In re Lott, Case No. 1-05-bk-90147M (Bankr. W.D. Ark. 9/23/2008)
| Decision Date | 23 September 2008 |
| Docket Number | AP No. 1:07-ap-7160.,Case No. 1-05-bk-90147M. |
| Parties | IN RE: CHARLES D. LOTT, (CHAPTER 7) DEBTOR. RENEE S. WILLIAMS, TRUSTEE, Plaintiff, v. CHARLES D. LOTT, Defendant |
| Court | United States Bankruptcy Courts. Eighth Circuit. U.S. Bankruptcy Court — Western District of Arkansas |
On December 12, 2005, Charles D. Lott ("Debtor") filed a voluntary petition for relief under the provisions of Chapter 11 of the United States Bankruptcy Code. C. Richard Crockett was authorized to represent the Debtor-In-Possession on March 24, 2006. No creditors' committee was formed in the case, and no plan of reorganization was ever confirmed. On December 6, 2006, the case was converted to Chapter 7 on motion of the Debtor, and on December 7, 2006, Renee S. Williams was appointed Chapter 7 Trustee.
On March 2, 2007, the Trustee commenced this adversary proceeding against the Debtor. Subsequently, the Trustee, with leave of Court, filed an amended complaint on October 5, 2007.
In Count I of the amended complaint, the Trustee alleges that the Debtor's discharge should be denied pursuant to 11 U.S.C. § 727(a)(2)(3) and (5). In Count II, the Trustee seeks turnover, judgment, an accounting, and punitive damages, all of which will be discussed separately below.
The Debtor filed a timely answer pro se denying the allegations of the complaint and a timely answer to the amended complaint denying any wrongdoing but attempting to explain some of the transactions described in the Trustee's complaint.
Hearings were conducted on December 5, 2007, in El Dorado, Arkansas, and on December 14, 2007 and May 16, 2008, in Little Rock, Arkansas. At the conclusion of the third hearing the matter was taken under advisement.1
The proceeding before the Court is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(E)&(J)(2006), and the Court has jurisdiction to enter a final judgment in this case. The following shall constitute the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
During the relevant time period, the Debtor lived in rural Calhoun County, Arkansas, on Sponer Ranch, a farm he leased and also the location of Charlie's Welding, a steel fabrication business that he operated. (Tr. 1 at 32). The address of his unincorporated business was Highway 78 West, Hampton, Arkansas. (Pl.'s Ex. 1.) The Debtor is married to Beth Lott, and they have two sons, Matthew and Cody. In January 2006, Matthew was 19 years old and Cody was 24 years old.
After the Debtor filed his Chapter 11 petition on December 12, 2005, he operated as an individual Chapter 11 Debtor-In-Possession. The Debtor testified that he engaged in the steel fabrication business from the petition date until July 2006 when Charlie's Welding ceased doing business. (Tr. 1 at 30.)
From January 2006 through July 2006, the Debtor served one major customer named Brandt, a business located in Houston, Texas. He also had other customers including Shaw Process and Pense Brothers Drilling. (Pl.'s Ex. 44-2 at 1-2). The Debtor's contract with Brandt originally called for the Debtor to fabricate two mud tank systems for use in oil and gas drilling. This contract was later modified by agreement of the parties and called for Charlie's Welding to complete four additional mud systems. The Debtor explained that a "mud system" is a fabricated steel tank with electric motors and paddles used in blending and mixing fluid for oil rigs. (Tr. 2 at 47.)
Beth Lott worked in the business as a secretary and bookkeeper. (Tr. 1 at 31.) The Debtor testified that his wife kept the books and records, which were sent periodically via a computer disc to Marc Emrich, an accountant who prepared the monthly Chapter 11 operating reports for a portion of the time period when the Chapter 11 case was active. According to the Debtor, Emrich received the bank statements for the debtor-in-possession account and the payroll account. (Tr.2 at 48.)
