BARBARA J. HOUSER, Bankruptcy Judge.
The Court tried this adversary proceeding (the "
The U.S. District Court for the Northern District of Texas has subject matter jurisdiction over this proceeding under 28 U.S.C. § 1334. Although bankruptcy courts do not have independent subject matter jurisdiction over bankruptcy cases and proceedings, 28 U.S.C. § 151 grants bankruptcy courts the power to exercise certain "authority conferred" upon the district courts by title 28. Under 28 U.S.C. § 157, the district courts may refer bankruptcy cases and proceedings to the bankruptcy courts for entry of either a final judgment (core proceedings) or proposed findings and conclusions (noncore, related-to proceedings). So, as relevant here, this Court exercises authority over the Chapter 7 bankruptcy case of Lloyd Ward ("
Chapter 7 trustee Robert Yaquinto (the "
Ward is a lawyer licensed to practice in the state of Texas. Joint Pretrial Order [AP
Along with the Petition, Ward filed his bankruptcy schedules (DX 3 at 6 of 56, the "
On May 13, 2014, the Judgment Creditors, with the Defendant's consent, filed their unopposed motion in the EDTex Court (the "
The Venue Motion was granted by the EDTex Court by Order entered on June 5, 2014 (the "
On June 23, 2014, the Clerk of Court issued a Notice of Chapter 7 Bankruptcy Case, Meeting of Creditors, & Deadlines (the "
On August 27, 2014, the Judgment Creditors filed a motion seeking an extension of the deadline to object to Ward's receipt of a discharge and the dischargeability of the Judgment to December 22, 2014 [BC ECF No. 32] (the "
On October 31, 2014, after notice and a hearing, the Court entered the Order Extending Deadline to Object to Discharge and/or Dischargeability of Debt [BC ECF No. 76], granting the Extension Motion in part and extending the deadline by which the Plaintiffs may object to Ward's receipt of a discharge and the deadline by which the Judgment Creditors may object to the dischargeability of the Judgment through and including December 22, 2014.
On April 30, 2015, the Plaintiffs filed their Original Complaint Objecting to Discharge Under 11 U.S.C. § 727 and 11 U.S.C. § 523 [AP ECF No. 3] (the "
In the Third Amended Complaint, the Plaintiffs argue that Ward's receipt of a discharge should be denied under 11 U.S.C. §§ 727(a)(2), (3), (4)(A), 4(D), and (5), and the Judgment Creditors argue that the Judgment should be held nondischargeable under 11 U.S.C. §523(a)(6). Joint Pretrial Order at 2 (¶ 1). Before reaching the merits of these allegations, however, the Court must first address certain preliminary matters, including Ward's renewed argument that the Adversary Proceeding must be dismissed because the Original Complaint was not timely filed, as well as other defenses that Ward raises in his Defendant's Trial Brief [AP ECF No. 107] and the Joint Pretrial Order.
Bankruptcy Rules 4004 and 4007, respectively, govern the deadlines for filing objections to a debtor's discharge and the dischargeability of individual debts. Bankruptcy Rule 4004 provides:
FED. R. BANKR. P. 4004(a), (b)(1). In turn, Bankruptcy Rule 4007(c) provides that:
Id. 4007(C).
Ward's defense of untimeliness resulted from the voluntary transfer of the Case to this Court. When Ward filed his Petition, the Clerk of the EDTex Court issued a notice informing parties in interest that the § 341 meeting of creditors would be held May 30, 2014 and that the deadline to object to Ward's receipt of a discharge and the dischargeability of individual debts would be July 29, 2014.
In reliance on the NDTex 341 Notice, the Judgment Creditors filed the Extension Motion on August 27, 2014, which the Trustee joined on September 22, 2014. Thus, the issue before the Court at the October 21, 2014 hearing on the Extension Motion, and which Ward re-urges now,
As an initial matter, the Court agrees with Ward that the filing deadlines of Bankruptcy Rules 4004 and 4007 are interpreted strictly. Indeed, "[t]he strict time limitation placed upon creditors who wish to object to a debt's dischargeability reflects the Bankruptcy Code's goal of providing debtors with a fresh start." State Bank & Trust, N.A. v. Dunlap (In re Dunlap), 217 F.3d 311, 315 (5th Cir. 2000); Neeley v. Murchison, 815 F.2d 345, 347 (5th Cir.1987) (stating that Rule 4007 "places a heavy burden on the creditor to protect his rights"). However, the Court disagrees with Ward that the Original Complaint was not timely filed. This is so because Bankruptcy Rules 4004 and 4007 can be, and have been, harmonized with other principles and rules without losing their strictness, and the Fifth Circuit has recognized situations in which the deadline should be deemed to have occurred after the sixtieth day following the first date set for the § 341 meeting of creditors. See, e.g., Coston v. Bank of Malvern (In re Coston), 987 F.2d 1096, 1099 (5th Cir. 1992) (holding the deadline ran from the second setting of the § 341 meeting when the initial proceedings were stayed due to the pendency of a related involuntary case in another state); In re Dunlap, 217 F.3d at 314-17 (holding that the "first date set" for the § 341 meeting does not mean the date set in the first notice if circumstances, such as an intervening dismissal of the case, prevent a creditor from timely filing a complaint objecting to discharge); In re Castleman, 2011 WL 925567, at *3-4 (Bankr. N.D. Tex. March 24, 2011) (holding that creditors may rely on an affirmative misstatement by the Clerk as to the deadline to object to a debtor's discharge); Official Comm. of Unsecured Creditors of the Project Grp., Inc. v. Crawford (In re Crawford), 347 B.R. 42, 48 (Bankr. S.D. Tex. 2006) (citing to Neeley v. Murchison in support of the "conclu[sion] that the Fifth Circuit would follow the Sixth, Eighth, Ninth, and Tenth Circuits in holding that an affirmative misstatement of the deadline extends the deadline. ..."); see also Neeley v. Murchison, 815 F.2d at 347 n.5 (5th Cir. 1987) (differentiating between situations in which a Clerk does not provide any information about the discharge objection deadline and situations in which a Clerk provides "affirmative but erroneous notice of a bar date").
Moreover, the Court does not find the cases relied upon by Ward in his Defendant's Trial Brief persuasive. Indeed, virtually all of them appear to be cited to for general propositions regarding filing deadlines under the Bankruptcy Code and Rules, which is unsurprising and not particularly helpful here, where the NDTex 341 Notice (which was issued after the EDTex Court transferred the Case here) clearly states that the deadline to object to Ward's receipt of a discharge and the dischargeability of individual debts was September 22, 2014. The one case that is somewhat on point, Owen v. Miller (In re Miller), 2006 WL 6507922 (N.D. Tex. March 28, 2006), involved a situation where, although there was inconsistent information regarding when the § 341 meeting of creditors would be held, at all times the docket listed January 1, 2005 as the relevant objection deadline. Id. at *2. Moreover, the creditor in Miller never alleged that it received official information from PACER or the Clerk's office that the January 1, 2005 deadline had changed or been reset. Id. Thus, the Court finds Miller distinguishable from the facts at hand.
Here, the Clerk of Court issued and served to parties in interest the NDTex 341 Notice which clearly stated that September 22, 2014 was as the deadline for parties to object to Ward's receipt of a discharge and the dischargeability of their debts. All parties in interest in the Case, including the Plaintiffs, were entitled to rely on the information contained in the NDTex 341 Notice. Thus, September 22, 2014 is deemed the applicable deadline for parties to file objections to Ward's receipt of a discharge or the dischargeability of their individual debts. The Plaintiffs timely sought to extend that deadline and carried their burden to establish "cause" to do so at the October 21, 2014 hearing on the Extension Motion, as well as at subsequent hearings related to further extensions of the deadline, by demonstrating, among other things, that the Plaintiffs were diligent in investigating very complicated pre-bankruptcy transactions involving Ward and his complex web of entities (which are discussed in more detail below) and the substantial questions raised with respect to the accuracy of documents Ward filed with the Court.
