JOAN N. FEENEY, Bankruptcy Judge.
The matter before the Court is the Second Amended Complaint filed by the Commonwealth of Massachusetts, through its Attorney General, Martha Coakley. Together with the United States trustee, the Commonwealth seeks, inter alia, the denial of Alec G. Sohmer's discharge pursuant to 11 U.S.C. § 727(a)(2), (3), (4), and (5). On August 28, 2009, this Court granted the Joint Motion to Sever and Conduct Trial on Plaintiffs' Claims pursuant to 11 U.S.C. § 727. The Commonwealth and the United States trustee (collectively, the "Plaintiffs") asserted, and the Court agreed, that trial on the claims arising under 11 U.S.C. § 727 would promote the interest of judicial economy as the Commonwealth's claims under 11 U.S.C. § 523(a) would be
At the trial, three witnesses testified: Alec G. Sohmer ("Sohmer" or the "Debtor"), Harold B. Murphy, Esq., the Chapter 7 Trustee of the Debtor's bankruptcy estate (the "Trustee"), and Craig R. Jalbert, CPA, the Trustee's accountant ("Jalbert"), and 48 exhibits were introduced into evidence. The issues presented include whether the Debtor concealed property of the estate, failed to maintain accurate, complete, and reliable books and records, or made false oaths or accounts in connection with his case. Documentary evidence submitted by the Plaintiffs, together with the stipulated facts set forth in the parties' Joint Pre-Trial Memorandum, substantiate the Plaintiffs' claims that the Debtor omitted bank accounts, investment accounts, contingency fee agreements and rights thereunder, and certain transfers from his Schedules of Assets and Statement of Financial Affairs. Thus, the outcome of the adversary proceeding depends in large part on the viability of the defenses raised by the Debtor, including lack of any fraudulent intent. The Court now makes its findings of fact and conclusions of law in accordance with Fed. R. Bankr.P. 7052.
The Debtor, an attorney who concentrated his practice in bankruptcy law, filed a voluntary Chapter 11 petition on November 6, 2006. His Schedules and Statement of Financial Affairs, as well as other documents were initially due on November 22, 2006. On November 20, 2006, however, the Debtor, following the appointment of Harold B. Murphy Esq. as Chapter 11 Trustee on November 15, 2006, moved on an emergency basis to convert his Chapter 11 case to a case under Chapter 7. As grounds for his motion, he stated:
The Court granted the Debtor's Motion to Convert on November 20, 2006, and set a new deadline of December 5, 2006 for filing Schedules and the Statement of Financial Affairs. After obtaining an extension of time, the Debtor filed his Schedules, Statement of Financial Affairs and other required documents on December 22, 2006, and the Trustee conducted the section 341 meeting of creditors on January 17, 2007. The Debtor never filed amended Schedules or an Amended Statement of Financial Affairs.
A 1991 graduate of Villanova School of Law, the Debtor practiced as Alec G. Sohmer & Associates in Brockton, Massachusetts and, together with Andrew Palmer, Esq., as a partner in a partnership known
In the two-year period preceding the filing of his bankruptcy petition, the Debtor, in addition to practicing bankruptcy and personal injury law, conceived and implemented, through a Nevada corporation known as Timeless Funding, Inc. ("Timeless Funding"), a foreclosure rescue program. He described and characterized the program as follows:
As a result of participation in the program, 25 individual or joint homeowners were divested of title to their residential real properties, which, as the Debtor recognized, they may have lost to foreclosure in any event.
The mechanics of the Timeless Funding program were not uniform for each of the 25 individuals or couples who participated, some of whom were Sohmer's bankruptcy clients. The transactions did have a number of elements in common, however. Participation in the program required, among other things, the execution of a purchase and sale agreement by the property owner(s); the execution of an Interim Ownership Agreement; the conveyance of the distressed property from the property owner(s) to the Debtor (or to a nominee trust he controlled, his spouse, Jennifer Sohmer, or his brother, Bradley Sohmer)
In most instances, the Debtor applied for mortgage loans to acquire the properties from the distressed homeowners and signed the HUD-1 Settlement Statements at the closings.
In conjunction with the Interim Ownership Agreements, the homeowners typically held a 85% beneficial interest in the nominee trust which eventually held title to the properties, and Timeless Funding held the remaining 15% interest. Timeless
In practice, the Timeless Funding program failed to benefit either the property owners or the Debtor. The financial difficulties plaguing the property owners were not alleviated by reduced monthly payments, and many defaulted with respect to their interim ownership contributions, triggering defaults by Sohmer to the lenders he borrowed from to acquire title from the Timeless Funding homeowners. Sohmer attempted to keep up with his mortgage obligations but, in his words, the Timeless Funding program "got away" from him, resulting in a "nightmare of mortgages in potential foreclosures."
