Opinion
Case No. 08-30031-svk, Adv. Proc. No. 09-2072.
February 3, 2010
MEMORANDUM DECISION
The Plaintiff, GD Deal Holdings, LLC ("GDD") filed a Complaint objecting to the discharge and dischargeability of a debt owed by Rohit and Heidi Sharma. GDD owned a number of gas stations in Kentucky and Tennessee that it leased to Clark Retail Enterprises, Inc. ("Clark"). Clark filed a Chapter 11 bankruptcy in Chicago in 2003, and Clark's assets, including the GDD leases, were put up for sale. Rohit Sharma was part of a group that purchased the assets and assumed the leases out of the Clark bankruptcy. Other members of the group included Ramesh Kapur and Dr. Bhupinder Saini. Each of these individuals brought something different to the table: Rohit Sharma successfully owned, leased out and/or operated some 27 gas stations in the Midwest; Ramesh Kapur had valuable financing connections and the ability to obtain letters of credit and loans; and Dr. Saini was the "money man," expected to infuse up to $6 million into the operation. The Clark Bankruptcy Court approved the sale in August 2003, and Rohit Sharma's operation, which had previously been located only in Illinois and Wisconsin, suddenly increased by 47 stores in Tennessee and Kentucky. Mr. Sharma's administrative staff grew from 9 to 30, and gas station employees ballooned from 100 to 1,100.
The former Clark station leases were originally assigned to Baker Energy, Inc. ("Baker"). By a Guaranty dated July 13, 2003, the principals of Baker, including Rohit Sharma, personally guaranteed Baker's obligations under the GDD leases. Two additional entities, also owned by Sharma, Kapur and Saini, were involved in the operation of the former Clark stations: Crown Oil and Petroleum, LLC ("Crown"), and SKS Ventures, LLC.
The testimony of Shivender Sofat was that the initial plan was for Crown to operate the Kentucky stores, SKS to operate the Illinois stores, and Baker to supply the stores with gas. (Sofat Dep. 32-33 (July 14, 2008)). Although the parties made some attempts to carry out this plan, it seems that Baker operated most of the stores until the signage could be changed (Def. Ex. 54), which either never happened or happened too late to allow Crown and SKS to achieve any level of success.
Almost immediately, a laundry list of problems developed with the new locations: signs had to be changed, mandatory licenses were delayed, local governments insisted on improvements to some of the properties, and current operators were unwilling to work with the new owners. The most significant issue, however, was the fact that although Ramesh Kapur obtained the necessary letters of credit, Dr. Sanai refused to contribute the money he had promised. Rohit Sharma was then forced to sell and refinance assets in order to try to keep the operation afloat. For example, the Sharmas transferred six gas stations to a new entity: Omega Financials, LLC. Omega was owned by Rohit Sharma, Ramesh Kapur and Tony Jovanovich of Community Bank and Trust, a lender with which Ramesh Kapur had a strong relationship. Rohit Sharma testified that by paying off land contracts with 12% interest rates on these stations, and refinancing them at a 4% rate with Community Bank, he could save money on the interest payments and obtain cash to infuse into the Clark Stations. Despite these efforts, the empire and the original investor group began to unravel, with Rohit Sharma on one side and Ramesh Kapur and Dr. Sainai on the other.
According to the testimony, Tony Jovanovich was the Chairman of the Board of Community Bank and Trust, and he signed a loan document as the Bank's "CEO". (Tr. 113, 128, 135, 235; Pl. Ex 92).
Defense Exhibits 34 and 52 show that within two years, by July 2005, the stations pledged by Omega Financials were all being foreclosed and/or sold for the benefit of Community Bank, and the sales prices were about half of their appraised values.
Rohit Sharma testified and Defense Exhibit 54 confirms that in October 2004, Baker attempted to sublease most of the Clark stores to Crown. The transition was to be effective when the signage on the stations was changed. For reasons that were not explained, on December 13, 2004, Ramesh Kapur and Dr. Sanai ousted Rohit Sharma from Crown and SKS. ( See Def. Ex. 41-42).
The troubles culminated with litigation in early January 2005, when Crown and GDD sued Baker in separate lawsuits in Federal District Court in the Western District of Kentucky. Matters brightened when all of the parties to both suits signed a comprehensive agreed preliminary injunction on January 25, 2005, under which Crown would assume all of the obligations under the leases with GDD, and "assume operational responsibility for the subject stations as of the date hereof." (Def. Ex. 55). Under this agreement, the parties agreed to work together to implement the transition of the stores to Crown and the resolution of alleged defaults on the leases. However, the agreed injunction stated that Crown's assumption of the liability did not release the guarantors, nor relieve Baker of its liability. Rather than rescuing the operation, the terms of the agreed injunction became irrelevant when, less than ten days later, on February 4, 2005, Crown filed a Chapter 11 petition in the Bankruptcy Court for the Eastern District of Wisconsin. Baker soon followed, filing its Chapter 11 petition on February 15, 2005 in Tennessee; on February 28, 2005, T Mart, Inc., another of Rohit Sharma's companies, filed bankruptcy in Illinois. None of these bankruptcies resulted in successful reorganizations or the repayment of the GDD debt, and, on May 11, 2007, GDD obtained a judgment against Rohit Sharma in an amount in excess of $10,000,000. (Compl. ¶ 25).
In December 2005, Rohit Sharma, acting with the power of attorney for his father, V.P. Sharma (Pl. Ex. 74), and Dennis House, who had worked with Rohit at T Mart, formed a new venture, Lotus Business Group, LLC ("Lotus"), to develop and operate gas stations and to set up and operate a water bottling plant. (Def. Ex. 1). Notably absent from the Lotus ownership roll, Rohit Sharma testified that his father, who lives in India, wanted to help Rohit and his family make a fresh start after the Baker Energy and T-Mart bankruptcies. Rohit conceived the idea of buying some of the stations out of the bankruptcies and foreclosures. His father agreed to sell some property he owned in India to fund Lotus and provide his son with a salary or other form of compensation in exchange for Rohit acting as a business consultant. Dennis House became involved because he had connections in the gas business and trade references that V.P. Sharma lacked. At some point, V.P. Sharma's share of the business was transferred to Pankaj Jolly, another resident of India and a friend of Rohit Sharma's.
