Krudy v. Simpson (In re Simpson)

• Decision Date: 02 July 2012
• Docket Number: Bankruptcy No. 08–11224–BHL–7A.,Adversary No. 09–50423.
• Citation: 474 B.R. 656
• Parties: In re Paul Dean SIMPSON, Debtor. Thomas A. Krudy, in his Capacity as Chapter 7 Trustee, Plaintiff, v. Paul Dean Simpson and Linda L. Simpson, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Indiana

474 B.R. 656

In re Paul Dean SIMPSON, Debtor.

Thomas A. Krudy, in his Capacity as Chapter 7 Trustee, Plaintiff,

v.Paul Dean Simpson and Linda L. Simpson, Defendants.

Bankruptcy No. 08–11224–BHL–7A.

Adversary No. 09–50423.

United States Bankruptcy Court,

S.D. Indiana,

Indianapolis Division.

July 2, 2012.

Paul D. Gresk, Gresk & Singleton, Indianapolis, IN, Randolph A. Leerkamp, Carmel, IN, for Plaintiff.

Stephen M. Gentry, Indianapolis, IN, for Defendants.

MEMORANDUM DECISION

BASIL H. LORCH III, Bankruptcy Judge.

This matter was initiated by the chapter 7 trustee (“Trustee”) on July 28, 2009, and, after the parties stipulated to the entry of partial summary judgment in open Court on April 3, 2012 [ see Doc. 59], the remaining four counts of the Trustee's complaint were tried to the Court on May 3, 2012. Having considered the foregoing, and being otherwise duly and sufficiently advised, the Court, for the reasons set forth herein, enters judgment for the Trustee against Paul Dean Simpson under Counts II and III of the Trustee's complaint, and enters judgment in favor of the Defendants on the remaining counts of the Trustee's complaint.

Background

As he neared retirement from a long career in the automotive industry, Paul Dean Simpson and his wife, Linda L. Simpson, in April 2002, purchased 37 acres of undeveloped farmland in Wilkinson, Indiana, with the intent of constructing their retirement home and a horse farm on the property. The Simpsons financed the $122,000 purchase with a signature loan from James Deuer, an old friend of Mr. Simpson. The next spring, the Simpsons began construction on what would be Simpson Farms' main barn, aided by a loan to Mr. Simpson from his sister.

Over the following year, the Simpsons made their home on the property, building a modest residence for themselves and state-of-the-art stables for Simpson Farms. They sold their house in Ohio, and repaid Mr. Deuer from the proceeds. Simpson Farms bought, sold, boarded, trained, and conditioned race horses, and sought to specialize in rehabilitation, which it was well equipped to do with a swimming pool for the horses and an air-conditioned barn with music piped in. Mr. Simpson made the important decisions concerning the horse business, which was not incorporated as a legal entity, though Mrs. Simpson helped organize the accounts and with barnyard chores. When he purchased horses, Mr. Simpson titled them in his wife's name, as is customary for men who own race horses, but paid for them with Simpson Farms' funds. The Simpsons maintained separate bank accounts, with Mr. Simpson having exclusive control over Simpson Farms' account (which he also deposited his Social Security benefits into and used to conduct other personal transactions) and Mrs. Simpson having her own personal checking account (into which she deposited her small pension benefits and from which she paid most of the household bills).

Simpson Farms struggled in its first years, recognizing five-figure losses for tax purposes each year, but it steadily grew its revenue. With the improvements on the property, Mr. Simpson, with his wife's aid, was eventually able to obtain conventional financing for his business. In August 2006, with the residence and main barn completed, the Simpsons borrowed $175,000 from First National Bank and Trust, secured by a mortgage on the Simpsons' real estate. Of the loan proceeds, approximately $75,000 went to repay Mr. Simpson's sister; $40,000 went into improvements to the real estate, including two pole barns and some fencing; and the balance funded the ongoing operations of Simpson Farms.

Before long, Simpson Farms required more capital, and Mr. Deuer was there to help. In January 2007, Mr. Simpson borrowed $275,000 from National City Bank, backed not by a mortgage on the Simpsons' real estate, but only by Mr. Deuer's guarantee and the pledge of Mr. Deuer's brokerage account. Mrs. Simpson was not a party to the new loan. As he had with the proceeds of the previous loans from his sister, Deuer, and First National, Mr. Simpson put the borrowed funds into his Simpson Farms bank account. With the proceeds of the loan from National City, Mr. Simpson repaid the loan from First National, causing the mortgage to be released and leaving the Simpsons' real estate unencumbered.

