Tow v. Henley (In re Henley)

• Decision Date: 28 September 2012
• Docket Number: Adversary No. 11–03453.,Bankruptcy No. 11–33438.
• Parties: In re David HENLEY and Belinda Henley, Debtors. Rodney Tow, Trustee and Jerry and Mary Caroom, Plaintiffs, v. David Henley and Belinda Henley, Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Texas

480 B.R. 708

In re David HENLEY and Belinda Henley, Debtors.

Rodney Tow, Trustee and Jerry and Mary Caroom, Plaintiffs,

v.David Henley and Belinda Henley, Defendants.

Bankruptcy No. 11–33438.

Adversary No. 11–03453.

United States Bankruptcy Court,

S.D. Texas,

Houston Division.

Sept. 28, 2012.

Christopher R. Murray, Diamond McCarthy LLP, Peter Johnson, Law Offices of Peter Johnson, Houston, TX, Glenna England Crews, Tow & Koenig, PLLC, The Woodlands, TX, for Plaintiffs.

Leonard H. Simon, Pendergraft & Simon, LLP, Houston, TX, for Defendants.

MEMORANDUM OPINION REGARDING: (1) PLAINTIFFS' OBJECTION TO DISCHARGE UNDER 11 U.S.C. § 727(a); and (2) DEFENDANTS' COUNTERCLAIM AGAINST PLAINTIFFS, JERRY CAROOM AND MARY CAROOM PURSUANT TO 11 U.S.C. § 362(k) [Adv. Docket Nos. 1 & 10]

JEFF BOHM, Chief Judge.

I. Introduction

It would be a gross understatement to characterize the dispute in this adversary proceeding as acrimonious. The Plaintiffs, who are the Chapter 7 Trustee and the two largest creditors in the main case, assert that the Defendants, who are the Debtors, committed numerous fraudulent acts, and therefore should not receive their discharge under 11 U.S.C. § 727(a)¹ (the § 727 Action). The Debtors vehemently deny that they have done anything to justify the denial of their discharge; and, as counter-plaintiffs, contend that the two creditors orchestrated their arrest by a swat team, thereby violating the automatic stay under 11 U.S.C. § 362(k) (the § 362 Action).

The Court has decided to issue this Memorandum Opinion for three reasons. First, all too frequently this Court hears debtors blame their attorneys when challenges are made to the accuracy of the debtors' Schedules and Statements of Financial Affairs. In this particular suit, the Debtors do exactly that. In issuing this opinion, the Court wants to emphasize the following tenet: the more time a debtor's counsel spends personally meeting with the debtor, the more difficult it will be for the debtor to escape responsibility by pointing the finger at counsel.

Second, the Court issues this opinion to highlight the need for debtor's counsel to give notice of the bankruptcy filing—both oral and written—to any known creditors' counsel as soon as the petition is filed. Failure to give immediate notice can result in harsh consequences to debtors whose creditors are willing to aggressively seek and collect the debts owed to them. That is exactly what happened here. The creditors and their attorney, not having received timely and sufficient notice of the filing of the Debtors' petition, took no action to stop the enforcement of an arrest warrant that was issued in the wake of a civil court in Arkansas holding the Debtors in contempt.

Finally, this Court publishes this opinion to alert the bar of its position on an issue about which there is split authority. Specifically, some courts have held that creditors who assist the appropriate officials in taking criminal action against debtors in order to collect debts owed to them are in violation of the automatic stay. See In re Dovell, 311 B.R. 492, 494 (Bankr.S.D.Ohio 2004). Other courts have held that regardless of whether a creditor assists in a criminal matter concerning the debtor, there is no violation of the stay. See In re Bartel, 404 B.R. 584, 590 (1st Cir. BAP 2009). This Court adopts the latter position.

Based upon the entire record, the Court now makes the following written findings of fact and conclusions of law pursuant to FED. R. CIV. P. 52, as incorporated into adversary proceedings by Fed. R. Bankr.P. 7052.² For the reasons set forth herein, the relief which the Plaintiffs seek is granted: the Debtors' discharge will be denied; and the relief which the Debtors seek is denied in its entirety: no damages will be awarded to them because the creditors did not violate the automatic stay.

II. Findings of Fact

1. David and Belinda Henley are the debtors in this Chapter 7 case (the Debtors).Belinda Henley (Ms. Henley) is a licensed general contractor specializing in construction and interior design. [June 14, 2012 Tr. 52:4–18]. She is licensed by the American Society of Quality Control, is recognized as a quality engineer by the American Society of Quality Control, and obtained a degree in industrial management with an emphasis in industrial engineering from the University of Arkansas at Little Rock. [ Id.]. Moreover, Ms. Henley has purchased between six and eight properties during her adult life. [ Id. at 52:23–53:12]. David Henley (Mr. Henley) holds a degree in business from Southern Arkansas State University. [ Id. at 87:21–23].

2. The Debtors owned Henley Design & Construction, Incorporated (HDC, Inc.), a construction and design company in Hot Springs, Arkansas. [Tape Recording, 6/11/2012 Trial at 11:13:54–11:14:04 a.m.]; [Tape Recording, 6/27/2012 Trial at 6:51:00–6:52:13 p.m.]. They also owned Aqua–Lock Waterproofing, Inc. (Aqua–Lock). [June 14, 2012 Tr. 98:25–99:9]; [Caroom/Trustee Ex. No. 7].

