ROBERT E. GROSSMAN, Bankruptcy Judge.
Before the Court is the Plaintiff's motion for summary judgment [ECF No. 14]
Many of the Plaintiff's allegations are predicated on the assumption that the Debtor and his wholly owned entity, Greenboy, should as a matter of law be deemed one and the same. Therefore the Debtor's failures to maintain records and explain the disposition of the assets of Greenboy form the basis of the summary judgment motion. However, there has been no finding by this Court or any other court that Greenboy is the Debtor's alter ego, and the Court will not make such a finding at the summary judgment stage. Therefore, for purposes of this motion the Debtor and Greenboy shall be viewed as separate and the assets of Greenboy will not be deemed the assets of the Debtor. On this basis, the Court is unable to find as a matter of law that the Debtor's alleged failures as they relate to Greenboy constitute a basis to deny the Debtor's discharge.
For these reasons and for the reasons stated herein, the Court finds that there are genuine disputes as to material facts which preclude entry of summary judgment in favor of the Plaintiff.
On March 29, 2015, Greenboy Landscape Inc. entered into an Asset Purchase Agreement and Bill of Sale (the "
After making one initial payment of $3,500, Greenboy defaulted.
On August 15, 2015, the Plaintiff commenced an action against Greenboy and the Debtor individually in the Supreme Court of the State of New York Suffolk County ("
Around the same time, the Debtor created a LetGo.com ("
On November 17, 2016, the Debtor filed the instant chapter 7 petition, which stayed the State Court action. The Debtor listed Gardiners Bay as a general unsecured creditor with a contingent, unliquidated, and disputed claim in the amount of $90,000 [Case No. 16-75377, ECF No. 1, Schedule E/F]. Although this is a "no asset" case and no claims bar date was set, the Plaintiff filed a Proof of Claim in the amount of $103,159.73, plus interest and attorney's fees. The only other scheduled liabilities are $20,000 in priority tax debt, plus de minimis ($1,700) in general unsecured debt.
The Debtor represented in his petition that his debts were primarily "consumer debts." [Case No. 16-75377, ECF No. 1, Official Form 101]. In response to Question 37 of Schedule A/B, the Debtor swore that he did not have any legal or equitable interest in any business-related property. In response to Question 17 on Schedule A/B, the Debtor disclosed four bank accounts: (1) Checking account; joint with wife, Capital One Bank, (2) Checking account, TFCU, (3) Savings account, TFCU, and (4) Checking account, TFCU. Account numbers were not provided. In response to Question 20 of the Statement of Financial Affairs, the Debtor swore that within the one year before he filed bankruptcy there were no checking savings, money market or other financial accounts held in his name, or for his benefit, which were closed, sold, moved or transferred.
The exhibits presented in connection with the summary judgment motion show that the Debtor maintained at least three personal bank accounts: (1) Teachers Federal Credit Union ("
On February 16, 2017, the Plaintiff commenced the instant adversary proceeding seeking to deny the Debtor's discharge. On May 18, 2017 the Debtor answered the complaint.
On December 5, 2017, the Plaintiff filed the present motion for summary judgment together with a declaration, exhibits, and memorandum of law in support of summary judgment. The Debtor replied to the motion on February 9, 2018 with a counterstatement of material facts and later filed a reply memorandum of law in support of denying summary judgment. A hearing was scheduled for February 26, 2018 at which time this matter was taken under submission.
The Debtor's personal liability under the Purchase Agreement was made an issue in this case.
In order to grant summary judgment, "there [must be] no genuine issue as to any material fact." Fed. R. Civ. P. 56(c). Once the movant shows ". . . the absence of a genuine issue of material fact . . .", then, the burden is on the non-moving party to set forth specific facts raising a genuine issue of fact for trial. United States ex. rel. Romano v. New York Presbyterian, 426 F.Supp.2d 174, 177 (S.D.N.Y. 2006); Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986).
The plaintiff bears the burden of establishing each of the elements of § 727 by a preponderance of the evidence." See Minsky v. Silverstein (In re Silverstein), 151 B.R. 657, 660 (Bankr. E.D.N.Y. 1993); see also Fed. R. Bankr. P. 4005. It is well-settled that the denial of a debtor's discharge is a drastic remedy that must be construed strictly in favor of the debtor. State Bank of India v. Chalasani (In re Chalasani), 92 F.3d 1300, 1310 (2d Cir. 1996).
Determining the legal relationship between the Debtor and Greenboy is a critical threshold issue in this case. Can the Court find as a matter of law that Greenboy is the alter ego of the Debtor? In order to establish a claim for alter ego liability, the plaintiff is generally required to prove, "complete domination of the corporation in respect to the transaction attacked and that such domination was used to commit a fraud or wrong against the plaintiff which resulted in the plaintiff's injury." Baby Phat Holding Co., LLC v. Kellwood Co., 997 N.Y.S.2d 67, 70 (N.Y. App. Div. 2014) (citing Matter of Morris v. New York State Dept. of Taxation & Fin., 82 N.Y.2d 135, 141 [1993]).
