SEAN H. LANE, Bankruptcy Judge.
Before the Court are the merits of the above-captioned adversary proceeding commenced by Premier Capital, LLC ("Premier" or the "Plaintiff") against the debtor Anthony Gasson (the "Debtor" or the "Defendant"). The Plaintiff asserts that the Debtor should be denied a discharge of his debts under three provisions of the Bankruptcy Code: (1) Section 727(a)(2)(A) based on the Debtor's alleged transfer or concealment of his assets from creditors; (2) Section 727(a)(3) based on the Debtor's alleged failure to produce or maintain records sufficient to ascertain his business transactions and financial condition; and (3) Section 727(a)(5) based on the Debtor's alleged failure to explain the loss of assets and the deficiency of assets to meet his liabilities. See generally Complaint to Deny Debtor's Discharge Pursuant to 11 U.S.C. § 727 and for Other Related Relief [ECF No. 1] (the "Complaint"). The Debtor argues that the Plaintiff has failed to meet its burden of proof under any of these provisions. A trial in this case took place on June 28, 2017, and July 6-7, 2017, and post-trial briefing was not completed until early 2018. For the reasons set forth below, the Court finds that the Plaintiff prevails on its claim under Section 727(a)(2) but fails on its claims under Section 727(a)(3) and (a)(5).
The Debtor is licensed as a certified public accountant in New York who worked for Price Waterhouse in the 1970's, helping to uncover frauds and obtain recovery for financial institutions. Trial Tr. 356:21-22 (July 6, 2017) [ECF No. 95]; Trial Tr. 530:18-22 (July 7, 2017) [ECF No. 96]. The Debtor has been self-employed for 30 years, dating back to the 1980s, working as a financial consultant. Trial Tr. 344:9-14, 356:21-25 (July 6, 2017); Schedules of Assets and Liabilities, Schedules B and I, Plaintiff's Trial Ex. 1 at Bates 000005-000006, 000014 (listing individual consulting business and New York State certified public accountant license as personal property and noting occupation as self-employed business consultant for the last 30 years).
For years prior to filing for bankruptcy, the Debtor provided consulting services through certain of his companies. See Plaintiff's Tr. Ex. 1; Trial Tr. 380:3-15 (July 6, 2017). The Debtor's specialty as a financial consultant was in factoring and assisting troubled companies that were in debt or struggling financially, including some of his own companies. Trial Tr. 48:16-49:8 (June 28, 2017) [ECF No. 94]; Trial Tr. 354:12-355:5, 357:1-6 (July 6, 2017); Trial Tr. 474:23-475:6, 482:11-16 (July 7, 2017). During the period of roughly 2001 to 2015, the Debtor worked with approximately three to five such companies, and the Debtor was accustomed to collaborating with workout officers. Trial Tr. 357:7-9 (July 6, 2017); Trial Tr. 482:14-16, 530:21-22 (July 7, 2017).
In the past, the Debtor also operated several companies that manufactured and sold clothing and accessories. Trial Tr. 357:19-21 (July 6, 2017). The Debtor's relationship with Premier arises out of certain loans
The Debtor's business affairs can roughly be broken down into two periods: (1) his work and business ventures from prior to 2001, which set the stage for the Debtor's financial difficulties and the debts at issue here, and (2) his work and business ventures after 2001, which consisted primarily of the Debtor's work for a company named Soroban, Inc. ("Soroban").
Prior to 2001, the Debtor was part owner in three companies that manufactured and sold clothing and accessories: Swirl Corporation, Nick Textiles and Easley Textiles. Trial Tr. 357:19-21 (July 6, 2017). The Debtor's business partner Joseph Santarlasci was a co-owner of Swirl. Defendant's Post-Trial Brief at 3. Swirl was the principal business and manufactured housecoats. Trial Tr. 358:1-2 (July 6, 2017). Nick Textiles was the manufacturing arm of Swirl and Easley Textiles was the "trim side" of that business, both feeding into the final product that Swirl sold. Trial Tr. 358:2-4 (July 6, 2017). These businesses were eventually dissolved and liquidated, and creditors began to look to the Debtor for payment through the personal guarantees that he had made on the loans to the businesses. Trial Tr. 359:4-17, 360:7-9 (July 6, 2017). Swirl filed for Chapter 11 in 1995, along with its sister companies Nick Textiles and Easley Textiles. Trial Tr. 359:4-11 (July 6, 2017); Trial Tr. 479:17-19 (July 7, 2017). At the time of filing, the company grossed about $18 million in sales, had 350 employees, and occupied 125,000- and 6,000-square-feet of space in South Carolina and New York City, respectively. Trial Tr. 479:23-25 (July 7, 2017). The Swirl line of business continued operations through 2003 but eventually failed, leaving behind a corporate debt of $65,765.82 to the IRS and a $498,500.54 debt to Chemical Bank, now J.P. Morgan Chase (the "Chase Debt"). Defendant's Post-Trial Brief at 3; Trial Tr. 358:8-359:3, 360:2-6, 397:20-24 (July 6, 2017). Both debts were personally guaranteed by the Debtor and his business partner, and the Chase Debt ultimately became a judgment in 2004.
Around the same time, the Internal Revenue Service also seized assets from the Debtor due to tax debts related to certain of his companies. Trial Tr. 29:22-24 (June 28, 2017); Trial Tr. 393:9-14 (July 6, 2017). The Debtor ultimately sold certain of his and his wife's personal investment property to satisfy the IRS debts and continued making payments over the course of several years, from approximately 1996 to 1998. Trial Tr. 29:18-21 (June 28, 2017). In addition to these debts, the Debtor had personal credit card debt of approximately $85,000, which he represents was paid off after six years of monthly installments. Defendant's Post-Trial Brief at 4, 23; Trial Tr. 493:24-494:4 (July 7, 2017).
The Debtor conceded that during this time, he was "under siege" from creditors and that "there was no easy way [he] could earn any income" due to the pressure put upon him by his creditors. Trial Tr. 392:14-393:14 (July 6, 2017); see also Trial Tr. 388:3-9, 391:13-15 (July 6, 2017). During his opening statement at trial in this case, he reiterated that he had been under siege and that he had to deal with pressures relating to Swirl creditors, as well as personal credit card problems. Trial Tr. 29:7-16 (June 28, 2017).
T.G. Capital was a corporation through which the Debtor used to provide consulting services in the early 1990's. Trial Tr. 267:5-12, 380:3-8 (July 6, 2017). Foreshadowing the setup of the Debtor's later corporation, Soroban, T.G. Capital had no employees and the Debtor was the only individual who performed services under its auspices. Trial Tr. 380:13-23 (July 6, 2017). The Debtor generated income through the fees paid to T.G. Capital for the Debtor's financial consulting services. Trial Tr. 380:20-23 (July 6, 2017). Similar to the Debtor's arrangement with Soroban, T.G. Capital created a K-1, and the K-1 was filed in the Debtor's personal tax returns. Trial Tr. 380:24-381:9 (July 6, 2017). In addition to the consulting the Debtor provided under T.G. Capital, the company also owned the Swirl business. Trial Tr. 474:23-475:6 (July 7, 2017).
