IN RE: James Jack Lewis CASE NO. 91-0162

UNITED STATES BANKRUPTCY COURT
FOR THE EASTERN DISTRICT OF KENTUCKY
LEXINGTON DIVISION

IN RE: James Jack Lewis

CASE NO. 91-0162

SYNOPSIS

This matter is pending on the complaint of the trustee to revoke the discharge of the debtor and to recover from the debtor postpetition income received by the debtor pursuant to the terms of a prepetition farm lease agreement between the debtor and a corporate entity, Hargus Sexton, General Agent, Inc. To the extent the rental payments are not recoverable from the debtor, the complaint of the trustee also seeks recovery of the rental payments from Hargus Sexton, General Agent, Inc. and its president, Hargus Sexton. 11 U.S.C. 542, 549, and 727(d)(2).

. . . .

By Count II of the complaint the trustee requests that pursuant to 11 U.S.C. 727(d)(2) the court deny the debtor a discharge for failure to account for and to turn over to the trustee rental payments received by the debtor during the pendency of his bankruptcy case as lessor under a lease of the debtor’s farm in effect when bankruptcy intervened.

. . . .

Subsection 727(d)(2) of the Bankruptcy Code, 11 U.S.C. 727(d)(2), empowers the court on timely request of the trustee, a creditor, or the United States Trustee, after notice and hearing, to revoke the discharge of a debtor, if the discharge was obtained through fraud of the debtor, and the requesting party did not know of the fraud until after the granting of the discharge. The request is timely if made at any time before the case is closed. 11 U.S.C. 727(e)(2)(B).

. . . .

The court is not persuaded that the debtor’s receipt and use of the income from the farm lease was fraudulent under the facts presented in this case. This stream of income from the farm lease agreement, the existence of which was revealed in the schedules to the petition, was readily discoverable, but remained undisclosed primarily due to lack of diligence on the part of the trustee. Section 727(d)(2) protects creditors from purposeful concealment by a debtor. It dies not protect creditors from lackluster administration by a trustee.

. . . .

Subsection 542(b) provides that an entity that owes a debt that is property of the estate and that is matured, payable on demand, or payable on order, shall pay such debt to, or on the order of, the trustee.

. . . .

The payments Hargus Sexton made to the debtor as rental payments under the lease were made by Sexton [individually] voluntarily. He was not legally obligated to make these payments to the trustee as representative of the debtor’s estate. The court finds that Sexton cannot be held liable for making these payments to the debtor rather than to the trustee.

Sexton’s testimony indicates he believed in reliance on public records indicating that title to the farm was in the debtor’s children and in reliance on representations of the debtor that the farm was not involved in the debtor’s bankruptcy proceeding. There is no evidence that Sexton had notice to the contrary prior to late February or early March of 1989. He made no payments to the debtor after February 20, 1989.

. . . .

The bankruptcy estate’s interest in the farm was sold to Hargus Sexton, individually, subject to liens and encumbrances, including the outstanding lease agreement between the debtor and Hargus Sexton, General Agent, Inc. When the farm was deeded to Sexton on June 21, 1990, he became entitled to all the rights of the lessor under the lease, by assignment. The trustee, acting for the bankruptcy estate, conveyed to Sexton all of the estate’s right, title and interest in the farm, including the estate’s rights under the lease agreement with Hargus, Sexton, General Agent, Inc. There was no reservation of the estate’s rights under the lease agreement to collect rental payments from any of the defendants herein.

The court is of the opinion that the trustee’s deed conveying the estate’s interest in the farm to Sexton operated as a release of and as a transfer to Sexton of any claim the trustee might have had to the lease payments in question.

Dated:

By the court -

____________________

Joe Lee, Chief Judge

Copies to:

John T. Hamilton

Terry L. Yewell

Tracey N. Wise

W. Thomas Bunch