Maureen A. Tighe, United States Bankruptcy Judge.
In this adversary proceeding, the Chapter 7 Trustee, David Seror (the "Trustee")
On May 20, 2011, an involuntary chapter 7 petition was filed by petitioning creditors, Miguel Ortega, Martha Gomez, and Richard Pena in the name of Diana Lopez. See Case no. 1:11-bk-16307-MT ("Lopez Bankr."). On July 20, 2011, Lopez filed an answer wherein she stated that she did not oppose the entry of an order for relief. See Answer to Complaint, Lopez Bankr. ECF Doc. 10. An order for relief was entered on July 28, 2011. See Lopez Bankr.ECF Doc. 12. On October 31, 2011, the same petitioning creditors filed a second involuntary chapter 7 petition in the name of L.D.T. Investments, Inc. ("LDT"). See Case no. 1:11-bk-22664-MT ("LDT Bankr."). An order for relief was entered on December 8, 2011. See LDT Bankr. ECF Doc. 11. David Seror is the Chapter 7 Trustee appointed in both cases.
Lopez is the sole equity holder of LDT. On August 25, 2011, the California Department Real Estate issued an Order to Desist and Refrain against LDT (the "DRE Order"). The DRE Order found that LDT and Lopez violated various provisions of the Financial Code and the Business and Professions Code. Subsequently, on September 16, 2011, a Decision and Default Order was filed from the Department of Real Estate State of California stating that LDT's real estate license was revoked. Lopez was named in the caption and an order issued for her to desist and refrain from performing any activity that requires a real estate license. See Defendant Ex. 8 at 24-33 of 81.
Prior to Lopez's first § 341(a) meeting of creditors in her personal bankruptcy on August 2, 2011, Lopez filed her schedule of assets and liabilities ("Original Schedules") and statement of financial affairs ("SOFA") and asserted her Fifth Amendment privilege against self-incrimination on key questions in her SOFA. Lopez invoked her privilege with respect to:
The initial § 341(a) meeting in the personal case was held on September 22, 2011 ("§ 341(a) Meeting"). At the § 341(a) Meeting, the Trustee questioned the Debtor regarding the following topics, to which the Debtor invoked her Fifth Amendment privilege not to testify:
The Trustee testified at trial that the § 341(a) meeting of creditors is an important opportunity for him to ask questions, to figure out various transfers and to understand documents provided by the debtor. A complete SOFA allows a trustee to tell what secured debt there is, what income might be available, what transfers have been made pre-petition, and what the larger picture of the debtor's financial affairs is. He usually compares the tax returns provided by the debtor to the SOFA. In Lopez's individual case, her refusal to testify and provide a lot of information, combined with a failure to turn over tax returns made it very frustrating and difficult to administer the case.
After the initial 341(a) meeting, on October 6, 2011, Lopez filed Amended Schedules and an Amended SOFA, in which Lopez again invoked her Fifth Amendment privilege on three questions, Items No. 1, 2, and 8 in the amended SOFA. The 341(a) meeting in the Lopez case was concluded on the morning of October 26, 2011. After the 341(a) meeting was officially concluded, Lopez finally provided a copy of her 2010 personal tax returns to the Trustee and informed him that she was no longer asserting her Fifth Amendment privilege with respect to the 2010 return. See Trustee Ex 59. The following day, Lopez withdrew any claim of privilege as to her 2009 tax return and sent a copy to the Trustee. See Trustee Ex. 60.
On February 7, 2012, in connection with LDT's involuntary bankruptcy case, counsel for the Trustee requested that Lopez, as the 100% shareholder, CEO, and sole officer of LDT, turn over all books and records in her possession, custody, and control regarding LDT (the "Demand Letter"). In response to the Demand Letter, on February 10, 2012, former counsel for Lopez responded to the Trustee, stating that Lopez would preserve all of LDT's books and records then in her possession, custody, and control, and that she would produce the same to the Trustee. Lopez's counsel stated, however, that LDT had "sold" all of its electronic equipment, including computers and hard drives at a garage sale (the "Garage Sale"), and Lopez therefore could not produce them.
On February 14, 2012, former counsel for Lopez wrote to the Trustee, informing him that Lopez needed to make copies of the LDT documents, but she believed she could deliver them by February 29, 2012. On February 29, 2012, Lopez produced two banker's boxes, containing a total of eleven folders. The Trustee declined to pay for the copying of the LDT records.
On March 19, 2012, the Trustee commenced this adversary proceeding against Lopez seeking a denial of discharge under § 727 of the Bankruptcy Code. See Case no. 1:12-ap-01097-MT (the "Adversary").
Lopez then began the long process of copying additional LDT records herself and providing them in bits and pieces to the Trustee from March 20, 2012 until November 30, 2012. See Trustee Ex. 57 at SDL0346-0399. On June 12, 2012, after Lopez had produced 16 boxes of documents to the Trustee, the Trustee reached a stipulation for Lopez's voluntary appearance to testify and finish turning over LDT documents and then sought an order under F.R.B.P.2004 for numerous other entities to produce records and testimony.