With the financial difficulties described above as a backdrop, the Debtor was involved in a number of companies in the fifteen years leading up to his bankruptcy.
Soroban was formed in 2001 in the name of the Debtor's wife, Jacqueline Gasson ("Mrs. Gasson"),
Mrs. Gasson was listed as the sole owner of Soroban, and was chairman of the board, secretary and treasurer of the company. Trial Tr. 298:16-24 (July 6, 2017). But Mrs. Gasson had no business or accounting training or experience. Trial Tr. 288:7-15 (July 6, 2017). The Debtor was the only individual that did any work for the company through his consulting work; no one else worked for Soroban. Trial Tr. 299:2-14, 300:6-11 (July 6, 2017). The Debtor was also listed as the president, chief executive officer, and chief operating officer of Soroban, and he ran the company in this capacity. Trial Tr. 298:25-299:3, 310:5-15 (July 6, 2017).
Mrs. Gasson testified that she had little to no involvement in the operations of Soroban and did not receive reports concerning Soroban's business or any documents in her capacity as an officer of the company.
The Debtor used a Wells Fargo Visa credit card for both Soroban and personal expenses. Trial Tr. 323:7-18 (July 6, 2017); Trial Tr. 473:2-8 (July 7, 2017). The Debtor testified that this card was issued in 1986 in the name of himself and Mrs. Gasson, though Mrs. Gasson testified that she had never used it. Trial Tr. 335:9-19 (July 6, 2017); Trial Tr. 442:24-444:13 (July 7, 2017). At some time after 1986, Soroban, Inc. was added as the billing address to this card. Trial Tr. 444:6-10 (July 7, 2017). In October 2012, the billing address was changed to Jacqueline Gasson, on behalf of Soroban, Inc. at the Debtor's home address. Plaintiff's Trial Ex. 15, 16; Trial Tr. 327:5-331:3 (July 6, 2017). Notwithstanding the change, Mrs. Gasson testified that she never reviewed these card statements. Trial Tr. 316:8-10 (July 6, 2017).
In 2007, the Debtor began a consulting relationship with a group of entities owned and controlled by Martin Terzian that are informally referred to by the parties as the Pacific Group. Trial Tr. 21:1-5, 42:6-19, 44:10-14, 45:14-25, 58:5-59:4 (June 28, 2017). The Debtor provided these consulting services through Soroban. Plaintiff's Trial Ex. 1; Trial Tr. 48:9-15, 68:1-20 (June 28, 2017). Payment for the Debtor's consulting services was made to Soroban by various entities within the Pacific Group.
According to Mr. Terzian, there was no contract between the Debtor and the Pacific Group. Trial Tr. 70:6-24, 79:15-80:11 (June 28, 2017). Instead, the parties operated on a "verbal-handshake-type deal," with monthly compensation fluctuating depending on the effort expended by the Debtor and later by the amount that the Pacific Group could afford to pay the Debtor. Trial Tr. 66:7-13, 70:6-24, 79:15-80:11, 109:1-6 (June 28, 2017). In the beginning of the relationship, Soroban was paid approximately $8,000 to $10,000 per month by Pacific Group for the Debtor's consulting services. Trial Tr. 67:8-18, 76:21-77:14 (June 28, 2017). Between 2010 and 2011, that amount had increased to approximately $13,000. Plaintiff's Trial Ex. 28; Trial Tr. 107:16-21 (June 28, 2017). During at least 2013, Soroban had a verbal understanding with the Pacific Group to provide them with consulting services and that compensation for such services was between $10,000 and $13,000 a month. Trial Tr. 395:5-12 (July 6, 2017). In addition, the Debtor received bonuses based on the performance of the Pacific Group companies. Trial Tr. 67:19-23, 77:12-14 (June 28, 2017). Based on Soroban's tax returns, Mr. Terzian's companies appear to have paid Soroban over $1,000,000.00 for the Debtor's work between 2009 and 2012. Plaintiff's Post-Trial Brief at 11; Plaintiff's Trial Exs. 2-6.
Mr. Terzian testified that part of the Debtor's compensation by the Pacific Group included being provided office space in New York City at no cost to the Debtor. Trial Tr. 66:17-67:7, 75:3-76:6 (June 28, 2017); see also Trial Tr. 383:4-7 (July 6, 2017).
In addition to the consulting work, Soroban also began doing business using the name of Swirl starting in late 2003 to 2004 and thereafter on a going-forward basis. Trial Tr. 296:23-297:3, 359:18-360:1, 398:4-9 (July 6, 2017); Trial Tr. 496:12-23 (July 7, 2017). Model Coats was a trademark of Swirl, and, in 2004, Soroban started designing, manufacturing and selling apparel under the trade name Model Coats by Swirl. Trial Tr. 297:4-298:14, 385:1-24, 397:6-7 (July 6, 2017); Trial Tr. 461:24-462:3 (July 7, 2017).
The Debtor transferred the Model Coats trademark to Soroban when Swirl was dissolved. Trial Tr. 385:9-14 (July 6, 2017).
For several years leading up to 2012 and beyond, Soroban had revenues around or in excess of $200,000 a year. Trial Tr. 387:3-14 (July 6, 2017). The trial record focuses on details for certain years. In 2009, for example, Soroban had gross revenues of $193,877.00. Trial Tr. 432:1-14 (July 7, 2017). In 2010, Soroban's gross revenue was $375,646; in 2011, $307,207; and in 2012, $236,252. Plaintiff's Trial Ex. 2-5; Trial Tr. 433:4-7, 434:15-17, 437:3-5 (July 7, 2017). Soroban's total assets in cash and inventories at the beginning of 2011 were $111,676. Plaintiff's Trial Ex. 4; Trial Tr. 435:4-8 (July 7, 2017). The vast majority of the revenue from Soroban during the year preceding and year after the bankruptcy was from the consulting that the Debtor performed. Trial Tr. 387:22-388:2 (July 6, 2017). The business's remaining revenues stemmed from the sale of product. Trial Tr. 433:11-14 (July 7, 2017).
From 2001 through the time of the filing of bankruptcy, the Debtor received his income from consulting through Soroban. Trial Tr. 348:14-18 (July 6, 2017). Once again, the trial record provides details for particular years. The Debtor's statement of financial affairs filed in his bankruptcy case lists the Debtor's and his spouse's joint income in 2011 as $107,000. Trial Tr. 350:7-17 (July 6, 2017). And ten months into the year 2012, the Debtor listed their year-to-date income as $72,736.83—$66,736 of which was from his wife's income and $6,000 from his own. Trial Tr. 350:18-351:19 (July 6, 2017). According to the Debtor's bankruptcy schedules, his income from Soroban was approximately $600 a month, which he referred to as an "allowance." See Schedules of Assets and Liabilities, Schedule I, Plaintiff's Trial Ex. 1 at Bates 000014; Trial Tr. 346:5-10, 351:6-19 (July 6, 2017). The schedules also stated that the Debtor received an "irregular and approximate" income of $6,000 from IGC, a company owned by Mr. Terzian. See Schedules of Assets and Liabilities, Schedule I, Plaintiff's Trial Ex. 1 at Bates 000014; Trial Tr. 70:25-71:2 (June 28, 2017). Notwithstanding all this, the Debtor's 2012 tax return did not show any income for the Debtor. Trial Tr. 379:24-380:2 (July 6, 2017).
