IN RE RICHMOND

Decision Date16 June 2010
Docket NumberAdversary No. 2:08-ap-1135.,Bankruptcy No. 2:07-bk-14908M.
Citation430 B.R. 846
PartiesIn re James Victor RICHMOND and Jill Janette Richmond, Debtors. Southern Bancorp South f/k/a/ First Bank of the Delta, N.A., Plaintiff, v. James Victor Richmond and Jill Janette Richmond, Defendants.
CourtU.S. Bankruptcy Court — Eastern District of Arkansas

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Joseph A. Strode, Bridges Law Firm, Pine Bluff, AR, for Plaintiff.

Vaughn Knight, Knight Law Firm, PLC, Fayetteville, AR, for Defendants.

MEMORANDUM OPINION

JAMES G. MIXON, Bankruptcy Judge.

On September 6, 2007, James Victor Richmond (Vic) and Jill Janette Richmond (Jill), the Debtors, filed a voluntary joint petition for relief under the provisions of Chapter 7 of the United States Bankruptcy Code. On March 28, 2008, Southern Bancorp South, formerly known as First Bank of the Delta, N.A.1 (Bank), filed this adversary proceeding against the Debtors objecting to the dischargeability of various debts owed to the Bank and objecting to the discharge of both Vic and Jill.

Count I of the complaint objects to the dischargeability of debts owed by the Debtors pursuant to the provisions of 11 U.S.C. ž 523(a)(2)(A) on the grounds that the debts were procured by false pretense, false representation, and actual fraud. Count II objects to the dischargeability of the Bank's debt pursuant to the provisions of 11 U.S.C. ž 523(a)(2)(B) because of the Debtors' use of some materially false financial statements. Count III objects to the dischargeability of the Bank's debt pursuant to the provisions of 11 U.S.C. ž 523(a)(4) for embezzlement or larceny of the Bank's collateral which was encumbered by a valid security interest. Count IV objects to the dischargeability of the debt under the provisions of 11 U.S.C. ž 523(a)(6) for willful and malicious injury to the Bank's property. Also, in a separate paragraph in Count IV, the complaint adds an allegation, as an independent basis of liability of both Vic and Jill, based on fraud practiced on the Bank resulting in damages equal to the unpaid balances of the notes owed to the Bank by JSR & Co. and Richmond & Co. The complaint asked for judgment against both Debtors, jointly and severally, for $3,483,181.38 plus accrued interest, costs, and attorney's fees, which sum represents the unpaid balance of nine separate notes.

On August 28, 2008, the Bank filed an amended complaint which added the following counts. Count V alleges that the Debtors are the alter egos of their corporations, partnerships, limited liability companies, and other entities and, therefore, both Debtors are liable for all debts incurred by the fictitious entities owed to the Bank. Count VI objects to the Debtors' discharge pursuant to 11 U.S.C. ž 727(a)(2) for transferring or concealing property with intent to hinder, delay, or defraud creditors. Count VII objects to the Debtors' discharge pursuant to 11 U.S.C. ž 727(a)(3) because the Debtors failed to keep or preserve books and records from which their financial affairs might be ascertained. Count VIII objects to the Debtors' discharge pursuant to 11 U.S.C. ž 727(a)(4) for knowingly and fraudulently, in connection with the case, making a false oath. Count IX objects to the Debtors' discharge pursuant to 11 U.S.C. ž 727(a)(5) on the grounds that the Debtors failed to explain satisfactorily the loss or deficiency of assets to meet their liabilities.

The Debtors filed a timely answer to the complaint and the amended complaint denying the allegations.

Trial on the merits was conducted in Helena, Arkansas, on July 27, 28, and 29, 2009, and on September 29, 30, and October 1, 2009, after which the matter was taken under advisement. The parties have each filed post-trial briefs.

The proceeding before the Court is a core proceeding pursuant to 28 U.S.C. ž 157(b)(2)(I) and (J) and the Court has jurisdiction to enter a final judgment in the case. The following shall constitute the Court's findings of fact and conclusions of law pursuant to the Federal Rule of Bankruptcy Procedure 7052.

SUMMARY

The Debtors are husband and wife who live in Phillips County, Arkansas, near Helena, Arkansas. They have farmed for 23 or 24 years. This particular case concerns the Debtors' farming activities in the calendar years 2006 and 2007. Although the Debtors owned only a small amount of farm land in 2006, they proposed to the Bank that they would farm 5,000 acres of rented land in Phillips County, Arkansas, (Phillips County) and a little more than 5,000 acres of rented land in Jefferson County, Arkansas, (Jefferson County) approximately 100 miles west of the Debtors' home. The crop to be produced in 2006 was all cotton. To accomplish this goal, two partnership entities were created by Vic to conduct the 2006 farming operations; JSR and Company (JSR & Co.) and Richmond and Company (Richmond & Co.). The debts involved were two crop production loans made in March and May of 2006, to the two entities created by Vic. The loans were in the sum of $2,100,000.00 to JSR & Co.2 and $2,050,000.00 to Richmond & Co. The Bank is also owed indebtedness left over from previous farming activities by Vic and Jill, individually.3 The Debtors' farming businesses in 2006 included not only the production of the cotton crop, but also the operation of a cotton gin in Jefferson County and custom harvesting and hauling of cotton for other farmers by Richmond & Co. and JSR & Co.