The operating agreement establishes that when the LLC was formed, V.P. Sharma owned 75% and Dennis House owned 25% of Lotus.
Rohit Sharma also was the attorney-in-fact for Pankaj Jolly, under a power of attorney dated May 12, 2006. (Pl. Ex. 75).
By Quit Claim Deed recorded on April 10, 2006 in the land records for Washington County, Wisconsin, Rohit and Heidi Sharma transferred their personal residence to Lotus, although they continued to live there. This transaction was extensively reviewed at the trial. Rohit Sharma testified that he was three months behind on the mortgage on the residence, and the mortgage creditor was threatening to foreclose. Heidi Sharma was pregnant and expecting a child on July 15, 2006. During this same time period, Dennis House's son had moved to Wisconsin and was actively involved in the Lotus business. Rohit testified that he approached Dennis House and the other owner of Lotus (V.P. Sharma) with the idea that Lotus would buy the house by assuming all of the mortgages and taxes, and allow the Sharmas to live there rent free until August 2006, after the baby was born. Then Dennis House could either move from Iowa to Wisconsin, joining his son and running Lotus from Wisconsin, or sell the house. This was agreed upon, and the deed was recorded. (Pl. Ex. 23; Compl. Ex. R).
On May 24, 2006, Community Bank loaned Lotus $1,650,000. Banker David LaDuke testified that the proceeds of the loan were used to enable Lotus to purchase two stations from Travelers Mart and three lots from T Mart, pay some miscellaneous taxes and fees, and fund the $700,000 payoff on two mortgage loans on the residence Lotus purchased from the Sharmas. Mr. LaDuke confirmed that the house was in Lotus' name, although the Sharmas were living there. However, the planned transition of the residence to Dennis House never occurred; he suffered a massive heart attack in July 2006, was hospitalized for a month, and canceled all plans to move to Wisconsin. During this period, Rohit Sharma became more involved in Lotus, in order to assist Dennis House. After he recovered, the relationship between Rohit Sharma, Dennis House and Lotus eventually waned; by 2007, Dennis House was the sole member of Lotus.
Dennis House signed the loan documents and a personal guaranty; Pankaj Jolly, by his attorney-in-fact Rohit Sharma, also signed the Note, Security Agreements and Guaranty. (Pl. Ex. 76; 80).
On September 27, 2007, Sahara Investments, LLC entered the picture. Heidi Sharma is the 100% owner and managing member of Sahara. According to its Operating Agreement (Pl. Ex. 52), Sahara is in the business of buying and selling gas stations, convenience stores and other properties, and performing consulting services for financial institutions. Sahara provided Rohit and Heidi Sharma with all of their income in the period from October 2007 until September 2008. Rohit Sharma, an employee of Sahara, would locate buyers and sellers of gas stations and convenience stores, especially stores that had been foreclosed or involved in bankruptcy. He testified that he was often more successful than traditional real estate brokers in finding buyers for gas stations and convenience stores and facilitating their sales. The bankers from Community Bank confirmed that Rohit Sharma, through Sahara Investments, had assisted in brokering deals for several gas stations and convenience stores repossessed by the Bank.
In October 2007, Rohit Sharma, as an employee of Sahara, facilitated a transaction involving convenience stores in Marion and Cedar Rapids, Iowa. Lotus Business Group, LLC, now solely owned by Dennis House, was also involved. The stores were transferred to an entity called Market Express, LLC, a "pass-through" entity owned by Dennis House, and then sold to third party buyers. Rohit Sharma testified that Dennis House demanded part of his money up front in order to get the deal done, and Mr. Sharma and the other investors capitulated, with Sahara set to make almost $200,000 from the transaction. Closing the deal proved problematic, and included several draft promissory notes to enhance the "commission" to Sahara and the other investors. Apparently nothing was ever paid on these notes. In the end, in order to get the deal done, Sahara was forced to cancel the promissory notes and accept a drastically reduced commission.
Prior to the Market Express transaction, Rohit Sharma had intervened on behalf of Dennis House with Community Bank in order to obtain a $35,000 letter of credit for Lotus. Lotus needed the letter of credit for its supplier, Lakeside Oil Company, and, with Rohit Sharma's recommendation, the Bank made a $35,000 unsecured loan to Lotus to purchase the letter of credit. Eventually, the Market Express deal closed, and Sahara received $124,000 to distribute to the participants, including $35,000 that was due to be paid to Lotus. But Lotus had defaulted on its debt to Community Bank, and the Bank advised Rohit Sharma that Lakeside Oil was about to call the letter of credit. Fearful of losing his consulting relationship with the Bank, on October 26, 2007, Rohit Sharma took the $35,000 in Market Express proceeds that were due to be paid to Lotus, and purchased a certificate of deposit (the "CD") in the name of his minor child. He then pledged the CD as collateral for the Lotus loan related to the letter of credit. A few days later, Lakeside Oil called the letter of credit, and the Bank applied the CD to Lotus' obligation. When asked why he did not purchase the CD in his own name, Rohit Sharma testified that he did not have an account in his own name. He stated that he did not want to open an account in his name, because the money was not his; it belonged to Lotus. He could not purchase the CD in Lotus' name because he was not a member of Lotus, and he did not trust Dennis House to use the money to pay Community Bank, because of past history. He used his child's name for the CD at the advice of Tony Jovanovich, the Chairman of the Board of the Bank, although Rohit Sharma admitted that he willingly acceded to the idea, because he was desperate to maintain his consulting relationship with the Bank, from which he derived most of his current income.
Dennis House also signed a personal guaranty for this letter of credit. (Trial Tr. 200).
