United States Trustee v. Rael et al

IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF WYOMING
In re 	)
)
ROBERT ALYN RAEL 	) 	Case No. 08-20251
LISA LYNN RAEL 	) 	Chapter 7
)
Debtors. 	)
)
UNITED STATES TRUSTEE 	)
)
Plaintiff, 	)
)
v. 	) 	Adv. No. 15-2013
)
ROBERT ALYN RAEL 	)
LISA LYNN RAEL 	)
)
Defendants. 	)
OPINION
This adversary proceeding came before the court for an evidentiary hearing on February
21, 2017, on the United States Trustee’s Complaint to Deny Debtors’ Discharge and Debtors
Robert Alyn Rael and Lisa Lynn Rael’s Answer. At the hearing’s conclusion, the court took the
matter under advisement. Having reviewed the record, testimony and documentary evidence, the
court is prepared to rule.
Jurisdiction
This court has jurisdiction under 28 U.S.C. §§ 1334 and 157(b)(2)(J). Venue is proper
under 28 U.S.C. § 1408. The matter is before the court pursuant to 11 U.S.C. § 727(a)(6)(A) and
Fed. R. Bankr. P. 4004.
Background
The Raels filed their voluntary chapter 11 bankruptcy petition on May 1, 2008, retaining
Stephen Winship, Esq. as their attorney. At the time of filing, the Raels were sole shareholders
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and members of Professional Contractors, Inc. and Lovell’s American Car Care Center, LLC as
well as these entities’ officers. These businesses failed in 2011, and no longer operate.1
This court confirmed the Raels’ Amended Chapter 11 Plan of Reorganization on January
20, 2010, and granted a final decree on March 7, 2011. The plan created Class One – Wells
Fargo Bank and called for this claim to be partially satisfied through the sale of three parcels:
Class One-Wells Fargo Bank. This creditor holds security interests against
Raels’ real estate and some equipment and vehicles used in their businesses. This
claim, which is disputed, is for $1,176,262.00 and is secured by assets having a
value of $502,261.00. This creditor’s claim will be partially satisfied by the sale
of the following parcels of real property:
520 Oregon Trail and Fifth Street (car wash) 	$36,431.00
Lovell, Wyoming
51 East Main Street 	$48,208.00
Lovell, Wyoming
330 South 1st West Street 	$36,817.00
Cowley, Wyoming
In the event any of the parcels are not sold within one year of the effective date
of the Plan, such unsold parcels will be surrendered by quit claim deed to Wells
Fargo and the secured claim of the creditor will be reduced by the values
indicated above.2
Additionally, Raels were to make monthly payments to Wells Fargo.
With respect to the IRS’s claim, the Plan provides:
Class Three-IRS. This creditor has a claim for $69,544.00, which represents a
penalty assessment under 26 U.S.C. § 6672 arising from PCI payroll tax liability.
This amount will be satisfied by PCI’s plan payments since this is an overlapping
obligation.3
1 Professional Contractors, Inc. (Wyo. Bankr. Case No. 08-20252) and Lovell’s American Car Care Center, LLC
(Wyo. Bankr. Case No. 08-20128) were related Chapter 11 business bankruptcy cases to Debtors’ individual
Chapter 11 case.
2 Case No. 08-20251, ECF 84 at p. 2.
3 Case No. 08-20251, ECF 184 at p. 3.
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Raels subsequently defaulted on the Wells Fargo payments. Wells Fargo filed complaints
in the Fifth Judicial District for the State of Wyoming and obtained default judgments on
amounts Raels owed to the Bank’s for pre-petition mortgages. Wells Fargo filed the complaints
without having first obtained relief from the automatic stay. Wells Fargo filed its judgment as a
lien against the Cowley Parcel in the real estate records for Big Horn County, Wyoming.
Raels filed a Motion to Reopen Case “to allow Defendants to enforce the terms of the
confirmed Plan and to bring contempt actions for violation of the Automatic Stay.”4 The Court
reopened the case on June 6, 2013.
On September 16, 2013, the Raels sought permission to sell the Cowley Parcel to David
and Michelle Banks. The original “Motion for Approval of Sale of Real Property” asserted that
the Parcel was “subject to a mortgage held by Wells Fargo Bank . . . the sale proceeds will be
paid to the mortgagor, Wells Fargo Bank.” The Sale Order stated in pertinent part that “…the
proceeds thereof shall be paid in accordance with Debtors’ Motion.” Raels made several
subsequent modifications to the sale motion to address various title insurance company
requirements and to adjust the sales price, but did not modify the allocation of the proceeds. No
party opposed the sale motions, and this court entered Orders approving these sale motions.
