BOKF, N.A. v. Simmons

Filing 11

MEMORANDUM OPINION affirming the decision of the Bankruptcy Court. Signed by Honorable Jimm Larry Hendren on December 28, 2012. (jn)

IN THE UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF ARKANSAS
FAYETTEVILLE DIVISION

IN RE: PATSY SIMMONS, DEBTOR

CHAPTER 7

BOKF, NA

PLAINTIFF
v.

Civil No. 12-5105

PATSY SIMMONS

DEFENDANT
MEMORANDUM OPINION

Now

on

this

28th

day

of

December,

2012,

the

captioned

bankruptcy appeal comes on for consideration, and from the briefs
of the parties, the transcript of the evidentiary hearing, and the
documents of record, the Court finds and orders as follows:
1.

In the Chapter 7 proceedings of debtor Patsy Simmons,

one of her creditors, BOKF, NA d/b/a Bank of Arkansas ("BOKF"),
filed a Complaint To Determine Dischargeability Of Debt (the
"Complaint"). BOKF alleged that its predecessor in interest, Bank
of Arkansas, made several loans totaling over $8,000,000 to
Simmons Limited Partnership ("Simmons LP") that were guaranteed by
Ms. Simmons.

The Complaint further alleged that Ms. Simmons had

given materially false financial statements and tax returns in
support of the loans, and transferred property to others with
intent to defraud creditors.
The Complaint alleged that neither Simmons LP nor Ms. Simmons
paid the loans in question, and further alleged that:

(a)

Ms. Simmons' debt to BOKF was not dischargeable pursuant

to 11 U.S.C. § 523(a)(2)(B), and
(b)

Ms. Simmons was not entitled to a discharge pursuant to

11 U.S.C. §§ 727(a)(2), (3), or (5).
2.

Following an evidentiary hearing, the Bankruptcy Court

found that BOKF had abandoned its claims under § 523(a)(2)(B) and
§ 727(a)(2), and denied the objections to discharge asserted under
§§ 727(a)(3), (a)(4)1, and (a)(5).
3.

BOKF appealed

the

Bankruptcy

Court's

decision, and

elected -- pursuant to 28 U.S.C. § 158(c)(1)(A) and Fed.R.Bankr.P.
8001(c) -- to have the appeal heard by this Court.

The matter is

fully briefed, and ripe for decision.
4.

On appeal, this Court reviews the Bankruptcy Court's

findings of fact for clear error, and its conclusions of law de
DeBold v. Case, 452 F.3d 756, 761 (8th Cir. 2006). A

novo.

finding of fact is clearly erroneous "when although there is
evidence to support it, the reviewing court on the entire evidence
is left with the definite and firm conviction that a mistake has
been committed."

U.S. v. U.S. Gypsum Co., 333 U.S. 364, 395

(1948).
The denial of discharge provisions in § 727 are strictly
construed in favor of debtors, as they impose harsh and drastic

1

This claim was asserted in BOKF's post-trial brief, and the Bankruptcy Court
elected to resolve it.

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sanctions, but the section is also intended to "prevent the
debtor's abuse of the Bankruptcy Code."
464, 471 (8th Cir. BAP 2001).
objecting to discharge.
5.

In re Korte, 262 B.R.

The burden of proof is on the party

Id.

The facts found by the Bankruptcy Court may be briefly

summarized as follows:
(a)

Ms. Simmons had an on again/off again marriage to

Charles Simmons, who remained her business partner even during
times when they were divorced.
(b)

Ms. Simmons operated multiple corporate entities, two of

which -- Simmons LP and Walter White, LLC ("White LLC") -- figure
in the events of this case.
(c)
Simmons

At some point before her bankruptcy, Ms. Simmons (or
LP

or

White

LLC)

owned

the

following

businesses or

properties:
*

Ride Rite, Inc. ("Ride Rite"), a used car dealership

with locations in Rogers and Springdale;
*

the real property underlying and adjacent to Ride Rite;

*

sixteen parcels of real property set out in a prenuptial

and

agreement between Ms. Simmons and Mr. Simmons dated August 11,
2008.
(d)

Ms. Simmons transferred control of Ride Rite to her son

Walter White in the early 1990's, but retained title to all stock
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and all tax liabilities and benefits, pursuant to a handwritten
"Business

Agreement"

dated

January

1,

1997.

