BRUCE A. HARWOOD, Bankruptcy Judge.
On January 25, 2018, the Court held a trial on the complaint of Robert Browne, Aqua Gulf Transport, Inc. and JRL Properties, Inc. (the "Plaintiffs"). The Plaintiffs seek to deny the discharge of the debtor, Patricia Lombard (the "Debtor"), pursuant to 11 U.S.C. § 727(a)(4)(A), on account of a number of different statements the Debtor made under oath.
This Court has jurisdiction of the subject matter and the parties pursuant to 28 U.S.C. §§ 1334 and 157(a) and Local Rule 77.4(a) of the United States District Court for the District of New Hampshire. This is a core proceeding in accordance with 28 U.S.C. § 157(b).
The Court draws much of the initial factual background from its earlier decision in
The Debtor and her two daughters, Ashley and Haley Lombard, owned Patrilom. This ownership makeup is borne out by the trial testimony and corporate documents.
In 2008, Café Bella Sera began to experience financial difficulties. Browne, a friend of the Lombard family, and his companies—the other plaintiffs, Aqua Gulf Transport and JRL Properties—provided Peter Lombard and Café Bella Sera with over $300,000 between 2008 and 2011 to help the ailing business.
At some point in late 2013 or early 2014, the Debtor ceased working for Café Bella Sera and moved from Florida to New Hampshire to start a restaurant business of her own, Sub Crazy, Inc. ("Sub Crazy"). The record is devoid of any information about the decision to start this new business, whose idea it was, or when and why the decision was made. Café Bella Sera, Inc. and Patrilom provided significant amounts of money to Sub Crazy during late 2013 and early 2014, in the months leading up to the opening of Sub Crazy in May 2014. The precise amount of these transfers is not material to the outcome of this proceeding, but the total amount was more than $50,000.
Of these funds intended for Sub Crazy, about $10,000 was transferred from a Café Bella Sera account directly to the Debtor's personal checking account.
The money did not flow just one way, from Café Bella Sera to Sub Crazy; Sub Crazy also transferred money back to Café Bella Sera to help that business with its expenses. Peter Lombard personally cashed some of the checks written on Sub Crazy's account, i.e. he went to the bank and cashed checks that either he or the Debtor had written.
Around this time, the Debtor asked her daughter to review Sub Crazy on the business rating service, Yelp. The review includes the sentence: "Spoke to the owner and
During the first half of 2014, Café Bella Sera ceased operating and Peter Lombard moved to New Hampshire.
In December 2014, Peter Lombard filed an individual chapter 7 bankruptcy petition in New Hampshire.
In the interim, after Peter Lombard had filed his chapter 7 petition, but before the final judgment in
The Debtor filed this chapter 7 case on August 19, 2016, just a few days after Browne lost his appeal of the
The Debtor's testimony at the 341 meeting of creditors is also relevant to the Plaintiffs' claims in this proceeding. There, in response to a question by the Plaintiffs' counsel, the Debtor indicated that she did not know what `Patrilom' was. At trial, the Debtor explained that this claimed lack of knowledge was due to a mispronunciation on the part of Plaintiffs' counsel and the pressures of the situation itself.
After conducting the 341 meeting of creditors, the chapter 7 trustee filed a no asset report. Consequently, no deadline to file proofs of claim was established in this case. Nevertheless, the Plaintiffs each filed a proof of claim.
The Plaintiffs filed this adversary proceeding on January 20, 2017, after various extensions of time to file complaints pursuant to §§ 523 and 727. Additionally, after an adverse ruling on appeal in
In its original form, the adversary complaint in this proceeding contained two counts. The Court dismissed Count II—the § 523 count—after a protracted fight over whether the Plaintiffs had properly stated a claim.
During the pretrial phase of this proceeding, the Plaintiffs' theory of the case regarding Count I shifted significantly, but without any commensurate amendment of the allegations contained in that count. The version of Count I of the complaint that was effective as of the time of the trial appears at AP Doc. No. 22 ("Amended Complaint").
