Opinion
MEMORANDUM DECISION
LAURA S. TAYLOR, Bankruptcy Judge
Debtor Donald A. Yates ("Debtor") initiated his chapter 7 case (the "Case") on June 24, 2004 (the "Petition Date") and received his discharge on September 22, 2004. In December of 2004, chapter 7 trustee, Gregory Akers (the "Trustee"), filed the first of several adversary proceedings naming Debtor and others as defendants. This memorandum decision follows the Trustee's Motion for Summary Judgment (the "Motion") in his fourth adversary proceeding, which seeks to revoke Debtor's discharge ("Discharge Revocation") and to recover a judgment based on Debtor's alleged conversion and fraudulent concealment of certain estate assets ("Conversion Claims").
Unless otherwise indicated, all references to chapter and code sections are to Title 11 of the United States Code, also referred to as the Bankruptcy Code, and all references to "Rules" are to the Federal Rules of Bankruptcy Procedure. The docket in this Adversary Proceeding shall be cited as "Dkt # ___ at ___". The docket in related matters will be similarly phrased with initial references to the relevant case or adversary proceeding.
Given the gravity of a proceeding seeking to revoke discharge, the Court carefully reviewed all relevant facts and carefully considered the arguments of the parties as well as relevant law. Based on this analysis and review, the Court grants the Motion as to the Discharge Revocation under 11 U.S.C. § 727(d)(2) and (3), but denies the Motion as to the Conversion Claims.
From case initiation through December of 2007, the Honorable John J. Hargrove presided over the Case. Upon Judge Hargrove's retirement, the Case was transferred to the author of this memorandum decision. In order to assure a fair consideration of the Motion, the author carefully reviewed the entirety of the docket in the Case and in the various adversary proceedings arising therein and read numerous documents and transcripts filed in the Case. The author, thus, is confident in her ability to speak for the Court as to its actions and opinions prior to January of 2008 to the extent set forth herein and does not distinguish between Judge Hargrove's actions and her own, except in limited circumstances. The Court's ability to take notice of items on the docket of the case at hand is clear. See St. Louis Baptist Temple, Inc. v. FDIC, 605 F.2d. 1169, 1172 (10th Cir. 1979).
BACKROUND
1. Debtor Is An Attorney Who Initiated The Case With The Assistance Of A Bankruptcy Attorney.
Debtor, a member of the California bar, obtained a law degree in 1998. He initiated the Case on June 24, 2004. In so doing, he utilized the services of an experienced bankruptcy attorney. In early testimony and disclosures, he described himself as a criminal law practitioner and denied that he represented clients in personal injury cases.
2. Debtor's Health Issues Contributed To His Financial Problems.
Debtor suffered pre-petition and suffers today from medical conditions including, but not limited to, diabetes. Debtor alleges that these health issues were a significant cause of his chapter 7 filing. In particular, Debtor contends that in 2002 he was hospitalized three times, had two operations, and spent an entire year in bed with a life threatening post-surgical infection. Immediately after the Court ordered Debtor's eviction in 2005, the Debtor claimed diabetic foot ulcers. More recently, Debtor claims multiple amputations. Immediately prior to his 2004 bankruptcy filing, however, he was well enough to go on a Caribbean cruise.
3. Debtor's Schedules And Statement Of Affairs Do Not List Any Contingent Fee Receivables, Income Tax Refunds, Litigation Claims Capable Of Recovery, Equity In Real Property In Excess Of Exemptions, Or Potential Preference Recoveries.
Debtor's schedules (the "Schedules") initially appeared unremarkable and, among other things, described Debtor's assets and pre-petition activities as follows:
a. Debtor scheduled pre-petition unsecured debt totaling $227,304 and consisting of medical expenses of $24,643; a judgment held by TACI Corp. of $110,175; legal expenses of $46,854; credit card and unsecured loan debt of $42,392; and a small amount of miscellaneous debt.
b. Debtor scheduled a single real property asset, a condominium located at 5885 El Cajon Boulevard (the "Condo"), valued at $240,000, and allegedly encumbered by three liens, a first trust deed owed to an institutional lender and second and third trust deeds owed to Debtor's personal friends, Terry Babler and Thomas Durisoe, respectively.
c. Debtor scheduled minimal personal property assets including a single bank account at Union Bank of California and a single $15,000 account receivable owed by Wade Hughes. The Schedules state that the Hughes receivable is "considered uncollectable". Debtor did not schedule any other receivables and, in particular, did not schedule any tax refunds, contingent fee receivables, or litigation claims.
d. Debtor stated in his Statement of Financial Affairs at paragraph 3 that he made no payments to creditors of over $600 within the 90 days prior to filing the Case.
4. At Debtor's 341(a) Meeting, Debtor Received Instruction On The Importance Of Candor And Guidance As To What Assets Properly Are Includable In His Estate, And Indicated His Understandings In Connection Therewith.
Debtor's 341(a) meeting took place on July 23, 2004. In filling out the 341(a) Meeting of Creditors Questionnaire (the "341(a) Questionnaire"), Debtor declared under penalty of perjury, among other things, that:
The Trustee introduced the 341(a) Questionnaire into evidence, without any Debtor opposition, as Exhibit A to the Declaration of Nannette Farina in Support of Trustee's Supplemented Motion to Compel Debtor's Interrogatory Answers re Offshore Accounts and For Adjudication re Debtor's Claim of Fifth Amendment Privilege Against Self-Incrimination filed on April 16, 2008 as docket #240 in 04-5619.
a. He reviewed his Schedules and Statement of Financial Affairs and discussed them with his attorney prior to signing them.
b. He neither has nor had an offshore account.
c. He did not make any payment or transfer any property in excess of $5,000.00 within four years of filing bankruptcy except for regular periodic required payments on contracts.
d. He advised that he was seeking recovery in a current lawsuit or had a belief that he had grounds to do so, but identified this claim as: "possible personal claim minimal value < small PL case vs state 2000 (?) may have S/L problem."
e. Debtor demonstrated his understanding of the importance of candor in the bankruptcy process. In particular, he answered "yes" to the question "Do you understand that you are required to disclose all present and future property and money to the Trustee and to not do so could result in civil as well as criminal penalties?" In testimony at his 341(a) meeting, Debtor confirmed the statements in the Questionnaire generally and specifically under oath. And, in particular, Debtor affirmed that he listed all assets in his Schedules, had no receivables other than as already disclosed, and had no contingent fee cases as: "I don't do PI."
