JANICE MILLER KARLIN, Bankruptcy Judge.
This matter is before the Court on the Complaint by Hilda L. Solis, Secretary of Labor, ("DOL") objecting to the discharge of the debt owed by Debtor and Defendant, Mohammad Asif ("Asif"), pursuant to 11 U.S.C. § 523(a)(2)(A),
The Court conducted a consolidated trial on these two adversary proceedings, has reviewed the parties' post trial briefs with proposed findings of fact and conclusions of law, which the parties requested to file, and is ready to rule. These matters constitute core proceedings over which the Court has jurisdiction and authority to enter a final order.
The Court makes the following findings of fact based upon the numerous stipulations of the parties contained in the Pretrial Order entered in each adversary and the evidence presented at trial. Debtors were the owners/operators of several convenience stores/gas stations in the Topeka, Kansas area, including the 29th Street Quick Stop (located on 29th Street), A & U LLC (located on 6th Avenue), the Topeka Quick Stop LLC (located on Topeka Blvd),
These companies owned the real estate at both the 6th Avenue and California Street locations. Although the ownership percentages varied, each of the above businesses was solely owned by Debtors. The evidence at trial showed that only Asif actively participated in operating these businesses, and that Uzma Shahzadi had very little, if any, role in the daily operations of the convenience stores or the parent companies, or in making any decisions about their operation. The evidence also established that while Asif had help from his accountant, Ajay Dave, on many aspects of the businesses, including seeking nonimmigrant workers, Asif was fully aware of and authorized all of Dave's actions conducted in connection with these businesses.
In 2005, Asif and Mahaom LLC participated in the federal government's H-1B
One of the guarantees an employer must make in filing these applications is that it will pay the foreign worker at least the local prevailing wage for the job for which the worker will be hired. This is so H-1B workers do not displace U.S. workers,
Asif authorized a fairly low level employee
On May 25 and June 1, 2005, under the H-1B program, Asif and Mahaom LLC, through their accountant Ajay Dave, filed an LCA and I-129 Petition seeking to bring Ghulam Hussain ("Hussain") into the United States to work as a financial manager for Mahaom LLC for a three year period beginning October 2005. The Petition certified, under penalty of perjury, that the job duty for Hussain was "financial manager." It further required a salary of $44,429, and represented that 100% of his duties would be to "direct the preparation of financial reports."
According to Asif, he intended to start a fuel distribution business to aid in the profitability of his convenience stores/gas stations. He believed that such a fuel distribution business would allow him to capture the profits that were now going to the fuel distributor that provided gasoline to his stores. The description of the Mahaom, LLC business contained in the DOL paperwork was that it consults, develops, manages and operates businesses, researches market regarding viability of such franchises and its operations. Because of that business, it contended it needed "superior financial analysis and marketing," which Hussain was to supply.
At Asif's direction, 38 identical Consulting Contracts with different company names, all signed by his wife, Uzma Shahzadi, were attached to demonstrate that there was adequate work for a finance manager at Mahaom, LLC. No services were ever performed by Hussain, or anyone else, in furtherance of those purported contracts.
The alleged purpose of the secondary business was to sell gasoline to other area
The fuel distribution business never materialized, as Asif was unable to obtain financing to start that new venture. Asif knew no later than April or May 2006, months before Hussain's visa was even issued, that he could not get financing for either a fuel wholesale or consulting business for which a financial manager was supposedly needed.
Notwithstanding that fact, Asif and Dave continued to communicate with Hussain by email about the job and his visa,
The visa was finally issued August 16, 2006 for Hussain to travel to the United States, and Asif arranged to pay for his airline ticket through a Pakistani travel
Conversely, Hussain testified that he was never informed that the financial manager position was no longer available, and that in fact Asif sent him a photograph of the office area where he would supposedly work, as well as of the computer and laptop he would use. He testified that he came to the United States expecting to serve in that capacity at the required annual salary contained in the H-1B visa of $44,429. And contrary to Asif's claim that Hussain showed up unannounced at Asif's home, Hussain testified that Asif personally picked him up at the Kansas City airport and drove him to his home to live in his basement until he could obtain his own place.
Hussain claimed that upon starting work for Asif, he was taken to the 29th Street Quick Stop, trained how to use the cash register and told to learn the prices of the items in the store. He said he was informed that he needed to learn the clerk's duties because it was important for him to learn the business, top to bottom, before assuming his financial manager position. Hussain also testified that he was required to work approximately 80 hours per week for far less than minimum wage.
