In re Lewis

637 B.R. 861

IN RE: Daniel E. LEWIS and Tami L. Lewis, Debtors

CASE NO.: 4:20-bk-71735

United States Bankruptcy Court, W.D. Arkansas, Texarkana Division.

Signed February 4, 2022

Jack W. Gooding, Trustee Debtor Estates, Little Rock, AR, Trustee, Pro Se.

Marc Honey, Jennifer A. Wyse, Honey Law Firm, P.A., Hot Springs, AR, Milam Michael Kinard, Kinard Law Firm, Magnolia, AR, for Debtor.

MEMORANDUM OPINION ON MOTION FOR SANCTIONS

HONORABLE RICHARD D. TAYLOR, UNITED STATES BANKRUPTCY JUDGE

Before the court are two pleadings: a Motion for Sanctions Against Danny Jewell and Stephen Arnold ("Motion") filed on August 31, 2021, at docket entry 81 by Daniel¹ and Tami Lewis, the debtors ("debtors"), and a Response to Motion for Sanctions ("Response") filed by Danny and Charlotte Jewell (the "Jewells") and Chandler Insurance Agency, Inc. ("Chandler Insurance") on September 14, 2021, at docket entry 85. The court heard the Motion and Response on November 3, 2021, and took the matter under advisement. For the reasons set forth below, the Motion is granted.

I. Jurisdiction

This court has jurisdiction over this matter under 28 U.S.C. §§ 1334 and 157. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A). The following opinion constitutes findings of fact and conclusions of law in accordance with Federal Rules of Bankruptcy Procedure 7052 and 9014.

II. Introduction

For approximately four years, the Jewells and the debtors were in business together; however, the relationship soured leading to state court litigation that predated this bankruptcy. The state court litigation resulted in a judgment adverse to the debtors in favor of: (1) the Jewells on the basis of a breach of contract and (2) Chandler Insurance on the basis of a fraudulent breach of fiduciary duty. Thereafter, the debtors filed bankruptcy. The Jewells and Chandler Insurance then collectively filed their First Amended Complaint Objecting to Discharge and Dischargeability of Debt ("Complaint") in a related adversary proceeding before this court seeking to deny the debtors either their complete discharge or to determine the dischargeability of their specific debts based upon the adverse state court judgment.

This court heard the Complaint on the same date as it heard the Motion and Response. The disposition of the Complaint is the subject of a separate Memorandum Opinion of even date. Reference can be made to the Memorandum Opinion for a more expositive examination of the relationship between the parties and the conclusions drawn with respect to that relationship, the state court judgment, and the Complaint.

For purposes of this proceeding, it suffices that the debtors and the Jewells purchased Chandler Insurance in 2009, with the Jewells acquiring 51% and the debtors acquiring 49%. Daniel Lewis ("Lewis") was charged with the day-to-day operations as president. Danny Jewell ("Jewell") was to be a silent partner who, according to Lewis, may have played a more active role. Regardless, two events in 2013 precipitated a significant change in their business relationship: the first involved Jewell's discovery of potential unauthorized uses of Chandler Insurance funds; the second concerned unpaid withholding taxes.

The initial demand by the Internal Revenue Service ("IRS") was for approximately $42,000 representing both employee withholding (sometimes, trust fund taxes) and the employer's contribution (sometimes, non-trust fund taxes or excise taxes). Jewell, concerned about responsible party liability, immediately borrowed and deposited enough money into a Chandler Insurance account for the company to write a check to the IRS for $26,646.79. This amount represented outstanding trust fund taxes for which he and Lewis may have had personal liability. Jewell expected Lewis to reimburse him and address the IRS demand; Lewis was unable to do so. To date, the balance of the initial IRS demand has not been paid and has increased significantly.

The resulting digression of the parties’ relationship led to a Settlement Agreement in 2014 that severed most of their business connections and resulted in the debtors transferring all their stock in Chandler Insurance to the Jewells. Part of the settlement also involved the debtors signing a $20,000 promissory note to the Jewells. In unquantified parts, the note encompassed several factors or considerations, including the value of the debtors’ Chandler Insurance stock transferred to the Jewells, the IRS debt, and other incidental obligations between the parties.

Thereafter, the debtors breached the Settlement Agreement by failing to pay the note; the Jewells filed suit to collect in Miller County, Arkansas. The debtors counterclaimed and brought in Chandler Insurance. A two-day jury trial resulted in a judgment adverse to the debtors for (1) breach of contract in favor of the Jewells concerning the $20,000 promissory note and (2) fraudulent breach of fiduciary duty in favor of Chandler Insurance. The latter addressed the unauthorized use of Chandler Insurance funds. Thereafter, the debtors filed their bankruptcy proceeding.

