WILLIAM R. SAWYER, Bankruptcy Judge.
This Adversary Proceeding came before the Court for an evidentiary hearing on May 6, 7, and 9, 2019, on Defendant Timothy McCallan's "Motion to Determine Compliance with the Civil Contempt Orders and for the Immediate Release of Defendant McCallan from Incarceration." (Doc. 787). Evidence was concluded on May 7, 2019, and the Court heard closing arguments telephonically on May 9, 2019. For the reasons set forth below, the motion is denied. McCallan shall remain in custody until further order of this Court.
This case has generated a daunting amount of case history. The two most complete summaries may be found in the Court's Memorandum Decision of February 16, 2016 (Doc. 361), reported at 545 B.R. 675 (Memorandum Decision of trial on the merits); and its Memorandum Decision dated May 23, 2018 (Doc. 707), reported at 2018 WL 2373639 (Memorandum Decision concerning McCallan's contempt hearing which was held January 30-31, 2018). A common theme which runs through all of this is McCallan's dishonesty and his obstinance. He cheated thousands of consumers out of more than $100,000,000. During the discovery phase of trial, McCallan repeatedly lied about and concealed the business records of AmeriCorp. Since judgment has entered, he has stonewalled and lied to the Trustee about the existence of his assets to avoid paying his creditors. The most recent hearing, on May 6-7, 2019, is more of the same.
The contempt proceedings, through January 31, 2018, are summarized in this Court's May 23, 2018 Memorandum Decision. (Doc. 707). A few points are worth revisiting. Between the date of judgment, which was February 16, 2016, and January 31, 2018, which was the date of the evidentiary hearing giving rise to the May 23, 2018 Memorandum Decision, a period of about two years, the Court entered 14 orders and held four evidentiary hearings in an effort to get McCallan to comply with his obligation to provide post-judgment discovery. (Doc. 707, p. 3). McCallan was first held in contempt of court, for his failure to respond to post-judgment discovery, on October 6, 2016. (Doc. 396). He was not incarcerated until October 23, 2017, a year later, after another evidentiary hearing. (Doc. 583-Order; Doc. 594, pp. 224-27-Transcript). The basis of the contempt order was McCallan's failure to respond to discovery and to disclose his assets. (Doc. 583).
Several examples of McCallan's misdeeds are as follows:
1. The October 24, 2017 Order scheduled a hearing for November 6, 2017. On the eve of the November 6, 2017 hearing, McCallan's lawyers disclosed that they would be making a massive supplement to the prior disclosures. The Court lamented that there was yet another last minute "document dump" engineered by McCallan and his lawyers in an effort to surprise the Trustee and her lawyers. The Court set another hearing for November 16, 2017 to review this newly promised production. (Doc. 587-Order dated November 7, 2017).
2. On November 14, 2017, two days prior to the scheduled November 16, 2017 Hearing, McCallan produced additional documents-another document dump. In light of the fact that production was not yet complete, the Court scheduled a telephonic hearing for January 9, 2018. (Doc. 592). An evidentiary hearing was scheduled for January 30, 2018. It was that hearing which yielded this Court's Memorandum Decision of May 23, 2018. (Doc. 707). After all of these proceedings, McCallan's counsel announced at the January 30, 2018 Hearing that "we have no presentation, we just have rebuttal . . . we have nothing to present at this time." (Doc. 636, p. 6). Following the January 30-31, 2018 evidentiary hearing, the Court made detailed findings of fact, ultimately finding that McCallan had failed to purge himself of contempt. (Doc. 707, pp. 17-35).
3. The Court conducted yet another evidentiary hearing on May 24-25, 2018. (Docs. 715-16-Transcripts of proceedings). The Court again concluded McCallan had failed to purge himself of contempt. (Doc. 709-Order). One of the more surprising pieces of testimony was McCallan's admission that he had given $800,000 to Robert Sanfilippo in 2015 to "invest" for him. (Doc. 715, p. 150). The Trustee has now brought suit against Robert Sanfilippo in an effort to recover money transferred to him by McCallan. Adv. Pro. 18-3091. In addition, the Trustee has brought Adversary Proceedings against Jeanne McCallan, Timothy McCallan's wife, Adv. Pro. 18-3084; Peter McCallan, Timothy McCallan's brother, Adv. Pro. 18-3089; and Vanessa Vinicombe, Adv. Pro. 18-3092. While these Adversary Proceedings are yet to be resolved, the Trustee has brought suits for more than $10,000,000 based upon documents and evidence obtained from McCallan, after he claimed he had nothing more to produce.
