In Re Robert W. Richmond

• Decision Date: 08 June 2010
• Docket Number: Adversary No. 2:08-ap-01134.,Bankruptcy No. 2:07-bk-15035.
• Citation: 429 B.R. 263
• Parties: In re Robert W. RICHMOND, Debtor.Helena Chemical Company, Plaintiffv.Robert W. Richmond, Defendant/Debtor.
• Court: U.S. Bankruptcy Court — Eastern District of Arkansas

429 B.R. 263

In re Robert W. RICHMOND, Debtor.Helena Chemical Company, Plaintiffv.Robert W. Richmond, Defendant/Debtor.

Bankruptcy No. 2:07-bk-15035.

Adversary No. 2:08-ap-01134.

United States Bankruptcy Court,

E.D. Arkansas,

Helena Division.

June 8, 2010.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Ralph W. Waddell, Robert J. Gibson, Barrett & Deacon, Jonesboro, AR, for Plaintiff.

Vaughn Knight, Knight Law Firm, PLC, Fayetteville, AR, for Defendant/Debtor.

MEMORANDUM OPINION AND ORDER

RICHARD D. TAYLOR, Bankruptcy Judge.

On March 28, 2008, Helena Chemical Company (“Helena Chemical”) filed its Complaint Under 11 U.S.C. § 727 Requesting Debtor be Denied Discharge, or Alternatively, that Debt to Helena Chemical Company be Excepted from Discharge Under § 523 (“Complaint”). The debtor, Robert W. Richmond, filed an answer. The parties tried this adversary proceeding the week of January 4, 2010, in Helena, Arkansas. At the parties' request, the court held the record open until January 29, 2010, to include the transcript testimony of five additional witnesses. Thereafter, the court closed the record and took the matter under advisement. For the reasons stated below, the Complaint is granted in part and denied in part. The debtor is denied his discharge generally and specifically as to the debt owed Helena Chemical. A judgment will be entered consistent with the findings and conclusions stated herein.

I. Introduction

Helena Chemical attacks the debtor's discharge based on both the debtor's own actions and the imputed actions of his alleged agent, James Victor Richmond (“Vic Richmond”). Vic Richmond is the debtor's son. The scrutinized activities relate to a number of east Arkansas farming operations involving the debtor, Vic Richmond, family members, and close associates.

The critical events concern Helena Chemical's spring 2006 credit to Richmond related entities. Helena Chemical contends that its 2006 credit had, in addition to typical credit terms, two conditions: first, that the Richmond entities would obtain necessary operating, or crop, loans, and, second, that the Richmond entities had paid in full their 2005 indebtedness to Helena Chemical.

As part of its credit analysis, Helena Chemical assumed that the 2006 operating loans would not be used to pay the 2005 Helena Chemical debt. Concurrently, the bank making the Richmond entities their 2006 operating loans expected that the 2006 credit would not be used to pay 2005 operating loans or 2005 Helena Chemical debt. The Richmond entities,¹ contrary to these assumptions and understandings, used their 2006 crop loans to pay their 2005 Helena Chemical and crop loan debts. The effect was to substantially diminish the borrowers' ability to effectively farm in 2006 and adequately address their 2006 debt.

II. Jurisdiction

This court has jurisdiction over this matter under 28 U.S.C. §§ 1334 and 157. This is a core proceeding under 28 U.S.C. § 157(b)(2)(I) and (J). The following opinion constitutes findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.

III. Facts

Helena Chemical supplies fertilizer, seed, and related products to farmers. It has separate sales and credit divisions; the local presence emphasizes sales. Typical sales terms are net 30 days. Predicated on a credit application process, farmers may obtain extended credit that, while having defined due dates, in practice conforms to the cyclical rhythms of farming.

Vic Richmond is at the epicenter of the controversy between the debtor and Helena Chemical. Helena Chemical contends that Vic Richmond is the agent for, and operator of, a number of farming entities that he controls, although others-including the debtor-are the owners, partners, or farm managers.

There are no less than twenty-three Richmond related farming entities involved in this case ² (Ex. 189), most owing their existence to government subsidy regulations.

The three principal and pertinent entities are Richmond & Company, a general partnership (“Richmond Company”), JSR & Company, a general partnership (“JSR”), and Richmond Gin, LLC (“Richmond Gin”).

A. Richmond Company

Paulab Ag, Inc., Billb Ag, Inc., and Bobr Ag, Inc. formed Richmond Company in March, 2003. (Ex. 1.) Vic Richmond's previous farming venture, Richmond Farming, was in decline; Vic Richmond was insolvent and could not personally obtain credit. He had outstanding debt from his previous farming ventures and ongoing issues with the Internal Revenue Service (“IRS”).

