Opinion
MEMORANDUM DECISION
LAURA S. TAYLOR, Bankruptcy Judge
Gayle Griffith ("Plaintiff) seeks a determination that her claim against debtors Jay Gedanken and Mara Boras-Gedanken (collectively, " Debtors") is nondischargeable under 11 U.S.C. § 523(a) because it arises out of prepetition fraud and/or willful and malicious injury by Debtors and/or that Debtors are not entitled to a discharge under 11 U.S.C. § 727(a) as a result of their failure to properly disclose assets and liabilities, maintain records, and/or based on false oaths.
Hereinafter, references to code sections refer to Title 11 of the United States Code, also referred to as the "Bankruptcy Code", unless otherwise specified. References to rules refer to the Federal Rules of Bankruptcy Procedure, unless otherwise specified. References to the transcript of the trial in this matter, docket ## ___ and ___, are abbreviated "Tr. ___: ___-___."
The Court heard over three days of testimony in this matter, received significant evidence both oral and documentary, reviewed the arguments of the parties both written and oral, including written post-trial closing argument from each party (" Closing Argument"), and now determines that judgment for the Debtors is appropriate.
BACKGROUND
Debtor Jay Gedanken ("Mr. Gedanken") was the 100% shareholder, sole officer, and sole director of a mortgage brokerage, Amerifund USA, Inc. ("Amerifund, Inc."). Amerifund, Inc. utilized several dbas and employed numerous individuals. Mr. Gedanken freely admits, however, that he made operational errors in connection with Amerifund, Inc. Such errors, coupled with a downturn in the general economy and the mortgage industry in particular, caused Amerifund, Inc. to fail in 2007.
On June 15, 2007, Mr. Gedanken as the sole shareholder, officer, and director authorized Amerifund, Inc. to terminate all employees, close the office, and liquidate all physical assets. The bank records of Amerifund, Inc. produced at trial are consistent with this directive as the records of three bank accounts, including the payroll account, last show activity in May of 2007 and the other, an escrow account, shows limited activity thereafter and no activity shortly thereafter. Mr. Gedanken liquidated Amerifund, Inc.'s personal property assets, collected Amerifund, Inc.'s monies, and paid certain liquidation proceeds to himself.
Plaintiff was a contract employee of Amerifund, Inc. and received commission based compensation. The exact commission percentage varied during the time of her employment. It is clear, however, that she was not a salaried employee at any relevant time. It is also clear that Amerifund, Inc. paid some commissions, but failed to timely and appropriately perform its contractual obligations to Plaintiff on occasion. In particular, Amerifund, Inc. failed to pay Plaintiff commissions of $17,718.75 on account of two transactions.
Amerifund, Inc. also failed to pay some employee withholding taxes for at least one employee, Laura Reyes Navarra.
In 2005, Amerifund, Inc. borrowed money from Plaintiff. The loan (the "Loan") was evidenced by a promissory note dated March 30, 2005 and in the original principal amount of $25,000 (the "Note"). The Note provided for an initial interest payment of $5,000. Thus, the stated face amount of the Note was $30,000. Mr. Gedanken executed and delivered a guaranty also dated as of March 30, 2005 (the "Guaranty"), and thereby personally guaranteed Amerifund, Inc.'s obligations under the Note.
The parties introduced conflicting testimony as to whether Mr. Gedanken provided Plaintiff with finalized documents in connection with this transaction or whether Plaintiff finalized form documents provided by Mr. Gedanken. As a result of this Court's determination that the debt arising from this transaction is fully dischargeable, it is unnecessary for the Court to resolve this evidentiary debate. In particular, it has relevance only to the extent the Note remains collectable and, even then, only in that the effective interest rate may be usurious.
Plaintiffs complaint in this adversary proceeding (the "Complaint") and later filed documents state on numerous occasions that neither Mr. Gedanken nor Amerifund, Inc. made any payment on the Note or the Guaranty; the evidence is to the contrary. In particular, payments were made in amounts which reflect Note payments, and the documentary evidence establishes that, as of April 30, 2006, Plaintiff agreed that only $12,000 remained owing on the Note. Further, while Plaintiff testified that Amerifund, Inc. and the Debtor owed her on account of various obligations and that, as a result, she is not sure of the intended purpose of most payments, the testimony ultimately resulted in Plaintiffs agreement that at least one $5,000 payment represented a payment on the Note.
A review of Amerifund, Inc. bank records indicates an extremely close relationship between Mr. Gedanken and Amerifund, Inc. As noted, he was a sole shareholder, sole officer, and sole director. Further, these bank records evidenced numerous instances of admitted use of the corporate accounts for personal expenses of Mr. Gedanken and his family. The Debtors admitted that certain expenses were personal, such as expenses for Ms. Gedanken's hairdresser. In connection with many other transactions that strongly suggest personal use, the Debtors did not deny that this was the case, but instead stated that they did not know if the expenses were personal. The Court finds this testimony lacking in credibility and concludes that Debtors made significant personal use of Amerifund, Inc. assets. Whether this was compensation properly paid to Mr. Gedanken, as he testified, and properly reported for tax purposes, the Court need not decide.
Ms. Gedanken had no direct involvement in the operations of Amerifund, Inc., but she had signing authority on the various bank accounts and use of the corporate credit or debit cards. She primarily worked to raise the Debtors' sons and to maintain the family home. At some point, however, she decided to utilize her interior design training and, therefore, created a business name, MB Designs, and opened bank accounts in that name (the "MB Designs Accounts"). MB Designs was not an active business. Its sole business activity consisted of a single purchase of patio furniture for a neighbor. As a result of this lack of activity, the MB Designs Accounts were closed during the twelve months prior to the Petition Date.