Hussain eventually quit, on October 15, 2007. He and his family moved away from
Interestingly, although Asif/Mahaom had numerous employees at all these convenience stores, he apparently paid his employees with cash, and kept no payroll records. One exception was a check Asif deposited directly into Hussain's bank account (on which he had signature authority) for $3,000, but which amount Asif then immediately withdrew from Hussain's account to pay Uzma Shahzadi that same amount.
During its investigation, DOL determined that because Hussain actually worked as a cashier/stocker for Mahaom, as opposed to a salaried professional, his employment was not exempt from the requirement to pay overtime wages for any work in excess of 40 hours per work. In September 2009, it eventually obtained a judgment
Debtors closed their convenience stores by February 2009. The real estate and businesses owned by Mahaom LLC, located at 1320 SW 6th Avenue and 2701 SE California in Topeka, were sold to Alliance Petroleum LLC for a total sale price of $610,000 at the end of January 2009 (hereafter called "Alliance Petroleum Transaction"). Out of that sale price, Alliance assumed two loans in the amounts of $218,311.54 and $212,876.69. After crediting these assumed loans against the sale price, Mahaom received a cash sum of $170,218.83, which was wired to and deposited in a bank account owned by Mahaom LLC (again, owned 100% by these Debtors).
The Trustee solicited testimony that Asif wrote checks and/or withdrew cash
DATE AMOUNT 02/03/09 $9,000.00 02/04/09 $9,000.00 02/05/09 $9,000.00 02/06/09 $3,000.00 02/09/09 $7,000.00 02/09/09 $2,017.37 02/09/09 $9,000.00 Unknown Dates Unknown Transfers
Debtors also indicated on their Statement of Financial Affairs that of this $170,218, they used $119,270 to pay a fuel bill owed by Mahaom LLC to Lion Petroleum and $13,000 to pay a fuel bill owed by Maham Inc. to Lion Petroleum. Debtors indicated the remaining amount, which was nearly $38,000, was used to pay final bills for their other convenience stores prior to their closing. Debtors did not indicate, in response to Questions 3 and 10 of their SOFA, that they had paid any secured lender upon the sale of the businesses. Debtors did provide the Trustee, however, at a second § 341 hearing, documents evidencing the automatic transfers of these funds to these entities.
At his two § 341 meetings, Asif testified he used approximately $48,000 from the Alliance Petroleum Transaction to pay fuel bills. He also claimed to have paid tobacco product bills to Sant Joe and Shariam.
Although Debtors filed bankruptcy only a few months after these payments were allegedly made, Asif allegedly retained no invoices or other business records to document the bills owed to Lion or Alliance, or to document any of the other debts Asif claimed he paid with these sale proceeds. In addition, he testified that he purposefully elected to destroy any and all books he had kept for these businesses, including any invoices or check registers, and that he had no electronic or other accounting system to corroborate the payments. Asif testified he discarded the records because he knew he could contact the vendors at a future date and get replacement copies if he ever needed them.
Because of that testimony that he could easily get replacement copies of anything needed, the Trustee made a written request in August 2009 for all documents related to the Alliance and Lion Petroleum transactions, including security agreements and promissory notes for two vehicles
The Trustee also solicited testimony that during the year Hussain worked for Asif/Mahaom, Asif deposited $9,000 into Hussain's personal checking account (on April 9, 2007), and another $1,000 the next day. One day later, on April 11, a $9,900 wire transfer was made from Hussain's own checking account to an engineering firm in Lahore, Pakistan. Asif infers these were wages he paid to Hussain, but Hussain says he never received that money, that he is not from Lahore and has no family or friends there, and that he did not transfer these funds. Conversely, both Asif and his wife went to high school in Lahore, they were married in Lahore, and numerous friends and family members resided there during this time.
Although the testimony was clear that Hussain had nothing to do with these deposits, and Asif was the only other signatory on this bank account, Asif denied he had anything to do with these deposits. The Court finds that testimony also lacking in credibility.
The ownership of the various companies owned by Debtors was explored, and although Debtors testified at their § 341 hearing that they were 50/50 owners in all the business, the tax returns for the entities indicated differently. In every instance the companies were wholly owned by them, but the percentages were significantly different than they disclosed.