An alter ego finding establishes that at the time of the relevant transaction, the controlling principal and the corporation were in actuality one and the same with the effect that the assets and liabilities of the corporation are assets and liabilities of the principal, and vice versa. See Agai et al. v. Mihalatos (In re Mihalatos), 527 B.R. 55, 64 (Bankr. E.D.N.Y. 2015). In this case, as previously stated, the Debtor's personal liability under the Purchase Agreement is not necessary to establish standing. Nor is it important in the context of the distribution of assets because this is a no asset case and no distributions will be made.
In support of the alter ego allegation, the Plaintiff asserts that the Debtor continued to use Greenboy bank account(s) for his own personal use after Greenboy ceased doing business, and he transferred personal funds into Greenboy account(s) with the intent to shield personal monies from his creditors and from the chapter 7 trustee. The Plaintiff also argues that the Debtor commingled the proceeds of the sale of Greenboy assets with his personal funds, and vice versa. [ECF No. 16, Exhibit H at 124-125].
The Court is not prepared to make this alter ego finding and disregard the corporate separateness of Greenboy at the summary judgment stage. Alter ego requires a finding that the Debtor's domination of the corporation was used to commit a fraud or wrong against the Plaintiff. The Debtor disputes any wrongdoing or intent to defraud. The Court is of the view that absent exceptional circumstances any finding of fraud or wrongdoing in this context should be made after trial. This is so especially in the § 727 context where denial of discharge is such a drastic remedy and any analysis should be strictly construed in favor of the Debtor.
A debtor's discharge may be denied under § 727(a)(2) "if the debtor (1) with intent to hinder, delay, or defraud a creditor (2) transfers, removes, destroys, mutilates, or conceals, or has permitted to be transferred, removed, destroyed, mutilated, or concealed, (3) property of the debtor (4) within one year of the petition date." Doubet, LLC v. Palermo (In re Palermo), 370 B.R. 599, 612 (Bankr. S.D.N.Y. 2007) (citation omitted). "A key component of [§] 727(a)(2) is that the property at issue was the property of the debtor, so that the transfer diminished the debtor's bankruptcy estate." Web Holdings, LLC, v. Cedillo (In re Cedillo), 573 B.R. 451, 464-65 (Bankr. E.D.N.Y. 2017). Furthermore, the plaintiff must establish an actual intent to hinder, delay or defraud. Glaser v. Glaser (In re Glaser), 49 B.R. 1015, 1019 (Bankr. S.D.N.Y. 1985).
In the instant action, the Plaintiff asserts that the Debtor transferred assets or permitted assets to be transferred by creating the LetGo account in his own name and posting assets of Greenboy for sale. The Debtor does not dispute that he created the LetGo account for the purposes of selling assets and that assets were in fact sold.
The parties disagree as to two key elements of § 727(a)(2), i.e., whether (1) the property transferred was property of the Debtor, and (2) whether the transfer occurred with actual intent to hinder, delay, or defraud creditors. The Plaintiff argues that the Debtor transferred assets in an attempt to hinder Plaintiff's ability to obtain a recovery on its claim. The Debtor asserts that the property alleged to have been transferred was Greenboy property and his intent was a good faith attempt to wind up the affairs of Greenboy in accordance with his duties as sole shareholder. And, he argues, the property sold was either negligible or encumbered by liens, rendering it valueless thus negating any intent to hinder, delay or defraud creditors.
The Court finds that the existence of these material disputes preclude summary judgment. Therefore, summary judgment is denied as to § 727(a)(2).
Pursuant to § 727(a)(3), the court shall deny the debtor's discharge if the debtor ". . . concealed, destroyed, mutilated, falsified, or failed to keep or preserve information . . . from which the debtor's financial condition or business transactions might be ascertained . . ." 11 U.S.C. § 727(a)(3). The "policy underlying § 727(a)(3) is to insure that the trustee and the creditors receive sufficient information to enable them to trace the debtor's financial history, to ascertain the debtor's financial condition, and to reconstruct the debtor's business transactions." State Bank of India et al. v. Sethi (In re Sethi), 250 B.R. 831, 837 (Bankr. E.D.N.Y. 2000).
The Plaintiff argues that as the sole shareholder of Greenboy, it was the Debtor's obligation to maintain corporate books and records. The Debtor admits that he kept no books or records for Greenboy other than the bank account statements, tax returns for the relevant time period, customer lists, and a list of Greenboy equipment and how it was disposed of — all of which information was turned over to the Plaintiff. The Debtor claims that the records turned over to Plaintiff were adequate to determine the value of his financial interest in Greenboy.
As there has been no alter ego finding at this stage, the focus of the analysis is on whether the information preserved by the Debtor is sufficient to ascertain his financial condition or business transactions, not Greenboy's per se. The Court finds that there is a genuine dispute of material fact as to whether the information alleged to be missing is necessary to ascertain the Debtor's financial condition or business transactions. As a result, summary judgment is denied under § 727(a)(3).
To deny the discharge under § 727(a)(4) the Plaintiff must prove that, "(1) the debtor made a statement under oath; (2) the statement was false; (3) the statement related materially to the bankruptcy case; (4) the debtor knew the statement was false; and (5) the debtor made the statement with fraudulent intent." Agai et al. v. Antoniou (In re Antoniou), 515 B.R. 9, 22 (Bankr. E.D.N.Y. 2014).