On September 19, 2008 (the "Petition Date"), Debtors filed their chapter 7 case. They were not represented by counsel in connection with the preparation of their schedules (the "Schedules") and Statement of Financial Affairs ("SOFA"). Debtors properly identified Amerifund, Inc. in their SOFA and listed Amerifund as a dba used by Mr. Gedanken personally. They did not identify Amerifund, Inc.'s dbas or its bank accounts in either the Schedules or the SOFA. They also listed three personal bank accounts with small balances, two cars, and $2,500 of office equipment and supplies owned by Mr. Gedanken. They did not identify MB Designs and the closed MB Designs Accounts in the Schedules or SOFA filed on the Petition Date.
The 341a meeting revealed that Debtors had failed to schedule an asset, a $26,889.75 real estate commission that was earned pre-petition but paid post-petition. It appears that Mr. Gedanken testified honestly regarding this asset at the 341a meeting as the Trustee apparently worked with him to allow a revision of the Schedules. Further, at the Trustee's suggestion, Mr. Gedanken also modified the Schedule C claim of exemptions with the result that the commission was largely exempted.
On November 17, 2008, Plaintiff initiated this adversary proceeding. In the course of the long litigation that followed, her counsel raised some additional issues in connection with the Schedules and SOFA. The Debtors made Schedules and SOFA amendments in connection with some of the issues Plaintiff identified and made other corrections, including an amendment to add MB Designs and the MB Designs Accounts. The Debtors, thus, modified their Schedules and/or SOFA on three occasions.
DISCUSSION
A. The Court Must Strictly Construe Plaintiffs Objections To Debtors' Discharge And Objections To Dischargeability Of Her Claim.
A central purpose of the Bankruptcy Code is to provide an honest but unfortunate debtor with a fresh start free of pre-bankruptcy debt and its pressures. Grogan v. Garner, 498 U.S. 279, 286-287 (1991). Thus, exceptions to discharge are confined to those plainly set out in the Code. Kawaauhau v. Geiger, 523 U.S. 57, 62 (1998). And a Court in evaluating discharge objections must strictly construe them in favor of a debtor's fresh start. Jett v. Sicrofff (In re Sicroff), 401 F.3d 1101, 1104 (9th Cir. 2005) [citing Industrie Aeronautiche v. Kasler (In re Kasler), 611 F.2d 308, 310 (9th Cir. 1979)]. Thus, Plaintiff bears the burden of proof here, and it is a high one.
B. Plaintiff Fails To Prove That Her Objections to Dischargeability Are Appropriate.
Plaintiff seeks to have her claim deemed non-dischargeable under section 523(a). She clearly asserts that the claim based on the Loan arose as a result of fraud and that the failure to repay the Loan willfully and maliciously caused injury. It is less clear as to the precise nature of her section 523(a) claim as it relates to the unpaid commissions, but her arguments, at most, again are based on an alleged willful and malicious injury and fraud. Thus, the Court analyzes both components of her claim under 11 U.S.C. § 523(a)(2) and (6).
While the Complaint references section 523(a)(2), it fails to cleanly plead a cause of action thereunder. First, there is no cause of action directly asserted under this Bankruptcy Code section. Second, the prayer for relief seeks a "Judgement [sic] Denying Discharge, or in the alternative, deny the discharge of the defendants with prejudice." As a section 523(a)(2) claim seeks to avoid dischargeability of a specific creditor's claim rather than a complete denial of discharge, the prayer fails to cleanly request relief under section 523(a)(2). Finally, the Complaint fails to specify whether Plaintiff asserts a claim under section 523(a)(2)(A) (money, credit, etc. obtained by false pretenses, false representations, or actual fraud) or 523(a)(2)(B) (money, credit, etc. obtained by use of a false financial statement).
Section 523(a)(2)(A) provides that:
(a) A discharge under section 727, 1141, or 1328(b) of this title does not discharge an individual debtor from any debt
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by -
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition.
Thus, to prove actual fraud for section 523(a)(2)(A) purposes, a creditor must establish each of the following elements:
(1) that the debtor made the representations;
(2) that at the time he knew they were false;
(3) that he made them with the intention and purpose of deceiving the creditor;
(4) that the creditor relied on such representations; [and]
(5) that the creditor sustained the alleged loss and damage as the proximate result of the representations having been made.
Britton v. Price (In re Britton), 950 F.2d 602, 604 (9th Cir. 1991); see also, Defined Benefit Pension Plan v. Kirsh (In re Kirsh), 973 F.2d 1454, 1457 (9th Cir. 1992). The creditor must prove each element of fraud by a preponderance of the evidence. Grogan, 498 U.S. at 290. And where the fraud allegedly arises at loan or debt origination the Court must be careful as:
... courts naturally are concerned lest every breach of contract be levered into fraud by the too-facile expedient of asking the jury to infer from the fact that the defendant did not perform his promise that he never intended to perform it. So the rule has grown up that nonperformance is not enough to ground such an inference; there must be additional evidence of the defendant's intentions at the time he made the promise.
Milwaukee Auction Galleries, Ltd. et al. v. Chalk, 13 F.3d 1107, 1109 (7th Cir. 1994). Having said this, however, fraud can be found where the debtor obtains a loan or debt with a fixed intention not to pay. Id.