In the late summer of 2006, the Commonwealth commenced a civil action against Sohmer and his spouse, both individually and as trustees of various nominee trusts, and Timeless Funding in the Suffolk Superior Court, Department of the Trial Court and obtained a Temporary Restraining Order on August 30, 2006. That order prohibited the Sohmers, in their individual capacities and as trustees, and Timeless Funding, its agents, employees, and affiliates, from "transferring, pledging, selling, mortgaging, encumbering, or in any way disposing of ownership or custody of any real or personal assets that Defendants own or control...." In violation of that injunction, the Debtor and his spouse refinanced their property located at 23 Roxanne Road, Pembroke, Massachusetts in mid-September 2006. The Debtor did not disclose the transaction in his Statement of Financial Affairs.
In addition to the civil action commenced against him by the Commonwealth, several Timeless Funding participants became disenchanted with the program and commenced actions against him. These actions caused Sohmer, in an e-mail sent on August 14, 2006, to advise his partner, Andrew Palmer, of the following: "I have removed all of my files from the office. I do not think it is a good idea that I am seen renting space. A little distance wouldn't hurt."
At the commencement of his case, in addition to his marital residence and office condominium, the Debtor held title to 22 properties, either as trustee or as co-trustee with his brother, Bradley Sohmer, or his spouse, Jennifer Sohmer. He held title to one property, 3 Lady Allison Way, Bourne, Massachusetts, as trustee of the Sohmer Family Intervivos Trust. The owners of the property located at 5 Joe Jay Lane, Sandwich, Massachusetts conveyed it to Jennifer Sohmer by quitclaim deed, and the property may have been subsequently transferred to a nominee trust, although the declaration of trust was not introduced into evidence. Although holding title to 49 Courtland Street, Middleboro, Massachusetts as Trustee of the 49 Courtland Street Nominee Trust, the Debtor, through the merger of legal and equitable title, actually owned that property outright as he was designated the 100% beneficiary of the trust. The Debtor testified that the schedule of beneficiaries of that nominee trust was erroneous.
Although the Debtor prepared "Accounting Statements" for each of the Timeless Funding program participants, the statements were not necessarily contemporaneous with receipts and disbursements and contained no references to any of the five bank accounts the Debtor used to deposit and disburse monies. In addition, the Debtor utilized an accounting software program identified as QuickBooks. Jalbert testified that because the Debtor
The collapse of Timeless Funding triggered the Debtor's decision to commence a Chapter 11 on November 6, 2006. Two weeks later, the Debtor elected to convert his Chapter 11 case to a case under Chapter 7 and Harold B. Murphy, Esq. was appointed the Chapter 7 Trustee. The Trustee engaged the accounting firm of Verdolino & Lowey, P.C., whose principal, Jalbert, together with representatives of the Trustee, secured the Debtor's law office soon after the Trustee's appointment. As noted above, the Debtor filed his Schedules and Statement of Financial Affairs on December 22, 2006, signing them under penalty of perjury.
On Schedule A-Real Property, the Debtor listed his marital residence, business condominium, a month-to-month lease, as well as 22 other properties associated with the Timeless Funding program. He specified the nature of his interest in the property as follows: "Timeless Funding holds a 15 % beneficial interest in the property." A comparison of the Plaintiffs' exhibit setting forth properties held in trust (with the exceptions of the property located at 5 Joe Jay Lane, Forestdale, Massachusetts, for which no deed from Jennifer Sohmer to a nominee trust was produced, and the property located at 49 Courtland Street, Middleboro, Massachusetts, which the Debtor owned outright as a result of the merger of the legal and equitable title), the Debtor's ownership interests with respect to the Timeless Funding properties were equitable interests in nominee trusts and did not constitute an ownership interest in the real estate itself. The Debtor did not list his equitable interests in the nominee trusts on Schedule B-Personal Property (Question 19. "Equitable or future interests, life estates, and rights or powers exercisable for the benefit of the debtor other than those listed in Schedule A-Real Property" and Question 35. "Other personal property of any kind not already listed."). He did not disclose the transfers arising from the Timeless Funding participants' conveyances of their properties to him (or his nominees) and then by him (or his nominees) to the nominee trusts holding title to the properties in his Statement of Financial Affairs.