The

Business

Agreement provided that the stock would transfer to Mr. White ten
years from the date of the Business Agreement.
(e)

In 1997 or 1998, Ms. Simmons transferred the real

property on which Ride Rite was situated to White LLC.
(f)

On January 1, 2008, Ms. Simmons transferred additional

real property to White LLC.

She then "stepped down" from White

LLC, leaving Mr. White as its owner, and executed a document
entitled Minutes of the Directors and Shareholders Meeting of
Ride-Rite, Inc., transferring the Ride Rite stock to Mr. White.
(g)

On

August

11,

2008,

in

view

of

their

upcoming

remarriage, Ms. Simmons and Mr. Simmons entered into a handwritten
Prenuptial Agreement which allocated nine real properties owned by
Simmons LP to Mr. Simmons in the event of Ms. Simmons's death or
the

parties'

divorce.

This

document

allocated

seven

real

properties to be retained by Ms. Simmons in the event of divorce,
or by her estate upon her death.
(h)

On February 22, 2010, Ms. Simmons and Mr. Simmons were

divorced, and Mr. Simmons received, by way of settlement, the same
property allocated to him in the Prenuptial Agreement.
(i)

On July 19, 2010, Ms. Simmons filed her Chapter 7

bankruptcy petition.
6.

On the basis of the evidence presented, the Bankruptcy

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Court reached the following conclusions:
*

BOKF failed to meet its burden of showing that Ms.

Simmons' record-keeping was "so deficient as to make it impossible
to determine her financial condition and business transactions,"
as required for its § 727(a)(3) claim.
*

BOKF failed to show that Ms. Simmons made a false

statement in connection with her bankruptcy, as required for its
§ 727(a)(4) claim.
*

Ms. Simmons satisfactorily explained the diminution of

assets that she experienced before filing her bankruptcy petition,
so as to withstand BOKF's § 727(a)(5) claim.
BOKF alleges that each of these findings was error, and that
the Bankruptcy Court erred when it failed to find that Ms.
Simmons' personal guaranty to BOKF was non-dischargeable under §§
727(a)(3), (a)(4), and (a)(5).
7.

Section 727(a)(3) provides that the bankruptcy court

"shall grant the debtor a discharge" unless
the debtor has . . . failed to keep . . . any recorded
information, including books, documents, records, and
papers, from which the debtor's financial condition or
business transactions might be ascertained, unless such
act or failure to act was justified under all of the
circumstances of the case. . . .
BOKF had the initial burden of proving that Ms. Simmons had
inadequate records from which her financial condition could be
ascertained. Upon such proof, the burden would shift to Ms.

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Simmons to justify her recordkeeping, but BOKF would retain the
ultimate burden of proof on this claim.

In re Swanson, 476 B.R.

236, 240 (8th Cir. BAP (Minn.)) 2012).

These are factual issues

reviewed for clear error.

In re Sendecky, 283 B.R. 760, 764 (8th

Cir. BAP (Minn.) 2002).
The Bankruptcy Court found that BOKF failed to prove Ms.
Simmons had inadequate records. It stated that "[w]hen considered
together, various documents over a span of 11 years show that it
was [Ms. Simmons'] long-time intention to fully transfer the Ride
Rite business and the Ride Rite real properties to her son Mr.
White. . . . In the same way, the prenuptial agreement between
[Ms. Simmons] and Mr. Simmons [], dated August 11, 2008, clearly
allocated assets in the event of their divorce, which subsequently
occurred in 2010."
8.

BOKF contends that Ms. Simmons' financial records were

nothing more than a "shoebox accounting system" which commingled
her assets with those of Simmons LP and Mr. Simmons, conveniently
allowing her to claim ownership when it was in her best interest,
and to disclaim ownership when it was not.

BOKF points out that

the only documentation of the transfers to Mr. White and Mr.
Simmons were handwritten notes that surfaced after the bankruptcy
proceedings began, that the assets were transferred to close
family members, and that the transfers were inconsistent with
other evidence, such as:
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*

the 2008 federal income tax returns of Ms. Simmons, Ride

Rite, and White LLC, showing that Ms. Simmons was 100% shareholder
of Ride Rite and owned 99.8088% of White LLC in 2008;
*

the

2008

Arkansas

State

Police

Used

Motor

Vehicle

Dealers Application for Ride Rite (Springdale location) showing
that Ms. Simmons had an interest in the corporation;
*

the

2009

Arkansas

State

Police

Used

Motor

Vehicle

Dealers Application for Ride Rite (Rogers location) showing that
Ms. Simmons had an interest in the corporation;
*

a Loan Offering Memorandum prepared by Simmons First

Bank on January 5, 2009, in connection with Ms. Simmons' request
to renew a loan there, stating that the majority of Ms. Simmons's
cash flow comes from Ride Rite, which "is managed by Mr. Walter
White, her son," and which she "has agreed to sell . . . to her
son, Mr. White, sometime in the next 24 months.