At trial, Asif also called several friends and acquaintances to testify that they had loaned Asif cash in the past, and that he had repaid them—also in cash—out of the proceeds from the sale of the convenience stores. These personal cash loans were supposedly in the amounts of $15,000,
Finally, the following fact pattern provides further evidence why this Court is convinced that Asif lied continuously during the trial. Although Hussain worked for Asif until October 15, 2007, Asif wrote a letter dated September 6, 2007 to the U.S. Consulate in Islamabad, Pakistan requesting revocation of Hussain's visa. In that letter, he stated that "the beneficiary [Hussain] never reported to work after landing in USA."
Additional facts will be disclosed below, when necessary.
The first issue is whether the debt owed by Asif to the DOL should be excepted
Asif now wishes to raise, in this litigation, defenses that he should have, and could have, raised in the federal district court action. First, he suggests that because DOL elected not to bring an administrative proceeding against him, personally, before bringing the action in federal court, DOL was somehow estopped from bringing the action against him in federal court that resulted in a money judgment. He provides no citation to authority for this position.
Even if he had authority to support that argument, this is a defense he should have timely raised in that litigation. He is precluded from now raising potential defenses to DOL's federal district court litigation under the principles of res judicata.
Similarly, Asif belatedly argues that DOL can only bring this kind of wage and hour claim against the actual employer, and claims either Mahaom, or even his accountant, Ajay Dave, was Hussain's true employer. Again, the Court finds that Asif is precluded from raising this issue now, again because he failed to raise this defense in the DOL case.
Asif also argues that perhaps the District Court did not have jurisdiction to hear that case under either Section 17 of the Fair Labor Standards Act or 28 U.S.C. § 1345. Once again, the jurisdiction to hear that case was not raised in that proceeding, and it is too late to now raise this as a defense to that judgment.
Asif then tries to undermine the amount of the judgment entered against him by the District Court by presenting evidence that he actually paid Hussain wages in excess of what he was credited by the District Court when it calculated damages. Asif was required to raise in that proceeding any argument regarding the amount of his liability. Because he did not challenge the numbers presented by DOL, and because he elected not to appeal the decision after it was entered, he is barred from making these arguments here. The Court cannot allow Asif to do through the back door of this litigation what he declined to do through the front door via a proper defense of the district court litigation, or a timely appeal of the adverse decision entered against him.
Finally, Asif argues that DOL effectively does not have standing to bring this § 523(a)(2)(A) action because if he made any misrepresentation, which he denies, it was to Hussain, not the DOL, and Hussain failed to bring an action within the time allowed by Fed. R. Bankr.P. 4007(c). In other words, he argues only Hussain is a creditor, rather than DOL, and thus it has no claim upon which a dischargeability action can be pursued. Section 523(c)(1) does limit standing to bring § 523(a)(2)(A) actions to "the creditor to whom such debt is owed."
Accordingly, the Court finds that the Secretary has the statutory authority to seek the nondischargeability of this debt. She is the party entitled to payment of the money judgment, and she is the only party with authority to bring this action. Mr. Hussain remains the statutory beneficiary to receive the back pay award,
The burden of proof rests with the party opposing discharge. Thus, in this case, DOL has the burden of proof, by a preponderance of the evidence.
The DOL claims that the debt it is owed is non-dischargeable pursuant to § 523(a)(2)(A), which provides as follows:
In order to prevail on a claim under § 523(a)(2)(A), a creditor must prove, by a preponderance of the evidence, that (1) the debtor made a false representation, (2) the debtor had the intent to deceive the creditor, (3) the creditor relied on the debtor's conduct, (4) the creditor's reliance was justifiable, and (5) the creditor was damaged as a proximate result.
The DOL asserts that Asif, through his company Mahaom, LLC, filed a false LCA and a false I-129 Petition in support of a visa application to employ Hussain. The parties stipulated that Asif represented during the visa application process that Hussain would be hired as a financial manager, would have specific duties exclusively relating to accounting and financial operations for Mahaom, Inc., and would be paid approximately $44,000 annually to perform those specific duties. However, after applying for the H-1B visa for Hussain, Asif instead employed Hussain as a cashier/stocker at one of Asif's convenience stores. Hussain never worked as a financial manager for Mahaom.