Plaintiff initially argues that Mr. Gedanken obtained the Loan from her under false pretenses. In particular, she initially asserted that he obtained the Loan, made no payment thereon, and intended at the time he solicited the Loan to discharge the same in bankruptcy prior to payment. The Court concludes to the contrary, and, thus, Plaintiffs claim under section 523(a)(2)(A) in relation to the Loan fails. In short, she holds a claim for breach of contract - not a claim for damages as a result of fraud.
First, the evidence is clear, contrary to Plaintiffs assertion, that Amerifund, Inc. made payments to Plaintiff, including payments on account of late charges. Indeed, Plaintiff conceded in pre-bankruptcy correspondence that the Note balance was $12,000.00. Next, Amerifund, Inc. obtained the Loan in 2005, but Debtors did not file bankruptcy until 2008. And, again, Plaintiff received interim payments on the Note. This timing is inconsistent with Plaintiffs theory. Plaintiff alleged prior to trial that she would provide evidence establishing that Mr. Gedanken made statements supportive of her fraud allegation, but such evidence did not materialize at trial. In contrast, Mr. Gedanken provided highly credible evidence that he intended repayment in full at Loan origination. The Court, thus, finds credible Mr. Gedanken's assertions that he actually intended to repay the Loan and that he did not obtain the Loan through fraud.
Indeed, if the Note's interest rate is usurious, Amerifund, Inc. may have reduced the Note balance more significantly. A note provision requiring payment of usurious interest is void and uncollectible. Haines v. Commercial Mortgage Co., 200 Cal. 609, 622 (1927). As interest in the amount of $5,000 is included in the Note balance, the Note balance may be reduced by some amount. Principal would remain payable, however, as well as post-maturity interest at the legal rate. Epstein v. Frank, 125 Cal.App. 3d 111, 123 (Cal.App. 2d Dist. 1981). Treble damages for receipt of usurious interest are not recoverable here as the one year statute of limitations period expired prior to the Petition Date. See Cal. Civ. Code § 1916.12-3(a).
In her Closing Argument, Plaintiff also briefly asserts that Mr. Gedanken acted with fraudulent intent when he asked Plaintiff to hold an Amerifund, Inc. check and then stopped payment. Plaintiff does not develop this argument, and it is unclear whether Plaintiff intends the point as an additional act of fraud or as supportive of her assertion that the Loan was obtained through fraud. The Court, however, rejects the argument entirely. First, these actions occurred long after Loan initiation and after Plaintiff received other payments; they in no way prove or even support a fraud in the inducement claim. Second, the elements necessary for finding this to be an independent claim of fraud do not exist. Mr. Gedanken's testimony, in essence, is that he presented the check as a token of good will and stopped payment when Plaintiff stated an intention, notwithstanding, to commence litigation. The Court believes Mr. Gedanken on this point and notes that there is no evidence that Mr. Gedanken provided the check with the then present intent of dishonor.
In the background of this dispute is a question of whether Plaintiff advanced the Loan to Amerifund, Inc. or to Mr. Gedanken. The Court finds it unnecessary to resolve this issue as Mr. Gedanken guaranteed the Loan. Thus, Mr. Gedanken was personally liable for the Loan in all respects, and it is irrelevant whether the Loan funded to him personally or to Amerifund, Inc. or whether he has an additional obligation to repay the Loan as the alter ego of Amerifund, Inc.
As to the unpaid commissions, there is no developed theory or evidence of fraud at contract initiation. Clearly, Amerifund, Inc. paid Plaintiff other commissions. On this record, the Court finds that Plaintiffs claim on account of unpaid commissions also arises from breach of contract - not from fraud.
The Plaintiff also argues for the first time in her Closing Argument that the non-payment of the Note and commissions owed creates a non-dischargeable claim under section 523(a)(6). Section 523(a)(6) provides that a debtor cannot discharge any debt that arises from willful and malicious injury by the debtor to another entity or to the property of another entity.
Given the Request for Leave to Amend, the Court again addresses a claim not raised in the Complaint by specific statutory reference - again in an abundance of caution.
A willful injury is a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury. Albarran v. New Form, Inc. (In re Barboza), 545 F.3d 702, 706 (9th Cir. 2008) (citing Kawaauhau v. Geiger, 523 U.S. at 61). The willful injury requirement of section 523(a)(6) is met when a claimant shows either that the debtor had a subjective motive to inflict the injury or that the debtor believed that injury was substantially certain to occur as a result of his conduct. Petralia v. Jercich (In re Jercich), 238 F.3d 1202, 1208 (9th Cir. 2001). Thus, a debtor is charged with the knowledge of the natural consequences of his actions. Ormsby v. First Title (In re Ormsby), 591 F.3d 1199, ___, 2010 U.S. App. LEXIS 423, *12 (9th Cir. 2010).
The "malicious" injury requirement in section 523(a)(6) is separate from the "willful" requirement. Carrillo v. Su (In re Su), 290 F.3d 1140, 1146 (9th Cir. 2002). A malicious injury requires: (1) a wrongful act; (2) done intentionally; (3) which necessarily causes injury; and (4) is done without just cause or excuse. Id. at 1146-47 (citing In re Jercich, 238 F.3d at 1209). The Court may infer malice based on the nature of the wrongful act. Ormsby, 2010 U.S. App. LEXIS at *14. Again, the Court must find both willful injury and malicious injury to establish non-dischargeability under section 523(a)(6). Barboza, 545 F.3d at 704.
Having concluded that Plaintiffs claims arise solely from breach of contract and not from fraud, her section 523(a)(6) claim fails. Intentional breach of contract cannot support a determination of nondischargeability under section 523(a)(6) unless it is accompanied by conduct that constitutes a tort under state law. Lockerby v. Sierra, 535 F.3d 1038 (9th Cir. 2008).
