Opinion
Case No. 15-13536 Adv. No. 15-1117
10-18-2018
In re: GERALD BENJAMIN BRUCE Debtor DANIEL M. MCDERMOTT Plaintiff v. GERALD BENJAMIN BRUCE Defendant
Chapter 7
MEMORANDUM DECISION DENYING MOTION OF THE UNITED STATES TRUSTEE FOR SUMMARY JUDGMENT [Docket Number 29]
This Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a) and 1334, and the standing General Order of Reference in this District. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J). This matter is before this Court on the Motion of the United States Trustee for Summary Judgment and Memorandum in Support [Docket Number 29]; and Defendant's Objection to Motion of the United States Trustee for Summary Judgment and Memorandum in Support [Docket Number 30].
Plaintiff Daniel M. McDermott, United States Trustee for Region 9 ("United States Trustee") seeks to deny Defendant-Debtor Gerald Benjamin Bruce ("Debtor")'s discharge pursuant to Bankruptcy Code Sections 727(a)(2) and (a)(4). On summary judgment, the United States Trustee argues that the discharge should be denied as a matter of law for the Debtor's pre-petition transfers of assets in an alleged attempt to evade creditors and for alleged false oaths on his statement of financial affairs.
In the text of this decision, use of the terms "Bankruptcy Code Section" or "Section" are references to provisions of Title 11 of the United States Code.
Upon review of the evidence and the arguments of the parties, this Court concludes that the United States Trustee is not entitled to summary judgment. Genuine issues of material fact exist with respect to the Debtor's intent, a required element of the United States Trustee's claims. Consequently, the United States Trustee's motion for summary judgment is denied.
I. BACKGROUND
The following facts are undisputed on summary judgment except where stated.
Prior to the Debtor's bankruptcy filing, on February 19, 2014, Robert Greer ("Greer"), obtained a judgment against the Debtor for $607,182.40 [Docket Number 29, Ex. E ("Greer Judgment")]. On February 18, 2014, the day before entry of the Greer Judgment, the Debtor signed and filed paperwork with the Ohio Secretary of State to form Linden Property Management LLC ("LPM") as its authorized representative [Docket Number 29, Ex. A Debtor's Response to United States Trustee's Second Request for Admissions ("Second Set of Admissions"), p. 1]. The Debtor asserts that LPM was formed to minimize the tax burden of just starting a rental management business [Docket Number 30, "Debtor's Objection," p. 5]. The Debtor was directly involved as an officer, shareholder, director or person in control of LPM [Second Set of Admissions, p. 2].
On March 18, 2015, the Debtor transferred title to property he owned located at 12438 Disbro Road, Moores Hill, IN 47032 to LPM for no consideration [Docket Number 29, Ex. C., Transcript of 341 Meeting held November 4, 2015 ("341 Meeting Tr."), pp. 26-30; Ex. G]. On March 19, 2015, the Debtor transferred title to property he owned located at 12408 Disbro Road, Moores Hill, IN 47032 to LPM for no consideration (together with the 12438 Disbro Road transfer, the "Disbro Transfers") [341 Meeting Tr., pp. 26-30; Ex. H]. Debtor asserts that these properties were all transferred in the ordinary course of business [Debtor's Objection, p. 6].
On April 2, 2015, via an amendment to LPM's Operating Agreement originally executed on February 18, 2015, the Defendant transferred 75% of his interest in LPM to Sandra Barbe, Madison Bruce, and Waylon Bruce (the "LPM Equity Transfer") [341 Meeting Tr., pp. 20-21; Ex. F].
On September 15, 2015, the Debtor filed a pro se voluntary Chapter 7 petition. He attended the first meeting of creditors held pursuant to 11 U.S.C. § 341 on November 4, 2015 ("341 Meeting").