5. The Trustee Initially Questions Only The Babler And Durisoe Liens, Begins Investigation As To Their Validity, But Allows The Debtor To Receive His Discharge.
On August 24, 2004, the Trustee issued his initial report after conclusion of the 341(a) meeting and advised that he was investigating the existence of assets. This investigation apparently focused initially only on questions as to the validity of the Babler and Durisoe trust deeds. As a result, the Trustee did not request additional time to object to Debtor's discharge, and Debtor received a discharge on September 22, 2004.
Ultimately, the Trustee obtained a judgment and a settlement resulting in complete disallowance of the Durisoe lien and a voluntary reduction of the Babler lien to $5,000. In short, the Trustee established through trial or negotiation that these liens constituted a fraud on creditors or should otherwise be set aside. The Trustee, however, does not request that this Court vacate Debtor's discharge based on improprieties related to these liens. Instead, the Trustee asserts that the facts related to these liens and the Trustee's difficulty in obtaining a set aside of these liens evidence Debtor's general lack of candor and cooperation in the Case. The Durisoe litigation history is also relevant as discovery in relation to the Durisoe liens eventually led to the discovery of numerous unscheduled assets, including those directly involved in the Court's decision here to grant partial summary judgment. As a result, an overview of this litigation is appropriate.
a. The Trustee discovers an improper attempt to transfer the Condo.
On November 18, 2004, Debtor executed a grant deed dated November 15, 2004 transferring title to the Condo to Durisoe and delivered it to an Arcadia Escrow account. And on December 1, 2004, Durisoe executed a grant deed dated November 16, 2004 transferring title to the Condo to a Mr. Williams. Debtor subsequently denied any knowledge of the Durisoe-Williams transaction.
The Trustee learned of the alleged Condo sale on December 13, 2004 and immediately initiated an adversary proceeding seeking recoveries against Durisoe, Babler, and Yates. The Trustee refined his theories and, shortly thereafter, initiated a second adversary proceeding that added Mr. Williams as a defendant. The two adversary proceedings were consolidated thereafter (as so consolidated, the "Durisoe Lien Litigation") and allege that the Durisoe and Babler trust deeds were fraudulent transfers and that Debtor improperly sold the Condo. The Durisoe Lien Litigation also sought to recover title to the Condo. The Trustee alleged in the Durisoe Lien Litigation, among other things, that Yates stood to recover $46,000 in connection with the Condo transactions.
b. Debtor claims that the Condo transfer was an honest mistake.
Debtor answered the Durisoe Lien Litigation complaint and in his affirmative defenses alleged his belief that he could appropriately transfer the Condo given discharge. This affirmative defense is significant as it begins a theme; throughout the Case, Debtor repeatedly claimed ignorance of the law or mistaken understanding of the law when caught in an improper action.
c. The Court orders production of records, determines that the Trustee has the right to possess and control the Condo, and notes the Debtor's lack of cooperation.
In June of 2005, the Trustee brought a motion to compel the production of banking records and a motion seeking summary judgment on Trustee's claim of a right to possession and control of the Condo. The Court ultimately granted both motions in full and, among other things, issued its order allowing eviction. In the eviction order, the Court made clear its concerns regarding Debtor's behavior up to that point in the Case:
Since December 2004, when the trustee discovered that the debtor had sold the [Condo] without notice or court approval, the case has been marked by a complete lack of cooperation by the debtor to assist the trustee in setting aside the unauthorized sale... [t]he most recent example... [is that the] debtor opposed the transfer of the [Condo] back to the trustee...
04-90530, Dkt. #53 at 2:19-27.
d. The Debtor briefly converts the Case to chapter 13.
After the Court ordered eviction, the Debtor converted the Case to a proceeding under chapter 13. The Trustee opposed conversion and filed a motion to reconvert (the "Reconversion Motion"). In the memorandum of points and authorities supporting the Reconversion Motion, the Trustee asserted that the Debtor lied under oath, concealed estate assets, and refused to provide information regarding his law practice income. The Debtor initially opposed the Reconversion Motion, but ultimately withdrew his opposition, and the case was reconverted.
Thereafter, the Trustee sought sanctions in connection with the conversion, but the Court denied the sanctions motion finding that Debtor's conversion was not inappropriate and that, as noted above, Debtor ultimately withdrew his opposition to reconversion.
e. The Trustee obtains summary judgment in the Durisoe Lien Litigation and the Court describes Durisoe and those involved in his defense as "the gang who couldn't get their stories straight/'
In July of 2007, the Trustee brought a summary judgment motion seeking to set aside the Durisoe trust deed as constructively fraudulent. On reply, the Trustee outlined the various inconsistent stories Durisoe, Debtor, and other witnesses gave during the course of the Durisoe Lien Litigation. These inconsistencies also were clear to the Court; Judge Hargrove stated on the record that the declaration of a Mr. Parker regarding the alleged Durisoe loan to Debtor was a "sham, " and he described Durisoe and his cohorts as the "gang who couldn't get their stories straight." Significantly, Mr. Parker, who testified that he personally gave Debtor funds from Durisoe's store and kept accounts regarding the same, was uncooperative at his deposition and asserted the Fifth Amendment as to questions regarding his employment history. The Court ultimately found inconsistencies as to the form of payment, the documents used for payment, the timing of the trust deed, the reason for the loan, and all of Mr. Parker's testimony. Thus, the Court granted summary judgment and avoided the Durisoe lien.
Judge Hargrove's exact comments were as follows:
The Court notes that Debtor acted as counsel for Mr. Parker at his deposition.
