Farm Credit Servs. of Am., PCA v. Hylle (In re Hylle)

641 B.R. 203

IN RE: Charles Jordan HYLLE, Debtor.

Farm Credit Services of America, PCA, Plaintiff

v.Charles Jordan Hylle, Defendant

In re: Matthew Stephen Hylle, Debtor.

Farm Credit Services of America, PCA, Plaintiff

v.Matthew Stephen Hylle, Defendant

Case No. 3:19-bk-16624

AP Case No. 3:20-ap-01022

Case No. 3:19-bk-16625

AP Case No. 3:20-ap-01023

United States Bankruptcy Court, E.D. Arkansas, Northern Division.

Signed April 21, 2022

R. Bryant Marshall, R. Bryant Marshall, Attorney, PLC, Jonesboro, AR, for Plaintiff.

Joel Grant Hargis, Caddell Reynolds, Jonesboro, AR, Emily J. Henson, Caddell Reynolds Law Firm, Fayetteville, AR, for Defendants Charles Jordan Hylle, Matthew Stephen Hylle.

Ralph D. Scott, Lax, Vaughan, Fortson, Rowe & Threet, PA, Little Rock, AR, for Defendant Helena Chemical Company.

MEMORANDUM OPINION

Phyllis M. Jones, United States Bankruptcy Judge

Farm Credit Services of America, PCA ("Farm Credit "), as the servicer for AgDirect Farm Credit Services, initiated separate actions against Charles Jordan Hylle ("Jordan Hylle ") (AP Case No. 3:20-ap-1022) and Matthew Stephen Hylle ("Matthew Hylle ") (AP Case No. 3:20-ap-1023) (collectively the "Defendants ") alleging that the obligations the Defendants owe to Farm Credit should be determined to be nondischargeable or, alternatively, that their respective discharges should be denied. The allegations against both Defendants focus on the alleged unauthorized disposition of collateral and the failure of the Defendants to pay Farm Credit the sale proceeds of collateral sold. Both Defendants responded stating that the relief sought by Farm Credit is not supported by the evidence and should be denied.

A consolidated trial on the merits was held in Jonesboro, Arkansas, on September 21–22, 2021. R. Bryant Marshall and Kyle Singleton of R. Bryant Marshall, Attorney, PLLC, appeared on behalf of Farm Credit. Joel Hargis and Emily J. Henson of the Caddell Reynolds Firm appeared on behalf of the Defendants. Farm Credit and the Defendants consented to this Court entering final orders or judgments in the proceedings. At the conclusion of the trial, the Court took the matters under advisement.

I. Jurisdiction

The Court has jurisdiction over these matters pursuant to 28 U.S.C. §§ 1334 and 157. These are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(I) and (J). The following shall constitute the Court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

II. Procedural Background

Farm Credit is the plaintiff in both the above-referenced adversary proceedings. Jordan Hylle is the defendant in one adversary proceeding, and his brother, Matthew Hylle, is the defendant in the other. On motion of the plaintiff, the two adversary proceedings were consolidated for the purpose of trial. The relevant procedural background for the bankruptcy cases, and adversary proceedings for each defendant, will be presented separately below.

A. Farm Credit vs. Jordan Hylle (AP No. 3:20-ap-1022)

Jordan Hylle filed a voluntary petition for relief under the provisions of Chapter 7 of the United States Bankruptcy Code on December 14, 2019.¹ (Case No. 19-16624, Doc. No. 1). About a month later, Farm Credit filed a motion for relief from stay seeking termination of the automatic stay as to eight pieces of farm equipment and seeking to have the equipment abandoned from the estate. (Case No. 19-16624, Doc. No. 9). On February 5, 2020, an order was entered granting Farm Credit relief from stay and abandoning the eight pieces of farm equipment from the estate. (Case No. 19-16624, Doc. No. 26).

Farm Credit timely filed this adversary proceeding on May 1, 2020, after obtaining an extension of time to do so. (Case No. 19-16624, Doc. Nos. 50, 58; AP No. 20-1022, Doc. No. 1). The original complaint was amended December 4, 2020, and amended a second time on August 18, 2021 (the "Amended Complaint "). (AP No. 20-1022, Doc. No. 105). The causes of action contained in the Amended Complaint seek relief against Jordan Hylle under 11 U.S.C. § 523(a)(6) and 11 U.S.C. § 727(a)(5).²

In summary, Farm Credit alleges that Jordan Hylle pledged certain equipment for loans he entered into with Farm Credit, he defaulted under the loans by failing to make payments when due, and he has sold or otherwise disposed of the equipment pledged as collateral. Farm Credit alleges that the sale of its collateral by Jordan Hylle violates the terms of the loan documents and, as a consequence of the unauthorized disposal of the collateral, Farm Credit has been injured by Jordan Hylle's actions. The Amended Complaint further alleges that Jordan Hylle knew his conduct was substantially certain to cause harm to Farm Credit and was willful and malicious. The Amended Complaint seeks to have the debt Jordan Hylle owes to Farm Credit determined to be nondischargeable pursuant to 11 U.S.C. § 523(a)(6).

