Ruter v. Schryver (In re Schryer)

558 B.R. 856

In re: Lin R. Schryer, and Annette K. Schryver, Debtors.

Keith Ruter, Plaintiff,

v.Lin R. Schryver, and Annette K. Schryver, Defendants.

Bankruptcy No. 12-84683

Adversary No. 14-96009

United States Bankruptcy Court, N.D. Illinois, Western Division.

Signed September 28, 2016

Bradley T. Koch, Jocelyn L. Koch, Holmstrom & Kennedy PC, Rockford, IL, for Plaintiff.

Lin R. Schryver, Forreston, IL pro se.

Annette K. Schryver, Forreston, IL, pro se.

MEMORANDUM OPINION

Thomas M. Lynch, United States Bankruptcy Judge

This matter comes before the court on creditor Keith Ruter's objection to discharge and complaint to find a debt excepted from discharge. For the reasons set forth herein, the objection to discharge will be sustained and both Debtors will be denied a Chapter 7 discharge. Because they will be a denied a discharge, the Plaintiff's request to find a specific debt excepted from discharge under 11 U.S.C. § 523(a)(6) will be dismissed without prejudice as moot.

JURISDICTION

The court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. It is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J). The Chapter 7 bankruptcy discharge is a statutory injunction created by Sections 524 and 727 of the Bankruptcy Code and therefore the determination to deny a discharge is a matter that arises under Title 11 and is within this court's constitutional authority to enter final judgment. See Stern v. Marshall, 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) (bankruptcy courts have authority to issue final judgment on an issue that “stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process.”). See also Deitz v. Ford (In re Deitz), 760 F.3d 1038, 1049–50 (9th Cir. 2014) (“Exception to discharge claims arise solely under title 11 and ... are examples of the bankruptcy courts doing what they are supposed to do.”). Additionally, at the beginning of trial on November 12, 2015, both the Schryvers and the Plaintiff expressly agreed the issues raised in the complaint were core matters and consented to this court entering final judgment.

PROCEDURAL HISTORY

Plaintiff, Keith Ruter, filed his adversary complaint through counsel on January 22, 2014.¹ The Debtors' counsel in the underlying bankruptcy case filed an appearance on their behalf and subsequently filed the Debtors' answer, which pleading with leave of court was amended on May 7, 2014. The court allowed considerable time for discovery because of, among other things, a contemporaneous investigation by the Bureau of Alcohol, Tobacco, Firearms and Explosives, and delays in obtaining documents from the ATF. Although the parties were able to reach agreement on a discovery dispute that developed, the Debtors' counsel, with the approval of his clients and leave of court withdrew as counsel in both the bankruptcy and the adversary proceeding on April 29, 2015, citing “irreconcilable differences ... concerning strategies in the pending cases.” (Mot. to Withdraw, ECF No. 29.) The court gave the Debtors the opportunity to find new counsel if they chose, setting a pre-trial conference in late July, but they ultimately chose to proceed to trial pro se.

Trial was held over the course of three days, with the Schryvers representing themselves throughout. Witnesses who testified at trial included Lin Schryver, Annette Schrvyer, Keith Ruter, Brian Potempa (a principal of Twin Image, Inc. and Ka-Ching Global Sourcing Inc.), Jeffrey Snyder (president of Forreston State Bank), Jeff Cowman (a computer repair person familiar with the Debtors' computer), and Jeremy Penington (a former part-time worker at the Debtors' store). The Plaintiff and the Debtors also presented a number of exhibits which were received into evidence. Both parties presented closing arguments at the end of trial and were given leave to file post-trial proposed findings of fact and conclusions of law, which the Plaintiff filed on February 26, 2016 and the Debtors filed on March 17, 2016.

The court warned the Debtors of the potential difficulty of proceeding to trial without assistance of counsel, both at the time their counsel was given leave to withdraw and at the pre-trial conference. The court also attempted to give the Debtors every reasonable latitude and accommodation at trial, but they were still bound by the relevant rules and law. See, e.g., Steege v. Johnsson (In re Johnsson), 551 B.R. 384, 391–92 (Bankr. N.D. Ill. 2016). The findings of fact below are made from the evidence adduced at trial.

FINDINGS OF FACT²

Lin and Annette Schryver, with the assistance of counsel, filed a joint petition for protection under Chapter 7 of the Bankruptcy Code on December 18, 2012. (Case No. 12–B–84683.) The Schryvers together were the sole owners of Schryver Gun Sales, Inc., an Illinois corporation which itself filed a voluntary petition under Chapter 7 on the same date, through the same counsel and signed by Lin Schryver, as president of Schryver Gun Sales, Inc. (Case No. 12–B–84686.)