6. The Trustee Also Pursues Recovery Of Post-Petition Payments To Durisoe.
In the course of the Durisoe Lien Litigation, the Trustee obtained bank records that identified another Durisoe related concern. On August 16, 2004, Farmer's Insurance Company ("Farmer's") issued a $235,000 check (the "Whiteman Check"). It is undisputed that the Whiteman Check relates to personal injury litigation that Debtor initiated on behalf of Mr. Whiteman in December of 2002. It is further undisputed that Debtor took an attorneys' lien on this recovery on June 7, 2003 and asserted an insurance claim against Farmer's in December of 2003. Finally, Debtor does not deny pre-petition communications with Farmer's in connection with the Whiteman case. Thus, there is no question that the Whiteman Check relates to a personal injury case that Debtor initiated pre-petition.
Ultimately, the Trustee sought to recover a judgment equal to the amount of the Whiteman Check retained by Debtor alleging that it was an asset of the Debtor's bankruptcy estate (the "Estate"). The Court denied the Trustee's request for summary judgment on this issue as Debtor argued that a portion of the Whiteman Check is consideration for post-petition legal work and, therefore, that these Whiteman Check proceeds are not Estate assets. Significantly, however, Debtor concedes that a portion of this payment was an asset of the Estate. Thus, the issue is not whether Debtor converted Estate assets when he negotiated and retained a portion of the Whiteman Check; the only issue is the amount of Estate assets he converted.
Debtor deposited the Whiteman Check into his trust account on October 13, 2004, and on December 9, 2004 he paid $16,300 to himself and advanced $146,700 to Mr. Whiteman through a check made payable to Durisoe and Mr. Whiteman jointly. On that same day, Durisoe transferred funds into the Arcadia Escrow account.
The Trustee discovered these transactions when he obtained Debtor bank records and Durisoe records in connection with the Durisoe Lien Litigation. The Trustee, thereafter intensified efforts to obtain information regarding the Whiteman case and attempted to subpoena Farmer's records.
a. The Debtor opposes all efforts to obtain information about the Whiteman litigation and the Whiteman Check and requires the Trustee to obtain information through Court order.
Debtor strongly opposed Trustee's every effort to obtain records from Farmer's and expressed "outrage and objection" in a letter to Farmer's dated April 10, 2007. This letter instructed Farmer's not to release records without a court order. On April 25, 2007, he sent a second letter alleging that the entire Whiteman file was privileged. In response, the Trustee requested a 2004 exam order for Farmer's. The Debtor opposed production of these records on the ground that they included" medically private information" notwithstanding the Trustee's assurance that he was not seeking any such information.
On May 29, 2007, the Trustee also filed a motion seeking turnover of Debtor's law office records and an accounting of contingent and unliquidated Debtor claims (the "Law Office Accounting Motion"). The Debtor opposed the Law Office Accounting Motion, alleging, among other things, that he had provided everything he had.
At the June 26, 2007 hearing on the Law Office Accounting Motion and the Trustee's request for a 2004 examination of Farmer's, the Court took the unusual step of placing the Debtor under oath during his argument. Thereafter, the Debtor stated under oath that he had only "minimal civil contingency work" and almost no clients prior to filing. Debtor also alleged his understanding based on a review of cases that contingent fees were not earned until paid and that, as a result, post-petition recoveries on cases pending pre-petition were not Estate assets. After the Court told him this understanding was absolutely incorrect, Debtor admitted that he did not properly schedule the Whiteman account receivable. He then alleged a similar misunderstanding regarding tax refunds for pre-petition tax years. Thus, once again, Debtor alleged innocent mistake once caught in improper acts.
At hearing end, the Court granted both motions, carefully explained the law making pre-petition contingent fee case recoveries assets of the Estate, and required Debtor to provide a list of all matters he handled from 2001 to 2004. The Court especially emphasized the need for candor and completeness in this process and ordered the Debtor to make a good faith attempt to identify all cases pending pre-petition so that the Trustee could conduct an investigation.
b. The Debtor provides information regarding his pre-petition law practice, Farmer's also provides records, and the Trustee obtains an additional recovery from Durisoe.
Consistent with the Court's requirement, the Debtor produced a writing on July 9, 2007. The writing, among other things, listed several contingent fee cases and other accounts receivable previously omitted from the Schedules, alleged that Debtor had no bank records not already provided to the Trustee and no relevant writings, and stated that he made "every effort to re-create the requested items from memory."
Farmer's response to the Trustee's 2004 examination order included documents which evidenced that the Whiteman litigation was pending pre-petition, that Debtor was actively involved in this litigation immediately prior to the Petition Date, and that Debtor made a policy limits demand prior to the Petition Date.
After review of the newly available information regarding the Whiteman litigation and payment, the Trustee filed an adversary proceeding against Durisoe and Arcadia Escrow. The Trustee ultimately settled this litigation and recovered $95,000 for the Estate from Durisoe and Arcadia Escrow proceeds.
7. The Durisoe Discovery Leads To Discovery Of Other Omitted Assets.
On September 28, 2007, the Trustee filed the adversary proceeding in which the Motion arises, Adv. No. 07-90596, and sought to recover assets from Debtor and to revoke Debtor's discharge. Through bank record subpoenas in the Durisoe Lien Litigation and other investigation, the Trustee identified numerous receivables or claims that constitute Estate assets in whole or in part. In addition to the Whiteman litigation proceeds, these assets include tax refund payments for pre-petition tax years, payments in relation to other litigation initiated pre-petition, and $1,015 in connection with a pre-petition claim asserted by Debtor against Holland America Line, Inc. (" Holland America").
The Trustee sought revocation of discharge under section 727(a)(2) and (3) based on conversion and non-disclosure of Estate assets including, but not limited to, those listed in this complaint and Debtor's alleged failure to comply with three Court orders.
8. Debtor Refuses To Answer Questions Regarding A Swiss Bank Account That Received Deposits Of Checks Written To Debtor And Bearing His Endorsement.