On March 19, 2013, the Court entered a Memorandum of Decision and Order on the Trustee's Motion to Compel LDT to (1) File Statements and Schedules and Creditors Matrix, (2) Turn Over Books, Records and Property of LDT, and (3) Cooperate with the Trustee (LDT Bankr.ECF No. 97), in which the Court ordered Diana Lopez to: (1) immediately turn over all books, records, and property of LDT to the Trustee, (2) turn over all computer files of LDT that were still in her possession, (3) turn over any rents collected following the Order for Relief by Lopez, Precious Gems Management, Inc., or Lopez's daughters as to properties owned by LDT; and (4) cease from engaging in any post-petition action that otherwise require Court or Trustee approval, regardless of whether Lopez was acting on behalf of herself or LDT. ("2013 Memo of Decision"). See LDT Bankr.ECF No. 184.
Lopez, as the sole shareholder, Chief Executive Officer, and sole corporate officer of LDT, has never filed schedules in the LDT bankruptcy case. Debtor did eventually produce approximately seventy cartons of copied LDT books and records. Lopez also hired CPA Ilma Avila ("Avila") sometime in 2013 to do an "Accountant's Compilation Report" of her finances and spent 22 hours with her reviewing personal and LDT records.
On May 28, 2013, Lopez filed a second amended SOFA in her personal case. The Second Amended SOFA removed any invocation of the Fifth Amendment privilege. Lopez answered all questions in that SOFA regarding income from LDT in 2009 and 2010; income from other sources including her gambling winnings; and disclosed her losses. Lopez's answers differed from her original and first amended SOFA.
As of January 7, 2014, Lopez represented herself following the withdrawal of her attorney of record. On January 17, 2014, Lopez filed a Motion for Summary Judgment which was denied. The Court then held a two day trial on November 7 and 10, 2014. The Trustee pursued only the causes of actions listed below; all others in the complaint were abandoned.
The Trustee alleged three causes of action under the Bankruptcy Code with respect to Lopez' personal bankruptcy:
In addition, the Trustee alleged four violations under § 727(a)(7) with respect to Lopez's activity as an officer of the LDT Investments bankruptcy, which prohibits
At the hearing, the Trustee requested the Court take judicial notice of Lopez's Schedule of Assets and Liabilities and SOFA; Lopez's amended Schedules of Assets and Liabilities and SOFA (Trustee Ex. 1); Memorandum of Decision entered on January 29, 2013 (Trustee Ex. 2); an Order on Chapter 7 Trustee's Motion to Compel (Trustee Ex. 7); Lopez's Second Amended SOFA filed May 28, 2013(Trustee Ex. 9); and various Los Angeles Superior Court documents: including Unlawful Detainer Complaints, 3-Day Notices to Pay Rent or Quit and 60-day Notice to Terminate Tenancy (Trustee Ex. 36-53 "UD proceeding documents").
The Court overruled Lopez's objection to this request. Federal Rule of Evidence 201
The following witnesses testified at trial: Diana Lopez, Debtor; David Seror, Chapter 7 Trustee; John Menchaca, a rebuttal witness called to testify as to the sufficiency of the expert report of Certified Public Account Ilma Avila; Kathleen March, former counsel for Debtor; Ilma Avila, Certified Public Accountant, Debtor's expert. Lopez had planned to call numerous other witnesses, and subpoenas were issued for them, (Adv. ECF Doc. 97), but Lopez ultimately decided not to call these witnesses.
Lopez represented herself at trial, although she was represented by counsel in her personal bankruptcy case for the first
At the completion of the two day trial, the following exhibits were admitted into evidence:
Ex. Trustee's Exhibits: Ex. Defendant's Exhibits: # #1 Lopez's schedule of assets and5 IRS Proof of Claim #6 in Lopez Bankr. liabilities and SOFA2 Lopez's AMENDED schedule of6 Declaration and Report of CPA Expert assets and liabilities and SOFA Witness Ilma Avila7 Memorandum of Decision8 LDT Documents and Correspondence with the Department of Real Estate8 Order on Chapter 7 Trustee's Motion11 LDT Insurance Claims and Denials to Compel -9 Lopez's 2nd AMENDED schedule of12 LDT Records and Related Financial assets and liabilities and SOFA Documents - 628 pages36-53 Unlawful Detainer proceeding16 2010 Payroll Checks and Cash documents Deposited by Diana Lopez54 Expert Rebuttal Report by John19 Index of LDT documents produced Menchaca and delivered to the Trustee55 Deposition Transcript of Diana Lopez22 Proof of Payments to IRS and Lenders after LDT Suspension57 Exhibits to the Depositions of Diana31 Income Tax Examination Revised Lopez and Ilma Avila Report by the IRS58 Letter from Debtor's Former Counsel to Trustee re amounts borrowed by Lopez from persons listed in Schedule E.59 Letter from Debtor's Former Counsel to Trustee re waiver of 5th Am. Privilege to 2010 Tax return60 Letter from Debtor's Former Counsel to Trustee re waiver of 5th Am. Privilege to 2009 Tax return
The parties filed a written stipulation as to some of the facts of this case. See Adv. ECF No. 89. The Court hereby adopts the stipulated facts as findings of fact and discusses them along with any other trial evidence as part of the findings of fact and conclusions of law.
