LAWRENCE S. WALTER, Bankruptcy Judge.
The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and the standing General Order of Reference in this District. This proceeding constitutes a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J).
This matter is before the court on the Motion for Summary Judgment filed by Plaintiff James R. Warren, Trustee [Adv. Doc. 35]; the Response filed by Defendant-Debtor Harold M. Roland [Adv. Doc. 37]; and the Reply Memorandum filed by the Plaintiff [Adv. Doc. 38]. The facts underlying this action are established by the Complaint [Adv. Doc. 1] and Answer [Adv. Doc. 7]; the "statement of material facts" contained in Plaintiff's Motion for Summary Judgment and the correspondingly numbered responses to those facts contained in Defendant's Response; the affidavits of Michele Gravens (amended) [Adv. Doc. 31], Frederick A. Williams [Adv. Doc. 30], James A. Warren [Adv. Doc. 33], and Joseph Hutson [Adv. Doc. 34] in support of the Motion for Summary Judgment; and the affidavit of Harold M. Rowland [Adv. Doc. 36] in opposition. In addition, the Motion for Summary Judgment incorporates by reference three transcripts: 1) Harold M. Rowland § 341 Meeting of Creditors [Adv. Doc. 32]; 2) Deposition of Lorena M. Rowland [Adv. Docs. 27 & 47]; and 3) Deposition of Douglas Rowland [Adv. Doc. 46].
The Plaintiff, James R. Warren, Trustee ("Trustee"), filed an adversary complaint against the Defendant-Debtor, Harold M. Roland ("Debtor"), seeking denial of Debtor's discharge under 11 U.S.C. § 727(a)(2), (3) and (4) and also seeking the same relief by virtue of an alleged fraudulent transfer pursuant to Ohio Rev.Code § 1336.
Generally, the facts underlying the Trustee's causes of action pertain to certain prepetition transfers of property by Debtor without consideration that were not properly disclosed in Debtor's schedules and statement of financial affairs as initially filed on August 5, 2008. Those initial filings stated that Debtor owned no real estate, that his interest in Our Hero Subs Ltd. LLC ("OHS") had a value of $0.00, and that he had made no transfers of property within the previous two years. All of those statements proved to be incorrect. The property interests at issue in this matter came to light during creditor questioning at the first meeting of creditors held pursuant to 11 U.S.C. § 341 on October 3, 2008 ("§ 341 Meeting"), and were not disclosed on the docket until
In chronological order, the property transfers uncovered during questioning at the § 341 Meeting are as follows:
Debtor's sole source of income was and is revenue from OHS. Most of Debtor's debt is attributable to his guarantee of OHS business debt. At the time of the Selma Road Property transfer, OHS was unable to pay all of its debts and had a number of its checks payable to a vendor, Ellenbee Leggett Co., Inc. ("Ellenbee"), returned for nonsufficient funds. Likewise, Debtor was unable to pay all of his personal debts during this period.
On February 2, 2006, Ellenbee sued Debtor and OHS in state court on the delinquent account in the amount of $106,929.82. It was during the pendency of this suit that Debtor transferred the Everett Road Property to his wife. Ellenbee ultimately obtained judgment against OHS and Debtor on February 4, 2008. On or about July 21, 2008, just two weeks before Debtor's bankruptcy filing, Debtor transferred the revenues from the Derr Road and Selma Road Our Hero stores to accounts in the name of his wife's new company, Rowland Enterprises.
The appropriate standard to address the Trustee's motion for summary judgment is contained in Fed.R.Civ.P. 56(c) and incorporated in bankruptcy adversary proceedings by reference in Fed. R. Bankr.P. 7056. Rule 56(c)(2) states in part that a court should grant summary judgment to the moving party if:
Fed.R.Civ.P. 56(c)(2). In order to prevail, the moving party, if bearing the burden of persuasion at trial, must establish all elements of its claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Thereafter, the opposing party "must come forward with `specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (citations omitted); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249-251, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Matsushita, 475 U.S. at 586-88, 106 S.Ct. 1348.
In this case, the Trustee seeks summary judgment on four statutory causes of action with the ultimate result of denying Debtor's discharge: Ohio Rev. Code § 1336 and 11 U.S.C. § 727(a)(2), (a)(3), and (a)(4). Two of these claims are easily dispensed with. First, the court need not decide whether Debtor's transfers constitute fraudulent transfers under Ohio Rev.Code § 1336 because such a determination does not compel denial of discharge, the only remedy the Trustee seeks.