During the period of 2010 through 2014, the Debtor used Soroban funds to pay certain of his and his wife's expenses directly from Soroban's bank account. Defendant's Trial Ex. 19-G; Trial Tr. 381:19-23 (July 6, 2017); Trial Tr. 471:13-472:4 (July 7, 2017); Trial Tr. 510:8-9 (July 7, 2017). This included household expenses, such as the Debtor's heating, water and sewer bill at the residence where they lived and which also served as an office for Soroban. Trial Tr. 322:23-323:6, 324:23-325:6 (July 6, 2017). The vast majority of Soroban checks made out to cash were allowances for the Debtor and his wife. Trial Tr. 321:8-322:14 (July 6, 2017); Trial Tr. 470:5-14 (July 7, 2017). Mrs. Gasson testified that through this process, she was provided $250 per week by the Debtor for her allowance, and that the Debtor would keep the remainder of the amount withdrawn for himself. Trial Tr. 321:2-322:14 (July 6, 2017); see also Defendant's Post-Trial Brief at 16 (stating that Soroban disbursed $400 per week to the Debtor and his wife for household and commuting expenses). Soroban also paid for certain publications read by the Debtor, such as The Economist, The Wall Street Journal, The New York Times, and The Journal News. Trial Tr. 505:10-506:14 (July 7, 2017). Certain larger checks were for travel that the Debtor claims was business-related. Trial Tr. 470:8-10, 508:9-15 (July 7, 2017). Other amounts covered by Soroban included remodeling expenses. Trial Tr. 510:15-16 (July 7, 2017).
Alexandra and Jamie Gasson, two of the Debtor's children, never worked for Soroban but nonetheless had checks written out to them on occasion from the Soroban accounts. Trial Tr. 320:7-321:1 (July 6, 2017); 469:14-24 (July 7, 2017). Some of these checks made out to Alexandra Gasson were personal payments, one check having been drawn out and signed by the Debtor as a wedding gift. Trial Tr. 469:14-24 (July 7, 2017). Soroban funds were also given by the Debtor to personal friends—who subsequently repaid these funds—to help them out on a short-term basis. Trial Tr. 509:15-21 (July 7, 2017). In addition to Mrs. Gasson's allowance, the Debtor also wrote several large checks from the Soroban account to his wife to pay their personal tax returns, including checks in the amounts of $10,000 and $11,000. Trial Tr. 471:13-472:7 (July 7, 2017). Still other amounts were for personal dental work and medical expenses for the Debtor and his wife. Trial Tr. 470:23-471:12, 507:14-16 (July 7, 2017). The practice was that checks were paid to Mrs. Gasson to be deposited into her separate bank account to pay non-business credit card bills. Trial Tr. 472:11-14 (July 7, 2017). From 2010 to 2014, whether reflecting personal or business charges, all of the Debtor's Wells Fargo credit card bills were paid directly by Soroban. Trial Tr. 323:7-18 (July 6, 2017); Trial Tr. 473:2-8 (July 7, 2017). During the period of time from approximately 2010 through 2014, the Debtor did not maintain a bank account and was not writing checks out of the bank account maintained by Mrs. Gasson. Trial Tr. 324:13-19 (July 6, 2017).
Soroban was involved with a few other companies and ventures beyond the Debtor's financial consulting. One of these—Genesis—was the subject of considerable evidence.
In 2009, Soroban began testing the electronic bicycle business, which led to the creation of Genesis in 2011. Trial Tr. 135:8-11 (June 28, 2017); Trial Tr. 462:4-8 (July 7, 2017). Genesis imports electric bikes and sells them in the U.S. Trial Tr. 135:14-19 (June 28, 2017). Gross revenues for Genesis in 2012 were $47,287. Trial Tr. 146: 18-24 (June 28, 2017); Trial Tr. 438:13-15 (July 7, 2017). Gross revenues for 2013 were $55,882. Trial Tr. 439:4-14 (July 7, 2017). One of the Debtor's daughters, Melissa Gasson, is the president and owner of Genesis and put approximately $11,200 of her own capital into the company. Trial Tr. 133:14-134:7, 159:7-15 (June 28, 2017); Trial Tr. 438:22-25 (July 7, 2017).
Upon its formation in 2011, Genesis' initial inventory of ten bikes were sold to it by Soroban, and were paid for with money borrowed by Melissa Gasson from Soroban. Trial Tr. 138:5-8, 140:1-141:2 (June 28, 2017). Both this and subsequent orders of bikes were handled by the Debtor. Trial Tr. 138:15-19, 142:2-21 (June 28, 2017). The Debtor also handled the financing of those orders with loans from Soroban. Trial Tr. 142:22-143:8 (June 28, 2017). Soroban provided approximately $116,000 in loans to Genesis, with the promissory notes being signed by the Debtor on behalf of Soroban and Melissa Gasson on behalf of Genesis. Defendant's Trial Ex. 19-H; Plaintiff's Trial Ex. 25 (promissory notes for over $50,000); Trial Tr. 149:10-152:4, 155:1-10 (June 28, 2017); Trial Tr. 507:17-25 (July 7, 2017). Genesis never paid back Soroban for these loans. Trial Tr. 315:2-6 (July 6, 2017). Checks were also made out from the Soroban account to Genesis. Defendant's Trial Ex. 19-G; Trial Tr. 464:12-16 (July 7, 2017). Melissa Gasson testified that Soroban was the source of capital because she did not want any debt and was hoping to have short-lived borrowing from Soroban. Trial Tr. 157:22-158:2 (June 28, 2017). Melissa Gasson never spoke with Mrs. Gasson directly regarding these transactions, testifying that there were talks in the house about lending it and that Mrs. Gasson would never have never done anything regarding the transfer of money unless she was sure, and that her father handles everything. Trial Tr. 156:2-13 (June 28, 2017). Mrs. Gasson testified that the first time she had seen the promissory notes was when preparing for her deposition in this case. Trial Tr. 314:20-23 (July 6, 2017).
In April 2012, several months prior to his bankruptcy filing, the Debtor was served with an information subpoena from creditor Premier concerning his financial affairs, which he completed. Trial Tr. 439:25-440:18, 446:1-3, 448:14-18 (July 7, 2017). The Debtor was also served with a subpoena relating to the financial affairs of Soroban, to which the Debtor responded on behalf of Soroban. Trial Tr. 291:5-17 (July 6, 2017).