At the 341 Meeting, the Debtor admitted that he transferred 75% of his interest in LPM to his mother (Sandra Barbe) and his 4 year-old daughter and 1 year-old son (Madison and Waylon Bruce) [341 Meeting Tr., p. 20]. The Debtor did not disclose the transfer on his Statement of Financial Affairs filed with the Bankruptcy Court [Bankruptcy Case Number 15-13536, Docket Number 15, Statement of Financial Affairs, Question 10]. The Debtor denies that the transfer was done to defraud creditors and instead asserts that he added these individuals to the LLC "per the requirements of form 8823 affirmatively electing to be treat (sic.) as a corporation . . . . [the] actions [were] based on general accounting principles, IRS tax guidelines and regulations, and in no way to conceal or to fraud." [Debtor's Objection, pp. 8-9].
In addition, the Debtor did not disclose the transfer of the Disbro Properties on his Statement of Financial Affairs [Bankruptcy Case No. 15-13536, Docket Number 15, Statement of Financial Affairs, Question 10]. Debtor asserts that the reason he did not disclose the Disbro Properties transfer is because they were transferred in the ordinary course of business [Debtor's Objection, pp. 5-6]. Debtor further asserts that he did not hide the transfers and disclosed the Disbro Transfers, as well as the LPM Equity Transfer, at the 341 Meeting [Id., pp. 14-15].
The Debtor also admitted at the 341 Meeting that after the Greer Judgment, he asked his employer to deposit his wages into LPM's business bank account instead of his personal account in an effort to avoid the wages being garnished [341 Meeting Tr., pp. 12-14]. The United States Trustee alleges that the Debtor did not disclose this business bank account being used to deposit his personal wages on his bankruptcy schedules [Bankruptcy Case Number 15-13536, Docket Number 1, Schedule B].
At the 341 Meeting, the Chapter 7 Trustee Eileen Field ("Chapter 7 Trustee") gave specific instructions to the Debtor regarding amendments that needed to be made to Schedule B to list the business bank account, amendments to the Statement of Financial Affairs to list all transfers of real estate and the transfers of business interests to his mother and children [Docket Number 29, Ex. B, Affidavit of Trustee Eileen K. Field ("Trustee Aff."), ¶ 2; 341 Meeting Tr., pp. 33-34]. The 341 Meeting was continued to November 18, 2015 so that the Debtor could provide additional information to the Chapter 7 Trustee [Trustee Aff., ¶¶ 1-3]. On November 23, 2015 the Chapter 7 Trustee sent the Debtor a follow up letter detailing the changes that were needed to Schedule B and the Statement of Financial Affairs [Docket Number 29, Ex. D].
The Debtor failed to attend the continued 341 meeting scheduled for November 18, 2015 as well as each subsequent meeting scheduled on December 2, 2015, and December 16, 2015 [Trustee Aff., ¶¶ 3-6]. Debtor admitted to missing the meetings but asserts that he was overwhelmed by the legal process and was seeking counsel that he was ultimately unable to afford [Debtor's Objection, p. 5].
On December 7, 2015, the United States Trustee filed an adversary complaint in this adversary proceeding against the Debtor objecting to the Debtor's discharge pursuant to Bankruptcy Code Section 727(a)(2) and (a)(4).
Subsequently, on March 21, 2016, the Chapter 7 Trustee filed a separate adversary complaint, in Field v. Gerald Benjamin Bruce and Linden Property Management LLC, Adversary Proceeding Number 16-1019, to avoid the Disbro Transfers from the Debtor to LPM as fraudulent transfers pursuant to Bankruptcy Code Sections 548 and/or 544. In that adversary proceeding, Defendant LPM did not file an answer to the complaint or respond to the Chapter 7 Trustee's motion requesting default judgment. Accordingly, this Court issued a decision and granted default judgment to the Chapter 7 Trustee against LPM avoiding the Disbro Transfers as fraudulent transfers [Docket Number 29, Ex. I].
II. SUMMARY JUDGMENT STANDARD
This Court addresses the United States Trustee's motion for summary judgment under the standard set forth in Rule 56(a) of the Federal Rules of Civil Procedure (the "Civil Rules") made applicable to this proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure. Civil Rule 56(a) provides that summary judgment is to be granted by this Court "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). "As to materiality, the substantive law will identify which facts are material. Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A "genuine" dispute exists only where "evidence is such that a reasonable [finder of fact] could return a [judgment] for the nonmoving party." Id.; Gallagher v. C.H. Robinson Worldwide, Inc., 567 F.3d 263, 270 (6th Cir. 2009).
