KATHLEEN H. SANBERG, CHIEF UNITED STATES BANKRUPTCY JUDGE.
At Minneapolis, Minnesota, November 2, 2018.
This adversary proceeding came on for trial beginning on May 29, 2018, and ending on May 30, 2018, to determine whether Defendant Craig Jeffrey Zaligson's discharge should be revoked pursuant to 11 U.S.C. § 727(d)(1). Colin Kreuziger appeared on behalf of Plaintiff and William Skolnik appeared on behalf of Defendant. This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157(b)(1) & 1334, Fed. R. Bankr. P. 7001, and Local Rule 1070-1. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(J) & (O).
In this adversary proceeding, the issue is whether the discharge should be revoked for Defendant's making false oaths by failing to disclose two luxury watches in his petition and at his Section 341 meeting
The U.S. Trustee, Plaintiff James Snyder, brought this action after learning about two Ulysse Nardin luxury watches, worth approximately $30,000, from a creditor who had seen two YouTube videos in which Defendant referred to one of the watches as "his." Defendant told a suspicious story about the sale of the watches to a mysterious owner and the owner's failure to collect the watches — that Andrew Billison bought the watches in 2007 and 2009 from Defendant's company, dropped off the watches for repair in 2013, and never picked them up. Mr. Billison allegedly lived on an oil rig in Russia and had only returned to the United States twice since 2013.
There was a question about whether Mr. Billison really existed as the addresses on the sales receipts were not valid addresses, he was unable to produce picture identification, and his phone number appeared to be registered to a different person. Now, there is no doubt that he is a real person and that he was the person who appeared at the deposition.
The story that Mr. Billison lived on an oil rig in Russia and did not return to retrieve two luxury watches after four years is not believable. However, after listening to the testimony of the witnesses and reviewing the evidence, the Court is persuaded that it was not the Defendant who made up the story — it was Mr. Billison. He was avoiding arrest. Whether Defendant believed Mr. Billison's Russia story (which the Court doubts) is immaterial as independent witnesses and documentation show that a sale of the watches had taken place.
For purposes of revocation of the discharge, therefore, the Court determines that the U.S. Trustee has failed to meet his burden of proving that Defendant owned the watches and thus, should have disclosed them.
For the reasons stated below, the Court finds in favor of Defendant.
The Plaintiff, James L. Snyder, is the United States Trustee for Region 12. Plaintiff has standing to commence this adversary proceeding pursuant to 28 U.S.C. § 586(a) and 11 U.S.C. § 787(c)(1).
The Defendant, Craig Jeffrey Zaligson, is a resident of the State of Minnesota and the debtor in this bankruptcy case.
The following witnesses provided testimony at the trial:
The following facts were either stipulated to by the parties or found by the Court after trial.
1. Defendant is a resident of the State of Minnesota.
2. Defendant filed a voluntary petition for relief pursuant to Chapter 7 of Title 11 of the United States Code on June 16, 2016.
3. Randall Seaver was appointed Chapter 7 Trustee of the Defendant's bankruptcy estate.
4. Defendant filed his original schedules on June 16, 2016 ("Original Schedules").
5. Defendant's Original Schedules included a single Seiko men's watch and a pair of cuff links valued at $600.00, but did not list any Ulysse Nardin watches.
6. Defendant's Statement of Financial Affairs did not state that he was holding or controlling any property that was owned by someone else.
8. Midwest Diamond ceased doing business on the Petition Date.
9. On June 17, 2016, one day after filing, Defendant organized a new entity called TimeScape USA, LLC ("TimeScape") and began doing business as that entity.
10. Prior to the meeting of creditors, Defendant sent Mr. Seaver a list of inventory and consigned items held by Midwest Diamond.
11. Mr. Seaver convened the meeting of creditors on August 8, 2016.
12. Defendant testified at the meeting of creditors that Midwest Diamond had previously carried high-end watches, including Ulysse Nardin watches, but that it ceased selling them before the 2008 recession.
13. Defendant also testified that the information in the documents filed with the Court were true and correct, contained no errors or omissions, and that all of his assets were listed in the schedules.
14. Defendant did not tell Mr. Seaver that he was in possession of two Ulysse Nardin watches at the meeting of creditors.
15. Defendant filed amended schedules on September 8, 2016 ("Amended Schedules") that did not include any Ulysse Nardin watches.
16. The Court entered its Order granting Defendant's discharge on September 19, 2016.
17. On March 31, 2017, Mr. Swanson first learned about the watches when he received an email from a creditor's attorney stating that Defendant had posted two videos on YouTube in which he is seen wearing one of the two Ulysse Nardin watches at issue.
