PETER C. McKITTRICK, Bankruptcy Judge.
The United States Trustee (Plaintiff or the UST) filed a complaint to deny Peter Szanto (Debtor) a discharge under 11 U.S.C. § 727.
Plaintiff commenced this adversary proceeding approximately two years ago, in early March of 2018. Adv. P. 18-3022-pcm, Doc. 1 (the Complaint). Debtor filed a document in response to the Complaint that, among other things, included allegations against additional individuals. Adv. P. 18-3022-pcm, Doc. 32. Because of certain irregularities with that document, the Court entered an order, Adv. P. 18-3022-pcm, Doc. 41, in which, among other things, it told Debtor that if he wanted to join additional defendants, "he must do so in accordance with the requirements of the Fed. R. Civ. P. regarding joinder, rather than merely including allegations against third parties and serving his answer on said parties."
Debtor eventually filed a document captioned First Amended 1) Statement of Unwillingness to Consent to Entry of Final Orders 2) Demand for Jury Trial 3) Affirmative Defenses 4) Admissions 4) [sic] General and Specific Denials 5) Answer 6) Counterclaim (the Answer). Adv. P. 18-3022-pcm, Doc. 53. Debtor purported to assert four counterclaims against Plaintiff, Nicholas Henderson and Marissa Henderson in the Answer. On the same day he filed the Answer, Debtor filed a Notice of Joinder (the Notice), in which he purported to join the Nicholas Henderson and Marissa Henderson as indispensable parties. Adv. P. 18-3022-pcm, Doc. 54. The Court entered an Order Re Notice of Joinder, Adv. P. 18-3022-pcm, Doc. 56. In that order, the Court found that (1) filing a mere notice of joinder was insufficient, (2) if the Notice was deemed a motion, it was untimely and (3) if the Notice was deemed a timely motion, it would be denied in its merits.
A few months later, I issued a letter ruling that addressed a motion filed by Plaintiff to dismiss the counterclaims asserted against the UST, and Debtor's demand for a jury trial and statement in the Answer that he did not consent to entry of final judgment. Adv. P. 18-3022-pcm, Doc. 139. I concluded that the Court lacked subject matter jurisdiction over the counterclaims against Plaintiff based on sovereign immunity, there is no right to a jury trial in a § 727 action, and Debtor's refusal to consent was irrelevant because the Court has jurisdiction and Constitutional authority to enter final judgment in this adversary proceeding.
On January 21, 2020, I held a final pretrial conference (the Final PTC) at which I ruled on various pretrial motions filed by the parties. An audio recording of the Final PTC appears on the adversary proceeding docket as docket numbers 274 and 275.
At the time the trial in this adversary proceeding commenced, the only claims remaining to be tried were Plaintiff's claims to deny Debtor a discharge under § 727. Although the Complaint asserts eleven claims for relief, Plaintiff stated in its trial brief that it would pursue only six (its second, fourth, fifth, sixth, tenth and eleventh claims for relief).
There are numerous grounds to deny Debtor a discharge in addition to those I address below. To the extent I do not discuss conduct relied on by Plaintiff at trial, that does not mean that the UST failed to meet its burden of showing that Debtor's discharge should be denied based on that conduct. Debtor is a vexatious litigant and his conduct in the main bankruptcy case and numerous adversary proceedings, including this one, has put an immense burden on judicial and other public resources. Considerations of judicial economy prevent me from making detailed findings on every factual basis established by Plaintiff for denying Debtor's discharge.
Section 727 is construed liberally in favor of a debtor and strictly against the party objecting to discharge.
To deny a debtor a discharge under section 727(a)(2)(B), the plaintiff must show that:
(1) debtor transferred or concealed property;
(2) the property was property of the estate;
(3) the transfer or concealment occurred after the petition was filed; and
(4) debtor acted with the intent to hinder, delay or defraud a creditor or an officer of the estate.
Plaintiff argues that Debtor's discharge should be denied under § 727(a)(2)(B) because Debtor (1) failed to disclose multiple financial accounts in his original bankruptcy schedules and statement of financial affairs (SOFA) and (2) created a new, undisclosed limited liability corporation (LLC) postpetition and secretly transferred estate assets to that LLC. Debtor's discharge will be denied on both grounds.