The May 6-7, 2019 evidentiary hearing is responsive to McCallan's January 4, 2019 Motion to Release. (Doc 787). To understand McCallan's January 4, 2019 Motion (Doc. 787), one must return to the conclusion of the May 25, 2018 hearing, where the Court found that McCallan had filed complete responses to the post-judgment discovery. (Doc. 716, pp. 216-17-Transcript of Proceedings held May 25, 2018). The following are excerpts from the Court's May 25, 2018 oral ruling.
(Doc. 716, pp. 216-17)(citing in part the District Court's Order of March 29, 2018).
The Court goes on to discuss at length the analysis done by Alan Carrol, the Trustee's forensic accountant at Exhibit 257, which proves that McCallan has concealed $16.2 million in assets. In addition to the $16.2 million, $1.82 million in unreported income, of which the Court was not previously aware, was turned up at the May 24-25 hearing. Moreover, $3.2 million was shown to have been accumulated by McCallan prior to the time period covered by the Carrol analysis. (Doc. 716, pp. 218-19). Adding the $3.2 million and the $1.82 million, the total becomes $21,220,000 in undisclosed assets.
The underpinning of McCallan's contempt changed during the May 24-25, 2018 hearing. Prior to May 24, 2018, the basis of McCallan's contempt was his failure to respond to discovery, as well as his failure to disclose assets. McCallan provided responses to the discovery at the May 24-25 hearing. The problem is that while he provided responses to the discovery, the evidence produced at the May 24-25 hearing showed, by a preponderance of the evidence, that McCallan was continuing to hide assets from the Trustee and from the Court. This is more than a paper chase. McCallan is required to disclose his assets for the express purpose of assisting the Trustee in collecting her judgment against him. McCallan was found to be concealing assets at the May 24-25, 2018 hearing.
Following the May 25, 2018 hearing, the Court entered an order on May 29, 2018, which provided as follows:
McCallan states, in Paragraph 8 of his January 4, 2019 Motion, that:
However, also within the January 4 Motion, McCallan acknowledges that he did not produce to the Trustee, until October 23, 2018, data held on its MAS 200 software, that had been held by Creative Networks Innovations, Inc. (Doc. 787). This admission, by itself, justifies McCallan's continued incarceration because it demonstrates that McCallan continues to produce documents and information in response to his incarceration. The more rapidly he produces documents and information, the sooner he will be released from custody.
The recent production of the MAS 200 software to the Trustee is one of the latest in a long series of galling misrepresentations by McCallan and his lawyers. In Paragraph 11 of the January 4, 2019 Motion, McCallan alleges "11. To further his assertions, the McCallan team requested the servers that were confiscated by the Trustee prior to judgment." This statement is patently false. McCallan has possession of his servers and they were never confiscated by the Trustee. In Paragraph 12 of the Motion, McCallan alleges:
The Court made an effort to clear this up prior to the hearing when it asked the following of McCallan's lawyer Michael Fritz.
(Doc. 803, pp. 11-12).
When the Trustee's lawyer examined Kellie Eckstein, McCallan's bookkeeper, the story changed considerably.
(Doc. 803, pp. 150-51).
Thus, the factual underpinning alleged by McCallan in his January 4, 2019 Motion was false. To begin, the Trustee did not seize anything. McCallan's suggestion that he is being held in jail because he cannot rebut the Trustee's assertions and the Alan Carrol analysis is patently false. Moreover, as Eckstein testified, McCallan had the MAS 200 accounting program for "many, many, many years." The reason it was not produced was not, as McCallan suggests because the Trustee had seized it and she was keeping it from him, rather McCallan has known all along about the MAS 200 program and withheld that information from the Trustee. This is in the face of repeated demands by the Trustee for documents and evidence as to McCallan's business activities.
McCallan also misstates the reason for his continued incarceration in his January 4, 2019 Motion. He argues that he produced documents and responded to discovery at the May 24-25 hearing, and that his incarceration after that time is unlawful. He ignores the Court's finding that he continues to hide assets-the real reason for his incarceration. (Doc. 709, Order dated May 29, 2018, "McCallan was continuing to hide and secrete assets and that he had not truthfully disclosed the existence and location of his money and other valuable property.")(Doc. 771, Order dated October 2, 2018, entitled "Order Governing Defendant Timothy McCallan's Efforts to Purge Himself of Contempt," stating "In the Court's view, McCallan should offer evidence to show what efforts he has made to repatriate funds held outside the United States and those efforts to secure funds of his held by others."). Any professed bewilderment on McCallan's part, contending that he does not understand why he is being held in custody is, like everything else he has done to date in this Court-a sham.