The record also fails to otherwise support a finding of willfulness or malice. The Court finds credible Mr. Gedanken's testimony that he did not intend to injure Plaintiff and that Amerifund, Inc. attempted repayment. Amerifund, Inc. paid some late charges and did not challenge an interest rate that Mr. Gedanken, a mortgage broker, likely knew was questionable. Amerifund, Inc. paid other commissions and apparently raised the percentage paid to Plaintiff on at least one deal to compensate for the failure to immediately pay a commission on another. The Court concludes that the failure to repay Plaintiff was not the result of an unexcused intent to injure. Instead, it was a result of a business failure that Debtors did not desire and could not stop.
3. Non-Dischargeability of Claims Against Mara Gedanken.
There has never been any allegation that Ms. Gedanken made any representation in connection with the Loan, Note, or unpaid commissions. And Plaintiff provided no evidence of any involvement by Ms. Gedanken at any time in connection with the Loan, Note, and unpaid commissions. Thus, the non-dischargeability claims clearly fail to as to Ms. Gedanken for this additional reason.
C. Plaintiffs Objections To Discharge Also Fail.
Plaintiff clearly objects to discharge in the Complaint based on sections 727(a)(3) and (4)(A). The Complaint also requests relief generally under section 727(a) in connection with two claims for relief. Such claims contain allegations that appear to most properly raise claims under sections 523(a)(2) and 727(a)(3). But the precise section 727(a) subparagraphs are unclear; it is at least arguable that Plaintiff initially sought relief under section 727(a)(2), and Plaintiffs Closing Argument more specifically seeks section 727(a)(2) relief. Given Plaintiffs Request for Leave to Amend, and in an abundance of caution, the Court, thus, will discuss all three Code provisions herein.
1. Alter Ego Assertions Do Not Mandate A Denial Of Discharge.
Plaintiffs arguments under section 727(a) appear to arise in part from the assertion that Mr. Gedanken and Amerifund, Inc. are alter egos. The Court determines, however, that alter ego findings would not aid Plaintiff here.
First, the evidence is insufficient to support an alter ego finding. Under California law, there are two general requirements for "piercing the corporate veil":
"(1) that there be such unity of interest and ownership that separate personalities of the corporation and the individual no longer exist and
(2) that, if the acts are treated as those of the corporation alone an inequitable result will follow."
Mesler v. Bragg Mgt. Co., 39 Cal. 3d 290, 300 (1985) (citation omitted). Here Debtors used corporate accounts and credit for personal purposes. Mr. Gedanken may have also improperly retained corporate liquidation proceeds on account of his equity position rather than paying these amounts to Amerifund, Inc.'s creditors. But contrary to Plaintiffs assertion, the evidence did not establish any confusion among creditor witnesses as to who they worked for, some evidence of corporate formalities exists, Debtors did not personally utilize all accounts (in particular the payroll account remained inviolate), and Amerifund, Inc. apparently maintained an active separate business. All the above aid Debtors in defending against alter ego attack under the first requirement. In the final analysis, however, it is the second requirement that renders an alter ego finding inapposite here.
An alter ego finding does not dissolve the corporation. Id. Instead, the corporate form will be disregarded only in narrowly defined circumstances and only when the ends of justice so require. Here at best for Plaintiff, unpaid Amerifund, Inc. creditors could have claims against Mr. Gedanken, in particular, based on alter ego theories if they do not already hold claims based on a guaranty or otherwise. But alter ego arguments do not require that the Court treat Amerifund, Inc. and Mr. Gedanken as the same for all purposes in reviewing his compliance with the Bankruptcy Code. Debtors properly identified Amerifund, Inc. in the Schedules - as they were required to do. But Debtors were not required to list Amerifund, Inc. bank accounts, creditors, and assets on their personal bankruptcy schedules except in those cases where they asserted an ownership interest at filing (personal property in the form of personal property business assets - listed) or were liable for the debt based on guaranty or otherwise (Plaintiffs claim based on guaranty listed albeit as a litigation claim). Here, Debtors apparently listed some corporate debt in the Schedules where Mr. Gedanken had personal liability based on a guaranty. They did not list Mr. Gedanken's potential control person liability on account of unpaid employee withholding tax liability, but as discussed in Section 3(f) below this omission does not justify a denial of discharge. In short, there is insufficient evidence supporting an argument that equity requires that the acts of Mr. Gedanken and Amerifund, Inc. be treated as one and, in particular, nothing that requires a creation of Schedules and SOFA in this case that ignores the separate existence of Amerifund, Inc.
2. 11 U.S.C. § 727(a)(3) Claim.
The Ninth Circuit has stated that: "the purpose of § 727(a)(3) is to make discharge dependent on the debtor's true presentation of his financial affairs." Caneva v. Sun Communications Operating Ltd. P'ship (In re Caneva), 547 F.3d 1082, 1087 (9th Cir. 2008). Thus, the objecting creditor must show: "(1) that the debtor failed to maintain and preserve adequate records; and (2) that such failure makes it impossible to ascertain the debtor's financial condition and material business transactions." Lansdowne v. Cox (In re Cox), 41 F.3d 1294, 1296 (9th Cir. 1994) [quoting Meridian Bank v. Altern, 958 F.2d 1226, 1232 (3d Cir. 1992)]. It is not necessary, however, that the objecting creditor demonstrate that the debtor intended to conceal his financial condition in order to satisfy the burden. In re Cox, 41 F.3d at 1297.