On Schedule B-Personal Property, the Debtor listed, among other things, 10 bank accounts (four at Citizens Bank and six at Community Bank),
In addition to the accounts listed on Schedule B, the Debtor had other bank accounts, including two at Sovereign Bank, one ending in the digits 8972, and the other ending in the digits 7016. He opened the accounts on November 4, 2006, two days before he filed his Chapter 11 petition. The Debtor suggested during his testimony that he intended those accounts to be Debtor in Possession accounts, although they were not designated as such on any of the bank statements. On November 6, 2006, he deposited the sum of $85,796.74 into Sovereign Bank Account xxx 7016 using a Citizens Bank treasurer's check; two days later, again using a Citizens Bank treasurer's check, he deposited another $10,000 into Sovereign Bank Account xxx 7016. On November 9, 2006, the Debtor opened a Community Bank Account xxx 3703 and the next day, November 10, 2006, he deposited $92,705.57 into that account. On December 11, 2006, he withdrew the remaining funds in the Sovereign Bank Account xxx 7016, which totaled $3,092.44.
In sum, the Debtor stipulated 1) that on October 12, 2006, he deposited refinancing proceeds from his personal residence in the sum of $157,283.81 into his Citizens Bank Account No. xxx 333-7; 2) that on October 18, 2006, he withdrew $130,000 from Citizens Bank Account No. xxx 333-7 in the form of a treasurer's check; 3) that on October 24, 2006, using a Citizens Bank treasurer's check dated October 18, 2006, he deposited $130,000 back into Citizens Account No. xxx 333-7; 4) that on November 4, 2006, he withdrew $95,796.97 from Citizens Bank Account No. xxx 333-7; and 5) that on November 6, 2006, he deposited $85,796.97 into Sovereign Account No. xxx
The Debtor also did not disclose Sovereign Bank Account No. xxx 8972, which he opened on November 4, 2006. He made his first deposit into that account on the petition date in the amount of $4,039.91. Neither account contained any reference to "Debtor in Possession" or "DIP."
As noted above, the Debtor's law practice was not limited to consumer bankruptcy cases. Prior to his bankruptcy, the Debtor entered into oral and written contingency fee agreements with a number of clients to represent them in connection with personal injury claims before he filed his bankruptcy petition.
After filing his bankruptcy petition, but before the section 341 meeting held January 17, 2007 at which he testified under oath, the Debtor, on January 8, 2007, opened an IOLTA bank account at Rockland Trust (Account No. xxx 2905). He subsequently deposited 21 checks into that account related to the settlement of personal injury claims of clients with whom he had contingency fee agreements prior to the commencement of his case. The Debtor did not disclose these contingency fee agreements as assets either on Schedule B, Schedule G-Executory Contracts, or in his Statement of Financial Affairs. The following is a list of clients, the date of the
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Date of Amt. of
Settlement Settlement
Prepetition Client Check Check
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Anthony Cahill 12/19/06 $ 3,000
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Helen Soderlund 12/26/06 $ 42,500
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Michelle Brousseau 1/17/07 $ 5,000
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Kimberly May 1/19/07 $ 7,279.41
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Marie Cherie 3/16/07 $ 5,000
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Casseus Cadeus 4/12/07 $ 3,000
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Marie Cherie 4/12/07 $ 3,000
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Melinda Cherie 4/18/07 $ 3,000
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Natalie Cherie 4/18/07 $ 2,000
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Joanne Bergin 5/7/07 $ 27,500
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Wesley Designor 6/4/07 $ 7,500
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Debra Hutchinson 6/5/07 $ 17,500
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James White 10/3/07 $ 4,500
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John Doe 10/25/07 $200,000
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Shamus Scannell 4/4/08 $ 7,500
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Cindy Soderlund 4/10/08 $ 9,000
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Vernae Barber 4/30/08 $ 7,500
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Jean Fleurime 4/22/08 $ 6,000
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Marie Aneus 4/22/08 $ 4,000
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Amber Sampson 6/26/08 $110,000
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Robert Levine 10/14/08 $ 4,413.04
______________________________________________________
Total $479,192.45
