Spohn v. Carney (In re Carney)

558 B.R. 250

In re: Danny Carney, Debtor.

Perry C. Spohn, Plaintiff,

v.Danny Carney, Defendant.

Bankruptcy No. 12-84145

Adversary No. 13-96012

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

Signed September 20, 2016

Stephen A. Clark, DeKalb, IL, Richard G. Larsen, Springer Brown, LLC, Wheaton, IL, for Plaintiff.

Brian K. Wright, Brian Wright & Associates, P.C., Sycamore, IL, for Defendant.

MEMORANDUM OPINION

Thomas M. Lynch, United States Bankruptcy Judge

Danny Carney purchased Riverside Pub, a bar and grill located in Sycamore, Illinois, from Perry's Riverside Pub, Inc. in October 2009. Perry C. Spohn was the seller's president. The parties agreed to a purchase price of $100,000 to be paid in monthly installments through November 2019. Mr. Carney, who appears to have had no appreciable prior experience running a business—let alone a restaurant—took possession, renamed the establishment Joker's Pub and struggled to make a go of it. He operated the business through an Illinois corporation, Danny Carney, Inc., for at least a portion of the period relevant to this dispute. It seems fortunate that the Debtor kept his day job because his establishment lost money on a consistent basis. After making the initial $30,000 down payment and approximately $25,000 in monthly payments, the Debtor eventually defaulted on his obligation to pay the balance of the purchase price. On October 31, 2012, Mr. Carney filed a rather muddled individual petition for relief under Chapter 7 of the Bankruptcy Code.

Neither Perry's Riverside Pub, Inc. nor Mr. Spohn filed a proof of claim in the Debtor's bankruptcy case. Instead, Mr. Spohn brings this adversary proceeding to deny the Debtor a discharge pursuant to Sections 727(a)(2) and (4) of the Bankruptcy Code. In his “Complaint to Object to Debtor's Discharge,” the Plaintiff alleges that the Debtor did not list income received from the bar or business property that he owns in connection with the bar and grill and that he transferred assets to the corporation with the intention of hindering, delaying and defrauding his creditors and the bankruptcy estate.

Based on the evidenced adduced at trial and the stipulations of the parties, this court finds that the Plaintiff has failed to meet his burden to prove that the discharge may be denied Mr. Carney and, therefore, his objection is OVERRULED. The court makes the findings of fact and conclusions of law set forth below in accordance with Bankruptcy Rule 7052. Based on these findings judgment will be entered in favor of the Debtor and against the Plaintiff on the claims alleged in the adversary complaint. Accordingly, the Plaintiff's objection to discharge is overruled and judgment shall be entered in favor of the Defendant.

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.”). Additionally, both the Plaintiff and the Defendant expressly consented to this court entering final judgment in the matter. (See Plaintiff's Statement of Jurisdiction (ECF No. 82); Debtor's Supplemental Statement of Jurisdiction (ECF No. 84).)

PROCEDURAL HISTORY

The Debtor commenced this Chapter 7 case on October 31, 2012. The Debtor listed Perry Spohn as the holder of an unsecured claim of $56,420.00 in Schedule F attached to his bankruptcy petition. On February 4, 2013. Perry Spohn filed an adversary complaint to object to the Debtor receiving a discharge. The Debtor does not object to Mr. Spohn's standing to raise this objection. The pleading, consisting of a single count, alleges that the Debtor failed to properly reveal his interest in certain business assets in his Schedule B and failed to disclose all income and expenses from his business operations. Mr. Spohn further alleges “on information and belief” that Mr. Carney transferred “property of the debtor and property of the estate with intent to hinder, delay, or defraud a creditor.” The complaint asks the court to enter “an order denying discharge in this matter” pursuant to 11 U.S.C. § 727(a)(2)(A) and (B) and § 727(a)(4).