For the reason explained above, the Court concludes that the Plaintiffs timely filed the Original Complaint. Thus, Ward's request to dismiss this Adversary Proceeding is denied.
Ward also raised various other defenses to the Third Amended Complaint, including alleging that: (i) the Third Amended Complaint must be dismissed in accordance with Federal Rule of Civil Procedure ("
First, Ward argues that the Court must dismiss this Adversary Proceeding due to the Plaintiffs' failure to comply with Civil Rule 8(a)(1), as incorporated by Bankruptcy Rule 7008. To analyze Ward's argument, the Court must first look to the requirements contained in each rule, beginning with Bankruptcy Rule 7008, which states that:
FED. R. BANKR. P. 7008. In turn, Civil Rule 8(a) requires that the pleading contain "a short and plain statement of the grounds for the court's jurisdiction, unless the court already has jurisdiction and the claim needs no new jurisdictional support." FED. R. CIV. P. 8(a); see Joint Pretrial Order at 4 (¶ 7); Defendant's Trial Brief ¶¶ 27-30.
Ward argues that, because the Third Amended Complaint does not contain the required jurisdictional statement or a statement that the Plaintiffs consent to this Court entering a final order, the Court must dismiss the Adversary Proceeding in its entirety, particularly since the Plaintiffs amended the Original Complaint several times but never included the required statement. As explained below, the Court disagrees,
Although the Third Amended Complaint is missing the statement required by Civil Rule 8(a) and Bankruptcy Rule 7008, the deficiency is not fatal, especially when, as here, the Court is able to determine its jurisdiction and the core nature of the claims asserted based upon the face of the Third Amended Complaint. See LeBlanc v. Salem (In re Mailman Steam Carpet Cleaning Corp.), 196 F.3d 1, 5 (1st Cir. 1999) ("Affirmative pleading of the precise statutory basis for federal subject matter jurisdiction is not required as long as a complaint alleges sufficient facts to establish jurisdiction."); Continental Casualty Co. v. Canadian Universal Ins. Co., 605 F.2d 1340, 1343 (5th Cir. 1979) (holding that failure include the jurisdictional statement required by Civil Rule 8(a) is not fatal when "diversity jurisdiction is evident from the face of the complaint"), cert. denied, 445 U.S. 929 (1980); Carlson v. Attorney Registration and Disciplinary Comm'n of the Supreme Court of Ill. (In re Carlson), 202 B.R. 946, 948 (Bankr. N.D. Ill. 1996) (holding that failure to include jurisdictional statement or allegation that proceeding was core or non-core in a discharge complaint was not a jurisdictional defect since alleged facts provided a basis for assumption of jurisdiction); Painter v. First Fed. Sav. & Loan Ass'n of S.C. (In re Painter), 84 B.R. 59, 61 (Bankr. W.D. Va.1988) (finding requirement of Rule 7008(a) that complaint contain allegation that matter is core or non-core "is technical in nature and certainly not fatal to the complaint").
Here, as more fully explained in Section I of this Memorandum Opinion, the Court already has jurisdiction over Ward, the Case, and this core Adversary Proceeding that alleges claims arising solely under 11 U.S.C. §§ 727 and 523. Moreover, because the Third Amended Complaint only implicates bankruptcy law, the constitutional limitations that Stern placed on this Court's authority to enter final orders in certain statutorily core matters involving state law claims is not applicable. Accordingly, the jurisdictional statement described in Civil Rule 8(a) is not necessary here. Similarly, there is also no need for the Plaintiffs to consent to this Court's entry of a final order, as the Court already has both the statutory and constitutional authority to do so. Thus, the Plaintiffs failure to include within the Third Amended Complaint the statement required by Civil Rule 8(a) and Bankruptcy Rule 7008 is not fatal, as the Court can garner all the necessary information from the face of the Third Amended Complaint. Accordingly, Ward's request to dismiss the Adversary Proceeding is denied.
Second, Ward argues that the Plaintiffs may not re-litigate matters already decided as part of the final judgment entered in the GPC Adversary. While the Court agrees that it may not re-litigate issues already decided in the GPC Adversary, it is not doing so here and this defense must also be rejected. Before turning to its analysis of this argument, it is helpful for the Court to give a brief overview of Ward's various entities, several of which are implicated in both this Adversary Proceeding and the GPC Adversary, as well as the complaint and judgment entered in the GPC Adversary, which the Court will address in turn.
There are primarily two bankruptcy documents that require a debtor to disclose entities he either owns or has served in a managerial capacity for. First, Schedule B requires a debtor to list all of his personal property. More specifically, Item 13 of Schedule B requires a debtor to provide an itemized list of all "[s]tock and interests in incorporated and unincorporated businesses." In response, Ward listed the following entities on his Amended Schedule B filed January 23, 2015:
DX Ex. 16 at 4 of 16 (Item 13). In turn, the Statement of Financial Affairs (Item 18) requires a debtor to list all entities in which he has served as an officer, director, or in a managerial-type capacity during the prior six years.
DX Ex. 18 at 7-8 of 10 (Item 18).
The defendants in the GPC Adversary were Ward, Amanda Ward (Ward's wife), GPC, and BRM, although the complaint also included allegations involving non-defendant Lloyd Ward & Associates, P.C. The complaint alleged eight separate counts:
The defendants in the GPC Adversary (other than Ward) moved for summary judgment on all counts, which the Court granted on the following grounds:
Final Judgment, Adv. Proc. No 15-3037 [ECF No. 165] at 2-3. Because the Court granted summary judgment in favor of both GPC and BRM, it also dismissed the Count II (alter ego) claim against Ward.
Defendant's Trial Brief at 20 (¶¶ 37-38).
Although the Court agrees with Ward's basic legal proposition, it is not applicable here. For the reasons explained further in the analysis section of this Memorandum Opinion, the Court concludes that Ward's receipt of a discharge should be denied under 11 U.S.C. § 727(a)(4)(A) and § 727(a)(5) for reasons wholly independent of the allegations made in the GPC Adversary regarding Ward's alleged ownership of the Residence, GPC, and/or BRM and his alleged failure to include those entities and/or their assets in his Schedules and Amended Schedules. Accordingly, Ward's request to dismiss the Adversary Proceeding is denied.
Finally, Ward argues that the Plaintiffs may not urge claims that were previously disposed of by a settlement approved by this Court in relation to two adversary proceedings—Yaquinto v. Ward., Adv. Proc. No. 15-03033 (the "
The dispute in the Banks Adversary centered on a substantial contingency fee resulting from an over $5.7 million postpetition judgment entered in favor of the Banks by a state court in Arkansas.
Joint Pretrial Order at 14-15 (Stipulated Fact No. 73). Thus, the next step in this Court's analysis is to review paragraphs 17 and 36 of the Original Complaint and compare those allegations to the allegations in the Third Amended Complaint.