In general, the bankruptcy court must grant a discharge to an individual chapter 7 debtor unless one of the twelve enumerated grounds in § 727(a) is satisfied. In the spirit of the "fresh start" principles that the Bankruptcy Code embodies, claims for denial of discharge are liberally construed in favor of the debtor and against the objector to discharge. Khalil v. Developers Sur. & Indem. Co. (In re Khalil), 379 B.R. 163, 172 (9th Cir. BAP 2007) aff'd, 578 F.3d 1167 (9th Cir. 2009). The objector to discharge bears the burden to prove by a preponderance of evidence that the debtor's discharge
Section 727(a)(3) provides for denial of a debtor's discharge if the debtor "has concealed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure was justified under all of the circumstances of the case." 11 U.S.C. § 727(a)(3). The [Debtor] must present sufficient written evidence which will enable his creditors reasonably to ascertain his present financial condition and to follow his business transactions for a reasonable period in the past. In re Cox, 904 F.2d 1399, 1400 (9th Cir.1990). In some cases, a failure to produce proper records will not justify a denial of discharge when the missing information can be reconstructed from records kept by others. See Collier on Bankruptcy, ¶ 727.03 (Alan N. Resnick & Henry J. Sommer eds., 16th ed). To determine whether the failure was justified under the circumstances, the court should consider, among other factors it deems relevant, (1) Debtor's intelligence and educational background; (2) experience in business matters; (3) the extent of involvement in the businesses for which discharge is sought; (4) Debtors reliance, including her knowledge of whether records were being kept; (5) the nature of the marital relationship; and (6) any recordkeeping or inquiry duties imposed upon Debtor by state law. In re Cox, 904 F.2d 1399, 1403 n.5 (9th Cir.1990).
Section 727(a)(4)(D) provides that a discharge shall be denied to a debtor who "knowingly and fraudulently, in or in connection with the case withheld from an officer of the estate entitled to possession under this title, any recorded information, including books, documents, records, and papers relating to the debtor's property or financial affairs." The purpose of § 727(a)(4) is to ensure that a debtor provides reliable information so interested parties do not have to dig out the facts in examination or investigations. Hansen v. Moore (In re Hansen), 368 B.R. 868, 872 (9th Cir. BAP 2007). Intent under § 727(a)(4) may be established by circumstantial evidence, or by inferences drawn from a course of conduct. Id.
Under 11 U.S.C. § 727(a)(5), a debtor may not be granted a discharge if the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor's liabilities. Section 727(a)(5) is broadly drawn and gives the bankruptcy court power to decline to grant a discharge in bankruptcy when the debtor does not adequately explain a shortage, loss, or disappearance of assets." Aoki v. Atto Corp. (In re Aoki), 323 B.R. 803, 817 (1st Cir. BAP 2005). Vague, indefinite, and uncorroborated explanations are unsatisfactory. Bell v. Stuerke (In re Stuerke), 61 B.R. 623, 626 (9th Cir. BAP 1986); Aoki, 323 B.R. at 817.
Under § 727(a)(5) an objecting party bears the initial burden of proof and must demonstrate: (1) debtor at one time, not too remote from the bankruptcy petition date, owned identifiable assets; (2) on the date the bankruptcy petition was filed or order of relief granted, the debtor no longer owned the assets; and (3) the bankruptcy
Section 727(a)(7) denies a discharge to a debtor who:
Section 727(a)(7) extends the basis for denial of discharge to the debtor's misconduct in a substantially contemporaneous related bankruptcy case. See Collier on Bankruptcy, ¶ 727.10 (Alan N. Resnick & Henry J. Sommer eds., 16th ed.; In re Leija, 270 B.R. 497, 500 (Bankr. E.D.Cal.2001). Thus, if the debtor engages in objectionable conduct in a case involving ... a corporation of which the debtor is an officer, director or controlling person, the debtor may be denied a discharge in the debtor's own case. Id. This provision is intended to induce the cooperation of individuals in related bankruptcy cases. In re Krehl, 86 F.3d 737, 741 (7th Cir.1996); In re Miller, 448 B.R. 551, 570 (Bankr.N.D.Okla.2011) (§ 727(a)(7) broadens the reach of discharge exceptions to encompass actions of insiders).
