Dahleh v. Mustafa et al

Filing 40

OPINION AND ORDER Signed by the Honorable Sara L. Ellis on 9/18/2018: Affirming the bankruptcy court's denial of Dahleh's discharge pursuant to 11 U.S.C. § 727(a)(2) and (a)(4). Mailed notice (mw, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
IHASSAN F. DAHLEH,
Defendant-Appellant,
v.
ANNA MUSTAFA and GHAZI MUSTAFA,
Plaintiffs-Appellees.

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No. 17 C 8005
Judge Sara L. Ellis

OPINION AND ORDER
This case arises out of a Chapter 7 bankruptcy petition filed by Ihassan Dahleh and the
subsequent adversary proceeding filed by Anna and Ghazi Mustafa, in which they objected to the
dischargeability of Dahleh’s debt to them. After a trial before the bankruptcy court, the court
determined that Dahleh (a) concealed, transferred, or removed property of the estate in violation
of 11 U.S.C. § 727(a)(2); (b) failed to keep records in a form adequate to ascertain his financial
condition in violation of 11 U.S.C. § 727(a)(3); (c) knowingly and fraudulently made false oaths
or accounts in violation of 11 U.S.C. § 727(a)(4); and (d) failed to explain satisfactorily the loss
of estate assets in violation of 11 U.S.C. § 727(a)(5). Because of these violations, the bankruptcy
court denied Dahleh a discharge of the debt he owed the Mustafas. Dahleh filed an appeal to this
Court. The Court affirms the denial of the discharge, finding that the bankruptcy court did not
commit clear error in finding that Dahleh concealed, transferred, or removed property of the
estate in violation of § 727(a)(2), and knowingly and fraudulently made false oaths or accounts
in violation of § 727(a)(4).

BACKGROUND
Dahleh petitioned for Chapter 7 bankruptcy in 2015. He listed the Mustafas as unsecured
creditors with a $475,000 claim. The Mustafas then filed an adversary proceeding related to
Dahleh’s bankruptcy, in which they sought to prevent Dahleh from discharging his debt to them.
The Mustafas pleaded two counts contending the debt was nondischargeable, but the bankruptcy
court proceeded to trial only on the claim arising under 11 U.S.C. § 727 (count II of the
adversary complaint). After hearing evidence over the course of eight afternoons in February
and March 2017 and receiving proposed findings of fact and conclusions of law from the parties,
the bankruptcy court issued its decision on count II of the adversary complaint on October 19,
2017. The bankruptcy court had before it several contested factual issues and found as follows:
First, the parties disputed Dahleh’s ownership interest in Liquor Station, Inc. (“Liquor
Station”). In his bankruptcy schedules, Dahleh indicated that he held only a 5% ownership
interest in Liquor Station, with his brother Gus owning the remaining 95% interest. But the
bankruptcy court found that Dahleh repeatedly misrepresented his ownership interest in Liquor
Station to the bankruptcy court based on other representations Dahleh made about his ownership
of Liquor Station. Specifically, Dahleh stated on liquor license renewal applications filed with
the Illinois Liquor Control Commission in 2012, 2013, and 2014 that he owned 100% of Liquor
Station, only reporting to the Commission on November 30, 2015, after filing his bankruptcy
petition, that Gus owned 95% of the company. Dahleh made similar representations to the Town
of Cicero’s Liquor Commission, only changing from his claim of 100% ownership to 5%
ownership in November 2015. Dahleh also testified that he never formalized or documented the
ownership interests in Liquor Station with his brother. The bankruptcy court noted the difficulty
in distinguishing between Liquor Station’s and Dahleh’s personal business because of Dahleh’s