Paragraph 17 of the Original Complaint alleges various misrepresentations on Ward's original Schedule D (titled "Creditors Holding Secured Claims") involving alleged loans from Allen Monroe to Ward and Amanda that the Trustee argued should be reclassified as gifts, while paragraph 36 alleged that Ward disposed of various assets without notifying the Trustee, including the postpetition removal of Ward as a governing person of Ward Bell & Gallegos, PLLC. The Court has reviewed the settlement agreement, its order approving the settlement agreement, the Original Complaint, the Third Amended Complaint, and all ancillary documents and finds that none of the claims previously released in relation to the Banks Adversary are raised by the Plaintiffs in the Third Amended Complaint. To the extent that any such allegations may arguably remain, they were not considered by this Court in reaching the findings and conclusions contained in this Memorandum Opinion. Accordingly, Ward's request to dismiss the Adversary Proceeding is denied.
Turning to the Monroe Adversary, it was a lawsuit brought by the Trustee against Allen Monroe, M Real Estate, Inc., Ward, and Ward Legal Group, PLLC f/k/a Lloyd Ward & Associates, P.C. centered on alleged loans from Allen Monroe or M Real Estate, Inc. to Ward and/or Amanda.
On June 30, 2015, the Trustee filed a motion seeking approval of a settlement resolving the Monroe Adversary, which the Court granted on August 5, 2015. In accordance with the settlement, the Court entered an Agreed Order of Dismissal on October 13, 2015, dismissing the Monroe Adversary with prejudice. Agreed Order of Dismissal with Prejudice, Adv. Proc. No. 15-3053 [ECF No. 7].
In relation to the Monroe Adversary, the Court has reviewed the complaint filed in that adversary proceeding, the related settlement, the order approving that settlement, the order dismissing the Monroe Adversary with prejudice, the Third Amended Complaint, and all ancillary documents. Based upon this review, the Court finds that none of the claims previously dismissed with prejudice in the Monroe Adversary are raised by the Plaintiffs in the Third Amended Complaint. To the extent that any such allegations may arguably remain, they were not considered by this Court in reaching the findings and conclusions contained in this Memorandum Opinion. Accordingly, Ward's request to dismiss the Adversary Proceeding is denied.
With these preliminary matters addressed, the Court will now turn to the claims asserted in the Third Amended Complaint.
Bankruptcy Rule 4005 places the burden of proof on the party objecting to discharge. FED. R. BANKR. P. 4005. Moreover, the § 727 exceptions to discharge are construed liberally in favor of the debtor and strictly against the objecting party in furtherance of the "fresh start" policy of the Bankruptcy Code. McClendon v. DeVoll (In re DeVoll), 266 B.R. 81, 97 (Bankr. N.D. Tex. 2001) (citing cases). The objecting party must prove its grounds for objecting to a debtor's receipt of a discharge by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279 (1991); In re DeVoll, 266 B.R. at 97-98.
The Plaintiffs ask this Court to deny Ward's receipt of a discharge because he knowingly and fraudulently made a false oath or account as proscribed by 11 U.S.C. § 727(a)(4)(A). More particularly, the Plaintiffs allege that Ward falsely testified at both trial and his § 341 meeting of creditors and that he filed multiple false documents with the Court under penalty of perjury, namely the Schedules and SOFA and the Amended Schedules and Amended SOFA.
Section 727(a)(4) of the Bankruptcy Code conditions the debtor's receipt of a discharge on his truthfulness: "The court shall grant the debtor a discharge, unless ... the debtor knowingly and fraudulently, in or in connection with the case ... made a false oath or account." 11 U.S.C. § 727(a)(4)(A). To prevail on a claim under this subsection, a plaintiff must prove by a preponderance of the evidence that "`(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 was material to the bankruptcy case.'" Cadle Co. v. Duncan (In re Duncan), 562 F.3d 688, 695 (5th Cir. 2009) (quoting Sholdra v. Chilmark Fin. LLP (In re Sholdra), 249 F.3d 380, 382 (5th Cir.2001)). Circumstantial evidence may be used to prove fraudulent intent, and the cumulative effect of false statements may, when taken together, evidence a reckless disregard for the truth sufficient to support a finding of fraudulent intent. Id. (citing In re Sholdra, 249 F.3d at 383).
"False statements in the debtor's schedules or false statements by the debtor during the proceedings are sufficient to justify denial of discharge." Id. (citing Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 178 (5th Cir.1992)). Moreover, the materiality of an omission is not based solely on the value of the item omitted or whether it harmed creditors. Id. Rather, the statement need only "`bear[] a relationship to the bankrupt's business transactions or estate, or concern[] the discovery of assets, business dealings, or the existence and disposition of his property.'" Id. (alternations in original) (quoting In re Beaubouef, 966 F.2d at 178). As explained by the Fifth Circuit,
In re Beaubouef, 966 F.2d at 178 (quoting Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 618 (11th Cir.1984)). Amendments to schedules and statements of financial affairs will "not negate the fact that [the debtor] made knowingly false oaths in his original schedules and statement of financial affairs." In re Sholdra, 249 F.3d at 382 (citing Mazer v. U.S., 298 F.2d 579, 582 (7th Cir. 1962)). This is even more true when the debtor files those amendments only after the falsity of the original schedules and statements was revealed. Id.; see also Neese v. Garcia, 2010 WL 2545706, at *2 (Bankr. D. Md. June 18, 2010) ("The subsequent amendment of statements or schedules after their falsity is discovered does not negate the effect of the original fraud.").
If the plaintiff establishes a prima facie case, then the burden shifts to the debtor. In re Duncan, 562 F.3d at 696 (citing First Tex. Savings Ass'n v. Reed (In re Reed), 700 F.2d 986, 992 (5th Cir.1983) ("While the burden of persuasion rests at all times on the creditor objecting to discharge, it is axiomatic that the debtor cannot prevail if he fails to offer credible evidence after the creditor makes a prima facie case.")).
With this understanding of the requirements of § 727(a)(4)(A), the Court turns to the false statements here.
When a debtor files his bankruptcy petition, he is required to complete various forms that are intended to disclose his assets, liabilities, and other information relevant to his financial situation, both as of and prior to the bankruptcy petition date. These documents include the Schedules and the Statement of Financial Affairs. Item 1 on the Statement of Financial Affairs, which is titled "Income from employment or operation of business," requires the debtor to:
In his SOFA filed on May 1, 2014, Ward disclosed the following in response to Item 1:
DX 3 at 29 of 56.
Ward filed his Amended SOFA on January 23, 2015. His initial disclosure of wages/distributions remained unchanged, but he added significant amounts described as "[c]ompany distributions/expense payments:"
DX 18 at 1.
Turning to the Third Amended Complaint, one of the alleged grounds for denying Ward a discharge is that he fraudulently understated his gross income on his SOFA and Amended SOFA. To fully consider this allegation, the Court must first determine exactly what SOFA Item 1 requires Ward to disclose.
The term gross income is not defined in the Statement of Financial Affairs, the official Instructions to the Statement of Financial Affairs,
The Tax Code broadly defines "gross income" as "all income from whatever source derived" including, but not limited to, an itemized list that includes items such as "[c]ompensation for services, including fees, commissions, fringe benefits, and similar items," gross income derived from business, and dividends. 26 U.S.C. § 61(a). Notably, the Tax Code is not the only source that broadly defines "gross income." For example, Black's Law Dictionary defines "gross income" as the "[t]otal income from all sources before deductions, exemptions, or other tax reductions. See IRC (26 USCA) § 61." Black's Law Dictionary 881 (10th ed. 2014). With the Tax Code's broad definition of "gross income" in mind, the Court will analyze the amounts disclosed in both Ward's SOFA and Amended SOFA.