In January of 2008, the Trustee continued his asset discovery efforts and sought a Rule 2004 examination of Debtor in regard to an offshore account at "Leu Bank" of Switzerland. He also subpoenaed Leu Bank records. The Trustee also promulgated interrogatories related to the Leu Bank account including: Interrogatory 1, which asks whether Debtor had an offshore account at any time from 2001 to the present; Interrogatories 2 and 3, which ask for the account number at Leu Bank and confirmation that a specific check was deposited into a Leu Bank account in which Debtor had an interest; and Interrogatories 11 through 15, which request additional information regarding offshore accounts. Debtor did not answer the above referenced interrogatories and, instead, asserted his rights under the Fifth Amendment and refused to answer. The Debtor has asserted his Fifth Amendment rights consistently thereafter as to all questions related to the Leu Bank account.
The Trustee identified Leu Bank as a bank receiving checks payable to Debtor and endorsed by him for deposit through subpoenas on third parties.
9. Trustee Discovery Identifies Yet Another Significant Asset.
On or about April 9, 2009, the Trustee subpoenaed records from Cheong, Denove, Rowell & Bennett (the "Cheong Firm"). The Cheong Firm produced, among other things, two checks totaling $37,904 (the "Stillman Checks"). The Cheong Firm production established that the Cheong Firm wrote the checks and sent them to Debtor during the ninety days prior to the Petition Date. The Stillman Checks bear a "for deposit only" endorsement by the Debtor and notations evidencing post-petition deposit into the Leu Bank account.
The Trustee promptly initiated another adversary proceeding (09-90161) seeking turnover of the Stillman Checks or their value, among other things, and filed a summary judgment motion. The Debtor opposed summary judgment, alleging that he had assigned and transferred the proceeds of the Stillman Checks to Antonio Zarate Araiza ("Araiza"). The Court concluded, however, that his argument and evidence were insufficient to create a triable issue of material fact and granted summary judgment.
Debtor alleged that he had borrowed money from Araiza, and at that time he gave Araiza a lien on future attorneys fees to be received by Debtor. Debtor also filed a declaration purportedly from one of the Debtor's former clients, Manuel Gomez Garcia, who testified that he had introduced Debtor to Araiza and that Araiza was "not a nice man." 09-90161, Dkt. #27 at 19:17.
The Debtor timely sought reconsideration of this summary judgment order (the "Reconsideration Motion"). Final briefing and determination were delayed at Debtor's request, however, as the Federal Bureau of Investigation ("FBI") and Internal Revenue Service seized his computer and records pursuant to a warrant requiring turnover of records related to the Case. The Court will hear the Reconsideration Motion on November 19, 2009.
10. Debtor Has Never Provided Adequate Law Office Records And Has Provided Numerous Excuses For This Failure.
Central to the Motion and to this Case is the Trustee's struggle to obtain information regarding Debtor's pre-petition law practice. As the above evidences, the Trustee ultimately turned up an abundance of evidence, but without any aid from the Debtor. Instead, the Debtor failed to produce adequate client records and to provide an adequate reason for this failure. And the story regarding the Debtor's inability to produce his files continues to change.
The Debtor, a long-time practicing attorney, allegedly has a system of record keeping that is not consistent with his obligations as an attorney. In addition to poor practices as regards client files, the Debtor claims that he does not reconcile bank statements or trust accounts. Rather, the Debtor claims to just make "notations" on bank statements. This practice is troubling given that Rule 4-100 of the California Rules of Professional Conduct, requires Debtor to:
The Trustee first took Debtor's deposition in September of 2005. In this deposition, counsel for the Trustee inquired as to the location of the Debtor's legal files. The exchange went as follows:
Q. (Ms. Farina): The testimony you gave was that you have some boxes packed and some records stored and some at your premises, I believe. Please indicate for me a list of all places in which you have data or client files or records relating to your law practice files. Let's do a list presently existing, wherever they are.
A. (Debtor): I believe there are some in my file drawers, there are some in boxes, there may be some at a friend's house. I don't really know. I mean, things just got scattered when I got evicted, so I - I'm not sure where things are. Like I say, I've been very disorientated since that time.
Dkt. #70-2, Ex. Gat20-21.
In a subsequent follow-up deposition, just weeks after the initial deposition, the Debtor again testified as to the location of his legal files and trust account statements. The Debtor stated that his files were either at a condominium or a friend's place of business. Dkt. #70-3, Ex. I at 17-18.
When the Trustee inquired further about the friend's place of business, the Debtor was unable to give the profession of his friend, the type of business, or the address or phone number of the business. According to the Debtor, he did not know any of this information despite being friends with the party retaining his documents for over 20 years. See Dkt. #70-3, Ex. I at 18-20.
Approximately two years later, in connection with the Law Office Accounting Motion, the Debtor provided yet another explanation for being unable to produce legal records. In sworn testimony, the Debtor stated:
Q. (Judge Hargrove): What happened to these files? You had three drawers full of records.
A. (Debtor): What I want to make clear is, your Honor, that we're talking about different periods of time. And different files and things existed at different areas of time. Obviously, when I had a law office back in 1999, 1 had ten file cabinets full of records. When I lost my law office and moved my practice into my home, I destroyed nine of those file cabinets full of records and kept only what was the most current. When I got evicted from my home, I went through the files. And most of them have nothing in them. And I got rid of most of them. I mean, I've moved to Texas. And I'm basically homeless as we speak. So I don't have boxes of files anywhere. I mean I just don't have them.
04-05619, Dkt. #240-6, Ex. K at 2.
And two years later, the Debtor provided yet another story. In a declaration submitted by the Debtor supporting his opposition to the Motion, the Debtor states:
37. Then, there was the problem of moving. I had no place to move to thus no place to store any of my furniture or boxes. So, if anyone had the room to store a dozen boxes, or a piece of furniture, they came and took what they could and put it in their storage, wherever that was. One friend even hired a Mexican laborer with a truck, out of a Home Depot parking lot, to come to my residence and move some boxes to her storage area. Turns out the laborer overloaded the truck, and an unknown number of boxes "fell off the truck" onto the highway. To this day, I have no idea what boxes were lost or what was in them.
38. So there were more than a hundred unmarked boxes, with unknown contents, scattered in six or seven different places. And it should be noted that, at the time, I have been practicing law out of my home since 2001, so all of my law practice files and records were packed in and amons these mystery boxes.