Asif admits that the financial manager position never came to fruition, and that Hussain never worked as a financial manager for Mahaom, or any other company owned or operated by Asif. However, Asif claims that at the time he submitted the H-1B application, it was his honest intent to create that position for the fuel distribution business and for Hussain to serve as the financial manager for that company. Asif testified he thought the company would operate as contemplated until he learned that he could not obtain bank financing to fund the project. Asif claims that he contacted Hussain at that point to inform him of this development, and to advise him not to come to the United States because the job no longer existed.
Asif further claims that Hussain insisted on coming to the United States, and showed up at Asif's front door, unannounced, despite Asif telling him not to come.
The Court finds that DOL did not sustain its burden to prove that Asif intentionally made false or misleading statements at this initial stage of the process to obtain a visa for Hussain to enter the United States. Asif's testimony concerning the creation of the fuel distributor business was believable mostly because it was corroborated by other evidence. First, Ajay Dave's testimony concerning the creation of the distribution business matched Asif's testimony, at least on this aspect of the case. In addition, documentary evidence was admitted demonstrating Asif's attempts to obtain financing for this business venture. The timeline created with the application to bring Hussain to the United States to work as a financial manager and the application for credit to begin the fuel distributor business were also consistent.
The Court also finds that the representations Asif made concerning the second H-1B application for Latif were satisfactorily explained. Contrary to the assertions made by the DOL, Asif testified that Latif was to be hired to occupy a different financial manager position than the one Hussain was to hold. The business model needed two separate financial managers: one for the fuel distribution operation, and the other to handle the side-business of tax and financial consulting to customers of the distribution operation. Therefore, the Latif application does not necessarily cast suspicion over the Hussain application.
Although the Court finds that DOL did not prove that Asif made intentionally false or misleading statements in the initial LCA or I-129 Petition to bring Hussain to the United States, the inquiry does not end there. As noted by the DOL, Asif's obligation to provide truthful information under the H-1B program did not end with the filing of those documents. Asif was under a continuing duty to inform the federal government of any significant changes to the employment of Hussain, including filing a new LCA in the event of significant changes in job duties.
Testimony from DOL's investigative agent confirming this duty is corroborated by specific federal regulation, specifically 8 C.F.R. § 214.2(h)(2)(i)(E). That regulation unequivocally requires that
The Court can think of no more "material change[] in the terms and conditions of employment" than the fact that the advertised job no longer existed.
Asif disputes he had a duty, arguing that nothing in the H-1B program required him to notify DOL of any changes after he submitted the original paperwork. He relies on 20 C.F.R. § 655.731(c)(7) to support this argument. That regulation provides that if the H-1B employee is not performing work due to a decision of the employer, the employer must nevertheless pay the worker the prevailing wage. He contends this was his only duty, and thus he had no duty to tell DOL that the job that was the
The H-1B program did require Asif to notify DOL of the fact that an allowed position under the H-1B program no longer existed, since the statute and regulations implementing the program require, as critically material conditions, that a nonimmigrant worker not take a "non-speciality" job that an American can perform, and that he not occupy a job at below minimum wage, which could serve to give the employer a competitive edge, and could depress wages.
And in fact, this is exactly what happened after Asif failed to disclose that conditions had changed. Hussain was issued a visa he should never have been given, and this allowed Asif to employ Hussain at wages significantly below minimum wage. This gave him and his company a competitive advantage over other convenience store businesses in the area. Further, giving that job to Hussain meant it was not available for an American (and in fact, two Americans since this Court believes Hussain's testimony that he was working close to 80 hours each week). The Court agrees with DOL that a change of the type of work the H-1B worker would occupy was such a substantive changes in employment that it actually required Asif and Mahaom to file an entirely new petition pursuant to 8 C.F.R. § 214.2. Accordingly, had Asif notified DOL, it would have denied the visa (and required a new petition if another such job later became available), since the job where Asif ultimately placed Hussain was not an allowed position under the program.
Asif did not notify anyone in the federal government that the financial manager position no longer existed prior to Hussain coming to the United States.
Although Asif knew at least by April/May 2006, when the bank rejected his financing requests, that the original premise for the application for Hussain had evaporated and he could no longer meet the statutory requirements of the program, the first time he took it upon himself to notify the federal government that there was any issue, whatsoever, with the Hussain visa was when he personally signed and sent a letter on September 6, 2007.