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At trial, the Plaintiffs were able to establish links between the total settlement amounts received by the Debtor from certain of his personal injury cases, which were initially deposited into his Rockland Trust IOLTA account, with the net amounts of money attributable to Sohmer's contingent fee. Sohmer subsequently deposited those amounts into his Sovereign Bank Account No. xxx 8972 using Rockland Trust treasurer's checks as follows:
-----------------------------------------------------------------------------Date of Deposit Amt. of Deposit Type of Deposit Client ----------------------------------------------------------------------------- Rockland Trust 7/13/07 $ 5,856.64 treasurer's check Debra Hutchinson ----------------------------------------------------------------------------- Rockland Trust 7/13/07 $ 2,525.88 treasurer's check Wesley Designor ----------------------------------------------------------------------------- Rockland Trust 5/16/2008 $ 2,526.46 treasurer's check Shamus Scannell ----------------------------------------------------------------------------- Rockland Trust 5/16/08 $ 2,500 treasurer's check Vernae Barber ----------------------------------------------------------------------------- Rockland Trust 5/16/08 $ 3054.14 treasurer's check Cindy Soderlund ----------------------------------------------------------------------------- Rockland Trust Jean Fleurime and 5/16/08 $ 3,333.33 treasurer's check Marie Aneus _____________________________________________________________________________Total $19,796.45 -----------------------------------------------------------------------------
The Debtor also deposited checks into Sovereign Account xxx 8972 which he received and which were dated before November 6, 2006, the date of the filing of his petition, including a Citizens Bank check in the sum of $4,039.91 which he used to open the account, as well as nine other checks totaling $14,937. All of these checks were from prepetition clients and some related to the filing of bankruptcy petitions (two checks were in the sum of $299—the amount of the filing fee for a Chapter 13 case). Neither the Debtor's Schedules nor Statement of Financial Affairs contained any references to those payments.
On November 30, 2006, the Debtor sent an e-mail to his attorney, containing an unsworn "current Case Inventory." In that e-mail, he stated:
The Debtor added that he required access to his laptop computer to handle his pending bankruptcy cases.
The Debtor's current Case Inventory contained the names of 26 clients with contingency fee agreements and 17 consumer bankruptcy clients. The Debtor did not ascribe a value to most of the contingency fee cases listed. The highest value ascribed to any case was $10,000. The Debtor did not include in his Case Inventory the names of the two clients whose postpetition settlements yielded the largest fees, namely "John Doe" and Helen Soderlund, as well as the names of five other clients for whom he obtained postpetition settlements. In particular, the Debtor received a settlement check in the amount of $42,500, dated December 26, 2006, for Helen Soderlund just after he filed his Schedules and Statement of Financial Affairs. Additionally, the Roman Catholic Archbishop of Boston issued a check made payable to Alec G. Sohmer & Associates as Attorney for John Doe, a minor whose identity is confidential, on October 25, 2007 in the sum of $200,000. The Debtor deposited that check in his Rockland Trust Account xxx 2905, and obtained a Rockland Trust Treasurer's Check dated November 5, 2007 in the sum of $128,158.34.
The Debtor stipulated that he did not disclose an active Citizens Bank Account xxx 2378 in his Schedules or Statement of Financial Affairs. Additionally, he did not disclose the following four accounts at Community Bank:
The last two accounts were closed on March 23, 2006, within one year of the filing of his petition.
Although the Debtor listed five John Hancock SEP/ IRA accounts on Schedule B, he admitted in the Joint Pre-Trial Stipulation that he omitted three other accounts as follows:
Jalbert testified that his firm was engaged to analyze the Debtor's books, records, and accounts. Together with counsel to the Trustee, he visited the Debtor's Brockton office where he found the Debtor's office, a conference room, and a room on the second floor to be in complete disarray with papers everywhere, including opened and unopened mail. He indicated
Jalbert indicated that, although he collected the Debtor's books and records, he was available by appointment to meet with the Debtor to enable him to access his records, including client files, and to prepare his Schedules and Statement of Financial Affairs. Jalbert reported that as of September 11, 2009, his firm had incurred fees in excess of $47,515 and expenses of $611.98 in trying to make sense of the Debtor's accounts, QuickBooks and Timeless Funding transactions. Additionally, Jalbert testified that his firm performed a significant amount of work for which it did not charge the bankruptcy estate. Indeed, he testified that the firm spent "north of 400 hours" attempting to reconcile the Debtors' various accounts and ascertaining his business affairs.