The objector bears the initial burden of proof, but after she shows inadequate or nonexistent records, the burden of proof then shifts to the debtor to justify the inadequacy or nonexistence of the records. Caneva, 547 F.3d at 1087. And justification for a debtor's failure to keep or preserve books or records will depend on whether similarly situated debtors would ordinarily keep them. Id. at 1089. Thus, a debtor must either produce such records as are customarily maintained or satisfy the court with adequate reasons why he was not duty bound to keep them. Id.
In this case, Plaintiff does not suggest that Debtors improperly maintained personal records except to the limited extent such an argument arises in relation to MB Designs. As discussed below, the Debtors properly scheduled all relevant active personal accounts, and all bank records were available to Plaintiff through subpoena and presumably through 2004 exam or discovery. While Plaintiff complains about a lack of cooperation in discovery, it appears that Plaintiff never requested personal account information through discovery in this adversary proceeding or through examination under Rule 2004. Instead, Plaintiff independently obtained bank records by subpoena - without notice to Debtors - prior to making any document production request.
Further, the Court does not find that the absence of business records related to MB Designs is problematic. MB Designs was, for all practical purposes, a single transaction rather than an operating business. And, MB Designs was not a separate corporation, but a dba of Ms. Gedanken in her capacity as an interior designer. The Court finds the lack of such business records reasonable, since the Court finds believable Ms. Gedanken's explanation regarding the extremely limited extent of MB Designs' business operations from inception through the Petition Date. Thus, the absence of MB Designs' records other than bank account records and the failure to initially disclose the closed MB Design Accounts also fail to support an objection to discharge.
See Section 3(d) below for further discussion.
The main focus of the Plaintiffs section 727(a)(3) argument relates to the alleged absence of records relating to Amerifund, Inc. First, there is disputed testimony regarding whether Mr. Gedanken destroyed some or all Amerifund, Inc. business records. Mr. Bell, a paralegal for Plaintiffs attorney, Mr. Rolls, testified that Mr. Gedanken stated at a meeting during the course of the litigation that he had destroyed certain Amerifund, Inc. records years ago.
Mr. Gedanken strongly disputes this assertion. Mr. Gedanken admits, however, that certain records were lost when he failed to maintain payments on a storage facility and the contents were seized. Thus, one issue in relation to Amerifund, Inc. records is to what extent they existed as of the Petition Date. The Court finds, based on this admission, that some corporate records were destroyed.
The section 727(a)(3) issue also is clouded by the fact that Mr. Gedanken did not produce extensive records in connection with discovery or otherwise prior to trial, but claims that records not reviewed by Plaintiff exist. The Plaintiff clearly sought certain records in a document production request to which Mr. Gedanken asserted objections, but a review of the document production request is of little aid to the Court.
As to bank records, Debtors objected, at least in part, by stating that Plaintiff already had all bank records as a result of subpoena. Plaintiff did not seek to compel additional response. On this record, the Court concludes that Debtor did not fail to maintain Amerifund, Inc. bank records.
Plaintiff also requested Amerifund, Inc. payroll records for Plaintiff and two other individuals, formation and corporate governance documents, a lease, payment commission and loan generating information in relation to Plaintiff and two other individuals, and correspondence with Plaintiff. Debtors produced limited documents beyond the bank records. In particular, Mr. Gedanken produced minutes of the June 15, 2007 shareholder meeting that document the decision to close Amerifund, Inc.'s doors and liquidate its assets. Debtors, however, also interposed objections. Plaintiff also requested similar documents for Amerifund, Inc. dbas and another entity with a similar name. Debtors responded to these requests by stating that the entity was unknown and/or that no such documents existed as the named entity was a mere dba of Amerifund, Inc. The Plaintiff asserts that she did not seek additional production through a motion to compel based on Mr. Gedanken's assertion that he had "destroyed" relevant documents.
Finally, Mr. Gedanken provided only limited testimony regarding the quality and quantity of documents that do exist and would have otherwise been produced. In particular, Mr. Gedanken indicates that most of the business records at issue were in the form of bank records - bank records that the Plaintiff already obtained by subpoena. There is, however, absolutely no testimony from Mr. Gedanken regarding what other records existed and would have been produced.
The Court, thus, is in a quandary. It believes, however, that the matter can best be resolved by looking at the kinds of records that reasonably could be anticipated in this situation, whether a chapter 7 individual debtor would necessarily have such records, and whether review of such records is necessarily required in order to ascertain Debtors' financial status. The Court ultimately concludes, after over three days of testimony, that there is no evidence that records critical to the evaluation of Debtor's personal finances were destroyed by Mr. Gedanken or otherwise unavailable to creditors. Even if some of Amerifund, Inc. records were destroyed, as Mr. Bell testified, there is no evidence indicating that such records would have provided any additional and meaningful ability to understand Debtors' personal finances.
First, the Court focuses on the fact that Amerifund, Inc. closed its doors in mid-2007. Thus, there is some distance between Mr. Gedanken's operation of Amerifund, Inc. and his receipt of income therefrom. Consistent with this allegation, the bank records of Amerifund, Inc. show a cessation of business well before bankruptcy. In short, there is no evidence indicating that Mr. Gedanken continued to receive regular income or more than insignificant income from Amerifund, Inc. during a more than 12 month period prior to his bankruptcy filing. The Court finds the bank records that were available to be adequate for the purposes of evaluating the cash assets of Amerifund, Inc. and the transfer of such assets to Debtors.