On January 11, 2019, in response to McCallan's January 4, 2019 Motion, the Court entered an order which provided, in part, as follows:
The purpose of the January 11, 2019 Order was to set out why the Court was having McCallan held in custody and to give him fair notice of what he must do to secure his freedom. Because McCallan has failed to purge himself of his contempt, he remains incarcerated.
McCallan has been incarcerated on a finding of civil contempt of court. "A party seeking civil contempt bears the initial burden of proving by clear and convincing evidence that the alleged contemnor has violated an outstanding court order." Commodity Futures Trading Comm'n v. Wellington Precious Metals, Inc., 950 F.2d 1525, 1529 (11th Cir. 1992), cert. denied 506 U.S. 819 (1992). The Trustee must prove, by clear and convincing evidence, that: (1) the allegedly violated order was valid and lawful; (2) the order was clear and unambiguous, and (3) the alleged violator had the ability to comply with the order. Securities and Exchange Comm'n v. Greenberg, 105 F.Supp.3d 1342 (S.D. Fla. 2015).
There are numerous orders under which McCallan has been held in contempt. A good example is this Court's Order of May 23, 2018. "The evidence shows and the Court finds that McCallan has secreted millions of dollars' worth of money and property in locations presently unknown to the Trustee. Until he discloses all of his property and turns over all of his ill-gotten gains, he remains in contempt." (Doc. 707, pp. 34-25). A more recent order was entered on January 11, 2019, which provides as follows:
Addressing the three requirements set out above, the Court first finds that its orders are valid and lawful. Indeed, for all of the arguments raised by McCallan over the past several years, he has never argued that this Court does not have the authority to supervise the collection of a judgment. Second, notwithstanding McCallan's protestations to the contrary, the orders under which he are held are clear and unambiguous. He must turn over his money and property-less any amounts which are determined to be exempt. The orders are clear. One should bear in mind that this is not a case where a debtor has turned over a significant amount of money and property-claiming that is everything I have, yet the Trustee wants still more. In this case, McCallan has completely stonewalled the Trustee. The third prong of the test, that he has the ability to comply with the Order, is plainly in dispute. McCallan claims he has nothing to turn over, but the Court has found to the contrary. This is a disputed fact which has been found against McCallan. The Court would welcome candor on McCallan's part. The money the Trustee's forensic accountant has determined that McCallan has secreted may well have been dissipated, at least in part. But he must show what he has, what he had, and where it went. Until McCallan is willing to be forthcoming, he will remain in contempt.
McCallan has been secreting assets for years. On Friday, October 7, 2016, the Trustee filed a Request for Entry Upon and Inspection of Premises, seeking an inspection of McCallan's property at 6730 Still Point Drive in Melbourne, Florida and requested that the Court enter an order prohibiting McCallan from removing personal property or allowing it to be removed. On Monday, October 10, 2016, the Trustee filed a Process of Garnishment to Wells Fargo Bank seeking money and property for the satisfaction of the February 2016 judgment against McCallan. (Doc. No. 300). On Tuesday, October 11, 2016, before the Process of Garnishment could be served on Wells Fargo, McCallan obtained a cashier's check from Wells Fargo in the amount of $388,285.14, which he withdrew from his account ending 0716. (Transcript of March 27, 2017 Hearing, page 38, lines 16-20). On October 10 and 11, 2016, the Trustee filed her Second and Third Post-Judgment Requests for Production to McCallan, respectively. (Doc. Nos. 399 and 407).
McCallan is in contempt of court because he has failed to turn over his money and property to the Trustee. The judgment against McCallan is for more than $100,000,000. To be clear, McCallan has not been found in contempt because he has not paid the full $100,000,000. Rather, he must pay over what he has-less any allowed exemptions.
To understand McCallan's contempt, one must understand the analysis prepared by the Trustee's forensic accountant Alan Carrol. While the Trustee, with Carrol's help, has produced a raft of analyses, the Court has focused on Trustee's Exhibit 257, as a good summary of where this case presently sits.
To begin, Carrol selected a 9-year period-the years 2007 to 2015. The first number in the analysis for each year is identified as "Distributions and Wages." The wages are taken from IRS Form 1040's filed by McCallan during those years. The distributions are amounts identified by Carrol as having been distributed to McCallan by 11 corporations found by the Trustee to have been controlled by McCallan. These amounts are detailed on page 2 of Exhibit 257. The distributions from the corporations are not taxable income, therefore the Trustee is not guilty of double counting money paid to McCallan. The "Distributions and Wages" line on Exhibit 257 is amounts known to have come into the possession of McCallan. From these amounts, for each year, Carrol deducted payments of State and Federal taxes, adding back refunds, arriving at an amount of cash actually available to McCallan, after the payment of taxes.
