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Trustee Alleges Fraud in Farmers’ Bankruptcy

6 min read
Emerging row rice early in the season 128778
<p style="text-align: right;"><em>Illustration based on photo by Jarrod Hardke, UA System Division of Agriculture.</em></p> ()

A couple who farmed in Monroe County allegedly tried to shield assets from creditors before filing a multimillion-dollar bankruptcy, according to a lawsuit filed last month by a bankruptcy trustee.

Kimberly and Henry “Lee” Stewart Jr., now of Oxford, Mississippi, filed for Chapter 11 reorganization in October 2018 in U.S. Bankruptcy Court in Helena. The case was converted to a Chapter 7 liquidation in June.

The Stewarts, who own Stewart Farms of Brinkley and mainly grew and harvested rice and corn, listed $8.1 million in debts and $10.1 million in assets in their bankruptcy filing. Their largest secured debt is $6.7 million owed to entities of Farm Credit Midsouth of Jonesboro. The Stewarts’ farmland in Monroe County is securing the debt.

Before and after filing for bankruptcy protection, the Stewarts “engaged in an ill-planned enterprise to shield” assets from creditors and bankruptcy liquidation, attorney Hamilton M. Mitchell of Little Rock, who is the trustee in the case, said in the lawsuit he filed inside the bankruptcy case.

Mitchell alleged that part of the plan involved pretending to owe themselves hundreds of thousands of dollars.

The Stewarts declared in their bankruptcy that they owe $759,000 to H.T. Stewart Farms. But H.T. Stewart Farms is a partnership composed of the Stewarts and Lee Stewart’s adult son from a previous marriage, Henry “Teale” Stewart.

The Stewarts said they used the money for living expenses.

“The problem, however, is [the Stewarts] were the source of the deposits to HTS Farms and HTS Farms was simply an extension of the Debtors,” Mitchell wrote. “In other words, the Debtors were funding their own borrowing and effectively borrowing money from themselves.”

In an Aug. 13 bankruptcy proceeding, Kimberly Stewart said that the couple owes Teale Stewart almost $1 million.

Mitchell also alleged that Lee and Kimberly Stewart fraudulently transferred vehicle titles to Teale Stewart. The vehicles represented nearly all of the Stewarts’ unencumbered assets and had a value of less than $150,000, Mitchell said. Before the transfers were made, creditors had sued or threatened to sue the Stewarts, he said.

Mitchell told Arkansas Business that it’s not uncommon for people to try to shield assets before filing for bankruptcy. “People see the writing on the wall ahead of time,” he said.

The Stewarts said in a bankruptcy filing that ownership of the vehicles — a 1966 Chevy, 1979 Dodge, 2010 Harley and 2013 Ford — was transferred to Teale Stewart as payment for farm labor. Mitchell said he wasn’t sure what caused the Stewarts’ financial problems, but he also alleged that they opened other bank accounts and churned millions of dollars through them as a way to keep money out of the hands of creditors.

“The actions of the [Stewarts] constitute a gross abuse of the bankruptcy process,” Mitchell said.

Lee Stewart didn’t return a text message or an email, and he couldn’t be reached by phone. The Stewarts’ bankruptcy attorney, J. Brad Moore of Little Rock, was not available for comment last week. As of Thursday morning, the Stewarts had not responded to the trustee’s suit.

The court filings, however, provide a look into the financial troubles of a family farmer.

Farming Problems

“I’ve farmed for 40 years,” Lee Stewart told the Oxford Eagle in March 2018. “I was born in it, and I think I can raise anything in any way.” The article said Stewart farmed 70,000 acres.

Lee Stewart operated his business as Stewart Farms. One financial blow occurred in 2012 when, Stewart Farms alleged in a 2016 lawsuit, farmer Kenneth Wilson, who does business as Wilson Farming of Monroe County, used Gramoxone herbicide on a soybean crop growing adjacent to Stewart Farms’ corn crop. The Gramoxone “drifted over the property line,” the civil suit said, and Stewart’s corn crop “suffered irreparable damage including stunted growth, plant kill and unproductive growth.”

Stewart said the damage to about 800 acres of corn was $1.1 million. In response, Wilson denied that he was negligent or caused the alleged damage to Stewart’s crops. That case is pending.

