TERRENCE L. MICHAEL, Chief Judge.
Throughout history, inventors have spent entire lives seeking to unearth their private holy grails. In the Middle Ages, alchemists sought fame and fortune by trying to turn lead into gold. Centuries later, Alexander Graham Bell and Thomas
Christopher Smart ("Mr. Smart") spent 13 years of his life inventing a device that, in his own words, would double or triple the gas mileage of every car in America. Imagine what such a product would do for America's dependency on foreign oil, as well as Mr. Smart's financial well-being. In June 2011, Mr. Smart was telling the world about his invention, its effectiveness, and the three patents related thereto, all of which he claimed to own. However, this is not his only story.
On June 1, 2010, Mr. Smart filed a Chapter 7 bankruptcy petition. In his schedules and statement of financial affairs, he claimed no interest in the invention, stating that he had sold all rights to it for less than $30,000. He also claimed no interest in the company that supposedly owns the invention, stating that, while his mother may have owned some interest in the company, he never did. As late as October 2011, Mr. Smart's wife was attempting to obtain an ownership interest in the company. A creditor has cried foul, alleging that Mr. Smart has been less than candid with the Court. Notwithstanding his proclamations to the world, Mr. Smart claims that his statements in the schedules and related documents are the true story, and he is sticking to them. It remains for the Court to determine whether Mr. Smart is entitled to a discharge. The following findings of fact and conclusions of law are made pursuant to Federal Rule of Bankruptcy Procedure 7052.
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b).
The intellectual property at the center of this case is a "Fuel Economizer Vapor System for Internal Combustion Engine."
In retrospect, 2009 was a big year for Mr. Smart and the Economizer. In September 2009, a corporation, Advanced Mileage Technology LLC ("AMT") was formed for the purpose of developing ideas like the Economizer. In the documents that created AMT, Mr. Smart was identified as the "Manager and President" of AMT.
At some point in 2009, Mr. Smart executed and delivered to AMT a document entitled "Confidentiality, Inventions and Non-Competition Agreement," in which Mr. Smart, among other things, sold, transferred, and assigned to AMT all rights in any intellectual property he developed between January 1, 1997, and the date of the agreement.
The Court heard much evidence on who owned AMT. Mr. Smart testified that he never owned any interest in AMT and never intended to. His testimony is contradicted by a series of e-mails generated in August and September 2009, many of which suggested that Mr. Smart would own between 19.50% and 39.00% of the membership interest in AMT.
On September 10, 2009, something changed. In an e-mail dated September 10, 2009, at 5:03 p.m., Roger Feldman ("Feldman"), a Massachusetts attorney involved in the formation of AMT, sent to Judith Roberts Smart ("Judith"), the mother of Mr. Smart, a subscription agreement that, if properly executed, would result in Judith, and not Mr. Smart, owning 43.92% of AMT.
There is another interesting aspect to the AMT ownership documents. Virtually all of the women listed as managers and/or owners, including Judith, took their ownership interests using their maiden names. The documents in evidence contain no explanation for this. Mr. Smart testified that he had no conversations with Judith regarding this fact, and that any information she received came from another individual. Mr. Smart also testified that he personally did not know why the use of maiden names was utilized here. Mr. Smart also testified that his mother at times used her maiden name in business, a charge she denies. Judith testified that it was Mr. Smart who informed her that all of the women owners were using their maiden names when it came to AMT. She also testified that she had not used her maiden name since her marriage to Mr. Smart's father in 1960.
Mr. Smart resigned as President of AMT, effective November 30, 2009. Judith took his place, at least as a matter of record. Judith testified that she performed no duties as the President of AMT, and had no idea why she was chosen to hold the office. According to his testimony, Mr. Smart remained active in AMT, but only in the capacity of the inventor of the Economizer.
While 2009 appeared to be a year of potential for AMT and the Economizer, it was less so for Mr. Smart on other business fronts. One unsuccessful venture involved NJL Investments, LLC ("NJL"), the plaintiff in this adversary proceeding. At the risk of oversimplification, NJL provided $120,000 in financing to a company involving Mr. Smart for the purchase of an oil and gas lease NJL never received. On October 13, 2009, NJL filed a lawsuit in Muskogee County District Court (the "District Court") against Mr. Smart and others styled NJL Investments, LLC v. Christopher R. Smart et al., Case No. CJ-2009-1494 (the "Muskogee Lawsuit") asserting claims for, inter alia, fraud and breach of fiduciary duty. A default judgment was entered against Mr. Smart in the Muskogee Lawsuit on February 3, 2010, awarding NJL actual damages against Mr. Smart and the other defendants in the amount of $120,000 plus prejudgment interest on that amount from June 5, 2009. The default judgment included an Order setting a hearing on NJL's request for an award of punitive damages for March 3, 2010. On that date, a hearing was held and the District Court awarded NJL punitive damages in the amount of $500,000 against Mr. Smart and the other defendants. Thereafter, NJL filed an Application for an Award of Attorneys Fees, and, on April 13, 2010, the District Court entered an Order awarding NJL attorney fees and costs against Mr. Smart and the other defendants in the amount of $16,842.02. The District Court scheduled an asset hearing for Mr. Smart to be held on June 2, 2010. Mr. Smart claimed to have no knowledge of the judgments in favor of NJL until shortly before his bankruptcy case was filed, testifying that various people told him that the matter had been "handled."