The Plaintiffs introduced into evidence the joint federal and state income tax returns submitted by the Debtor and his spouse for 2004 and 2005. The Debtor and his spouse signed the returns under penalty of perjury. On Schedule C to the tax return, the Debtor reported gross receipts of $729,671 and a net profit of $116,778 for the 2004 tax year; the Debtor reported gross receipts of $1,002,986 and a net profit of $95,381 for the 2005 tax year. He did not reference Timeless Funding on either return. Nevertheless, on his Statement of Financial Affairs, the Debtor attributed both his 2004 and 2005 net income to his law practice
Additionally on Schedule C attached to his federal income tax return, the Debtor reported "Client Loans" in the amount of $19,579 in 2005. On Schedule B, he listed 10 Timeless Funding participants and accounts receivable due from them totaling
The Debtor emphasized the circumstance that he was locked out of his office and lacked access to his laptop computer when he converted his case from Chapter 11 to a case under Chapter 7. Nevertheless, ten days after the date of the conversion of his case to Chapter 7, and before filing his Schedules on December 22, 2006, he produced a Case Inventory. Although Jalbert and counsel to the Trustee collected his books and records on the day they secured his office, and Jalbert did not communicate with him about his accounting practices, the Debtor did not testify that either Jalbert or the Trustee refused him reasonable access to client files, books, records, and other papers or that he even requested that they do so. While it may not have been as convenient for him to compile information as it would have been had he remained a Chapter 11 debtor in possession, the Court finds that he was not deprived of access to his business and personal records so as to justify the submission of false and inaccurate Schedules and a false and inaccurate Statement of Financial Affairs.
The Trustee testified about his experience liquidating law practices. He noted that the attorney—client privilege and the collection of contingent fees owed attorneys poses challenges to trustees charged with oversight of attorneys and law firms who are debtors. He testified that it was his practice to enter into arrangements whereby the estate and the attorneys working on contingency fee cases would share any recoveries based upon an allocation of prepetition and postpetition services, adding that he relied upon self-reporting by the attorneys involved.
The Trustee testified that he reviewed the Case Inventory produced by the Debtor, but did not enter into an agreement with the Debtor with respect to his contingency fee cases, focusing instead on the more urgent and complex Timeless Funding issues. The Trustee concluded based upon his review of the Case Inventory that "it didn't appear that there was any meaningful value there." The Trustee indicated, however, that the Debtor did not inform him of, and he was unaware of, the $42,500 settlement obtained for Helen Soderlund, the $200,000 settlement received on behalf of John Doe, the $27,500 settlement received on behalf of Joanne Bergin,
The Trustee concluded his direct testimony with the observation that a significant portion of the time he committed to the Debtor's case was focused on obtaining
The Trustee testified that after the conversion of the case to Chapter 7, the Debtor's office was locked and that the Debtor did not have unfettered access to his office without the presence and supervision of his representatives. Additionally, he testified that he had no discussions with the Debtor about the value of the cases listed in the Case Inventory or about the potential sale of the personal injury cases to him, adding that he did not abandon the cases. According to the Trustee, the value of the Debtor's contingency fee cases would vary depending upon whether most of the work was done prepetition. He explained:
The Plaintiffs seek to deny the Debtor a discharge under 11 U.S.C. § 727(a), which provides in relevant part the following:
11 U.S.C. § 727(a).
The United States Court of Appeals for the First Circuit has addressed the legal standards applicable to what this Court considers the crux of the Plaintiffs' Second Amended Complaint, namely the Debtor's knowing and fraudulent false oaths made in conjunction with his Schedules and Statement of Financial Affairs. See 11 U.S.C. § 727(a)(4)(A). From the submission of those false documents and circumstantial evidence, the Court can infer violations of other subsections of 11 U.S.C. § 727, namely subsections (a)(2) and (a)(4)(D).
In re Tully, 818 F.2d at 110 (emphasis supplied). See also The Cadle Co. v. Duncan (In re Duncan), 562 F.3d 688, 696 (5th Cir.2009) (citing Tully and shifting the burden to the debtor to present evidence that he is innocent of the offense charged
With respect to 11 U.S.C. § 727(a)(4)(D), a party objecting to discharge under that section has the initial burden of proving the following: "1) the withholding of documents was done by the debtor or someone for whose conduct the debtor is legally responsible; 2) was in connection with a case; 3) was withheld from an officer of the estate entitled to possession; 4) was done knowingly and fraudulently; and 5) relates to the debtor's property or financial affairs." Olson v. Slocombe (In re Slocombe), 344 B.R. 529, 534 (Bankr.W.D.Mich.2006). See also Lassman v. Hegarty (In re Hegarty), 400 B.R. 332, 344 n. 81 (Bankr.D.Mass.2008).
