In re Sayler
| Decision Date | 10 October 1986 |
| Docket Number | Bankruptcy No. 85-11742,Adv. No. 86-0024. |
| Parties | In re Jerome SAYLER, Margaret Elaine Sayler, Debtors. The PEOPLES STATE BANK AND TRUST COMPANY, Plaintiff, v. Jerome SAYLER, Margaret Elaine Sayler and Lynn D. Allison, Trustee, Defendants. |
| Court | United States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Kansas |
Ernest McRae, McRae & Early, Wichita, Kan., for debtor.
Lynn D. Allison, Wichita, Kan., Trustee.
Greg L. Bauer, McPherson, Bauer, Pike & Pike, Chartered, Great Bend, Kan., for Peoples State Bank and Trust Company of Ellinwood, Kansas.
Mark D. Calcara, Watkins, Calcara & Rondeau, Great Bend, Kan., for American State Bank and Trust Company of Great Bend, Kansas.
This matter is before the Court for hearing on the objection to the debtors' exemption of certain life insurance policies by the American State Bank and Trust Company of Great Bend, Kansas (hereinafter "American State" or "ASB") and the trustee, Lynn Allison (hereinafter "the trustee") and the above captioned complaint to determine the dischargeability of debt filed by the Peoples State Bank and Trust Company of Ellinwood, Kansas (hereinafter "Peoples" or "PSB"). Margaret Elaine Sayler, the codebtor in the above captioned case, was previously dismissed. Jerome Sayler (hereinafter "Sayler" or "the debtor") appears by Ernest McRae of McRae & Early, Wichita, Kansas; American State appears by Mark D. Calcara of Watkins, Calcara & Rondeau, P.A., Great Bend, Kansas. Peoples State Bank appears by Greg L. Bauer of McPherson, Bauer, Pike & Pike, Chartered, Great Bend, Kansas.
1. The debtor is a medical doctor and has practiced in Great Bend and Illinois, Kansas for many years.
2. He filed his petition for relief under Chapter 7 of the United States Bankruptcy Code on September 18, 1985.
3. The debtor became 65 years of age on July 25, 1985.
4. At all times material hereto, the debtor was a principal and stockholder in Central Kansas Pathological Associates, Chartered. He was also a beneficiary of two ERISA qualified plans known as the Central Kansas Pathological Associates, Chartered Employees Profit Sharing Plan and Trust and the Central Kansas Pathological Associates, Chartered Employees Pension Plan and Trust. Hereafter both will be referred to jointly as "the Plans". At all times relevant, the debtor and Dr. Edward L. Jones were the designated trustees of the two ERISA plans.
5. The debtor and Margaret Elaine Sayler were married in 1979.
6. In early 1982, the debtor was indebted to the Plans in the approximate amount of $258,000.00. He was informed by the Plans' accountants and advisors that he must repay the loans prior to June 1, 1982 or run the risk of incurring a substantial tax liability under then recent changes in the ERISA law.
7. At the relevant point in 1982, the debtor's vested interest in the Plans totaled $355,285.65. (P.S.B. Exhibit 3).
8. On May 28, 1982, the debtor called Alan Isern, president of PSB, and set up a meeting for later that morning.
9. At that time the debtor had had a business relationship with PSB for several years, including substantial farm borrowings for a farm corporation he owned by the name of "Jerel, Inc."1
10. On the morning of May 28, 1982, the debtor indicated to Isern that he wished to borrow $300,000.00.
11. Mr. Isern had other obligations that morning and contacted Evelyn Miller of the bank staff to prepare the loan papers and told her that the loan was approved if the debtor could pledge collateral.
12. Mrs. Miller was a senior vice president of PSB and has worked in the bank for several years. Mrs. Miller originally drafted two promissory notes dated May 18, 1982 for the debtor to execute, one in the amount of $200,000.00 and another in the amount of $100,000.00. (Debtor's Exhibit "K"). She contacted Ray Cheely, the CPA and financial advisor to the Plans and determined that the debtor was unable to pledge his interest in the Plans as collateral for the notes.