Under § 727(a)(2), the court may deny the debtor a discharge, where the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed either property of the debtor, within one year before the date of the filing of the petition; or property of the estate, after the date of the filing of the petition.
A party seeking denial of discharge under 11 U.S.C.S. § 727(a)(2) must prove two things: (1) a disposition of property, such as transfer or concealment, and (2) a subjective intent on the debtor's part to hinder, delay or defraud a creditor through the act of disposing of the property. Retz v. Samson (In re Retz), 606 F.3d 1189, 1193 (9th Cir.2010).
A debtor has the affirmative duty to surrender all estate property and
The order for relief in the LDT case was entered on December 8, 2011. It ordered debtor LDT to file a list containing the name and address of each entity included on Schedule D, E, F, G, and H; LDT was also ordered to file schedules, a SOFA and a verified Statement of Social Security Number(s) (Official Form B21) referred to in Federal Rule of Bankruptcy Procedure 1007(a), (c) and (f) within 14 days after entry of the Order For Relief. See LDT Bankr.ECF No. 11. The Trustee then held a § 341(a) meeting of creditors on January 23, 2012 and had to continue it to February 21, 2012, because there were still no LDT schedules and no appearance by LDT. See LDT Bankr.ECF No. 31. Lopez had already invoked her Fifth Amendment privilege not to testify on September 22, 2011, and October 26, 2011, in response to many questions in her personal case that related to LDT assets and records. The 341(a) meeting was concluded on February 21, 2012, and still no items required under F.R.B.P. 1007 had been filed on behalf of LDT and no one appeared on behalf of LDT.
Lopez allowed all of LDT's computers with all of its digital records to be sold at a garage sale. The garage sale occurred pre-petition before either the Lopez or the LDT bankruptcies were filed. Lopez testified that LDT stopped operating in April 2011. After LDT was evicted from its business location, Lopez let LDT's furnishings go and did not keep the computers. See Three Day Notice to Vacate, Defendant Ex. 12 at 427 dated May 10, 2011. Lopez claimed she had paper copies of all the documents and there was no reason for her to preserve the computers. Under the circumstances, liquidating the computers at a garage sale without proof of any knowledge of a potential future involuntary bankruptcy is not a basis for denial of discharge. Because LDT's electronic records were lost, the Trustee had a greater need for the hard copies of any records to be provided clearly and quickly so the missing information could possibly be reconstructed from the records that were kept.
Lopez's accounting expert CPA Avila testified that she was hired by Lopez to review and analyze LDT's financial information. Avila stated that over a two day period, she reviewed thousands of LDT documents and with the assistance of Lopez, was able to discern LDT's finances. Avila stated that her report offered no opinion on the sufficiency of Lopez's records personally, but the review of LDT financials did include some of Lopez's personal records.
John Menchaca ("Menchaca") was the Trustee's accounting rebuttal expert and was hired by the Trustee solely to analyze Avila's report. Menchaca testified that Avila's report did not provide enough of a basis to conclude what it concludes. Menchaca was convincing that what Avila reviewed did not support the opinions she expressed in her expert report.
Avila did not support Lopez's argument that the records she turned over were adequate. Avila provided no opinion on the sufficiency of records for Lopez personally. Although Lopez admitted to significant gambling losses and self-employment income over $300,000 in certain years, the source of either LDT or other funds for this was never clearly explained. Menchaca testified that his review of the gambling records were that Lopez had $2.5 million in gambling winnings in various Las Vegas casinos, but losses of $1.6 million. As she only claimed $315,000 in income at that time, there was more to explain as to how she generated those winnings. As a CPA, Menchaca did not see how anyone could opine as to Lopez's personal finances or LDTs assets without looking at a larger universe of bank records to explain such things.
Lopez also made it extremely difficult for the Trustee to ascertain her personal financial condition or material business transactions for over two years during her personal bankruptcy case because she never produced any personal financial information such as bank statements or canceled checks, and other information normally
The Court must consider that the records and information needed to be gathered from a company that had been quickly shut down and evicted from its business premises and that Lopez did not have a staff to assist her. Even considering those circumstances, Lopez's actions were not justified. Although, Lopez was forced into an involuntary bankruptcy, she did not oppose the entry of the order for relief in either her personal or LDT's case. Her failure to bring any coherent explanation to the documents is only explained in part by the prepetition sale of the computers. Although Lopez did not graduate high school, she was still quite experienced in real estate sales and was intelligent and sophisticated enough to start and run a business. Lopez began her career at age twenty one as a receptionist and worked her way up to sales, then became a title representative and eventually an Escrow Officer. As LDT's sole shareholder, she was extensively involved in the business and was required by law to maintain books and records for LDT, particularly for tax purposes. Through all of these positions, she appears to have been aware of the need to document and maintain records in order to run the business. She also demonstrated that she had the capacity to track specific transactions through complex LDT records as part of running the company pre-petition and in the report she prepared for the IRS and introduced as defendants Exhibit 31.