Thereafter, Raels filed their first motion for order to show cause and/or contempt citation
against Wells Fargo. The court held an evidentiary hearing and denied the motion. It ruled that
the stay terminated upon the case closure and that there was no discharge injunction because the
Raels had not completed the plan payments.5 The court also ruled that it did not have “related to”
jurisdiction over the Bank’s action to enforce its liens.6 “When property leaves the bankruptcy
4 Case No. 08-20251, ECF 239.
5 Case No. 08-20251, ECF 322 at pp. 5-6.
6 Id. at 11.
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estate, however, the bankruptcy court’s jurisdiction proceeding [sic] comes to an end.” 7 Raels
filed their second motion for order to show cause and/or contempt citation against Wells Fargo,
which this court also denied.
The Tenth Circuit Bankruptcy Appellate Panel affirmed the denial of relief:
Applying the concurring opinion from Houlik further reiterates that the
bankruptcy court is not left without jurisdiction entirely. Instead, exclusive
bankruptcy court jurisdiction did not arise based on those particular facts—facts
that are nearly identical to those found here. As a result, the Raels' arguments also
fail as to this portion of the bankruptcy court's orders.8
While the appeal was pending, Raels proceeded with the sale transaction. The buyers
originally made a $5,000.00 down payment, which Counsel deposited in his trust account. On
April 4, 2014, the closing occurred on the Parcel’s sale to David and Michelle Banks for a sales
price of $130,000.00. Raels received a total of $127,283.81 at closing in the form of a check
from the title insurance company and retention of the $5000.00 down payment.
Neither the Raels nor Counsel turned the sale proceeds over to Wells Fargo. Instead,
Raels, held the check for nearly a year, eventually depositing it into a bank account opened at the
Bank of Greybull on March 10, 2015. Based upon the documentary evidence, Counsel and the
Raels began discussing the disbursement of the Sale proceeds in a letter dated March 11, 2015.9
The bank placed the funds on a 10-day hold upon being deposited, due to the large amount.
Counsel and the Raels communicated numerous times from the day the Raels deposited the
check before converting their case to a Chapter 7. On March 19, 2015, Counsel sent Raels a
letter suggesting that Raels obtain cashier’s checks payable to the IRS for $95,584.00; $4,250.00
to pay Raels’ accountants; and $22,439.72 to Mr. Winship for unpaid fees and services. 10
7 Id. at 9 (citing In re Houlik, 481 B.R. 661, 674 (B.A.P. 10 th Cir.) (emphasis added)).
8 In re Rael, 527 B.R. 799, at 8 (B.A.P. 10th Cir. 2015).
9 UST Ex. No. 9, at 112.
10 UST Ex. No. 9 at 121.
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Raels converted their bankruptcy case to a Chapter 7 on May 4, 2015. The Chapter 7
§ 341 Meeting of Creditors was scheduled and held on May 25, 2015. Mr. Tom Klepperick,
counsel for Wells Fargo, attended the Meeting of Creditors to determine the status of the sale of
the Property. 11 In spite of a request to Raels’ counsel, the Meeting of Creditors was the first time
Mr. Klepperick was made aware the parcel was sold and to whom the proceeds were distributed.
On June 25, 2015, the U. S. Trustee filed the Complaint commencing Adversary Proceeding 15-
2013.
Analysis
The U.S. Trustee seeks to deny the Raels’ discharge for refusal to follow a court order.12
In its complaint, the U.S. Trustee alleges that Raels failed to comply with the Sales Order when
they failed to distribute any proceeds to Wells Fargo. Raels’ Answer that they relied upon their
Counsel’s advice, which affected their ability to form the requisite intent.
1. 	General standard for revoking/objecting to discharge
In weighing the facts put forward in a contest over a discharge, the court must bear in
mind the beneficial policy of allowing honest debtors to receive a fresh start in life.13 The
Bankruptcy Code serves to relieve the honest debtor from the weight of oppressive indebtedness,
and permit the debtor to start afresh, free from the obligations and responsibilities consequent
upon misfortunes.14 Jurisprudence is unequivocal that courts construe objections to discharge
liberally in favor of a debtor and strictly against creditors in order to further the Code’s fresh
start policy.15 Totally barring discharge is an extreme penalty. 16
11 Mr. Klepperick was Wells Fargo’s counsel until his retirement.
12 § 727(a)(6)(A).
13 Grogan v. Garner, 498 U.S. 279, 283 (1991); In re Brown, 108 F.3d 1290, 1294 (10th Cir. 1997); In re
Christensen, 561 B.R. 195, 215-16 (Bankr. D. Utah 2016).
14 Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934).