Carrol next conducted an in depth examination of McCallan's lifestyle. From this examination, Carrol concluded that McCallan spent an average of $422,595 per year over the 9-year period. That is, Carrol deducted from the cash available to McCallan, from wages and distributions, $422,595, giving him credit so to speak for spending this money to live-meaning that it was not available to have been saved or secreted. One should bear in mind that this $422,595 figure for living expenses is after taxes. One would have to earn considerably more than that after tax liabilities are considered.
After deducting the $422,595 per year, or $3,803,355 over the nine-year period, Carrol also deducted another $2,311,498 for purchases made by McCallan during that time frame. McCallan spent $2,261,998 for his home in Melbourne, Florid and he deposited another $49,500 into IRA accounts. These amounts were also deducted from the amount available to McCallan. Once these deductions were made, one is left with $16,251,649, which is the amount the Trustee contends has not been accounted for, meaning that McCallan has secreted this money.
The Court would point out that Carrol also factored in 5% for assumed growth of the funds over time. If one factors 5% for assumed growth, the $16,251,649 grows to $21,942,042. The Court does not adopt this portion of the Carrol analysis for two reasons. First, as it is supposed that McCallan is hiding this money, he may well not be able earn any interest or return on it. Second, the Trustee has not found any evidence of McCallan actually earning any of this supposed 5% return. This $16,251,649 ($16.2 million rounded for convenience) has not been identified as any known fund. Rather, its existence if inferred from a wealth of evidence. While the Court has inferred the existence of the $16.2 million based upon a mountain of evidence, it is unwilling to infer earnings on amounts that are themselves inferred.
Before leaving the Carrol analysis, the Court will discuss why it almost certainly underestimates the cash available to McCallan. First, it begins with amounts reported by McCallan to the Internal Revenue Service. While tax returns will in many cases provide an accurate picture of someone's financial situation, this depends on the honesty of the person who files the tax returns. In this case, McCallan is known, by his own admission, to have had in the past, large cash hoards. In addition, he is known to have dealt in large quantities of gold coins, buying and selling, yet not reporting trading profits to the Internal Revenue Service. One may only speculate as to the amount of the understatement; the Court is certain that the amount is not zero. Therefore, the Carrol analysis is necessarily low by some, as of yet, undeterminable amount.
Second, the Carol analysis does not account for any amounts prior to 2007. Yet, it was later learned that McCallan's net worth was at least $3.2 million on January 1, 2007. McCallan was known to have been in business for many years prior, yet that was all disregarded, to his benefit.
McCallan has mad several attempts to rebut the Carrol analysis, most recently at the evidentiary hearing held on May 6-7, 2019. One should bear in mind that McCallan is a highly sophisticated individual who has been in business for 20 years or more, much of perpetrating fraud of one stripe or another. He has fleeced thousands of victims of more than $100,000,000. Any argument to the effect that he is not financially sophisticated or does not understand these proceedings is rejected.
To rebut the Carol analysis, McCallan must show where money the Trustee has placed in his hands, actually went. Of course, if it is hidden in off-shore bank accounts the Trustee will insist he return it before getting out of jail. Secondly, if it is held by others, such as his wife Jeanne, his brother Peter, his former CFO Vanessa Vinicombe, his friend Robert J. SanFilippo, or others not yet identified by the Trustee, she will no doubt insist that the money be returned before she agrees to request McCallan's relase. In sum, the Trustee has placed $16.2 million (or more) in McCallan's hands and he has not explained where it went.
At the May 6-7 Hearing, McCallan called bookkeeper and friend Kellie Eckstein, who prepared her own analysis, which McCallan contends explains everything and should result in him being released from jail. The Trustee prepared a detailed analysis showing why the Eckstein analysis was incorrect. (Doc. 806, pp. 50-51). The Court will focus on one flaw, which the Court considers so egregious as to preclude any further serious consideration of it. Eckstein identified $14 million in transfers, which she contends explains the bulk of the money. However, further analysis shows that she did nothing more than count money transferred from one bank account controlled by McCallan to others also controlled by McCallan. This shifting of money from one account to another proves nothing. For this reason, the Eckstein analysis is not only flawed, but laughable. Just as moving money from one pocket to another results in no substantive change, so does a transfer from one account to another. The Court is not fooled by McCallan's game of Three Card Monte.