In order to prevail, the moving party, if bearing the burden of persuasion at trial, must establish all elements of his claim. Celotex Corp. v. Catrett, 477 U.S. 317, 331 (1986). Thereafter, "the nonmoving party must come forward with 'specific facts showing that there is a genuine issue for trial.'" Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986) (citations omitted). All inferences drawn from the underlying facts must be viewed in a light most favorable to the party opposing the motion. Id. at 587-88; Anthony v. BTR Auto. Sealing Sys., Inc., 339 F.3d 506, 511 (6th Cir. 2003). Nonetheless, mere conclusory allegations or unsupported opinions of the nonmovant are insufficient to defeat a motion for summary judgment. Matsushita, 475 U.S. at 586-88; See also Blaney v. Cengage Learning, Inc., 2011 U.S. Dist. LEXIS 43780, at *19-20, 2011 WL 1532032, at *7 (S.D. Ohio Apr. 22, 2011) ("Although the summary judgment standard requires that evidence of record be viewed in the light most favorable to the nonmoving party, it does not require that all bald assertions and subjective unsupported opinions asserted by the nonmoving party be adopted by a court.").
III. LEGAL ANALSYIS
The United States Trustee seeks to deny the Debtor's discharge pursuant to Bankruptcy Code Section 727. Generally, an honest debtor filing under Chapter 7 is to be granted the protections of the discharge injunction unless one of the specific grounds for denying a discharge applies. United States Trs. v. Zhang (In re Zhang), 463 B.R. 66, 78 (Bankr. S.D. Ohio 2012); Baker v. Reed (In re Reed), 310 B.R. 363, 367 (Bankr. N.D. Ohio 2004). Denial of a debtor's discharge is an extreme remedy that should not be taken lightly. Buckeye Retirement Co., LLC v. Hake (In re Hake), 387 B.R. 490, 501 (Bankr. N.D. Ohio 2008). Consequently, the provisions denying a discharge are liberally construed in favor of the debtor. Buckeye Retirement Co., LLC v. Swegan (In re Swegan), 383 B.R. 646, 653 (B.A.P. 6th Cir. 2008); Reed, 310 B.R. at 367.
Nonetheless, the exceptions to discharge serve the purpose of ensuring compliance with basic bankruptcy policy including honesty. Reed, 310 B.R. at 367. "From a global perspective, honesty envisions a debtor who 'has tried his best to pay his creditors but failed.'" Id. (further citation omitted). Contrary to this policy is the debtor who transfers his or her property, or fails to disclose transfers, for the purpose of evading payment to creditors. Id. at 367-68. See also Hake, 387 B.R. at 502 (noting that while "the law favors discharges in bankruptcy, it will not ordinarily tolerate the [debtor's] intentional departure from honest business practices where there is a reasonable likelihood of prejudice").
On summary judgment, the United States Trustee seeks to deny the Debtor's discharge under two specific provisions of Bankruptcy Code Section 727(a) as a matter of law. First, the United States Trustee asserts that the Debtor's discharge should be denied pursuant to Section 727(a)(2) because he transferred real property (the Disbro Transfers) and 75% of his interest in LPM for no consideration and with the intent to hinder, delay, or defraud creditors. Alternatively, the United States Trustee seeks to deny the Debtor's discharge pursuant to Section 727(a)(4) because the Debtor failed to disclose the Disbro Transfers and the LPM Equity Transfer on Question 10 of his Statement of Financial Affairs ("SOFA").
Bankruptcy Code Section 727(a)(2) provides that a debtor may be denied a discharge if the debtor "with intent to hinder, delay, or defraud a creditor . . . has transferred, removed, destroyed, mutilated, or concealed . . . property of the debtor, within one year before the date of the filing of the petition[.] 11 U.S.C. § 727(a)(2)(A). To prevail under this section, the United States Trustee must prove two elements: (1) a disposition of property, such as a transfer or concealment; and (2) a subjective intent by the debtor to hinder, delay, or defraud a creditor through the act of disposing of the property. Keeney v. Smith (In re Keeney), 227 F.3d 679, 683 (6th Cir. 2000); Carter-Jones Lumber Co. v. Beatty (In re Beatty), 583 B.R. 128, 136 (Bankr. N.D. Ohio 2018).