Debtor filed a voluntary chapter 11 petition on August 16, 2016. Case No. 16-33185-pcm7, Doc. 2. He filed his bankruptcy schedules and SOFA a couple of weeks later, on August 30, 2016. Exhibit 1.
On September 20, 2017, the United States Department of Justice's Tax Division filed a Motion to Convert or Appoint a Trustee (the Motion to Convert). Case No. 16-33185-pcm7, Doc. 185. On December 5, 2017, I entered an order converting this case to chapter 7 (the Conversion Order) based, in part, on Debtor's failure to disclose estate assets. Exhibit 9.
In the conversion proceeding, I found that Debtor failed to disclose numerous financial accounts, including the following:
(The Undisclosed Accounts).
My finding in the conversion proceeding that Debtor concealed the Undisclosed Accounts, and other findings that I will discuss below, apply in this adversary proceeding by virtue of the doctrine of collateral estoppel, also known as issue preclusion.
The Undisclosed Accounts were property of the estate. With certain exceptions not applicable here, property of the estate is comprised of "all legal or equitable interests" a debtor has in property as of the petition date. § 541(a)(1). Property of the estate also includes:
§ 541(a)(2). The Ford Interest Advantage Account Ending in 3843 is a joint account owned by Debtor and his wife. Debtor's is the only name listed on the statements for the other Undisclosed Accounts.
Debtor concealed the Undisclosed Accounts after the petition date by failing to list them in his bankruptcy schedules and the monthly operating reports that he filed during his chapter 11 case.
Finally, I find that Debtor acted with the intent to hinder, delay and defraud his creditors when he concealed the Undisclosed Accounts. In the conversion proceeding, I found that Debtor's misconduct in his chapter 11 case, specifically including concealment of the Undisclosed Accounts, was not the result of a long series of innocent mistakes, as Debtor continues to maintain. Instead, it was attributable to "a deliberate and concerted effort to withhold information" from his creditors and the UST. Exhibit 26, pp. 29-30. I reaffirm that finding here. The number of financial accounts concealed by Debtor and the amount of money involved "eliminate[s] any possible finding of mere negligence that could vitiate the inference of intent."
Debtor offered conflicting testimony at trial about the Undisclosed Accounts. He testified at one point that the Undisclosed Accounts are community property. However, he also testified that, although his name appears on each of the Undisclosed Accounts, he had no interest in those accounts on the petition date because they were, in fact, his wife's accounts. According to Debtor, a California state court had assigned them to his wife as some type of preliminary division of assets in an ongoing dissolution of marriage proceeding. Finally, Debtor also testified that his name appears on the accounts only because his wife designated him a "pay on death beneficiary" of the accounts. There are a multitude of problems with Debtor's arguments.
As a threshold matter, Debtor's arguments that the Undisclosed Accounts are (1) community property and (2) his wife's separate property can not be reconciled. Moreover, Debtor's testimony that the Undisclosed Accounts are community property is contrary to a sworn statement Debtor made at the inception of this case that he and his wife have never "had joint/community/shared or combined property of any type[.]" Exhibit 1, p. 24. In any event, § 541 directs that community property is property of the bankruptcy estate. Debtor provided no evidence, other than his own testimony, which I do not find credible, that the California state court had assigned to his wife an ownership interest in the Undisclosed Accounts as of the petition date.
Debtor formed a new business entity, the Peter Szanto LLC (the LLC), in August of 2017, approximately one year after he filed his chapter 11 petition. Exhibit 15; Exhibit 26, p. 26 (making same finding in conversion proceeding). The LLC was property of Debtor's bankruptcy estate. § 1115(a)(1) (property of the estate in a chapter 11 case includes property debtor acquires after the petition date but before the case is closed, dismissed or converted).
Soon after he formed the LLC, Debtor opened an E*Trade account ending in 5272 in the name of the LLC (the LLC E*Trade Account) and transferred estate funds to the LLC. Exhibit 6; Exhibit 26, p. 26 (making same finding in conversion proceeding). From late September to mid-October of 2017, Debtor transferred approximately $367,000 in estate assets from one of his debtor in possession accounts to the LLC E*Trade Account. Exhibits 5, 6. Debtor did not report the formation of the LLC in his August monthly operating report. Case No. 16-33185-pcm7, Doc. 197. He also failed to report any of the transfers in his September and October 2017 monthly operating reports. Case No. 16-33185-pcm7, Docs. 224 and 277.