The debtor, as president of Bobr Ag, Inc., personally signed the Richmond Company Partnership Agreement (“Partnership Agreement”), originally consisting of the three corporate partners named above. (Ex. 1.) The debtor also owned a half-interest in the other two original partners, along with Paula Knight (“Knight”) and William Vangilder, respectively the bookkeeper and a farm manager for one or more of the Richmond entities. (Ex. 189.) Richmond Company farmed cotton in Jefferson County, Arkansas.

The Partnership Agreement names the debtor as the manager, states that a successor can be appointed if he is “unable or unwilling” to serve, and that he may be removed by a majority vote. (Ex. 1 at 2-3.) The manager had extensive and specifically enumerated duties, including preparing an annual budget, determining the crop loan needs each year, choosing a lending institution, applying for necessary loans, and entering into financial agreements with lending institutions. (Ex. 1 at 3-4.) Further, the Partnership Agreement designated the debtor as its representative for all matters involving the Farm Service Agency (“FSA”) and the IRS. (Ex. 1 at 4.) These financial responsibilities are in addition to the debtor's actual farm management obligations. (Ex. 1.)

In February 2004, the initial three partners amended the Partnership Agreement to include several Richmond related entities. Vaughn Knight, Paula Knight's son and debtor's counsel, assisted in the preparation of the First Amendment to Partnership Agreement. The partners designed the amendment in light of government subsidies and FSA rules.

Throughout its history, the Richmond Company partnership and partners ignored most of the formalities-financial, record keeping, meetings, and otherwise-set forth in the Partnership Agreement and customary to the operation of a business. The debtor actively participated in, or passively and knowingly permitted, this pattern and practice.

The reasons for designating the debtor as Richmond Company's manager are vague. Vic Richmond testified simply that someone had to be personally responsible, and that the debtor was the “natural choice.” At varying points in his testimony, Vic Richmond gave conflicting testimony concerning the debtor's ability to run a farming operation: the debtor was capable of running a farm; conversely, the debtor was unsophisticated and age had diminished his mental capabilities; the debtor, however, was sufficiently coherent to understand both his delegation of authority and the import of the financial documents he either signed or permitted others to sign on his behalf.

Regardless, the debtor abdicated and delegated the majority of his management responsibilities to Vic Richmond. The parties never documented this delegation or the unlimited and unrestricted scope of Vic Richmond's authority. Vic Richmond occasionally consulted with the debtor but basically performed all the management functions himself. The debtor did, however, negotiate some leases on behalf of Richmond Company due to his prior history with the landlords. The debtor also picked up mail, ran errands, prepared labor sheets, picked up and dropped off documents, occasionally signed financial documents, and knew how much and from whom Richmond Company obtained credit. On some documents, the debtor signed his own name; on other occasions, Vic Richmond signed the debtor's name; his authority was solely verbal and is not reflected on the face of any document.

B. JSR

Six corporations formed JSR in March 2005. (Ex. 51.) The debtor was not an equity owner of any of the partners. (Ex. 189.) The equity owners were either members or friends of the extended Richmond family. Jill Richmond, Vic Richmond's wife, served as JSR's manager; she delegated all of her management authority to Vic Richmond. Jill Richmond lacked the necessary skills to run a farming operation. Jill Richmond and the partners completely ignored standard and typical partnership formalities. The partners structured JSR, and its corporate partners, solely to take full advantage of government subsidies. JSR farmed principally cotton in Phillips County, Arkansas.

C. Richmond Gin

Members of the Richmond family formed Richmond Gin in 2005, though there was testimony that the operative date was actually in June 2006. See Exhibit 189, Richmond Gin's partners as of 2006, though Vic Richmond testified that Richmond Gin was formed in spring, or possibly June, 2005. Richmond Gin also filed a 2005 tax return. (Ex. 160.) Richmond Gin leased a cotton gin from an entity operated by Larry McClendon and ginned principally for Richmond Company and JSR. Vic Richmond is the president of Richmond Gin. (Ex. 193 at 5047.)

D. Helena Chemical Credit History Prior to 2006

Starting in 1984, Vic Richmond had a credit relationship with Helena Chemical, both individually and through various farming entities. Richmond Company first obtained credit from Helena Chemical in June 2003. (Ex. 9.) Vic Richmond worked principally with Curtis Hopkins at Helena Chemical.

Although Helena Chemical considered Vic Richmond the principal representative and decision maker for Richmond Company, the original Application for Credit (“Application”) in 2003 bears the debtor's signature ³ and lists the debtor as the manager. (Ex. 9.) The debtor delegated the financing...