As with other

children she'll be 'gifting' a portion of the business to him, as
she has agreed to a sales price of $600k."
*

A Term Loan Agreement for Simmons First Bank signed by

Ms. Simmons on 03/04/09 which included a "negative pledge" that
she

would

not

sell

or

transfer

Ride

Rite

until

certain

contingencies were met.
*

A 12/04/09 e-mail from David Bartlett of Simmons First

Bank, recapping a 12/03/09 meeting with Ms. Simmons, which noted
that Ms. Simmons was filing for divorce and had said in the

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meeting that "there was no prenuptial agreement."
9.

The Court is not persuaded that the Bankruptcy Court

erred in finding that Ms. Simmons kept sufficient records to
satisfy § 727(a)(3). The fact that documents are handwritten does
not invalidate them, and it is not particularly surprising that
transactions

between

family

members

were

not

revealed

Simmons

offered

explanations

to

outsiders.
Moreover,

Ms.

for

the

discrepancies in the various documents, and the Bankruptcy Court
accepted those explanations.

For example, Ms. Simmons testified

that she transferred Ride Rite to Mr. White on January 1, 2008,
pursuant to the Business Agreement, but listed income from Ride
Rite on her 2008 federal income tax return to true up a reporting
error on previous years' returns.

She testified that after

transferring Ride Rite to Mr. White, she signed -- before reading
it -- a document for Simmons First Bank agreeing not to transfer
Ride Rite until certain contingencies occurred.

She testified

that she then read the document, and said the provision would have
to be stricken, and that the bank agreed to substitute a corrected
page, but failed to do so.
The Bankruptcy Court found Ms. Simmons' explanations for the
inconsistencies satisfactory. While the discrepancies pointed out
by BOKF do raise questions in the Court's mind, it cannot say that
it is left with "the definite and firm conviction that a mistake

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has been committed" by the Bankruptcy Court in accepting Ms.
Simmons' explanations.

Thus, BOKF has not met its substantial

burden of demonstrating clear error on the part of the Bankruptcy
Court in connection with the § 727(a)(3) issue.
10.

Section 727(a)(4) provides that the bankruptcy court

"shall grant the debtor a discharge" unless "the debtor knowingly
and fraudulently, in or in connection with the case -- (A) made a
false oath or account . . . ."
For a false statement to bar discharge, it must be both
material, and made with intent. These concepts are fleshed out in
In re Korte, supra:
The subject matter of a false oath is material and thus
sufficient to bar discharge, if it bears a relationship
to the bankrupt's business transactions or estate, or
concerns the discovery of assets, business dealings, or
the existence and disposition of his property.
The
question of a debtor's knowledge and intent under §
727(a)(4) is a matter of fact.
Intent can be
established by circumstantial evidence, and statements
made with reckless indifference to the truth are
regarded as intentionally false.
262 B.R. at 474 (internal quotation marks and citations omitted).
11.

To establish its claim under § 727(a)(4)(A), BOKF needed

to prove five things:
*

that Ms. Simmons made a statement under oath;

*

that the statement was false;

*

that she made the statement with fraudulent intent;

*

that she knew the statement was false; and

-9-

*

that the statement related materially to her bankruptcy.

In re Richmond, 429 B.R. 263, 307 (Bkrtcy. E.D. Ark., 2010).
The Bankruptcy Court found that BOKF failed to prove the
first two of these elements, making consideration of the remainder
unnecessary.

It reasoned that the property transfers to Mr.

Simmons and Mr. White were made outside the time periods within
which such transfers would have been required to be listed on Ms.
Simmons's bankruptcy schedules.

Thus, her failure to list them

did not amount to a false statement.
The Bankruptcy Court further found that, to the extent other
documents indicated Ms. Simmons actually retained ownership of the
properties,

she

offered

reasonable

explanations

for

these

discrepancies.
12.