Beginning with the SOFA generally, Ward initially only disclosed "wages," which he testified means actual wages and does not include any type of non-wage distribution from his companies. Tr. Trans. 12/12/16 at 245:1-19 (Ward). SOFA Item 1, however, does not request "wages," it requests the "gross amount of income." And, as discussed above, gross income is commonly defined to include far more than just wages earned. The Court finds that Ward, a lawyer and sophisticated businessman who has run multiple companies for many years, was undoubtedly aware of this distinction. Despite this, Ward chose to limit his initial disclosure to exclude substantial expenses paid on his behalf by entities he controlled, which creditors later learned was not less than $50,000 per year (and likely more). Although the Amended SOFA attempts to correct this omission, the amendment was filed nearly nine months into the Case and only after significant discovery had occurred and it was clear that the Judgment Creditors were going to aggressively pursue collection of the Judgment as permitted under the Bankruptcy Code. Thus, under the facts of this Case, the Court finds that Ward's Amended SOFA does not negate the false oath that Ward made in his SOFA. In re Duncan, 562 F.3d at 695. Accordingly, the Court finds that Ward misstated his gross income for each of 2012, 2013, and 2014 (YTD) on his SOFA by intentionally failing to disclose significant expenses paid on his behalf by companies he controlled.
Turning to the Amended SOFA, the Court will begin its analysis with 2014 and work back. As reflected on the SOFA and Amended SOFA, 2014 is unique in that it is only a partial year. This is important because the other information in the record that relates to Ward's income, such as tax returns showing officer compensation, are kept on an annual basis. Because of this, the Court is unable to tell, based upon the record before it, whether Ward accurately disclosed his year-to-date 2014 income in his Amended SOFA. Thus, the Court finds that the Plaintiffs have failed to meet their burden of proof with respect to their allegation that Ward gave a false oath by materially understating his 2014 gross income listed in the Amended SOFA.
The Plaintiffs have similarly failed to meet their burden with respect to their allegation that Ward materially understated his 2013 gross income in his Amended SOFA, as the Court will explain. For 2013, Ward's SOFA disclosed gross income of $41,180.11, while his Amended SOFA increased this amount to $91,180.11 ($41,180.11 + $50,000). The only evidence in the record against which to assess the accuracy of this disclosed amount is the tax returns and bank records for various Ward-related entities. As for the tax returns, only a single return—that of Lloyd Ward & Associates, P.C. (of which Ward was the sole officer)—shows compensation paid to officers in 2013, totaling $13,907. PX 72 at 00151; Tr. Trans. 12/12/16 at 240:5-10 (Ward).
Turning to the bank statements, the record reflects that VL Capital paid $48,474.32 in expenses on Ward's behalf in 2013:
This evidence establishes total compensation to Ward of $62,381.32 for 2013, calculated as $13,907 of compensation from Lloyd Ward & Associates, P.C. plus $48,474.32 of expenses paid on his behalf by VL Capital.
Additionally, Ward's personal bank records show that deposits into his personal account ending in x8076 totaled at least $137,428.93 for 2013:
Although the amount of these deposits raises questions regarding the amount of Ward's actual gross income in 2013, the evidentiary record is insufficient for the Court to determine where the deposits came from, what they were for, and whether they represent income to Ward.
Thus, for 2013, the Court can only reliably calculate $62,381.32 of income to Ward, which is less than the $91,180.11 disclosed on Ward's Amended SOFA. Accordingly, the Court finds that the Plaintiffs have failed to meet their burden to prove that Ward understated his 2013 gross income on his Amended SOFA.
The Plaintiffs, however, have carried their burden of proof that Ward understated his gross income in 2012 in both his SOFA and Amended SOFA, as the Court will explain in turn. With respect to the SOFA, Ward testified at trial that he was the sole officer of each of Lloyd Ward, P.C. and Lloyd Ward & Associates, P.C. Tr. Trans. 12/12/16 at 239:18-241:10 (Ward). The 2012 tax return of Lloyd Ward, P.C. shows that it paid officer compensation of $39,000 that year. PX 74 at 00336 (line 7). The 2012 tax return for Lloyd Ward & Associates, P.C. also shows that it paid officer compensation of $39,000 that year. PX 72 at 00145 (line 7). Thus, based on the tax returns in evidence that were filed by entities of which Ward is the sole officer, Ward received compensation of $78,000 in 2012. This amount is nearly double the $42,271.50 in "wages" disclosed in Ward's SOFA. DX 3 at 29 of 56; DX 18 at 1; Tr. Trans. 12/12/16 at 254:3-8 (Ward), 256:14-19 (Ward). When questioned about the discrepancy, Ward testified that he did not believe the $78,000 figure was accurate, though he did not explain why. Tr. Trans. 12/12/16 at 256:20-259:5 (Ward). Ward also testified that the entities would not file false tax returns. Id. at 257:22-23 (Ward). The Court is satisfied that the entities paid Ward the amount of compensation shown on the tax returns. Thus, the Court finds that Ward materially understated his 2012 income in his SOFA.
Ward's Amended SOFA, which disclosed an additional $60,000 in gross income for 2012, does not address his failure to disclose the $78,000 of officer compensation just discussed. First, the additional $60,000 is labelled, "[c]ompany distributions/ expense payments" and not "wages." Thus, it is clear based on the face of the Amended SOFA, and Ward's own testimony, that the additional amounts are not officer compensation, but either company distributions made to Ward as a shareholder or expenses paid on Ward's behalf. Tr. Trans. 12/12/16 at 245:5-8 (Ward) (testifying that the $42,271.50 was "wages, not wages and distributions"), 246:7-11 (Ward) (testifying that the additional $60,000 was company distributions and expense payments). Thus, it appears that the material misstatement regarding the amount of Ward's 2013 "wages" made in the SOFA was carried over into the Amended SOFA.
Second, even if the Court were to combine the amounts disclosed, for aggregate gross income of $102,271.50 ($42,271.50 + $60,000), the record clearly reflects that Ward still materially understated his 2012 income. In addition to the $78,000 in officer compensation discussed above, the record shows that Ward's entities paid far more than $60,000 in expenses on his behalf. For example, in 2012, money in a bank account titled in the name Lloyd Ward Group PC II was used to pay $32,749.11 of expenses on Ward's behalf:
There were also at least $30,934 in cash withdrawals from the Lloyd Ward Group PC II account in 2012:
Although Ward testified that be believed Robert Pendergrast (alleged CFO of Lloyd Ward Group, P.C., at least for a time) was also on this account and could have made those withdrawals, Ward was unable to recall the dates that Pendergrast was on the account and whether Pendergrast, in fact, made any ATM withdrawals from the account. Tr. Trans. 12/13/16 at 80:11-17 (Ward); Tr. Trans. 12/12/16 at 268:6-25 (Ward). Without documentary evidence or corroborating testimony, the Court does not find Ward's testimony that Robert Pendergrast was on the account
Further, during 2012, VL Capital paid $18,009.91 in either cash directly to Ward or for expenses paid on Ward's behalf:
Thus, it appears that Ward's gross income in 2012 was at least $159,693.02,
Based upon this record, there is no question that the first three and the fifth elements of a § 727(a)(4) claim are satisfied here. Ward filed his SOFA and Amended SOFA under penalty of perjury, and the misrepresentations regarding his income appear on both. Moreover, Ward's statements regarding his gross income were not only clearly false, but also material to the Case because his income bears a direct relationship to his estate and concerns the discovery of assets, Ward's business dealings, and the existence and disposition of his property. Also, based upon the record before it, the Court finds that Ward knew these statements were false. This leaves only the fourth element—i.e., that Ward made the statements with fraudulent intent.