Heidi Sharma's testimony confirmed that Rohit Sharma had not had an account in his own name for many years. (Trial Tr. 29).
Mr. Sharma testified that he facilitated a loan for Lotus and Dennis House with Amerimerchant. Lotus had defaulted, causing Rohit Sharma to lose the opportunity to obtain financing from Amerimerchant, which he believed was a valuable relationship capable of generating financing for 10 or 20 deals. (Trial Tr. 199-201).
By deed dated November 13, 2007, which was recorded February 14, 2008, Lotus transferred the residence to Community Bank. The Sharmas continued to live there. By deed recorded April 28, 2008, the Bank transferred the residence to Heidi Sharma, secured by a mortgage in the amount of $1,180,000. The closing statement shows that the purchase price of the residence was $821,500, and $250,000 was for the purchase of water equipment. Rohit Sharma testified that the water equipment had formerly been owned by one of his companies, Zodiac Beverages, LLC, who transferred it to Lotus, who pledged it to Community Bank. The Bank had repossessed the water equipment from Lotus, but Rohit Sharma had located a buyer, and the idea was that the Bank would sell the equipment to Heidi Sharma, who would sell it at a significant profit to Rohit's buyer. However, the potential buyer backed out, the sale never materialized and the equipment was returned to the Bank. As of October 2009, Rohit Sharma testified that the water equipment had no more than scrap value, and the Bank was conducting a foreclosure sale of the residence in November 2009.
The Sharmas apparently made payments on the mortgage until September 2008. ( See Cmty. Bank's Mot. for Relief from Stay ¶ 3).
On September 16, 2008, with GDD set to execute on their personal property to satisfy its judgment, Rohit and Heidi Sharma filed a Chapter 7 petition in this Court. On December 26, 2008, Community Bank and Trust filed a Motion for Relief from Stay seeking to foreclose on the residence owned by Heidi Sharma, to realize on the water equipment that had been pledged as part of the April 2008 loan, and to realize on vehicles that had been pledged by Rohit Sharma. An Order granting relief from stay was entered on January 28, 2009. After an extension of the December 30, 2008 deadline to object to the Debtors' discharge, on February 27, 2009, GDD filed the Complaint instituting this adversary proceeding, challenging both the Debtors' discharge and the dischargeability of the Debtors' debt to GDD. Trial was held on October 1 and 2, 2009. Rohit and Heidi Sharma testified, along with three officers of Community Bank: Marianne Portschy, David LaDuke and Paul Kuplic. Over 150 exhibits were received into evidence. The parties stipulated that depositions of Dennis House, Shivender Sofat and Alok Sharma could be used in lieu of their live testimony. Post-trial briefs were filed. After reviewing the evidence and considering the arguments of counsel, this Memorandum Decision constitutes the Court's findings of fact and conclusions of law.
At the close of the trial, the parties requested the opportunity to file post-trial briefs to "tie this all together." Neither brief was particularly helpful. At one point, GDD's brief inexplicably began to describe what the evidence "will show" rather what it did show. Numerous grammatical errors also made following GDD's argument difficult. For example: "The evidence shows, however, that Rohit Sharma maintain [sic] any beneficial or equitable interest in these companies as he was in control of the assets in the business activities." (GDD Post-Trial Mem. 5). As for the Debtors, their post-trial brief is little more than a 30-page cry for equity on the ground that they have "nothing," yet GDD insists on trying to collect its $10 million judgment. The Debtors should note the 15-page brief limit in Local Rule 9004 and should consider that if twice that many pages are required to explain the Debtors' various business entities, transactions and transfers, GDD's position may not be as "outrageous" as the Debtors claim. (Debtors' Post-Trial Mem. 29).
I. First Claim for Relief: Nondischargeability under § 523(a)(2)(A) and (B)
GDD claims that Rohit Sharma induced GDD to enter into the lease of the former Clark stations by representing and warranting that his personal net worth was $7,251, 811 in a Declaration filed in the Clark bankruptcy. (Compl. ¶ 128). GDD alleges that Rohit Sharma knew that the representation about his net worth was not accurate, and that Sharma made the representation with the intent to deceive GDD. (Compl. ¶ 129). GDD concludes that GDD, relying on the false and fraudulent statements of Rohit Sharma, entered into the lease and guaranty transaction. (Compl. ¶ 130). As a result, according to GDD, Rohit Sharma's debt to GDD is nondischargable under both subsections (A) and (B) of § 523(a)(2) of the Bankruptcy Code. However, these two subsections of § 523 are "mutually exclusive." See Jeffrey M. Goldberg Assoc. v. Holstein (In re Holstein), 272 B.R. 463, 480 (Bankr. N.D. Ill. 2001).
Section 523(a)(2)(A) provides that a debt is not dischargeable to the extent based on "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." (emphasis supplied). Section 523(a)(2)(A) does not apply in this case, because the alleged false representations relate to Rohit Sharma's net worth, i.e., his financial condition. Although there is some disagreement among the courts as to whether to give a broad or narrow construction to the term "financial condition," no court has held that a debtor's representation of his net worth is not a statement of his financial condition. See Schneiderman v. Bogdanovich (In re Bogdanovich), 292 F.3d 104 (2d Cir. 2002) (collecting cases); see also Cadwell v. Joelson (In re Joelson), 427 F.3d 700 (10th Cir. 2005). Since the misrepresentation at issue is indisputably a written statement of the debtor's financial condition, GDD's claim that Rohit Sharma's debt is nondischargeable under 11 U.S.C. § 523(a)(2)(A) borders on frivolous.
Section 523(a)(2)(B) states that a debt is not dischargeable if based on a written statement:
• that is materially false
• respecting the debtor's or an insider's financial condition
• on which the creditor reasonably relied; and
• that the debtor caused to be made or published with the intent to deceive.
GDD has the burden of proving each and every element of this claim. Goldberg Securities, Inc. v. Scarlata (In re Scarlata), 979 F.2d 521, 524 (7th Cir. 1992).