On December 17, 2007, Shannon Oury, Asif's attorney at the time, sent a letter to USCIS retracting the September 6, 2007 letter. This letter admitted that Hussain had, in fact, reported to work, but now claimed Asif had terminated his employment on October 15, 2007. These letters are demonstrative evidence of what this judge witnessed first-hand at the trial: Asif has no trouble lying when he thinks he can gain an advantage by doing so,
The Court finds that Asif's failure to inform the federal government that the financial manager position was no longer available prior to Hussain's arrival in the United States, or that Hussain was actually being employed as a cashier/stocker at the 29th Street Quick Shop for wages considerably below what was represented in the H-1B visa process, constitute intentionally false statements made by Asif. Silence or concealment may constitute the requisite "false pretenses," for nondischargeability purposes, if the debtor has a duty to disclose the concealed facts.
Finally, his attempts during trial to cast off responsibility for his acts on to his accountant, Dave, were non-persuasive.
The second element of the § 523(a)(2)(A) test requires a plaintiff to prove that the false statement/false pretenses were intentional. The Court finds that Asif intended to deceive DOL when he failed to notify DOL of these material changes. Intent to deceive may be inferred from the totality of the circumstances,
The Court believed Hussain's testimony that Asif required him to work upwards of 80 hours a week at far less than minimum wage, which wages he would have had to pay a nonimmigrant worker. This allowed Asif to make higher profits for his company and himself by using this cheap labor. Thus, Asif had every monetary incentive to get such a worker to the United States. And as even Asif argues, most nonimmigrant workers are used to earning almost nothing for their hard work—at least according to America's standards—and if Asif could get Hussain to the States, he likely figured he could keep him and pay him much less than he would have to pay anyone else.
The third element of the § 523(a)(2)(A) test requires that the creditor relied on the representation. The two LCA packets for two financial manager jobs were complete and contained no obvious inaccuracies or errors on the forms checked for by DOL under 8 U.S.C. § 1182(n)(1)(G). Unless an LCA is incomplete or is obviously inaccurate, the Secretary is to provide certification to proceed with the H-1B application. I-129 Petitions for visas were then filed with USCIS specifically for Ghulam Hussain and Amir Latif. Extensive supporting documents were sent in support of the petitions for both workers, including the multiple Consulting Contract Agreements, the Business Plan, the cover letters detailing the extensive work that the company was doing, the corporate officer chart, and the attachment detailing that each of the job positions would entail only preparation of financial reports.
The fourth element of the § 523(a)(2)(A) test is the creditor's reliance must be "justifiable." The standard is whether the creditor's reliance is "justifiable" from a subjective standpoint.
The Court has no doubt that the DOL justifiably relied on Asif to provide this information, and did not act to revoke Hussain's petition, or stop issuance of his visa, based on its justified belief that there were no material changes in Hussain's proposed employment. In addition, the government would not have issued a visa under the H-1B program for Ghulam Hussain, a man with a masters degree in economics,
Finally, Plaintiff must prove that the damages sustained were the proximate result of the false representation. DOL proved that Asif's failure to disclose that he no longer had the specialty job for Hussain, and his failure to pay Hussain the wages associated with that job even after the job evaporated, was the direct result of the damages for unpaid wages. The claim for unpaid wages would never have arisen had Asif timely informed the federal government that the specialty occupation no longer existed. The visa would never have been issued, and Hussain would not have worked 80 hours each week for almost a year at sub-standard wages.
Asif makes one final argument why he should prevail in this action. He argues that DOL had the opportunity to seek, at the administrative or district court level, civil penalties against him if his actions were truly willful or intentional, and it elected not to do so. He then suggests that DOL's decision not to seek civil penalties is "strong evidence that Plaintiff did not believe there had been any willful misrepresentations of any material facts in connection with the LCA application submitted for Mr. Hussain's employment."
First, Asif provides no caselaw support for this theory, and the Court has found
Therefore, the Court finds that the DOL has met its burden of proving that the debt owed by Asif was procured by fraud and is non-dischargeable pursuant to § 523(a)(2)(A). And although Asif tried to suggest the amount of the judgment obtained in federal court against him was inflated, he did not appeal the amount of that judgment when entered, and this Court is bound by the amount of the judgment found by the District Court.
The Trustee has objected to Debtor Asif receiving a discharge on the basis that (1) he failed to keep or preserve books, documents, records and papers from which his financial condition or business transactions might be ascertained, (2) he knowingly and fraudulently made a false oath or account in connection with his bankruptcy case, (3) he knowingly and fraudulently withheld from the Trustee books, documents, records and papers relating to Debtors' property or financial affairs, and (4) he failed to explain any loss of assets or deficiency of assets to meet his liabilities.