I find that Debtor acted with the intent to hinder, delay or defraud his creditors when he secretly created the LLC and then made undisclosed transfers of estate property to it. In the conversion proceeding, I found that Debtor's misconduct in his chapter 11 case, specifically including creating the LLC and making transfers of estate property to it, was not the result of a long series of innocent mistakes, as Debtor continues to maintain. Instead, it was attributable to "a deliberate and concerted effort to withhold information" from his creditors and the UST. Exhibit 26, p. 29-30. I reaffirm that finding here.
"Certain `badges of fraud' strongly suggest that a transaction's purpose is to defraud creditors unless some other convincing explanation appears."
There is a close relationship between Debtor and the LLC. He formed the LLC and is the only member listed on the formation documents. Exhibit 15. Mr. Arnot, the former Chapter 7 trustee (Mr. Arnot or the Trustee) testified that Debtor is the only member of the LLC.
The timing of the creation of the LLC is also suspicious. In April of 2017, the Court entered an order granting the IRS's motion pursuant to Rule 2004 to require Debtor to produce all statements for any financial account in which he had an interest.
Debtor has not offered any convincing explanation for the creation of, or transfers to, the LLC. Debtor claims that he formed the LLC because the Court and the IRS instructed him to do so. I made no such instruction, and Debtor has never provided any detail or evidence to substantiate his contention. Debtor stated at trial that he intended to disclose the transfers of estate funds to the LLC's E*Trade Account, but was waiting until all assets of the estate had been transferred to make the disclosure. Debtor's explanations simply are not credible. Debtor was using the LLC in an attempt to hinder, delay and defraud his creditors.
For the reasons set forth above, Debtor will be denied a discharge under § 727(a)(2)(B).
To deny a debtor a discharge under § 727(a)(4)(A), the plaintiff must show that "(1) the debtor made a false oath in connection with the case; (2) the oath related to a material fact; (3) the oath was made knowingly; and (4) the oath was made fraudulently."
"A false oath may involve a false statement or omission in the debtor's schedules."
A statement is material if it "bears a relationship to the debtor's business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of the debtor's property."
Fraudulent intent must be actual, not constructive,
Plaintiff alleges that Debtor should be denied a discharge under § 727(a)(4)(A) because he knowingly and fraudulently made false oaths in his bankruptcy schedules and SOFA relating to the Undisclosed Accounts and a closely held business entity, the Yankee Trust Corporation. I agree.
Debtor made a false oath relating to a material fact when he failed to list the Undisclosed Accounts on Schedule A/B of his bankruptcy schedules.
Debtor formed the Yankee Trust Corporation (the YTC) in 2014 and was its registered agent and a director. Exhibit 26, p. 19. He was also a 30 percent% owner at the time of formation. Exhibit 24, pp. 116-17. Although Debtor claims that he transferred his ownership interest in the YTC to his family effective January 1, 2015, he remained a director on the date he filed his bankruptcy petition.
Mr. Arnot testified that, despite Debtor's claim that he no longer had an ownership interest in the YTC on the petition date, Debtor made extensive use of YTC assets after he allegedly divested himself of an ownership interest, including during his chapter 11 case. Plaintiff's documentary evidence supports Mr. Arnot's testimony.
Debtor made multiple, material false oaths concerning the YTC in his bankruptcy schedules and SOFA. First, Debtor was at least a director of the YTC on the petition date. He was required, but failed, to report that interest in response to question 27 on the SOFA.
Debtor's testimony at trial in this matter, including about the YTC, was inconsistent, evasive and equivocal. On one hand, Debtor testified that he did not make use of assets held in the name of the YTC and that someone else, either his wife or one of his children, was responsible for his apparent use of those assets.
Debtor made the false oaths about the YTC knowingly and fraudulently. I have carefully considered Debtor's testimony and conclude it is entitled to no weight insofar as he tries to lay blame on others. Debtor has never, including at trial in this matter, offered any corroborative evidence to support his frequent attempts to shift blame to others. A debtor's "failure to produce available explanatory or rebutting evidence when the circumstances attending the transfer are suspicious" is indicative of fraudulent intent.
Plaintiff has proved its case for denial of discharge under this claim.