In order to prove these allegations at trial, GDD relied exclusively on the Declaration filed July 28, 2003 (Pl. Ex. 128) and the testimony of Rohit Sharma. GDD did not call any witnesses from GDD to substantiate its claims. The Court notes that Plaintiff's Exhibit 128 is incomplete, and does not contain the detailed Exhibits that were apparently attached to the original document filed with the Clark Bankruptcy Court. The Declaration, made on behalf of Baker, and signed under penalty of perjury by Rohit Sharma, states that, in support of its $2,594,000 bid for the Clark stations and leases, Baker has submitted the following documents regarding its financial position, and that of its principals: (1) Bidder Qualification Worksheet and Certifications for Baker, with a balance sheet and income statement for Baker (Exhibit A); (2) Consolidated Personal Financials of Rohit Sharma, Ramesh Sharma (sic), Dr. Bhupinder Saini, Surinder Multani and Travelers Mart, LLC (Exhibit B); (3) Personal Financial Statement of Rohit Sharma (Exhibit C); (4) Individual Financial Statement of Dr. Bhupinder Saini (Exhibit D); (5) Biographical and Financial Disclosure Statement of Ramesh Kapur (Exhibit E); (6) Balance Sheet and Resume of Surinder Multani (Exhibit F); and (7) Details of Real Estate Owned by Travellers (sic) Mart, LLC (Exhibit G). The Declaration introduced as Plaintiff's Exhibit 128 only contains Exhibits A, B and C; absent are the detailed financial statements submitted by Dr. Saini, Ramesh Kapur and Surinder Multani.
However, Exhibit B is a consolidated personal financial statement that contains summary information about the other investors' finances. Therefore, even in its incomplete state, the Declaration confirms Rohit Sharma's testimony that the other principals of Baker Energy had the stronger net worth, and that he was bringing operational experience, rather than a big balance sheet, to the deal. Exhibit B shows that Dr. Saini's net worth is over $12.6 million, including $3.5 million cash on hand and in banks and $7,500,000 of real estate, with only $200,000 in real estate mortgages. Ramesh Kapur's net worth is $11,836,000, with liabilities against real estate assets totaling only $450,000, and Surinder Multani's net worth is over $15 million. Rohit Sharma's net worth, at $7,281,000 is the weakest of all, and reveals real estate holdings of $5.4 million with mortgages on real estate of $3.2 million.
The largest share of Rohit's Sharma's net worth is "other assets" of $4.8 million, consisting of his "investment in Baker Energy and T Mart Inc." But at the trial, GDD did not question the $4.8 million valuation of Baker and T Mart, focusing instead on the real estate holdings listed on Rohit Sharma's financial statement, and the fact that, within a few years, all the listed real estate was gone. However, Rohit Sharma had a credible explanation for the disposition of each parcel. He testified that all of the real property listed in the financial statement was owned by him at the time of the Declaration, but later the property was either transferred or foreclosed. One of the properties was sold in 2004 for $1.8 million; of this amount, Rohit Sharma received $400,000 that he "put in the purchase of the Clark locations." (Trial Tr. 233). Six stations were transferred to Omega, the original loans were refinanced at a substantially reduced interest rate, and the money was injected into the Clark stations. (Trial Tr. 236). Unfortunately, Omega failed to make the payments on the new loans, Community Bank foreclosed and sold the stations, and Rohit lost "everything." There was no contrary testimony from GDD or anyone else; in fact Marianne Portschy from Community Bank corroborated Rohit Sharma's testimony concerning the refinancing and eventual Bank sale of the Omega stations. (Trial Tr. 132). Ms. Portshcy also confirmed that the foreclosure and forced sale prices of the gas stations were significantly less than their appraised values. (Trial Tr. 132-33). In its post-trial brief, GDD commented that Rohit Sharma transferred six stations to Omega between the date of the financial statement and the date that the Order approving the sale was signed by the Clark Bankruptcy Court. But at trial Rohit Sharma testified, without contradiction, that as of the date he presented the financial statement he owned the stations and that the reason for the transfer was not to deceive or defraud anyone, but rather to refinance the stations at a better interest rate, and obtain some necessary funds to put into the Clark locations.
The testimony and documents established that the six properties were being purchased under land contracts with interest rates of 12%, and the refinance by Omega was at a 4% rate. (Trial Tr. 236).
In short, GDD failed to carry its burden of proof that the financial statement Rohit Sharma submitted in connection with the Declaration was false or given by Rohit Sharma with an intent to deceive GDD. Even assuming that the financial statement was false, GDD offered no proof whatsoever that it reasonably relied on Rohit Sharma's financial statement. GDD appears to argue that GDD's Objection to Clark's proposed sale and assignment to Baker proves this element. However, a review of GDD's Exhibit 127, the "Limited Objection," does not support the claim. In this Objection, GDD is more concerned with the terms of the Guaranty and the amount of the cure price than the financial condition of Rohit Sharma. Without the testimony of someone from GDD, Rohit Sharma's testimony and the Exhibits attached to the Declaration show that GDD relied on the financial statements of Dr. Saini and Ramesh Kapur, the "strong" principals of Baker, rather than the net worth of Rohit Sharma. Since GDD has not carried its burden of proof that the elements of § 523(a)(2)(B) are met in this case, GDD cannot succeed on its nondischargeability claim, and the First Claim for Relief is dismissed.
II. Second Claim for Relief: Failure to keep Books and Records under § 727(a)(3)
Section 727(a)(3) of the Bankruptcy Code provides that the debtor shall be granted a discharge unless the debtor has "concealed, destroyed, mutilated, falsified or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all the circumstances of the case." The standards for applying this provision were aptly described in In re Goldstein:
In adjudicating a § 727(a)(3) proceeding, the law will be applied in favor of the Debtor. This court therefore recognizes that public policy requires that objections to discharge not be easily granted. Despite these considerations, the fundamental purpose of § 727(a)(3) continues to be to insure that the trustee and the creditors receive adequate information to enable them to trace the debtor's financial history, to ascertain the debtor's financial condition, and to reconstruct the debtor's business transactions.
