MARK E. FULLER, District Judge.
This bankruptcy appeal by Chapter 7 Debtor David Benton Dorsey ("Dorsey") and his non-debtor wife Karmen M. Dorsey ("Karmen") raises three issues: (1) the propriety of the Bankruptcy Court's denial of discharge to Dorsey, pursuant to 11 U.S.C. §§ 727(a)(2), (a)(3), and (a)(4); (2) the propriety of the Bankruptcy Court's conclusion that three transfers of real property to Karmen were fraudulent and, thus, avoidable under § 544(b); and (3) whether the Bankruptcy Court erred in concluding that Karmen was not entitled to a credit for value given under Ala. Code 8-9A-8(d). The bankruptcy court is due to be
This is a core proceeding over which appellate jurisdiction is exercised. See 28 U.S.C. § 158(a) (granting district courts jurisdiction to hear appeals "from final judgments, orders, and decrees . . . of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges under section 157 of this title"); § 157(b)(2)(I). Venue is proper because an appeal "shall be taken only to the district court for the judicial district in which the bankruptcy judge is serving." Id.
"Factual findings by the bankruptcy court are reviewed under the limited and deferential clearly erroneous standard." In re Club Assocs., 951 F.2d 1223, 1228 (11th Cir. 1992); see also In re Jet Fla. Sys., Inc., 861 F.2d 1555, 1558 (11th Cir. 1988) ("When the district court has affirmed the bankruptcy court's findings . . . we will apply the clearly erroneous doctrine with particular rigor."). The district court examines the bankruptcy court's legal conclusions de novo. In re Celotex Corp., 613 F.3d 1318, 1322 (11th Cir. 2010); see also Fed. R. Bankr. P. 8013.
The Bankruptcy Court entered a through and well-reasoned thirty page opinion on June 8, 2011. (Mem. Op. (Doc. # 3-44).) In that opinion, the Bankruptcy Court made factual findings and credibility determinations after a bench trial, and based upon those factual findings, concluded that a denial of discharge to Dorsey was appropriate under §§ 727(a)(2), (3), and (4). The Bankruptcy Court also concluded that Dorsey's three property transfers to his wife, Karmen, were done with the actual intent to hinder, delay, and defraud his creditors under Ala. Code § 8-9A-4. At the same time, the Bankruptcy Court concluded that constructive fraud was present as well for these transfers, Ala. Code § 8-9A-5. Given these findings, the Court decided that the transfers were subject to the Trustee's avoidance power under 11 U.S.C. § 544(b).
Having reviewed the Bankruptcy Court's factual findings for clear error and legal conclusions de novo, this Court concludes that nothing need be added to the Bankruptcy Court's opinion. Accordingly, this Court adopts the opinion as its own, and attaches it as Exhibit A to this Order.
The Bankruptcy Court addressed the issue of whether Karmen was entitled to a credit for value given under Ala. Code 8-9A-8(d) in a subsequent order. (Doc. # 3-48, at 4-8.) Section 8-9A-8(d) states:
Id. (emphasis added).
The Bankruptcy Court first determined that Karmen was not a "good-faith transferee" for purposes of § 8-9A-8(d). The Alabama Supreme Court has indicated that it is proper to look to other jurisdictions' interpretations of the Uniform Fraudulent Transfer Act ("UFTA") in construing Alabama's version. Horton v. Alexander, 977 So.2d 462, 465 (Ala. 2007). The Bankruptcy Court cited a Northern District of Georgia bankruptcy case construing Georgia's UFTA, wherein that court stated:
In re Christou, Bankr. Nos. 06-68251MHM & 06-68376MHM, 2010 WL 4008167, at *3 (Bankr. N.D. Ga. Sept. 24, 2010) (citations omitted). In addition, many courts have concluded that the UFTA good faith standard is identical to that in § 548(c) of the Bankruptcy Code. See Herup v. First Boston Fin., LLC, 162 P.2d 870, 874 n.15 (Nev. 2007) (collecting cases). That standard is almost identical to the one used by the Bankruptcy Court in this case. See, e.g., In re World Vision Entm't, Inc., 275 B.R. 641, 659 (Bankr. M.D. Fla. 2002).
Given the factual circumstances, reviewed for clear error, found to exist by the Bankruptcy Court concerning Karmen's level of knowledge of Dorsey's business affairs, including the impending or pending Tommy Andrews lawsuit, this Court is not in a position to disagree with the Bankruptcy Court's finding that Karmen was not a good-faith transferee within the meaning of § 8-9A-8(d).