In response to questions about his monthly income in the year 2012, "including the source of all income, 1099 income, ownership of corporations or partnerships," the Debtor listed all zeros. Trial Tr. 441:18-23 (July 7, 2017). In response to a question requesting information about banking institutions where he presently or in the past six years maintained checking, savings, CD, or investment accounts, either individually or jointly with a third party, the Debtor responded that he had none. Plaintiff's Trial Ex. 10. When asked about his monthly living expenses including food, mortgage payments and taxes, the Debtor listed "none." Plaintiff's Trial Ex. 10; Trial Tr. 442:16-19 (July 7, 2017). The Debtor also listed that he had no interest in corporations, partnerships and other business entities, and earned no salary from such interests. Plaintiff's Trial Ex. 10; Trial Tr. 442:20-23 (July 7, 2017). Concerning the money received from other sources such as family members and spouses to help support him, the Debtor listed a monthly allowance of approximately $500 per month, but did not identify the source of such funds. Trial Tr. 444:19-445:4 (July 7, 2017).
Despite questions concerning the source of his spouse's income, her employer and her bank accounts, the Debtor would not provide information about his wife other than her name and home address, deeming other information irrelevant to the matter. Trial Tr. 440:23-441:17 (July 7, 2017); Plaintiff's Trial Ex. 10. Like those related to his wife, the Debtor deemed questions about his children irrelevant. Trial Tr. 442:5-12 (July 7, 2017).
In late September 2012, the Debtor filed a voluntary petition for relief with this Court under Chapter 7 of the Bankruptcy Code. Compl. at 2; Trial Tr. 342:5-9 (July 6, 2017). In his Schedules of Assets and Liabilities filed in his bankruptcy case, the Debtor represented that he owned only $7,000 in personal property. Schedules of Assets and Liabilities, Schedules B, Plaintiff's Trial Ex. 1 at Bates 000004; Trial Tr. 352:22-24, 355:13-19 (July 6, 2017). As for personal property, the Debtor's Schedules stated that he had no cash on hand or in bank accounts. Schedules of Assets and Liabilities, Schedule B, Plaintiff's Trial Ex. 1 at Bates 000004. With respect to his stock and interest in incorporated and unincorporated businesses, he listed an "individual consulting business" and indicated the value at $0. Schedules of Assets and Liabilities, Schedule B, Plaintiff's Trial Ex. 1 at Bates 000005. When asked his regular income from operation of a business or profession, the Debtor also omitted a value. See Schedules of Assets and Liabilities, Schedule I, Plaintiff's Trial Ex. 1 at Bates 000014. He instead listed "in-kind" payments from Soroban and IGC of $600 and (irregularly) $6,000, respectively, under the category of "other monthly income." See Schedules of Assets and Liabilities, Schedule I, Plaintiff's Trial Ex. 1 at Bates 000014.
On March 31, 2014, the Plaintiff filed the above-captioned adversary proceeding. Compl. ¶ 1. Among other things, the Plaintiff argues that the Debtor should be denied a discharge under Section 727(a)(2)(A) because he allegedly transferred and concealed assets during the one-year period prior to his bankruptcy filing with the intent to hinder, delay and defraud creditors. Plaintiff's Post-Trial Brief at 3. The Plaintiff asserts that the Debtor holds the true beneficial and equitable interest in Soroban and that he concealed that interest from his creditors by, among other things, failing to provide information or documentation to his creditors regarding his interest in Soroban both prior to and subsequent to his bankruptcy filing. Plaintiff's Post-Trial Brief at 8-14. The Plaintiff notes that Soroban was formed when the Debtor and his assets were being pursued by the IRS and other creditors. The Plaintiff also notes that the Debtor used Soroban funds to pay for his personal and household expenses. Plaintiff's Post-Trial Brief at 14-15.
The Debtor disputes that the Plaintiff has met the elements of Section 727(a)(2)(A), as well as the other Sections relied upon by the Plaintiff. Defendant's Post-Trial Brief at 6-7. The Debtor argues that the Plaintiff failed to identify property that he transferred or concealed within one year of the petition date. Defendant's Post-Trial Brief at 12-19. He also argues that he reasonably believed that the debts he incurred with Chase had been settled pursuant to a settlement agreement signed by his former partner, Mr. Santarlasci. Defendant's Post-Trial Brief at 8-12. As he was allegedly unaware that Premier was attempting to collect a debt from him, the Debtor contends that he could not have operated Soroban with the intent of concealing assets or income. Defendant's Post-Trial Brief at 8-12.
Prior to this trial, the Debtor had argued that certain of the New York State judgments upon which Premier relies for its status as a creditor were unenforceable on two grounds: 1) two judgments from South Carolina upon which certain of the New York State judgments were based were beyond the statute of limitations; and 2) the debt underlying one of the New York State judgments had been resolved as part of a settlement between Chase and the Debtor's former business partner, Mr. Santarlasci. Defendant Post-Trial Brief at 5. The Court held a prior trial on these standing issues on October 14, 2016, and subsequently issued a bench ruling on those issues. Hr'g Tr. 3:7-13 (Feb. 14, 2017) [ECF No. 77]. In that bench ruling, the Court concluded that Premier had standing to proceed with this non-dischargeability action. Hr'g Tr. 4:4-15 (Feb. 14, 2017). More specifically, the Court concluded that the Plaintiff could establish standing through the validity of any one of these three New York State judgments. Hr'g Tr. 4:4-15 (Feb. 14, 2017). The Court noted that while two of the judgments had originated from South Carolina, the Supreme Court of New York, Westchester County had issued its own judgments for those debts. Hr'g 4:21-6:25, 8:6-11:3 (Feb. 14, 2017). The Court further noted that the Debtor was prohibited from challenging in this Court the state court judgments entered by the Supreme Court of New York under the Rooker-Feldman Doctrine. Hr'g Tr. 8:21-10:4 (Feb. 14, 2017). In its ruling, the Court noted the Debtor was not prevented from pursuing his arguments regarding the validity of the New York judgments with the New York State courts to the extent such action is permitted by applicable law. Hr'g Tr. 11:13-16 (Feb. 14, 2017). As to the Debtor's settlement argument, the Court rejected it as plainly inconsistent with the language of the settlement agreement. That agreement was only entered into by Mr. Santarlasci and not by the Debtor. Hr'g Tr. 4:21-7:11 (Feb. 14, 2017). Having already decided the issue of standing, any questions related to the enforceability of these judgments were not within the purview of the non-dischargeability trial and are not addressed in the Court's ruling today.
Chapter 7 of the Bankruptcy Code is designed to provide individual debtors the opportunity for a "fresh start" through the discharge of personal liability for pre-petition debts. To that end, Section 727(a) states that the Court "shall grant the debtor a discharge" unless one of the exceptions enumerated in the statute applies. 11 U.S.C. § 727(a). Because a denial of discharge is a harsh sanction, Section 727(a) "must be construed strictly against those who object to the debtor's discharge and liberally in favor of the bankrupt." Gordon v. Tese-Milner (In re Gordon), 535 B.R. 531, 536 (S.D.N.Y. 2015) (quoting State Bank of India v. Chalasani (In re Chalasani), 92 F.3d 1300, 1310 (2d Cir. 1996)). At the same time, "the discharge of a bankrupt from his debts is a privilege . . . that has been granted by Congress upon such terms as it has seen fit to impose," and "[a]mong these terms is the requirement that debtors act in good faith and provide full and honest disclosure." In re Gordon, 535 B.R. at 536 (internal citations omitted); Husky Int'l Elecs., Inc. v. Ritz, 136 S.Ct. 1581, 1589 (2016) ("§ 727(a)(2) is a . . . remedy for actions that hinder the entire bankruptcy process."). The Plaintiff bears the burden of proving by a preponderance of the evidence that a discharge should be denied based on one or more of the exceptions set forth in the statute. In re Gordon, 535 B.R. at 536. While the Plaintiff here invokes three provisions of Section 727 in its complaint, it need only prevail on one to deny a discharge. See HSBC Bank USA v. Handel (In re Handel), 266 B.R. 585, 588 (Bankr. S.D.N.Y. 2001).