In her testimony at trial, Lopez stated that she relied on other people's expertise in accounting and bookkeeping and figured the Trustee would put it all together with his accountants. Although Lopez is correct that the Trustee has the affirmative duty to investigate the financial affairs of the debtor, the "information about a debtor's assets, of necessity, must come primarily if not entirely from the debtor. The trustee cannot conjure it out of thin air." Starky v. Birdsell, 522 B.R. 220, 227 (9th Cir. BAP 2014). She avoided explaining why she did not attempt to explain the records in more detail to the extent she could without her accountant, and instead kept launching into a discussion of how she lost her investment and it is inequitable for the Trustee to have any money belonging to LDT when she is broke. Even if her claim were correct that she put more into the company than she took out, she never pointed to records of the operations or finances of LDT in a way that the Trustee could have figured out the total assets or liabilities to the benefit of all creditors, including potentially herself.
Lopez also hindered the Trustee from filing avoidance actions. The passage of time — without more — erodes the Trustee's potential use of his avoidance and asset recovery powers. Most generally, those powers are limited in 11 U.S.C. § 546; an action or proceeding under §§ 544, 545, 547, 548 and 552 "may not be commenced" (under the circumstances of this Chapter 7 case) after two years from the petition date. In re Boyajian, 486 B.R. 306, 322-23
Lopez's extreme delay in turning over documents to the Trustee coupled with her assertion of the Fifth Amendment privilege grossly impeded the Trustee's ability to administer her personal case in an efficient manner. The lack of schedules and a SOFA in the LDT case further compounded this, resulting in Lopez withholding information and concealing LDT's financial condition.
The complaint alleges that there is an inadequate explanation of a loss of assets in both the personal and LDT cases. As discussed earlier, the Trustee has the initial burden to show the debtor owned identifiable assets, and that the debtor has failed to explain the loss of those assets in the bankruptcy. The burden then shifts to the debtor to explain the loss of assets. A debtor's failure to offer a satisfactory explanation when called on is a sufficient ground for denial of discharge. In re Retz, 606 F.3d 1189 (9th Cir.2010).
The Trustee alleged in his complaint that Lopez's individual income for the two years prior to the petition date was in excess of $300,000, but her statements and schedules filed in this case do not sufficiently account for the disparity between her previous substantial income and the value of her scheduled assets. Lopez testified that any gambling income she received she then invested into LDT. Lopez did not provide complete enough LDT records to corroborate her explanation. She did show, however, that she was able to convince the IRS that she put more money into LDT than they originally believed. She also provided records of money put into LDT, although Lopez was evasive during the trial as to exactly what she put into LDT from personal income as opposed to funds received previously from LDT.
The evidence at trial showed that Lopez freely used LDT funds for her own personal benefit, i.e., in extensive gambling, paying for personal expenses such as her BMW, and paying for tickets to expensive sporting events. See Trustee Exhibits 32 and 33. Lopez's testimony combined with the exhibits at trial of her expenditures and funds returned to LDT actually showed that Lopez was unlikely to have had any assets in her personal estate at the time she filed. The evidence showed that she did not adequately distinguish between her own income, the income of family members who worked for LDT, and income of LDT. She spent fairly wildly when things were going well without regard to what was hers or the corporation's and failed to maintain sufficient cash reserves to pay LDT's rent or storage costs. She counted on a regular influx of distressed properties and rents to keep the
Conversely, there was no explanation of what happened with LDT's assets and properties. There is no question that LDT still had properties at the point when the order for relief was entered. Lopez herself alleges there was equity in some of the properties and seemed to think there was money to be made collecting rent on some of them. LDT handled approximately 180 properties in some capacity during its existence, although it is unclear how many were for rent collection, for "flipping" into profits or for purposes of negotiating a "short sale." The Court has held hearings and granted relief from stay orders on over 25 different properties, and it appeared there was no equity in them. Without the proper records, however, the Trustee could not ascertain LDT's financial condition and Lopez, as LDT's sole shareholder, failed to explain satisfactorily any loss of assets or deficiency of assets to meet LDT's liabilities. Although Lopez eventually turned over LDT documents to the Trustee, provision of voluminous financial documents is no defense where they still do not explain the assets and liabilities of an estate. In re Hazelrigg, No. Adv. 12-01966-TWD, 2013 WL 6154102, at *7 (9th Cir. BAP Nov. 19, 2013).