15 In re Butler, 377 B.R. 895, 915 (Bankr. D. Utah 2006).
16 Id.
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2. 	Section § 727(a)(6)(A)
Under § 727(a)(6)(A), the Trustee must establish that Debtors received the order in
question and failed to comply with its terms.17 As movant, the U.S. Trustee has the burden to
prove the grounds for denial of discharge by a preponderance of the evidence.18 Debtors then
bear the burden of explaining the non-compliance.19 The court may only deny discharge under §
727(a)(6)(A) if it finds that a debtor’s non-compliance was willful, “refusal, as opposed to simple
failure, requires intent.”20 Failure to comply because of inability, mistake, or inadvertence is
insufficient.21 Where grounds for denying discharge are present, § 727(a) nonetheless vests this
court with the discretion to grant a discharge.22
3. 	Advice of counsel as defense
Debtors argue they did not have the requisite intent as they relied upon counsel’s advice.
To establish an advice of counsel defense, Debtors must present evidence, which satisfies the
following elements:
(1) that all facts were fully and fairly communicated to counsel;
(2) that counsel gave legal advice;
(3) that debtors relied on the legal advice; and
(4) that debtors’ reliance was in good faith.23
Raels relied on Mr. Winship’s legal interpretation about the validity of the court order.
Counsel was not only fully informed as to all relevant facts, he best understood the consequences
of bankruptcy law. Thereafter, Debtors sought guidance from Mr. Winship on the distribution of
the sale proceeds. In a letter dated February 19, 2015, Mr. Winship informed the Raels:
17 In re Osborne, 476 B.R. 284, 296 (Bankr. D. Kan. 2012).
18 In re Garland, 417 B.R. 805, 810–11 (B.A.P. 10th Cir. 2009).
19 In re Osborne, 476 B.R. at 296.
20 Id. at 297.
21 Id.
22 In re DiGesualdo, 463 B.R. 503, 523 (Bankr. D. Colo. 2011).
23 In re Biorge, 536 B.R. 24, 30 (Bankr. D. Utah 2015).
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[I]f the Bankruptcy Appellate Panel affirms the Bankruptcy Court ruling, it means
that the proceeds from the sale to the Banks is not subject to Bankruptcy Court
jurisdiction thereby allowing that money to then be applied in large part to the
non-dischargeable IRS obligation.24
Subsequently, as stated above, Counsel advised the Raels disburse the Sale Proceeds to the IRS,
the Rael’s accountants, and himself.
Debtors testified that they relied on Counsel’s advice. In this instance, a number of events
combined to cause Counsel to question the Sales Order’s legitimacy. In its first contempt order,
the court found that its jurisdiction over property that leaves the bankruptcy estate “comes to an
end.” The Bankruptcy Appellate Panel found that the property pledged to Wells Fargo “was not
estate property.”25 When combined with Counsel’s advice, it was not unreasonable for Debtors
to have faith in Mr. Winship or have any reason to believe he was in error.
It is rare that there will not be consequences for failure to obey a court order. All parties
should err on the side of clarification as opposed to disregarding. The U.S. Trustee met its
burden showing Debtors failed to comply with a court order. But upon the burden shift, Debtors
established their actions were not willful as they reasonably relied on Counsel’s advice.
Revoking Debtors’ discharge is not appropriate given the principal that courts should narrowly
construe the exceptions to the general policy favoring discharge.
4. 	Mutual mistake
Debtors further challenge the U.S Trustee’s request to deny discharge by asserting there
was a mutual mistake at the time the parties and the court moved forward on the Sale Order.
Debtors contend the parties were mutually mistaken about the existence of a mortgage on the
property. Counsel for Wells Fargo, Mr. Klepperick, testified he advised Mr. Winship that Wells
24 UST Ex. No. 9 at 107.
25 In re Rael, 527 B.R. 799 at *5 (B.A.P. 10th Cir. 2015).
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Fargo had a judgment lien, not a mortgage and “was surprised [to] seeing the wording” in the
Sale Motion as Mr. Winship continually confused the judgment lien as a mortgage. Debtors’
petition and schedules indicate the property was encumbered.26 Regardless of the phrasing of
Wells Fargo’s interest as a mortgage or judgment lien, it was the Raels’ intent to turn the sales
proceeds over to Wells Fargo. There was no mutual mistake.
Conclusion
In conclusion, as discussed above, the court finds the U.S. Trustee met its burden
showing the Raels failed to comply with the court’s Order. However, as the burden shifted, the
Raels established their actions were not willful as they reasonably relied upon Mr. Winship’s
advice. Therefore, the court finds for Defendants, Mr. and Mrs. Rael and against the U.S.
Trustee, determining Debtors’ discharge shall be entered.
This opinion constitutes the court’s findings of fact and conclusions of law. A separate
order shall be entered pursuant to Fed. R. Bankr. P. 9021.
BY THE COURT
_____________________________
Honorable Cathleen D. Parker
United States Bankruptcy Judge
Service to:
Daniel Morse
Stephen Winship
26 Case No. 08-20251, ECF 20, Schedules A and D.
6/12/2017
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