Section 727(a)(2) of the Bankruptcy Code precludes discharge when
11 U.S.C. § 727(a)(2). As the Plaintiff alleges that the Debtor concealed his property before the date of the filing of the petition, Section 727(a)(2)(A)—rather than (a)(2)(B)—is the relevant statutory section here. See Pereira v. Gardner (In re Gardner), 384 B.R. 654, 663 (Bankr. S.D.N.Y. 2008) ("By the unambiguous text of the statute, concealment alone is sufficient under this subsection.") (internal citations omitted). Under subsection (a)(2)(A), a plaintiff claiming improper concealment of property must show that (i) the property at issue belonged to the debtor; (ii) the debtor concealed it; (iii) the debtor did so with the intent to hinder his creditors, delay them, or defraud them; and (iv) the debtor either did so within one year before the filing of his bankruptcy petition or his initial act of concealment took place before this one-year period but he then allowed the property to remain concealed into the critical year. Mazer-Marino v. Levi (In re Levi), 581 B.R. 733, 744 (Bankr. S.D.N.Y. 2017).
As the Bankruptcy Code does not specify what constitutes "property of the debtor" for purposes of Section 727(a)(2)(A), courts look to state law to define an interest in property. Id. (citing Kaufman v. Chalk & Vermilion Fine Arts, LLC, 31 F. App'x 206, 208 (2d Cir. 2002)). But guidance is provided by Section 541(a)(1) of the Bankruptcy Code, which provides that "property of the estate" includes "all legal or equitable interests of the debtor in property as of the commencement of the case." 11 U.S.C. § 541; see In re Levi, 581 B.R. at 744; Pereira v. Summit Bank, 2001 WL 563730, at *13 (S.D.N.Y. May 23, 2001); Ng v. Adler (In re Adler), 494 B.R. 43, 62 (Bankr. E.D.N.Y. 2013). "Among other things, an asset is any form of personal property with value . . . not exempt from liability by statute or common law." In re Adler, 494 B.R. at 62 (internal citations omitted). In this regard, "property of the debtor" includes all forms of tangible and intangible assets under state law. Id. at 62-63. But "Congress [nonetheless] intended to limit the reach of § 727(a)(2)(A) only to those transfers of property in which the debtor has a direct proprietary interest." In re Thurman, 901 F.2d 839, 841 (10th Cir. 1990).
A debtor's interest in property can be direct, such as a house owned in his or her own name. But it can also be indirect or beneficial, so as to cover instances where ownership is not so obvious. See, e.g., Darwin (Huck) Spaulding Living Trust v. Carl (In re Carl), 517 B.R. 53, 65-66 (Bankr. N.D.N.Y. 2014) (noting that while debtor was not legal owner of property in question, debtor has been found to have equitable interest in property where the property was transferred but debtor retains benefit of beneficial ownership); see also In re Levi, 581 B.R. at 744 ("Record title is not determinative of an debtor's equitable ownership."); Baron v. Klutchko (In re Klutchko), 338 B.R. 554, 571 (Bankr. S.D.N.Y. 2005).
In evaluating whether a debtor has a beneficial interest in a business—and thus whether that business should be considered property of the debtor—courts use a multi-factor analysis. In re Carl, 517 B.R. at 65. First, courts look at whether a debtor previously owned a similar business. Id. at 66 (citing Cadle Co. v. Ogalin (In re Ogalin), 303 B.R. 552, 555 (Bankr. D. Conn. 2004)). Second, courts examine whether the debtor left his previous business venture under financial duress. Id. (citing In re Ogalin, 303 B.R. at 555-57; In re Klutchko, 338 B.R. at 571). Third, and most importantly, courts examine whether the debtor transferred his or her salary, or the right to receive salary to a family member or to a business entity owned by an insider. Id. (citing Coady v. D.A.N. Venture III, L.P. (In re Coady), 588 F.3d 1312, 1314 (11th Cir. 2009); In re Ogalin, 303 B.R. at 555-56; In re Klutchko, 338 B.R. at 571; In re Frumovitz, 10 B.R. 61, 65-66 (Bankr. S.D. Fla. 1981); Marine Midland Bank v. Portnoy (In re Portnoy), 201 B.R. 685, 693-95 (Bankr. S.D.N.Y. 1996)). Fourth, courts evaluate whether the debtor is actively and actually involved in the success of the insider business. Id. (citing In re Frumovitz, 10 B.R. at 66; In re Coady, 588 F.3d at 1314). Fifth and finally, the debtor must retain some of the benefits of the salary, such as having expenses paid for by the insider or the business. Id. (citing In re Coady, 588 F.3d at 1314; In re Klutchko, 338 B.R. at 571).
As to the first prong, the Debtor previously owned a similar, if not identical, business in T.G. Capital, through which he provided consulting services. Trial Tr. 380:3-381:9 (July 6, 2017). Indeed, the Debtor's consulting work was the primary business of both T.G. Capital and Soroban. Trial Tr. 291:18-21, 380:3-8, 380:20-23, 387:22-388:2 (July 6, 2017). The vast majority of the revenues from Soroban were from Debtor's consulting work during the years just before and after the Debtor's bankruptcy. Trial Tr. 387:12-14 (July 6, 2017). In short, Soroban was simply another corporate entity through which the Debtor could engage in the same activities as his prior businesses.
As for the second prong of the analysis, the credible evidence establishes that the Debtor left his prior business ventures in financial distress, which led directly to Soroban's creation. More specifically, the record shows that the Debtor and Mrs. Gasson went through difficult economic times and decided to make a new economic start by creating Soroban in her name. Trial Tr. 301:9-302:2, 303:4-7, 304:9-13 (July 6, 2017). Before Soroban's creation, Mrs. Gasson had resolved to no longer accrue debt. Trial Tr. 302:24-25, 304:11-13 (July 6, 2017). Under siege economically, he only had his consulting work to rely upon. Trial Tr. 29:7-16 (June 28, 2017); Trial Tr. 388:3-9, 392:14-393:14 (July 6, 2017). He needed a vehicle for that consulting work and that vehicle was Soroban. Trial Tr. 302:24-25, 392:21-393:2 (July 6, 2017); 495:12-19 (July 7, 2017). Thus, the credible evidence establishes that Soroban's creation was motivated by a desire to continue the Debtor's consulting without any of the financial baggage—past or future—from his prior businesses.