Lopez submitted the expert report of CPA Avila and asserted the assets of LDT could be ascertained from the records she turned over. Neither Lopez nor Avila provided any explanation of how these documents explained the transfers or disposition of all or some of the properties and rents. Avila's opinion as to the sufficiency of LDT records was too vague as she did not quantify the time period her examination applied to. Although she opined that there was no unexplained loss of assets, she never stated what assets she referred to — cash or property and as of which beginning and ending date. Without beginning cash inflows and outflows between 2007 and 2011, there was no basis for concluding that there had been no loss of cash assets of LDT. Avila's opinion seemed concerned mainly with showing that Lopez put lots more money into LDT than she ever took out, but it did not explain what happened to the assets of LDT, regardless of where they came from.
Lopez argued that LDT had properties, and if the Trustee had only allowed her to sell them, she could have turned the company around and paid everyone. She believes placing her into involuntary bankruptcy is what brought ruin on everyone. Although there is no evidence that anyone could have continued to operate LDT in a legally permissible manner, if it were possible, she never provided this information on how to bring so much revenue into the LDT estate. The evidence showed that Lopez failed to explain what actually happened to LDT's assets and properties after the Trustee demonstrated that there were significant assets of LDT pre-petition. Thus, she is not entitled to a discharge under § 727(a)(5) as applied through § 727(a)(7).
The evidence showed that there was an attempt to collect rents from properties belonging to LDT, but it is unclear whether Lopez or her family members actually collected any rent or took possession of any LDT properties. This evidence is probative of other issues, but there was insufficient evidence of a successful violation of § 727(a)(2).
As of the petition date of her personal bankruptcy, Lopez was the 100% shareholder, Chief Executive Officer and sole corporate officer of LDT. See Pretrial Stipulation and Order, Adv. ECF No. 91 at ¶ 8. As such, she is considered an insider of LDT under 11 U.S.C. § 101(31)(A)(iv), and LDT is an insider of debtor Lopez under § 101(31)(B)(iii). Lopez has argued that she could not take any actions on behalf of LDT because LDT was a suspended corporation. That fact, however, does not excuse Lopez from filing schedules or turning over LDT's book and records. The Court already ruled that LDT's defunct status did not excuse its compliance with § 521. See Trustee Ex. 7 at 4:9. The Court explained in its 2013 Memo of Decision that although LDT may generally not continue to conduct business, this Court still has jurisdiction over LDT in order to wind up its affairs under California law. The Court required LDT to submit the information necessary to wind up its business and administer the estate for the benefit of the creditors. Reed v. Norman, 48 Cal.2d 338, 343, 309 P.2d 809 (Cal.1957); Weinstock v. Sinatra, 379 F.Supp. 274, 277 (C.D.Cal.1974). Regardless of whether a Corporation is suspended, it is still required to comply with the Bankruptcy Code, which LDT failed to do so. Lopez was the only individual who could have caused LDT's compliance with court orders.
This excuse of "suspended status" for not assisting the Trustee with basic information necessary for winding up a corporation is also not credible in light of
On June 26, 2013, Lopez also filed a motion, which was granted, requesting authorization to speak to the IRS and California Franchise Tax Board about LDT's pre-petition tax liability on the basis that any tax assessed against LDT would flow through to Lopez personally because of LDT's "S corporation" status. See LDT Bankr.ECF Doc. 198. Notably, where her personal liability was at issue, Lopez found a way to provide information about LDT. Where assistance to the Trustee was required in the LDT case, she took the position that she could not do anything despite her status as LDT's sole officer and shareholder.
Notably, this failure to assist the Trustee in understanding even what real property belonged to LDT and what the liabilities were occurred at the same time there were over twenty five relief from stay motions filed in the LDT case. The Trustee had limited opportunity and very little information to respond to motions that, theoretically, were critical to the question of what return creditors would receive in the case. During the course of the LDT case, there have been over 500 docket entries, indicating the complexity of its administration and the need for information to wrap up its affairs.
Lopez correctly argues she cannot be denied a discharge for previously invoking her Fifth Amendment privilege against self-incrimination. The Bankruptcy Code contemplates that the Fifth Amendment privilege can be invoked in bankruptcy cases and adversary proceedings. 11 U.S.C.S. § 344; 11 U.S.C.S. § 727(a)(6). Proper invocation of the privilege against self-incrimination is not a basis for denial of discharge in and of itself. 11 U.S.C. § 727(a)(6)(B) and (C). Exercising her privilege against self-incrimination did not excuse Lopez from cooperating with the Trustee and does not protect Lopez from being denied a discharge. See In re Ciotti, 442 B.R. 412 (Bankr.W.D.Pa.2011), subsequent determination, 448 B.R. 694, 65 Collier Bankr.Cas.2d 671 (Bankr.W.D.Pa. 2011) (when debtor refuses to answer questions at trial, citing a Fifth Amendment privilege, debtor could be denied discharge because assertion of the privilege precludes the fair and effective administration of the bankruptcy estate); In re Connelly, 59 B.R. 421, 14 Bankr.Ct.Dec. 274 (Bankr.N.D.Ill.1986) (invoking Fifth Amendment does not excuse debtor from performing duties under Bankruptcy Code).