The Bankruptcy Court also determined that, even if Karmen was a good-faith transferee, she nevertheless would not qualify for a credit under § 8-9A-8(d) because she failed to prove that the payment was "`as a consequence of the debtor's making such transfer.'" (Doc. # 3-48, at 6 (quoting Ala. Code § 8-9A-8(d).) This is a factual question reviewed for clear error. The Bankruptcy Court emphasized: (1) that Karmen was obligated to pay the mortgage irrespective of the transfer; and (2) that the payment was made thirteen months after the transfer from Dorsey. It was not clear error for the Bankruptcy Court to have concluded that Karmen's mortgage payment was not a consequence of Dorsey's transfer of the property to her.
For the foregoing reasons, it is ORDERED that the bankruptcy court is AFFIRMED. The Clerk of the Court is DIRECTED to terminate this appeal and close this case number. The case is REFERRED back to the Bankruptcy Court.
This Adversary Proceeding came before the Court for trial on February 2-3, 2011. At the conclusion of the trial, the Court requested Proposed Findings of Fact and Conclusions of Law from the parties, which have been filed. (Docs. 39, 40). For the reasons set forth below, judgment is entered in favor of Plaintiff Susan S. DePaola and against Defendants David Benton Dorsey and Karmen M. Dorsey. Defendant David M. Dorsey, the Debtor in the underlying Chapter 7 bankruptcy case is denied a discharge pursuant to 11 U.S.C. §§ 727(a)(2), (3) and (4). In addition, the transfers of three parcels of real property are avoided pursuant to 11 U.S.C. § 544(b) and Alabama Code §§ 8-9A-4 and 8-9A-5. The Court will further order a sale of the joint property pursuant to 11 U.S.C. § 363(h), with the proceeds to be apportioned as set forth herein. The Court will retain jurisdiction over this matter to supervise the sale of the property and the further administration of the estate.
The Court will divide its discussion of the facts of this case into two parts. In Part I(A), the Court will discuss the proceedings which took place during the pendency of the Debtor's Chapter 7 bankruptcy case. In Part I(B), the Court will discuss transfers of Dorsey's interest in three separate parcels of real property to his wife, co-defendant Karmen Dorsey.
On June 12, 2009, David Benson Dorsey (Dorsey) filed a petition in bankruptcy pursuant to Chapter 7 of the Bankruptcy Code. (Case No. 09-11157, Doc. 1.).
Dorsey is 48 years old and a graduate of Troy State University. He has been involved in various trucking business most of his adult life and is knowledgeable about business matters, particularly the financing and leasing of semi-trucks and trailers and the trucking business. He has been married to co-defendant Karmen Dorsey for 20 years and they have three children. Dorsey and Karmen reside in Dothan, Alabama, having lived there since the year 2000. Dorsey and Karmen have resided together their entire married life and have never separated or filed for divorce. Karmen has a college degree, also from Troy State University and is a school teacher. After the Dorsey's first child was born in 1993, Karmen quit teaching school and stayed home to raise the children. Karmen began working, again as a school teacher, in August of 2009 as a result of financial difficulties resulting from Dorsey's business failure. Karmen was not employed outside the home between 1993 and August of 2009. (Tr. 304-07).
Dorsey filed Schedules and Statements with his bankruptcy petition. (Pl. Ex. 1) (09-11157, Doc. 1). In Schedule B, Dorsey listed a boat, which he valued at $6,000. Schedule B calls for the Debtor to disclose the location of the property, but he failed to do so. On Schedule D, Dorsey represented that an individual named Teddy Vaughan held a security interest in the boat, which secured an indebtedness of $12,000. Thus, Dorsey disclosed ownership of a boat but claimed that it was subject to a security interest in favor of Teddy Vaughan, a lifelong friend of Dorsey.
Dorsey gave testimony at a meeting of creditors conducted by chapter 7 Trustee Daniel Hamm (Hamm) on September 3, 2009. (Pl. Ex. 40). In response to Hamm's inquires, Dorsey testified under oath that there was a lien against the boat. (Pl. Ex. 40, p. 16). The following exchange took place between Trustee Hamm and Dorsey's lawyer Matt Brunson.
(Pl. Ex. 40, pp. 16-17).