Third, the Debtor largely transferred his right to receive a salary into indirect benefits, including monetary benefits to himself and family members. He used the income of Soroban— derived from his efforts—to give an allowance to himself and his wife, to pay his household expenses, to pay numerous personal expenses, and even to provide economic assistance to his children and their endeavors.
The remaining two factors are also satisfied. As to the fourth prong, the credible evidence demonstrates that, while identified as the equity holder, Mrs. Gasson did not have substantive involvement with Soroban. Rather, the Debtor—as its only consultant and worker— was the basis for the entire business. Even though the Debtor technically did not receive a salary from Soroban that flowed into a personal account of his own, he enjoyed the use of funds from Soroban, which satisfies the fifth prong. See In re Carl, 517 B.R. at 67; see also In re Coady, 588 F.3d at 1315-16.
Courts have most frequently found concealment under Section 727(a)(2) where a debtor transfers legal title to property to a third party while retaining a secret interest in that property. Minsky v. Silverstein, 151 B.R. 657, 661 (Bankr. E.D.N.Y. 1993) (internal citations omitted). "Concealment" also exists "when a debtor places assets beyond the reach of creditors or withholds pertinent information when he has a legal duty to disclose it." In re Levi, 581 B.R. at 744 (citing McCarthey Inv. LLC v. Shah (In re Shah), 2010 WL 2010824, at *7 (Bankr. S.D.N.Y. May 13, 2010)) (internal citation omitted). For example, when a debtor lives in and makes all mortgage, insurance, and maintenance payments for property owned by another, he may be found to have fraudulently concealed his interest in the property by maintaining it in another person's name. See id.
Thus, courts have found concealment of an equitable interest when the debtor diverts "the fruits of his industry to . . . family members, who then provided him with the use and enjoyment of material comforts purchased with those fruits." In re Coady, 588 F.3d at 1316. This is because a debtor could devote his time and talent to increasing the business's value, but instead chose to organize his affairs so that "whatever increase in equity came about in the future through his labor would be protected from his creditors" while still being available for the debtor's benefit. Id. at 1315. Concealing "property for the purposes of [Section] 727(a)(2) . . . can [also] be accomplished by a transfer of title coupled with the retention of the benefits of ownership." In re Olivier, 819 F.2d 550, 553 (5th Cir. 1987); see San Jose v. McWilliams, 284 F.3d 785, 794 (7th Cir. 2002) ("[T]he transfer of title with attendant circumstance indicating that the bankrupt continues to use the property as his own is sufficient to constitute a concealment.") (internal citations omitted).
Applying these principles here, the evidence demonstrates that the Debtor concealed his interest in Soroban. As explained above, he organized his affairs so that he would receive the benefit of Soroban without ever making such benefits within the reach of creditors. His arrangement of his affairs concealed his interest in Soroban from creditors. Such concealment is confirmed in the Debtor's response to Premier's information subpoena in 2012. In that response, the Debtor repeatedly denied having any interest or business affiliation with Soroban. In response to Questions 13 and 27 specifically, the Debtor claimed no ownership or interest in any corporations, partnerships, joint ventures or any other business or association or entity, and, in the same breath, denied receiving a salary from any such venture. See Plaintiff's Trial Ex. 10.
The Debtor continued to be less than forthcoming about Soroban even when he filed for bankruptcy. In his Schedules, when asked about his stock or interest in any incorporated and unincorporated business the Debtor listed zero value for his "individual consulting business." Plaintiff's Trial Ex. 1 at Bates 000005.
The Court also seriously doubts the Debtor's credibility as to this testimony, given the level of business sophistication that the Debtor had, including providing consulting services for businesses in financial difficulties and operating his own companies for dozens of years. See Bank of India v. Gobindram (In re Gobindram), 2014 WL 2809078, at *7 (Bankr. E.D.N.Y. June 20, 2014) ("A well-educated, long experienced and sophisticated businessman is expected to answer with more care and accuracy than a financially unsophisticated one . . . The Debtor, an owner and operator of two multi-million dollar businesses, is a sophisticated businessman who has experience in handling and signing important documents. He should have known to carefully read over all questions before signing the SOFA, and not just the questions for which he provided answers other than `none.' The questions themselves were not complex business questions, but rather plain facts that could have easily been answered by the Debtor without the help of his counsel."). Indeed, the Court notes that this is not the Debtor's first time coming into contact with the bankruptcy process, given that several of his companies filed for bankruptcy in the past. Moreover, the Debtor's use of the "in-kind" label is consistent with the Debtor's ambiguous, qualified and misleading responses to the information subpoena, pointing to a pattern of obfuscation when dealing with his creditors. See In re Gardner, 384 B.R at 663 ("[A] failure to volunteer is inadequate for concealment but concealment is evidenced when a debtor withholds knowledge or refuses to divulge owed information because there is a `duty to tell' once a debtor begins to set forth the facts surrounding a subject.") (discussing holding in In re Portnoy, 201 B.R. at 694-95); In re Levi, 581 B.R. at 744 (noting that concealment exists when a debtor withholds pertinent information that he has a duty to disclose).
The Debtor's lack of a substantive paper trail for his expenses also points towards concealment. See, e.g., In re Shah, 2010 WL 2010824, at *7 (noting debtor's pattern of using wife's name to conceal assets, including fact that bank accounts were in her name though the debtor provided the funding). Despite operating a business that generated hundreds of thousands, if not millions, of dollars in income, the Debtor maintained no personal bank accounts, instead receiving extensive monetary benefits indirectly. Trial Tr. 378:4-379:4 (July 6, 2017). The Debtor took weekly cash allowances out of Soroban's bank account, cashing checks and keeping the money left after giving money to his wife for her allowance. Trial Tr. 321:2-322:14 (July 6, 2017); Trial Tr. 470:5-14 (July 7, 2017). Through this arrangement, the Debtor could conceal and protect the fruits of his benefits from Soroban from his creditors. His obfuscation about this income—or other monetary benefits—from Soroban in his response to the information subpoena and his bankruptcy SOFAs is consistent with this pattern of deception.
Section 727(a)(2) requires that the Debtor have acted with actual "intent to hinder, delay, or defraud a creditor. . . ." 11 U.S.C. § 727(a)(2); see also In re Levi, 581 B.R. at 745. "Actual fraud involves moral turpitude and connotes deceit, artifice, or trick which involves a direct and active operation of intellect which is designed to mislead." In re Levi, 581 B.R. at 745 (internal citations and quotations omitted). But since the language of the statute is written in the disjunctive, a showing of intent to hinder or delay a creditor is also sufficient to meet the requirements of the statute. See id. An intent to "hinder" is shown where a debtor acts "with an intent to impede or obstruct creditors," while the intent to "delay" is shown when the debtor acts "with an intent to slow or postpone creditors." Id. (internal citations and quotations omitted). In these circumstances, courts focus on whether a debtor has "act[ed] improperly to make it more difficult for a creditor to collect a debt." Id. (internal citations and quotations omitted).