The Court finds that the Plaintiffs sustained their burden of establishing that the Debtor knowingly and fraudulently made false oaths both on his Schedules and Statement of Financial Affairs and at his section 341 meeting and that those false statements were material and intended to mislead the Trustee and creditors. Regardless of whether a three-part or five-part test is employed, circumstantial evidence supports findings that the Debtor knew his statements to be false and that
The Debtor omitted from his Schedules three bank accounts in his own name or that of his law office (Sovereign Bank Account Nos. xxx 8972 and 7016 and Community Bank Account No. xxx 0319), as well as three other Community Bank accounts. Additionally, on Schedule B, he omitted his SEP/IRA Account No. xxx 921-0 at John Hancock, which contained a share balance of 875.8070, as well as two other accounts, one of which belonged to his spouse who had designated him the beneficiary of her account.
The Debtor's omissions of the Sovereign Bank accounts were particularly egregious as he had opened the accounts just two days before he filed his Chapter 11 petition and deposited funds in them on the very day he filed his petition. He compounded his omissions by lying about the existence of the Sovereign Bank accounts at his section 341 meeting. Furthermore, he used Sovereign Bank Account No. xxx 8972 to deposit at least some of the contingency fees he received postpetition from settlements of prepetition personal injury cases, totaling $19,796.45, and he used the same account to make postpetition deposits of checks, totaling $18,978.91, which he received prepetition. The Court rejects the Debtor's suggestion that the Sovereign Bank accounts were intended to be Debtor in Possession accounts.
In addition to failing to disclose his Sovereign Bank accounts, the Debtor failed to disclose, either in his Schedules or Statement of Financial Affairs, the contingency fee agreements he had with his personal injury clients, and, as noted above, the existence of prepetition checks he was holding at the commencement of his case. While representing that he was discontinuing the practice of law on Schedule I, he failed to disclose to the Trustee the settlements of his prepetition personal injury cases for which he obtained $479,192.45.
With respect to the Debtor's contingent fee agreements, the United States Court of Appeals for the Seventh Circuit considered the issue of "whether a merely potential contingent fee is property." In re Carlson, 263 F.3d 748 (7th Cir.2001). It observed:
In re Carlson, 263 F.3d at 750-51. Under Massachusetts law, just like under Illinois law, an attorney has a legally enforceable interest in a potential contingent fee that is property of the estate under 11 U.S.C. § 541(a). See generally Malonis v. Harrington, 442 Mass. 692, 816 N.E.2d 115 (2004). Accordingly, Sohmer was required to disclose his personal injury cases on his Schedules, either on Schedule B or on Schedule G,
The Debtor's Case Inventory did not cure his omissions. Not only did the Debtor omit cases which resulted in the highest settlement amounts from his Case Inventory, which was not filed with the Court or signed under oath, he minimized the value of the cases on the list transmitted to the Trustee. Thus, the Court finds that Plaintiffs established that the Debtor withheld records relating to his property and financial affairs from the Trustee under 11 U.S.C. § 727(a)(4)(D).
The Debtor raises a no harm, no foul defense to Plaintiffs' claims with respect to the omission of the Sovereign Bank accounts and other assets. He asserts that because there were no funds in the accounts at the time he filed his bankruptcy petition and because the Trustee learned of the accounts on the petition date, his failure to disclose the accounts was immaterial, although the evidence did not establish whether the initial deposits preceded or followed the actual time the Debtor filed his petition. The Court rejects the Debtor's position, particularly as he funded one of the accounts with the proceeds from the refinancing of his home, a transfer which he did not disclose on his Statement of Financial Affairs, and which was in violation of a temporary restraining order issued by the Suffolk Superior Court.
According to the court in United States Trustee v. Garland (In re Garland), 417 B.R. 805 (10th Cir. BAP 2009),
417 B.R. at 814-15 (citations omitted, footnotes omitted) (emphasis supplied). See also In re Mascolo, 505 F.2d 274, 277 (1st Cir.1974) ("Matters are material if pertinent to the discovery of assets, including the history of a bankrupt's financial transactions"). Even assuming there was no money in the accounts at the time the Debtor filed his petition and the deposits were made minutes or hours after the commencement of his case, the Court finds that the Debtor had a duty to disclose the existence of the accounts, particularly as he immediately started to use Account No. xxx 8972 to deposit prepetition checks which, depending upon whether they were payment in full or retainers for future work, should have been listed on Schedule B as "Other personal property of any kind not already listed," or on the Statement of Financial Affairs.