In the early Spring of 2007, the Debtors notified the Bank by e-mail that JSR & Co. and Richmond & Co. would not be able to repay a substantial portion of either crop production loan, or any of the existing indebtedness, all of which totaled about $3,400,000.00. The Debtors soon filed bankruptcy and this adversary proceeding followed.

THE PARTIES

1. Vic is one of the Co-Debtors. He was in total control of the farming operation of both partnerships. He also created all of the various entities involved. (Tr. 9/29/09 at 76-77.)

2. Jill is the other Co-Debtor and is married to Vic. She did not testify at the trial of this matter. Her apparent signature appears on the note and security agreement executed by JSR & Co., and her apparent signature appears on the personal guaranty of the note executed by JSR & Co.4 (Pl.Ex.20-23.) She is the named managing partner of JSR & Co. and president of several of the corporate partners of JSR & Co. Her apparent signature appears on many of the checks and other important documents in the case. (Tr. 9/29/09 at 76-77.)

3. JSR & Co. is a general partnership that borrowed $2,100,000.00 from the Bank to produce a 2006 cotton crop on land located in Phillips and Jefferson County. JSR & Co. is a partnership made up of partners, all of which are corporations. Jill is designated as the managing partner and the corporate partners are SJILL AG II, INC., Jill S. Richmond, President; LAURAJ AG II, INC., Jill S. Richmond, President; VCASE AG II, INC., Jill S. Richmond, President; ELIZ AG II, INC., Robert L. Easley, President; EHEATHER AG II, INC., Robert Easley, President; and EKATIE AG II, INC., Robert Easley, President. (Pl.Ex. 19; Tr. 9/29/09 at 76.) Vic is not a partner of JSR & Co. nor a shareholder of any of the corporate partners of JSR & Co.

4. Richmond & Co. is a general partnership that borrowed $2,050,000.00 from the Bank to produce a 2006 cotton crop on land located in Jefferson County. Robert W. Richmond (Robert), Vic's father, is the named managing partner. (Tr. 7/28/09 at 290.) The partnership consists of eight partners, all of which are corporations. The eight corporations are PAULA AG, INC., Paula S. Knight, President; BILLB AG, INC., William M. Vangilder, President; BOBR AG, INC., Robert W. Richmond, President; RTAYLOR AG II, INC., John V. Richmond, President; KJIM AG II, INC., Paula S. Knight, President; KPAULA AG II, INC, Paula S. Knight, President; VMONA AG II, INC., William M. Vangilder, President; and VKEITH AG II, INC., William M. Vangilder, President. (Pl.Ex.3.) Robert personally guaranteed part of the debt of Richmond & Co. to the Bank. Neither Vic nor Jill is a partner of Richmond & Co. or a stockholder of any of the corporate partners of Richmond & Co.

5. JSR, LLC is owned 80% by Jill and 20% by Laura Jill Richmond (Laura Jill), the Debtors' college-aged daughter. The primary purpose of this entity was to own equipment used in the farming operation. (Pl.Ex. 83; Tr. 7/28/09 at 295-296.)

6. JSR Farms is the name used to describe Jill, individually doing business as JSR Farms. JSR Farms purported to perform farming activities such as custom work, cutting stalks, and plowing fields. (Def. Ex. 8; Tr. 9/29/09 at 76.)

7. Richmond Gin, LLC (Richmond Gin), was originally owned 80% by Jill and 20% by Laura Jill. (Pl.Ex. 120; Tr. 7/28/9 at 297.) In January 2007, the ownership percentage was changed to 25% Jill, 26% Vic, 24% Laura Jill, and 25% Case Richmond (Case), the Debtors' high school-aged son. (Pl.Ex. 121; Tr. 7/28/09 at 297.) In 2006, Richmond Gin conducted a cotton ginning business, module hauling, and custom cotton harvesting. In 2007, it did not conduct any ginning business but engaged in custom harvesting and cotton hauling. (Pl.Ex. 121; Tr. 7/28/09 at 297-298.)

8. DVFarm Group is a farm partnership made up of partners that are corporations. Vince Richmond (Vince), Vic's twin brother, was the named manager. DVFarm Group farmed the same land Richmond & Co. farmed in 2006 in Jefferson County. Vince borrowed the money to produce a crop in 2007. Vic actually operated the farming operation in 2007 and 2008 on behalf of FARMMGR, LLC (FARMMGR). (Tr. 7/28/09 at 299-302.)

9. RDFarm Group is a farm partnership made up of partners that are corporations. Jeff Davis (Davis), a friend of Vic's, financed the 2007 crop. The named manager of the partnership is Lane Easley. RDFarm Group farmed the same land JSR & Co. farmed in 2006 in ...

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