It is undisputed that the Debtor made a statement under oath when he signed his bankruptcy petition. See Bank of India v. Sapru (In re Sapru), 127 B.R. 306, 314 (Bankr. E.D.N.Y. 1991). As to the second element, the Plaintiff contends that the Debtor made affirmative statements that were false and failed to include information that should have been included in the bankruptcy petition. Specifically, the Plaintiff argues that the Debtor represented that his debts were primarily "consumer debts" when in fact his debts relate mainly to his business. Next, the Plaintiff alleges that the Debtor falsely represented that he did not use an Employer Identification or any business name within the past 8 years. [Case No. 16-75377, ECF No. 1, Official Form 101]. Finally, the Plaintiff alleges that the Debtor failed to disclose his legal or equitable interest in any business property, claimed to have not transferred any interest in same, and falsely asserted that corporate funds were never held in his personal accounts. [Case No. 16-75377, ECF No. 1, Schedule A/B]. The Plaintiff contends that the Debtor knew his statements were false, the statements were materially related to the bankruptcy, and that he made the statements with fraudulent intent.
In response, the Debtor argues that listing his debts as "primarily consumer debts" was not false because although his scheduled debt did relate primarily to business obligations, he disputes any personal liability. In addition, he notes that fraudulent intent is negated by his act of listing the Plaintiff's disputed claim in the bankruptcy petition. Further, while the Debtor admits that his statements were incorrect with regard to the use of a business name or Employer Identification Number (EIN) in the past 8 years, he asserts that the Plaintiff has failed to prove materiality or fraudulent intent as his interest in Greenboy was disclosed elsewhere in the bankruptcy petition. Finally, the Debtor argues that he was not required to include Greenboy bank accounts and property in his petition because he did not hold a personal interest Greenboy's assets.
Clearly, the Debtor made false statements in his petition. The question here is whether the false statements were made by the Debtor with fraudulent intent. The Court will not decide issues of fraudulent intent on summary judgment. See In re Adler, 395 B.R. 827, 843-44 (E.D.N.Y. 2008) ("Section 727(a)(4) disputes regarding intent are generally decided after a trial/evidentiary hearing resolving such factual issues."). The Court finds that the Debtor has raised a triable issue of fact on the element of fraudulent intent sufficient to warrant denial of summary judgment under § 727(a)(4).
Pursuant to § 727(a)(5), the Court shall grant the debtor a discharge unless the "debtor has failed to explain satisfactorily . . . any loss of assets or deficiency of assets to meet the debtor's liabilities." 11 U.S.C. § 727(a)(5). First, the plaintiff must establish that (1) the debtor at one time possessed or claimed to control substantial and identifiable assets; (2) that those assets have disappeared, their disposition or placement is unknown; and (3) no plausible explanation for this deficiency is apparent from the submitted records or has been articulated by the debtor. See, e.g. Adams v. Inzero (In re Inzero), 426 B.R. 428, 432 (Bank. D. Conn. 2009) (citing In re Cacioli, 463 F.3d at 238)); Jiminez v. Rodriguez (In re Rodriguez), No. 05-19599, 2008 WL 3200215, at *2-3 (Bankr. S.D.N.Y. 2008) (quoting 6 COLLIER ON BANKRUPTCY ¶ 727.08 (15th ed. rev.2008)). Once the plaintiff has satisfied this burden the "debtor must explain satisfactorily the losses or deficiencies." Sonders v. Mezvinsky (In re Mezvinsky), 265 B.R. 681, 689 (Bankr. E.D. Pa. 2001).
First, the Plaintiff contends that Debtor has failed to explain satisfactorily a loss of assets due to numerous transfers from the Debtor's personal bank account(s) to Greenboy bank account(s), and the Debtor's admission that he used Greenboy accounts to pay personal obligations. Second, the Plaintiff claims that numerous assets were scrapped or sold within one year prior to filing the bankruptcy petition. The Debtor contends that either (a) these assets were Greenboy's property, not his, or (b) even if they were his property, he provided plausible explanations for the disposition of these assets. The Debtor claims that only one piece of his equipment was sold on LetGo, and that all other items claimed to be dissipated were either sold for scrap by Greenboy, left with repairmen, or remain in the Debtor's possession with little to no value.
The Court finds that there is a genuine dispute as to material facts which preclude summary judgment under § 727(a)(5). The disposition of Greenboy assets should not form the basis for relief under this section unless and until Greenboy is found to be the alter ego of the Debtor. Summary judgment is therefore denied under § 727(a)(5).
For all the foregoing reasons, the Plaintiff's motion for summary judgment is denied pursuant to 11 U.S.C. §§ 727(a)(2), (a)(3), (a)(4) and (a)(5). Despite the Court's holding that the Debtor's discharge should not be denied as a matter of law, the Court has serious concerns about the Debtor's conduct in connection with this case. The sale of assets by the Debtor in the months preceding and during the pendency of the case is troubling, as is the Debtor's use of business bank accounts for personal finances.
So Ordered.