Farm Credit's Amended Complaint also alleges that by disposing of Farm Credit's collateral without consent and without paying the sale proceeds to Farm Credit, there is a loss of assets to meet his liabilities. It alleges that Jordan Hylle has failed to satisfactorily explain "when, how and for what consideration, if any, he disposed of the equipment." (Am. Compl. ¶ 16). Based on these allegations, Farm Credit seeks to have Jordan Hylle's discharge denied pursuant to 11 U.S.C. § 727(a)(5).

In his answer to the Amended Complaint, Jordan Hylle denies the allegations that he sold equipment in violation of the terms of the security agreement with Farm Credit, denies that Farm Credit has been injured by his actions, and denies that his actions were willful and malicious. He further denies there was a loss of assets to meet his liabilities, or that he has failed to satisfactorily explain the disposition of collateral.

B. Farm Credit vs. Matthew Hylle (AP No. 3:20-ap-1023)

Matthew Hylle also filed his voluntary petition for relief under the provisions of Chapter 7 of the United States Bankruptcy Code on December 14, 2019.³ (Case No. 19-16625, Doc. No. 1). About a month later, Farm Credit filed a motion for relief from stay seeking termination of the automatic stay as to five pieces of farm equipment and seeking to have the equipment abandoned from the estate. (Case No. 19-16625, Doc. No. 14). On February 5, 2020, an order was entered granting Farm Credit relief from stay and abandoning the five pieces of farm equipment from the estate. (Case No. 19-16625, Doc. No. 29).

Farm Credit timely filed this adversary proceeding on May 1, 2020, after obtaining an extension of time to do so. (Case No. 19-16625, Doc. Nos. 53, 61; AP No. 20-1023, Doc. No. 1). The original complaint was amended June 8, 2020 (the "Complaint "). (AP No. 20-1023, Doc. No. 5). The causes of action contained in the Complaint seek relief against Matthew Hylle under 11 U.S.C. § 523(a)(6), 11 U.S.C. § 523(a)(4), and 11 U.S.C. § 727(a)(5).

Similar to the Amended Complaint against Jordan Hylle, in this second adversary proceeding, Farm Credit alleges that Matthew Hylle pledged certain equipment for a loan he entered into with Farm Credit, he defaulted on the loan by failing to make payments when due, and he has sold or otherwise disposed of the equipment he pledged as collateral. Farm Credit alleges that the sale of its collateral by Matthew Hylle violates the terms of the loan documents and, as a consequence of the unauthorized disposal of the collateral, Farm Credit has been injured by Matthew Hylle's actions. The Complaint further alleges that Matthew Hylle knew his conduct was substantially certain to cause harm to Farm Credit and was willful and malicious. The Complaint seeks to have the debt Matthew Hylle owes to Farm Credit determined to be nondischargeable pursuant to 11 U.S.C. § 523(a)(6).

In addition, in Count II of the Complaint, Farm Credit alleges that Matthew Hylle participated in the sale of the collateral Jordan Hylle pledged to Farm Credit and argues it is entitled to judgment for the fair market value of the collateral "converted" by Matthew Hylle, which judgment should be determined to be nondischargeable pursuant to 11 U.S.C. § 523(a)(6).

The Complaint, in Count III, alleges that Matthew Hylle was a proprietor, shareholder, officer, or member of Black Dirt Farms and other farming operations and in those capacities controlled the deposits, disbursement of funds, and assets owned by himself and Jordan Hylle. Farm Credit then alleges that Matthew Hylle authorized the sale of Farm Credit's collateral without paying the proceeds to Farm Credit, a breach of Matthew Hylle's fiduciary duties to Farm Credit. Farm Credit asserts that Matthew Hylle's actions amount to fraud and defalcation while acting in a fiduciary capacity and seeks to have its debt determined nondischargeable pursuant to 11 U.S.C. § 523(a)(4).

Finally, also similar to the allegations made against Jordan Hylle, Farm Credit's Complaint alleges that by disposing of Farm Credit's collateral without consent and without paying the sale proceeds to Farm Credit, there is a loss of assets to meet Matthew Hylle's liabilities. It alleges that Matthew Hylle has failed to satisfactorily explain the loss or deficiency of assets to meet his liabilities. Based on these allegations, Farm Credit seeks to have Matthew Hylle's discharge denied pursuant to 11 U.S.C. § 727(a)(5).

In his answer, Matthew Hylle admits that Farm Credit did not authorize him to sell a certain draper header and admits that the sale proceeds from the draper header were not paid to Farm Credit. He denies these actions amount to a willful and malicious injury to Farm Credit. Matthew Hylle also admits that he knew of Farm Credit's security interest in collateral pledged by Jordan Hylle and that he permitted the equipment to be sold at auction. Matthew Hylle again denies that his actions amount to a willful and malicious injury to Farm Credit.

As to Count III, Matthew Hylle admits that he is a partner of Black Dirt Farms but states ...