Here, the Court is satisfied that Ward made the statements regarding the amount of his gross income with fraudulent intent. Although there is no evidence explaining how Ward calculated the gross income information included in his SOFA and Amended SOFA, two things are clear. First, Ward only included "wages" in his SOFA, despite the clear language of SOFA Item 1 that asks for disclosure of a debtor's gross income. DX 3 at 29 of 56 (compare SOFA Item 1, which calls for "the gross amount of income" with Ward's answer that is designated as "wages"). Ward's choice to limit expressly his gross income to "wages" is important because Ward is both a lawyer and a sophisticated businessman, having run multiple businesses over many years with significant business operations. Considering Ward's level of sophistication, the only logical conclusion this Court can draw is that Ward's decision to only disclose his "wages" was intentional and strategic; and, by doing so, he intended to mislead his creditors. Nearly nine months later, Ward amended his SOFA to include additional income he received, but only after it was obvious (at least to the Court) that the Judgment Creditors intended to attempt to prevent their debt from being discharged by Ward in the Case—either by having the Judgment excepted from Ward's discharge or by having Ward's discharge denied outright. Notwithstanding the fact that it was clear that litigation over Ward's discharge was likely, Ward again materially understated his gross income for 2012 in his Amended SOFA. Ward's purposeful and continuing misstatements regarding his gross income, coupled with the other false oaths discussed below, show a clear pattern of reckless disregard for the truth that this Court finds is sufficient to prove fraudulent intent. In re Duncan, 562 F.3d at 695.
Thus, for the reasons explained above, the Court concludes that Ward's receipt of a discharge must be denied under 11 U.S.C. § 727(a)(4)(A) due to the multiple false oaths regarding his gross income contained in his SOFA and Amended SOFA.
A debtor's bankruptcy Schedules are another key source of information that creditors may review to ascertain a debtor's financial position. Included within these is Schedule I, titled "Your Income," which requires a debtor to provide current employment and income information. Part 2 of Schedule I asks the debtor to "[e]stimate monthly income as of the date you file this form" and lists various categories of income for the debtor to consider and, if applicable, disclose. To the extent a debtor receives income that does not fit into the stated categories, Item 8h is a catchall that asks the debtor to list "[o]ther monthly income." As part of his disclosures, the debtor is also required to calculate his gross income and his "total monthly take-home pay." If the debtor is married, this information is to be provided separately for both the debtor and his spouse. See, e.g., DX 16 at 11-12 of 16. With this basic background in mind, the Court will turn to Ward's disclosures.
In Schedule I, Ward swore that he made $2,000 per month in gross income. DX 3 at 25 of 56 (Item 4). After subtracting the various deduction items specified on Schedule I, Ward swore that he had net monthly income of $1,816.16. Id. at 26 of 56 (Item 10). For Amanda, he disclosed $2,200 per month in gross income and $1,653.26 per month of net income. Id. at 25 of 56 (Item 4) and 26 of 56 (Item 10). Ward filed his Amended Schedules nearly nine months later, on January 23, 2015. Although his and Amanda's gross income figures reflected in Item 4 remained unchanged, Ward added an additional $6,000 per month in response to the catchall provision of Item 8h, which Ward described as "company distributions." DX 16 at 12 of 16 (Item 8h). As stipulated to by the parties, the $6,000 per month "represents Lloyd Ward & Associates, PC's payment of Ward's personal expenses." Joint Pretrial Order at 10 (Stipulated Fact No. 36). For the reasons explained below, the Court finds that the income disclosed on Schedule I for (i) Amanda in both the Schedules and the Amended Schedules, and (ii) Ward in the Schedules, is false.
As explained below, the record does not contain concise information regarding Amanda's gross income as of the Petition Date (May 1, 2014, the same day Ward filed his Schedules). Instead, the Court received conflicting testimony and evidence regarding Amanda's net income at various times before and immediately after the Petition Date. Despite this, the Court can narrow the amount of Amanda's net monthly income down to one of several alternatives, each of which, standing alone, is sufficient to prove by a preponderance of the evidence that Ward misstated Amanda's gross and net income on Schedule I. To explain this ruling, the Court must first explain how it determined Amanda's likely gross income as of the Petition Date.
Turning to the bank records in evidence, they show that Amanda received salary from two sources over time. Beginning at least as of January 13, 2012 through approximately September 2012, Amanda received a paycheck of $1,277.12 from Lloyd Ward & Associates, P.C. on approximately the first and fifteenth of each month (which the Court will refer to as bi-weekly). PX 43 at 000945, 949, 951, 953, 957, 961, 965, 965, 967. Beginning in October 2012 through December 31, 2012, Amanda received bi-weekly payroll checks from BRM (a company scheduled as Amanda's sole management community property) in an identical amount. Id. at 000969, 973, 977.
Moving on to Amanda's testimony regarding her income, she testified at a Bankruptcy Rule 2004 examination taken on February 2, 2015 that her then-present take home pay was $2,700 every two weeks and had been at that level for one year (or back to February 2, 2014). Tr. Trans. 12/12/16 at 40:17-42:10 (Amanda). At trial, however, Amanda testified that the $2,200 per month gross income figure in Schedule I was correct, despite her prior sworn testimony and her failure to correct that prior testimony. Id. at 44:17-46:8 (Amanda).
Despite the lack of clarity as to Amanda's gross monthly income as of the Petition Date, the record is more than sufficient to show that Schedule I and Amended Schedule I are materially false under any alternative. Ward swore under penalty of perjury that his wife's gross monthly income was $2,200. To the contrary, Amanda's testimony (as construed most favorably to Ward) establishes that her net income was $2,400 to $2,500 monthly, and bank records admitted into evidence show that her monthly net income was more likely $3,035.46 or $5,433.32. Thus, under any of these alternatives, Ward's statements regarding Amanda's gross income on Schedule I and Amended Schedule I, which were made under penalty of perjury, are false.
Along these same lines, Schedule I and Amended Schedule I also misrepresent Amanda's net income as $1,653.26 per month. The evidence in the record establishes that Amanda's net income ranged from a minimum $2,400 per month up to $5,433.32 per month, each of which is materially higher than $1,653.26. Thus, Schedule I also materially misstates Amanda's net income.
Turning to Ward, it is undisputed that his entities paid significant expenses directly on his behalf (likely exceeding $50,000 per year). See pp. 23-37, supra. Despite this, Ward did not factor any of those payments (or estimated future payments) into his income figure reflected in Schedule I (Item 2). Instead, Ward chose to limit his disclosure to the $2,000 "payroll" amount allegedly provided to him by his accountant. Tr. Trans. 12/14/16 at 104:4-17 (Ward). Even if Ward did not believe that the expense reimbursements were part of his "gross wages, salary, and commissions" requested by Item 2 of Schedule I, the schedule goes on to list other forms of income a debtor is to disclose and contains a catchall for "[o]ther monthly income." See, e.g., DX 3 at 26 of 56 (Schedule I, Item 8h). And, as explained above, expense reimbursements are clearly part of a debtor's gross income that must be disclosed on his bankruptcy filings. See pp. 24-25, supra. Although Ward ultimately added $6,000 per month to his Schedule I income (as reflected in Amended Schedule I), the Court finds that this amendment, which was made nine months into the Case and after it was clear that litigation over Ward's discharge and the dischargeability of the Judgment was likely, did not negate the false statement Ward made in Schedule I when he knowingly and intentionally underreported his current gross income. In re Duncan, 562 F.3d at 695.