Formation of Schryver Gun Sales, Inc. and Loans from Forreston State Bank

At the time of the petition Schryver Gun Sales, Inc. was owned 50% by Lin and 50% by Annette. Lin was a director, president, vice president and treasurer of Schryver Gun Sales, Inc. and Annette was a director and secretary. The company was formed in January 2011 and operated a retail firearms and firearms accessories store at 304 S. Oak Ave., Forreston, Illinois (the “Oak Ave. Property”), until December 2012. Schryver Gun Sales also provided services for firearms, including ceramic coating, and developed, marketed and sold cheek pads for rifles.

The Plaintiff, Dr. Keith Ruter, is a dentist who later opened a gun shop of his own. He originally owned the Oak Ave. Property, and sold it to the Schryvers on an installment contract for deed that was not fully paid as of the petition date. Dr. Ruter also guaranteed and pledged additional collateral for three loans that the Schryvers and Schryver Gun Sales, Inc. received from Forreston State Bank on or about April 16, 2012.³ Each of the Schryvers, Schryver Gun Sales, Inc. and Dr. Ruter were listed as co-borrowers on the three notes. Dr. Ruter testified without contravention that he did not receive any of the loan proceeds. The first loan was a line of credit of up to $95,000, from which $80,502.26 was used to repay two outstanding loans to Forreston State Bank. That loan had a maturity date of April 16, 2013, and was secured by a blanket security interest in essentially all personal property of the Schrvers, Schryver Gun Sales, Inc., and Dr. Ruter. The second loan was in an initial principal amount of $217,440.27, from which $181,440.27 was used to repay two outstanding loans to Forreston State Bank. This loan had a maturity date of April 15, 2015, and was secured by a blanket security interest in the personal property of the Schrvers, Schryver Gun Sales, Inc., and Dr. Ruter. It was also secured by mortgages in the Schryvers' residence in Forreston, Illinois, the Oak Ave. Property, and a storage facility and farm land owned by Dr. Ruter. The third loan of $250,000 was entirely used to repay two outstanding loans to Forreston State Bank. The third loan had a maturity date of April 15, 2015, and was also secured by a blanket security interest in the personal property of the Schrvers, Schryver Gun Sales, Inc., and Dr. Ruter and by mortgages in the Schryvers' Forreston residence, the Oak Ave. Property and the same storage facility and farm land owned by Dr. Ruter.

According to the testimony of the president of Forreston State Bank, Jeff Snyder, Schryver Gun Sales, Inc. was in financial distress in early 2012. The 2012 loans were part of a restructuring of the Schryvers' debt to the bank. Forreston required the additional guarantee and pledge of collateral by Dr. Ruter as a condition to restructure those loans. However, even after the refinancing the business continued to deteriorate. In May 2012, the loan balances to Forreston State Bank together with accounts payable of Schryver Gun Sales, Inc. exceeded the store's inventory value by $415,307.10. By the end of August 2012, the difference reached $446,597.89. After August, Schryver Gun Sales, Inc. ceased providing Forreston State Bank with required monthly financial information. By October 2012, Schryver Gun Sales, Inc. and the Schryvers had stopped making payments on the loans to Forreston State Bank. The Schryvers attempted to find refinancing of the loans from another bank, but were unable to do so.

The Status of the Gun Shop upon Abandonment

The Schryvers closed the store on or about December 14, 2012. Mr. Snyder testified that, after he heard the store was closing he went to the premises on the 14th and saw the Schryvers moving out some items. He testified that when he asked the Schryvers whether they were removing any inventory, they responded that they were only removing personal items and that they were leaving all remaining inventory for the bank. Mr. Schryver admitted at trial that in December 2012 he moved the business's computer, business records and a six foot mechanic's tool chest containing various parts and wrenches to his home, and later to the business premises of a new company the Schryvers later formed, Schryver Firearms, Inc. He also admitted that in December 2012 he had an air compressor owned by the company at his home which he subsequently moved to the new premises and continued to use.

On December 15, 2012, both Mr. Snyder and Dr. Ruter visited the store. At this time the bank surrendered possession of both the building and any remaining personal property to Dr. Ruter. According to notes written by Mr. Snyder at the time, he and Dr. Ruter “agreed that inventory could remain in the store since it would be [the bank's] intent that ownership would eventually be transferred to him.” (Pl. Ex. 83.) Both...