The United States Trustee further seeks to deny the Debtor's discharge pursuant to Bankruptcy Code Section 727(a)(4). Under this provision, a debtor may be denied a discharge if "the debtor knowingly and fraudulently, in or in connection with the case . . . made a false oath or account[.]" 11 U.S.C. § 727(a)(4)(A). To prevail under Section 727(a)(4)(A), the Trustee must prove that: "1) the debtor made a statement under oath; 2) the statement was false; 3) the debtor knew the statement was false; 4) the debtor made the statement with fraudulent intent; and 5) the statement related materially to the bankruptcy case." Keeney, 227 F.3d at 685 (citing Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 178 (5th Cir. 1992)).
Significantly, both Sections 727(a)(2)(A) and (a)(4)(A) require the United States Trustee to prove that the Debtor made the property transfers or the allegedly false statements, with fraudulent intent. To determine intent, "the trier of fact is necessarily required to make a subjective inquiry into the debtor's state of mind. Such an inquiry normally requires explanatory testimony by the debtor and an assessment by the trier of fact of the debtor's demeanor and credibility." Hunter v. Sowers (In re Sowers), 229 B.R. 151, 159 (Bankr. N.D. Ohio 1998). Because determining a debtor's fraudulent intent is such a fact-intensive inquiry, it generally is not amenable to disposition by summary judgment. Swegan, 383 B.R. at 655-56 (citing Hoover v. Radabaugh, 307 F.3d 460, 467 (6th Cir. 2002)); Schaumburg Bank & Trust Co., N.A. v. Hartford (In re Hartford), 525 B.R. 895, 903 (Bankr. N.D. Ill. 2015) ("As to section 727(a)(2), the element of intent on the part of the Debtor is a factual issue that is almost never appropriate for summary judgment."). While there is no per se rule against summary judgment where a debtor's state of mind is at issue, it should be granted only where "the evidence is so one sided that reasonable minds could not differ as to the only rational outcome." Beatty, 583 B.R. at 138; see also Swegan, 383 B.R. at 656 (finding that summary judgment was not appropriate where "'all reasonable inferences' do not necessarily 'defeat the claims of one side.'"); Sowers, 229 B.R. at 159 (noting that summary judgment may be appropriate on claims requiring fraudulent intent "as long as there is no possibility that the facts presented at trial would demonstrate a lack of fraud or intent").
In this case, this Court recognizes that there are certain "badges" of fraud present which suggest that the Debtor acted with the requisite fraudulent intent needed to establish a Section 727(a)(2) or (4) claim. In particular, the creation of LPM and the Debtor's transfers of the interests at issue around the time of the Greer Judgment and shortly before this bankruptcy case was filed are suspect. Transfers to family members and transfers where a debtor retains an interest in the property transferred are also indicia of fraud. The Debtor's subsequent failure to disclose these transactions in his Statement of Financial Affairs is also circumstantial evidence of fraudulent intent.
However, while admitting to the Disbro Transfers and LPM Equity Transfer, the Debtor provides reasons for the transfers other than fraud or evading creditors. The Debtor states that he had legitimate business and tax reasons for the transactions at issue. He further denies that his failure to disclose the transfers on his SOFA was done with the requisite fraudulent intent. The Debtor asserts that he believed that the SOFA only required disclosure of transfers outside the ordinary course of business and he considered the transfers at issue to be within the ordinary course.
The justifications given by the Debtor could serve to blunt a presumption of fraudulent intent if undertaken in good faith. United States Tr. v. Halishak (In re Halishak), 337 B.R. 620, 630 (Bankr. N.D. Ohio 2005). Moreover, false information given as the result of mistake or inadvertence may not give rise to a finding of fraudulent intent while a debtor's reckless indifference or disregard of the truth may result in the opposite conclusion. Keeney, 227 F.3d at 686. The veracity of the Debtor's statements and his credibility cannot be determined on the documents submitted by the parties. Accordingly, a genuine dispute of material fact exists as to an essential element of the United States Trustee's claims that cannot be resolved on summary judgment.
