Bub v. Rockstone Capital, LLC et al
Filing
12
MEMORANDUM AND OPINION. For the reasons set forth herein, the Court affirms the order and judgment of the Bankruptcy Court in its entirety. The Clerk of the Court shall close the case. SO ORDERED. Ordered by Judge Joseph F. Bianco on 6/25/2014. (Chipev, George)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF NEW YORK
_____________________
No 14-CV-546 (JFB)
_____________________
KEITH BUB,
Appellant,
VERSUS
ROCKSTONE CAPITAL, LLC, OFFICE OF THE UNITED STATES TRUSTEE, AND
KENNETH KIRSCHENBAUM,
Appellee.
___________________
MEMORANDUM AND ORDER
June 25, 2014
___________________
JOSEPH F. BIANCO, District Judge:
Keith Bub (“Bub” or “debtor”) appeals
from an order entered by the United States
Bankruptcy Court for the Eastern District of
New York (the “Bankruptcy Court”) in the
underlying bankruptcy proceeding. After
trial and in an opinion dated November 13,
2013 (the “November 13 Order” or “Bankr.
Ct. Op.”), the Honorable Robert E.
Grossman denied debtor’s discharge,
pursuant to 11 U.S.C. § 727(a)(4)(A), on the
grounds that debtor made false and
fraudulent statements regarding his income
and expenses, and his company’s assets and
liabilities, with the intent to deceive the
creditors and the Bankruptcy Court.
On appeal, Bub argues that the
November 13 Order should be reversed and
that he should be granted a discharge, or that
the case be remanded for an evidentiary
hearing, because the Bankruptcy Court
erroneously concluded that Bub falsely and
intentionally underrepresented his income
and the amount of funds he drew from his
business, The Storage Guys, Inc. (“The
Storage Guys”); misrepresented his monthly
expenses; and misrepresented The Storage
Guys’ assets and liabilities. Bub argues that
the Bankruptcy Court did not thoroughly
analyze the evidence and should have sought
additional information, and that the evidence
does not support a finding of falsehoods or
intent to deceive. Appellee Rockstone
Capital, LLC (“Rockstone”) opposes and
argues, inter alia, that, in addition to the
false statements in Bub’s Schedules and
Statement of Financial Affairs, upon which
the Bankruptcy Court correctly relied in
reaching its determination, “[t]he court
properly detailed wrongful conduct to
demonstrate that Debtor has engaged in a
long campaign of hiding assets and of false
statements under oath in his efforts to evade
legitimate efforts of creditors to recover on
their claims and that Debtor’s falsehoods
continued in his bankruptcy schedules and
his evasive testimony at the trial of this
action.” (Appellee’s Brief, at 3.)
connection with a loan guaranteed by debtor
and made by Rockstone to one of debtor’s
former businesses. (Bankr. Ct. Op., at 4.)
Debtor owned and operated several
businesses related to computer consulting
for small businesses over the course of his
professional career. (T-41–43.) As of the
petition date, debtor’s sole source of income
came from The Storage Guys, a computer
consulting business owned entirely by
debtor. (Bankr. Ct. Op., at 4; see Schedule I,
ER-1 (Voluntary Petition & Exhibits).)
For the reasons set forth below, the
Court finds debtor’s arguments on appeal to
be unpersuasive and affirms the Bankruptcy
Court’s November 13 Order. Specifically,
having carefully reviewed the record, the
Court concludes that the Bankruptcy Court’s
determination that debtor made several false
statements knowingly and with fraudulent
intent was not clearly erroneous. Therefore,
the Bankruptcy Court did not err in entering
judgment in favor of Rockstone on its third,
fourth, and fifth causes of action.1
I.
In his Chapter 7 Bankruptcy Petition,
debtor listed that he had $91,000 in real
property assets, $114,437.13 in personal
property assets, $1,531,703.12 in liabilities
to creditors holding secured claims, and
$32,861.16 in liabilities to creditors holding
unsecured non-priority claims; that his
current income was $4,447.24; that his
current expenditures were $4,423.09; and
that he had no domestic support obligations.
According to Schedule I, $1,110 of
plaintiff’s income came from his girlfriend’s
contribution to household expenses.
Therefore, plaintiff’s monthly income from
his business was $3,837.24.
BACKGROUND
A.
Facts2
Rockstone is a creditor of debtor
pursuant to a judgment entered in New York
State Supreme Court, Suffolk County, on
May 27, 2009, in the amount of
$632,466.80. (Complaint Objecting to
Discharge ¶ 2, R-1.) The debt arose in
1
The Court would reach the same conclusion even
under a de novo standard of review, for the reasons
discussed in the November 13 Order and herein.
On Schedule B, Bub listed a one
hundred percent ownership interest in
Country Road 332 LLC, with an “unknown”
value. (Schedule B, at 2.) Country Road 32
LLC owns one-third of a condominium in
Gainesville, Florida (the “Gainesville
Condo”). (See T-48–49.) The other owners
are Barbara Anzalone (debtor’s first wife)
and Joshua Bub (debtor’s adult son). (Id. at
49.) Debtor’s older daughter and her fiancé
live in the condominium and do not pay
rent. (Bankr. Ct. Op., at 5; T-113.) On
Schedule D, debtor disclosed that he is
obligated to Wells Fargo Home Mortgage in
the amount of $124,472.40. (Schedule D, at
2.) The obligation is secured by a mortgage
2
Bub does not claim that the Bankruptcy Court
incorrectly detailed the facts in the November 13
Order (See Docket No. 1-9). Instead, he objects to the
conclusions drawn from those facts, and to the
absence of further evidentiary analysis. Therefore,
the Court draws the facts from the November 13
Order, and from other facts that were admitted in
evidence at the trial and are in the appellate record.