18. Defendant posted the first video on May 12, 2016, approximately one month
19. Defendant posted a second YouTube video on March 6, 2017, approximately 10 months after the Petition Date.
20. On June 7, 2017, Mr. Swanson conducted a Rule 2004 examination of Defendant.
21. After resuming the 2004 examination, Defendant testified that he was holding two Ulysse Nardin watches for Mr. Billison.
22. Defendant does not frequently wear watches owned by customers and usually only does so when attempting to sell watches on consignment for clients.
23. Defendant testified at trial that calling the watch "his" was a poor choice of words and that any use of the watches in the videos was for marketing and demonstration purposes only.
24. After the Rule 2004 examination, Defendant provided Mr. Swanson with two reprinted receipts purporting to be evidence of Mr. Billison's purchases.
25. The receipts provided to Mr. Swanson following the Rule 2004 examination bore the name Timescape USA, LLC, which was an entity that did not exist until 2016.
26. The original receipts were produced to Mr. Kreuziger on December 7, 2017 and bore the name Midwest Diamond.
27. At trial, Defendant introduced the sales and use tax documentation for both sales.
28. In order to contact Mr. Billison, Mr. Swanson sent a letter to the address for Karen Billison, Mr. Billison's mother, around July 11, 2017.
29. Defendant received a call from Mr. Billison on July 18, 2017, stating that he had returned from Russia and wanted his watches back.
30. Mr. Billison contacted Mr. Swanson from a telephone number identified on Mr. Swanson's screen as belonging to Ryan Dietzler.
31. On September 11, 2017, Mr. Swanson sent a text message requesting Mr. Billison's mailing address to the telephone number from which he received the call from Mr. Billison.
32. On November 27, 2017, Mr. Billison executed an affidavit stating he purchased the two Ulysse Nardin watches from Midwest Diamond (the "Affidavit").
33. The Affidavit contained very precise statements with respect to the circumstances under which Mr. Billison purchased and relinquished possession of the watches.
34. On December 5, 2017, Mr. Crawford, Billison's attorney, sent a copy of the Affidavit to counsel for Defendant.
35. On December 8, 2017, Mr. Crawford produced copies of Mr. Billison's social security card and birth certificate.
36. On December 14, 2017, Plaintiff's counsel issued a subpoena for the deposition of Mr. Billison.
37. Mr. Billison testified at his deposition that he was currently employed by Link Oil Corporation and had been living on an oil rig in the Caspian Sea.
38. The deposition subpoena requiring Mr. Billison to appear and provide testimony also required him to produce a government issued photographic identification.
39. Mr. Billison failed to provide the identification and Plaintiff filed a motion for contempt.
40. Ms. Klemz testified at trial that she is a child support officer for Hennepin County and has been assigned Mr. Billison's file.
41. Ms. Klemz testified that because of the past due child support obligations, a passport hold had been in place on Mr. Billison's passport since April of 2007.
42. Kanabec County has been unable to obtain any information regarding Mr. Billison's employment since August of 2006.
43. Ms. Billison appeared and testified at trial. She told the Court that her son had always lived in the Minneapolis area since graduating from high school, but that she did not have his current address.
44. Ms. Billison last saw her son on May 28, 2018, the night before trial.
45. She took a picture of Mr. Billison as requested by Defendant's attorney and she confirmed his identity at trial.
46. Ms. Billison testified that her son worked for an oil company, but she did not know the name of the company or what type of work her son did for the company.
47. She was unaware of any child support obligations or arrest warrants.
48. Ms. Billison testified, as had her son at his deposition, that he had keratoconus, a disease that affects his vision and ability to drive.
49. Ms. Diaz began working for Defendant at TimeScape in 2013.
50. Mr. Strom testified that when he brought in a watch for repair in December of 2014, he asked Defendant the price of one of the watches at issue.
51. Defendant has consistently maintained that he did not list the watches on the Original Schedules, Statement of Financial
52. On June 19, 2017, Plaintiff first became aware of the watches and of Defendant's failure to list them in the Original Schedules, Statement of Financial Affairs, Amended Schedules, or the inventory and consignment lists.
53. Plaintiff filed this adversary proceeding on September 18, 2017, alleging that Defendant knowingly and fraudulently made false oaths on his Original Schedules by failing to disclose ownership of the two Ulysses Nardin watches, on his Statement of Financial Affairs by failing to disclose that he was in possession of the two watches, and on his Amended Schedules by failing to disclose his ownership of the two watches.
Plaintiff asserts that Defendant made multiple false oaths during his bankruptcy case relating to his alleged ownership or holding of the two Ulysse Nardin watches and seeks revocation of discharge under 11 U.S.C. § 727(d)(1). Defendant argues that he did not own the watches and, therefore, the watches did not need to be disclosed.