To state a claim under § 727(a)(3), the Trustee must show that Asif failed to maintain and preserve adequate records, and that the failure made it impossible to ascertain his financial condition and material business transactions.
The Court finds the Trustee has met her burden of establishing Asif failed to keep and maintain sufficient records to enable his creditors and the Trustee to ascertain material business transactions. The business records that Debtor maintained (and later turned over) relating to the business operations were spotty, at best. The majority of ordinary business records were apparently either non-existent, or were simply discarded by Asif. Payroll records were not maintained, but tax returns were magically completed. Asif claimed he had discarded invoices and other records the Trustee requested and needed, but managed to later put together tax returns for the 2009 tax year. As to the sale of the Mahaom business, Asif was able to provide the Trustee with nothing more than documents dealing with Alliance Petroleum's purchase of certain convenience store real estate from Mahaom and a large and incomplete stack of invoices for fuel purchases.
Asif failed to keep any general accounting ledgers or invoices for other products sold, failed to keep cancelled checks, failed to keep inventories for his businesses, and failed to keep receipts. It appears that most of these records, which are routinely kept by most businesses, were simply not kept in the course of Asif's business practices. The limited business records that Asif claims he did keep were apparently discarded by him following the close of the businesses, despite express directions by his accountant, Ajay Dave, to retain the records in the event of another tax audit.
Asif also kept no documentation of the numerous personal loans he belatedly claimed he obtained from his acquaintances (some of whom seemed remote in closeness of the relationship to justify the size and informality of the loan), which loans were also conveniently repaid in cash from the sale of Mahaom's assets within just a few months of the bankruptcy. There were no promissory notes, no receipts for payment, no cancelled checks, no ledgers, no journal entries, no calendar entries—no documentation of any kind This failure to keep records also prejudices a trustee's attempts to avoid preferences for the mutual benefit of all unsecured creditors, resulting in some creditors getting repaid 100% of their unsecured, while others receive nothing. It also prevents the Trustee from quickly and accurately ascertaining if a debtor is actually making transfers to insiders, or simply pocketing the money.
Debtor's theory is more fully explained in Buckeye Ret. Co., LLC v. Bishop (In re Bishop),
However, as explained even in Bishop, if "corporate records are necessary to determine the debtor's financial condition, and the debtor has not kept or preserved such records, the debtor's discharge should be denied pursuant to § 727(a)(3)."
"Some courts have specifically stated that corporate records are relevant to denial of discharge proceedings where the `financial condition of the individual debtor and the corporation are closely connected.'"
Although the Debtor is correct that the Trustee has not specifically alleged that the corporate books and records were necessary to fully determine Debtors' personal finances, it is clear from the Pretrial Order, and from the evidence received at trial, that this is the case the Trustee was making. Debtors were the sole owners of the businesses in question and interchangeably used the funds from those businesses as their personal assets. Even Asif admitted at trial that he used the assets from the sale of Mahaom to pay fuel bills of another corporation he owned, A & U. He testified "[w]hen I own all the companies I have the right whatever I want I can transfer the money."
Without being able to trace the financial history of Debtors' various businesses, it is impossible to fully understand Debtors' personal finances in this case. For example, after the sale of the property held by Mahaom and the closing of the different convenience stores, Mahaom received a payment of over $170,000. If any of that payment remained in Asif's possession or control on the date of filing of this bankruptcy, it could constitute property of the Debtors' bankruptcy estate, assuming Mahaom's own creditors had been paid. Further, if any preferential or fraudulent payments were made with that money, the Trustee could institute a proceeding to collect those funds for the benefit of the estate. The failure to keep business records in this case directly impaired the Trustee's ability to do her job, and for the creditors of the estate to determine Debtor's financial transactions.
Although the Trustee can admittedly attempt to seek records from third parties to determine if there were inappropriate dissipation of assets, preferential transfers, fraudulent transfers, or outstanding assets to be recovered, she is seriously hampered since she does not know the identity of many of the payees. Again, she does not have this information because Asif elected, contrary to advice he received from an accountant, to either not keep the records in the first place, or discard them in the second place, or both. Accordingly, this is precisely the type of case that § 727(a)(3) is meant to address, and Debtor Asif's discharge is denied on that basis.