Second, the Court obtained significant testimony regarding the tangible assets of Amerifund, Inc. Mr. Gedanken does not have records regarding his liquidation of these assets. Given his testimony, however, the Court finds that this is not material. Mr. Gedanken sold the limited personal property assets personally. He did not retain an auctioneer and he did not do a single sale to a single buyer such that a bill of sale would appropriately have been produced. His testimony, indeed, suggested that he was offering chairs at $5.00 each and otherwise, to use a term from the retail world, blowing the inventory out the doors. Given the nature of the personal property liquidation, the Court does not find it surprising that records were not maintained. Further, Mr. Gedanken candidly stated that he retained certain personal property and lists $2,500 of business inventory and equipment owned only by Mr. Gedanken on the Schedules. Thus, to the extent such assets were not sold, they were scheduled.
It is also true that Mr. Gedanken does not have extensive corporate minutes, etc. Here, however, these are not necessarily the kind of records that section 727(a)(3) contemplates. Mr. Gedanken produced evidence of the decision to close Amerifiind, Inc. There is no evidence that other Amerifund, Inc. records would reasonably aid in understanding Debtors' finances. Thus, the Court concludes that Mr. Gedanken's personal creditors would not be aided in any material respect in a review of corporate records for a fully liquidated closely held corporation.
Finally, there is no reasonably anticipated asset whose nondisclosure is unexplained. In some cases, a section 727(a)(3) objection is established by a lack of records necessary to explain the disappearance of an asset or the unavailability of income. Here there is no such situation. The Debtors' bank records do not reflect large cash withdrawals, but well evidence declining income and mounting debt through credit card advances. The Amerifund, Inc. bank records similarly fail to raise any such concerns. The Debtors explain the absence of a particular vehicle from their schedules - they traded it in on a new vehicle that was scheduled. And Plaintiff never requested documents in this regard.
The evidence is clear that all Amerifund, Inc. records were not properly maintained by Mr. Gedanken. The failure to properly pay for the storage facility may have resulted in an inadvertent destruction of some records, but inadvertence is not a full defense. To the extent corporate records were critical to an understanding of Mr. Gedanken's personal finances and under his control, denial of discharge might be appropriate notwithstanding inadvertent destruction. Having said that, however, the Court concludes that there is insufficient evidence to support a denial of Debtors' discharge under section 727(a)(3). Full bank records for Amerifund, Inc. exist. The failure to produce documentation related to the liquidation of the limited personal property was adequately explained. The Plaintiff failed to identify what other financial records necessary to an understanding of the Debtor's personal finances were reasonably anticipated, but not available. In summary, Plaintiff fails to meet her burden here as she fails to prove that specific records are needed to understand Debtors' finances, that the Court should conclude that such records reasonably should exist, and that such records do not exist.
The records Plaintiff requested in discovery as to payroll, checks, and commissions for three employees might show the existence of a claim against Amerifund, Inc., but the evidence here is that Debtors admit certain claims by Plaintiff and do not understand the basis on which Ms. Reyes may hold a claim. The Court has no idea how Ms. Romero fits into the picture, as Plaintiff provides no explanation for this request. Thus, the Plaintiff fails to meet her burden of proving that these records are necessary to an evaluation of Debtors' finances.
3. 11 U.S.C. § 727(a)(4) Claim.
11 U.S.C. § 727(a)(4)(A) provides that the court shall grant the debtor a discharge, unless: (4) the debtor knowingly and fraudulently, in or in connection with the case - (A) made a false oath or account. In a case arising under 11 U.S.C. § 727(a)(4)(A) the objecting party has the burden of proof. Fed. R. Bankr. P. 4005. Thus, the objecting party must show:
(1) Debtor made a false oath in connection with the case;
(2) The oath related to a material fact;
(3) The oath was made knowingly; and
(4) The oath was made fraudulently.
Roberts v. Erhard (In re Roberts), 331 B.R. 876, 882 (9th Cir. BAP 2005). A false oath may involve a false statement or omission in schedules. Id. And "materiality" may be found even absent direct financial prejudice to creditors. Id. at 883. "Knowingly" for purposes of this statute means deliberate and conscious while "fraudulently" has a meaning similar to that used in the context of common law fraud, but materiality replaces the elements of reliance and proximate causation of damages. Id. at 883-884. Thus, the creditor must show that the debtor made the representations with the intention and purpose of deceiving the creditors. Id. Further, a Debtor's intent must be actual, not constructive, and may be established by circumstantial evidence or by inferences from course of conduct. Id. [citing Devers v. Bank of Sheridan (In re Devers), 759 F.2d 751, 753 (9th Cir. 1985)]. Here, Plaintiff alleges numerous false oaths, but fails to meet her burden of establishing that any justify a denial of discharge.
a. Failure to disclose real estate commission.
The Debtors' initial Schedules failed to disclose a real estate commission of approximately $26,000 on account of a commission earned pre-petition, but paid post-petition. This omission is material. In a discussion at the 341a meeting, Mr. Gedanken disclosed this commission to the chapter 7 Trustee who advised the Debtors that an amendment to the schedules was necessary. The Debtors subsequently amended their schedules to include the real estate commission.
The Court finds here that the omission was not knowing and fraudulent. The Court believes the Debtors' explanation that, as lay persons and given that they were not represented by counsel at the time of their bankruptcy filing, they did not understand that the commission was properly included in their bankruptcy estate. The Court, in particular, finds that this mistake was not fraudulent given their candid identification of the asset upon questioning by the chapter 7 Trustee and their prompt amendment of the Schedules. The Court notes that such a result is appropriate; honest debtors should be allowed to rectify the result of an honest mistake in scheduling. Punishing an honest mistake through a denial of discharge improperly punishes honesty and discourages honest identification of assets throughout the bankruptcy process.
b. Failure to disclose bank accounts.