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recordkeeping practices, that Dahleh ran the business on a day-to-day basis, and that he
represented that he was the owner of Liquor Station to the individual from whom he purchased
the business’ assets. The bankruptcy court acknowledged that both Dahleh’s personal income
tax filings and Liquor Station’s corporate tax filings for 2011, 2012, and 2013 indicated that
Dahleh only held a 5% interest in Liquor Station, but it also noted that these tax filings were all
filed on September 23, 2014, which was after Dahleh had consulted with attorneys regarding
filing bankruptcy. Considering the evidence presented to it, the bankruptcy court concluded that
Dahleh’s “repeated but uncorroborated assertion that a transfer to Gus Dahleh took place at some
point is nothing more than an attempt to mask his ownership of Liquor Station, Inc.” In re
Dahleh, Adv. No. 16 AP 00136, 2017 WL 4792191, at *6 (Bankr. N.D. Ill. Oct. 19, 2017).
The parties also disputed Dahleh’s ownership interest in a Rolex wrist watch valued at
over $30,000. Dahleh repeatedly pawned and redeemed the Rolex watch at New York Jewelers,
a store in Chicago, Illinois, signing an agreement each time representing that the watch was his
own personal property and “not subject to any claims of ownership, possession or interest by any
other person or entity.” Id. at *4 (quoting Pl.’s Trial Ex. 50). Dahleh signed each of the pawn
tickets in his own capacity. At the time Dahleh filed for bankruptcy, New York Jewelers had
possession of the watch. Dahleh did not indicate that New York Jewelers was a secured creditor
or disclose the watch as personal property in his schedules. He also represented at the meeting of
creditors that he did not own any jewelry worth over $2,500. Two days after Dahleh filed for
bankruptcy, his father redeemed the watch from New York Jewelers. Then, on March 3, 2015,
Dahleh again pawned the watch to New York Jewelers, representing that he owned it. At some
point during the bankruptcy case, he forfeited the watch to New York Jewelers.

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Dahleh claimed that at the time he filed for bankruptcy, Liquor Station owned the watch,
having previously redeemed it in January 2014. The bankruptcy court did not credit Dahleh’s
assertion that Liquor Station owned the watch, finding that Dahleh did not produce any written
agreement documenting the transfer of ownership, indicate in his statement of financial affairs
that he transferred the watch to Liquor Station within the two years preceding his bankruptcy, or
inform New York Jewelers that the watch belonged to Liquor Station, instead representing that
he personally owned the watch each time he pawned it. Although the owner of New York
Jewelers testified that he did not ask individuals whether they owned the items they sought to
pawn, the bankruptcy court found the pawn tickets to be “powerful evidence” that Dahleh was
“the sole owner of the Rolex wrist watch.” Id.
With respect to bank accounts, Dahleh disclosed on his schedule an account at PNC Bank
but not accounts at BMO Harris Bank or TCF Bank. At trial, he testified that he did not know of
these accounts or whether they were still active but then admitted that he learned of them shortly
after filing bankruptcy. Dahleh admitted that he deposited funds into his BMO Harris account
after filing bankruptcy but that the maintenance fees imposed by the bank consumed the funds.
With respect to the TCF account, the court received evidence that Dahleh wrote two checks, one
several days before filing his bankruptcy case and the other two weeks after, from the TCF
account for over $6,000 that he then deposited into a PNC account for Liquor Station. The
bankruptcy court acknowledged that Dahleh revealed these accounts at the meeting of creditors
but noted that Dahleh did not amend his schedules to reflect these two bank accounts.
The bankruptcy court also found that Dahleh failed to include in his statement of affairs
the name, address, and taxpayer identification number of 40/30 Dental, Inc., a dental practice in
which he had held a 40% ownership interest until January 2013. Dahleh voluntarily disclosed

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this asset during the meeting of creditors on January 9, 2016, but he did not subsequently update
his bankruptcy schedule to reflect this interest.
Finally, the bankruptcy court found that Dahleh “r[a]n his business in such a way as to
make it virtually impossible to discern what he has done with his cash flow over the last several
years,” noting that he “has regularly done business in cash, made deposits, paid bills and
received deposits from businesses owned by his father, and has allowed his brother to use his
accounts to speculatively purchase futures and options, which has resulted in large losses.” Id. at
*6.
Based on these factual findings, the bankruptcy court denied Dahleh a discharge under
§ 727(a)(2), (a)(3), (a)(4), and (a)(5). Specifically, the bankruptcy court determined that Dahleh
repeatedly omitted or misrepresented his interests in property that he should have included in his
bankruptcy schedules and that his actions taken together demonstrated a pattern of behavior
intended to hinder, delay, or defraud the Mustafas in violation of § 727(a)(2). Relatedly, the
court found Dahleh made misstatements in his schedules and during his trial testimony, knowing
about his true ownership interest in certain assets while trying to obscure those interests, or in
other cases recklessly omitting assets from his schedules, requiring the denial of a discharge
under § 727(a)(4). The court also found Dahleh’s recordkeeping to be “convoluted and
contradictory,” with Dahleh providing no “persuasive explanation for the state of his personal
and his businesses’ financial records” to allow the court to determine his financial health,
requiring denial of discharge under § 727(a)(3). Id. Dahleh’s poor recordkeeping also
contributed to the denial of discharge under § 727(a)(5), with the court finding Dahleh unable to
explain the unavailability of certain assets, such as money held in bank accounts and the Rolex
watch.