Susan DePaola was later substituted as Chapter 7 Trustee in place of Hamm and a second meeting of creditors was held on October 9, 2009. DePaola followed up:
(Pl. Ex. 41, pp. 32-33).
On October 12, 2009, DePaola wrote Brunson, stating, in part, as follows:
(Pl. Ex. 39).
DePaola also wrote Brunson again on January 14, 2010, requesting again that Dorsey either deliver proof that Teddy Vaughan held a security interest in the boat or that the boat be delivered. Incredibly, Brunson did not respond and DePaola wrote a third time on March 23, 2010. On April 7, 2010, Brunson finally responded, promising to deliver the boat. (Pl. Ex. 39). Notwithstanding Brunson's promise, Dorsey failed to deliver the boat and the Trustee filed a motion with the Court. (09-11157, Doc. 67) (Pl. Ex. 39). On June 16, 2010, the Court ordered Dorsey to turn the boat over to DePaola. (09-11157, Doc. 73). The boat was sold at auction for only $1,900. (09-111157, Doc. 80). Teddy Vaughan was the high bidder at the auction.
At trial, DePaola inquired as to Dorsey's reasons for withholding the boat.
(Tr. p. 173). This testimony from Dorsey is patently false. Dorsey knew that the Trustee made repeated demands for the boat over a period of almost 10 months. Dorsey actively concealed the boat from the Trustee and testified falsely at trial. Moreover, Dorsey admitted that the boat had been vandalized while he was withholding it from the Trustee. (Tr. p. 174). The estate was harmed in that the missing items depressed the value of the boat. The most logical inference to be drawn from all of this is that Dorsey removed items from the boat and Teddy Vaughan later purchased the boat at auction, at a depressed price, all to the detriment of the estate.
The Court heard the testimony of Dorsey at trial. Having considered his demeanor the Court finds that Dorsey is not credible and that he willfully misrepresented facts concerning a lien on the boat. The testimony given by Dorsey at the meetings of creditors and the representations in his schedules were false and known by him to be false. These false statements were made intentionally by Dorsey with the intention to deceive the Trustee Dorsey attempted to defraud the estate by testifying falsely that the boat was encumbered by a security interest in favor of Teddy Vaughan.
What is particularly troubling here is that Matthew Brunson, Dorsey's lawyer falsely stated to Trustee Hamm that he had seen a UCC-1 relating to the boat, when in fact no UCC-1 was ever in existence. Brunson made repeated promises to produce the document, which he claimed that he had seen. When Trustee DePaola followed up, Brunson, together with Dorsey, stonewalled the Trustee. Brunson's statement was particularly harmful here because Brunson should have investigated Dorsey's claim of giving a security interest to a boyhood friend before he listed Vaughan as a secured creditor on Schedule D; a document was filed with the Court under oath. It clearly was both Dorsey and Brunson's intention that the Trustee would rely on this false claim of a security interest so as not to pursue the boat.
Dorsey reported on his initial and amended schedules that he only had two checking accounts: one with balance of $2,500 at CB&T and one with Regions Bank with a balance of $150. (Pl. Ex. 1, p. 9) (Sch. B). At trial, DePaola produced evidence of bank statements proving the inaccuracy of Dorsey's initial and amended schedules. First, Dorsey listed only one account with Regions, however he had two: one just in his name, account no. xxx-xxx-667-3 (Regions account 1), (Pl. Ex. 48, p. 413), and a second joint account with his wife, account no. xxx-xxx-692-8, (Regions account 2). (Pl. Ex. 49, p. 473). At the time of filing his petition, neither account had a balance of $150.00. Rather, the statement for Mar. 19, 2009 to June 17, 2009 for Regions account 1 shows a beginning balance of $197.70 and an ending balance of $187.93. There were no deposits or withdrawals, only $0.23 of earned interest. (Pl. Ex. 48, p. 417).
The Regions account 2 does not provide Dorsey any help in explaining his schedules either. On a statement for May 27, 2009 through June 25, 2009, page 3 has a section called "Daily Balance Summary." In that section, it shows that Regions account 2 had a balance of $281.65 on June 12, 2009, the date Dorsey filed his petition. (Pl. Ex. 49, p. 475). At no point was this account even close to $150.00 on the days immediately before or after Dorsey filed his petition.