The trier of fact is also free to draw adverse inferences from a failure of proof arising out of the assertion of the privilege. In re Nat'l Audit Def. Network, 367 B.R. 207 (Bankr.D.Nev.2007) (Although civil litigants may invoke the privilege against self-incrimination, the court is empowered to do more than simply draw adverse inferences; in appropriate cases it may strike pleadings, bar evidence, and even rule against a party based upon that party's refusal to testify). In certain circumstances, a negative inference arises from a defendant's failure to produce documents that should have been in his possession. The inference is that the documents would have been damaging to the defendant. This adverse inference rule is applicable
No adverse inference may be drawn, however, unless there is a substantial need for the information and there is not a less burdensome way of obtaining that information. In re Martinez, 500 B.R. 608 (Bankr.N.D.Cal.2013). The court must also determine whether the value of presenting the evidence is substantially outweighed by the danger of unfair prejudice to the party asserting the privilege. Id. Full, complete and timely schedules and SOFA's are designed to provide the critical information needed at the beginning of any bankruptcy case. "Neither the trustee nor the creditors should be required to engage in a laborious tug-of-war to drag the simple truth into the glare of daylight." In re Tabibian, 289 F.2d 793, 797 (2d Cir.1961).
Although Lopez properly invoked her privilege against self-incrimination, adverse inferences may fairly be made. Lopez was in possession of information and documents that were not available to the Trustee for a critical phase of the case. Clear explanations through full and timely schedules and assistance with understanding the financial circumstances of either her personal estate or the LDT estate were never provided. The Trustee had a substantial need for the information in both the Lopez and LDT bankruptcies. There was no less burdensome way of obtaining that information; the Trustee attempted to gather it at great expense to the estate by hiring an accountant, but still was unable to get a clear picture. LDT's computers were sold in a garage sale, and Lopez was the only person with any paper records of her personal and LDT's finances.
Lopez also argues that since she eventually turned over documents to the Trustee and withdrew her assertion of her Fifth Amendment privilege, the Trustee's claim is moot. Putting aside whether Lopez's late provision of information was of any use, Lopez's alleged eventual cooperation with the Trustee in this case did not erase the damage already done to the estate's creditors. Here, Lopez did not waive her privilege in her personal bankruptcy schedules until long after entry of the Order for Relief. Significantly, she timed the letter explaining that she was no longer asserting her Fifth Amendment privilege so that it arrived right after the Trustee had concluded the 341(a) examination. Her assertion of the privilege shut down the Trustee's ability to obtain necessary information required in the first year of the case when assets are marshaled, avoidance actions and other causes of action are investigated and claims are analyzed. The Trustee testified that Lopez's assertion of her privilege kept him from exploring and fulfilling his duties as a chapter 7 Trustee because he did not have any of her personal financial information and an insufficient understanding of LDT's finances.
Lopez's invocation of the Fifth Amendment also cannot be viewed in isolation. It was combined with a whole host of other actions or failures to act that harmed the Lopez and LDT estates. Lopez also failed to file LDT schedules, allowed valuable computer records to be sold at a garage sale pre-petition, sought to secretly continue some of LDT's business, delayed inexcusably in providing remaining records to
Various subsections of § 727(a) require a specific state of mind. Violations of subsection (a)(2) require "an intent to hinder, delay, or defraud a creditor or officer of the estate." A debtor's intent need not be fraudulent to deny a discharge for concealment of assets; it is sufficient if the debtor's intent is to hinder or delay a creditor. In re Retz, 606 F.3d 1189 (9th Cir.2010). In determining whether a debtor has acted with intent to defraud, the debtor's "whole pattern of conduct" should be considered. In re Sever, 438 B.R. 612, 620 (Bankr.C.D.Ill.2010).
The "knowing and fraudulent" intent standard of § 727(a)(4) means that Debtor Lopez must have actual (not constructive) intent in concealing records or making an omission in schedules. In re Wills, 243 B.R. 58, 64 (9th Cir. BAP 1999). Fraudulent intent may be proved by circumstantial evidence, and reckless disregard combined with other circumstances may support an inference of fraudulent intent. Matter of Sholdra, 249 F.3d 380, 382 (5th Cir.2001); In re Khalil, 379 B.R. 163, 174 (9th Cir. BAP 2007); Retz, 606 F.3d at 1199; Stamat v. Neary, 635 F.3d 974, 982 (7th Cir.2011) (reckless disregard shown where debtors who failed to disclose business interests were highly educated and had significant business experience). Intent can be established by consideration of the totality of circumstances. In re Devers, 759 F.2d 751, 753-54 (9th Cir. 1985). The necessary intent under § 727(a)(2) "may be established by circumstantial evidence, or by inferences drawn from a course of conduct." In re Adeeb, 787 F.2d 1339, 1343 (9th Cir.1986) (quoting Devers, 759 F.2d at 753-54)).