The balance of the funds did not last long. Simpson Farms continued to lose money, and on September 12, 2008, about a month after Mr. Deuer died, Mr. Simpson filed for relief under chapter 7 of the Bankruptcy Code with the intent to discharge his liabilities to National City and Mr. Deuer's widow, along with approximately $90,000 in credit card debt. Mr. Simpson captioned his petition for relief “Paul Dean Simpson dba Simpson Farms.” In the papers submitted with the petition, Mr. Simpson disclosed his interest in the real estate, which he valued at $600,000, but claimed a full exemption in the property on the grounds that it was held by he and Mrs. Simpson, who is not in bankruptcy, as tenants by the entireties. See11 U.S.C. § 522(b)(3); Ind.Code §§ 32–17–3–1 and 34–55–10–2(c)(5).

Those initial bankruptcy papers also contained some inaccuracies. On the day Mr. Simpson commenced his bankruptcy case, there were eleven horses boarded at Simpson Farms, five of which were beneficially owned by Mr. Simpson, having been purchased for between $800 and $4,300 apiece; they were later sold for a total of $4,650, less the costs of sale. Too, Simpson Farms, like any going concern, was owed a few thousand dollars by its customers. Mr. Simpson initially failed to disclose his ownership of these assets. Furthermore, in his statement of financial affairs, in the field where gross income is to be disclosed, Mr. Simpson provided only his net losses for the years preceding his bankruptcy. Despite his petition's faults, at the first meeting of creditors, see11 U.S.C. § 341, Mr. Simpson answered the Trustee's questions candidly, though not completely.

Soon thereafter, the Trustee obtained the Court's permission to conduct an examination of Mr. Simpson and his assets pursuant to Fed. R. Bankr.P.2004. In due course, the Trustee traveled to Wilkinson to tour the Simpsons' property and view Simpson Farms' operations. After seeing the fine facility and getting confused answers from Mr. Simpson, the Trustee, with the Court's approval, engaged an accountant to assist in his investigation. Mrs. Simpson handled most of the Simpsons' financial affairs, so Mr. Simpson naturally gave her his proxy in dealing with the Trustee's accountant. Mrs. Simpson provided the documentation requested by the accountant, disclosed the existence of Simpson Farms' receivables, and otherwise answered his questions as best she could. The Trustee's accountant confirmed that, while Simpson Farms was less than profitable, its ongoing operations generated significant gross income and the facilities where it operated had a value generally consistent with the estimate Mr. Simpson made in his submissions to the Court. Most important, the accountant confirmed the aforementioned series of transactions involving the Simpsons, Mr. Deuer, and the banks. With his investigation complete, the Trustee commenced the instant adversary proceeding.

Discussion

Four counts were tried to the Court. First, the Trustee seeks a judgment against Mrs. Simpson for contribution of half the amount of the joint loan from First National.¹ By the second and third counts, the Trustee seeks to recover accounts receivable owed to Mr. Simpson and certain personal property he owned when he filed his bankruptcy. Finally, the Trustee seeks the revocation of Mr. Simpson's chapter 7 discharge. Each count is specifically addressed below.

Count I: Contribution

In his pleadings and papers and based on his presentation at trial, the thrust of the Trustee's suit is behind the first count of his complaint, by which he, standing in Mr. Simpson's shoes, see11 U.S.C. §§ 323 and 541(a)(1), alleges that Mrs. Simpson is liable to the bankruptcy estate pursuant to Indiana's doctrine of contribution.² Though the general contours of the claim would be recognizable to bankruptcy courts that routinely hear preference cases pursuant to 11 U.S.C. § 547,³see, e.g., Smith v. Tostevin, 247 F. 102, 103 (2d Cir.1917) (Hand., J.) (ruling that a “payment to the creditor discharges [the surety] ... precisely as though made directly” to the surety), the Trustee's action is a creative one; the Court is unaware of any reported bankruptcy cases in which a trustee has brought an action for contribution against a debtor's spouse.⁴

The common-law right of one who has satisfied a joint obligation to demand contribution from his co-debtors was recognized by Indiana's courts in the nineteenth century. See Cook v. Cook, 92 Ind. 398, 399 (Ind.1884) (explaining that the “doctrine of contribution rests on the principle that where parties stand in equal right, equality of burden becomes equity”). Indiana's Uniform Commercial Code generally recognizes a right to contribution, but, apart from providing two affirmative defenses discussed below, defers to coexisting state law for its specifics. Ind.Code § 26–1–3.1–116(b) (providing that “a party having joint and several liability who pays the instrument is entitled to receive from any party having the same joint and several liability contribution in accordance with applicable law”); Fleck v. Ragan, 514 N.E.2d 1287, 1288–89 (Ind.Ct.App.1987) (“The Indiana Code is silent as to the liability between co-guarantors. Thus, we must look to the common law.”).⁵ In the absence of further statutory guidance, Indiana's appellate courts have repeatedly revisited contribution doctrine, with three reported decisions involving those who stand in the shoes of spouses.

Indiana's watershed decision on spousal liability for contribution was issued nearly one hundred years ago. See Magenheimer v. Councilman, 76 Ind.App. 583, 125 N.E. 77 (1919). Among the first courts in the...