3. Ms. Henley also operated an interior design business under the name of Henley Design. [Tape Recording, 6/27/2012 Trial at 6:23:00–6:23:13 p.m.]. Ms. Henley also claimed to own a jewelry design company. [Tape Recording, 6/27/12 Trial at 6:30:59–6:31:26 p.m.]. Mr. Henley also claimed to be in the business of buying old cars, repairing, and selling them.³ [June 15, 2012 Tr. 42:21–25].

4. In December 2007, Jim Henley, Mr. Henley's brother, signed and recorded a quitclaim deed conveying residential property located at 3035 Marion Anderson Road (the Anderson Property) to the Debtors.⁴ [June 14, 2012 Tr. 58:8–11]; [Caroom/Trustee Ex. No. 8, at 1–2].

5. On June 26, 2009, the Debtors submitted an asset/liability sheet (the Financial Statement) to Diamond Bank in which the Debtors listed the Anderson Property as their homestead. [June 14, 2012 Tr. 59:10–62:23]; [Caroom/Trustee Ex. No. 7, at 1]. To obtain a loan from Diamond Bank, the Debtors included the Anderson Property on the Financial Statement. [June 14, 2012 Tr. 62:19–23].

6. Jim Henley deeded the Anderson Property to the Debtors on the condition that they obtain financing to buy the Anderson Property from Diamond Bank. [Tape Recording, 6/14/2012 Trial at 10:46:16–10:48:49 a.m.]. On June 19, 2009, the Debtors submitted a loan application to Diamond Bank, not to obtain financing for the purchase of the Anderson Property, but to gain financing to buy other real property. See [Caroom/Trustee Ex. No. 24]. The loan application was for $79,000.00. [ Id.]. In that loan application, the Debtors purported to already own the Anderson Property—they checked the box marked “OWN” in the section next to the address query. [Caroom/Trustee Ex. No. 24].

7. The Debtors lived on the Anderson Property from the spring of 2004 to June of 2010. [June 14, 2012 Tr. 63:5–10]. While living on the Anderson Property, the Debtors made monthly payments to Jim Henley in the amount of $1,710.09—the exact amount of the monthly payment under the note for which Jim Henley is liable; this note is secured by a mortgage on the Anderson Property. [ Id. at 57:19–58:7]; [Debtors' Ex. No. 96].

8. The Financial Statement included the balance sheet for Aqua–Lock. [June 14, 2012 Tr. 98:25–99:9]; [Caroom/Trustee Ex. No. 7]. As of May 31, 2009, the Financial Statement showed Aqua–Lock's total value to be $548,685.00. [Caroom/Trustee Ex. No. 7, at 3]. The Debtors purchased Aqua–Lock for an amount between $62,000.00 and $68,000.00. [June 14, 2012 Tr. 100:6–9]. The other company owned by the Debtors was HDC, Inc. The Financial Statement did not include a separate balance sheet for HDC, Inc., but simply represented that HDC, Inc.'s total value was $187,000.00 as of June 26, 2009. [Caroom/Trustee Ex. No. 7, at 2].

9. In June 2008, Jerry and Mary Caroom (the Carooms) contracted with the Debtors to build a home at 148 Catalina Circle, Hot Springs, Arkansas (the Caroom Home). [Tape Recording, 6/11/2012 Trial at 11:14:53 a.m.].

10. On December 7, 2009, the Carooms filed a lawsuit (the Lawsuit) against the Debtors in the Garland County Circuit Court of the State of Arkansas, Civil Division (the Arkansas Court). [Carooms' Ex. No. C–02]; [Tape Recording, 6/14/2012 Trial at 10:36:50–10:36:57 a.m.]. The Lawsuit was assigned No. CV–2009–1712–1. [Caroom/Trustee Ex. No. 1, at 31–32]. The Carooms filed suit based upon their disenchantment with the Debtors over the Debtors' construction of the Caroom Home. In the Lawsuit, the Carooms alleged that the Debtors fraudulently overcharged them by padding invoices submitted to the Carooms for the construction of the Caroom Home. [Caroom/Trustee Ex. No. 16, at 6].

11. The Debtors retained an attorney named Ray Baxter (Baxter), who subsequently filed an answer and counterclaim against the Carooms in the Lawsuit. [June 14, 2012 Tr. 53:22–54:2]; [ Id. at 154:2–8]. Due to ensuing health problems, Baxter engaged D. Scott Hickam (Hickam) to assist him in representing the Debtors in the Lawsuit. [Tape Recording, 6/11/2012 Trial at 11:18:29–11:19:29 a.m.].

12. The Debtors' counterclaim in the Lawsuit asserted that the Carooms interfered with HDC, Inc.'s contractual relations. [Tape Recording, 6/11/2012 Trial at 11:22:56–11:24:10 a.m.]. The Debtors further alleged that the Carooms contacted current HDC, Inc. clients and advised them to terminate their contracts as HDC, Inc. would soon be bankrupt. [ Id. at 11:22:56–11:24:10 a.m.].

13. In March of 2010—while the Lawsuit was pending—HDC, Inc. ceased operations, and the Debtors deeded ⁵ the Anderson Property back to Jim Henley.⁶ [June 14, 2012 Tr. 62:24–63:04].

14. In June of 2010, the Debtors relocated from Hot Springs, Arkansas to Houston, Texas. [ Id. at 55:5–8]. The Debtors testified that their hostile relationship with the Carooms left them unable to gain or retain business in Hot Springs, Arkansas, and so they concluded that they needed to depart from that area. [ Id. at 54:14–24]. They chose to move to Houston because Mr. Henley...