Whether a debtor acts with "actual intent to hinder, delay, or defraud" for purposes of Section 727(a)(2) is a fact-specific inquiry. Id. As a debtor will not usually admit to intending to act in a fraudulent manner, a court may infer fraudulent intent from the facts and circumstances of the case. In re Handel, 266 B.R. at 589; Republic Credit Corp. I v. Boyer (In re Boyer), 328 F. App'x 711, 715 (2d Cir. 2009) (citing Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574, 1582 (2d Cir. 1983)). An otherwise innocent motive on the part of the debtor can coexist with the intent to hinder or delay creditors. In re Levi, 581 B.R. at 745-46 (citing Rupp v. Pearson, 658 F. App'x 446, 450-51 (10th Cir. 2016); First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339, 1343 (9th Cir. 1986) (where debtor transferred property "intend[ing] to protect the property from one creditor for the benefit of the other creditors," requisite intent to hinder or delay a creditor under Section 727(a)(2)(A)) was still found)).
An intent to defraud on the part of a debtor is often inferred through the presence of certain "badges of fraud," including:
In re Gardner, 384 B.R. at 663-64. While many of the badges are more applicable in the transfer context, the badges can also be applied in determining whether the debtor concealed assets. See Painewebber Inc. v. Gollomp (In re Gollomp), 198 B.R. 433, 440 (S.D.N.Y. 1996).
Given the factual record here, the Court finds that the credible evidence demonstrates that the Debtor intended to hinder his creditors. The first and second badges of fraud—the inadequacy of consideration and the relationship between the parties—support this conclusion. The Debtor's wife received a weekly "allowance" of $250.00 from Soroban despite her lack of involvement in the company and despite not providing any consulting services, the very work that was Soroban's primary source of revenue. Trial Tr. 113:4-7 (July 6, 2017). The Debtor similarly transferred Soroban funds to his children for no consideration, both through direct transfers to them and through support of various business ventures in the form of loans that were never repaid. With respect to the third badge of fraud—the retention of position, benefit, or use of the property in question—the Debtor retained the beneficial use of the assets of Soroban despite not possessing an ownership interest or even admitting to an employee relationship with the company. This included the payment of both his and his family's personal and household expenses, including his and his wife's household heating, water and sewer bills and their medical expenses.
The remaining badges of fraud also support a finding of intent here. The facts here show that Soroban was created to provide a fresh start to the Debtor, free of threat from the Debtor's creditors past and future. The Debtor's wife testified that when she created Soroban in her name she and her husband had been through "rough times" and wanted to make a "new start." Trial Tr. 301:9-20 (July 6, 2017). Before the creation of Soroban, the Debtor's income was subject to the claims of his creditors. The IRS was seizing assets from him, and the Debtor was under threat from other creditors. The Debtor and his wife created Soroban with no intention for Mrs. Gasson to work there herself nor an expectation to hire employees to work there. Trial Tr. 302:6-20 (July 6, 2017). Rather, the Debtor served as the sole consultant for the consulting business that Soroban operated. See Defendant's Post-Trial Brief at 13. Despite establishing his wife as Soroban's sole shareholder, the Debtor essentially maintained exclusive control over the company and was able to enjoy the fruits of the business as if it were his own. Operating his business under the auspices of Soroban allowed the Debtor a safe harbor from creditors and protected the proceeds of his multi-million-dollar business.
The Debtor asserts that the Court cannot find the requisite intent to hinder creditors because he was unaware of the debts now owned by Premier. He alleges that his judgment to Chase was settled by Mr. Santarlasci and complains about Premier's lack of prior enforcement of the three judgments. Defendant's Post-Trial Brief at 6, 8-11. As a threshold matter, the Court has already ruled on the standing of Premier as a creditor to bring this action, with the Court already determining that Premier has such standing. The Debtor cannot now reargue this issue here. In any event, the Debtor's position ignores that Premier is not the only creditor here. The Debtor listed other debts in his Schedules besides the judgments purchased by Premier, including IRS debts in the total amount of $65,765.82. Schedules of Assets and Liabilities, Schedule F, Plaintiff's Trial Ex. 1 at Bates 000010. Moreover, the Debtor's position that he was free of some of these judgments strains credibility. See Hr'g Tr. 4:21-7:11 (Feb. 14, 2017). But even more fundamentally, the Debtor's position ignores that his intent in setting up Soroban was to insulate himself against any and all creditors that might come along, while retaining the benefits of his work through Soroban.
The Court finds further evidence of the Debtor's intent based upon his response to the information subpoena and the information contained in the Debtor's bankruptcy Schedules and Statement of Financial Affairs, which all took place after he became aware of Premier and the South Carolina judgments in 2011. The Debtor's responses to the information subpoena concerning his personal financial condition fly in the face of the reality of his involvement in Soroban. In response to questions about his monthly income, for example, the Debtor listed all zeros. Plaintiff's Trial Ex. 10 at Bates Premier00052, Premier00055-56. The Debtor also listed that he had no interest in any corporations, partnerships and other business entities, and that he did not derive a salary from any such ventures. Plaintiff's Trial Ex. 10 at Bates Premier00052, Premier00055-56. In response to a question regarding additional sources of income that he received other than through his employment, the Debtor listed "none." Plaintiff's Trial Ex. 10 at Bates Premier00052, Premier00062. The Debtor's intent to hinder is also reflected in his refusal to respond to the questions concerning the source of his spouse's income, her employer and her bank accounts, even though she was the owner of and received money from Soroban. Plaintiff's Trial Ex. 10 at Bates Premier00052, Premier00051-52.
The Debtor's subsequent representations in the Schedules and Statement of Financial Affairs in this bankruptcy provide some additional information but still present far less than a full picture. The Debtor's response to the question on his Schedules regarding stock and interest in incorporated or unincorporated businesses now identifies an "individual consulting business." Plaintiff's Trial Ex. 1 at Bates 000005. But the value of that business is listed as zero. Id. The Debtor's Schedules now list a monthly income but that income is misleadingly labeled as "in-kind" from Soroban of $600 and "in-kind' from IGC of $6000 on an irregular basis.
While the Debtor attempted to explain away the many discrepancies at trial, they are too numerous and significant to ignore. Moreover, the Debtor's explanations are not credible given his background as a sophisticated business person who has consulted and operated his own companies for dozens of years. Indeed, this is not the Debtor's first experience with the bankruptcy process given that several of his companies have filed for bankruptcy in the past.
Under the final prong of a Section 727(a)(2)(A) analysis, the party objecting to discharge must establish that the act complained of was done within one year prior to the filing of the petition. Importantly, courts have held that the one year requirement can be extended by the continuing concealment doctrine. In re Gardner, 384 B.R. at 663. Under this doctrine, "a concealment within the meaning of Section 727(a)(2)(A) can be found to have existed during the year prior to filing even if the initial act of concealment of assets occurred before this one year period; however the debtor must have continued to conceal his or her interest in the property into the critical year." Nate B. & Francis Spingold Found., Inc. v. Halperin (In re Halperin), 215 B.R. 321, 331 (Bankr. E.D.N.Y. 1997).