BOKF's contention that this was error is based on the

theme underlying all its arguments, i.e., that the asset transfers
to Mr. Simmons and Mr. White were a sham.
connection

with

its

§

727(a)(4)

argument,

BOKF reasons, in
that

Ms.

Simmons

actually retained the assets, thus making her bankruptcy schedules
false for failing to include them.
BOKF argues that "the Bankruptcy Court recognizes that Mrs.
Simmons 'actually retained some ownership in Ride Rite and Walter
White [LLC] as late as 2009' but concludes that Mrs. Simmons
'reasonable explanations' somehow remove these owned assets from
disclosure."

BOKF goes on to state that the Bankruptcy Court

-10-

"reluctantly conceded" that Ms. Simmons "clearly retained control
of Ride Rite, Inc. and Walter White, LLC during 2009 (and may
still)."
BOKF misquotes the Bankruptcy Court's Order.

What the Order

actually says is "BOKF alleges that [various documents] show that
Ms. Simmons actually retained some ownership interest in the Ride
Rite business and Walter White, LLC as late as 2009." (Emphasis
added.)

The Order then immediately rejects BOKF's allegation,

stating that Ms. Simmons "offered reasonable explanations for
these

discrepancies,

and

the

Court

is

satisfied

that

the

properties were transferred in January 2008."
BOKF has mistaken the Bankruptcy Court's description of
BOKF's trial position as the Bankruptcy's Court's finding of fact.
It has not demonstrated any error in the Bankruptcy Court's
decision on the § 727(a)(4) issue.
13.

Section 727(a)(5) provides that the bankruptcy court

"shall grant the debtor a discharge" unless
the debtor has failed to explain satisfactorily, before
determination of denial of discharge under this
paragraph, any loss of assets or deficiency of assets to
meet the debtor's liabilities. . . .
As with the § 727(a)(3) claim, BOKF had the initial burden of
proving that Ms. Simmons failed to satisfactorily explain a
diminution in her assets.

In re Swanson, supra, 476 B.R. at 241.

The Bankruptcy court found that BOKF met this initial burden.

-11-

The

burden

satisfactory
(Bkrtcy.

then

shifted

explanation.

S.D.

Iowa,

to

In re

2012).

Ms.
De

Ms.

Simmons

Ronde,
Simmons

2012

to

offer

a

WL

5246916

offered

various

explanations:
*

that she had planned the transfers to Mr. White for a

long time;
*

that the prenuptial agreement with Mr. Simmons was

reasonable in light of their relationship history;
*

that her financial statements were submitted in her name

jointly with either Mr. Simmons, Simmons LP, or both, and thus did
not provide an accurate portrait of her individual assets; and
*

that the financial statements do not account for the

general decline in property values resulting from the real estate
crisis that started in 2008.
The Bankruptcy Court found these explanations satisfactory.
14.

BOKF contends that this was error, based largely on its

position that the transfers were sham; that Ms. Simmons failed to
account for the amount of her contribution toward acquisition of
assets Mr. White received under the Prenuptial Agreement; and that
the transfers to Mr. White took place when Ms. Simmons was in
default on the BOKF loans and other loans.
"The determination of whether a debtor's explanation is
satisfactory rests within the discretion of the court."
Kouangvan, 2012 WL 2931182 (Bkrtcy. S.D. Iowa, 2012).
-12-

In re
In the

absence of an abuse of this discretion, there is no basis to
reverse the trial court, and BOKF has shown no such abuse.

The

Bankruptcy Court believed Ms. Simmons when she testified that she
made the transfers to Mr. White and Mr. Simmons, and that they
were legitimate, and there was an evidentiary basis for that
belief. The assets in the Simmons' divorce were divided according
to their Prenuptial Agreement, and BOKF cites no legal precept
requiring a prenuptial agreement to allocate property to the
person who paid for it in the first place.
15.

Because BOKF has failed to establish any error in the

Bankruptcy Court's findings relative to §§ 727(a)(3), (a)(4), and
(a)(5), it has also failed to establish that the Bankruptcy Court
erred in finding that Ms. Simmons's personal guaranty to BOKF was
non-dischargeable.

The decision of the Bankruptcy Court is,

therefore, affirmed.
IT IS SO ORDERED.
/s/ Jimm Larry Hendren
JIMM LARRY HENDREN
UNITED STATES DISTRICT JUDGE

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