If the two watches belonged to Defendant and were property of the bankruptcy estate, Defendant was required to disclose the watches as jewelry on Schedule A/B. If Defendant was holding the watches in his individual capacity for Mr. Billison, Defendant would have been required to disclose the watches on the Statement of Financial Affairs as property held or controlled for another. It is undisputed that the watches were not disclosed on Defendant's Original Schedules, Amended Schedules, and were never mentioned at the meeting of creditors. It is also undisputed that Defendant did not list the watches as property being held for someone else on the Statement of Financial Affairs.
First, a debtor is generally not required to disclose property of a corporation, even if the debtor is the sole owner. See McDermott v. Crabtree (In re Crabtree), 554 B.R. 174, 192 (Bankr. D. Minn. 2016) ("As a general matter, property of the estate does not include assets owned by a corporation in which the debtor holds an interest."), rev'd on other grounds, 562 B.R. 749 (8th Cir. BAP 2017). Rather, a debtor is required to disclose any ownership interests in a business. Here, Defendant properly listed his 100% ownership interest in Midwest Diamond on both the Original Schedules and Amended Schedules.
Defendant argues that the watches were not included on the inventory and consignment
For individual debtors, the principal purpose of the Bankruptcy Code is to give a fresh start to the honest but unfortunate debtor, in part through a discharge of prepetition debt. Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) (citing Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)); see McDermott v. Petersen (In re Petersen), 564 B.R. 636, 644 (Bankr. D. Minn. 2017). Given the severe and extreme nature of a denial or revocation of discharge, courts must "strictly and narrowly construe the provisions of § 727 in favor of a debtor." Petersen, 564 B.R. at 644 (citing Kaler v. Charles (In re Charles), 474 B.R. 680, 683 (8th Cir. BAP 2012)). This is because "the denial of discharge is a harsh result." Id. at 645. In order to bring a successful claim to deny or revoke a discharge, a plaintiff must present reasons that are "real and substantial, not merely technical and conjectural." Id. (citing Boroff v. Tully (In re Tully), 818 F.2d 106, 110 (1st Cir. 1987)).
The Bankruptcy Code provides:
11 U.S.C. § 727(d)(1). The party seeking a revocation of discharge bears the burden of proving each applicable element of 11 U.S.C. § 727(d) by a preponderance of the evidence.
The first element, discharge obtained through fraud of the debtor, is met if "grounds existed which would have prevented the discharge had they been known and presented in time." Fokkena v. Peterson (In re Peterson), 356 B.R. 468, 475 (Bankr. N.D. Iowa 2006) (quoting First Interstate Bank of Sioux City v. Ratka (In re Ratka), 133 B.R. 480, 483 (Bankr. N.D. Iowa 1991)). Thus, if the plaintiff can prove each of the elements that would be necessary to prevail on a denial of discharge under 11 U.S.C. § 727(a)(2)-(5), the proof will be sufficient to demonstrate that the discharge was obtained through the debtor's fraud. See Carns v. McNally (In re McNally), Adv. No. 15-01445, 2017 WL 4082093, at *4 n.32 (10th Cir. BAP Sept. 15, 2017) (collecting cases); Davis v. Osborne
Under 11 U.S.C. § 727(a)(4)(A), bankruptcy courts may deny a discharge if "the debtor knowingly and fraudulently, in or in connection with the case — (A) made a false oath or account." 11 U.S.C. § 727(a)(4)(A). It is a question of fact as to whether a debtor made a false oath under Section 727(a)(4)(A). In re Petersen, 564 B.R. at 649.
"A denial of discharge under § 727(a)(4)(A) requires the objecting party to prove: (1) the debtor made a statement under oath; (2) that statement was false; (3) the debtor knew the statement was false; (4) the debtor made the statement with a fraudulent intent; and (5) the statement related materially to the debtor's bankruptcy case." Id. at 648 (citing Lincoln Sav. Bank v. Freese (In re Freese), 460 B.R. 733, 738 (8th Cir. BAP 2011)). Denial of discharge "is an extreme step and should not be taken lightly." Id. (quoting Rosen v. Bezner, 996 F.2d 1527, 1531 (3d Cir. 1992)).
As to the first element, statements made in a bankruptcy petition and schedules require the debtor to sign and verify under penalty of perjury and have the force and effect of an oath. In re Petersen, 564 B.R. at 648 (citing Korte v. United States (In re Korte), 262 B.R. 464, 474 (8th Cir BAP 2001)). In addition, "testimony elicited at the first meeting of creditors is given under oath." Id. Plaintiff is correct that Defendant's omission of the watches from his bankruptcy petition and schedules were statements made under oath.