The Schedules initially identified three bank accounts. Through discovery, the Plaintiff identified numerous additional bank accounts in the names of Amerifund, Inc. or its dbas and accounts in the name of MB Designs. A close review of the information obtained, however, shows that none of these accounts were in active use at the time of the Bankruptcy filing and all but one contained no assets on the Petition Date. The Debtors similarly failed to list any of these accounts in the initial SOFA at paragraph 11 which requests information regarding accounts in Debtors' name closed within the one year prior to bankruptcy. A review of the information provided, however, indicates that no Amerifund, Inc. accounts were closed by the Debtors or involuntarily closed by the bank within that time period. The Court concludes that, except as to the MB Designs Accounts, the information was not required and, thus, not material and that, as to all accounts, the failure of the Debtors to include the information was not fraudulent. The Amerifund, Inc. accounts remained in the name of Amerifund, Inc. and all but one was closed and left with a zero balance more than a year prior to bankruptcy. The only corporate account that remained open was inactive most of the year prior to the Petition Date and held 29 cents on the Petition Date. The Court finds no evidence of fraudulent intent in Debtors' determination not to list this long inactive, valueless corporate account. As discussed above, the Court fmds that alter ego principals do not mandate inclusion of Amerifund, Inc. accounts. And even if they did, there is no evidence that Debtors failed to list the Amerifund, Inc. accounts in an attempt to defraud or disadvantage their creditors.
The Court discusses the MB Designs Accounts more thoroughly in Section 3(d) below, but notes here that the Debtor subsequently amended the Schedules in March of 2009, clearly in response to this litigation, to identify these accounts. While this non-disclosure is material, there is, once again, no compelling evidence of fraudulent intent as opposed to honest mistake.
The Plaintiff also questioned the Debtors regarding accounts in the name of their minor children. Again, however, the only evidence is that such accounts were created and closed well outside the year prior to bankruptcy. This non-disclosure is neither required, material, nor fraudulent.
c. Alleged failure to disclose Griffith wage claim and/or guaranty of Griffith debt.
The Debtors disclosed a $20,000 obligation to Gayle Griffith in their Schedule F identified as "2005 Lawsuit." Indeed, they disclosed the obligation in two places as they also disclosed the same obligation in the same amount as held by her attorney, K.R. Rolls. It is true that the exact nature of this obligation was not specified; Schedule F lists it as a litigation claim. The Court, however, finds the lack of detail on this disclosure to be neither material nor fraudulent. The Debtors scheduled Plaintiff as a principal and undisputed creditor of this estate. Thus, she had notice of the bankruptcy and a more than adequate opportunity to protect her rights and interests including any dispute regarding the amount of debt owed.
d. MB Designs.
The Court finds that the Debtors' failure to initially schedule MB Designs and the bank accounts related thereto does not justify a denial of discharge. In connection with the MB Designs Accounts, the evidence establishes that all MB Designs Accounts were inactive on the Petition Date and closed prior to the Petition Date. The failure to schedule an inactive bank account with zero or negative balances by these unrepresented chapter 7 debtors does not justify a denial of discharge. Having said this however, the SOFA required this information at paragraph 11. Thus, this non-disclosure was material. The evidence fails to establish, however, that the non-disclosure was fraudulent.
Ms. Gedanken testified persuasively that MB Designs was not an actively operating business at the time of the bankruptcy. Her testimony was that the enterprise consisted entirely of a single assignment where she obtained patio furniture for a neighbor. There is no evidence that the business had any assets, including receivables, or any activity at any time after 2007. While the SOFA and Schedules required a listing of MB Designs and information related to MB Designs, Ms. Gedanken persuasively testified that the failure to list MB Designs was an oversight and not intentional or fraudulent. The Court finds this testimony credible particularly given the lack of MB Designs business assets and activity. The Debtors also appropriately modified the Schedules and SOFA in relation to MB Designs. Thus, the failure to list MB Designs and related accounts in the initial Schedules and SOFA also is not sufficient to justify a denial of discharge.
e. Tangible Personal Property.
Plaintiff suggests that Debtors did not accurately schedule tangible personal property and, thus, concealed the same. The Court finds no evidence supporting this contention.
*Failure to disclose Amerifund, Inc. tangible assets and their proceeds.
The Debtors scheduled $2,500 of "office equipment and supplies." While there is no evidence specifically identifying these assets, Mr. Gedanken testified that he liquidated Amerifund, Inc. tangible assets in 2007 and thereafter retained the proceeds and the remaining assets for himself. Given the many months between liquidation of these assets and the Petition Date, and given the nature of these assets, the Court finds believable the suggestion that such assets, if any, have little, if any, value and that if included in this category the value given is reasonable. In particular, while the Plaintiff elicited testimony regarding the identity of such assets, there was no expert testimony as to value and the testimony provided indicated that the assets consisted exclusively of used desks, work stations, computers, computer monitors, and a 20 year old telephone system that the Debtor bought on EBay.
*Alleged failure to disclose an Escalade.
Plaintiff also suggests that Debtors may have owned an expensive automobile not listed on the schedules. The Debtors, however, dispute the allegation that they owned, leased, or ever drove a black Escalade as suggested by Plaintiff. Instead, the evidence establishes that the Debtors drove a black Explorer which was scheduled. Similarly, while the Debtors previously owned a Denali, the testimony indicates that the Denali was used as a trade-in on a GMC Envoy. The GMC Envoy is scheduled.