AMT and Mr. Smart continued work on the Economizer in 2010. On January 6, 2010, an application to patent the Economizer was filed, listing Mr. Smart as the inventor and AMT as the assignee of all rights to the invention.
On June 1, 2010, Mr. Smart filed his bankruptcy case. Sidney K. Swinson ("Mr. Swinson") was appointed to serve as trustee in this case. Mr. Smart did not list the Economizer or an interest in AMT as an asset in his bankruptcy schedules. He claimed that he had not worked in over a year. In his statement of financial affairs, Mr. Smart disclosed the December 23, 2009, transfer of all patent rights in the Economizer to AMT.
The first meeting of creditors was held in Mr. Smart's case on June 28, 2010. At the meeting, Mr. Smart failed to disclose the fact that his mother was an owner, officer, and/or manager of AMT. At the conclusion of the meeting, Mr. Swinson asked Mr. Smart to amend his schedules and statement of financial affairs to provide greater detail regarding his income, as well as his transfer to AMT of all patent rights in the Economizer. Mr. Swinson also requested all documents surrounding the transfer of the Economizer and the payments received by Mr. Smart in exchange for said transfer. Amendments to the schedules and statement of financial affairs were filed on July 19, 2010.
The only remaining litigation in Mr. Smart's bankruptcy case is this adversary proceeding. NJL has alleged that Mr. Smart's discharge should be denied, or, in the alternative, that the amounts owed to NJL arising out of the Muskogee Lawsuit are not dischargeable. During the course of this adversary proceeding, the parties attempted to obtain court approval of a settlement (the "Settlement"). Under the terms of the Settlement, Mr. Smart agreed to pay NJL the sum of $70,000, in exchange for which NJL would dismiss this adversary proceeding and file a satisfaction of the judgment entered in the Muskogee Lawsuit. A hearing with respect to approval of the Settlement was held on April 5, 2011. On July 7, 2011, this Court rendered a bench ruling in which it declined to approve the Settlement, finding that settlement of an objection to discharge under the terms outlined in the Settlement (namely, payment of monetary
Work with respect to the Economizer did not stop after Mr. Smart filed his bankruptcy case. By his own admission, Mr. Smart continued his involvement with AMT in his capacity as the inventor of the Economizer. Correspondence received by Mr. Smart in March 2011 shows that additional efforts were being undertaken to obtain patents on the Economizer, with the knowledge and assistance of Mr. Smart.
After Mr. Smart filed his bankruptcy case, there was significant activity regarding the interest in AMT owned by Judith. Sometime in March 2011, Judith had a falling out with Mr. Smart regarding an unauthorized use of her credit card. On March 21, 2011, Judith sent an e-mail to Mr. Feldman in which she resigned her office in AMT, and asked that all of her interest in AMT be transferred to Mr. Smart.
To the extent the Conclusions of Law contain any items that should more appropriately be considered Findings of Fact, they are incorporated herein by this reference.
NJL asks the Court to deny Mr. Smart a discharge pursuant to 11 U.S.C. § 727(a)(4) and (5). In order to prevail under these sections, NJL must prove each statutory element by a preponderance of the evidence.
Section 727(a)(4)(A) of the Code provides that a discharge may be denied where the debtor "knowingly and fraudulently, in or in connection with the case ... made a false oath or account[.]"
The Fourth Circuit has held that
A statement contained in a debtor's schedules or statement of affairs, or the omission of assets from the same may constitute a false oath for purposes of § 727(a)(4)(A).
NJL claims Mr. Smart lied to the Court in his schedules, his statement of financial affairs, and in his testimony regarding his interests in AMT and the Economizer. NJL contends that, at the time of the filing of his bankruptcy case, Mr. Smart continued to have an economic interest in AMT and the Economizer, notwithstanding the fact that he had transferred the rights to the Economizer to AMT, and that his mother, rather than Mr. Smart, held the membership interests in AMT. Mr. Smart denies all of this, and claims that, as early as December of 2009, he had no interest in either the Economizer or AMT. The best way to determine whether Mr. Smart is entitled to a discharge is to compare his testimony with his actions.