Sections 727(a)(3) and (5) do not have an intent or state of mind requirement. Denial of discharge under these provisions only requires the debtor to act. In re Scott, 172 F.3d 959, 969 (7th Cir. 1999); Cox, 904 F.2d at 1401 (quoting Burchett v. Myers, 202 F.2d 920, 926 (9th Cir.1953)).
Intent can be inferred because Lopez had the ability and willingness to work with others to reconstruct records or find information when it benefited her, as she did with the IRS and CPA Avila, but failed to do with the Trustee. Facing a significant tax liability, she found a way to assist the IRS find and put together the financial information they needed to determine her tax liability. See IRS report dated May 16, 2014, Defendant Ex. 31. The IRS claim was originally $3 million but with the help of Lopez, the liability decreased significantly to $178,858.65. See Amended Proof of Claims # 6-4 and 6-5, Lopez Bankr.Lopez's fraudulent intent can also be inferred based on the timing of Debtor's final waiver of the Fifth Amendment privilege and lack of filing of LDT bankruptcy schedules. Lopez waived the Fifth Amendment privilege for her schedules and SOFA three months after the Court ordered her cooperation with the Trustee in connection with the LDT Bankruptcy Case and twenty one months after the order for relief in her personal case.
The Court has considered Lopez's defenses carefully and listened closely to her testimony and argument at all pretrial hearings and trial. She is clearly a hard worker, a single mother with seven children who has struggled to advance herself with little to no formal education. Her efforts throughout the pretrial discussions and trial appeared to consistently be intended to prove that she had invested more in LDT than ever was returned to
Based on the correspondence between the Trustee and debtor's former counsel, the Court sought to discern whether Lopez was relying on advice of counsel or was possibly just confused or misguided. While her actions delaying turnover of records violated § 727(a)(3) regardless of whether she had a fraudulent intent, the Court has concluded that any fair reading of her activities, trial testimony and demeanor shows that she also possessed a knowing and fraudulent intent and did indeed seek to hinder and delay the Trustee. Lopez never stated at any point that she took the actions she did in obstructing any reasonable administration of this estate solely because of advice of counsel or because she thought she was somehow helping the Trustee or creditors. She also very definitely made choices to ignore clear court orders that were served on her individually.
Based on her testimony at her 2004 examination (Trustee Ex. 55), and her trial testimony, Lopez appears to have relied on various professionals throughout the operation of LDT and the two bankruptcy proceedings to take care of all tax, accounting and legal matters. She seemed to blame most of the failures in properly paying taxes, sending items to regulatory agencies, accounting for transactions and explaining the finances to the Trustee on these professionals. She consistently followed these professionals' advice, however, where it was to her immediate benefit. She operated before and after the bankruptcy with an attitude that was reckless about any personal responsibility as an officer of a company and then a debtor and principle of a corporate debtor. She freely admitted gambling extensively with LDT's money (Trustee Ex. 55 at SDL0051-59), then argued that it was all her money when she "invested" it in LDT. She frequently avoided answering questions directly or claimed a lack of memory. Every document and answer was pulled out of her after extensive time and expense to the estate.
Lopez chose to attempt to continue running the LDT business after the order for relief was entered because she stubbornly believed that the creditors who filed the involuntary bankruptcy had wronged her. She knew she needed to be deceptive in doing so because she switched payments over to "Precious Gems," her daughter's company, instead of LDT. Although she may not have a finance or business degree, she chose what to learn about financial or business matters and where to claim a lack of sophistication or fail to listen to simple instructions. She operated an extensive real estate investment operation involving 180 properties after working as an escrow officer and learning how to acquire property. She had the talent to obtain these distressed properties from lenders and homeowners and knew enough to keep a "cash for keys" operation going for years. Such a business entailed significant paperwork, coordination, record keeping, regulatory compliance, accounting and legal work. This demonstrates an ability to fill
Lopez may well have had a factual and lawful basis to rely on her right not to testify. It is important to remember, however, that a debtor's choice to protect her own personal interests can also be a choice to harm the interests of the estate, especially when combined with other activities taken in these two bankruptcy cases. Being a debtor or a principle of a debtor in a bankruptcy proceeding is generally not a pleasant process. The trade-off for cooperation and honesty in this process is the discharge of debts.
Thus, based on the facts stated above, Lopez is denied her discharge under §§ 727(a)(3), and (a)(4)(D) as a result of actions in her personal bankruptcy. With respect to the LDT bankruptcy, her discharge is denied under § 727(a)(3), (a)(4)(D) and (a)(5) as applied through § 727(a)(7). As explained above, the Trustee has not met his burden of proof as to § 727(a)(5) in the personal bankruptcy and § 727(a)(2) in the LDT bankruptcy. The Trustee shall submit an order and judgment consistent with this ruling.