123 B.R. 514, 522 (Bankr. E.D. Pa. 1991) (internal citations and quotations omitted). And, in Barristers Abstract Corp. v. Caulfield (In re Caulfield), the court stated that the sufficiency of the debtor's records is a matter of the bankruptcy court's discretion: "It is a question in each instance of reasonableness in the particular circumstance." 192 B.R. 808, 823 (Bankr. E.D.N.Y. 1996) (citing In re Underhill, 82 F.2d 258, 259 (2d Cir. 1936), cert. denied, 299 U.S. 546 (1936)). The Caulfield court went on to say:
The inquiry focuses on whether the debtor's present financial condition and the debtor's recent business transactions for a reasonable period in the past can be ascertained with substantial completeness and accuracy. There should be some nexus between the Debtor's failure to keep records, destruction or loss of records and the creditor's ability to ascertain the debtor's financial condition.
Id. (internal citations omitted).
In its Complaint, GDD alleges that Rohit Sharma failed to keep and preserve books of account or records regarding:
the Sterling Store, Soundspeed, Supreme Limousine, the Indiana Stores, T. Q. Salons, Inc., the Lotus Business Locations, the 1984 S. Highland Store, the Sharma — Lotus Transactions, the Omega Loan, transactions associated with the Omega Stores, R S Petroleum, the Sahara Stores, the Burlington Store, and Travelers Mart, LLC from which his financial condition and business transactions might be ascertained.
(Compl. ¶ 135).
This broad accusation, however, is overreaching. Some of these entities and locations were not mentioned at the trial; others were too remote to constitute recent business transactions. It is not reasonable to expect the Debtors to maintain voluminous documents for entities that were bankrupt, had no assets and provided no income to the Debtors for years before the Debtors' bankruptcy petition. For example, Heidi Sharma testified that T.Q. Salons (a hair salon that she owned) went out of business at least three years ago. (Trial Tr. 55). She closed the bank accounts and turned the business over to the landlord. (Trial Tr. 12, 50). She offered to give the Bank a release to enable GDD to see the bank account records, but GDD apparently declined. (Trial Tr. 54). Similarly, the assets of Rohit Sharma's entity, Supreme Limousine, were repossessed and sold by Community Bank on December 2, 2005. (Def. Ex. 40; Trial Tr. 169). To comply with GDD's discovery requests, Rohit Sharma obtained documents from the Community Bank showing the purchase price, identity of the buyer, and other details of the Supreme Limousine repossession and sale. (Def. Ex. 23, 40). In April 2006, Travelers Mart, LLC sold three stores in Tennessee to Sartaj's Illinois Nine, LLC, an entity not connected with Rohit Sharma. (Def. Ex. 14). Community Bank financed the purchase (Trial Tr. 136), and Rohit Sharma testified that the Bank has all of the records related to the transaction. In fact, Community Bank witnesses confirmed that the Bank maintained "stacks and stacks" of "voluminous bank records relating to Traveler's Mart, LLC, Omega and other entities." (Trial Tr. 128). Both Baker Energy and T Mart filed bankruptcy petitions, and Rohit Sharma testified that all of the records, including the computer server, were given to the bankruptcy trustee. (Trial Tr. vol. 2, 18). Notably, GDD did not offer any evidence to the contrary.
This would include Soundspeed. There was no testimony about R S Petroleum, and Rohit Sharma's failure to keep documents regarding individual stores that were foreclosed and sold 3 years before bankruptcy is likewise irrelevant to a determination of his financial condition.
An offer to produce documents that the creditor declines is relevant in determining whether the debtor should be denied a discharge for failure to maintain documents. See Alleman v. Kitson (In re Kitson), 2008 U.S. Dist. LEXIS 37530 (C.D. Ill. May 8, 2008), aff'd 341 Fed. Appx. 234 (7th Cir. 2009) (debtor authorized his accountant to release records to creditor, but creditor declined).
With respect to Omega Financials, LLC, Rohit Sharma testified credibly that in 2003, six properties that he owned were transferred to Omega (owned by Rohit, Ramesh Kapur, and at least for a short time, Tony Jovanovich, the Chairman of the Board of Community Bank). As stated above, the purpose of the transfer was to refinance the land contracts on the six stations at a much more favorable interest rate, and to invest the additional loan proceeds into the Clark stations. Documents were produced showing that by July 2005, Community Bank had instituted foreclosure on four of the properties, and two more were subject to sale contracts. (Def. Ex. 34, 52). According to Defense Exhibit 52, the Bank had been receiving rent directly from the Omega Financial tenants in Iowa and Illinois for a while, but when T Mart declared Chapter 11 bankruptcy, the payments stopped and the Bank commenced foreclosure. By July 2005, Omega was failing and all of the proceeds would have gone to Community Bank, with a shortfall. (Trial Tr. 132). When a debtor has not received any personal income from a failing corporation that is shut down a year or more prior to bankruptcy, the debtor is not responsible for maintaining the business records of the corporation. Alleman v. Kitson (In re Kitson), 2008 U.S. Dist. LEXIS 37530 (C.D. Ill. May 8, 2008), aff'd 341 Fed. Appx. 234 (7th Cir. 2009) (financial status of corporation which had no assets at the time of the sole shareholder's personal bankruptcy had no bearing on bankruptcy estate, and corporate records were not material). The Court concludes that sufficient documents were produced by Rohit Sharma concerning the Omega Financials, LLC enterprise.
Similarly, the documents produced regarding Lotus Business Group, an entity in which Rohit Sharma did not have any ownership interest, satisfy the requirements of § 727(a)(3). Rohit Sharma testified that Lotus Business Group was formed to enable him to get back on his feet and to provide Dennis House with some retirement security; however Rohit denied that he had any ownership interest in Lotus. (Trial Tr. 177). David LaDuke from Community Bank confirmed that Rohit Sharma never had an interest in Lotus. (Trial Tr. 140, 149). GDD produced innuendo, not evidence, to counter this.