With regards to the CB&T account, account number xxx-xxx-703-4, the schedules state generally that a CB&T account had a balance of $2,500 on the date of petition. As CB&T account 703-4 is the only one the Trustee has evidence of, the Court assumes this is the account Dorsey disclosed in his schedules. If account number xxx-xxx-703-4 is the account, then Dorsey again misstated his financial affairs. On the last statement for this account prior to filing, dated June 9, 2009 (three days before filing), Dorsey had a balance of $5,793.92. (Pl. Ex. 46, p. 359). On page three on the following months summary, there is also a "Daily Balance Summary" and it shows that on June 12, 2009, the petition date, Dorsey had $3,233.96 in the CB&T account.
The Court finds the omissions and inaccuracies troubling for a variety of reasons. First, in this day in age and with the prevalence of electronic banking, an experience businessman like Dorsey should have been able to determine the current balance of his accounts. Second, even though technology makes accuracy possible, the Court recognizes mistakes happen, but Dorsey never corrected his mistakes, including never adding the third account (Regions account 2). The Court wonders, if it can figure out Dorsey's three bank accounts and balances as of the date of the petition more than two years later, how come Dorsey could not do it himself? The Court heard testimony from Dorsey and observed his demeanor at trial. Considering all relevant evidence, the Court finds that Dorsey willfully misrepresented his bank account information and thereby converted property of the estate.
On Schedule B, Dorsey disclosed that he owned an account with Wachovia Securities which he valued at $75,000. On Schedule C, Dorsey claimed that account as exempt as an IRA pursuant to 11 U.S.C. § 522(b)(3) and Alabama Code § 19-3-1. Trustee Hamm requested copies of the IRA statements at the September 3, 2009 meeting of creditors.
(Pl. Ex. 40, p. 12).
DePaola took Dorsey's deposition on July 15, 2010, and made inquiry into these matters:
At trial, DePaola again asked Dorsey about the IRA and about the securities.
(Tr. pp. 150-51). A few minutes later DePaola broached the subject again after confronting Dorsey with a financial statement disclosing ownership of security accounts.
(Tr. p. 176-77). In fact, Dorsey had been asked for statements and documents relating to these securities by Trustee Hamm on September 3, 2009, by Trustee DePaola on October 9, 2009, and again by Trustee DePaola at Dorsey's deposition on July 15, 2010. Dorsey has failed to provide documentation showing either the disposition of the securities or their existence in a valid IRA account. Based upon this, the Court concludes that Dorsey has concealed property of the estate with a value of more than $200,000. Despite repeated requests, Dorsey has not, to this day, produced the requested statements and has thereby concealed these accounts from the Trustee.
On the face of a petition in bankruptcy, the debtor must indicate the "nature of debts." Two check boxes are provided. Notwithstanding the fact that the schedules clearly show that Dorsey's debts are overwhelmingly business in nature, Dorsey nonetheless checked the "consumer" box. (09-11157, Doc. 1). This representation is patently false, and was known by Dorsey to be false at the time he made the statement.
Question No. 18(a) of the Statement of Financial Affairs poses the following question:
(09-11157, Doc. 1). In response to this question, Dorsey replied "None." In fact, Dorsey was employed full time running various trucking businesses in which he owned an interest. At trial, Dorsey testified at great length about his activities and various business interests, many of which took place during the six years prior to the date of the petition, within the scope of Question No. 18. During the relevant time frame, Dorsey engaged in the trucking business in Dorsey Trailer Leasing, Inc., and One Source Transportation, Inc. Dorsey's response to Question No. 18 in the Statement of Financial Affairs was false and known by him to be false at the time he made the statement.
The following exchange between Dorsey and DePaola took place at the meeting of creditors on October 9, 2009.
(Pl. Ex. 41, pp. 9-10). The record is replete with nonresponsive and outright false answers. One example will suffice here. On September 3, 2009, Trustee Hamm asked about DTA Trucking.
(Pl. Ex. 40, p. 13).
At trial, on February 2, 2011, Trustee DePaola asked again about DTA Trucking.
(Trial Tr. 16-17). At trial, Trustee DePaola confronted Dorsey with a verbatim quote from his earlier testimony at a meeting of creditors. Dorsey denied his earlier testimony, making nonresponsive answers. The Trustee asked about DTA and Dorsey responded with testimony about Dave's Trucking, a separate entity, attempting to confuse the issues. Furthermore, Dorsey resorted to one of his usual ploys by making nonsensical arguments about assumptions that have clearly not been made. The exchange set forth in this note is typical of responses made by Dorsey. That is, he did not simply misstate or prevaricate on one occasion, rather this was a pattern that repeated itself through hours of testimony.