“R___” refers to the numbered documents in the
record filed with the Court on January 24, 2014. (See
Docket No. 1.) “T___” refers to the transcript of the
trial proceedings before the Bankruptcy Court on
February 12, 2013. (See R-8.) “EB___” refers to the
lettered documents in the record filed with the Court
on February 18, 2014, and “ER___” refers to the
numbered documents in the record filed with the
Court on February 18, 2014. (See Docket No. 6.)
2
on the Gainesville Condo, which debtor
valued at $100,000. 3 (Id.) On Schedule J,
debtor listed a rent or home mortgage
payment expense in the amount of $550.00
per month. (Schedule J, at 1.) He also listed
an expense in the monthly amount of
$135.00 for a maintenance fee. (Id. at 2.) At
trial, Bub testified that this was his monthly
“contribution toward a mortgage payment
on [the] condo.” (T-112.) He stated that he
was making the payments, despite not
having any ownership interest, in lieu of
repaying arrears owed to his ex-wife in
connection with unpaid child support. (Id. at
113–14.) Debtor also testified that he
stopped making payments around the time
he filed the petition because he could no
longer afford to make them. (Id. at 120.)
Debtor did not amend Schedule J to correct
the nature of this expense, and he did not
delete it as an expense after he stopped
paying. At trial, debtor stated that he listed it
because “[i]t’s something I had been paying.
And that’s what I understood this [Schedule
J] to be. It’s my expenses.”4 (Id.)
is no documentary evidence to support a
monthly rental or mortgage expense in this
amount [$550].” (Bankr. Ct. Op., at 8.) Bank
account
records
reflect
that,
for
approximately one year prior to the petition
date, monthly transfers in the amount of
$1100 were made from a TD Bank account
in the name of The Storage Guys to Bub’s
personal bank account. (Id.; see The Storage
Guys Bank Account Statements, ER-6; Bub
Bank Account Statements, EB-1.) In
addition, each month, an electronic payment
in the amount of $1,093.97 was made from
Bub’s account to Wells Fargo Home
Mortgage. (Bankr. Ct. Op., at 8; see Bub
Bank Account Statements.) Neither bank
account reflects a monthly payment or debit
in the amount of $550 (or $685). (Bankr. Ct.
Op., at 8.) The Bankruptcy Court thus
concluded that “[t]his documentary evidence
contradicts the Debtor’s testimony and
supports the conclusion that the Debtor was
paying the entire monthly mortgage on the
Gainesville Condo with funds generated
from The Storage Guys for the entire year
prior to the Petition Date.”5 (Id. at 8–9.)
The Bankruptcy Court found that “there
On Schedule B, debtor listed his stock
interest in The Storage Guys. (Schedule B,
at 2.) He indicated that The Storage Guys
had “[n]o assets,” and he valued his stock
interest at zero. (Id.) At the same time,
however, The Storage Guys’ bank account
balance was approximately $19,000. (T110.) At trial, debtor testified that he wrote
“no assets” in his disclosure because, as of
the petition date, The Storage Guys had no
“net” assets. (Id.) Debtor reached this
conclusion by offsetting the assets with The
Storage Guys’ corresponding $19,000
liability to Chase Manhattan Bank as of the
petition date—an obligation personally
guaranteed by debtor. (Id. at 110–11;
3
Debtor no longer has an ownership interest in the
Gainesville Condo, but he and Anzalone are obligors
on the note. (Bankr. Ct. Op., at 5 n.2; see T-49.)
4
No documentary evidence before the Bankruptcy
Court supported debtor’s claim that he was paying
the mortgage and maintenance fee to satisfy a prior
divorce support obligation. (See Bankr. Ct. Op., at 8.)
Bub has submitted an affidavit from Anzalone with
his brief to this Court, but the Court cannot consider
it as part of the record on appeal. See Weinstock v.
Columbia Univ., 224 F.3d 33, 46 (2d Cir. 2000)
(finding that evidence submitted for the first time on
appeal was “simply not part of the record” and
“cannot be considered in deciding this case”).
Regardless, as set forth infra, even if the Court were
to consider this affidavit, it does not support a
conclusion that the Bankruptcy Court’s findings were
clearly erroneous. In addition, Bub, in his brief to this
Court, admits that these “were not rightly debtor’s
own living expenses.” (Debtor’s Brief, at 5.)
5
Debtor did not address this discrepancy in his
filings with this Court.
3
Schedule F, at 2.)
are the company? A. Correct.”); id. at 116
(“Q. Okay. It’s true though, is it not sir, that
your company, The Storage Guys, in fact
paid that electric bill? A. Yes. Q. So the
statement, at least insofar as the portion
that’s attributable to electric is that you’re
paying this as an individual expense is
incorrect, because it’s paid by your
company? A. Well, since I’m the one
hundred percent shareholder in my
company, it is my company. And when I
need money to pay bills that’s what I use.
Because I don’t take a salary.”).)