The Debtor timely answered the complaint, and shortly afterward the parties filed cross motions for summary judgment. The court denied their motions finding several questions of material fact to exist. In particular, the court noted that material factual disputes were evident as to the fraudulent intent (if any) of the Debtor, his personal liability for corporate debts after its administrative dissolution and the effect (if any) of payments on the corporation's behalf and whether the Debtor received distributions that should have been disclosed. The court permitted the parties adequate time for discovery on the issues after which a trial on the merits was conducted. At the outset, the parties stipulated to the admissibility of several exhibits and called the Debtor to testify as the sole witness. As stipulated, the parties agreed to the admissibility and use of fifteen exhibits, including a copy of the Asset Purchase Agreement (without, as will be discussed below, the Exhibit A referenced in that document), as well as the transcripts of Mr. Carney's deposition taken by the Plaintiff on August 10, 2013 (Ex. 6) and the Section 341 meeting of creditors conducted by the Chapter 7 trustee on December 6, 2012. (Ex. 2.) The parties have also stipulated to certain facts. (ECF No. 52.) Mr. Carney was the sole witness called to testify at the trial by either side.

FINDINGS OF FACT¹

From its consideration of the evidence adduced at trial, the stipulations of the parties, and the court's review and argument of counsel, and having taken judicial notice of its own docket, the court makes the following findings of fact.

The Debtor. Danny Carney has some post-secondary education but did not earn a degree. In his words, he almost obtained an associate's degree “but not quite.” He and his wife reside in the home they own in Sycamore, Illinois. It appears that the Debtor has had little, if any formal business education or experience outside of his failed bar and grill venture. He has been employed by ADP Payroll Services for more than nine years. According to his petition, Mr. Carney works there as a “payroll technician” for which he receives a monthly salary of $5,558.28. His spouse is not employed. The Debtor testified that before he purchased the bar he had limited business experience, or “no prior business” as he phrased it.

Joker's Pub. The Riverside Pub was a bar and grill located in Sycamore, Illinois. On or about October 26, 2009 the Debtor, individually, and Perry's Riverside Pub, Inc. (“PRP”) entered an Asset Sale Agreement whereby Mr. Carney acquired the “furnishings, furniture and equipment, supplies, counters and shelves, inventory and stock in trade, and good will of the Riverside Pub” for the purchase price of $100,000. Perry Spohn signed the agreement as president of PRP. Under its terms the Debtor paid the seller an initial down payment of $30,000 and agreed to pay PRP the balance plus 8% annual interest in 120 equal monthly installments of $854 beginning December 1, 2009. Mr. Carney separately signed a lease agreement for the premises with another party, Jeff Bridge.

The Asset Sale Agreement contains ambiguous and inconsistent terms. For example, one paragraph declares that “all property agreed to be sold hereunder shall be delivered” at “the time of closing” while another states that the seller shall deliver a bill of sale for the stock in trade and other property sold under the agreement upon “tender of the final payment of the sales price at closing.” (Ex. 1.) While these terms might make sense if delivery and payment of the purchase price occurred simultaneously, it is undisputed that in fact the property sold was delivered to the Debtor in November 2009 even though only the down payment had been made and the agreement expressly contemplated Mr. Carney making monthly payments over the next ten years.

The Asset Sale Agreement also states that the purchase price is $100,000 “plus the value of the stock in trade and inventory” with the “cost to the Buyer for Seller's inventory [to] be based on the dollar amount Seller paid for said inventory [and the] inventory [to] be taken the day before the closing ” (Id. ) Notwithstanding this language in the agreement, all testimony and other evidence presented showed that the purchase price was simply $100,000 and that there was never a closing day inventory. It appears that Mr. Carney, Mr. Spohn and PRP were not represented by counsel in connection with the negotiation and preparation of the sale agreement (Depo. Tr. 69:4-8), and the parties did not present any evidence to explain, let alone attempt to harmonize, these inconsistencies. At the Section 341 meeting of creditors, Mr. Spohn's (then) counsel argued that under the terms of the agreement title to the property never passed from PRP to Mr. Carney because Mr. Carney failed to tender the “final payment of the sales price.” In this Adversary Proceeding, however, Mr. Spohn now argues that title did pass and that Mr. Carney should have listed the property he purchased under the agreement in his bankruptcy schedules.

It is undisputed that the Debtor assumed possession of the premises and began to operate the restaurant in November 2009. (Depo. Tr....