Dorsey was similarly argumentative and evasive throughout the meetings of creditors, as well as at trial. Having filed false schedules with the Court, Dorsey compounded his misdeed by stonewalling the Trustee at the meeting of creditors. Dorsey willfully concealed his business interests and knowingly and intentionally misrepresented the same in his response to Question No. 18 of the Statement of Financial Affairs. At trial, Dorsey was evasive and hostile to the Trustee. (Trial Tr. p. 16-). To this day, Dorsey still has not disclosed his various business interests with any degree of candor.
Dorsey submitted a financial statement supplied to Corporate Billing in which Dorsey claimed to own personal property of a value of $150,000, in addition to the securities which are referenced in Part I(A)(5) above. (Pl. Ex. 22). When Dorsey filed bankruptcy sixteen months later, he reported owning personalty of a value of only $1,100, consisting of clothing, watch, wedding ring, a .22 cal. rifle and the ill-fated boat discussed in detail in Part I(A)(2) above.
At the September 3, 2009 meeting of creditors, Hamm inquired as to whether he had any household goods. Dorsey responded, "nothing in there that belongs to me." (Pl. Ex. 40, p. 19). After this obviously false response, Hamm stated as follows:
(Pl. Ex. 40, p. 20). It was clear to an experienced Chapter 7 Trustee as early as the first setting of the meeting of creditors, that Dorsey's schedules were incomplete and that he was testifying falsely. On January 5, 2010, Dorsey amended his Schedule B and listed household goods with a value of $1,000. (09-11157, Doc. 52).
On April 20, 2010, Dorsey again amended Schedule B. In that last amended Schedule B, Dorsey lists no cash, no checking accounts, no household goods, indeed no personal property of any kind except for a 2008 Child Tax Credit in the amount of $3,000, which he claimed as exempt on Schedule C. (09-11157, Doc. 66). In this second amendment, Dorsey shows his utter contempt for the system. Hamm invited Dorsey to come clean, but instead he continued to lie and stonewall. Transfers of property during the two years prior to the date of the petition should have been disclosed.
In Counts I and II of the Complaint, DePaola alleges that Dorsey fraudulently conveyed three parcels of real property to his wife, co-defendant Karmen Dorsey. In Part I(B)(1), the Court will discuss Dorsey's financial condition at the time of the transfers and his intent to defraud. In Part I(B)(2)(a), the Court will discuss the transfer of the marital residence in Dothan, Alabama. In Parts I(B)(2)(b) and (c), the Court will discuss the two additional parcels of real property, consisting of residential rental property and commercial property.
In 2000, Dorsey was in business with two individuals named Tommy Andrews and Vann Carter. The business relationship soured. On September 24, 2002, Andrews filed suit against Carter and Dorsey in the Circuit Court for Houston County, Alabama, Civil No. CV-2002-690. Andrews alleged breach of contract, fraud, conversion and conspiracy. (Pl. Ex. 5). Ultimately, the Circuit Court entered a default judgment against Dorsey and in favor of Andrews on January 26, 2009. On February 18, 2009, the Circuit Court entered damages in favor of Andrews and against Dorsey in the amount of $1,164,800. (Pl. Ex. 7). Dorsey was aware of Andrews suit at all times relevant to these proceedings. As a result of Andrews receiving a monetary judgment against Dorsey, Andrews is an unsecured creditor of Dorsey. Andrews has filed a proof of claim in the underlying bankruptcy matter. (Pl. Ex. 9).
Moreover, at trial Dorsey testified that it was his belief that Andrews suit did not have merit and that it was not a motivating factor in anything he did. The Court rejects that contention. The evidence at trial established that Dorsey was aware of Andrews impending suit and that there had been negotiations to resolve their differences as early as July 2001. (Tr. 44). All three transfers happened after the business relationship soured and negotiations began, immediately before Andrews filed his suit, or during the pendency of the case. For these reasons, the Court finds that Andrews claim against Dorsey motivated the three transfers in question.
