiff in its State Court Complaint.

Plaintiff appears by Attorney Richard M. Davis.

Defendants appear by Attorney Terry E. Johnston.

Submitted. Evidence and arguments heard.

The parties in open court orally stipulated into evidence Plaintiff's Exhibits 1 through 20.

The Plaintiff's initial witness was the Defendant Diane who testified as follows:

1. That she signed the application for the bond on behalf of Tri-L on November 24, 1982 (page 2 of Plaintiff\'s Exhibit No. 1), but denied that she signed the November 10, bond itself as "Principal" of Tri-L (page 1 of Plaintiff\'s Exhibit No. 1). The signature on the face of the bond is clearly not the same as on the application. (It is noted that curiously the date of the bond itself is 14 days prior to the date of the application for the bond). There are no other signatures by any other principal or duly authorized representative of Tri-L on the bond itself.

2. That she signed said bond application solely at the telephonic request of her husband, the Defendant Larry, who was at work in that he did not have time to execute the same and have it delivered to the State the next day.

3. That she had absolutely no ownership in, connection, or affiliation with, Tri-L in any capacity nor did she receive any monies or property from Tri-L, and did not handle the issuance of the State licenses or the monies received by Tri-L for their issuance.

The Plaintiff's second witness was the Defendant Larry. He testified as follows:

1. That Tri-L was a fishing, bait and tackle store which was operated initially by his brothers Wayne and Terry Littell for about one year, and for the succeeding six or seven years by he and his brother Wayne Littell (hereinafter: "Wayne") until it failed and closed in 1983.

2. That he was actively involved in the management and operation of Tri-L, though he was also employed full time at a local mill at the same time as was Wayne.

3. That he did not handle the paperwork and procedures with the State as to the licenses as this was handled by Wayne, but that he did sell the licenses to the general public.

4. That he and Wayne had an informal partnership as to Tri-L, but that the Defendant Diane was not a partner therein (See Plaintiff Exhibit No. 15, IRS Form 1065, Partnership Return of Tri-L showing only the Defendant Larry and Wayne as partners on Schedule K-1).

5. That when the sale of a license was made to the public it was rung up on the cash register a separate item of sale identifiable to the license only towards the end of the business; that the proceeds from the sale of the licenses were always indiscriminately commingled with the proceeds from all other non-license sales of Tri-L to the public, not segregated in any way, and deposited in the one and only general operating bank account of Tri-L from which all trade creditors, rent, wages, etc. as well as remittances to the State were paid.

6. That neither he nor Wayne ever received a draw or salary out of Tri-L, nor did he ever receive a distribution of profits or any property therefrom, as the business was never at anytime profitable. Monies were expended out of the Tri-L account to acquire some adjacent real estate with a view towards building a new store and a fishing pond thereon. (See Plaintiff\'s Group Exhibit No. 14, cancelled checks drawn on Tri-L account).

7. That he and his wife invested a substantial, but unspecified sum of their personal earnings from their regular jobs in Tri-L, and he and Wayne placed second mortgages on their residence to obtain a $25,000.00 loan as capital for Tri-L; that as a result of a failure of the business, both he and Wayne lost their personal residences.

8. That the business of Tri-L failed because of competition from a new K-Mart, and the overall severe economic slump in Northwest Indiana incurred in 1981 and 1982.

9. That a representative of the State never called on Tri-L regarding the licenses or the sale proceeds thereof, and Tri-L was never instructed or ordered by the State to place the proceeds from the sale of the licenses in a separate account.

10. That the promissory note he executed in favor of the Plaintiff on August 4, 1984 in the sum of $17,140.00 (Plaintiff\'s Exhibit No. 11) was to evidence his debt to the Plaintiff arising out of the Plaintiff paying said sum to the State on the bond for failure of Tri-L to remit the license proceeds to the State.

11. That an undesignated representative of the Plaintiff advised him that when he signed the note, that would be the basis for his liability to the Plaintiff for failure to remit the license proceeds, and would "remove" the Defendant Diane\'s liability.

12. That the procedure that Tri-L followed to obtain authority from the State to sell licenses to the public as agent for the State was as follows:

A. That initially he personally visited the Department of Natural Resources (hereinafter: "DNR") of the State in Indianapolis, Indiana.

B. That he was advised by the DNR that all he needed initially to sell licenses as an agent of the State was a $2,000.00 bond; that no written and signed applications, financial statements, etc. were required by the State prior to receiving authorization to sell licenses.

C. That Tri-L acquired the requisite bond and delivered the same to a clerk at the DNR who gave him a license order form in which he checked off the number and types of license books Tri-L wanted to receive from the State and sell to the public. The State then issued books of licenses as ordered to Tri-L. The books each contained 20 licenses that were consecutively numbered.

D. That no written agreement was ever signed with the State, and he received no instructions to place the proceeds of the sale of the licenses in a segregated account.

E. The licenses were sold for $6.00 each and Tri-L was permitted to retain .50 on each sale and the balance was to be remitted to the State.

Wayne was called as a witness for the Defendant. He testified as follows:

1. That he handled all of the written paperwork, reports and remittances required by the State for Tri-L relating to the licenses from the time that Tri-L commenced business in 1977 or 1978 until it ceased operations in 1983.

2. That he would periodically prepare a written report of licenses sold by Tri-L as agent for the State on a form provided by the State. Said form was in the form as set out in the first page of Plaintiff\'s Exhibit 2. The reverse side of that form was inventory of the various licenses that Tri-L had received from the State during the reporting period, and licenses on hand (page two of Plaintiff\'s Exhibit No. 2).

3. That said report provided that Tri-L enclose therewith a check or money order for all licenses sold during the reporting period. The reports were to be

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