39. So there were at least a hundred unmarked boxes, with unknown contents, scattered in at least six or seven different locations. I still don't know where many of these boxes are. Some of the boxes were lost forever. Some have not been unpacked to this day. The contents of every box that is found and opened is still a surprise.
Dkt. #77 at 7-8 (emphasis in original).
This most recent story is inconsistent with the previous sworn testimony that many of the files were destroyed when moving his law practice to his home and later when evicted from his home. Only two things are clear in relation to Debtor's records. First, he never provided anything that indentified a previously unknown Estate asset. And second, notwithstanding this lack of records, the Trustee identified numerous undisclosed Estate assets.
11. As Discussed Below, Partial Summary Judgment Is Appropriate On This Record.
Through the Trustee's persistence, bit by bit and document by document, a more complete picture of Debtor's pre-petition activities and assets emerged. The Debtor provided multiple excuses for his lack of disclosure. The Debtor also wove a web of inconsistent stories and hid behind the Fifth Amendment. In summary, the Case involves a tidal wave of omission and implausible theory. The Court, however, stops short of granting summary judgment on all issues given the stringent summary judgment standards and, instead, provides limited summary judgment as discussed below.
The Court provided the parties with an oral ruling consistent with this memorandum decision at a Pre-Trial Status Conference held on October 22, 2009. At that time, the Court was aware of the pending Reconsideration Motion and the FBI's execution of its warrant. The Court had not reviewed, however, the Declaration of FBI Special Agent, Marcie Soligo subsequently filed in opposition to the Reconsideration Motion that attaches copies of documents obtained from Debtor and related to the Leu Bank account. This evidence fully supports certain of the Court's prior conclusions. This new evidence also supports additional theories for summary judgment under section 727(d)(3) and (2). The Court, however, does not expand herein its grounds for summary judgment beyond those in its previous oral ruling.
LEGAL STANDARDS
A. Statute Of Limitations For Revocation Of Discharge - 11 U.S.C. § 727(e).
Under the Bankruptcy Code, a trustee, creditor, or the United States trustee may request revocation of a chapter 7 discharge. 11 U.S.C. § 727(e). In instances where the revocation is based on sections 727(d)(2) or (d)(3), the party seeking revocation of discharge must file an adversary proceeding before the later of one year after granting of discharge or the date the case is closed. 11 U.S.C. § 727(e)(2) (emphasis added).
B. Summary Judgment Standard.
Federal Rule of Civil Procedure 56(c) (incorporated into the Federal Rules of Bankruptcy Procedure by Rule 7056) provides that a party may move for summary judgment when there is no genuine issue as to a material fact and the moving party is entitled to judgment as a matter of law. "A genuine issue" is one where, based on the evidence presented, a fair-minded jury could return a verdict in favor of the non-moving party on the issue in question. Anderson v. Liberty Lobby, Inc., All U.S. 242, 249 (1986); Lang v. Retirement Living Pub. Co., 949 F.2d 576, 580 (2d Cir. 1991). A "material fact" is one for which the resolution could affect the outcome of the case. Anthes v. Transworld Systems, Inc., 765 F.Supp. 162, 165 (D. Del. 1991).
All justifiable inferences must be drawn in favor of the non-moving party. Anderson, 411 U.S. at 225. Likewise, all evidence must be viewed in the light most favorable to the non-moving party. Lake Nacimiento Ranch Co. v. County of San Luis Obispo, 841 F.2d 872, 875 (9th Cir. 1987). However, once the moving party has met its burden, the non-moving party must do "more than simply show that there is some metaphysical doubt as to the material facts." Matsushita Electric Indust. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-587 (1986). If the record, taken as a whole, cannot lead the trier of fact to rationally find for the non-moving party, " there is no genuine issue for trial.'" Id. at 587. The court is not required to draw every conceivable inference from the records, but only reasonable ones. Spring v. Sheboygan Area School Dist., 865 F.2d 883, 886 (7th Cir. 1989). If the "genuine issue for trial" is implausible, the non-moving party must support the claim with evidence more persuasive than otherwise necessary to survive a summary judgment motion. Matsushita Electric Indus., 475 U.S. at 587.
C. Acquiring Property Of The Estate And Failing To Report - 11 U.S.C. § 727(d)(2).
A trustee, creditor, or the United States trustee can request a revocation of discharge if:
[T]he debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee...
The court shall revoke discharge if the above finding is made after notice and a hearing. Id. Leaving no doubt, the Senate Report states that section 727(d) requires the court to revoke discharge. S. Rep. No. 95-989, at 99. Thus, this Court has no discretion in revoking discharge if the moving party meets its summary judgment burden.
The first element that a plaintiff must prove is that the debtor acquired property of the estate or became entitled to property of the estate. It is immaterial whether the debtor received the property before or after discharge. See 6 Collier on Bankruptcy ¶ 727.15[4] (15th ed. Rev. 2008).
The second element the plaintiff must prove is that the debtor knowingly and fraudulently failed to report such property and/or to deliver the property to the trustee. In order to prove this behavior, the plaintiff may show that the debtor: "had access to omitted information and either knew that failure to disclose it would be seriously misleading or that the debtor acted so recklessly as to imply fraudulent intent." 6 Collier on Bankruptcy ¶ 727.15[4]; see also In re Yonikus, 974 F.2d 901, 905 (7th Cir. 1992). Fraudulent intent can be based on inferences drawn from a course of conduct and inferred from all of the surrounding circumstances. In re Yonikus, 91A F.2d at 905; see also Devers v. Sheridan (In re Devers), 759 F.2d 751, 754 (9th Cir. 1985). While recklessness alone is not enough to infer intent, recklessness combined with other circumstantial evidence is. In re Khalil, 578 F.3d 1167, 1168 (9th Cir. 2009).
D. Refusing To Obey A Lawful Order Of The Court - 11 U.S.C. § 727(d)(3).
A trustee, creditor, or the United States trustee also can request a revocation of discharge if the debtor committed an act specified in section 727(a)(6), which prevents discharge if the debtor refused to obey a lawful court order. For a debtor's refusal to obey an order to provide grounds for revocation of discharge it must be willful, intentional disobedience or dereliction, not merely inadvertent disobedience or inability to comply. See 6 Collier on Bankruptcy ¶ 727.09[4]; and see Concannon v. Costantini (In re Costantini), 201 B.R. 312, 317 (Bankr. M.D. Fla. 1996).
