Jewell v. Lewis (In re Lewis)

637 B.R. 832

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

Danny Jewell, Charlotte Jewell, and Chandler Insurance Agency, Inc., Plaintiffs,

v.Daniel E. Lewis and Tami L. Lewis, Defendants.

AP NO.: 4:20-ap-07048

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 Debtors

MEMORANDUM OPINION

HONORABLE RICHARD D. TAYLOR, UNITED STATES BANKRUPTCY JUDGE

Before the court is a First Amended Complaint Objecting to Discharge and Dischargeability of Debt ("Complaint") filed by Danny Jewell (individually, "Jewell"), Charlotte Jewell (collectively with Jewell, the "Jewells"), and Chandler Insurance Co., Inc. (individually, "Chandler Insurance" and collectively with the Jewells, the "Claimants") against Daniel E. Lewis (individually, "Lewis") and Tami L. Lewis (collectively with Lewis, the "debtors") on November 4, 2020, at docket entry 4. The debtors filed their Amended Answer to Complaint Objecting to Discharge and Dischargeability of Debt on December 1, 2020, at docket entry 12. The court heard this matter on November 3, 2021. The Claimants appeared personally and by and through their attorney, Stephen T. Arnold, and the debtors appeared personally and by and through their attorneys, M. Michael Kinard and Marc Honey. Thereafter, the court took this matter under advisement.

For the reasons stated herein, the relief sought in the Complaint pursuant to 11 U.S.C. § 727 is denied; the relief sought in the Complaint pursuant to 11 U.S.C. § 523 is granted in part and denied in part. The court shall enter a separate judgment to this effect.

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)(I) and (J). The following opinion constitutes findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.

II. Findings of Fact

The Claimants sought to deny the debtors their discharge pursuant to 11 U.S.C. § 727(a)(2) and (a)(4) and to determine dischargeability pursuant to 11 U.S.C. § 523(a)(2) and (a)(4). The Claimants introduced no evidence relative to the section 727 causes of action. At the conclusion of their case, the court dismissed the section 727 counts pursuant to Federal Rule of Civil Procedure 52(c) as incorporated by Federal Rule of Bankruptcy Procedure 7052 on the bases of insufficient evidence, Claimants’ admission of abandonment, and the inapplicability of section 727 to a Chapter 13 discharge pursuant to 11 U.S.C. § 1328(a).

The factual predicates for the surviving dischargeability counts were the subject of state court litigation in Miller County, Arkansas (sometimes, the "State Court Litigation") that predated the filing of the present bankruptcy and resulted in a Final Judgment ("Judgment") adverse to the debtors. The Claimants address that sequence of events in their Complaint as follows.

6. [Claimants] filed an Arkansas state court lawsuit against [the debtors] to recover the embezzled funds and obtained a Judgment in the sum of on or about $121,890.33[.]

7. [Debtors’] discharge of [Claimants’] debt as reflected in the foregoing Judgment should be denied under 11 USC 523(a) (2 [and] 4).

(Complaint, Nov. 4, 2020, ECF No. 4, at ¶¶ 6-7.) In their prayer, the Claimants requested that "the foregoing Judgment entered in state court against [the debtors] in favor of [Claimants] be excepted from discharge[.]" (Compl. at 5.)

A bankruptcy filing following a substantial adverse judgment is not unusual. Equally, the basis of that judgment often gives rise to a complaint to determine the dischargeability of the judgment debt. This, in turn, inevitably raises issues of res judicata and collateral estoppel. Typically, the parties suss out prior to trial which matters are collaterally estopped and factually dispositive through motions for summary judgment. That did not occur in this case.

Instead, the Claimants and the debtors filed pretrial briefs. Each side argues for the inclusive or preclusive effects of res judicata and collateral estoppel. Each brief also contains information, pleadings, exhibits, and references to the State Court Litigation. Despite the court's admonition that they were not part of the trial record, those documents were not introduced, admitted, or fully supported by exhibits or testimony in the actual trial record before this court.¹ (Trial Transcript, Nov. 10, 2021, ECF No. 46, at 65, 79-82.) The trial record does, however, include evidence that contextualizes the Judgment that each party introduced in support of the relief sought or defense offered. Given this methodology, it is at times difficult to tell where the trial facts end and collateral estoppel begins. Accordingly, the foundation of any analysis must begin with the facts established by the actual trial record complemented or restrained by the res judicata or collateral estoppel effects of the prior Judgment.