The Court held a trial on the merits of the § 727(a)(4)(A) count on January 11, 2018. In another late development, the Debtor—for the first time, and during her opening statement— contested the Plaintiffs' standing as creditors, calling into question their ability to maintain their claims. The Plaintiffs offered no evidence to support their standing beyond the Debtor's reference to "Robert Browne et. al." in her Schedule E/F,
As to standing, the Plaintiffs' argument begins and ends with the Debtor's schedules and their proofs of claim. They note that the Debtor scheduled them as the holder of a disputed, unsecured claim in the amount of $364,280.43, and that they filed proofs of claim in this case. They conclude that their inclusion in the schedules and their filing of proofs of claim makes them at least the holders of disputed claims against the estate, and therefore "creditors" who can bring a § 727(a) claim, based on the definitions of creditor and claim in the Bankruptcy Code.
The Plaintiffs advance a number of theories as to why the Debtor should lose her discharge. First, they argue the $10,000 worth of deposits that Café Bella Sera, Inc. made into the Debtor's personal bank account should have been disclosed as income in answer to SOFA Question 5. Second, they claim that the Debtor's answers to SOFA Question 27 were knowingly false in two respects: the failure to check a box to indicate what her relationship to Patrilom was and her inclusion of the parenthetical statement that Patrilom "never operated" when it did actually operate. Third, they argue that the Debtor made a knowing and fraudulently false statement when she claimed to not know what Patrilom was at her 341 meeting. Finally, the Plaintiffs argue that the Debtor's failure to disclose what they claim is Peter Lombard's "hidden beneficial interest" in Sub Crazy, evidenced by his acting like an owner in taking money out of the business, from which they conclude that the Debtor is merely a straw owner. They also point to the use of the masculine pronoun "he" to refer to the owner of Sub Crazy in the Yelp review to support this theory of the case.
The Debtor challenges the Plaintiffs' standing, arguing that despite being scheduled as creditors with a disputed claim, and having filed proofs of claim, the record demonstrates that the Plaintiffs actually have no claim against her. In response to the Plaintiffs' claim about the unscheduled $10,000 in deposits, the Debtor argues that this claim was not pleaded in the complaint, but, even if it is considered, there was no material misstatement because Peter Lombard, not the Debtor, made the deposits and she was unaware of them until this proceeding. The Debtor claims that the Plaintiffs have not proven that the $10,000 in deposits amounted to gross income that should have been included in her SOFA.
Finally, the Debtor argues that no knowingly false statement was made regarding SOFA Question 27 because her failure to check a box in answering it was clearly inadvertent; her ownership interest in Patrilom was disclosed on Schedule B, and her intention in saying "never operated" was to disclose that she never operated the company, not that it never operated at all.
The Court will first address whether the Plaintiffs have standing to maintain their § 727(a)(4)(A) claim and then move on to address the claim itself.
The Court must resolve questions of standing whenever raised, even when they first occur at trial.
There is no evidence in the record in this case that explains what debt the Plaintiffs think the Debtor personally owes them. At trial, Plaintiffs' counsel was unable even to argue what the basis of the debt was beyond referring to requests for admissions from prepetition litigation, to which—he argued—the Debtor had failed to respond and so should be deemed admitted.
The Plaintiffs cite cases that support the proposition that even a disputed claim may provide a creditor with standing.
If the world worked as the Plaintiffs argue it should, then the Court would be prevented from examining the validity of a putative creditor's standing during a § 727(a) adversary proceeding, so long as the creditor was scheduled as the holder of a claim or had filed a proof of claim—even where, as here, creditors were requested on the chapter 7 341 meeting notice
Even if the Court were to assume that the Plaintiffs had standing, their § 727 claims have no merit. Section 727(a)(4)(A) provides that a debtor will not receive a discharge if "the debtor knowingly and fraudulently, in or in connection with the case—made a false oath or account." § 727(a)(4)(A). "The elements that must be proved to avoid discharge under this provision are (1) the debtor knowingly and fraudulently made a false oath, and (2) the false oath related to a material fact in connection to the bankruptcy case."