As stated above, the Jewells and Chandler Insurance collectively filed the Complaint seeking to determine dischargeability of debt or otherwise deny the debtors their discharge. While that matter was pending, Jewell took certain steps concerning the IRS indebtedness that resulted in the Motion. Stated succinctly, Jewell, acting as president of Chandler Insurance, filed proofs of claim on behalf of the IRS. Jewell apparently hoped that the IRS would receive some payment, as a priority creditor or otherwise, that might relieve Chandler Insurance of some or all of the outstanding tax indebtedness. It is this effort which offends and led the debtors to file their Motion.

The Response misrepresents or rewrites the state court judgment, which in no form or fashion addresses the IRS tax debt. It conflates Jewell's claims with those of Chandler Insurance. Furthermore, it advances a factual and legal basis for liability that unfavorably forms Jewell's entire justification for filing the proofs of claim on behalf of the IRS. Specifically,

[A]s to [the debtors’] liability for the IRS deficiency, [the debtors] well know that the liability was litigated in the State Court case which resulted in a Judgment against [the debtors] for the tax debt in the form of the Promissory Notes.

(Response, Sept. 14, 2021, ECF No. 85, at 3.) Stephen Arnold ("Arnold"), as Jewell's attorney, signed the Response. Jewell and Arnold have apparently concluded that the debtors are now direct co-obligors with Chandler Insurance to the IRS for the tax indebtedness on which they otherwise have no liability because Jewell had to fund part of the Chandler Insurance tax obligation and thereafter the debtors signed a promissory note to the Jewells which partially, in an unquantified amount, included a settlement of the IRS debt as between the Jewells and the debtors.

III. Facts

In their Motion, the debtors contend that Jewell and Arnold should be sanctioned and ordered to pay attorney's fees for violating Federal Rule of Bankruptcy Procedure 9011(b)(2) and (b)(3) by filing a "secured proof of claim [claim 22-1] in the amount of $67,000.00, purportedly on behalf of the Internal Revenue Service." (Motion, Aug. 31, 2021, ECF No. 81, at ¶ 2.) The debtors maintain that Jewell pro se² filed an unauthorized and false proof of claim on behalf of the IRS, that the proof of claim failed to provide necessary evidentiary support, and was untimely filed. The debtors also assert that Rule 9011 sanctions should apply to Jewell's counsel, Arnold, based on his "actions for actually filing [the proof of claim], promoting [claim 22-1], [and] arguing in support of [the claim] through the case[.]" (Trial Transcript, Nov. 3, 2021, ECF No. 102, at 27.)

A. The Proof of Claim

In support of their Motion, the debtors introduced the proof of claim, which is the subject of the Motion—claim 22-1. The claim was filed on March 8, 2021, and identifies the "current creditor" as the "Internal Revenue Service" but also lists "[o]ther names the creditor used with the debtor" as "Chandler Insurance Agency, Inc." (Debtors’ Exhibit 1.) Part 1 of claim 22-1 provides the creditor's name and address for "notices and payments to [ ] be sent" as "Internal Revenue Service, PO Box 7346, Philadelphia, PA 19101-7346." (Debtors’ Ex. 1.) The total claim amount including interest or other charges is $67,000.00. (Debtors’ Ex. 1.) The claim's basis is listed as: "940, 941 taxes Chandler Insurance Agency, Inc., the Taxpayer, Debtor was President." (Debtors’ Ex. 1.) The claim indicates that it is secured by an IRS lien on real property, specifically "Chandler Insurance real property." (Debtors’ Ex. 1.) The value of the property securing the lien is listed as $200,000 with the secured portion of the lien totaling $67,000. (Debtors’ Ex. 1.) No lien is attached to the claim. The claim lists a fixed "annual interest rate of 4.6%." (Debtors’ Ex. 1.) Additionally, the claim reflects that it is entitled to priority status due to the nature of the debt being "[t]axes or penalties owed to governmental units. 11 U.S.C. § 507(a)(8)." (Debtors’ Ex. 1.) Jewell signed the claim as President of Chandler Insurance indicating that it was the "trustee, or the debtor, or their authorized agent. Bankruptcy Rule 3004." (Debtors’ Ex. 1.) Jewell lists his email address as "dan[ ]." (Debtors’ Ex. 1.)

Two documents are attached to the claim. The first document is correspondence from Marcus J. Johnson, a manager with the IRS, dated April 9, 2019, and mailed to Chandler Insurance in reference to an inquiry made by Jewell regarding "a payoff of your tax liability through 4/30/19." (Debtors’ Ex. 1.) The "balance through [April 30, 2019] is $55,557.07." (Debtors’ Ex. 1.) The letter does not indicate any personal liability for the debt; only Chandler Insurance is referenced. The second document is a letter from Jewell to Mark Johnson, group manager with the...