The next claim by the Trustee is that Asif withheld recorded information in connection with the bankruptcy case, and that his discharge should be denied pursuant to § 727(a)(4)(D). The Court finds that the Trustee failed to establish at trial that the recorded information she sought existed as of the date of the bankruptcy, or that it was in Asif's possession. In fact, the Trustee was successful in demonstrating that Debtor failed to keep and preserve appropriate business records, which formed the basis for the Court's denial of discharge under § 727(a)(3). In other words, if a debtor fails to keep records, it is difficult to also argue he should have turned over the records that were not kept.
The next claim by the Trustee is that Debtor Asif's discharge should be denied pursuant to § 727(a)(4)(A) because he knowingly and fraudulently made a false oath or account in connection with his bankruptcy case. That statute provides, in part, that "[t]he court shall grant the debtor a discharge, unless ... the debtor knowingly and fraudulently, in or in connection with the case ... made a false oath or account."
The Trustee has the burden to prove that the debtor knowingly and fraudulently made an oath, and that the oath related to a material fact.
A false statement or omission within a debtor's schedules may qualify as a false oath under § 727(a)(4)(A).
A false oath is "material," if it bears a relationship to the debtor's business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property.
There is really no dispute that Asif intentionally made a false statement under oath; the only real issue is if he had an intent to defraud. Asif contends, however, that his lie was immaterial because the money was repaid outside the 90 day preference period, so even had he told the truth initially, the Trustee could still not have pursued recovery for the estate.
The Court finds this information was material and in connection with the case. As noted above, even assets of little or no value may give rise to a denial of discharge if the omission prevents the trustee or a creditor from fully examining the debtor's pre-bankruptcy financial dealings. Asif's decision to lie about these loans caused the Trustee here to go down a rabbit hole, requesting documents, using deposition time, seeking interrogatory answers, and generally trying to find documentation of the $48,000 allegedly paid to pre-petition vendors.
In addition, if Asif would lie about this, the Trustee must surely then inquire what else he was lying about. Perhaps the loans to friends (or to pre-petition vendors) were repaid not after 90 days from the filing of bankruptcy, but instead, within 90 days, such that she could pursue the return of the assets. Or perhaps, like with the $10,900 Lahore transfer that Asif arranged using Hussain's checking account, which seems likely to have been made to insiders, this $48,000 was simply hidden. The Trustee should not have to guess, and this Court doubts the creditors or the Trustee will ever know for sure what Asif did with the sale proceeds. Accordingly, all the elements of the false oath claim are satisfied.
The Trustee claims that Debtor Asif's discharge should be denied pursuant to § 727(a)(5) because he has failed to explain any loss of assets or deficiency of assets to meet his liabilities. In order to prevail on this claim, the Trustee must make an initial showing of "the disappearance of substantial assets or of unusual transactions."
The Trustee successfully satisfied her initial burden in this case. At the end of January 2009, Debtors sold the property held by Mahaom LLC for $610,000. Approximately six months later, they filed for bankruptcy claiming to have only $714.14 in their checking account. Given this significant sale of property, the fact that these Debtors owned 100% of that company, and the lack of proceeds remaining a relatively short time later, it is incumbent on Debtor to explain what happened to all of those proceeds.
Debtor explained (and adequate documentary evidence corroborated) that from the total sales price, Alliance assumed a loan in the amount of $218,311.54 and a loan in the amount of $212,876.69. After crediting the assumption of these loans against the sales price, the sum of $170,218.83 remained, and that amount was wired to, and deposited in, a bank account owned by Mahaom LLC. Debtors indicated on their Statement of Financial Affairs that with this $170,218.83, they used $119,270 to pay a fuel bill owed by Mahaom LLC to Lion Petroleum and $13,000 to pay a fuel bill owed by Maham Inc. to Lion Petroleum. Although the records necessary to substantiate this information were not retained by Debtor, Debtor did finally produce incomplete records. They were so incomplete, however, as to make it impossible for the Trustee to corroborate that these amounts were the correct amount to pay these entities.
There was no evidence to suggest that Debtor had any motivation to overpay these creditors, however. For that reason, it is the remaining $48,000 that is of greater concern to the Court.
Debtor initially testified at a § 341 hearing, under oath, that he used the remaining sum to pay other miscellaneous expenses from winding down the remaining convenience store businesses. As noted, however, Asif later changed that story and claimed he actually used the funds to repay five loans he had received from friends and acquaintances in 2008. Debtor called five witnesses to testify that they had loaned Debtor large sums of cash during 2008. These loans varied between $5,000 and $8,000, with some witnesses testifying they loaned him cash on two separate occasions.