First, the Court will address the issue of the Debtor's failure to disclose the $10,000 that Peter Lombard deposited into her personal checking account at the beginning of 2014. The Plaintiffs argue that the Debtor's failure to disclose these deposits amounts to a false oath for which the Debtor's discharge should be denied. The Defendant argues that this issue was not raised in the Amended Complaint, and that even if the issue is properly before the Court, the evidence is insufficient to show that the deposits are income that the Debtor was required to disclose in her bankruptcy schedules.
As the Court recounted above in the fact section, it is clear that the Plaintiffs make no mention of a failure to disclose income in the Amended Complaint. This $10,000 of missing income issue appears for the first time in the supplement to the joint pretrial statement. At that time, however, the Debtor made no objection to the Plaintiffs raising the issue. Federal Rule of Bankruptcy Procedure 7015, applying Federal Rule of Civil Procedure 15(b), "permits the consideration of unpleaded claims `by express or implied consent' of the parties."
The Debtor, through counsel, expressly agreed to the trial of this issue by signing the supplement to the joint pretrial statement. Accordingly, the Court concludes that the issue is properly before it now.
On the merits, the Plaintiffs have failed to build a record sufficient to persuade the Court, by a preponderance of the evidence, that the cumulative $10,000 deposits were gross income that the Debtor knowingly and fraudulently failed to disclose in her answer to SOFA Question 5. The only evidence in the record on this point is the deposit slips themselves—pages 2 and 3 of Ex. 11—and the Debtor's testimony regarding the deposits. The Debtor testified that she did not remember or recognize the specific deposits themselves, which occurred nearly two years before the petition date. There was no evidence regarding what happened with the money after it was deposited into the Debtor's account or why the money was transferred from Café Bella Sera's account to the Debtor's personal account. There was general testimony from Peter Lombard that he was transferring money to Sub Crazy and the Debtor to help start the Sub Crazy business, but that testimony did not specifically address the $10,000 worth of deposits included in Exhibit 11. On this record, the Court finds it more plausible that the funds were meant for Sub Crazy and passed through the Debtor; it is unclear that they even became the Debtor's property. And, even if the deposits were income to the Debtor, there is insufficient evidence for the Court to conclude that the Debtor's failure to include this income in her bankruptcy schedules was anything other than an unwitting omission. The Plaintiffs have not met their burden to prove by a preponderance of the evidence that the $10,000 worth of deposits were part of the Debtor's gross income that should have been disclosed in her SOFA, let alone that the Debtor's failure to disclose them was knowing and fraudulent.
Next, the Court will address the Plaintiffs claims regarding the treatment of the Debtor's role at Patrilom in her SOFA. The Plaintiffs first argue that the Debtor falsely and fraudulently indicated that Patrilom "never operated" and second that she knowingly and fraudulently did not check the appropriate box to indicate what her relationship to Patrilom was. First, with regard to the "never operated" parenthetical statement, the Court finds the evidence ambiguous. The Debtor indicates she meant that she never operated the LLC, not that the LLC never operated in the abstract. The evidence is consistent with the Debtor's characterization. The Debtor appeared generally unfamiliar with Patrilom's purpose and function, although she did appear to be aware that she was an owner of the LLC. As best as the Court can determine, far from being a knowingly false and fraudulent oath, the "never operated" was the Debtor's attempt to communicate this ambiguity in her schedules. As to the failure to check any of the boxes, there is no evidence that this was anything other than a mistake, which is not grounds for denial of a discharge. Indeed, the disclosure of Patrilom in the SOFA makes it unclear what the Debtor would have been hiding; her failure to check a box is actually consistent with the Debtor's professed lack of knowledge about her specific role with regard to Patrilom.