In his Statement of Financial Affairs,
debtor listed a Chase (Southwest.com) credit
card (the “Southwest Card”) in his name,
which he claimed was used solely for
business expenses and paid directly by The
Storage Guys. (Statement of Financial
Affairs, at 2 (stating that payments were
made “with funds from business, for
business debts”).) He also disclosed that
$15,516.54 in payments was made to the
card over the ninety days prior to the
petition date. (Id.) Exhibits produced at trial,
however, indicated that many of the charges
on the Southwest Card were for personal
items. For example, there was a recurring
charge of $500.00 for an entity named
“Natural Image Long Island”—an expense
for personal grooming—and charges from
supermarkets, pharmacies, dry cleaning
establishments, and other retail stores.
(Bankr. Ct. Op., at 9–10; see Chase
Southwest
Card
Statements,
EB-1.)
According to the Bankruptcy Court,
“[b]ased on an informal and conservative
review of the expenses charged on the Chase
Southwest Card for the ninety days prior to
the Petition Date, an average of $2594.00
per month was charged for personal items
unrelated to the business of The Storage
Guys.”6 (Bankr. Ct. Op., at 10.)
On Schedule I, Bub listed a monthly
income of $3,837.27 from his employment
at The Storage Guys.7 (Schedule I, at 1.) He
also listed a monthly contribution towards
household expenses in the amount of $1,100
from Susan Lane, his current girlfriend (id.);
a monthly health insurance expense in the
amount of $661.00 (id. at 2); and monthly
electricity and heating expenses in the
amount of $385 (id.). The Storage Guys
Bank Account statements reflect monthly
debits for the electricity bill, in amounts
varying form $125.33 to $261.21. (Bankr.
Ct. Op., at 11; see The Storage Guys Bank
Account
Statements.)
Debtor
also
acknowledged that his monthly health
insurance in the amount of $661 is paid from
that account. (T-120.) He explained that his
accountant calculated the monthly income
based on the transfers made by The Storage
Guys to and on behalf of debtor. (Id. at 190.)
At trial, Bub testified that he believed he
was one and the same as The Storage Guys,
and therefore The Storage Guys paid
debtor’s personal expenses in lieu of salary.
(See T-119 (“Q. Okay. So when the
company pays the electric bill, you sort of
think that’s yourself paying it because you
At trial, Bub acknowledged that, during
the two months before the petition date, The
Storage Guys, on Bub’s behalf, paid his
bankruptcy counsel approximately $7,500
and his son $6,840 as a gift. (Id.) Bub did
not know if the sum of those payments—
6
Bub has not taken issue with the Bankruptcy
Court’s calculation. Nevertheless, this Court has
conducted its own review of the Chase Southwest
Card statements and finds no basis to conclude that
the Bankruptcy Court’s estimate is clearly erroneous.
7
Bub listed his 2011 salary in his Statement of
Financial Affairs as $27,500. Averaged over twelve
months, the monthly income would be $2,291.67.
4
On April 19, 2012, Rockstone
commenced an adversary proceeding against
Bub, seeking to deny his discharge pursuant
to 11 U.S.C. § 727(a)(4)(A), based on false
statements made by debtor in the petition,
schedules, and statement of financial affairs.
Rockstone claimed that Bub (1) falsely
listed an ownership interest in three vehicles
as of the date the petition was filed because
the transfer of ownership from his minor son
was not completed until post-petition; (2)
provided false and fraudulent values for the
three vehicles in his schedules and falsely
claimed a vehicle exemption in one of the
vehicles in the hopes of buying one of the
vehicles back from the estate for less than it
was actually worth; and (3) falsely and
fraudulently overstated his expenses and
understated his income. Rockstone claimed
that these false oaths were made in order to
deceive the creditors and the Bankruptcy
Court regarding debtor’s true financial
condition. (See generally R-1.)
almost $14,000—was included in his
income calculation. (Id.) According to
debtor, his accountant calculated his
monthly income and expenses over a period
of time, based on his books and records, and
divided the number by the number of
months reviewed, to come up with the
amounts listed in the schedules to the
petition. (Id. at 190–91.)
In its opinion, the Bankruptcy Court
performed the following calculation. It took
the $1,100 per month transfer to debtor’s
personal bank account, added that amount to
the monthly insurance and utility expense
paid by The Storage Guys on behalf of Bub
(approximately $861, assuming the business
paid about $200 of the utility expense), and
amortized the payments to counsel and
debtor’s son over twelve months. (Bankr.
Ct. Op., at 12.) This resulted in a monthly
“salary” from the business of approximately
$3,060. (Id.) The court noted, however, that
this number did not include the personal
expense charges on the Southwest Card,
which averaged $2,594 per month at a
minimum. (Id.) The total of those numbers,
the court noted, would exceed the monthly
income listed in Schedule I by about $1,800,
and exceed the annual salary listed in the
Statement of Financial Affairs by over
$3,000 per month. (Id.)
B.
After a trial on February 12, 2013, the
Bankruptcy Court issued a Memorandum
Decision Denying the Debtor’s Discharge
on November 13, 2013. The Bankruptcy
Court held that debtor’s statements
regarding the three vehicles were neither
false nor fraudulent, and, therefore, it
dismissed Rockstone’s first two causes of
action. The court, however, determined that
“the causes of action regarding the false and
misleading representations in the Debtor’s
petition and schedules relative to his income
and expenses, which were the subject of
minimal discussion during the trial but are
fully set forth in the evidentiary record, do
present a clear basis for the denial of the
Debtor’s discharge.” (Bankr. Ct. Op. at 2.)