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LEGAL STANDARD
Under 28 U.S.C. § 158(a)(1), this Court has jurisdiction to hear appeals from final
judgments, orders, and decrees of a bankruptcy court. The Court reviews a bankruptcy court’s
findings of fact for clear error and its legal conclusions de novo. Kovacs v. United States, 739
F.3d 1020, 1023 (7th Cir. 2014). Under the clear error standard, the Court may reverse factual
findings “only if, upon the entire record, [it] reach[es] ‘the definite and firm conviction that a
mistake has been committed.’” In re Yonikus, 974 F.2d 901, 903 (7th Cir. 1992) (quoting In re
Love, 957 F.2d 1350, 1354 (7th Cir. 1992)).
ANALYSIS
Dahleh argues that the bankruptcy court made numerous factual errors in finding that he
owned 100% of Liquor Station and the Rolex watch and that his ownership of these assets
justified denial of a discharge under § 727(a)(2) and (a)(4). Dahleh also argues that the
bankruptcy court should not have denied him a discharge under § 727(a)(2) and (a)(4) for failure
to amend his schedules to include the TCF and BMO Harris bank accounts and his interest in
40/30 Dental, Inc. Finally, Dahleh claims that the bankruptcy court erred in finding that he
failed to keep information from which his financial condition could be ascertained and failed to
explain the loss or deficiency of assets under § 727(a)(3) and (a)(5). The Court need only find
that one of the bases for the bankruptcy court’s denial of the discharge suffices to uphold the
bankruptcy court’s decision. See Stamat v. Neary, 635 F.3d 974, 983 n.6 (7th Cir. 2011)
(affirming denial of discharge on one ground and declining to address the bankruptcy court’s
findings under other sections of § 727(a)).
The bankruptcy court found, based largely on the same facts, that Dahleh concealed,
transferred, or removed property of the estate with an intent to defraud, hinder, or delay the

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Mustafas in violation of § 727(a)(2), and that he knowingly and fraudulently made false oaths or
accounts in violation of § 727(a)(4). The discharge exception under § 727(a)(2) “essentially
consists of two components: an act (i.e., a transfer or a concealment of property) and an improper
intent (i.e., a subjective intent to hinder, delay, or defraud a creditor).” In re Kontrick, 295 F.3d
724, 736 (7th Cir. 2002) (quoting Rosen v. Bezner, 996 F.2d 1527, 1531 (3d Cir. 1993)), aff’d on
other grounds sub nom. Kontrick v. Ryan, 540 U.S. 443, 124 S. Ct. 906, 157 L. Ed. 2d 867
(2004). To establish the discharge exception found in § 727(a)(4), the Mustafas had to show that
(1) Dahleh made a statement under oath, (2) the statement was material to the bankruptcy case,
(3) the statement was false, (4) Dahleh knew the statement was false, and (5) Dahleh made the
statement with an intent to deceive. Lardas v. Grcic, 847 F.3d 561, 569 (7th Cir. 2017). With
respect to the bankruptcy court’s findings on these subsections, Dahleh argues that the
bankruptcy court erred in (1) finding that he owned the Rolex watch and 100% of Liquid Station,
(2) concluding that he acted knowingly and fraudulently, and (3) finding that Dahleh’s omission
of the bank accounts and interest in 40/30 Dental, Inc. was material to the bankruptcy.
Although Dahleh clearly believes that the bankruptcy court incorrectly decided the facts,
this Court’s review of the bankruptcy court’s factual findings is deferential: “If the bankruptcy
court’s account of the evidence is plausible in light of the record viewed in its entirety, we will
not reverse its factual findings even if we would have weighed the evidence differently.”
Freeland v. Enodis Corp., 540 F.3d 721, 729 (7th Cir. 2008) (citation omitted) (internal
quotation marks omitted). Having reviewed the record, the Court finds the bankruptcy court’s
factual findings plausible, particularly given the fact that the bankruptcy court had the
opportunity to judge the credibility of the witnesses. Id. at 734 (“[I]t is for the bankruptcy court
to assess the credibility of witnesses and weigh evidence, and we will not second guess the

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court’s resolution of conflicting evidence.”). The Court addresses Dahleh’s specific challenges
in more detail below.
A.

