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Creditor loses bid in bankruptcy case

by John Magsam | July 30, 2020 at 2:08 a.m.

A bankruptcy judge has denied a creditor's move to block the discharge of the bankruptcy of Bill Schwyhart, former high-profile real estate developer in Northwest Arkansas, and his wife Carolyn, saying CHP LLC failed to prove the couple tried to defraud their creditors.

Judge Harlin Hale of the U.S. Bankruptcy Court for the Northern District of Texas in a written finding of fact issued late Tuesday said the evidence presented at trial in June did not support a denial of the discharge of the couple's bankruptcy.

A discharge in a bankruptcy filing, with a few exceptions, effectively extinguishes the debtor's pre-bankruptcy obligations giving the debtor a fresh start. If the discharge is denied, creditors are allowed to pursue the debtor on pre-bankruptcy claims.

The Schwyharts filed for Chapter 7 bankruptcy protection in Texas in July 2018, claiming more than $80 million in debt, mostly related to business. CHP, a Schwyhart creditor, asked the court to deny the discharge of the Schwyharts' bankruptcy.

"At trial, the Debtors appeared to be honest people. They made a number of mistakes, but they seemed honest. And the Debtors' mistakes will not materially alter the outcome for creditors in this bankruptcy case," Hale wrote.

Hale said CHP failed to prove the couple used a sophisticated, multiyear plan to defraud and hide assets from creditors and the court, as it alleged. He noted that the couple did make some missteps and even made false statements but they appeared to be honest mistakes.

"A global denial of a debtor's discharge is a harsh remedy; it is, in essence, a civil death penalty. The Debtors do not appear to be the kind of people who would jeopardize a discharge of over $82 million in debt over the limited, improper disclosures in this case," Hale wrote. "Ultimately, the Court finds and concludes that CHP has failed to meet its burden and the Debtors are entitled to their discharge."

Attorneys for CHP had argued the Schwyharts hid assets through an elaborate web of entities to hinder, delay and defraud creditors. CHP contended that in a multiyear scheme, the Schwyharts shifted assets through various entities, including HMG Investments, and used that money for living expenses and other spending but then denied knowledge of them and made other false claims in their bankruptcy filing.

In a written statement Wednesday given through his attorney, Bill Schwyhart said he spent most of his life making Northwest Arkansas a place people from anywhere in the world would be proud to call home and that he's pleased that he and his wife have emerged from the ordeal of the bankruptcy with their reputation intact.

"The voluminous disclosure and invasive examination of numerous lawyers, accountants, entities, and others over the course of more than two years leaves only one simple but definitive explanation as to why no fraudulent scheme could be proven: because there never was one," Schwyhart said in the statement.

He said the couple is looking forward to focusing on his health and their new life in Dallas.

Brain Ferguson, attorney for CHP, declined to comment Wednesday about the ruling and said CHP had not decided if it would appeal.

Stephen Schultz, a tax and bankruptcy attorney in Austin, Texas, said Hale excused a number of false statements because he found the Schwyharts' testimony to be to be credible -- in that they were honest mistakes, even though the Schwyharts were sophisticated debtors with extensive business experience.

Schultz said it was clear the Schwyharts' attorneys convinced Hale that statements made by the couple, even if they were false in some instances, were not done so with fraudulent intent.

"The credibility of the debtors at trial was important to Judge Hale and I think that won the day," Schultz said in a Wednesday phone interview.

In late June, Bill and Carolyn Schwyhart took the stand in their own defense in a Dallas bankruptcy court, contending they never intended to deceive their creditors, adding they had used corporate entities for years to pay their bills and other living expenses. Bill Schwyhart also testified that he had stage four cancer and that the couple moved to Dallas in March of 2018 to be closer to his doctors to receive treatment for his illness and not to avoid CHP.

Schwyhart testified he was fighting the challenge to his bankruptcy discharge to restore his reputation, in the face of the accusations by CHP. He told the court his good name was all he had left.

Bill Schwyhart under questioning by his attorney John Lewis Jr. said he didn't open a bank account for HMG Investments in 2013 with the intent to hide funds and was uncertain of the HMG ownership structure when the couple filed their draft schedules for their bankruptcy forms. HMG is a business entity formed in 1982 to purchase land and real estate.

Alex Schwyhart, son of Bill Schwyhart and stepson of Carolyn Schwyhart, told the court that funds from HMG were loans. He told the court that he had control of HMG and he always expected to be repaid.

CHP attorneys argued, among other things, that the Schwyharts had control over an account designated to HMG and regularly used the account for living expenses to the amount of about $12,000 a month over several years but then concealed their ownership interest. They also contend the Schwyharts emptied the account of about $16,000 after they filed for bankruptcy, using it to pay bills and for other expenses.

The Schwyharts' attorneys argued the couple credibly believed the HMG account was not the property of the estate. They contended the pair had an indirect interest in HMG at best and that money in the account came from Alex Schwyhart and that CHP failed to prove any false statements made by the Schwyharts were done with any intent to deceive.

During the Northwest Arkansas building boom, Bill Schwyhart worked with trucking magnate J.B. Hunt and Tim Graham on the Pinnacle Hills Promenade mall, which opened in 2006. After Hunt's death later that year, his widow, Johnelle Hunt, and Graham broke ties with Schwyhart.

Later, Johnelle Hunt and Graham sued Schwyhart, claiming that he defaulted on various loans. In April 2010, eight development companies managed by Schwyhart filed for bankruptcy, claiming nearly $42 million in debt.

Schwyhart also was one of the investors, along with J.B. Hunt, in the now-defunct charter-jet company Pinnacle Air LLC, which did business as Aspen JetRide. Billionaire John P. Calamos of Naperville, Ill., and the chairman of financial company Calamos Asset Management became a partner with Schwyhart when Calamos' Ajax merged with Pinnacle Air. Aspen JetRide filed for Chapter 7 bankruptcy protection in early 2009.

Schwyhart testified in June that while business dealings with Johnelle Hunt and Calamos went sour they eventually settled their differences in a confidential settlement agreement in 2013. The settlement was entered into evidence under seal in the Schwyhart bankruptcy case.

Schwyhart said at trial that he and his wife had put the stress of that conflict behind them and and lived a peaceful life until CHP filed claims against them in Arkansas state court in 2018. He said it was pressure from CHP that pushed the couple to seek bankruptcy protection, since other major creditors, including Calamos and Hunt, had not pursued judgments over the years.


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