The Bankruptcy Court summarized its
conclusion as follows:
Bankruptcy Proceedings
On November 22, 2011, Bub filed a
voluntary petition for relief in the
Bankruptcy Court pursuant to Chapter 7 of
the Bankruptcy Code. (R-9, at 3.) Bub’s
gross estate exceeds $130,000, and
Rockstone is Bub’s largest unsecured
creditor, having filed a proof of claim in the
amount of $774,225.35 based on a judgment
against Bub. Rockstone Capital LLC v.
Metal, No. 13-CV-5161 (JFB), 2014 WL
13334265, at *4 (E.D.N.Y. Apr. 2, 2014).
As a result of the misstatements,
including the Debtor’s failure to
disclose all of the income he derived
5
the Debtor’s Discharge on November 13,
2013. (Notice of Appeal, at 5.)
from his wholly owned business, the
Debtor’s monthly income was
understated by at least $1,800.00.
The Debtor accomplished this by
falsely representing in the statement
of financial affairs that he used a
personal credit card solely for
business expenses, when in fact this
credit card was used for business and
personal expenses. The Debtor’s
explanation that he relied on his
accountant’s calculations to prepare
Schedules I and J does not support
his defense. Neither the total amount
of income listed, nor the individual
expenditures themselves, bear any
relationship to the Debtor’s actual
income and expenses, based on the
Debtor’s own financial records.
Furthermore,
the
Debtor’s
explanation that he and his solely
owned business are one and the
same, so he had the right to run his
personal expenses through the bank
account for the business, does not
absolve the Debtor in this case.
Regardless of whether he used his
solely owned business as his
personal piggy bank, it is the
Debtor’s failure to include as income
all of the funds he took from this
business for his own personal
benefit, the fact that the Debtor’s
listed income and expenses are not
supported by the documentary
evidence,
along
with
his
misrepresentation in the petition that
the Debtor’s business had no assets,
that warrant denial of the Debtor’s
discharge. Based on the foregoing,
the Debtor’s discharge is denied
pursuant
to
11
U.S.C.
§ 727(a)(4)(A).
C.
Appeal
Appellant filed a notice of appeal of the
November 13, 2013 Order in the Bankruptcy
Court on November 26, 2013, which was
docketed in this Court on January 24, 2014.
Appellant filed his brief on March 12, 2014.
Rockstone filed its brief on March 28, 2014.
Appellant did not file a reply. The Court has
fully considered the parties’ submissions.
II.
STANDARD OF REVIEW
Rule 8013 of the Federal Rules of
Bankruptcy Procedure provides that a
reviewing court may “affirm, modify, or
reverse a bankruptcy judge’s judgment,
order, or decree,” or it may “remand with
instructions for further proceedings.” Fed. R.
Bankr. P. 8013.
The Court reviews the Bankruptcy
Court’s legal conclusions de novo and its
factual findings for clear error. See Denton
v. Hyman (In re Hyman), 502 F.3d 61, 65
(2d Cir. 2007) (“The Bankruptcy Court’s
legal conclusions are reviewed de novo and
its factual conclusions are reviewed for clear
error.”); see Bankruptcy Servs., Inc. v. Ernst
& Young (In re CBI Holding Co., Inc.), 529
F.3d 432, 449 (2d Cir. 2008); Lubow Mach.
Co. v. Bayshore Wire Prods. Corp. (In re
Bayshore Wire Prods. Corp.), 209 F.3d 100,
103 (2d Cir. 2000); Shugrue v. Air Line
Pilots Ass’n, Int’l (In re Ionosphere Clubs
Inc.), 922 F.2d 984, 988–89 (2d Cir. 1990).
“‘A finding is ‘clearly erroneous’ when
although there is evidence to support it, the
reviewing court on the entire evidence is left
with the definite and firm conviction that a
mistake has been committed.’” Dist. Lodge
26, Int’l Ass’n of Machinists & Aerospace
Workers, AFL-CIO v. United Techs. Corp.,
610 F.3d 44, 51 (2d Cir. 2010) (quoting
(Id. at 2–3.)
The court entered the Judgment Denying
6
(S.D.N.Y. 2013) (accord). “The objecting
creditor bears the burden to establish the
requirements of § 727 by a preponderance of
the
evidence.”
Virovlyankaya
v.
Virovlyanskiy (In re Virovlyanskiy), 485
B.R. 268, 272 (Bankr. E.D.N.Y. 2013);
Moreo v. Rossi (In re Moreo), 437 B.R. 40,
59 (E.D.N.Y. 2010); Carlucci & Legum v.
Murray (In re Murray), 249 B.R. 223, 228
(E.D.N.Y. 2000).
United States v. U.S. Gypsum Co., 333 U.S.
364, 395 (1948)); see also Collins v. HiQual Roofing & Siding Materials, Inc., Nos.
02-CV-0921E(F), 02-CV-0922E(F), 2003
WL 23350125, at *4 n.16 (W.D.N.Y. Dec.
18, 2003) (“‘[A] finding is only clearly
erroneous when although there is evidence
to support it, the reviewing court on the
entire evidence is left with the definite and
firm conviction that a mistake has been
committed. . . . This standard precludes this
Court from reversing the Bankruptcy
Court’s decision if its account of the
evidence is plausible, even if this Court is
convinced that it would have weighed the
evidence differently.” (quoting In re B.
Cohen & Sons Caterers, Inc., 108 B.R. 482,
484 (E.D. Pa. 1989))).