The Plaintiffs' penultimate argument is that the Debtor knowingly and fraudulently misrepresented her role regarding Patrilom during her 341 meeting when she told Plaintiffs' counsel that she did not know what Patrilom was. After reviewing the transcript of the 341 meeting and hearing the Debtor's testimony about the meeting, the Court concludes that the statement was entirely immaterial because it was immediately clarified after it was made, during the same line of questioning.
Finally, the Court must address the Plaintiffs' argument that the Debtor failed to disclose Peter Lombard's hidden beneficial interest in Sub Crazy, and the other side of this coin: that the Debtor is its straw owner. In the supplement to the final pretrial statement, the Plaintiffs represented that the Debtor made a false statement at her 341 meeting that Peter Lombard was not an owner of Sub Crazy. This portion of the 341 transcript is not in the record in this case. The Plaintiff never pointed to any other instance of a false oath relating to this topic.
The Plaintiffs spent a significant amount of time trying to establish that Peter Lombard was the de facto owner of Sub Crazy. Yet, the Plaintiffs never provided any legal argument to back up their contention that Peter Lombard was a secret owner of Sub Crazy. The documentary evidence presented at trial consistently shows that Patricia Lombard was the legal owner of Sub Crazy. The filings with the New Hampshire Secretary of State are consistent in that representation, as are the Debtor's schedules. At best, there is evidence that Peter Lombard exercised a modicum of control over Sub Crazy's bank account. But, it is entirely unclear how pervasive that control was. The Plaintiffs were quick to identify the checks Peter Lombard had written on Sub Crazy's accounts, but provided no evidence of how prevalent such transactions were when compared to all of the checks that Sub Crazy wrote in the ordinary course. The Court entirely discounts the Yelp review—circumstantial evidence about the gender of Sub Crazy's owner does not tip the scales in the Plaintiffs' favor, especially when the review's author did not testify.
Another fundamental problem with the "hidden beneficial interest" claim is that the Plaintiffs did not establish that Peter Lombard held that interest prior to the Debtor's bankruptcy filing. If, for example, the Plaintiffs had pursued and obtained a judgment prepetition declaring that Peter Lombard had a beneficial interest in Sub Crazy, then the Debtor would have been required to disclose such an interest in her bankruptcy schedules. However, there is no such judgment. In effect, the Plaintiffs are asking the Court to find—based on some unarticulated legal principle—that Peter Lombard is an equitable owner of Sub Crazy and then hold the Debtor retroactively responsible for having failed to schedule that interest on her bankruptcy petition when it was filed. Such an argument is entirely without merit.
Additionally, the Court finds that the evidence does not support the Plaintiffs' theory that the Debtor was a mere straw owner of the Sub Crazy business. There is virtually no evidence about whose idea it was to start the business or any of the decision making process that lead to the business's creation. Neither the Debtor nor Peter Lombard were asked any questions on this topic. The only relevant question the Debtor was asked is whether she had any prior experience running a restaurant. Simply taking the fact that the Debtor had never run a restaurant before Sub Crazy and putting it beside the fact that Peter Lombard has extensive experience running restaurants is insufficient to demonstrate by a preponderance of the evidence that the Debtor was a straw owner of the business. The Plaintiffs have not established an evidentiary foundation for this theory.
Finally, justice demands that the Court generally address the merits of this litigation, having now considered each of the Plaintiffs' claims individually. After months of litigation and much pretrial posturing, the Plaintiffs presented a meritless case against the Debtor. At trial they could not articulate what debt the Debtor owed them
For the reasons outlined above, the Court finds the Plaintiffs lack standing to bring a complaint objecting to the Debtor's discharge. Alternatively, the Plaintiffs have failed to establish that the Court should deny the Debtor's discharge pursuant to § 727(a)(4)(A). Accordingly, the Court will deny the relief requested in the Amended Complaint. This opinion constitutes the Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. The Court will issue a separate judgment consistent with this opinion.