*Failure to include all dbas of Amerifund, Inc.
The Debtors properly scheduled "Amerifund dba" as a name under which Mr. Gedanken personally did business. The Debtors also showed Amerifund, Inc., at paragraph 18 of the SOFA. The Schedules and SOFA do not contain the names of other dbas utilized solely by Amerifund, Inc. The Debtor's explanation, which the Court finds credible, is that the Debtors did not personally operate a business under these names and did not believe that it was necessary to schedule the dbas used solely by Amerifund, Inc. The Court finds it unnecessary to determine whether these names were properly included as the Court finds the omission, if in fact it was an omission, to be neither intentional, fraudulent, nor material. First, by properly identifying the corporation itself, the Debtor provided the information necessary to obtain information regarding the corporation and its assets. Such investigation would have corroborated the SOFA which stated that Amerifund, Inc. ceased doing business under any name more than 12 months prior to the bankruptcy filing. Second, there is no evidence that Debtor or Amerifund, Inc. actively utilized these names in the year prior to the bankruptcy filing, that Amerifund, Inc. had bank accounts with assets held solely in these dba names, or that any personal or real property assets of any type were ever held solely in the name of these dbas. While the Debtor is responsible for providing information that qualitatively allows creditors and the trustee to identify assets, an omission of a corporate dba where there is no evidence that inclusion of the corporate dba would allow creditors of the individual owner of corporate stock to indentify any assets is not material. Further, the evidence is compelling that Debtors did not intentionally or fraudulently exclude these assets.
f. Failure to disclosure control person liability.
The Plaintiff also suggests that Debtors' failure to list certain control person employee tax withholding liability of Mr. Gedanken is also a failure justifying a denial of discharge. The Court disagrees. Mr. Gedanken, a layperson, testified convincingly that he did not believe he had any personal liability for Amerifund, Inc. employee withholdings that remained unpaid (and he convincingly claimed ignorance that such amounts remain unpaid). The Court is less certain. Mr. Gedanken was clearly not only a control person for Amerifund, Inc., he was the only control person as he was the 100% shareholder and the only officer and director. Ms. Reyes testified that Amerifund, Inc. did not appropriately withhold taxes. To the extent there were other salaried employees, they, too, may have such claims.
The Code, however, provides an otherwise adequate remedy in connection with such a claim. 11 U.S.C. § 523(a)(3) provides that a creditor's claim is not discharged if it is neither listed nor scheduled in time to permit an otherwise meritorious objection to discharge under section 523(a)(2), (4), or (6). In short, if Mr. Gedanken failed to schedule such creditors, and, if they have otherwise non-dischargeable claims, then these claims are not discharged in this bankruptcy case, and Mr. Gedanken may remain liable for the same. Where the Code provides a remedy to these creditors, however, it is unnecessary and inappropriate for the Court to deny discharge for all other creditors who are not harmed in any respect by Mr. Gedanken's failure in this regard.
And again, the evidence establishes that Debtors failed to list such creditors as a result of mistake - not fraud.
4. 11 U.S.C. § 727(a)(2)(A) Claims.
Section 727(a)(2)(A) provides that the court shall grant the debtor a discharge, unless:
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed-
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition;...
The burden of proof is on the objecting party. Fed. R Bankr. P. 4005. The preponderance of the evidence standard applies. Grogan v. Garner, 498 U.S. at 287; In re Cox, 41 F.3d at 1297. Actual intent to hinder, delay or defraud creditors must be shown - constructive fraud may not serve as basis for denial of discharge. Devers, 759 F.2d at 753-54. The necessary fraudulent intent, however, may be established by circumstantial evidence or by inferences drawn from course of conduct. In re Woodfield, 978 F.2d 516, 518 (9th Cir. 1992); Devers, 759 F.2d at 753-54.
As noted above, it was unclear whether Plaintiff sought a denial of discharge based on section 727(a)(2) in the Complaint. Given the Motion to Amend and reference to section 727(a)(2) in Closing Argument, however, and in an abundance of caution, the Court evaluated claims under this section. For the reasons discussed in detail above, however, the Court determines that an objection to discharge, if in fact based on this section, would fail. In short, there is no evidence that Debtor made any estate assets unavailable to his creditors during either of the relevant time periods. In particular, Debtors' bank records, the only relevant evidence before the Court indicate no unusual activity and, indeed, evidence only Debtors' precarious financial state.
CONCLUSION
For the reasons discussed above, the Court concludes that Plaintiff fails to meet her burden of proof and that neither a denial of discharge nor a determination that her claim is not dischargeable is appropriate. The Court will issue a judgment consistent with this Memorandum Decision promptly hereafter.
Notwithstanding the above, the Complaint contains allegations that could be construed as assertions of fraud in obtaining the Loan, the Plaintiff discussed fraud in her trial brief and Closing Argument, and the Plaintiff and Defendants introduced evidence relevant to such claims at trial. Further, prior to trial Plaintiff filed her Request for Leave of Court to Amend Pleadings According to Proof [at the time of trial.] ("Request for Leave to Amend") Dkt. No. 148. Thus, the Court concludes that section 523(a)(2) issues must be considered by the Court as they were tried with the implied consent of the Defendants. See Fed. R. Civ. P. 15(b)(2) and Rule 7015.
The Court also concludes that Plaintiffs claim rises only under section 523(a)(2)(A) as there is no evidence that Mr. Gedanken provided Plaintiff with a financial statement of any type.