DISCUSSION
A. Statute Of Limitations.
In his opposition to the Motion, the Debtor argues that this adversary proceeding is barred by the statute of limitations and that the Trustee must rely on the principles of equitable tolling. The Court need not address the equitable tolling argument, however, as the adversary proceeding with respect to the revocation of discharge falls clearly within the statute of limitations. Under section 727(e)(2), the adversary proceeding must be brought within one year of the chapter 7 case being closed. The Case has not been closed, and thus this adversary proceeding for revocation of discharge is timely.
The Debtor also asserts a laches defense of a sort, but given the record in the Case such a defense is meritless. And equitable tolling, if in fact an issue, also is appropriate. As discussed above, the Debtor was not cooperative and the Trustee was appropriately diligent.
B. A Fresh Start Through Bankruptcy Is Intended For The Honest But Unfortunate Debtor, And The Trustee Bears The Burden Of Establishing That Debtor Is Not Entitled To The Discharge That Allows This Fresh Start.
As a general policy matter, bankruptcy provides a fresh start for the honest but unfortunate debtor. Local Loan Co. v. Hunt, 292 U.S. 234, 244 (1934). As such: "[a] bankruptcy court is entitled to insist upon filings and representations made in the utmost good faith." Hannigan v. White (In re Hannigan), 409 F.3d 480, 483 (1st Cir. 2005). In fact, Rule 4002 expressly requires that the debtor: " cooperate with the trustee in... the administration of the estate." In short, it is not initially the Trustee's duty to find and recover assets of the Estate, but rather the Debtor's obligation to disclose and turnover. Thus, candor in the disclosure of assets and cooperation with the liquidation of assets for the benefit of creditors are the behaviors that best exemplify the honest debtor.
The Case, as discussed above, provides scant evidence of cooperation and candor. It is noteworthy that Debtor not only failed to disclose Estate assets, but also failed to amend his Schedules or similarly to cooperate.
In considering the Motion, however, the Court was mindful that the Trustee has the burden in seeking to revoke discharge. Anderson v. Poole (In re Poole), 111 B.R. 235, 239 (Bankr. E.D. Pa 1995). This burden is a heavy one. Bowman v. Belt Valley Bank (In re Bowman), 173 B.R. 922, 924 (9th Cir. BAP 1994) (revocation of discharge must be construed strictly against the objector). Thus, in this case, the Court must balance the twin policy considerations of allowing the honest but unfortunate Debtor to obtain a fresh start against the need for integrity in the bankruptcy process.
Here, the Trustee raises a virtual blizzard of allegations. In connection with some, Debtor advanced arguments that would require an evidentiary hearing even if the Court believes it unlikely that the Debtor's testimony will provide him with a victory. The Court, however, identified three instances that sufficiently justify a summary judgment revoking discharge.
C. 11 U.S.C. § 727(d)(2) - Failure To Report And Turnover Property Of The Estate.
1. The Holland America Assets.
Approximately two weeks before the Petition Date, the Debtor took cruises with Holland America. The Debtor claims that during the cruises his cabin air conditioning failed, Holland America failed to promptly remedy this problem, and, as a result, his trip was ruined. He, therefore, demanded a twenty-five percent refund, at a minimum. The Debtor sent a demand letter to Holland America on June 26, 2004, two days after filing the Case. Then, prior to receiving his discharge, he filed a small claims action against Holland America in San Diego County Superior Court. Finally, in November of 2004, Holland America paid $1,015 to the Debtor in satisfaction of the Holland America claim judgment. The Debtor never reported this claim, the action thereon, or the proceeds received in connection therewith (collectively, the "Holland America Assets") to the Trustee. Similarly, he failed to surrender these proceeds to the Trustee. Indeed, the Trustee discovered the Holland America Assets only through discovery in connection with the Durisoe Lien Litigation. Thus, there is no genuine issue of material fact as to whether or not the Holland America Assets are property of the Estate as all are rooted in a cause of action arising pre-petition. Indeed, the correct outcome of this issue is so clear that Debtor conceded this point through lack of any opposition or argument to the contrary.
Debtor, similarly, failed to advance a single piece of evidence or word of argument to dispute the contention of the Motion that he knowingly and fraudulently failed to report or surrender the Holland America Assets. Thus, summary judgment revoking discharge under section 727(d)(2) is appropriate based solely on the Debtor's silence.
And in addition to this silence there is powerful evidence of the intentional and fraudulent nature of Debtor's omissions. First, there is timing; the Holland America claim arose immediately pre-petition, the Debtor made demand two days after the Petition Date, and he received payment on the Holland America claim less than six months post-petition. Second, it is clear that Debtor understood the requirement that he disclose pre-petition claims like the Holland America claim. Debtor listed a valueless pre-petition receivable claim on the Schedules and yet another valueless pre-petition litigation claim on his 341(a) Questionnaire. Further, the Schedules, 341(a) Questionnaire, and 341(a) process prompted Debtor to disclose claims like the Holland America claim. Finally, Debtor never claimed prior to his response to the Motion that he did not know that a pre-petition litigation claim was not an Estate asset. Debtor previously claimed "mistake" in relation to his failure to schedule and turnover tax refunds for pre-petition tax years and proceeds from pre-petition contingent fee representations received post-petition. But Debtor never took such a position in relation to a claim like the Holland America claim and, indeed, is estopped from doing so given his previous disclosure of similar albeit valueless claims.
Indeed, in Debtor's opposition to a motion for partial summary judgment filed January 6, 2009 by Trustee in this proceeding, based on conversion of Estate assets, Debtor took no position as to most of the receivables he recovered post-petition. He provided evidence and direct argument only as to the smallest and as to the largest of" such claims advising that his alleged success in connection with those claims was dispositive of all other issues. Debtor, obviously, was wrong, and the Court previously granted summary judgment determining that the Holland America Assets were Estate assets.