Indeed, once the Bank realized that Rohit and Heidi Sharma had no ownership interest in Lotus all personal guaranties were released. (Trial Tr. 149).
It is true that Rohit and Lotus had an intertwined relationship. There is no dispute that when Dennis House had a heart attack, Rohit Sharma became more involved in the operations of Lotus to help the business (which was providing his income) and his friend. Likewise, Lotus was there for him when Rohit and his pregnant wife were facing foreclosure of their home. Significant to this peculiar relationship is the fact that Rohit Sharma produced documents concerning the transfer of the residence to Lotus, and Lotus' transfer of the residence to Community Bank. The transfer was not concealed, but was recorded in the public land records. Although GDD painted the transfer of the residence to Lotus as evidence of Rohit Sharma's secret interest in Lotus, Rohit Sharma testified credibly that the transfer was conceived in the first instance as a means for keeping his pregnant wife in her house for four months. When the four months passed, Dennis House had a heart attack, and was not in a position to move to Wisconsin. The house was listed for sale, but never sold. (Trial Tr. 188). In 2007, Lotus transferred the house to Community Bank, and in April 2008, Community Bank transferred the house to Heidi Sharma. All of the transfers were evidenced by duly recorded deeds and accompanied by closing statements signed by all of the parties. It is not clear what additional records GDD claims that Rohit Sharma reasonably should have maintained regarding this entity or these transactions. Because Rohit Sharma never had an interest in Lotus Business Group, and since the transfers of the residence to and from Lotus were documented and deeds were recorded in the public land records, this Court concludes that failure to maintain additional documents for Lotus was not relevant to ascertaining the financial condition of Rohit Sharma. See Kitson, 2008 U.S. Dist. LEXIS 37530, at *35 (because creditor failed to prove that debtor ran internet sales business, creditor failed to prove that debtor was under any obligation to keep records about the business).
Rohit's father V.P. Sharma and friend Pankaj Jolly were both original investors in Lotus, and Rohit Sharma derived his income from Lotus as either an employee or an independent consultant.
This relationship later waned and by Fall of 2007 when the Market Express transaction was closing, the relationship had deteriorated to the point that Rohit Sharma did not trust Dennis House with the $35,000 in proceeds due to Lotus for the Market Express deal. (Trial Tr. 200-204).
In paragraph 136 of the Complaint, GDD alleges that Heidi Sharma failed to keep records of T.Q. Salons and Sahara Investment Group from which her financial condition might be ascertained. This Court has already concluded that records of T.Q. Salons, Inc., a business shuttered three years before bankruptcy, are not relevant to determining the Debtors' financial condition. Sahara Investment Group, however, did provide the Debtors with their income for the year prior to the bankruptcy, and its records are presumably relevant. Heidi Sharma produced her personal tax returns showing income and expenses of Sahara and bank statements for Sahara. (Trial Tr. 16). She also produced Sahara's Operating Agreement. (Def. Ex. 29). She had copies of checks, but not of deposits, and had some difficulty identifying deposits made into the Sahara bank account. (Trial Tr. 16). It was apparent that while the business was in her sole name, Rohit Sharma was the one who was familiar with all of the deals in which Sahara was involved. Heidi Sharma testified that an offer was made to GDD's attorneys for bank releases so that they could get complete bank records, but GDD never requested the releases. (Trial Tr. 54). Rohit Sharma testified that Sahara's business was to find buyers for gas stations that had been foreclosed by the bank. "I'm still in touch and I still know what the business is and I can convince the buyer why that location is better . . . I have been able to produce result to the bank and realtors have not been able to." (Trial Tr. 67). He testified that he normally does not have any records of these "finder's fee" transactions, other than a few emails and a copy of his check. (Trial Tr. 68). Once he finds the buyer, the buyer must deal with the Bank. ( Id.)
As the Court has previously noted, an offer to produce documents that the creditor declines is relevant in determining whether the debtor should be denied a discharge for failure to maintain documents. See Alleman v. Kitson (In re Kitson), 2008 U.S. Dist. LEXIS 37530 (C.D. Ill. May 8, 2008), aff'd 341 Fed. Appx. 234 (7th Cir. 2009) (debtor authorized his accountant to release records to creditor, but creditor declined). The defense pointed out several occasions when GDD was offered documents, but apparently rejected the offer.
Rohit Sharma stated that he was involved in around six properties in 2008 prior to filing bankruptcy.
Marianne Portschy of Community Bank testified that, as an employee of Sahara, Rohit Sharma assisted the Bank in finding buyers, and Sahara was paid a finder's fee for these services. (Trial Tr. 136-37). She confirmed that the Bank maintained records of the various deals that Sahara brokered. Rohit Sharma stated that occasionally, some other individuals participated in locating buyers, and were due commissions from Sahara. (Trial Tr. 69). He testified that these individuals received 1099s from Sahara's accountant based on copies of the checks that were paid to the individuals by Sahara. While he did not produce copies of the 1099s, Rohit Sharma indicated that he had given the accountant's name to GDD's attorneys. One of Sahara's larger deals was the October 2007 Market Express deal. In addition to the bank account records showing the deposit of the Market Express proceeds, Rohit Sharma produced numerous drafts of closing statements, promissory notes, and correspondence with his attorney and Dennis House all related to this one deal. (Pl. Ex. 102-113). He testified with respect to the inception, negotiation and eventual closing of the deal, which the Court found to be credible. (Trial Tr. 203). He plausibly explained how and why the $35,000 that was due to Lotus from the Market Express transaction was instead put into a CD in his son's name and pledged to Community Bank as collateral for Lotus's line of credit. (Trial Tr. 204-206; Trial Tr. vol. 2, 37). The bankers from Community Bank verified the CD transaction and identified the loan documents.