Under this section of the statute, a debtor may be denied a discharge if "(4) 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). To prevail, the Trustee must prove the following by a preponderance of the evidence: "1) the debtor made a statement under oath; 2) the statement was false; 3) the debtor knew the statement was false; 4) the debtor made the statement with fraudulent intent; and 5) the statement related materially to the bankruptcy case." Keeney v. Smith (In re Keeney), 227 F.3d 679, 685 (6th Cir.2000); Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 178 (5th Cir.1992). A succinct amplification of these elements is also found in Keeney:
Keeney, 227 F.3d at 685-86.
As is frequently the case, the alleged false oath at issue in this instance relates to Debtor's schedules and statement of financial affairs which a debtor declares to be true and correct under penalty of perjury. See, e.g., Keeney, 227 F.3d at 685-86. Debtor was also under oath during his § 341 Meeting testimony. There is no question then that the first element, a statement by Debtor under oath, is satisfied. It is also clear that the failure to correctly list or otherwise disclose all assets is a falsehood that relates materially to the bankruptcy case. Nothing is more fundamental to a Chapter 7 bankruptcy case than the forthright disclosure of a debtor's assets and liabilities, essential information for administering the estate and an absolute prerequisite to a debtor's discharge. United States v. Ellis, 50 F.3d 419, 423-24 (7th Cir.1995). What
With respect to the first two items, Debtor is entitled to the benefit of the doubt despite the skepticism that naturally arises from the circumstances of this case. Regarding the Everett Road Property, Debtor testified at his § 341 Meeting that he transferred it to his wife "[a] couple 2 or three years ago, 2, I don't know what date. ..." (H. Rowland § 341 Meeting Trans., Oct. 3, 2008, at 8, Adv. Doc. 32). Because the statement of financial affairs only requires disclosure of transfers within the previous two years, it is possible that Debtor supposed the transfer was outside those parameters or simply forgot about the transfer. His affidavit does not directly address the issue of non-disclosure of this transfer, but rather suggests possible non-fraudulent motives for the transfer. On the other hand, the affidavit includes the curious statement that "I did not know if my name was on the property at the time that the bankruptcy was filed." (H. Rowland Aff., May 30, 2010, ¶ 5, Adv. Doc. 36). Uncertainty about one's property ownership at the time of completing bankruptcy schedules would seemingly prompt some due diligence or at least favor disclosure rather than nondisclosure. Nevertheless, while Debtor's failure to ascertain the date of transfer before making a sworn statement might be characterized as a dumb mistake or carelessness, the limited facts now before the court do not conclusively establish fraud or recklessness with respect to this specific single act of nondisclosure.
As for Debtor's failure to disclose his co-ownership of the Selma Pike Property, he provides no specific defense and does not address the issue in his affidavit. However, at his § 341 Meeting he stated that he has no interest in the property and that it is owned by his son Douglas Rowland. The depositions of both Lorena Rowland and Douglas Rowland corroborate, albeit somewhat confusedly, their general belief that the Selma Pike Property is owned solely by Douglas and that Debtor was only intended to be a co-signer on the loan note. Douglas also testified that he resides on the property and has been solely responsible for expenses related to the property, including the mortgage and insurance coverage. It is not unreasonable to suppose that Debtor regarded the property as belonging to his son, even if he was mistaken. That mistaken belief is not consistent with fraudulent intent. The court notes, however, that while Debtor enjoys the benefit of the doubt on each such transaction, in the aggregate they begin to suggest a pattern of conduct consistent with a knowing and fraudulent intent. See Hamo v. Wilson (In re Hamo), 233 B.R. 718, 724 (6th Cir. BAP 1999) (intent may be inferred from course of conduct).
Fed.R.Civ.P. 56(e)(2).