Debtor may have ignored the Holland America claim on the theory that it was only worth $1,015 and, therefore, was too small to form the basis for a revocation of discharge. But section 727(d)(2) does not contain an explicit materiality requirement. And in areas in section 727 where materiality is required, case law makes clear that materiality is not a function of amount or the extent of creditor harm. See, In re Roberts, 331 B.R. 876, 883 (9th Cir. BAP 2005) (holding that a statement or omission can be material even if not prejudicial to creditors). Instead, materiality looks at the area of impropriety; and a false oath as to the existence of an asset is always material. Id. Thus, while a $1,015 recovery may not provide significant additional value to the Estate, the omission is material. It involves an Estate asset, actually had value, and the failure to disclose its existence impeded the Trustee's efforts.
Therefore, given that the Debtor fails to offer any evidence, explanation, or argument in connection with his failure to disclose or surrender the Holland America Assets, given the timing in relation to this claim which arose immediately pre-petition, was pursued immediately after the Petition Date, and was recovered shortly after the Petition Date, and given the general pattern of duplicitous Debtor conduct, the Court finds that the Debtor knowingly and fraudulently failed to report and surrender the Holland America Assets, and, as a result, that a summary judgment revoking discharge is appropriate.
2. The "Famous" Stillman Case.
Prior to filing the Case, the Debtor represented Ms. Stillman in a suit against CBS and the producers of the reality-show Survivor (the "Stillman Case"). Ms. Stillman was one of the contestants on the very first Survivor series in 2000. The Debtor eventually associated the Cheong Firm as co-counsel. The Stillman Case settled in early 2004, and the Debtor received attorney fees totaling $37,904 in March and April of 2004. The Stillman Checks were not negotiated prior to the Petition Date.
Stillman v. CBS Corporation, Case No. BC 248733 (California Superior Court, Los Angeles); SEG, Inc. v. Stillman , Case No. BC 245328 (California Superior Court, Los Angeles).
The Trustee asserts that the Debtor intentionally and fraudulently failed to list the Stillman Checks in his Schedules. In response, the Debtor contends that he pledged the Stillman Checks to Araiza and believed these proceeds were not property of the Estate. In a separate adversary proceeding, this Court granted summary judgment in favor of the Trustee and held that the Stillman Checks were property of the Estate.
Having held that the Stillman Checks are property of the Estate, the Court now must consider whether the Debtor knowingly and fraudulently failed to report the Stillman Checks and/or failed to surrender them to the Trustee. The central facts surrounding intent involve the Debtor's alleged belief that the proceeds were not property of the Estate. In support of this contention, the Debtor submitted a declaration to the Court stating that he granted Araiza a lien on Stillman fees and therefore never believed them to be property of the Estate. Thus, the Debtor alleges an honest and innocent mistake, not knowing and fraudulent hiding of assets. Specifically the Debtor states:
16. Therefore, when I received checks from these cases, they were immediately signed and given over to Mr. Araiza. I believed at the time, and still believe, that this was his money that I received for him, and not my money that belonged to the bankruptcy estate, as the Trustee now claims.
17. Because of these liens, that were given before I even contemplated bankruptcy, I believed it had become Mr. Araiza's money as soon as I gave him liens on the proceeds of the cases. I did not consider any of the money to be "my money." It never even occurred to me that it was, or even could be considered to be, part of the bankruptcy estate.
09-90161, Dkt. #27 at 22.
Unfortunately for Debtor, however, the byzantine story in relation to the Stillman Checks does not bear careful scrutiny and leads to the inescapable conclusion that it is a fabrication.
In support of the Motion, the Trustee submitted copies of the Stillman Checks along with the affidavit of a partner at the Cheong Firm. The Stillman Checks were dated March 26, 2004 and April 30, 2004 and were subsequently deposited on July 26, 2004 (three days after the section 341(a) creditors meeting) in the Leu Bank Account. Both check endorsements clearly read "FOR DEPOSIT ONLY" and then contain the signature of the Debtor. This evidence clearly contradicts the declaration of the Debtor that he signed the checks over to Araiza. Further, Debtor offers no proof that Araiza received the Stillman Checks other than his own testimony. And Debtor has no proof that Araiza negotiated the Stillman Checks, and, indeed, the evidence is to the contrary. Both Stillman Checks were clearly received by Debtor as he endorsed both "for deposit only." And both checks passed through the Leu Bank account, the bank account as to which Debtor took the Fifth Amendment and refused to provide information. Further support for the Trustee's position is provided by the fact that four checks, not just the two Stillman Checks, were deposited into the Leu Bank account on June 26, 2004. One check, written by Laurnie Durisoe, however, on its face states "replenish retainer". In connection with this check, the Debtor never argues that it was paid over to Araiza and previously argued that it counter-balanced a check he wrote from his own account in a greater amount to Ms. Durisoe to "refund retainer." These facts support the Court's conclusion that the Debtor's story about Araiza is not credible.
Laurnie Durisoe, also referred to by Debtor as Laurnie Jackman, is Durisoe's spouse.
Further, at the hearing on the Motion, the Debtor provided further contradiction of his story. The Court asked why the Debtor did not schedule the alleged Araiza liens. The Debtor responded to the Court's questions as follows:
Q. (Judge Taylor): Did you list [the case liens] on your schedules?
A. (Debtor): What's that?
Q. Did you list the liens on your schedules?
A. No. Because they were paid. They were done deals. It was money I had earned in 1999 and paid out in 2003. I mean, you know, it was a done deal. And I mean, I didn't see any problem with it. I still don't see any problem with it.
Dkt. #91 at 62.
Given that the Stillman Checks were paid in 2004 and endorsed in 2004, the Debtor's statement that he paid Araiza prior to 2004 contradicts his defense and claim of innocent error.
Finally, in the Debtor's Statement of Financial Affairs, the Debtor states under oath that he made no payments to creditors of more than $600 within the 90 days pre-petition. As the Stillman Checks were sent to Debtor during this 90-day period, his new story is directly contradictory to his sworn statement in 2004.