III.
A.
To prove an objection to discharge under
§ 727(a)(4)(A), the party objecting to
discharge must establish by a preponderance
of the evidence that: “(1) the debtor made a
statement under oath; (2) the statement was
false; (3) the debtor knew that the statement
was false; (4) the debtor made the statement
with intent to deceive; and (5) the statement
related materially to the bankruptcy case.”
In re Moreo, 437 B.R. at 59 (quotations and
citation omitted); see also Republic Credit
Corp. I v. Boyer (In re Boyer), 328 F. App’x
711, 715 (2d Cir. 2009).
DISCUSSION
Denial of a Discharge Pursuant to 11
U.S.C. § 727(a)(4)(A)
Section 727(a)(4)(A) of Title 11 of the
United States Code (“Section 727”)
provides:
The
materially
false
statements
recognized under this subsection may have
been made as part of or omitted from the
bankruptcy petition, schedules, statement of
affairs, or during examinations or the
bankruptcy proceeding itself. E.g., New
World Rest. Grp., Inc. v. Abramov (In re
Abramov), 329 B.R. 125, 132 (E.D.N.Y.
2005); see also Pergament v. Smorto (In re
Smorto), No. 07-CV-2727 (JFB), 2008 WL
699502, at *4 (E.D.N.Y. Mar. 12, 2008)
(same). Further, “the debtor must have
presented or used, with intent to defraud,
inflated or fictitious claims in a bankruptcy
case.” Perniciaro v. Natale (In re Natale),
136 B.R. 344, 349 (Bankr. E.D.N.Y. 1992);
see also Dranichak v. Rosetti, 493 B.R. 370,
378 (N.D.N.Y. 2013); Painewebber Inc. v.
Gollomp (In re Gollomp), 198 B.R. 433, 439
(S.D.N.Y. 1996). “In either case, whether it
be a false statement under oath or use of a
false claim, the wilful intent to defraud is a
(a) The court shall grant a debtor a
discharge, unless—
(4) the debtor knowingly and
fraudulently, in or in connection
with the case-(A) made a false oath or account.
11 U.S.C. § 727(a)(4)(A). Because Section
727 “impos[es] an extreme penalty for
wrongdoing, [it] must be construed strictly
against those who object to the debtor’s
discharge and liberally in favor of the
bankrupt.” D.A.N. Joint Venture v. Cacioli
(In re Cacioli), 463 F.3d 229, 234 (2d Cir.
2006) (quotations and citation omitted); see
also Berger & Assocs. Attorneys, P.C. v.
Kran (In re Kran), 493 B.R. 398, 403
7
Casado), 187 B.R. 446, 450 (Bankr.
E.D.N.Y. 1995) (citing, inter alia, Diorio v.
Kreister–Borg Constr. Co., 407 F.2d 1330,
1331 (2d Cir. 1969); Kaiser, 722 F.2d at
1583 n.4)); see also Smorto, 2008 WL
699502, at *6 (citing cases).
crucial element of the cause of action.”
Natale, 136 B.R. at 349. Intent to defraud
can be proven by evidence of either (1) the
debtor’s actual intent to deceive or (2)
reckless disregard for the truth. Adler v. Lisa
Ng (In re Adler), 395 B.R. 827, 843
(E.D.N.Y. 2008); see also Pereira v.
Gardner (In re Gardner), 384 B.R. 654, 667
(Bankr. S.D.N.Y. 2008) (citations omitted).
Intent to defraud, however, “will not be
found in cases of ignorance or carelessness.”
Gardner, 384 B.R. at 667.
Once the moving party meets its initial
burden to produce evidence of a false
statement, “the burden of production then
shifts to the debtor[] to produce a ‘credible
explanation’ for making the ‘false and
fraudulent representations,’” Cadles of
Grassy Meadows II, L.L.C. v . St. Clair (In
re St. Clair), No. 13-mc-1057(SJF), 2014
WL 279850, at *7 (E.D.N.Y. Jan. 21, 2014)
(quoting Moreo, 437 B.R. at 59), or to
“prove that it was not an intentional
misrepresentation,” Gardner, 384 B.R. at
668 (citations omitted). “Courts may
consider the debtor’s education, business
experience, and reliance on counsel when
evaluating the debtor’s knowledge of a false
statement, but the debtor is not exonerated
by pleading that he or she relied on patently
improper advice of counsel.” Maletta, 159
B.R. at 112 (quoting Zitwer v. Kelly (In re
Kelly), 135 B.R. 459, 462 (Bankr. S.D.N.Y.
1992)).
Because “[f]raudulent intent is rarely
susceptible to direct proof[,] . . . courts have
developed ‘badges of fraud’ to establish the
requisite actual intent to defraud.” Salomon
v. Kaiser (In re Kaiser), 722 F.2d 1574,
1582 (2d Cir. 1983) (internal citation
omitted) (quoting In re Freudmann, 362 F.
Supp. 429, 433 (S.D.N.Y. 1973), aff’d 495
F.2d 816 (2d Cir. 1974) (per curiam)).
“Badges of fraud” include secreting
proceedings of a transfer, transferring
property to family members, the lack or
inadequacy of consideration, the general
chronology of the events or transactions in
question, and the concealment of relevant
facts. See id. at 1582–83 (quoting and citing
cases). Further, “[w]here there has been a
‘pattern’ of falsity, or a ‘cumulative effect’
of falsehoods, a court may find that
[fraudulent] intent has been established.”
