McDermott v. Crabtree (In re Crabtree)

• Decision Date: 08 August 2016
• Docket Number: BKY 13–60824–MER,Adv. No. 14–6025
• Citation: 554 B.R. 174
• Parties: In re: Todd Allen Crabtree and Terryl Lynn Crabtree, Debtors. Daniel M. McDermott, United States Trustee, Plaintiff, v. Todd Allen Crabtree and Terryl Lynn Crabtree, Defendants.
• Court: U.S. Bankruptcy Court — District of Minnesota

554 B.R. 174

In re: Todd Allen Crabtree and Terryl Lynn Crabtree, Debtors.Daniel M. McDermott, United States Trustee, Plaintiff

v.Todd Allen Crabtree and Terryl Lynn Crabtree, Defendants.

BKY 13–60824–MER

Adv. No. 14–6025

United States Bankruptcy Court, D. Minnesota.

Signed August 8, 2016.

Colin Kreuziger, US Trustee Office, Minneapolis, MN, for Plaintiff.

Robert Russell, III, Fergus Falls, MN, for Defendants.

MEMORANDUM DECISION

Michael E. Ridgway

, United States Bankruptcy Judge

The matters pending before the Court involve an adversary proceeding brought by the United States Trustee (“UST”), in the form of several objections to the Debtors' discharge under 11 U.S.C. § 727 (“727 trial”),¹ and a challenge by the chapter 7 trustee (“Trustee”) to the Debtors' claimed homestead exemption under 11 U.S.C. § 522(o) (“exemption trial”).² Although separate trials were held on the respective matters, because of the interconnectedness of the proceedings, this decision will embrace both.³ Appearances were as noted on the record: Colin Kreuziger, Esq., for the UST; Gene Doeling, Esq., for the Trustee; and Robert Russell, III, Esq., for Mr. and Mrs. Crabtree (“the Debtors” or “the Crabtrees” or “Todd” and “Terryl”).⁴ The Court requested and received extensive post-trial briefs; both matters are now ready for resolution.

This is a core proceeding under 28 U.S.C. § 157(b)(2)

, and this Court has jurisdiction under 28 U.S.C. §§ 157(a) and 1334. The Court makes this memorandum decision based on all the files, records, and proceedings herein, and under Fed. R. Bankr. P. 7052, made applicable to the contested matter (the exemption issue) by Fed. R. Bankr. P. 9014(c). For the reasons set forth below, the Debtors' discharge will be denied, and the Trustee's objection to the Debtors' homestead exemption will be sustained.

BACKGROUND⁵

This is a story about a very closely-knit family, Todd Allen Crabtree, and his wife Terryl Lynn Crabtree. They have three children: Bethany Harris a/k/a “Breezy,” (“Bethany” or “Breezy”) age 28; Gunnar Crabtree (“Gunnar”), age 30; and Bror Crabtree (“Bror”), age 25. Bethany is married to Mike Harris; Gunnar's wife is Lindsay Crabtree (“Lindsay”); Bror is single. All have, at one time or another, been involved in the many businesses set up or run by Todd. All of these individuals testified at the two trials that are the subject of this memorandum decision.

Todd is a licensed attorney; he obtained his juris doctor from Hamline University. He also holds an MBA from the University of Minnesota's Carlson School of Business. And he is also a licensed chiropractor. Todd operated Crabtree Law Firm, P.A. (“Crabtree Law Firm”), and its predecessor entities from 1990 until December 2013. Crabtree Law Firm was primarily involved in plaintiff's personal injury cases taken on a contingency basis. It then began to perform legal services, on an hourly basis, related to health care compliance, until it ceased operations in early December 2013. About that same time, Todd formed Crabtree Health Law P.A. (“Crabtree Health Law”), to work in conjunction with another entity created by Todd, Clinic Doctor, Inc. (“Clinic Doctor”).

Clinic Doctor is engaged in the business of providing online billing and electronic health records services to chiropractors nationwide. It also provides advice and guidance on statutory and regulatory guidance to the chiropractic community. It's Chief Executive Officer is Todd. He owns a 35% interest in Clinic Doctor, and his wife, Terryl, holds a 31% interest in the company.⁶

Terryl holds a B.A. degree in education. She testified that she provides administrative support and marketing assistance for Clinic Doctor. Gunnar and his wife, Lindsay, together own something less than a 6% interest. All of the Crabtrees' immediate family members, except Gunnar, either presently work as employees for Clinic Doctor, or have worked there.

All told, Crabtree Law Firm, while it was in business, Crabtree Health Law, and Clinic Doctor employed all of the family members as well as son-in-law Mike Harris, and daughter-in-law Lindsay. The daily operations of these businesses were quite interconnected.

THE VEHICLES/THE JOHN DEERE TRACTOR

Historically, the Crabtrees purchased vehicles for the use of themselves and their children. They typically titled the vehicles in the name of either Crabtree Law Firm, Clinic Doctor, themselves, or some combination thereof. They also paid for routine maintenance items. The Crabtrees and their children used the vehicles for all purposes, both business and personal.