It is undisputed that the watches were not disclosed on Defendant's Original Schedules, Amended Schedules, and were never mentioned at the meeting of creditors. It is also undisputed that Defendant did not list the watches as property being held for someone else on the Statement of Financial Affairs. Defendant signed and verified his bankruptcy petition and schedules under penalty of perjury and, as a result, Defendant's omission of the watches from his bankruptcy petition and schedules, as well as his testimony given at the meeting of creditors, were statements made under oath.
The Bankruptcy Code imposes a duty on debtors that "requires nothing less than a full and complete disclosure of any and all apparent interests of any kind." In re Charles, 474 at 686-87 (quoting In re Korte, 262 B.R. at 474) (internal quotation omitted). An omission in a debtor's bankruptcy petition and schedules is considered a false statement for purposes of Section 727(a)(4)(A). See, e.g., In re Petersen, 564 B.R. at 649.
Defendant omitted the two Ulysse Nardin watches from his Original Schedules, Amended Schedules, Statement of Financial Affairs, and failed to mention the watches at the meeting of creditors. As discussed above, Defendant was not required to disclose property of Midwest Diamond, even though Defendant was its sole owner. See In re Crabtree, 554 B.R. at 192. Defendant did list his 100% ownership interest in Midwest Diamond on both the Original Schedules and Amended Schedules. If the watches were Defendant's property, his omission of the watches would have constituted a false oath. As discussed in greater detail below, however, Plaintiff failed to show that the watches were Defendant's property and, as a result, failed to show that Defendant's omissions were false.
Plaintiff also argues that the receipts submitted by Defendant following the Rule 2004 examination were suspicious, as the receipts bore the name "Timescape USA, LLC." TimeScape is an entity that did not exist until June 17, 2016, long after the time of the purported sales. In addition, the receipt for the 2007 purchase lists an invalid mailing address for Mr. Billison and the 2009 receipt lists an address for Mr. Billison that does not exist.
Defendant explained that the inclusion of "Timescape USA LLC" on the receipts initially given to Mr. Swanson was due to the receipt copies having been re-printed on current invoice forms. Defendant testified, and the Court found credible, that the computer operating system and software system used by his business had changed from the time Mr. Billison purportedly purchased the watches to the time the receipts were re-printed and provided to Mr. Swanson. His testimony is corroborated by original receipts produced at trial that contained the correct name and address for Midwest Diamond.
Defendant also testified that the addresses on the receipts were given to him by Mr. Billison. There was no testimony or other evidence to refute this.
Finally, Defendant testified that calling the watch his in the YouTube video was a poor choice of words and that any use of the watches in the videos were for marketing and demonstration purposes only. Defendant does not frequently wear watches owned by customers and generally only does so when he is attempting to sell watches on consignment. There were times he wore one of the watches at issue, even though it belonged to Mr. Billison. The Court does not find the YouTube video persuasive evidence that Defendant owned the watches, especially with the evidence that will be discussed below. The comments were not material to the marketing purposes of the video and appeared to be puffery.
The Court agrees with Plaintiff that the story about Mr. Billson's dropping off the valuable watches and the reason for not retrieving them — living on an oil rig in Russia — is not believable. There are conflicting facts as to Mr. Billison's whereabouts during the entirety of the time in question. But who created the story — Defendant or Mr. Billison?
Mr. Billison had a greater incentive than Defendant to create the Russia story and not return for his property. Mr. Billison has been avoiding making payments on a large child support obligation and has been avoiding arrest. Mr. Billison has refused to provide photographic identification, failed to comply with orders of this Court and other courts on a routine basis, and claims to live in the Caspian Sea working on an oil rig. Further, Mr. Billison made no attempts to retrieve the watches until after
The Court gives significant weight to the testimony provided by Ms. Billison that her son has resided in the Minneapolis area since graduating high school. She testified that she hand-delivered Mr. Swanson's July 11, 2017 letter to Mr. Billison in downtown Minneapolis. She saw him on May 28, 2018, the night before trial in order to take a picture.
As to the whether the watches were sold to Mr. Billison, there is significant corroborating evidence that the sales occurred. Defendant submitted unrefuted documentary evidence in the form of confirmation statements from the Minnesota Department of Revenue that two watches were sold by Midwest Diamond on the dates and prices stated on the original receipts. Midwest had charged, collected, and remitted the appropriate sales tax to the State of Minnesota.