Stewart Farms sustained another blow stemming from its 2015 rice crop.

In another lawsuit, also filed in 2016 in Monroe County Circuit Court, Stewart Farms alleged that it had a contract with Erwin-Keith Inc. of Wynne to buy the farm’s rice. After the harvest, Erwin-Keith accepted nearly 100,000 bushels of rice but didn’t pay for it, Stewart Farms alleged in the lawsuit.

Stewart Farms also said it tried to deliver additional rice, but Erwin-Keith refused to take it because it didn’t have the storage space for it. Stewart Farms said the total damage was $1.6 million. James McHaney Jr. of North Little Rock, an attorney for Erwin-Keith, declined to comment. The case is pending.


Claims Register
The Top 10 Claims Filed in the Chapter 7 Bankruptcy of Kimberly and Henry “Lee” Stewart Jr.

Creditor Amount Claimed Secured Claimed
Farm Credit Midsouth entities
Jonesboro
$6,670,769 $6,670,769
CNH Industrial Capital America LLC
Lancaster, Pennsylvania
$391,532 $50,700
PHI Financial Services Inc.
Des Moines, Iowa
$138,444  
Rogers Group Inc.
Nashville, Tennessee
$69,799  
JPMorgan Chase Bank
Addison, Texas
$56,775 $21,177
Chrysler Capital
Fort Worth, Texas
$38,630 $38,630
21st Mortgage Corp.
Knoxville, Tennessee
$37,633 $37,633
AgHeritage Farm Credit Services
Little Rock
$33,314  
TD Auto Finance LLC
Lewiston, Maine
$21,740 $21,740
MFA Oil Co.
Jefferson City, Missouri
$21,037
Source: The Stewarts’ bankruptcy case in U.S. Bankruptcy Court, Helena Division

 

Road to Bankruptcy

Starting in 2016, after the alleged problems with the rice harvest, the Stewarts “generally failed to pay their debts as they became due, while also incurring debts beyond their ability to pay,” Mitchell said in the lawsuit.

The couple reported total income of $3 million in 2016, but that fell to $2.1 million in 2017, according to their bankruptcy filing. In March 2017, PHI Financial Services Inc. of Des Moines, Iowa, sued the Stewarts in Iowa state court to collect on a defaulted loan taken out in 2012, according to Mitchell’s filing. PHI received a default judgment of nearly $130,000 in July 2017.

The same month that the judgment was entered, HTS Farms was formed as a partnership between Lee and Kimberly Stewart and Lee’s son, Teale. But Mitchell said in the complaint that he doesn’t believe HTS Farms conducted any business “aside from the transfers and transactions” between it and the Stewarts.

In April 2017, the couple and Teale Stewart opened bank accounts in the similar sounding name of H.T. Stewart Farms of Brinkley. Mitchell alleged that in 2017 and 2018, the couple “regularly deposited and debited money to and from” H.T. Stewart Farms’ bank accounts.

Mitchell said bank statements indicate that the Stewarts were the only users of the accounts and $2.3 million flowed through them in 2017-18.

“The Trustee reasonably believes formal discovery will reveal that the balance of the deposits [to the H.T. Stewart bank accounts] consist of revenue and income generated by the [Stewarts] and/or other money payable to or for the Debtors,” Mitchell said in the complaint.

Lee Stewart said during the Aug. 13 bankruptcy proceeding that his son had been supporting the couple since early 2018. Teale Stewart has been “paying our bills and been keeping us going,” Lee Stewart said.

Between Jan. 1 and Oct. 5, 2018, Lee Stewart reported income of $63,000 and Kimberly reported no income, according to their filing. The couple also said that in 2018, they received a nearly $250,000 loan from H.T. Stewart Farms.

In August, Lee Stewart told the court that he was unemployed and his wife was working at a hospital.

The Stewarts moved to Mississippi in March 2018. “We were going to quit farming and move over there and do something else,” Kimberly Stewart said in the August proceeding.

Mitchell said he has been given extra time to decide if he will ask the bankruptcy court not to grant the Stewarts a discharge, meaning they would be left with their debts after going through the bankruptcy process. Farm Credit Midsouth also has been given more time before it decides to object.

But Mitchell wouldn’t say if he would ask to block the discharge. “I don’t want to predict the future,” he said. “I’ll just leave it at that.”

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