In short, while the Court is required to assume facts in a manner favorable to the non-moving party on a summary judgment motion, the Court is not required to believe the inherently unbelievable. Similarly, where the Debtor takes different positions under penalty of perjury, the Court is not required to believe that this time he is telling the truth. Merely presenting contradictory declarations, with no satisfactory explanation for the inconsistency, does not create a genuine issue of material fact. Cleveland v. Policy Mgmt. Sys. Corp., 526 U.S. 795, 806 (1999); Kennedy v. Allied Mutual Ins. Co., 952 F.2d 262, 266 (9th Cir. 1991). And where the Debtor asserts his Fifth Amendment rights in a civil matter, the Court is entitled to make an adverse inference provided corroborating evidence exists, as it does here. Leonard, Jr. v. Coolidge (In re National Audit Defense Network), 367 B.R. 207, 216 (Bankr. Nev. 2007). The Court believes that no rational trier of fact could come to any other conclusion than that the Debtor knowingly and fraudulently failed to report and turnover the Stillman Checks to the Trustee. Thus, the Court finds that misappropriation of the Stillman Checks, yet again, establishes grounds for revocation of discharge under section 727(d)(2).
As discussed above, recent evidence conclusively supports this determination.
3. Other Incidents Involving Failure To Turnover Property Of The Estate.
The Trustee asks the Court to grant summary judgment revoking discharge under section 727(d)(2) based on seven additional incidents where Debtor allegedly failed to report and turnover property of the Estate. This property consists of various fees earned for legal services performed by the Debtor and $621 in tax refunds. In each case, Debtor currently and/or previously claims honest mistake. As a result, and given the clear basis for revocation of discharge discussed above, the Court declines to revoke discharge based on these incidents through the Motion.
C. 11 U.S.C. § 727(d)(3) - Failing To Obey Court Orders.
1. Court Order To Turnover Records And Provide Accounting Of Clients.
The Trustee argues that the Debtor failed to obey the Court order of June 2, 2007 requiring the Debtor to produce client records, or a list of client engagements and fees earned, for the three year period immediately prior to the Petition Date. In response to the Order, the Debtor faxed over a "recollection" of his client list for the period (the "Client List") and claimed that he did not have any "writings" to produce. Since the Debtor claimed to have no "writings, " the Debtor provided the following caveat as to the Client List:
Debtor has no "writings" (with the exception of one (1) provided herewith) in his possession, custody or control. However, in accordance with the Court's instruction, Debtor has made every effort to re-create the requested items from memory. It should be understood that the Debtor was in poor health during much of the time period in question and his memory is far from perfect. The following recreation is the best memory will allow.
Dkt. #70-4, Ex. P at 36.
The Debtor did not list or mention his representation of Ms. Stillman in the Client List. The Court believes that no rational trier of fact could come to any other conclusion than that the Debtor intentionally and willfully failed to disclose the Stillman engagement. This determination is supported by the numerous moving papers and declarations the Debtor filed in a separate, but related, adversary proceeding and, in particular, in connection with the Reconsideration Motion. For example, in the most recent declaration the Debtor submitted in support of the Reconsideration Motion, the Debtor declares:
7. Trustee did say that I had "hidden" the STILLMAN representation from the Trustee but this is a claim without credibility. STILLMAN was one of the original contestants on CBS "reality" show, "Survivor." The story of STILLMAN suing CBS for cheating, and my representation of STILLMAN, was the most widely reported news event in the United States in 2001.
The underscoring is the Debtor's own emphasis. One questions the suggestion that the Stillman case was more widely covered than the horrific attacks of September 11th, 2001.
8. Since most news stories have only their "15 minutes of fame, " it is truly remarkable that a Google search under the my (sic) name today, returns ANY story on this case, let alone more than twenty (20) stories, more than five (5) years after the case was settled and became old news.
9. I would occasionally "Google" myself while the STILLMAN case was ongoing. It was not uncommon to get over 20, 000 hits". The case didn't settle until 2004 so even then, a search of my name would get between 2, 500 and 5, 000" hits".
09-90161, Dkt. #51 at 2.
It is impossible for this Court to believe that the Stillman case was famous enough that Debtor argues that the Trustee was on constructive notice of its existence; yet at the same time, the Debtor failed to recollect this client when creating the Client List. To believe this illogical argument would require the Court to reach into the metaphysical, which the Court is not required to do. The only plausible conclusion is that the Debtor willfully and intentionally disobeyed the Court order in order to hide his conversion of the Stillman Checks. There simply is no evidence offered by the Debtor, viewed in the utmost favorable light, that convinces the Court that a genuine issue of material fact exists. Thus, the Court finds that Debtor willfully failed to comply with this order and that a revocation of discharge under section 727(d)(3) on this basis is appropriate.
The Court does not consider the other theories for revocation of discharge under section 727(d)(3).
CONCLUSION
The Court recognizes that revocation of discharge is an extraordinary measure. Equally, the Court recognizes that the bankruptcy fresh start is intended for the innocent but unfortunate debtor. Thus, given the totality of the surrounding circumstances and the behavior of the Debtor, and based on all evidence and argument before the Court, the Court GRANTS the Trustee's motion for summary judgment and revocation of discharge under 11 U.S.C. §§ 727(d)(2) and (d)(3) as discussed above.
The Court DENIES summary judgment as to the Conversion Claims. There are genuine issues of material fact as to whether some portion of the payments at issue were on account of post-petition legal services and, thus, properly excludable from the estate.
You know, this story-these stories-I was reading these declarations and the affidavits, and it reminded me of a-movie came out years ago. I think Tim Conway was in it. The Gang Who Couldn't Shoot Straight, I mink was the name of the movie. And the thought came that this summary judgment motion and these affidavits [of Debtor, Durisoe, and Parker] remind me of the gang who couldn't get their stories straight, and that's clearly what this record shows. (July 31, 2007 Hearing Transcript, 04-90530, Dkt. # 141 at 37).
(3) Maintain complete records of all funds, securities, and other properties of a client coming into the possession of the member or law firm and render appropriate accounts to the client regarding them; preserve such records for a period of no less than five years after final appropriate distribution of such funds or properties; and comply with any order for an audit of such records issued pursuant to the Rules of Procedure of the State Bar.