The evidence shows that the Debtor's concealment began more than one year prior to the bankruptcy filing and persisted well into the required one-year period. The concealment began with the creation of Soroban itself. Soroban was created in 2001 while the Debtor was under financial stress. As explained above, it was created to effectively shield the Debtor's assets from the reach of his creditors. The Debtor's way of conducting his financial affairs persisted into the year prior to the Debtor's bankruptcy filing. Specifically, in the year prior to the filing, the Debtor continued to serve as the sole consultant for Soroban, while ownership of the Debtor's consulting business was held in the name of the Debtor's wife, despite the fact that she had no significant role in the business of the company. The earnings derived therefrom were given by the Debtor to his wife and were drawn down by the Debtor himself in the form of cash "allowances"—checks made out to cash which the Debtor them used for himself or distributed to his wife—at least until the time of his 2012 bankruptcy filing. In this manner, the Debtor was able to insulate his earnings from his creditors, without the need to maintain bank accounts or financial records of his own, or being involved in any personal transactions at all in his own name.
This continuing concealment of his finances during the year prior to the bankruptcy filing is also reflected in the Debtor's responses to the information subpoena before the bankruptcy and the information he provided in his Schedules and Statement of Financial Affairs filed with the bankruptcy. Indeed, information on Soroban was only finally produced with candor in the context of this adversary proceeding, during discovery taking place years after Premier had first sought the information.
Section 727(a)(3) of the Code focuses on a debtor's duty to maintain recorded information which bears on his financial condition and business affairs. Section 727(a)(3) states that a debtor's discharge will be denied if:
Construing a precursor to modern 11 U.S.C. Section 727(a)(3), the Second Circuit has long held the view that, although the Code "make[s] the privilege of discharge dependent on a true presentation of the debtor's financial affairs[,] . . . it is intended only `that there be available written evidence made and preserved from which the present financial condition of the bankrupt, and his business transactions for a reasonable period in the past may be ascertained.'" Berger & Assocs. v. Kran (In re Kran), 760 F.3d 206, 210 (2d Cir. 2014) (quoting In re Underhill, 82 F.2d 258, 260 (2d Cir. 1936)).
The Plaintiff has failed to show that the facts of this case fall within the scope of Section 727(a)(3). According to the Debtor, he produced some 1,900 pages of documents to Plaintiff. Status Conf. Tr. at 4:12, 13:11-14 (Nov. 20, 2015) [ECF No. 88]. Indeed, voluminous records were used in the trial. The Plaintiff provided no evidence establishing that the Debtor failed to keep records such that his financial condition or business transactions could not be ascertained either during the pendency of the proceedings or for a reasonable time before. See Cadle Co. v. Jacobowitz (In re Jacobowitz), 296 B.R. 666, 670 (Bankr. S.D.N.Y. 2003) (quoting Nof v. Gannon (In re Gannon), 173 B.R. 313, 321 (Bankr. S.D.N.Y. 1994)). In support of its Section 727(a)(3) claim, the Plaintiff highlights the Debtor's cash use, lack of a bank account and responses to the information subpoena. But Section 727(a)(3) does not require that a debtor maintain a bank account or "an impeccable system of bookkeeping." In re Jacobowitz, 296 B.R. at 670-71 (quoting Meridian Bank v. Alten, 958 F.2d 1226, 1230 (3d Cir. 1992)). In the end, the Plaintiff was supplied with sufficient information on which to rely in tracing the Debtor's financial history, even if that information was only provided years after originally requested by Premier or even if the information eventually supplied painted a different picture of the Debtor's financial affairs. Id; see also Micro Connections, Inc. v. Shah (In re Shah), 388 B.R. 23, 32 (Bankr. E.D.N.Y. 2008).
As for Section 727(a)(5) of the Bankruptcy Code, a debtor's discharge may be denied if "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). Section 727(a)(5) does not require fraudulent intent, as under some of the other subdivisions in 11 U.S.C. § 727. Prairie Prod. Credit Ass'n v. Suttles (In re Suttles), 819 F.2d 764, 766 (7th Cir. 1987). After the plaintiff presents proof that the debtor possessed assets which are not listed in the petition, the debtor must satisfactorily explain what happened to such assets. The debtor must explain the loss or deficiency of assets and why such a loss occurred. First Federated Life Ins. Co. v. Martin (In re Martin), 698 F.2d 883, 886-87 (7th Cir. 1983). The debtor's explanation should convince the court of his or her good faith and businesslike conduct. Filmar, Inc. v. White (In re White), 63 B.R. 742, 745 (Bankr. N.D. Ill. 1986); Schultz v. Shapiro (In re Shapiro), 59 B.R. 844, 853 (Bankr. E.D.N.Y. 1986).
To succeed in obtaining a denial of a debtor's discharge under this section, a plaintiff must establish a prima facie case showing a loss or deficiency of the debtor's assets. In re Cacioli, 463 F.3d 229, 238-39 (2d Cir. 2006). "Once this prima facie case has been established, it is up to the debtor to provide a plausible explanation for the loss or deficiency of the asset." Krohn v. Cromer (In re Cromer), 214 B.R. 86, 95 (Bankr. E.D.N.Y. 1997) (citing Hawley v. Cement Indus. (In re Hawley), 51 F.3d 246, 249 (11th Cir. 1995)). "As long as debtor's explanation convinces the judge that the debtor has not hidden or shielded assets, corroborating evidence by way of documentation is not necessary in every instance." In re Cromer, 214 B.R. at 97. The debtor's explanation need not be meritorious but satisfactorily account of the disposition. In re Gardner, 384 B.R. at 669; In re Cacioli, 463 F.3d at 235.
Applying these principles here, the Court concludes that the request for relief under Section 727(a)(5) should be denied. The Plaintiff points to Soroban's gross revenues for 2010 through 2012, the Debtor's cash spending, lack of bank accounts and the schedule amounts listed by the Debtor—$0 in cash and $7,000 in personal property—as proof that Debtor failed to explain a loss or deficiency of assets. Plaintiff's Post-Trial Brief at 25-27.
But the Debtor has provided sufficient evidence to explain the use of Soroban's credit card and revenue expenditure generally.
The Plaintiff also questions the use of Genesis's gross revenue expenditures for 2012 and 2013. Plaintiff's Post-Trial Brief at 26. But while Genesis generated gross revenues of $47,287.00 in 2012 and $55,882.00 in 2013, the evidence shows it netted losses of $16,762.00 and $26,709.00 in its first and second years, respectively. See Plaintiff's Trial Exs. 6-7; Trial Tr. 529:10-20 (July 7, 2017). Thus, there do not appear to be any revenues.
For the reasons set forth above, the Court finds in favor of the Plaintiff on its claim under Section 727(a)(2), which results in a denial of discharge. The Plaintiff's claims under Sections 727(a)(3) and 727(a)(5) are denied. The Plaintiff should settle an order on five days' notice. The proposed order must be submitted by filing a notice of the proposed order on the Case Management/Electronic Case Filing docket, with a copy of the proposed order attached as an exhibit to the notice. A copy of the notice and proposed order shall also be served upon the Debtor.