Monety Corp. v. Maletta (In re Maletta),
159 B.R. 108, 112 (Bankr. D. Conn. 1993)
(citation omitted). With respect to reckless
indifference to the truth, the Second Circuit
has recognized that fraudulent intent may be
inferred from a series of incorrect statements
and decisions contained in the schedules.
See Dubrowsky v. Estate of Perlbinder (In re
Dubrowsky), 244 B.R. 560, 571–72
(E.D.N.Y. 2000) (“[I]t is important to note
that under section 727(a)(4)(A), a reckless
indifference to the truth is sufficient to
sustain an action for fraud.” (citations
omitted)); Castillo v. Casado (In re
B.
Application
Bub contends that the Bankruptcy
Court’s findings of falsity and fraudulent
intent were clearly erroneous. For the
following reasons, the Court affirms the
Bankruptcy Court’s November 13 Order.
1.
Falsity of Statements
Based on the record developed before
and during the trial, the Bankruptcy Court
correctly determined that the following
statements by debtor were material
falsehoods: (1) the claim that he paid $550
in mortgage expenses; (2) the claim that he
had a monthly income from The Storage
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$1800 the Bankruptcy Court found was
missing from the monthly expense and
income schedules. (Debtor’s Brief, at 6.)
Debtor, however, misreads the Bankruptcy
Court’s opinion, and his argument does not
address the discrepancies identified in the
November 13 Order.
Guys of $3,837.24; and (3) the claim that
The Storage Guys had no assets and only
$19,000 in liabilities.
First, debtor contends that, although the
mortgage payments were not actually his
living expenses, they were the result of a
prior divorce support obligation to his exwife. Debtor argues that the Bankruptcy
Court should have requested evidence to
corroborate the child support arrears
justification. (Debtor’s Brief, at 5–6.) The
Court disagrees. Even crediting debtor’s
explanation, it is evident that the statements
were false in three material respects: (1)
Schedule J provides that debtor made
payments of $550 on the home mortgage,
not the $1,093.97 that he actually transferred
from his bank account to Wells Fargo each
month (see Bankr. Ct. Op., at 20); (2) based
on debtor’s testimony, the nature of the $550
expense was not to cover debtor’s mortgage
obligation, but to cure a child support
arrears, and debtor never disclosed in
Schedules E or J that he had any domestic
support obligations (see Schedules E, J; T113–14 (testimony that debtor made
payments in lieu of repaying arrears owed to
ex-wife)); and (3) debtor never amended his
statements to state that he stopped making
the payments around the time of the petition
(see T-120)). Therefore, the Bankruptcy
Court’s conclusion that debtor made a false
statement about his mortgage expenses was
not clearly erroneous.
Specifically, the Bankruptcy Court
focused on debtor’s claim that the Chase
Southwest Card was used solely for The
Storage Guys’ business expenses. The
Bankruptcy Court found, however, that for
the three months prior to the petition date,
Bub used the Chase Southwest Card for
personal expenses in the amount of at least
$2,594 per month. (Bankr. Ct. Op., at 21–
22.) This Court has reviewed the Chase
Southwest Card statements for the months in
question and finds that the Bankruptcy
Court’s calculation was not clearly
erroneous; arguably, it was generous to
debtor. (See generally Chase Southwest
Card Statements.) On appeal, debtor proffers
no explanation for his failure to report as
income the expenses he charged on the
Chase Southwest Card or for his false
representation in the Statement of Financial
Affairs that the card was used solely for
business purposes. In addition, debtor’s
income calculation ignores the fact that the
Bankruptcy Court included the additional
mortgage payments in its calculation. (See
Bankr. Ct. Op., at 12, 22 (adding $1,100 in
mortgage payments).) Further, even if one
subtracts the attorney fee and gift payments
from the monthly income calculation, there
is no logical way to reach debtor’s claimed
$3,837.24 monthly income. For instance,
absent the Chase Southwest Card expenses,
the monthly income would be markedly
below the claimed amount. On the other
hand, including the Chase Southwest Card
expenses of approximately $2,594, the
mortgage payments of $,1100, and the
maintenance fee of $135, the total is $3,829.
That amount, however, does not include
Second, debtor argues that the
Bankruptcy Court erred in its analysis of his
monthly income because (1) unlike debtor’s
accountant, the court improperly amortized
the “one-time expenses” of his legal bill to
his bankruptcy lawyer and his gift for his
son’s wedding ($14,340); and (2) if the court
added the amortized monthly sum of $1,195
to the extra $685 paid for the mortgage and
condominium maintenance fee, the total—
$1880—would amount approximately to the
9
Debtor, however, never attributed any of
The Storage Guys’ liabilities to his own, and
vice versa. Given this testimony, the
Bankruptcy Court did not err in concluding
that debtor ignored corporate formalities and
consequently should have attributed his own
assets and liabilities to The Storage Guys,
and vice versa. See Pisculli v. T.S. Haulers,
Inc. (In re Pisculli), 426 B.R. 52, 60–61
(E.D.N.Y. 2010) [hereinafter In re Pisculli
II] (explaining that “the corporate veil will
be pierced to achieve equity, even absent
fraud, [w]hen a corporation has been so
dominated by an individual . . . and its
separate entity so ignored that it primarily
transacts the dominator’s business instead of
its own and can be called the other’s alter
ego” (quoting Williams v. Lovell Safety
Mgmt. Co., LLC, 896 N.Y.S.2d 150, 151
(N.Y. App. Div. 2010)) (alteration in
original)); T.S. Haulers, Inc. v. Pisculli (In
re Pisculli), Nos. 805-89678-reg, 806-8335reg, 806-8337-reg, 2009 WL 700059, at *3
(Bankr. E.D.N.Y. Mar. 4, 2009) [hereinafter
In re Pisculli I] (“Ordinarily, the stock of a
debtor’s closely owned corporation, and
consequently the value of its assets, after
payment of the corporation’s debts, is
property of a debtor’s bankruptcy estate.”)).