The Debtor stated that the financial transactions of Charlie's Welding were recorded in a checking ledger book and in a computer program. (Tr.2 at 48-49.) The Debtor stated these recorded transactions included wire payments to Charlie's Welding, which were sent to a bank account or accounts and were recorded on the company books, checking ledger and the bookkeeping computer program. (Tr. 2 at 55.) The Debtor testified that he furnished his check ledger to the Trustee and that the ledger explained the purpose of any transfer of funds to or from Charlie's Welding. (Tr. 2 at 57-58.) The Debtor admitted he had a copy of the ledger, and it was introduced at the third hearing as Plaintiff's Exhibit 44 (renamed by the Court as Plaintiff's Exhibit 44-2.) (Tr. 2 at 93, Tr. 3 at 10.)
The Debtor's bank record of a debtor-in-possession account reflects total deposits from January 19, 2006 through November 2006 of $1,282,781.40. Despite the large amount of money that had been deposited into the account, the Chapter 7 Trustee testified that during her tenure as trustee, she has been unable to locate any assets.
In addition to the facts recited above, the Trustee established certain other facts to support her objection to discharge under Count I of the complaint with regard to the Debtor's failure to keep adequate books and records. Generally, these facts concern the Debtor's use of the debtor-in-possession account for personal purposes unrelated to conducting the business affairs of Charlie's Welding, the failure to keep adequate records of a cattle-raising venture, and the lack of records to explain wire and telephone transfers from the debtor-in-possession account.
The Trustee introduced evidence that the Debtor used the debtor-in-possession account to pay personal bills through transfers to his wife's bank account, to pay for his sons' college expenses, to pay for his brother's funeral and related travel expenses, and to fund a cattle raising venture with his two sons.
The Trustee presented evidence that between January 1, 2006 and June 20, 2006, the Debtor made the following transfers from the debtor-in-possession account to his wife or to his wife's checking account, which bears the number 86168081:2
The Debtor testified that both he and his wife worked for Charlie's Welding but because they did not draw a salary, they took funds from the business as needed for personal expenses. The evidence above shows that in March, April, May, and June, while the Chapter 11 was ongoing, the Debtor transferred an approximate average of $5000.00 a month from the business account to his wife's checking account. The Ledger shows no evidence of payroll checks made out to Charles or Beth Lott during March, April, or May. However, from June 9, 2006 to July 21, 2006, it appears that Charles Lott placed himself on the payroll, drawing seven checks from the debtor-in-possession account in amounts of either $310.78 or $527.10. (Pl.'s Ex. 44-2 at 23, 25, 28, 30, 33, 35, 36.)
The Debtor stated that Emrich instructed him to pay personal expenses out of the debtor-in-possession account because the CPA advised the Debtor to maintain only one account. (Tr. 2 at 56.) He said for that reason, he used an account in Beth Lott's name for only a brief period, but bank records show transfers from the debtor-in-possession account for at least four months while the Chapter 11 was ongoing. Moreover, the Trustee also adduced evidence that for some period not shown by the record, the Debtor maintained at least two debtor-in-possession accounts at Simmons Bank.
The Debtor offered no record or accounting of how the money deposited in Beth Lott's account was spent. The Debtor stated he did not know how the money deposited to his wife's account was spent, but it might have been used to pay bills. (Tr.2 at 85.)
In March 2006, the Debtor and his wife visited his seriously-ill brother, who resided in New Mexico. The Debtor's brother ultimately passed away, and the Debtor and his family again traveled out of state in May to attend the funeral. Expenses for the two trips and the funeral itself were paid out of the debtor-in-possession account in the following amounts:
DATE PAYEE AMOUNT
3/28/06 Southwest Air Debit $ 361.20
3/28/06 Southwest Air Debit $ 361.20
3/29/06 Budget Rent-A-Car $ 83.62
5/01/06 Debit American Air $ 258.70
5/01/06 Debit American Air $ 337.70
5/01/06 Southwest Air $ 363.70
5/01/06 Southwest Air $ 363.70
5/02/06 Enterprise Auto $ 200.00
5/02/06 Wheeler Mortuary $6,505.93
5/03/06 Enterprise Auto $ 11.42
_________
$8,847.17
Between April 10, 2006 and September 11, 2006, the Debtor transferred funds from the debtor-in-possession account to or for the benefit of his sons, Cody and Matthew Lott, in the following amounts:4
CHECK NO. DATE PAYEE AMOUNT
1238
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