Although the record does not contain sufficient information for this Court to verify whether the $6,000 figure is correct,
Joint Pretrial Order at 10 (Joint Stipulation No. 36). The Joint Pretrial Order clearly states that
At trial, however, Ward testified that he calculated the $6,000 in a completely different way:
Tr. Trans. 12/14/16 at 105:19-25 (Ward). The Court then asked Ward to repeat his answer, and he again testified that:
Id. at 106:10-17 (Ward). Thus, at trial, Ward testified that he calculated the $6,000 figure based upon expenses reimbursed to him as reflected in deposits made into his personal account.
The calculation methods contained in the Joint Pretrial Order and as testified to by Ward at trial cannot both be correct, as the former describes Lloyd Ward & Associates, P.C. directly paying Ward's expenses, while the latter describes reimbursement to Ward of expenses he personally paid. Although this discrepancy could arguably be the result of counsel's failure to use precise language in the Joint Pretrial Order, the Court finds that is not the case here based upon Ward's gross carelessness in preparing the documents filed with the Court and his serial false oaths described throughout this Memorandum Opinion. Moreover, not only was Ward represented by a lawyer, he is a lawyer and is aware of both the consequences of including a stipulation in a pretrial order presented to the Court and of giving a false oath. For these reasons, the Court will hold Ward to the stipulation in the Joint Pretrial Order, and finds that Ward falsely testified at trial when describing how he calculated the $6,000 figure.
Based upon this record, there is no question that the elements of a § 727(a)(4) claim are satisfied here. Ward filed his Schedule I and Amended Schedule I under penalty of perjury. The false statements regarding Amanda's income appear on both documents, while the false statements regarding Ward's income (i) appear on Schedule I, and (ii) were made by Ward at trial. These statements were not only clearly false, but also material to the Case because the documents and testimony disclosing Ward's and Amanda's income bear a direct relationship to Ward's estate, while the statements and testimony regarding Ward's income also concern the discovery of assets, Ward's business dealings, and/or the existence and disposition of his property. Also, based upon this evidentiary record, the Court finds that Ward was undoubtedly aware that both (i) the amounts listed for his and Amanda's income, and (ii) his testimony regarding calculation of the $6,000 he added to Amended I were false.
The Court is also satisfied that Ward made the statements regarding his and Amanda's income with fraudulent intent because, at a minimum, of Ward's reckless disregard for the truth that he showed in preparing Schedule I and Amended Schedule I. For example, when asked at trial how he determined the income shown on his Schedules, Ward testified that he asked the accountant to his various entities and BRM what he and Amanda's monthly "payroll" was. Tr. Trans. 12/14/16 at 104:6-23 (Ward) (Q: "And so let's look at the — Line 2 of Part 2 where it requires your gross wages, salary, and commissions. Can you tell me what you did to ascertain that—the amount for you, Debtor 1?" A: "Yeah." Q: "Is that for your or your wife, Debtor 1?" A: "1 is myself." Q; "And what does that reflect?" A: "That was what I was on ADP payroll for. I went to Pat [the accountant] and I said, `Pat, what's my monthly payroll?' It is asking for gross wages, salary, and commission, and [I] asked her what I was on the payroll for at that time."). That was all Ward did despite his knowledge that his entities directly paid upwards of $50,000 per year in his personal expenses.
Even when Ward amended Schedule I nearly nine months into the Case purportedly to account for the payment of his expenses by entities he controls, he testified that he only looked at his personal bank statements to determine expenses reimbursed to him. Tr. Trans. 12/14/16 at 105:14-106:25 (Ward). Ward, however, had previously stipulated in the Joint Pretrial Order that he calculated the $6,000 based upon expenses paid directly on his behalf. This is yet another example of Ward's reckless disregard for the truth when preparing his Schedules and Amended Schedules.
Thus, for the reasons explained above, the Court concludes that Ward's receipt of a discharge must be denied under 11 U.S.C. § 727(a)(4)(A) due to the false oaths (i) contained in his Schedule I and Amended Schedule I regarding Amanda's income, (ii) the false oath in Schedule I regarding his income, and (iii) the false oath made at trial when Ward testified as to how the $6,000 added to Amended Schedule I was calculated.
Pursuant to § 341 of the Bankruptcy Code, "[w]ithin a reasonable time after the order for relief in a case under this title, the United States trustee shall convene and preside at a meeting of creditors. 11 U.S.C. § 341(a). The § 341 meeting is typically held after a debtor files his Schedules and Statement of Financial Affairs and is an opportunity for parties in interest to question a debtor, under oath, regarding his financial condition. As previously explained, Ward's § 341 meeting was held and concluded on July 22, 2014. Joint Pretrial Order at 6 (Stipulated Fact No. 11).
As will be explained below, Ward gave false testimony at his § 341 meeting and at trial regarding the purchase of two vehicles listed on his Schedule B and Amended Schedule B—(i) a 2011 Mercedes Benz GL450 that Ward lists as his property, and (ii) a 2011 BMW 328 that is described as "Wife's sole management community property, identified herein for disclosure purposes only." DX 3 at 10 of 56 (Item 25); DX 16 at 5 of 16 (Item 25).
During Ward's § 341 meeting, he testified that, in 2011, he traded a 1999 Porsche 911 and a 1995 Porsche 928 in for the Mercedes GL. Tr. Trans. 12/13/16 at 98:8-99:15 (Ward). At trial, however, Ward testified that he sold the Porsche 911 and the Porsche 928 on consignment to raise funds to purchase the 2011 BMW. Id. at 98:8-16 (Ward). The documentary evidence, however, gives a third version of the transaction. It shows that VL Capital paid $48,053.94 for the purchase of the BMW. See PX 98 (Texas Certificate of Title dated October 12, 2011 showing the BMW was purchased from Classic BMW of Plano); PX 28 at First Community Bank 01905 ($48,053.94 wire from VL Capital to Classic BMW on September 20, 2011); Tr. Trans. 12/12/16 at 176:7-178:18 (Amanda). Instead of using the funds generated from the consignment/sale as Ward previously testified, he deposited the funds into his personal account in February 2012. See PX 42 at Preston Nat'l 00805 (deposit slip and copies of checks); Tr. Trans. 12/13/16 at 107:8-25 (Ward). Ultimately, Ward admitted that he did not trade either Porsche in on the Mercedes or the BMW and the funds generated from the sale of the Porsches were deposited into his personal account. Id.
Based upon this record, there is no question that the elements of a § 727(a)(4) claim are satisfied here. Ward clearly gave knowingly false testimony at both the § 341 meeting and at the trial regarding the disposition of the Porsches and his use of the sale proceeds. The statements were not only false, but they were material to the Case because the testimony bears a direct relationship to Ward's estate and concerns the discovery of assets and the disposition of his property.
The Court is also satisfied that Ward's fraudulent intent has been proven. When questioned at trial about his false testimony at the § 341 meeting, Ward testified that he was not prepared to answer the question at the § 341 meeting. Tr. Trans. 12/13/16 at 126:14-21 (Ward). If Ward was not prepared to answer the question at his § 341 meeting, why did he? Ward is a lawyer and undoubtedly understands the importance of giving true and accurate testimony, particularly after being placed under oath. Moreover, his explanation about his false testimony at the § 341 meeting does nothing to explain his false testimony at trial. Ward's actions clearly showed, at the very least, a reckless disregard for the truth sufficient to find that he made the false oaths with fraudulent intent. In re Duncan, 562 F.3d at 695.
Thus, for the reasons explained above, the Court concludes that Ward's receipt of a discharge must be denied under 11 U.S.C. § 727(a)(4)(A) due to his multiple false oaths regarding the disposition of the two Porsches and the use of the resulting proceeds.