13. The two May 28 notes were later replaced by two other notes for the same amounts, but which were signed by debtor and his wife, and which were for a shorter period of time. (Debtor's Exhibit "L").
14. The debtor promised to do whatever was necessary to secure the borrowing. The debtor did not represent that the money was to be used to fund the Plans, but stated that he was going to put the money into the Plans. The debtor did not state that he was indebted to the Plans for prior borrowing.
15. Both the debtor and the officers of PSB subsequently determined that the debtor could neither pledge his interest in the plan nor, as trustee, pledge any of the assets of the plan to secure the borrowing. This came about when PSB attempted to have the note redrawn to show the promissor as the Plan trustees. See Debtor's Exhibit "C". In any event, the debtor, on May 28, 1982, left PSB with certificates of deposit in the total amount of $300,000.00 in the name of the two Plans.
16. The C.D.s were delivered to the CPA, Ray Cheely, in his capacity as financial advisor to the Plans, who applied them on the debtor's indebtedness. The debtor's total indebtedness to the Plans was approximately $258,000.00. The excess was repaid to debtor by two checks from the Plans; one in the amount of $15,885.95 and the other in the amount of $26,104.40. See Peoples State Bank Exhibit 10.
17. Over the course of the next several months, the PSB and the debtor repeatedly corresponded concerning his obligation on the loan and the pledge of the certificates of deposit to secure the loan. The certificates of deposit were physically returned to PSB for safekeeping and a safekeeping receipt was issued. The certificates of deposit, however, remained in the name of the Plans.
18. PSB ultimately sued the debtor and his wife in Barton County, Kansas District Court on November 29, 1983 over their liability on the notes giving rise to the certificates of deposit in the name of the Plans. Although the Plans have been granted summary judgment, that action is still pending against the debtors, but stayed by these bankruptcy proceedings.
19. In 1983, Jerel, Inc., the farming venture owned by the debtor, filed a Chapter 11 proceeding before this Court. See Case No. 83-11593. The debtor had personally guaranteed the various indebtedness of Jerel, Inc.
20. Sometime in 1985, the District Court of Barton County, Kansas, allowed the Plans' trustees to withdraw the funds represented by the certificates of deposit originally issued by PSB. The exact date is not before the Court.
21. On June 1, 1985, pursuant to the terms of the Plans, the debtor withdrew all of his vested benefits in the Plans totaling $585,000.00.
22. As of June 1, 1985, the debtor was party to the following lawsuits:
Plaintiff County Pending Date Filed Amount Sought
American St. Bk. Barton Cty.D.C. 04/12/85 $405,018.31
Security St. Bk. Barton Cty.D.C. 02/11/85 $142,856.58
Peoples St. Bk. Barton Cty.D.C. 11/29/83 $300,000.00
23. As of June 1, 1985 the debtor was hopelessly insolvent in that his liabilities substantially exceeded his assets and he was generally not paying his obligations as they came due.
24. As of June 1, 1985, when the debtor began withdrawing his vested plan benefits, he was the owner and insured under the following listed insurance policies as reflected in the debtor's B-2 schedules:
25. Although it appears that the debtor began consulting Rob Laing, an agent for Southwestern Life Insurance Company, sometime prior to April 20, 1985, on that date he completed an application for insurance with Southwestern Life Insurance Company. In electing to make the application, the debtor discussed at length with his counsel and Mr. Laing the possible legal consequences of the policy. The debtor was advised of the In re Threewitt, 24 B.R. 927 (D.C.Kan.1982) decision, and discussed it with Mr. Laing and with Mr. McRae.
26. Southwestern Life Insurance Company offered to the debtor what is known as a universal life insurance policy which permits the payment of a substantial single premium which is then invested by the insurance company and the income used to pay future premiums. Debtor discussed the...
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