The Debtor signaled his concern about his postpetition Chapter 11 income in his Motion to Convert, but, nevertheless, misled the Trustee and creditors by stating "Debtor will close down his law practice and will likely see a decrease in income..." on Schedule I. The Debtor's receipt of several prepetition checks in the amount of $299, the amount of the filing fee for Chapter 13 cases, reveals that he intended to continue practicing bankruptcy law, and
The Debtor proffered several excuses for his failure to disclose the existence of all his contingency fee entitlements and other assets, including lack of access to his office and lack of prejudice to the Trustee. The Court rejects the Debtor's excuses. In the first place, the Debtor had access to all his books, records and laptop computer between November 6, 2006 and the appointment of a Chapter 11 Trustee on November 15, 2006 at the earliest, or between November 6, 2006 and the allowance of his Motion to Convert on November 20, 2006 at the latest. In view of the initial November 22, 2006 deadline for filing his Schedules and Statement of Financial Affairs, the Debtor was or should have been in the process of compiling the information needed to honestly and accurately prepare his Schedules and Statement of Financial Affairs before the appointment of Harold Murphy as either Chapter 11 or Chapter 7 Trustee.
The Debtor argues that he lacked any fraudulent intent with respect to the omission of assets, again pointing to his limited access to his office and the Case Inventory, which the Trustee did not question him about. The Debtor, as an experienced bankruptcy practitioner, knew or should have known that completion of the Schedules and the Statement of Financial Affairs is one of the paramount duties of a debtor. See 11 U.S.C. § 521(a). Moreover, he knew or should have known that he could request a court order compelling the Trustee to grant him full and complete access to his records in order to complete his Schedules and Statement of Financial Affairs if the Trustee were unreasonably denying him access to his office and business records. He made no such request. Finally, the Debtor could have amended his Schedules and Statement of Financial Affairs at any time if he perceived that they contained errors or omissions, see Fed. R. Bankr.P. 1009, yet he failed to do so.
In In re Tully, the First Circuit observed:
818 F.2d at 111 (footnote omitted, emphasis supplied).
Sohmer, unlike the debtor in Tully, did not amend his Schedules and Statement of Financial Affairs. Instead, he relies on the axiom that the provisions of 11 U.S.C. § 727 should be construed liberally in favor of the debtor and suggests that the myriad problems with his Schedules and Statement of Financial Affairs are merely "technical and conjectural." The Court is unpersuaded by his arguments. The Debtor's excuses easily fall within the ambit of "self-serving lamentations" which must be rejected, particularly as his veracity and credibility are suspect. Evidence of his lack of integrity, such as his conduct in violating the Commonwealth's restraining order and executing false HUD-1 Settlement Statements, demonstrates his lack of credibility and undermines any excuse he may proffer for the false oaths made on his Schedules and Statement of Financial Affairs and at the section 341 meeting. The Debtor's omissions, coupled with his "paperwork jungle," caused the Trustee and Jalbert needless work in their attempts to ferret out assets and understand his business affairs and the bankruptcy estate to incur needless expenses. Indeed, the condition of the Debtor's records could easily be construed as part of his effort to obscure or conceal assets. Sohmer's attempts to shift the blame for his conduct to them because they failed to engage him in discussions about his affairs are contrived and preposterous.
The Debtor's excuse that the Trustee took no action with respect to his personal injury cases after having been made aware of them before the filing of the Schedules and Statement of Financial Affairs, evinces desperation. It certainly does not support the conclusion that he was excused from producing a complete and accurate list of his personal injury cases in his Schedules and/or Statement of Financial Affairs and was entitled to keep his contingent fees from the proceeds from settlements of personal injury cases, which totaled $479,192.45. The Court rejects the Debtor's implicit argument that because the Trustee did not question him about his Case Inventory the Trustee effectively abandoned any interest in the personal injury settlements and authorized the Debtor to utilize his contingent fees in any manner he saw fit, particularly as he minimized potential recoveries in the Case Inventory and the Trustee would have had no reason to suspect, within the first months of the case, that the Debtor omitted the most valuable cases from his list.
