Kight v. Dep't of Treasury/Internal Revenue Serv. (In re Kight)

• Court: U.S. Bankruptcy Court — Middle District of Florida
• Writing for the Court: JERRY A. FUNK
• Citation: Kight v. Dep't of Treasury/Internal Revenue Serv. (In re Kight), 23 Fla. L. Weekly Fed. B 183, 108 A.F.T.R.2d 2011, 2011 USTC P 50715, 460 B.R. 555 (Bankr. M.D. Fla. 2011)
• Decision Date: 20 September 2011
• Docket Number: Bankruptcy No. 3:07–bk–03025–JAF.,Adversary No. 3:10–ap–326.
• Parties: In re Leo Jimmy KIGHT, and Karen Teresa Sullivan–Kight, Debtors.Leo Jimmy Kight, and Karen Teresa Sullivan–Kight, Plaintiffs, v. Department of Treasury/Internal Revenue Service, Defendant.

108 A.F.T.R.2d 2011-7061

2011-2 USTC P 50,715

23 Fla. L. Weekly Fed. B 183

460 B.R. 555

In re Leo Jimmy KIGHT, and Karen Teresa Sullivan–Kight, Debtors.Leo Jimmy Kight, and Karen Teresa Sullivan–Kight, Plaintiffs,

v.Department of Treasury/Internal Revenue Service, Defendant.

Bankruptcy No. 3:07–bk–03025–JAF.

Adversary No. 3:10–ap–326.

United States Bankruptcy Court, M.D. Florida,Jacksonville Division.

Sept. 20, 2011.

Brian R. Harris, U.S. Department of Justice, Tax Division, Stephen C. Dowdell, United States Department of Justice, Washington, DC, for Defendant.

FINDINGS OF FACT AND CONCLUSIONS OF LAW

JERRY A. FUNK, Bankruptcy Judge.

This proceeding came before the Court upon a complaint seeking damages for a violation of the discharge injunction. The Court conducted a trial of the proceeding on February 14, 2011 and February 15, 2011. In lieu of oral argument, the Court directed the parties to submit memoranda in support of their respective positions. Upon the evidence and the arguments of the parties, the Court makes the following Findings of Fact and Conclusions of Law.

Findings of Fact

Plaintiffs are both attorneys who graduated from Mercer University Law School in 1988. (Tr. at 27, 98.) While in law school, Plaintiffs took a federal tax class, which focused mainly on personal income tax. (Tr. at 27, 98.) Plaintiffs both knew they had an obligation to file tax returns every year and, with the exception of one year prior to 2000, Plaintiffs timely filed their tax returns. (Tr. at 32, 33, 102.)

Beginning in 1995 Plaintiffs practiced law with Mrs. Kight's brother in Forsyth, Georgia. (Tr. at 31.) Each of the three members of the firm had a capital account. (Tr. at 38.) One third of the firm's overhead expenses was to be subtracted from whatever each member brought in, leaving each member with the difference. (Id.) In 1997 Mr. Kight began work on the Ebon Academy cases ¹, a series of large and complicated multi-party and multi-forum lawsuits arising out of the operation and sudden closure of a private K–12th grade boarding school in Forsyth, Georgia. (Tr. at 36–37; Def.'s Ex. 3, Resp. # 14.) The Ebon cases eventually became the only cases upon which Mr. Kight was working. (Tr. at 37.) Because Mr. Kight was handling the Ebon cases on a contingency basis, he had virtually no income. (Tr. at 38.) What little income Mrs. Kight brought in went toward her portion of the office overhead. (Def.'s Ex. 3, Resp. # 14.) In order to provide Plaintiffs with income, which they took in the form of partnership draws, Mrs. Kight's brother loaned money to the firm. (Tr. at 38–39.) The source of the funds was an equity line on his home. (Id.)

By July 1999 Plaintiffs' situation had become “untenable”. (Tr. at 39.) Mrs. Kight's brother's home equity loan was near capacity. (Tr. at 39.) Mr. Kight's father urged Plaintiffs to move to St. Augustine. (Id.) Mr. Kight's father offered to co-sign on a loan to enable Plaintiffs to move to St. Augustine and to enable Mr. Kight to take the Florida Bar and establish a law practice. (Id. at 39–40.)

In July 1999 Plaintiffs moved to St. Augustine. (Tr. at 39.) Plaintiffs rented a house (the “Gerona Road Property”) with an option to buy. (Tr. at 40.) Mr. Kight continued litigating the Ebon cases. (Tr. at 41.) Mr. Kight also took and passed the Florida Bar examination and in November 1999 began the background investigation process for admission to the Florida Bar. (Tr. at 42.) Mrs. Kight took a job as a server and bartender at a local Irish pub. (Tr. at 113.)

In late 1999 the Ebon cases settled. (Tr. at 42.) On February 29, 2000, Mr. Kight received a settlement of $1.2 million on behalf of his clients. (Tr. at 43.) Of that, the law firm received a contingency fee of $425,000.00. (Tr. at 44.) After paying his brother in law for his work on the Ebon cases and replenishing Plaintiffs' capital accounts, Mr. Kight received $316,833.00. (Tr. at 46.)

During the spring of 2000 Plaintiffs made the following expenditures. (Tr. at 50.) Plaintiffs paid off two lines of credit upon which Mr. Kight's father had co-signed which totaled approximately $65,000.00 (Tr. at 47–48.) Plaintiffs spent $4,700.00 on furniture. (Tr. at 48.) Plaintiffs spent $35,346.00 to pay off their past due 1996, 1997, and 1998 federal income taxes. (Tr. at 48.) Plaintiffs used approximately $4,500.00 to pay past due Georgia state income taxes. (Tr. at 48.) Plaintiffs paid $4,388.00 to their former law firm for a malpractice insurance premium and for an employee's retirement account. (Tr. at 48.) Plaintiff's paid their 2000 property taxes in the amount of $2,165.00. (Tr. at 49.) Plaintiffs paid $7,000.00 to bring their student loans current. (Tr. at 55.) Plaintiffs spent $5,000.00 on a second vehicle. (Tr. at 58.)