Ownership of Assets and Disclosure of those Assets

The bankruptcy court had sufficient evidence before it to find that Dahleh owned 100%
of Liquor Station at the time he filed for bankruptcy, based on the representations made to the
Illinois Liquor Control Commission, the Town of Cicero Liquor Commission, and Shihada
Mustafa, the previous owner of Liquor Stations’ assets, as well as the failure to document the
alleged transfer of the 95% ownership interest to Gus. Similarly, with respect to the Rolex
watch, the pawn tickets presented at trial clearly stated that Dahleh, not Liquor Station, owned
the watch, which the bankruptcy court credited over Dahleh’s testimony that the Liquor Station
had assumed control over this asset. Such a conclusion draws further support from testimony at
the trial regarding the lack of differentiation between Dahleh’s and Liquor Station’s financial
affairs.
Dahleh does not challenge the fact that he did not disclose the bank accounts or his
interest in 40/30 Dental, Inc. on his schedules, instead focusing on the fact that he did reveal
these at the meeting of creditors.1 Although the bankruptcy court acknowledged this disclosure,
this does not change the fact that Dahleh made a false statement with respect to these interests in
filing his schedules for purposes of § 727(a)(4). Therefore, the bankruptcy court did not err in its

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The Court does agree with Dahleh that Bankruptcy Rule 1007(h) does not appear to apply to Dahleh’s
failure to disclose the bank accounts and 40/30 Dental, Inc. here, where Dahleh did not acquire an interest
in this property as provided by 11 U.S.C. § 541(a)(5). But this does not change the bankruptcy court’s or
this Court’s analysis that Dahleh failed to disclose these assets as required in his bankruptcy schedules.
Moreover, the bankruptcy court appears not to have taken any failure to amend the bankruptcy schedules
to include the bank accounts into its § 727(a)(2) analysis, and no suggestion exists that Dahleh did not
know of the interest in 40/30 Dental, Inc. at the time he filed for bankruptcy, instead only that he did not
believe he needed to disclose it. This belief, however, is contrary to the requirements of bankruptcy law.
See Stamat, 635 F.3d at 979 (“[T]he bankruptcy petition does not exempt assets no longer in existence.”).

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findings regarding ownership of the assets or whether Dahleh made false statements with regards
to the assets at issue.
B.

Materiality

Next, the Court briefly addresses Dahleh’s undeveloped challenge to the bankruptcy
court’s materiality finding for purposes of § 727(a)(4). Dahleh argues without citation that his
failure to disclose the bank accounts, which totaled only several hundred dollars, and the defunct
corporation could not be material to the bankruptcy to warrant denial of discharge under
§ 727(a)(4).2 But “materiality in the bankruptcy context has a broad meaning; ‘a fact 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.’” Lardas,
847 F.3d at 570 (quoting Stamat, 635 F.3d at 982). And “[d]ebtors have an absolute duty to
report whatever interests they hold in property, even if they believe their assets are worthless or
are unavailable to the bankruptcy estate.” In re Yonikus, 974 F.2d at 904; see also Chlad v.
Chapman, No. 17 C 5198, 2018 WL 4144627, at *7 (N.D. Ill. Aug. 30, 2018) (rejecting notion
that encumbered property and two accounts with less than $40 combined are immaterial because
disclosure is mandatory and sheds light on a debtor’s financial history). Therefore, the
bankruptcy court did not err in finding that the omission of the bank accounts or Dahleh’s
interest in 40/30 Dental, Inc. was material to the bankruptcy.

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Because Dahleh’s brief fails to develop the materiality argument, this Court could treat it as waived. See
Ewell v. Toney, 853 F.3d 911, 918 (7th Cir. 2017) (“But Ewell fails to develop this argument on appeal,
and we have repeatedly noted that perfunctory and undeveloped arguments do not preserve a claim for
our appellate review.”); United States v. Berkowitz, 927 F.2d 1376, 1384 (7th Cir. 1991) (“We repeatedly
have made clear that perfunctory and undeveloped arguments, and arguments that are unsupported by
pertinent authority, are waived[.]”). The Court nonetheless briefly addresses the issue.