On July 31, 2000, David and Karmen Dorsey purchased a residence in Dothan, Alabama, for $200,000. (Pl. Ex. 24). On August 28, 2002, Dorsey conveyed the property to Karmen for no consideration. (Pl. Ex. 25). Dorsey was employed on a full time basis at all times from the year 2000 to the date of the petition. Karmen Dorsey was not employed outside the home at the time of the purchase and did not obtain employment until 2009. David and Karmen Dorsey had been married for approximately 8 years at the time the residence was purchased and remain married to this date. Moreover, David and Karmen Dorsey have resided in the Dothan residence at all times since 2000, together with their three minor children. The 2002 conveyance to Karmen was not made pursuant to a separation agreement or an anticipated divorce. After the conveyance, Dorsey continued to reside in the Dothan residence with Karmen and he mortgaged the property, using the proceeds for his business. (Pl. Ex. 55).
Dorsey purchased residential real property, located on Summer Rain Terrace in Dothan, Alabama, on June 27, 2003. (Pl. Ex. 56) (Tr. p. 134). On October 23, 2003, Dorsey executed a quitclaim deed, transferring the property from solely in his own name so that it was held jointly with his wife Karmen. (Pl. Ex. 57). On June 30, 2006, Dorsey executed a deed in favor of Karmen Dorsey on the property, transferring it totally out of his own name so that Karmen was the sole owner of the property. (Pl. Ex. 28). No consideration was paid by Karmen Dorsey for either transfer. Dorsey's testimony on his reasons for the transfer was wholly unconvincing. (Tr. pp. 136-139).
Dorsey acquired commercial property in Dothan in 2003. On June 30, 2006, Dorsey executed a deed in favor of Karmen Dorsey the commercial property. (Pl. Ex. 32). The conveyance took place on the same day that he transferred the residential rental property described in Part I(B)(2) above. The conveyance also was for no consideration.
This Court has jurisdiction to hear this proceeding pursuant to 11 U.S.C. § 1334(b). Counts I and II, the fraudulent transfer claims, are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(H). Count III, seeking turnover pursuant to 11 U.S.C. § 542, and Count IV, seeking to sell property pursuant to 11 U.S.C. § 363, are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(A). Count V, the Trustee's objection to the Debtor's discharge pursuant to 11 U.S.C. §§ 727(a)(2)(B), (a)(3), (a)(4)(A) and (D), are core proceedings pursuant to 28 U.S.C. § 157(b)(2)(J). This is a final order.
The Trustee objects to Dorsey's discharge pursuant to 11 U.S.C. §§ 727(a)(2)(B), (a)(3), (a)(4)(A) and (a)(4)(D). "A denial of discharge is an extraordinary remedy and therefore, statutory exceptions to discharge must be construed liberally in favor of the debtor and strictly against the objection party."
Section 727(a)(4)(A) provides as follows:
11 U.S.C. § 727(a)(4)(A). "The veracity of the bankrupt's statements is essential to the successful administration of the Bankruptcy Act."
Materiality of a statement is determined if the matter is "pertinent to the discovery of assets, including the history of a bankrupt's financial transactions."
Dorsey made a considerable number of false statements, any one of which is sufficient to deny discharge. The cumulative effect of Dorsey's false statements overcomes any claim that the statements were in error. Moreover, the statements and omissions were material because they affected the Trustee's ability to discover all of Dorsey's assets and administer the case.
The first four false statements relate to the ill-fated boat. To begin, Dorsey swore, under oath, that he owned a boat worth $6,000 and that he owed Teddy Vaughan $12,000, which was secured by the boat. The first false statement was in Schedule D. Dorsey's second false statement was made during the September 3, 2009 meeting of creditors which was conducted by Trustee Hamm. Dorsey's second false statement was made to Hamm concerning Vaughan's security interest, which did not exist. To further compound this error, Dorsey stood by in silence while his lawyer misrepresented the existence of a UCC-1 statement, which Dorsey knew did not exist. Either Dorsey and Brunson conspired with one another to make false statements to the Trustee, supporting one another, or Dorsey misled Brunson who repeated Dorsey's false statement. Dorsey's third false statement was made on October 9, 2009, when Trustee DePaola followed up and Dorsey again stated falsely that there were documents. One might quibble as to whether Dorsey made one or two false statements to DePaola when he swore that there were documents and that he would get copies. Dorsey knew that there were no such documents and Dorsey had no intention of obtaining copies of these nonexistent documents. Nevertheless, the Court will count this as just one misstatement on October 9, 2009, bringing the total to three.