Ward also gave false testimony at the § 341 meeting regarding money used to fund the Ward Family Trust, a trust established with Amanda as the trustee and Amanda's and his children as the beneficiaries. Tr. Trans. 12/13/16 at 96:7-12 (Ward). At the § 341 meeting, Ward testified that Amanda's family funded the trust, except for approximately $125,000 that was funded by Lloyd Ward & Associates, P.C. Id. at 96:7-97:24 (Ward). That testimony was false, and Ward admitted at trial that, at his direction, his entities had funded more than $500,000 into the trust. Id. (Ward). Moreover, all money that came into and went out of the Ward Family Trust did so at Ward's direction. Id. at 97:21-98:7 (Ward). Later, after the trust was funded, virtually all money in the trust was distributed out to Ward and his entities. Tr. Trans. 12/12/16 at 100:14-102:10 (Amanda).
At trial, Ward attempted to explain his prior, false testimony at the § 341 meeting by claiming he had not reviewed the relevant documents and was not prepared to answer the question. Tr. Trans. 12/13/16 at 97:23-24 (Ward). The Court, however, does not find this testimony credible, particularly since Ward personally caused (i) at least $500,000 to be deposited from his various entities into the trust, and (ii) virtually all money in the trust to be distributed to him or his entities. Moreover, Ward is a lawyer. If he did not know the answer to a question posed while under oath, he knew better than to guess and risk perjuring himself. Instead, Ward's testimony at the § 341 meeting is another example of Ward giving purposefully false testimony to hide the true state of his financial affairs/position from his creditors.
Based upon this record, there is no question that the elements of a § 727(a)(4) claim are satisfied here. Ward clearly gave false testimony at the § 341 meeting regarding how the Ward Family Trust was funded. The statements were not only proven false, but they were material to the Case because the money flowing to and from the trust was at Ward's direction and could be, and as the record shows often were, used to pay Ward's personal expenses and the claims of his creditors. Finally, the testimony was, at best, given with reckless disregard to the truth, as Ward testified he was not prepared to accurately answer the question at the § 341 meeting but answered it anyway. Ward, as a lawyer, knew the consequences of giving false testimony, and his actions clearly evidence a reckless disregard for the truth sufficient to prove fraudulent intent. In re Duncan, 562 F.3d at 695.
Thus, for the reasons explained above, the Court concludes that Ward's receipt of a discharge must be denied under 11 U.S.C. § 727(a)(4)(A) due to his giving false testimony regarding the funding of the Ward Family Trust at his § 341 meeting.
Statement of Financial Affairs Item 18 requires a debtor to:
Ward's SOFA filed on the Petition Date listed five entities in response to Item 18. DX 3 at 34 of 56. However, Ward's response to Item 18 on his Amended SOFA, which was filed nearly nine months later and after substantial discovery was undertaken by the Judgment Creditors, listed sixteen entities. DX 18 at 7-8 of 10. When questioned about this at trial, Ward testified that he "missed a couple/three companies because they had been dead a couple of years by this point." Tr. Trans. 12/14/16 at 115:16-18 (Ward). Ward explained that:
Id. 115:21-116:5 (Ward).
The entities Ward added to his Amended SOFA in response to Item 18 appear to be entities that had no corporate books and that Ward, although he knew they existed, did not believe were "related to him." Id. 120:14-121:4 (Ward). According to Ward, his failure to schedule these entities was related to the large number of entities he operated through.
Returning to Ward's failure to accurately disclose operating dates for at least certain of the disclosed entities, the Court's focus will be on two entities—Lloyd Ward, P.C. and VL Capital. Ward listed Lloyd Ward, P.C. with an ending date of 2005, a date he testified was accurate during trial. DX 18 at 7 of 10; Tr. Trans. 12/12/16 at 249:3-10 (Ward). But the listed date was not accurate (nor was Ward's sworn trial testimony), as the documentary evidence clearly established. In fact, the trial record showed that Ward continued to operate Lloyd Ward, P.C. for many years after 2005. Tr. Trans. 12/12/16 at 248:21-255:12 (Ward).
For example, Lloyd Ward, P.C. filed tax returns in 2009 and 2010 showing that it had more than $269,000 and $533,000 in gross receipts or sales, respectively. PX 74 at 00287, 00296. Despite these tax returns, Ward testified that he did not consider Lloyd Ward, P.C. to be an operating entity. Tr. Trans. 12/12/16 at 249:11-25 (Ward). When asked whether he would consider an entity that had officers and employees to be operating, Ward responded "[y]es, I would." Id. at 250:3-5 (Ward). But, when directed to the portions of Lloyd Ward, P.C.'s tax returns showing compensation of officers and salaries and wages to employees, Ward explained that Lloyd Ward, P.C. was paying wages and salaries for people who did not work for it. Id. 252:2-16 (Ward). Ward further testified that Lloyd Ward, P.C. did not have sales, but merely had transfers into its account. Id. at 252:25-253:23 (Ward explaining that money was transferred into Lloyd Ward, P.C. for work it did not do and to pay employees it did not employ, and then reported this information on its tax returns). Ward also testified that "payroll [for Lloyd Ward & Associates, P.C.] ended up getting set up under Lloyd Ward, P.C., but all the clients and all the work was Lloyd Ward & Associates." Id. at 254:12-15 (Ward).
Thus, the trial record clearly demonstrates that the 2005 ending date sworn to by Ward on his Amended SOFA and in his trial testimony was clearly false. Lloyd Ward, P.C. continued to have substantial financial dealings well past 2005.
Ward also listed VL Capital in response to Item 18 of his Amended SOFA with an ending date of 2012. But, financial records show that VL Capital continued to operate until at least the end of May 2013. PX 25 at 1442-1456 (bank records showing activity during 2013); see also Tr. Trans. 12/13/16 at 10:4-32:14 (Ward). At trial, Ward acknowledged that, beginning in 2010 and until "sometime" in 2013, the sole purpose of VL Capital was to collect cash from Ward-related entities and disburse it "to wherever [Ward] needed it to go," including to him, his wife and others. Tr. Trans. 12/13/16 at 12:16-20 (Ward). Why VL Capital collected cash from other entities and disbursed it at Ward's direction was never fully or satisfactorily explained.
Once again, the elements of a § 727(a)(4)(A) claim have been clearly established. Based on the record before it, the Court finds that Ward made statements under oath (at trial and in response to SOFA Item 18 and Amended SOFA Item 18) regarding the operating dates for Lloyd Ward, P.C. and VL Capital, and that those statements were false. Moreover, Ward knew those statements were false given his active involvement with those two entities. Further, the money flowing to and from those two entities moved at Ward's sole discretion and could be used, and as the record shows often was used, to pay Ward's personal expenses and creditors. Thus, the statements were material to the Case as they bore a relationship to Ward's business transactions or estate and concerned the discovery of assets, business dealings or the existence and disposition of his property. Finally, the Court finds that (i) Ward's consistent pattern of material misstatements to the Court, and (ii) the gross carelessness with which he prepared his SOFA and Amended SOFA show, at the very least, a reckless disregard for the truth sufficient to prove that Ward made these false oaths with fraudulent intent. In re Duncan, 562 F.3d at 695.
Thus, for the reasons explained above, the Court concludes that Ward's receipt of a discharge must be denied under 11 U.S.C. § 727(a)(4)(A) due to the false oaths appearing on his SOFA and Amended SOFA regarding the operating dates of Lloyd Ward, P.C. and VL Capital, as well as for the false testimony regarding Lloyd Ward, P.C.'s operating dates Ward gave at trial.