There is additional support for Defendant's position that he did not own the watches from Mr. Strom and Ms. Diaz's testimony. Mr. Strom, an unbiased witness in this adversary proceeding, testified that when he brought in a watch for repair in December of 2014, he asked Defendant the price of one of the watches at issue. Mr. Strom testified that Defendant told him that it was a client's watch and was not for sale. Defendant told Mr. Strom that the client had not picked the watch up and was out of the country. This conversation took place long before the filing of the bankruptcy.
Ms. Diaz began working for Defendant at TimeScape in 2013. She testified that she made numerous attempts to contact Mr. Billison by phone over several months about the watches in 2013. Ms. Diaz contemporaneously made handwritten notes on the back of the watch repair receipts. One of the notes says "in Russia," which Ms. Diaz testified she wrote because she was told by Defendant that Mr. Billison was in Russia. Eventually, the telephone number for Mr. Billison that Ms. Diaz had been calling was disconnected. This occurred several years before the bankruptcy filing.
Thus, based on the evidence, the Court determines that the watches were sold to Mr. Billison. Plaintiff has failed to carry his burden to show by a preponderance of the evidence that the watches were Defendant's property and, as a result, has failed to show Defendant made a false statement under oath.
As to the third element, a debtor "acts knowingly if he or she acts deliberately and consciously." Id. at 650 (citing Roberts v. Erhard (In re Roberts), 331 B.R. 876, 883-84 (9th Cir. BAP 2005)). Careless or reckless acts committed by the debtor do not satisfy the knowledge requirement of § 727(a)(4)(A). Id.
The question of whether or not Defendant knew the omission of the two watches from his bankruptcy petition and schedules was false turns on whether or not Defendant actually owned the watches. As stated above, the watches had been sold to Mr. Billison and thus, there were no false statements made knowingly by Defendant.
As to the fourth element, statements made "with reckless indifference to the truth are regarded as intentionally false." In re Charles, 474 B.R. at 684. This element requires more than an "honest mistake or oversight by the debtor."
Plaintiff argues that the Court can infer that Defendant's alleged false oaths relating to ownership of the watches were made with fraudulent intent because Defendant made multiple false oaths to conceal the watches from the Chapter 7 Trustee and failed to disclose the existence of the watches until pressed at the Rule 2004 examination. Defendant maintains that because the watches were sold by Midwest Diamond to Mr. Billison and were being held for Mr. Billison by Midwest Diamond, he did not disclose the watches at issue in his Chapter 7 petition, Original Schedules, Statement of Financial Affairs, and Amended Schedules based on the advice of his Chapter 7 bankruptcy attorney, Mr. Huffman. Defendant asserts that he did not recklessly disregard the truth because the watches were not his property to disclose. The Court agrees with Defendant.
Plaintiff failed to prove that the watches were Defendant's property. Thus, Plaintiff has failed to establish that Defendant made false statements under oath with the requisite fraudulent intent.
As to the final element, "[t]he subject matter of a false oath is `material' and thus sufficient to bar discharge, if it bears a relationship to the bankrupt's business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property." Id. at 651-52 (citing In re Charles, 474 B.R. at 686). The threshold for materiality in the Eighth Circuit is fairly low. In re Charles, 474 B.R. at 686.
Here, the alleged false oaths would materially relate to Defendant's bankruptcy case because they related to property of the estate worth approximately $30,000.00 and concerned the discovery of assets. Defendant admits as much in his post-trial brief, stating that the "Ulysse Nardin watches in dispute would likely be considered material, as the valuable timepieces concern the assets of the bankruptcy estate."
For the reasons stated above, and in strictly and narrowly construing 11 U.S.C. § 727(a)(4)(A) and (d)(1) in favor of Defendant, the Court determines that Plaintiff has failed to carry his burden. Plaintiff has failed to establish that Defendant owned the two watches at issue. As a result, Plaintiff has failed to show by a preponderance of the evidence that the statements were false, that Defendant knew the statements were false, and that the statements were made with fraudulent intent.
Revocation of discharge is a harsh and severe result. Bearing in mind the extreme nature of this result, the Court must strictly and narrowly construe the provisions of Section 727 in favor of Defendant. Based on these considerations and the evidence before it, the Court finds that Plaintiff has failed to establish, by a preponderance of
1. This adversary proceeding is a core proceeding under 28 U.S.C. § 157(b)(2)(J) & (O) and this Court has jurisdiction pursuant to 28 U.S.C. §§ 157(b)(1) & 1334.
2. Venue is proper before this Court under 28 U.S.C. §§ 1408 & 1409.
3. Defendant's discharge is not revoked.
IT IS ORDERED: The Defendant's discharge is not revoked.
LET JUDGMENT BE ENTERED ACCORDINGLY.