The fourth misstatement was made a trial when DePaola asked Dorsey at trial about the documents and why he had not produced any. Dorsey replied that because Teddy Vaughan was trying to buy the boat he did not think he had to produce documents. This statement was clearly false as Dorsey knew that the Trustees were attempting to ascertain the existence of Vaughan's security interest from the beginning. Thus, DePaola proved at least four material misstatements from Dorsey concerning the boat and the nonexistent security interest in favor of Teddy Vaughan.
The fifth false statement was made by Dorsey when he failed to disclose all his bank accounts and his repeated failure to accurately report the balance in those accounts.
A sixth false statement was made by Dorsey when he answered "None" in response to Question No. 18 about business interest on the Statement of Financial Affairs.
Dorsey made repeated false statements concerning personal property. In his original Schedules he claimed that he did not own any household goods. One January 5, 2010, Dorsey amended his schedules, disclosing household goods valued at $1,000. Dorsey did not explain the discrepancy between his financial statement provided to a creditor showing personal property of $150,000 and household goods of only $1,000. To further muddy the waters, on April 20, 2010, Dorsey again amended his Schedules, again reflecting that he owned no household goods. All of these statements were false and they were designed to thwart the Trustee's efforts in learning the true state of Dorsey's property interests.
The evidence offered by DePaola showed many false statements which were made fraudulently and intentionally. The burden shifted to Dorsey to explain these false statements to the Court. As of the date of his trial, he has not explained the reasons behind these misstatements to the Court's satisfaction to save him from a denial of discharge. To deny a discharge, only one instance need be shown. DePaola has proved her case, pursuant to § 727(a)(4)(A), a half-dozen times or more.
Both §§ 727 (a)(4)(d) and (a)(3) deal with a debtor's recorded information required to be disclosed during the course of the bankruptcy. Section 727(a)(3) allows for denial of discharge if:
11 U.S.C. § 727(a)(3). While the law generally favors discharge, "it will not ordinarily tolerate the [debtor's] intentional departure from ordinary honest business practices where there is a reasonable likelihood of prejudice."
Under § 727(a)(4)(D) the Court may deny a debtor discharge if it finds that:
11 U.S.C. § 727 (a)(4)(D). Susan DePoala, as the Trustee in this case, is undisputedly an "officer of the estate" as under Chapter 3 of Title 11 of the Bankruptcy Code, the position of the "trustee" is defined under subchapter 11 — "Officers." Moreover, § 323 defines the role and capacity of the trustee as "(a) The trustee in a case under this title is the representative of the estate. (b) The trustee in a case under this title has capacity to sue and be sued." 11 U.S.C. § 323. Therefore, DePoala, as the Trustee has standing to bring this § 727(a)(4)(D) complaint.
In order for the Trustee to be successful in proving a violation under § 727(a)(4)(D), the Trustee must show that she actively requested the documents to meet the "knowingly and fraudulently" intent requirement.
The Trustee has proven both of the elements under § 727(a)(3) and § 727(a)(4)(D). Dorsey concealed the true nature of the amount in his bank accounts and his IRA. Despite numerous requests by the Trustee for documentation and statements regarding the substantive nature of Dorsey's IRA, to date Dorsey has failed to provide that information. In addition, Dorsey and his attorney reported to the Trustee that there was a UCC-1 detailing a security interest in a boat. However, both parties maintained the existence of the UCC-1, but never provided the documentation, even after the Trustee requested proof of the UCC-1's existence at both the Meeting of Creditors and through written communication. It appears that the UCC-1 does not exist, but due to the concealment of the true facts relating to the UCC-1, this is also a knowing and fraudulent concealment of information that is material and relevant to the underlying bankruptcy case. All three of these instances made it impossible for the Trustee to determine the true state of Dorsey's financial condition and business transactions. Therefore, this Court finds that Dorsey concealed recorded information despite numerous requests for the information such that made it impossible to assess the financial condition of his estate in violation of §§ 727(a)(3) and (a)(4)(D) and this further supports denial of discharge.
The Trustee also seeks to deny Dorsey's discharge under § 727(a)(2) for Dorsey's actions during the pendency of the case. Section 727(a)(2)(B) states:
Section 727(a)(2)(B) thus requires that the objecting party, here the Trustee, prove that the debtor (i) transferred or concealed his property or property of the estate; (ii) actual fraudulent intent; and (iii) the act occurred postpetition.
Section 727(a)(2)(B) requires "actual intent" of fraudulent activity and both rely on commonly considered "badges of fraud" that a trier of fact may consider in determining intent.