A. Facts Presented at Trial

1. Chandler Insurance

In April 2009, Jewell and Lewis joined in purchasing Chandler Insurance. The Jewells acquired 51% of the stock; the debtors acquired the remaining 49%. (Plaintiffs’ Exhibit 18; Tr. Trans. at 8.) Jewell obtained much of the financing for the purchase. (Tr. Trans. at 8-9). Each understood that Lewis was to run the day-to-day operations as president with Jewell a silent partner.² Jewell's version is that he left everything up to Lewis. Lewis testified that Jewell was an active but not always welcomed presence. Regardless, Lewis was responsible for the bank statements, all of which came to him. If there were problems with account balances, overdrafts, or a need for funds, Lewis would typically explain to Jewell that there was simply a downturn in business. Jewell would accept Lewis's explanation and make a deposit. This uneasy relationship continued until 2013.

In 2013, a banker alerted Jewell that a Chandler Insurance account was overdrawn. This was not atypical, but, while interacting with the bank, Jewell discovered a dormant account that had been reactivated without his knowledge. To Jewell, it looked like Lewis was depositing Chandler Insurance money into that account followed by unauthorized withdrawals. Initially, Jewell thought approximately $3000 was at issue.

This knowledge precipitated an uncomfortable phase between the two parties as they tried to sort out their circumstances vis-à-vis Chandler Insurance. They discussed Lewis paying the company back; his inability to do so resulted in a digression in their relationship, which included Jewell revoking Lewis's check signing authority.

The final straw came shortly thereafter when Jewell became aware of unpaid withholding taxes at Chandler Insurance. The IRS demanded approximately $42,000 representing both employee withholding and the employer's contribution. Jewell personally borrowed and deposited into a Chandler Insurance account sufficient funds for it to pay $26,646.79 in outstanding employee withholding taxes for which Jewell and Lewis had potential personal liability. Lewis's inability to reimburse Chandler Insurance for the questionable withdrawals and the unpaid taxes ultimately, and cumulatively, led to the end of the parties’ joint ownership of Chandler Insurance.

The Jewells and the debtors resolved their Chandler Insurance relationship by virtue of a Settlement Agreement dated April 24, 2014. The Settlement Agreement is not overwhelmingly expositive and purported to resolve differences that were later the subject of the State Court Litigation. In pertinent part, the agreement provided for the debtors to transfer their 49% interest in Chandler Insurance to the Jewells and to execute a $20,000 promissory note payable to the Jewells.

To that end, the debtors signed a promissory note to the benefit of the Jewells in the amount of $20,000 dated April 24, 2014.

(Pls.’ Ex. 19.) The debtors also signed a second promissory note to the Jewells in the amount of $2000 dated the same date. (Pls.’ Ex. 20.) A handwritten notation on the second promissory note reduced the principal balance to $1100. (Pls.’ Ex. 20.) Jewell testified that this second note represented other monies owed, but it is not referenced in the Settlement Agreement. Jewell did not know why.

The debtors defaulted on both the $20,000 and the $1100 notes. In 2016, the Jewells filed the State Court Litigation in Miller County, Arkansas for the debtors’ failure to pay. The debtors counterclaimed for the loss of their 49% ownership of Chandler Insurance. (Tr. Trans. at 63.) It is unclear if Chandler Insurance was an original plaintiff to which a counterclaim was filed or if it was third-partied in (more likely the latter). During discovery, Jewell realized that the $3000 amount that originally alerted him to some discrepancies during his 2013 bank interaction may have been just a small part of the problem and that there might have been thousands of dollars in additional damages. That discovery resulted in Chandler Insurance pursuing damages of $99,474.70 in the State Court Litigation, represented by Exhibits 5 through 11 discussed below. (Tr. Trans. at 61-62, 64, 103.)

A jury trial resulted in the Judgment in favor of the Jewells and Chandler Insurance for damages, costs, and attorney's fees. The debtors received nothing on their counterclaim. (Pls.’ Ex. 24 at 3; Tr. Trans. at 63.) Jewell testified that the debtors’ request for a rehearing and appeal "w[ere] denied." (Tr. Trans. at 62.) Thereafter, the debtors filed their bankruptcy proceeding. (Tr. Trans. at 62.)

2. The $20,000 Note

The genesis of the $20,000 note called for the in the Settlement Agreement is both pertinent and, unfortunately, unclear. Jewell testified that it had some nexus to the IRS debt. Specifically,

Jewell's Counsel : Tell us how

...