Plaintiff alleges that Debtor should be denied a discharge under § 727(a)(4)(A) because he knowingly and fraudulently made material false oaths during his chapter 11 case when he failed to disclose in his September and October 2017 monthly operating reports the transfers to the LLC discussed above in relation to Plaintiff's second claim for relief brought pursuant to § 727(a)(2)(B). I agree. My findings set forth above with regard to Plaintiff's second claim for relief support entering judgment against Debtor on Plaintiff's fifth claim for relief as well.
Plaintiff alleges that Debtor should be denied a discharge under § 727(a)(4)(A) because he knowingly and fraudulently made a material false oath at the initial Rule 341 meeting. I agree.
Debtor admitted at trial that he testified under oath at his initial Rule 341 meeting that his bankruptcy schedules were true and correct. They were not close to being true and correct, for the many reasons discussed above.
Debtor made the false oath knowingly and fraudulently. Debtor clearly knew that his bankruptcy schedules were not true and correct when he testified at the Rule 341 meeting of creditors. The number and materiality of the inaccuracies in Debtor's schedules eliminates the possibility of mere negligence or oversight.
For the reasons set forth above, Debtor will be denied a discharge under § 727(a)(4)(A).
Under this subsection of § 727(a), the plaintiff must prove "that the debtor (a) was aware of the order; and (b) willfully or intentionally refused to obey the order (i.e. something more than a mere failure to obey the order through inadvertency, mistake or inability to comply)."
Plaintiff argues that Debtor should be denied a discharge under § 727(a)(6)(A) because he refused to obey three separate orders of the Court. I agree.
The evidentiary hearing on the Motion to Convert commenced on Wednesday, November 29, 2017. Exhibit 24, p. 1. Debtor attended that hearing in person.
The next day, on November 30, 2017, the Court entered an Order Limiting Transfer of Estate Property (the No-Transfer Order). Exhibit 8. With two exceptions not relevant here, the No-Transfer Order provides:
Exhibit 8, p. 1.
The evidentiary hearing on the Motion to Convert resumed on Monday, December 4, 2017. Exhibit 25, p. 1. Debtor did not appear in person as expected, but I permitted him to appear via telephone.
The next day, I made extensive findings on the record,
Exhibit 9.
There is no question that Debtor was aware of the No-Transfer and Conversion Orders. Debtor willfully and intentionally refused to obey those two orders in multiple ways.
Mr. Arnot testified that Debtor never provided him with the itemized accounting and financial statements required under paragraphs 5(b) and 5(c) of the Conversion Order and did not turnover to him all property of the estate as required by paragraph 10. Debtor's response is two-fold.
First, Debtor claims to have no financial account statements, including for the period of time his chapter 11 case was pending. I do not believe Debtor and, even if I did believe him, that would in itself likely be grounds to deny his discharge under § 727(a)(3).
The Conversion Order clearly requires Debtor to provide the Trustee with the specified documents. That the Trustee arguably could have obtained the documents from other sources is beside the point and does not excuse Debtor's noncompliance. Indeed, Debtor would have been obliged to provide the Trustee with the specified information upon the Trustee's request even if the Conversion Order had not specifically required it.
Mr. Arnot further testified, in extensive detail, that Debtor willfully and intentionally violated the No-Transfer and Conversion Orders by making multiple transfers of substantial funds from December 1, 2017-December 7, 2017.
For example, from December 1-December 5, 2017, Debtor made three transfers totaling almost $278,000 from the LLC E*Trade Account, the existence of which he concealed during his chapter 11 case, to an HSBC account ending in 9269 (the HSBC 9269 Account). The HSBC 9269 Account is one of the many accounts I found Debtor failed to disclose during the conversion proceeding.
In response, Debtor claims that he did not violate the No-Transfer and Conversion Orders because he did not make the transfers. Debtor claims that the transfers all happened automatically in accordance with his proprietary trading software instructions because of the Trustee's alleged failure to properly monitor Debtor's accounts following entry of the Conversion Order. There are so many problems with Debtor's argument that it is difficult to know where to begin.
First, as is detailed above, Debtor repeatedly stated at the November 29, 2019, conversion hearing that he had already stopped all automatic transfers in his accounts. In any event, I do not believe that the transfers resulted automatically from preexisting trading instructions put in place by Debtor. This is not the first time that Debtor has made such a claim, but he has never provided any independent corroborative proof of the existence of such software. In fact, Mr. Arnot testified he asked Debtor to provide him with a thumb drive that contained the program, but Debtor refused to comply with that request.