In addition to the game of Three Card Monte, Eckstein's analysis was discredited in more subtle ways. For example, Eckstein deducted $1.4 million for cash withdrawals, assuming without any evidence that the money was spent. Second, coin and metal purchases of $920,000 were deducted improperly. Instead, that money was almost certainly secreted rather than consumed. Third, Eckstein deducted $4.76 million for "checks posted" without any proof of where the money went-yet another shell game. Fourth, money loaned was deducted improperly. Ordinarily, when money is loaned, cash in the bank is decreased but it is replaced by a note or an account receivable. If one asset is substituted for another, there is no explanation as to where the money went. (Doc. 806, pp. 50-51).
The Trustee undercut McCallan's claim that he has purged himself of contempt by showing that McCallan's family has not noticeably changed their lifestyle. In the Carrol analysis, it is assumed that the McCallan family is living on $422,000 per year, after taxes. Further evidence of a lifestyle significantly above what McCallan has claimed in Bankruptcy Court filings is shown in the Trustee's cross examination of Jeanne McCallan:
(Doc. 803, pp. 45-47)(Hearing held May 6, 2019)(bracketed matter added for clarity).
Jeannie McCallan had no plausible answer to that question. That is, the McCallan's are not only living in a multi-million dollar waterfront home, driving expensive late model automobiles and generally living a lifestyle one associates with the well-to-do, but they have paid $200,000 in private school tuition, all at a time when they have reported earning virtually no income and owning no assets. This undercuts any argument that McCallan makes that he has purged himself of contempt.
McCallan claims that he does not have any money or property to turn over to the Trustee and, for that reason, should be released from custody. The Court has conducted numerous hearings both evidentiary and non-evidentiary, heard days of oral testimony and considered countless documents, all to the effect that it has concluded that McCallan's claim is false. In fact, the Court concludes that McCallan has significant undisclosed assets which he continues to hide from the Trustee.
McCallan has not made an argument that even if he has money and property, the coercive effect of imprisonment will not compel him to turn over his money, and for that reason he should be released. Notwithstanding the fact that McCallan has not made the argument, the Court will consider it. In a case similar to the case at bar, where a bankrupt was imprisoned to compel him to turn over assets, the Eleventh Circuit provided the following guidance.
Lawrence v. Goldberg (In re Lawrence), 279 F.3d 1294, 1300-01 (11th Cir. 2002).
In observing this admonition, the Court is of the view that McCallan's incarceration continues to serve a coercive effect. All of the documents produced to date have been produced by McCallan, pursuant to tactical "document dumps" in response to either threatened or actual findings of contempt. The original "document dump" which produced a substantial portion of AmeriCorp's database, which for two years had been concealed, was made in June of 2013, after more than two years of acrimonious discovery disputes which, at one point, has resulted in McCallan's first incarceration. Most recently, in November of 2018, McCallan engineered another document dump in an effort to secure his release. (Doc. 780). The Trustee has filed 10 Adversary Proceedings in an effort to collect from McCallan. See, Adv. Pro. Nos. 18-3084, 89, 91, 92, 94, 95, 96, 97, 98, and 99. The impact of McCallan's November 2018 document dump on the 10 enumerated Adversary Proceedings has yet to be demonstrated, and may never be demonstrated definitely, but the Trustee's possession of these documents will limit available defenses which could otherwise be raised by the Defendants in those Adversary Proceedings. For this reason, the Court finds that McCallan's incarceration continues to serve a coercive effect.
The Court has a hearing scheduled for September 17, 2019, on McCallan's motion for immediate release. (Doc. 810-McCallan's Motion; Doc. 811-Court's Order to Show Cause). In the event McCallan is not released pursuant to his motion, the Court will consider whether there is a continued coercive effect to incarcerating McCallan. At the September 17, 2019 hearing, the Court will: (1) call upon the Trustee to make a showing as to her view as to whether McCallan's incarceration has any continuing coercive effect, and (2) offer McCallan an opportunity to offer evidence or make an argument to his views on this question, separate from his contention that he has produced everything.
The burden is on McCallan to prove that he has purged himself of contempt. He has not done so. First, he has failed to rebut the Carrol analysis, which proves he has secreted at least $16.2 million and probably more than $20 million. Second, he lives a lifestyle which is totally inconsistent with his claims that he has only minimal income and property. Third, McCallan has been lying to this Court for years. The pace and the brazenness of his lies is unabated. As set forth above, the Court has found that McCallan's continued incarceration continues to serve a coercive purpose and that it is not merely punitive. For these reasons, McCallan's January 4, 2019 Motion is denied and he shall remain in custody until further order of this Court.