Addressing the issue of the boat first, Dorsey disclosed his ownership of a boat, but concealed the whereabouts of the boat during the pendency of the case.
While Dorsey practically admits to concealing the boat from the Trustee, (Tr. p. 173-74), proving actual fraudulent intent, there are also several "badges of fraud" present, supporting a finding of actual fraudulent intent. First, the purported secured creditor of the boat, Teddy Vaughan, is a lifelong friend of Dorsey. It is for Mr. Vaughan that Dorsey concealed the boat because Dorsey's concealment drove down the price allowing Mr. Vaughan to purchase the boat a significantly discounted price from the Trustee.
In addition to the concealed boat, Dorsey concealed other property from the Trustee. Dorsey did not reveal the true amount in his banking accounts. In addition, he was illusive about the location and make-up of his IRA and repeatedly failed to provide requested documentation on the IRA. He was equally deceptive with his responses regarding his business interests in various enterprises. Finally, he continued this pattern of hiding the extent of his property with regards to his personal property — his Schedule B was severely incomplete in its listing of household goods and other personal items. While any one of these instances might suggest Dorsey's actual intent to defraud his creditors and hide property from the Trustee, there is a clear pattern of deceit and each instance involves some of the "badges of fraud." Dorsey has not provided an adequate explanation for why he continuously made statements and acted in a manner that concealed property of the estate from the Trustee post-petition. Thus, the Trustee has met her burden to demonstrate a violation of § 727(a)(2)(B).
The Trustee seeks to have the three transfers discussed in Part (I)(B) voided as fraudulent under Ala. Code §§ 8-9A-4 and 8-9A-5. These state remedies are available to the Trustee under 11 U.S.C. § 544(b), which states, in part:
The Court will first discuss the fraudulent transfer provision when actual fraud is present and then proceed with the constructive fraud provision.
Under Ala. Code § 8-9A-4, made applicable through the Bankruptcy Code 11 U.S.C. § 544(b),
The "actual intent" standard is the same as § 727(a)(2)(B)'s actual intent standard and the courts rely on the same "badges of fraud" to determine the intent of the debtor.
The Trustee has demonstrated not just one single "badge of fraud," but has presented facts demonstrating the presence of several "badges of fraud." Taking the badges as listed in order,
Sixth, Dorsey received no reasonably equivalent compensation for the transfers. There was some testimony that one of the transfers was because Mrs. Dorsey's mother had paid-off the mortgage, but the property was not transferred to Mrs. Dorsey's mother. Seventh, Dorsey transferred what appears to be the only three assets that had any equity in them. Moreover, due to the pendency of the lawsuit, and subsequent judgment, the entire picture makes Dorsey appear insolvent.
The Trustee has shown not just one or two badges of fraud with regards to these three transfers, but all seven "badge of fraud" listed above. Looking at the entire picture, it is evident that the Trustee has demonstrated that Dorsey had the actual intent to "hinder, delay, [and] defraud" his creditors by transferring these properties to his wife.
This Court has found actual fraud with regards to the fraudulent transfers discussed
Alabama courts have regularly held that "[c]ourts are to automatically infer constructive fraud if the transfer was made to a family member and there was no valuable consideration."
Upon reviewing the facts of the case and examining the applicable law, this Court finds that the Trustee, Susan DePaola has met her burden under the requirements of 11 U.S.C. §§ 727(a)(2), (3), and (4) to deny the Debtor, David M. Dorsey, discharge. Dorsey repeatedly made false statements and accounts; omitted, hid or concealed material financial information or property of the estate; and acted with an intent to hinder, delay, and defraud the trustee and creditors in this case. Therefore, a denial of discharge is proper under all three provisions of § 727(a) which the Trustee has brought her complaints.
Second, the Trustee has proven that Dorsey's three property transfers to his wife in the six years preceding this case were done with the actual intent to hinder, delay, and defraud his creditors under Ala. Code § 8-9A-4. Moreover, the facts prove constructive fraud under Ala. Code § 8-9A-5 in regards to these transfers. As such, these transfers being fraudulent are avoided as allowed under 11 U.S.C. § 544(b).
The Court finds that all remaining property, including the property of the three voided transfers, be turned over to the Trustee for sale pursuant 11 U.S.C. §§ 542 and 363(h).
The Court will enter an order to this effect by way of a separate document.
Done this 8