Therefore,
the
Bankruptcy
Court’s
conclusion that debtor made a false
statement about The Storage Guys’ assets
and liabilities was not clearly erroneous.
other personal expenses paid by The Storage
Guys (that Bub concedes were part of his
income), and which would bring the total
monthly income amount well above the
claimed amount. (See T-190 (testifying that
monthly income listed in Schedule I
included expenses for home electricity and
health
insurance).)
Therefore,
the
Bankruptcy Court’s conclusion that debtor
made a false statement by underrepresenting
his monthly income from The Storage Guys
was not clearly erroneous.
Third, the Bankruptcy Court concluded
that debtor made a false statement with
respect to The Storage Guys’ assets and
liabilities when he stated that the business
had no “net assets,” and did not list his own
assets and liabilities as the company’s assets
and liabilities despite testifying “at trial that
he and The Storage Guys were one and the
same.” (Bankr. Ct. Op., at 23.) Debtor
argues that the Bankruptcy Court erred
because (1) The Storage Guys is a separate
legal entity, and just because he was paid on
the basis of distributions did not mean his
assets and liabilities were the company’s;
and (2) both he and The Storage Guys “had
no assets . . . having rightfully given all of
[the] assets to the Bankruptcy Trustee.”
(Debtor’s Brief, at 7.) Debtor’s second
argument is frivolous. His first argument is
unpersuasive.
As Rockstone notes, debtor testified that
there was no difference between himself and
The Storage Guys—at least when it came to
his income and expenses. (See T-116
(“Well, since I’m the one hundred percent
shareholder in my company, it is my
company. And when I need money to pay
bills that’s what I use. Because I don’t take a
salary.”); id. at 119 (“Q. Okay. So when the
company pays the electric bill, you sort of
think that’s yourself paying it because
you’re the company? A. Correct.”); id. at
141 (“But I am the Storage Guys . . . .”).)
2.
Intent to Defraud
On appeal, debtor argues that the
Bankruptcy Court erred in finding that
debtor had intent to defraud because (1) the
Bankruptcy Court did not credit the veracity
of debtor’s claim that he was paying the
mortgage expenses to cure child support
arrears; (2) debtor properly relied on his
accountant’s analysis, and any discrepancy
in his monthly income calculation was not
intentional; and (3) the Bankruptcy Court
recognized that debtor’s statement regarding
10
result in a denial of discharge.”). Therefore,
the Court finds that the Bankruptcy Court
had ample basis to conclude that debtor
intentionally misrepresented his expenses to
create a false picture of his financial
circumstances to the creditors and the Court.
The Storage Guys’ assets and liabilities,
standing alone, would not suffice to deny the
discharge. As discussed below, viewing the
misstatements and omissions individually
and collectively, there was ample evidence
in the record to support the reasoned
conclusion by the Bankruptcy Court.
With respect to the monthly income, the
Bankruptcy Court concluded that debtor
knew that the income listed in Schedule I
was false and covered it up by making a
false representation about the use of the
Chase Southwest Card. (Bankr. Ct. Op., at
22.) The court reasoned that debtor’s
scheme was to use The Storage Guys “to
hide his true income and expenses to
deceive the creditors and the Court,” and
that there was no justifiable purpose for his
failure to disclose all his income. (Id. at 23.)
As noted supra, on appeal, debtor does not
discuss the Chase Southwest Card charges at
all, and he misunderstands the Bankruptcy
Court’s analysis. He also proffers no
evidence demonstrating that his omissions
were innocent or otherwise excusable.
Debtor’s reliance on his accountant’s
evaluation is unavailing, because “it is
transparently plain” that the actual use of the
Chase Southwest Card should have been
disclosed. Dubrowksy, 244 B.R. at 573
(“[E]ven the advice of counsel is not a
defense to a charge of making a false oath or
account when it is transparently plain that
the property should be scheduled. (citations
omitted)). Therefore, there is no basis to
disturb
the
Bankruptcy
Court’s
determination that debtor acted with
fraudulent intent as to those statements.
With respect to the mortgage expenses,
the Bankruptcy Court found it unnecessary
to determine why debtor “deceived the
Court and the creditors, only to determine
whether he has done so. . . . The only
conclusion the Court can draw from
[debtor’s failure to correctly list the monthly
expense] is that the Debtor intentionally
failed to disclose that he was paying the note
. . . in full.” (Bankr. Ct. Op., at 21.) In
Dubrowsky, the court held that the “gross
discrepancy . . . coupled with the omission
of the jointly owned property evidences, at
the minimum, a reckless disregard for the
truth which has consistently been treated as
the functional equivalent of fraud for
purposes of § 727(a)(4)(A).” 244 B.R. at
575–76 (citation omitted); see also MacLeod
v. Arcuri (In re Arcuri), 116 B.R. 873, 881
(Bankr. S.D.N.Y. 1990) (“[D]e minimis
value . . . may tend to vitiate the debtor’s
fraudulent intent”). Here, debtor has
presented no evidence in the record
suggesting that his failure to disclose the
$1,100 in mortgage payments ($550 of it, at
least, to address an undisclosed child
support obligation) was an innocent
oversight. These were not insignificant
omissions in the disclosures, debtor
benefited from the additional income he
drew from his business, and it is irrelevant
that debtor believes he legally was obligated
to make those payments. See Sanderson v.