Mr. Smart said he never had an ownership interest in AMT. While this may be technically true, Mr. Smart orchestrated the placement of AMT ownership interests in his mother's name, as well as her designation as an officer and manager of AMT. Regardless of the titles she held, Judith had no involvement in the day to day operations of AMT. She was the quintessential figurehead. The Court concludes that Mr. Smart intended for Judith to hold the AMT ownership interests as well as her offices in AMT at his direction and control and for his ultimate personal benefit.
Mr. Smart claims that he had no ownership interest in the Economizer after December 2009. While Mr. Smart may have told this story to Mr. Swinson and the Court, he told an entirely different story to KNEWS. In an interview aired in June 2011, Mr. Smart claimed to own the patents related to the Economizer.
Mr. Smart claimed the Economizer was worthless at the time he filed this bankruptcy case. His actions speak far louder than his words. He continued to work on the Economizer, remaining active with AMT in the capacity of "inventor." He continued to support efforts to obtain additional patents on the Economizer. He continued to promote the Economizer, telling KNEWS and all of its listeners that the Economizer would double or triple their gas mileage and be the solution for America's dependency on foreign oil.
Mr. Smart claimed that AMT had no value. However, in 2011, upon learning that Judith intended to transfer her interests in AMT to him, Mr. Smart resisted the transfer, asking that the interests be transferred to his wife instead. We are given no economic reason as to why Mr. Smart would want his wife to have an interest in AMT. The logical conclusion is that he would be able to assert control over AMT if his wife owned a significant interest in the company. When the transfer did not go forward, he and his wife went so far as to threaten to sue AMT to compel the transfer, asking the Court to believe that it was his grand plan to commence litigation to recover property that he didn't own, that he never had an interest in, and that he thought had little or no value. Mr. Smart's testimony is unbelievable.
The Court concludes that, at the time he sought bankruptcy protection, Mr. Smart believed that he held or controlled interests in AMT and the Economizer through his mother's ownership interest and position in AMT. The Court concludes that Judith's involvement in AMT was part of a plan by Mr. Smart to conceal his interests in the company while he was in litigation with NJL and while he was a debtor in this Court. The Court concludes that the bankruptcy schedules and statement of financial affairs do not accurately convey this information, and that the failure to convey this information was intentional. The Court concludes that the failure of Mr. Smart to identify his mother as an owner or principal of AMT at his first meeting of creditors was intentional. The Court finds that Mr. Smart has knowingly and fraudulently made several false oaths in the course of this bankruptcy case, and is not entitled to a discharge. As a result of the finding of a false oath, the Court does not reach any issues under 11 U.S.C. § 727(a)(5).
Mr. Smart shall not be granted a discharge in Case No. 10-11846-M. A separate judgment consistent with this Memorandum Opinion is entered concurrently herewith.
To the extent the exhibits reflect the plan of the parties in the formation of AMT and the allocation of AMT membership interests, they fall squarely within this exception. In any event, Mr. Smart did not object to Exhibit 64, which contains a direct statement that Mr. Smart is to own a 39% interest in AMT. Moreover, Exhibits 57 and 65 are e-mails authored by Roger Feldman. Mr. Feldman is employed in Massachusetts and, as such, is outside the subpoena power of this Court. See Fed.R.Civ.P. 45(c)(3)(A)(ii), made applicable to this adversary proceeding by Fed. R. Bank. P. 9016. Mr. Feldman authenticated these exhibits in a deposition taken on December 7, 2011, in anticipation of the trial of this adversary proceeding. The deposition of Mr. Feldman was received into evidence at trial without objection. Accordingly, there are no hearsay issues with respect to these exhibits, as Mr. Smart had a full and fair opportunity to cross-examine Mr. Feldman at the deposition.
Trial testimony of Christopher Smart, June 7, 2012, 2:25 p.m.
Mr. Smart was also asked why, if the Economizer was worthless, he incurred over $28,000 in legal fees seeking to patent it. His response was that he was getting the patent "for me. A lot of people do a lot of things for money." Trial testimony of Christopher Smart, June 7, 2012, 3:47 p.m. On redirect examination by his counsel, Mr. Smart changed his tune, stating that the Economizer might have some value if developed, and that he hoped to see it developed. Again, Mr. Smart's testimony is inconsistent and not credible.
In re Yonikus, 974 F.2d 901, 905 (7th Cir. 1992) (citations omitted). See also Kaler v. Olmstead (In re Olmstead), 220 B.R. 986, 994 (Bankr.D.N.D.1998) (quoting Yonikus); Rezin v. Barr (In re Barr), 207 B.R. 168, 176 (Bankr. N.D.Ill.1997) (fraud "may be proven by evidence that Debtors were aware the omitted assets existed and that they knew failure to list the assets would mislead creditors or the Trustee").