The failure to disclose these transfers appears indefensible. The Our Hero stores are of central concern to Debtor and to his creditors. This business enterprise was the primary source of his debt, the only source of income for he and his wife, and the primary catalyst of his financial difficulties and ultimate bankruptcy filing. His statement of financial affairs reveals numerous judgments or pending lawsuits against Debtor and OHS. The two stores that continue in business and presumably have some value were "transferred" to his wife's newly formed business entity approximately two weeks before he filed bankruptcy. He retained in his own LLC the remaining stores which, according to his testimony at the § 341 Meeting, are not solvent and have just enough assets to close them down. Debtor does not claim to have forgotten about the transfers of the store revenues, nor would that be a reasonable inference given this context. The only conclusion that can be drawn is that Debtor attempted to remove the two profitable stores or their funds from the reach of his creditors and knowingly omitted this information from his schedules with the fraudulent intention of hiding the assets from his creditors.
These circumstances, compounded by his failure to provide any explanation or defense, are sufficient to deny Debtor his discharge. But Debtor's testimony at the § 341 Meeting coupled with his wife's deposition testimony provide further confirmation that Debtor intentionally and fraudulently omitted this critical information from his schedules and statement of financial affairs, that he had no intention of making full disclosure to the trustee, and that he continued to resist disclosure even when confronted with the facts.
It is important to note that throughout the § 341 Meeting, beginning with preliminary questioning by James Warren, the Trustee, Debtor had numerous obvious opportunities to disclose the transfers, but avoided the subject until forced to deal with it under direct questioning by creditors. All of the quotations from the transcript that follow are in chronological order.
(H. Rowland § 341 Trans. at 1-2).
During the initial questioning of Debtor about OHS, he is notably indefinite about how many stores he has and avoids an obvious opportunity to explain that two stores are no longer a part of his LLC:
(H. Rowland § 341 Trans. at 2-3).
On two occasions, the Trustee delved into the assets and circumstances of Lorena Rowland, and in both instances, Debtor revealed as little as possible. The following selection from the second set of questions illustrates how Debtor provided limited and sometimes misleading answers without appropriate explanation, volunteering nothing about Rowland Enterprises until asked a direct question:
(H. Rowland § 341 Trans. at 5-6).
During questioning by creditors about the location of "Rowland's Sub Shop" and the time of transfer, Debtor persists with incomplete and vague answers, avers the probable untruth that his wife arranged financing and bought the store equipment from the bank, and never makes it clear that there are two stores under the auspices of Rowland Enterprises:
(H. Rowland § 341 Trans. at 11-12).
Debtor's attempts to characterize his wife as an independent prime mover in taking control of the Our Hero stores, arranging an equipment purchase through the bank, and forming her own LLC are dramatically undercut by her own testimony. From her deposition, it is abundantly clear that Mrs. Roland has no business or managerial experience whatsoever. Her only experience was as a cook and she repeatedly stated that she knew nothing about the financing or other business aspects
(Lorena Rowland Dep., Jan. 14, 2010, at 14, 18, 21, 25, Adv. Doc. 47).
The testimony of Debtor and his wife, Lorena, is sometimes inconsistent, contradictory, and obscure. They do not seem to fully understand the legal operation of deeds, security interests, asset purchase agreements, or incorporation documents. Based upon a comprehensive review of the transcripts, however, Debtor and his wife apparently take the position that the two stores located at Derr Road and Selma Road became the property of Lorena Rowland sometime during 2008 because Lorena was running the stores and because Debtor ceased "managing the cash flow" of the two stores. According to Debtor's view, this transfer was ultimately consummated or finalized when Lorena officially formed Rowland Enterprises about two weeks before the bankruptcy filing, and funds from the two stores were deposited into newly opened bank accounts in the name of Rowland Enterprises. Strictly speaking, the only real transfer in this scenario would appear to be the funds transferred from OHS to Rowland Enterprises.
However, it is not the transfer itself or the value of what was transferred that is at issue here, but Debtor's fraudulent intent, an intent to prevent his creditors and the Trustee from discovering transferred assets by means of a false oath. See Keeney, 227 F.3d at 685 ("Proof of harm is not a required element of a cause of action under Section 727"); Hamo, 233 B.R. at 725 (a debtor's assertion that omitted information concerns a worthless business asset is a specious defense). Debtor attempted to divert his only significant assets to his wife and disguised the transfer with the formation of a new legal entity and new bank accounts at two different banks. In effect, he tried to subtract the value from OHS, sequester that value in
Nowhere does Debtor claim that he forgot about this information or offer any other explanation or defense. The significance of the asset in question, the timing of the transfers, the complete lack of disclosure in the statement of financial affairs, the misleading valuation of OHS, and the clear pattern of obfuscation and reluctant disclosure during the § 341 Meeting lead this court to the inescapable conclusion that Debtor intentionally made a false oath by means of his schedules and statement of financial affairs as well as during his testimony. He did so with fraudulent intent and his discharge will be accordingly denied.