Ptasinski (In re Ptasinski), 290 B.R. 16, 23
(Bankr. W.D.N.Y. 2003) (“[I]f items were
omitted from the debtor’s schedules because
of an honest mistake . . . such a false
declaration may not be sufficiently
knowingly and fraudulently made so as to
Finally, with respect to The Storage
Guys’ assets and liabilities, the Bankruptcy
Court found fraudulent intent based on
debtor’s pattern of wrongful behavior.
(Bankr. Ct. Op., at 23–24.) In particular, the
court explained:
According
11
to
the
Plaintiff,
the
misrepresentation, along with the other
statements at issue, should not simply be
examined in isolation when determining
whether debtor acted with fraudulent intent
or with reckless indifference to the truth, but
rather should also be examined collectively
in conjunction with the other evidence
before the Bankruptcy Court. Here, when
each of the statements is considered as
whole in the context of the entire record,
there is no basis to conclude that the
Bankruptcy
Court
erred
in
its
characterization of debtor’s scheme and in
its finding of fraudulent intent.
Debtor’s listing of the liabilities of
The Storage Guys in his petition, and
not the $19,000 in the bank account
for The Storage Guys, constitutes
grounds to deny the Debtor’s
discharge as well. The Debtor admits
to stating in Schedule B that The
Storage Guys had no assets. His
explanation for this representation is
that because The Storage Guys owed
a debt to Chase bank in the
approximate amount of $19,000.00,
The Storage Guys had no “net
assets.” However, this excuse does
not ring true. The Debtor testified at
trial that he and The Storage Guys
were one and the same. Therefore,
the assets and liabilities of The
Storage Guys were his own assets
and liabilities. In order to be
consistent, the Debtor had to list
both, and he did not. If this were his
only questionable statement in the
petition, perhaps the Debtor’s
explanation would persuade the
Court to find that the Debtor did not
have the requisite intent to deceive
the Court. However, this is one in a
series of false statements which,
standing together, show a pattern of
deceptive behavior on the part of the
Debtor. As courts have recognized,
evidence of a “pattern of wrongful
behavior”
presents
a
more
compelling case of intent to defraud
than does an isolated instance of an
omission by a debtor. Such is the
case with this Debtor. In addition,
the Debtor’s testimony was evasive
and lacked credibility, as it was
contradicted by his own exhibits.
This is not the honest debtor who
deserves a fresh start.
It is evident that debtor, who had
business experience and at least some
financial sophistication, repeatedly made
material omissions and misrepresentations in
his bankruptcy petition, schedules, and other
submissions to the Bankruptcy Court. Such
a pattern of behavior, as the Bankruptcy
Court noted, supports a finding of fraudulent
intent based, at least, on reckless
indifference to the truth. See, e.g., IBA, Inc.
v. Hoyt (In re Hoyt), 337 B.R. 463, 468
(W.D.N.Y. 2006) (referencing that debtor
was a “sophisticated businessman” in
finding fraudulent intent and denying
debtor’s discharge); Dubrowksy, 244 B.R. at
571–72. Further, a bankruptcy judge’s
“intent” determination often relies heavily
upon the judge’s evaluation of the credibility
and demeanor of the debtor. See, e.g.,
Essenfeld v. Schultz (In re Schultz), 239 B.R.
664, 668 (E.D.N.Y. 1999) (“As the judge
hearing the testimony and viewing the
witness, Judge Conrad was clearly in the
best position to make this type of decision
and this Court will not interfere with Judge
Conrad’s factual conclusions.”). Thus,
deference is given to the original factfinder
because of that court’s superior position to
make determinations of credibility. See, e.g.,
Tully, 818 F.2d at 109 (citing Anderson v.
Bessemer City, 470 U.S. 564, 575 (1985)).
In the instant case, the Bankruptcy Court
(Id. (citations omitted).) Although Bub
objects to this finding, this Court finds his
objection to be without merit. The alleged
12
considered the credibility and demeanor of
debtor and found him to be evasive and
lacking credibility. (Bankr. Ct. Opp., at 24.)
Debtor has pointed to no evidence that
would support a finding that the Bankruptcy
Court’s determination on the issue of his
credibility and intent was erroneous.
In sum, after careful review of the record
and debtor’s arguments, the Court concludes
that the Bankruptcy Court did not err in
finding that debtor made the false statements
knowingly and with fraudulent intent, and
did not err in entering judgment for
Rockstone on its third, fourth, and fifth
causes of action in the adversary proceeding.
IV.
CONCLUSION
For the foregoing reasons, the Court
affirms the order and judgment of the
Bankruptcy Court in its entirety. The Clerk
of the Court shall close the case.
SO ORDERED.
_____________________
JOSEPH F. BIANCO
United States District Judge
Dated: June 25, 2014
Central Islip, New York
***
Debtor proceeds pro se. Rockstone is
represented by Paul A. Levine of Lemergy
Greisler, LLC, 50 Beaver Street, Albany,
NY 12207.
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