Crabtree Law Firm purchased a 2004 Toyota RAV4 (“the RAV4”). The vehicle was titled in the names of the Crabtree Law Firm and Todd. Todd and Terryl used this vehicle for both business and personal needs. Lindsay and Gunnar also used the vehicle for personal purposes, including commuting to and from work, while it was titled in the name of Crabtree Law Firm. The RAV4 was transferred to Gunnar on May 29, 2013.

Clinic Doctor also leased a Chevy Tahoe. That company also made the lease payments. The Chevy Tahoe was also used by Lindsay and Gunnar for personal purposes, including commuting to and from work. In addition, Terryl also used the vehicle for personal purposes.

Also, either Clinic Doctor or Crabtree Law Firm and Terryl or Todd owned a Toyota FJ Cruiser. Clinic Doctor made the payments on the FJ Cruiser. The parties testified that Terryl, Mike and Bethany, and Gunnar and Lindsay, all used this vehicle for personal purposes.

Crabtree Law Firm also owned a 2007 GMC Yukon. The firm purchased the vehicle and paid for routine maintenance. Initially, the vehicle was driven by Todd and Terryl, and then later by Mike and Bethany. Todd and Terryl used the GMC Yukon primarily for personal purposes; Mike and Bethany also used it primarily for personal purposes. During this time frame, the Harrises owned no vehicles of their own, and used only the FJ Cruiser and the GMC Yukon. Crabtree Law Firm transferred title to the GMC Yukon to Mike Harris, in the summer of 2013; he did not pay anything to the law firm.

At one time the Crabtrees purchased a 1999 Ford F–150 for their son, Bror, while he was in high school. Either Todd or Terryl was listed as owner on the certificate of title. The vehicle was involved in an accident and was totaled in May 2007; the insurance proceeds were paid out and were used to purchase a 2003 Ford F–150. The latter vehicle was jointly titled in the names of Terryl and Todd. Terryl transferred ownership of the truck to Bror; he did not pay her anything for the ownership interest.

As a general matter, Crabtree Law Firm maintained time records for its staff, although it did not keep any record of work that either Lindsay or Mike Harris may have performed for the law firm. Neither Crabtree Law Firm nor Clinic Doctor issued IRS Form W–2s or IRS Form 1099s to family members for their personal use of the corporate vehicles until after the UST commenced his § 727

action or not at all.

The Crabtrees also used the corporate entities to make payments for other personal expenses, including payments on a mortgage secured by their homestead, the purchase of building supplies for their homestead, payments to contractors that worked on their homestead, payments for gas for their vehicles, groceries, recreational expenses, and charitable contributions to their church, Firestarters Worship Center (“Firestarters”). Initially, the Crabtrees did not report any of the compensation when they filed their personal income tax returns; however, they later filed amended returns for the years in question.⁷

Todd testified that “roughly fifteen years ago” he had purchased a John Deere 4400 tractor with attachments for $30,000.00. On the statement of financial affairs, the tractor was listed as being in the Debtors' possession, but was owned by Gunnar.

Todd testified that he had given the tractor to Gunnar sometime in 2010, to plant a corn field. Gunnar, however, testified that he only began farming in either 2013 or 2014. The tractor was used extensively by the Crabtrees in their efforts at building the newer house on the property where the Crabtrees lived. The evidence also showed that Bethany paid for several improvements to it in 2012, using funds from the farm account. No documentation showing the transfer of ownership of the tractor to Gunnar was produced.

CRABTREE BROTHERS, LLC

At the time the Debtors' filed bankruptcy, Todd claimed a 50% ownership interest in Crabtree Brothers, LLC (“Crabtree Brothers”), an entity that owned four parcels of real estate in Colorado. The other owner of this entity was Todd's brother, Paul Crabtree. According to Todd's testimony, each parcel was valued at approximately $30,000.00. On Schedule B, however, Todd stated that Crabtree Brothers had no value, and that its “debts exceeded its assets.”

The tax returns filed by Crabtree Brothers reflected Todd's ownership interest in this entity as 100% in 2009 to 75% for each of the years 2010 to 2013, inclusive. Todd also testified that he transferred his ownership interest in the four lots to his brother, Paul, although he was unable to produce any documentary evidence of such transfer.⁸ He also stated that the entity was defunct as of early 2013. Todd also testified at the trial that one of the development contractors, Kaess Contracting, Inc. (“Kaess”), sued Crabtree Brothers in January 2015, for unpaid work that had been done on the lots. In settlement of that lawsuit, Crabtree Brothers agreed to convey one of the lots to Kaess.

CIVIL ACTION GROUP, LTD. (“CAG”)

Todd, while at the height of his personal injury practice with Crabtree Law Firm, had entered into an arrangement with CAG, going back as far as 2001, wherein CAG would advance certain expenses incurred by Todd in the prosecution of his clients' personal injury claims. In other words, CAG would advance or “front,” funds for case costs and services, and then collect when the proceeds were paid out of any settlement or...