The Case Inventory produced by the Debtor was not signed under penalty of perjury and was not a substitute for a complete and honest disclosure of the Debtor's contingency fee agreements with his personal injury clients, which should have been disclosed on Schedule B or even Schedule G. The Case Inventory produced by the Debtor was incomplete and discounted the value of potential settlements. It was not a full an complete disclosure. The Debtor omitted the two cases which were settled for the largest amounts, one of which involved alleged child sexual abuse, hardly forgettable under any stretch of the imagination.
The Debtor cites a decision in which the court determined that personal injury contingency fees cases were nonassumable executory contracts and not assets of the bankruptcy estate. See Tonry v. Hebert (In re Tonry), 724 F.2d 467 (5th Cir.1984). While that case, which was decided under Louisiana law, may or may not be applicable under Massachusetts law, the case did not involve an objection to the debtor's discharge under 11 U.S.C. § 727. The ultimate issue in this case is whether the contingency fee agreements should have been disclosed, not whether the contracts were assumable—an issue the Court could only determine after notice and a hearing. The Debtor's omissions of his contingency fee agreements and other assets warrants denial of his discharge under 11 U.S.C. § 727(a)(4)(A) and (D). The Debtor did not rebut the prima facie case submitted by the Plaintiffs.
In Razzaboni v. Schifano (In re Schifano), 378 F.3d 60 (1st Cir.2004), the First Circuit articulated the standards for denial of discharge under 11 U.S.C. § 727(a)(3). It stated:
In re Schifano, 378 F.3d at 68.
The issue in this case is not whether the Debtor failed to preserve any books and records, but whether the books and records he did maintain were in a condition to enable the Trustee and parties in interest to ascertain his financial condition and business transactions. The Plaintiffs cite Christy v. Kowalski (In re Kowalski), 316 B.R. 596, 602 (Bankr.E.D.N.Y.2004), in which the court observed:
In re Kowalski, 316 B.R. at 601-02 (citing Krohn v. Frommann (In re Frommann), 153 B.R. 113, 117 (Bankr.E.D.N.Y.1993)).
The Debtor was engaged in two businesses: a law practice and a mortgage foreclosure rescue business for which he received a fee, in most cases, of $15,000 per transaction. Although the Debtor kept separate files for each Timeless Funding transaction and kept accounting statements for those transactions, the accounting statements were not necessarily contemporaneous with actual receipts and disbursements and the Debtor commingled his receipts and disbursements from the Timeless Funding transactions with his law practice and his personal affairs using multiple accounts and producing a "paperwork jungle." See In re Tully, 818 F.2d at 111. In conjunction with the Timeless Funding transactions, the Debtor, with the complicity of Andrew Palmer, prepared false HUD-1 Settlement Statements which did not reflect the $15,000 Timeless Funding fee per transaction and did not accurately reflect that Sohmer, as the buyer of the Timeless Funding homeowners' properties, was contributing none of his own money for the acquisitions of the properties. From those false and misleading beginnings, the Debtor constructed accounting statements for the Timeless Funding transactions which were neither contemporaneous nor complete, as the statements omitted dates, check numbers and references to the bank accounts used in conjunction with the transactions.
Jalbert testified that when he and a representative of the Trustee first visited the Debtor's law office they found utter chaos. He also testified that he and his accounting firm incurred fees in the sum of $47,515 to obtain and organize the Debtor's records, to establish amounts due from or to the Timeless Funding homeowners, to review and analyze the Debtor's various bank accounts, and to prepare necessary tax returns. He also testified that time was spent for which the estate was never charged and that the firm spent "north of 400 hours" making sense of the Debtor's books and records.
Although the Debtor kept books and records, the books and records he kept were wholly inadequate for the Trustee to understand his financial affairs without the expenditure of considerable time and effort. While the absence of records can
The Debtor maintains that the Plaintiffs' claims under 11 U.S.C. § 727(a)(3) are unsupported and contradicted by Jalbert's testimony. The Court disagrees. Although Jalbert indicated that he was able to determine the source of some of the funds pertaining to Timeless Funding transactions, the Debtor conveniently overlooks the vast amount of time and expense it took Jalbert to ascertain the Debtor's financial condition from his books and records.
In view of the Court's determination that the Plaintiffs have sustained their burden under 11 U.S.C. § 727(a)(3) and (a)(4)(A), and (D), the Court need not address the Plaintiffs' remaining counts under 11 U.S.C. § 727(a)(2) and (a)(5). The Court shall enter a judgment in favor of the Plaintiffs on Count I of the Second Amended Complaint. Count II under 11 U.S.C. § 523(a)(2), (4), (6) and (7) is moot.
18 U.S.C. § 1010.