Having determined that Debtor should be denied a discharge pursuant to 11 U.S.C. § 727(a)(4), it is unnecessary to decide if the same result pertains under 11 U.S.C. § 727(a)(2). However, it may be instructive for the parties if the court completes the analysis and it will require little further discussion because the evidence already considered at some length above likewise supports summary judgment under § 727(a)(2).
The text of 11 U.S.C. § 727(a)(2) reads as follows:
11 U.S.C. § 727(a)(2). To prevail under this section, the Trustee must prove two elements: (1) a disposition of property, such as a transfer or concealment; and (2) a subjective intent by the Debtor to hinder, delay, or defraud a creditor through the act of disposing of the property. Keeney, 227 F.3d at 683.
Because much of this ground has already been covered in the previous section, it will not be repeated at length here. Debtor acknowledges the transfer of the two Our Hero stores and/or the revenues of the stores, so one of the two elements has seemingly been met. This is true despite the ambiguity of his admission. During his § 341 Meeting, he vaguely characterizes the transaction as a "transfer" of the stores to Rowland Enterprises. (H. Rowland § 341 Trans., at 12). Later, in responding to the motion for summary judgment, he adopts the characterization of the transaction recounted by Mrs. Rowland in her deposition, describing it only as the deposit of funds from the two stores into new accounts established by Rowland Enterprises. In his affidavit, he describes it more as a relinquishment of control: "I stopped managing the cash flow of two Our Hero stores. . . . My wife decided to continue operations at these stores some time after I had ceased business there. . . . I did not have any control of either of the businesses after I ceased operations." (H. Rowland Aff. at ¶ 12-14). At a minimum, it is clear that a transfer of value took place in that Debtor caused OHS to deposit business revenues from two of its stores into accounts belonging to his wife's company.
However, unlike the situation under 11 U.S.C. § 727(a)(4) where Debtor's intentional and fraudulent false oaths were not countered by any explanation or defense, Debtor has in this instance at least partially denied deleterious intentions with respect to his creditors. In his affidavit, Debtor categorically denies any intention to hinder or delay his creditors, although he curiously omits from his denial the intent to defraud. The court cannot imagine a debtor's intent to defraud creditors that would not also include the intent to hinder and delay them. Certainly, Debtor has not explained how this might be possible. Consequently, Debtor's self-serving and otherwise unsupported statement has no more probative effect than did his complete failure to provide an explanation for his false oaths. In both instances, the failure to respond with specific facts showing a genuine issue for trial warrants granting summary judgment against the nonresponding party pursuant to Fed. R.Civ.P. 56(e)(2).
The court is mindful of its duty to construe the facts in Debtor's favor and, to the extent Debtor has presented an alternative view of the facts that might vitiate the requisite intent, the court would be compelled to deny summary judgment. But, Debtor presents no coherent alternative view or theory. At most, Debtor provides two short sentences in his affidavit from which the court will attempt to extrapolate an alternative theory, a theory which Debtor may never have embraced. Those two sentences, quoted here once again, simply state that "I stopped managing the cash flow of two Our Hero stores. . . . My wife decided to continue operations at these stores some time after I had ceased business there." (H. Rowland Aff. at ¶ 12-13). These statements emphasize his passive relinquishment of business activities at the stores as contrasted with his wife's proactive assumption of control in his absence. They imply a scenario in which the stores were gradually acquired by Mrs. Rowland as if by osmosis without any overt action or intentional transfer by Debtor, fraudulent or otherwise.
Even when considered in a vacuum, the notion that a business owner could transfer his business enterprise (or bank funds under his control) passively and unconsciously, with no particular intent or any cognizance of its effect on creditors is not tenable. When viewed in the context of
Even when the court gives Debtor the most liberal benefit of the doubt, he cannot prevail. Debtor has ultimately countered this strong circumstantial evidence of fraudulent intent with nothing of substance. As a consequence, his discharge must also be denied under § 727(a)(2).
For the reasons stated above, the court