The sole document that Rohit Sharma could not produce was the document canceling the promissory note that had been issued to Sahara as part of the deal. (Trial Tr. vol. 2, 68-69). But, he explained that Dennis House had incited the buyer with tales about how much money Rohit Sharma would be making from the Market Express deal, which led the buyer to renegotiate the deal until Sahara's share was drastically cut and the note was canceled. Rohit Sharma testified credibly that the note was canceled and never paid by the buyer due to the renegotiation of the deal. (Trial Tr. vol. 2, 35). No conflicting evidence was presented at trial and Dennis House's deposition does not support a contrary conclusion; apparently Dennis House has severe memory problems. He testified to having received nothing from the Market Express deal, when in fact Defense Exhibit 56 shows that he received $50,000 as a down payment for the deal.
In short, the Sahara documents produced by Rohit and Heidi Sharma and Community Bank are sufficient to enable the creditors to ascertain the Debtors' financial condition. The Second Claim for Relief is dismissed.
III. Third Claim for Relief: Concealment of Property
In its third claim, GDD alleges that Rohit Sharma concealed property with the intent to hinder, delay or defraud GDD. As evidence, GDD points to a Response to a Request for Production of Documents dated on or about October 4, 2007, in which Rohit Sharma failed to disclose two vehicles and interests in various entities, such as Omega Financials, T.Q. Salons, Inc. and Market Express. GDD did not develop the facts to support this claim at the trial or in its post-trial brief. The facts that were elicited at the trial do not support the claim; for example, Heidi Sharma testified that she owned 100% of T.Q. Salons, Inc., and that the business was surrendered to the landlord at least three years ago. There was no contrary testimony, and GDD did not prove that Rohit Sharma concealed an interest in this business within one year of the petition date. The same holds true for Omega Financials and the other businesses listed in this Count. Rohit Sharma testified credibly with respect to all of the vehicles he and Heidi owned: most of the vehicles were subject to liens and repossessed by Community Bank; others were seized by GDD to satisfy its judgment. The Third Claim for Relief is dismissed.
IV. Fourth Claim for Relief: False Oaths
The fourth claim is that Rohit and Heidi Sharma made false oaths in their bankruptcy schedules. In order to prevail, GDD has the burden to prove: "(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 the intent to defraud; and (5) the statement related to the bankruptcy case in a material way." Kitson, 2008 U.S. Dist. LEXIS 37530, at *31. As in Kitson, GDD relies on statements made or omitted from the Debtors' Schedules to make its case. The first alleged omission was the failure to disclose the transfer of the $35,000 from the Market Express deal to the Certificate of Deposit in the name of the Sharma's minor child. However, Rohit Sharma testified credibly that the $35,000 was not his money; it was received by Sahara for the benefit of Lotus Business Group (Dennis House). Rather than pay it to Dennis House, Rohit caused Sahara to transfer it to a CD in the name of Rohit's son. Rohit Sharma did not waiver in his explanation that the money was not his; therefore he did not put it into his own name. If the $35,000 was not his, he did not have to disclose the transfer in his Schedules.
Similarly, Rohit Sharma did not have to disclose an interest in "Market Express." (Compl. ¶ 143(e)). The testimony was uncontroverted that Market Express was an entity solely owned by Dennis House. (Trial Tr. vol. 2, 34). Likewise, the interests in Travelers Mart, LLC, Omega Financials, Lotus Business Group, and any other entities in which he did not have an interest or which were in bankruptcy two or three years before the petition likewise did not need to be disclosed to pass muster under § 727(a)(4). See Alleman v. Kitson (In re Kitson), 2008 U.S. Dist. LEXIS 37530 (C.D. Ill. May 8, 2008), aff'd 341 Fed. Appx. 234 (7th Cir. 2009) (corporation that was out of business and had no assets at the time of the sole shareholder's personal bankruptcy had no bearing on bankruptcy estate).
GDD accuses the Debtors of failing to disclose the transfers of their residence in their Schedules. They transferred their residence to Lotus by quitclaim deed recorded in April 2006, more than two years before their bankruptcy petition. Lotus transferred the property to Community Bank, and by deed recorded in April 2008, the Bank transferred the residence to Heidi Sharma, secured by a mortgage. The mortgage is disclosed in their Schedules. Part of the mortgage transaction included funds to purchase the Zodiac Beverages water equipment back from the Bank. Although the water equipment itself was not listed, the "Patent for Zodiac Water Bottles" was included and valued at zero, since it is "no longer being used and has no value." And Zodiac Beverages is listed in the Statement of Financial Affairs under businesses in which the debtors formerly held an interest. Rohit Sharma testified that the Bank repossessed the water equipment, and the Bank officers confirmed that. (Trial Tr. 120; Trial Tr. vol. 2, 41-42). Then Rohit Sharma found a buyer for the water equipment for $300,000 on a contract basis, and purchased the water equipment back from the Bank for $250,000. (Trial Tr. vol. 2, 69-70). Unfortunately, the buyer was unable to complete the deal due to problems in the auto industry, and the Sharmas relinquished the water equipment back to the Bank. (Trial Tr. vol. 2, 43). Marianne Portschy testified that after there was a default on the mortgage loan, "Heidi had voluntarily surrendered that equipment back to the Bank, and we currently have it in storage." (Trial Tr. 120). Although this transfer should have been listed in the Statement of Affairs, Rohit Sharma testified that without his buyer, the water equipment only had scrap value. The water equipment was fully secured by the debt to Community Bank, and there would have been no equity in it for any other creditors. Under these circumstances, the Debtors did not make false oaths with respect to the Zodiac water equipment and the transfer of the residence from the Bank to Heidi Sharma.