In April 2000 Plaintiffs invested $100,000.00 in a Raymond James mutual fund account. (Tr. at 61.) Plaintiffs hoped the money would grow enough to cover the entire tax liability, which Mr. Kight believed would be approximately $150,000.00. (Tr. at 55, 57–58.)

On June 29, 2000 Plaintiffs purchased the Gerona Road Property for $136,000.00. (Tr. at 142.) Plaintiffs spent $6,551.00 on closing costs. (Tr. at 48.) Plaintiffs made a $10,000.00 down payment and financed the remaining $126,000.00 with a balloon note. (Tr. at 142; Def.'s Ex. 15.) Mr. Kight's father was a co-signor on the note. (Tr. at 141; Def.'s Ex. 15.)

Plaintiffs kept $90,000.00 to $95,000.00 of the proceeds in a money market account to be used for living expenses. (Tr. at 49.) Aside from Mrs. Kight's income from her job as a server and bartender at the Irish pub and Plaintiffs' later attempts to operate the pub, Plaintiffs had no income from March 2000 until September 2001.(Id.) During that time Plaintiffs' living expenses totaled approximately $5,000.00 monthly. A portion of the living expenses was comprised of Catholic school tuition for Plaintiffs' children. ² Plaintiffs are the parents of a son with Asperger's Syndrome, a high functioning form of autism. (Tr. at 124.) Plaintiffs were advised by therapists, psychologists and psychiatrists that it was necessary for the child to attend private school. (Tr. at 125–127.) Additionally, Plaintiffs' son's medical expenses were not covered by insurance. From February 2000 until October 2001 Plaintiffs spent $13,000.00 on their son's out of pocket medical expenses. (Tr. at 127.)

On April 15, 2001 Plaintiffs filed an extension of time to file their 2000 tax return, extending the deadline to file their return until October 15, 2001. (Def.'s Ex. 7; Tr. at 69.) Plaintiffs calculated they would have a tax liability of $123,488.00. (Id. at 70.) Although Plaintiffs had money in the Raymond James account and in their checking account, they paid only $1,000.00 with the extension. (Id.)

Because of his tax and credit issues, Mr. Kight encountered difficulty obtaining admission to the Florida Bar. (Def.'s Ex. 3, Resp. # 14.) Having become frustrated with the process, during the spring of 2001 Mr. Kight abandoned his bar admission plans and began to look for another means to earn a living. (Id.; Tr. at 72.) Around that same time, the family, which operated the Irish pub at which Mrs. Kight had been working, approached Plaintiffs about purchasing the pub. During May of 2001 Plaintiffs purchased the pub. (Tr. at 71–72.) Plaintiffs took out a $40,000.00 margin loan on their Raymond James investment account to make the down payment on the purchase. (Tr. at 74.) Plaintiffs also paid $5,000.00 to one of the pub's partners for back wages he was owed from 2000. (Tr. at 76.) The investment failed and Plaintiffs lost the $40,000.00. (Id.)

Although at some point the value of the Raymond James account was $110,000.00 or $120,000.00, after September 11, 2001 the stock market began to plunge. (Tr. at 77.) In October or November 2001 Plaintiffs liquidated the account. (Tr. at 78.) After payment of the margin loan, Plaintiffs received $51,782.00. (Id.) On November 15, 2001 Plaintiffs filed their 2000 income tax return reporting taxable income of $327,606.00, a total tax liability of $124,488.00, and an outstanding tax liability of $123,488.00. (Def.'s Ex. 10.) Despite having recently received the $51,782.00 from the Raymond James account, Plaintiffs did not pay anything with their tax return. (Tr. at 78.) Mr. Kight testified that they did not send any portion of the money to the IRS because “once again we were faced with we had no income, no job, no Bar license, no pub to run, nothing, and this was the only money we had ... the memories we had of the way [of] life with no money were never far from mind.” (Tr. at 78–79.) Mrs. Kight testified that it had become clear to Plaintiffs that if they used the proceeds from the Raymond James account to pay the Internal Revenue Service (the “IRS”), they would not have enough money to maintain a home, to feed their family and to pay for their autistic son's uninsured medical expenses and necessary private school. (Tr. at 119–120.)

During 2002 Mr. Kight became involved in another large multi-party and multi-forum contingency fee case involving South Georgia real estate fraud (the “Waycross Property Case”). (Tr. at 81; Def.'s Ex. 3, Resp. # 14.) Although Mr. Kight was successful in obtaining default judgments against the defendants, the defendants had no assets to satisfy the judgments. (Id.) Mr. Kight made no money on the Waycross Property Case. (Id.)

In an effort to help fund the Waycross Property Case, Mr. Kight's parents co-signed on another line of credit. (Tr. at 81.) By early 2003 Plaintiffs had drawn $40,000.00 on the line of credit. (Id.) Plaintiffs were also behind on their mortgage. (Id.) The bank, which held the note on the Gerona Road Property, was threatening to foreclose if Plaintiffs did not transfer the property to Mr. Kight's parents. (Tr. at 82.) On March 14, 2003 Plaintiffs transferred the Gerona Road Property to Mr. Kight's parents. (Tr. at 82; Def.'s Ex. 16.) Mr. Kight...