The Plaintiffs also object to Ward receiving a discharge under § 727(a)(5), alleging that Ward has failed to explain satisfactorily the dissipation (or disappearance) of substantial sums of money. In this regard, Bankruptcy Code § 727(a)(5) provides that "[t]he court shall grant the debtor a discharge unless ... the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor's liabilities." 11 U.S.C. § 727(a)(5). The Plaintiffs bear the initial burden to produce some evidence of the disappearance of substantial assets or of unusual transactions to establish a § 727(a)(5) claim. In re Reed, 700 F.2d at 993 (creditor demonstrated disappearance of $19,586.83 in cash); Benchmark v. Crumley (In re Crumley), 428 B.R. 349, 371 (Bankr. N.D. Tex. 2010) (creditor established significant cash withdrawals). The mere allegation that the debtor has failed to explain losses is insufficient; instead, the creditor must establish a prima facie case of loss or unusual transactions to shift the burden to the debtor to provide a satisfactory explanation. Crumley, 428 B.R. at 371. What constitutes a satisfactory explanation has not been definitively defined, but a lack of wisdom in the debtor's expenditures, standing alone, is not grounds for denial of a discharge. Cadlerock Joint Venture, L.P. v. Sauntry (In re Sauntry), 390 B.R. 848, 857 (Bankr. E.D. Tex. 2008). The proper focus under § 727(a)(5) is on the credibility of the proffered explanation rather than the propriety of the disposition of the assets, and an explanation need not even be meritorious to be satisfactory. Neary v. Guillet (In re Guillet), 398 B.R. 869, 890 (Bankr. E.D. Tex. 2008).
At trial, Ward testified that he was the sole officer of Lloyd Ward Group, P.C. Tr. Trans. 12/12/16 at 239:13-241:10 (Ward). The 2010 tax return of that entity shows compensation to officers of $1,325,000. PX 73 at 00209 (Line 7). When questioned about this compensation, Ward testified that his prior testimony that he was the sole officer of Lloyd Ward Group, P.C. was not accurate and that Lloyd Ward Group, P.C. had two additional officers, a CFO and a CEO. Tr. Trans. 12/12/16 at 268:6-24 (Ward). When pressed, however, Ward testified that each of these additional officers was paid approximately $130,000 (which Plaintiff's counsel rounded to $200,000 each during further questioning, resulting in the Plaintiffs' rough estimate of $900,000 in compensation paid to Ward). Id. 269:3-10 (Ward). Ward then testified that the 2010 tax return he was being questioned from had been superseded and the Court was directed to the 2010 tax return beginning at PX 73, Bates no. 00199. However, when shown that the return beginning at Bates no. 00199 also showed officer compensation of $1,350,000, Ward testified that he did not believe that return was the correct return either, despite the stipulation of his counsel that PX 73 was a true and accurate copy of the return as filed with the IRS. Id. at 270:9-25 (Ward).
When questioned by his counsel regarding those funds and where they went, Ward testified that a third party (Mr. Miles) had been "misallocating funds" in relation to Lloyd Ward Group, P.C. and "had been showing expenses that didn't exist, and taking money out of the company under the payroll. And at the time, we approximated it to be about $900,000." Tr. Trans. 12/13/16 at 149:19-25 (Ward). Ward further testified that these actions resulted in a lawsuit and a judgment against Mr. Miles, Silverleaf Debt Solutions, and Debt RX that, Ward testified "was right at $900,000 against [Mr. Miles'] companies [and] ended up being over $2 million." Id. at 151:17-25 (Ward). Finally, Ward testified that he believes the judgment against the Mr. Miles' entities is uncollectible. Id. at 154:2-6 (Ward). Other than this, Ward gave no explanation of where the $900,000 of compensation the tax return shows he was paid went.
The Court finds Ward's testimony regarding the $1,350,000 (or $900,000) of compensation paid to him unpersuasive for several reasons. First, Ward's testimony in this regard, in fact throughout the trial, was self-serving, not credible, or both. Ward's testimony often changed based upon the situation he was presented with — e.g., he was the only officer, until shown substantial compensation to officers; the tax returns were accurate, until they conflicted with his schedules or were harmful to him. Second, if Ward's testimony is to be believed and the $900,000 was somehow absconded with by Mr. Miles, why would Lloyd Ward Group, P.C. include the amount as "[c]ompensation to officers" on its tax returns when (i) the funds were allegedly stolen from it (so there wouldn't have been anything to pay to its officers as compensation), and (ii) there is absolutely nothing in the record indicating that Mr. Miles was an officer of Lloyd Ward Group, P.C.? See Tr. Trans. 12/12/16 at 268:6-25 (Ward testifying that Don Frey and Robert Pendergrast served as CEO and CFO, respectively, and that his earlier testimony that he was the sole officer was not accurate). It is simply not plausible that Ward (a lawyer and sophisticated businessman) would permit an entity he controlled to file a tax return showing substantial compensation to him if, in fact, that money was not paid to him.
Based upon the record before it, this Court finds, by a preponderance of the credible evidence, that the Plaintiffs established a prima facie case of loss related to the $1,350,000 in compensation paid by Lloyd Ward Group, P.C. to its officers—at least $900,000 of which would have been paid to Ward. Thus, the burden shifted to Ward to provide a satisfactory explanation for the where these monies, which were paid to him as compensation, went, which he failed to do. Thus, Ward's receipt of a discharge must be denied under 11 U.S.C. § 727(a)(5).
As fully detailed above, Court finds that (i) Ward made numerous false statements during the Case under oath, including in his Schedules, Amended Schedules, SOFA, Amended SOFA and in his testimony both at trial and at his § 341 meeting of creditors, (ii) Ward knew the statements were false when he made them, (iii) Ward made the statements with fraudulent intent or, at the very least, with a reckless disregard for the truth sufficient to support a finding of fraudulent intent, as evidenced by Ward's serial false oaths and gross carelessness and outright disregard for accuracy in preparing documents filed under oath with this Court, and (iv) the false statements related materially to the Case because they each bear a relationship to Ward's business transactions or estate, and/or concern the discovery of assets, business dealings, or the existence and disposition of his property. Thus, the Court concludes that Ward's receipt of a discharge must be denied pursuant to 11 U.S.C. § 727(a)(4)(A).
As also detailed above, the Court further finds that Ward has failed to explain satisfactorily the loss of at least $900,000 in compensation paid to him in 2010 as an officer of Lloyd Ward Group, P.C. Thus, the Court concludes that Ward's receipt of a discharge must be denied pursuant to 11 U.S.C. § 727(a)(5).
"If any one ground for a denial of discharge is established, the Court does not need to decide the propriety of any of the other grounds." In re DeVoll, 266 B.R. at 98 (citing In re Beaubouef, 966 F.2d at 177; Hibernia Nat'l Bank v. Perez (In re Perez), 954 F.2d 1026, 1027 (5th Cir.1992)). Because the Court finds ample support in the record for the denial of Ward's discharge under both 11 U.S.C. §§ 727(a)(4)(A) and (a)(5), it is not necessary to address the Plaintiffs' remaining claims.
A Final Judgment denying Ward's discharge shall be entered separately. The Court hereby directs the parties' counsel to confer with each other and attempt to submit an agreed form of Final Judgment to the Court consistent with this Memorandum Opinion within 14 days after the entry of the Memorandum Opinion on the Court's docket. If no agreement can be reached, each party shall submit its own proposed form of Final Judgment on the fifteenth day after entry of the Memorandum Opinion on the Court's docket, along with an explanation of why the other side's proposed form of Final Judgment is improper.
Joint Pretrial Order at 15 (Stipulated Fact No. 75).
Joint Pretrial Order at 15 (Stipulated Fact No. 74).