Not a single one of these loans was recorded by any writing, and each witness presented nearly identical testimony that (1) they were friends with Asif, (2) he asked for money to help and they gave it to him—no questions asked, (3) in their culture (all were from Pakistan or neighboring countries), they do not charge interest or make written promises to repay debts, (4) they gave the money to Asif in cash that they had located in their possession (not in the bank such that one could trace the transaction), and (5) Asif repaid them—also in cash, around February or March of 2009, just months before filing this bankruptcy.
The Court found the testimony concerning these loans to be odd. Not only was the testimony by each witnesses almost identical, but some witnesses seemed eager to volunteer testimony, such as the fact that it is not their custom to make written promises to repay debts, before even being asked by Debtors' counsel. In addition, the Court notes that at least one of these witnesses claimed to have only met Asif approximately four times prior to agreeing to loan him thousands of dollars with nothing more than an oral promise that the debt would be repaid. The Court
That said, the Court notes there was no evidence presented to refute any of the testimony given. Although the evidence was not entirely convincing, it was the only evidence presented, and the Court cannot find that the evidence presented was not truthful when testimony to deny discharge should be viewed in the light most favorable to the Debtor.
In addition, one of the witnesses that testified did state that he would have at least one bank record that would show the withdrawal and deposit of the money he loaned to Asif, and identified the specific identity and location of the bank. The Trustee had the opportunity to subpoena those records, because there was a break in the trial for several weeks after that testimony was received. She either did not obtain the records, or elected not to present the evidence, in an effort to rebut that testimony.
Again, because it is the Trustee's ultimate burden to show that Debtor failed to account for the funds, and it appears the funds were more likely than not spent in the manner Debtor claims, there is no unexplained disappearance or shortage of assets. Accordingly, discharge will not be denied on the § 727(a)(5) claim.
The Trustee next claims that she is entitled to the turnover of certain estate property pursuant to § 542. Specifically, the Trustee claims, in the Pretrial Order, that the following documents and/or accountings have not been provided:
The Trustee has the burden of proving what property belongs to the estate, and thus has to be turned over to the estate.
The Court finds that the Trustee did not establish that the itemized information existed, was in Debtor's possession, and had not been turned over. In fact, much of the information sought formed the basis for the Trustee's successful claim
The Trustee has requested a judgment in the amount of $48,000 plus all unknown sums transferred and not accounted for by Asif. The Court has held that Asif finally explained—albeit belatedly and pretty weakly—what he did with the $48,000 remaining from the sale of his businesses. The only evidence presented at trial was that this money was used to repay personal loans to friends who had lent him money. The Trustee has not advanced any other basis for a judgment in the amount of $48,000, and has not shown that Asif had this, or any other unreported assets, in his possession on the date of filing. Therefore, the Court finds there is no basis for awarding the Trustee a monetary judgment in this case.
In his post-trial brief, Asif actually argues that because he is an "honest but unfortunate" Debtor, the Court should deny all claims against him. This is ironic, because although the vast majority of debtors this Court sees each year are honest but unfortunate, this Debtor does not come close to meeting that description. Based on the foregoing analysis, the Court finds that the debt owed to the Department of Labor by Defendant, Asif, is a non-dischargeable debt pursuant to § 523(a)(2)(A).
The Court finds that Asif's failure to notify DOL that he no longer had a position for Hussain as a financial manager, which he knew well before the H-1B visa was issued to Hussain, constitutes the kind of actionable false representation or false pretenses contemplated by § 523(a)(2)(A). But for that failure to notify the government of the material change in the job that was now available for the H-1B employee, Hussain would not have come to the United States to work for Asif at substandard wages, so the damages are directly caused by that omission.
The Court further finds that Asif made similar omissions when he failed to notify DOL after Hussain's arrival that he was not working as a financial manager, as required by the H-1B program, and he did not pay Hussain the wages required by the H-1B program. Accordingly, the debt that arose as a result of his multiple failures to comply with the H-1B program, is non-dischargeable.
The Court also finds that Debtor Asif should be denied a general discharge pursuant to § 727(a)(3) for failure to keep or preserve proper financial records and pursuant to § 727(a)(4)(A) for knowingly and fraudulently making a false oath or account in connection with his bankruptcy case.