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C.

Fraudulent Intent

Dahleh’s main argument on appeal is that the bankruptcy court made no findings that he
had the required fraudulent intent under § 727(a)(2) and (a)(4). But the bankruptcy court
specifically addressed both the standard for establishing fraudulent intent and its reasoning for
finding “a pattern of behavior intended to hinder, delay or defraud” the Mustafas to warrant
denying discharge under § 727(a)(2). See In re Dahleh, 2017 WL 4792191, at *6 (recounting the
various misrepresentations and omissions Dahleh made regarding his interest in property). The
bankruptcy court also discussed fraudulent intent with respect to § 727(a)(4), noting the “credible
evidence that [Dahleh] knew about his true ownership interest in the Rolex wrist watch and in
Liquor Station, Inc., but indicated otherwise in his schedules” and that he acted recklessly in
omitting the bank accounts from the schedules, “which is functionally equivalent to fraud.” Id.
The Court reviews these findings for clear error, taking into account the requirement that the
bankruptcy court need only have found fraudulent intent by a preponderance of the evidence.
Freeland, 540 F.3d at 733; Chlad, 2018 WL 4144627, at *13.
Fraudulent intent can be established either by showing that the debtor knowingly
intended to defraud or engaged in behavior demonstrating a reckless disregard for the truth. In
re Kempff, 847 F.3d 444, 449 (7th Cir. 2017); Stamat, 635 F.3d at 982. Fraudulent intent is a
factual question left for the bankruptcy judge, with the judge considering the debtor’s “whole
pattern of conduct.” In re Ratner, 132 B.R. 728, 731 (Bankr. N.D. Ill. 1991) (quoting In re Reed,
700 F.2d 986, 991 (5th Cir. 1983)); see also In re Yonikus, 974 F.2d at 905 (“The bankruptcy
court’s finding of fraudulent intent may be based on inferences drawn from a course of conduct.
Additionally, fraudulent intent may also be inferred from all of the surrounding circumstances.”

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(citations omitted)); Chlad, 2018 WL 4144627, at *9 (“[A] pattern or series of false statements
may be used to establish a reckless disregard for the truth.”).
After carefully reviewing the record, the Court finds that the evidence before the
bankruptcy court sufficiently supports its conclusion that Dahleh acted with fraudulent intent,
intentionally hiding his ownership interest in Liquor Station and the Rolex watch while also
acting recklessly with respect to omitting the bank accounts and 40/30 Dental, Inc. from his
schedules. The Court declines Dahleh’s invitation to reassess the credibility of the witnesses at
trial and reweigh the evidence on this matter. See In re Kempff, 847 F.3d at 449 (“[B]ecause an
‘intent determination often will depend upon a bankruptcy court’s assessment of the debtor’s
credibility,’ the reviewing court’s deference to the bankruptcy judge’s ruling is particularly
strong in this context.” (quoting In re Krehl, 86 F.3d 737, 743 (7th Cir. 1996))). Although
Dahleh may have liked more specific or detailed factual findings on the issue of fraudulent
intent, his claim that the bankruptcy court did not make any such findings is belied by the
bankruptcy court’s written opinion, see In re Dahleh, 2017 WL 4792191, at *6, and Dahleh has
not cited any caselaw requiring more detailed findings than what the bankruptcy court provided.
Therefore, the Court does not find that the bankruptcy court committed clear error in finding that
Dahleh acted with the fraudulent intent required to satisfy either § 727(a)(2) or (a)(4).3
CONCLUSION
For the foregoing reasons, the Court affirms the bankruptcy court’s denial of Dahleh’s
discharge pursuant to 11 U.S.C. § 727(a)(2) and (a)(4).
Dated: September 18, 2018

______________________
SARA L. ELLIS
United States District Judge

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Because the Court finds the bankruptcy court did not err with respect to § 727(a)(2) and (a)(4), it need
not address Dahleh’s arguments for reversal with respect to the bankruptcy court’s findings denying
discharge based on § 727(a)(3) and (a)(5). See Stamat, 635 F.3d at 983 n.6.

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