In its post-trial brief, GDD points to the various judgments and court proceedings that the Debtors omitted from their Schedules. However, in response to Question 4 of the Statement of Financial Affairs, after listing three judgments, the Debtors state "A list from Wisconsin Circuit Court Access will be provided to the Trustee." Rohit Sharma also testified that certain unlisted lawsuits identified by GDD had been settled. (Trial Tr. 86). He testified that he had surrendered vehicles and collateral back to various lenders, and was unaware which of them might be seeking a deficiency against him. (Trial Tr. 88). Although tax warrants that were filed in Kenosha County were listed in the Statement of Financial Affairs, those filed in Door County, Racine County and Washington County were not. Rohit testified that he had met with the taxing authorities and was working with them to explain the locations of his various businesses. Numerous tax warrants were listed in Schedule D, mitigating the failure to list them in response to Question 4 of the Statement of Affairs. Similarly, although the GDD judgment was not listed in response to Question 4 of the Statement of Affairs, it was listed in Schedule D as a "judgment taken 5/11/07," and in response to Question 5 of the Statement of Affairs, GDD was listed as having repossessed property of the Debtors on September 11, 2008. As to why he did not give greater detail in response to Question 4 of the Statement of Affairs, Rohit Sharma testified that attorneys who had represented him in various suits over the years did not get paid, and therefore did not cooperate in giving Rohit information about the suits. (Trial Tr. 96). Another judgment was satisfied in 2006 for the payment of $8,000. (Trial Tr. 131).
In an unpublished opinion, the Seventh Circuit Court of Appeals recently had the opportunity to consider the failure of a debtor to list judgments and loans in his bankruptcy schedules:
Mr. Alleman further points out that Mr. Kitson failed to disclose a $6,300 loan from his parents, as well as several lawsuits in which he was a defendant. The bankruptcy court concluded that omission of the parental loan was not material because Mr. Kitson's estate had no remaining assets with which to pay unsecured creditors; thus, the omission had no effect on whether any of the unsecured creditors, including Mr. Alleman, would receive any distribution from the estate. Likewise, the omitted lawsuits were, if anything, potential unsecured liabilities. Their omission was immaterial for the same reason. Thus, we see no error in the bankruptcy court's rejection of Mr. Alleman's arguments.
Alleman v. Kitson (In re Kitson), 341 Fed. Appx. 234, 238 (7th Cir. 2009). Although it would have been preferable for the Debtors to detail each and every lawsuit in response to Question 4 of their Statement of Affairs, they listed several suits, and indicated that a more complete list would be provided to the Trustee. Moreover, Rohit Sharma testified as to why various suits were not listed, including his understanding that he did not have to list suits that were settled or satisfied prior to bankruptcy. And the failure to list GDD itself in the suits category is certainly excusable; that creditor is listed at least two other places in the Schedules and Statement of Affairs. GDD cannot seriously contend that the Debtors omitted GDD from the bankruptcy schedules with intent to defraud. The Court finds Rohit Sharma's testimony to be believable, and the Debtors' oversights appear to be caused by an honest mistake rather than an intent to defraud the Trustee or the creditors. In this case, the omission of the judgments was not material for the same reason that failing to list judgments was found immaterial in Kitson. In sum, although the Debtors' Schedules and Statement of Affairs are not perfect, GDD has failed to meet its burden of proof that the omissions were made knowingly and fraudulently. The Fourth Claim for Relief is dismissed.
V. Fifth Claim for Relief: Transfer of Property with Intent to Hinder, Delay or Defraud a Creditor.
In its Fifth Claim for Relief, GDD alleges that the Debtors transferred property within one year of their petition with the intent to hinder, delay or defraud a creditor. Two of the alleged transfers — the Cherokee Village Real Estate and the Burlington Store — were not developed by the evidence. GDD did not prove that the Debtors had an interest in either of these properties or that they transferred that interest fraudulently. Claims about the other two alleged transfers have been discussed above, and fail for the reasons already addressed. In short, Sahara's transfer of $35,000 from the Market Express transaction to the CD pledged for the letter of credit was not a transfer of property of the Debtors. It was a transfer of property that was due from Sahara to Lotus Business Group. If this transaction had not taken place, the evidence shows that Sahara would have transferred the $35,000 to Lotus or Dennis House, not GDD or Rohit Sharma. The transfer of the Debtors' residence to Lotus Business Group occurred more than two years before the petition, and Heidi Sharma's grant of a mortgage on the residence when the Bank transferred it to her was not done with the intent to hinder, delay or defraud a creditor. GDD did not prove the elements of this Claim, and the Fifth Claim for Relief is dismissed.
VI. Sixth Claim for Relief: Failure to explain loss of assets
GDD's final claim is that Rohit Sharma did not adequately explain the loss of his net worth of over $7 million as shown in the Declaration filed in the Clark Chapter 11 case. The Court disagrees. The greater portion of that figure was Rohit Sharma's investment in Baker Energy, and the rest was equity in real estate. Baker Energy failed fairly quickly after the purchase of the Clark station leases, and the equity in the real estate, based solely on appraisals, did not hold up when the properties became distressed and were liquidated by the Bank. Marianne Portschy and David LaDuke confirmed that the Omega Financial properties were selling for well below their appraised values, and Baker Energy and the other Sharma entities ended up in bankruptcy. Rohit Sharma testified that he was not supposed to put "a single penny" into the Clark leases; that was Dr. Saini's and Ramesh Kapur's responsibility. (Trial Tr. 235). But the evidence was uncontested that Dr. Saini did not put any money into the deal, and Rohit Sharma was forced to sell and refinance locations to keep the operation afloat. (Id). He testified as to the problems he encountered with going from 27 stores to over 70 stores, including some in the South where he had not previously owned stores. Crown, Baker, T Mart and Travelers Mart all ended up in bankruptcy, and the loss of their value was well established. The largest part of Rohit Sharma's net worth would have disappeared in the Baker bankruptcy proceedings, and the rest of the properties in which he had an interest were all foreclosed or sold with the proceeds payable to the Bank. GDD did not carry its burden of proof with respect to this Claim; the Sixth Claim for Relief is dismissed.
Having failed to meet its burden of proof as to any of the claims in the Complaint, GDD's Complaint is dismissed, and the Debtors may be granted a discharge. A separate Order will be entered consistent with this Memorandum Decision.