In late July of 2018, the Trustee filed a motion to hold Debtor in contempt for violation of the Conversion Order (the Contempt Motion). Exhibit 17. The Trustee asserted that he had been unsuccessful in his attempts to obtain Debtor's cooperation with the recovery of approximately $424,000 in estate assets that Debtor transferred to HSBC accounts in Australia and Singapore (the Foreign Accounts) shortly before and after entry of the Conversion Order.
The Court held an evidentiary hearing and, on October 2, 2018, I entered an order granting the Contempt Motion (the Contempt Order). Exhibit 10. I found that Debtor's acts or omissions resulted in estate funds being transferred to the Foreign Accounts. Case No. 16-33185-pcm7, Doc. 651, p. 4. Although I declined at that time to determine whether Debtor made the transfers intentionally or whether they occurred automatically, I have explained above why I do not believe that the transfers that happened shortly before and after entry of the Conversion Order occurred automatically. However, it is not necessary to decide that question for purposes of ruling on this claim for relief because the dispositive issue is Debtor's subsequent refusal to obey the Contempt Order's provisions requiring that he assist the Trustee in the Trustee's efforts to obtain information about and recover those funds.
The Contempt Order provides, in part:
Exhibit 10, pp. 1-2. The Release Form authorizes HSBC Bank USA, Australia, and Singapore, and HSBC Foreign Exchange, to release account information to the Trustee and to turn over to the Trustee "all funds in all bank and/or financial accounts with your institution in [Debtor's] name solely, [or] jointly with another."
Plaintiff argues that Debtor should be denied a discharge under § 727(a)(6)(A) because Debtor willfully and intentionally refused to obey the Contempt Order. I agree.
Debtor was aware of the Contempt Order and willfully and intentionally refused to comply with it. Mr. Arnot testified that Debtor refused to sign the Release Form and that, as a result, he was forced to hire special counsel in Singapore to assist with the Trustee's efforts to recover estate property.
Debtor does not dispute that he has refused to sign the Release Form and admitted at trial that he has participated in every hearing before the court in Singapore, either in person or by phone, in opposition to the Trustee's efforts there. Debtor testified that he is justified in refusing to comply with the Contempt Order because the money in Singapore belongs to his wife, not to him. Debtor testified that the money came from his wife's Israeli military pension and was necessary to pay for a recent liver transplant his wife had in Singapore.
I am skeptical about the veracity of Debtor's representations concerning the nature of the funds in Singapore. Debtor has never provided any corroborative documentary or third-party testimonial evidence to support his representations. I have told Debtor numerous times that he does not represent, and may not advance claims on behalf of, his wife.
Under § 727(a)(6)(A), once the plaintiff has shown that the debtor violated a lawful order of the court, which the UST has done, the burden shifts to the debtor show why his discharge should not be denied. Debtor has not met that burden and his discharge will be denied under § 727(a)(6)(A) based on his wilful and intentional violation of the No-Transfer, Conversion, and Contempt Orders as detailed above.
For the reasons set forth above, Debtor will be denied a discharge under § 727(a)(2)(B), (4)(A), (4)(D) and (6)(A). Counsel for Plaintiff should submit a judgment within 14 days of entry of this memorandum opinion.
An order is lawful if it is issued by a court with subject matter and personal jurisdiction.
The debtor's justification will be measured against what a reasonable person would do under similar circumstances and will be evaluated in light of the education, experience and sophistication of the debtor, the nature and extent of the debtor's business, and the amount of credit extended to the debtor.
It is inconceivable that Debtor's claimed failure to have even a single financial statement to provide to the Trustee could be justified under the circumstances of this case. Plaintiff alleged that Debtor should be denied a discharge under § 727(a)(3) in its fourth claim for relief. However, Plaintiff indicated in its trial brief that it would not pursue its § 727(a)(3) claim at trial.
Plaintiff argues that Debtor should be denied a discharge under § 727(a)(4)(D) because, despite repeated requests, Debtor knowingly and fraudulently withheld from the Trustee the itemized accounting and financial statements required under paragraphs 5(b) and 5(c) of the Conversion Order. I agree.