Nonetheless, the United States Trustee attempts to rely on this Court's decision and grant of default judgment in a separate but related adversary proceeding to preclusively establish the Debtor's fraudulent intent [Docket Number 29, Ex. I]. In that decision, this Court granted default judgment in favor of the Chapter 7 Trustee and against LPM avoiding the Disbro Transfers as fraudulent transfers [Id.]. The United States Trustee argues that this prior ruling against LPM is "law of the case" and that it includes a determination that the Debtor had an intent to hinder, delay, or defraud creditors.
The doctrine of the law of the case "'posits that when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages of the same case.'" In re Pilgrim's Pride Corp., 442 B.R. 522, 529 (Bankr. N.D. Tex. 2010) (quoting Christianson v. Colt Indus. Operating Corp., 486 U.S. 800, 816 (1988)). It is a "judicial doctrine that promotes finality and efficiency in the judicial process by encouraging courts to follow their own decisions within any given case." Pilgrim's Pride, 442 B.R. at 529. Bankruptcy courts apply the doctrine of law of the case in adversary proceedings and even between separate adversary proceedings in the same bankruptcy case. Id. at 530; Bourdeau Bros., Inc. v. Montagne (In re Montagne), 2010 Bankr. LEXIS 212, at *15, 2010 WL 271347, at *6 (Bankr. D. Vt. January 22, 2010).
However, the law of the case doctrine is "'an amorphous concept' whose application is a matter of discretion rather than a limit on the court's power." Associated Int'l Ins. Co. v. Crawford, 182 F.R.D. 623, 629 (D. Colo. 1998) (citing Arizona v. California, 460 U.S. 605, 618 (1983)). As such, it is within the court's discretion to decide it is inappropriate where its application would create an injustice. Id. Using such discretion, courts have determined that a default judgment against one defendant is not binding as "law of the case" against other defendants. See Mrs. Condies Salad Co., Inc. v. Colorado Blue Ribbon Foods, LLC, 2012 U.S. Dist. LEXIS 155388, at *15-16, 2012 WL 5354848, at *5-6 (D. Colo. Oct. 30, 2012); Associated Int'l Ins. Co., 182 F.R.D. at 629 (declining to bind an insured's judgment creditor to a default judgment against the insured when the default judgement contained only the conclusions sought by the plaintiff "without any testing of those conclusions by trial or argument").
In this instance, application of the law of the case doctrine in the manner argued by the United States Trustee would be inappropriate. The Debtor was not a party to the default judgment against LPM nor did this Court's decision to grant default judgment involve any factual findings or determinations as to the Debtor's intent. Consequently, this Court concludes that the default judgment against LPM in the separate adversary proceeding fails to establish the Debtor's fraudulent intent in this Section 727(a) action.
As a corollary point, the Debtor asks this Court to reach the conclusion that the Debtor's actions were not fraudulent based on this Court's dismissal of a different adversary proceeding brought by the Chapter 7 Trustee. In Adversary Proceeding No. 16-1020, the Chapter 7 Trustee sought to avoid the transfer of property located at 6359 Robert E. Lee Drive, Fairfield, Ohio by LPM to the Debtor's mother as a fraudulent transfer. That adversary proceeding was subsequently dismissed at the Chapter 7 Trustee's request. The Debtor argues that "during the discovery proceedings the evidence was so overwhelmingly clear that the transfers were not fraudulent or intended to defraud creditors, the Trustee requested the courts to dismiss Her (sic.) claim." Debtor's Objection, p. 3. This Court similarly declines to draw any inferences from the outcome in Adversary Proceeding No. 16-1020. --------
IV. CONCLUSION
Because genuine issues of material fact exist, this Court concludes that the United States Trustee is not entitled to judgment as a matter of law on the denial of discharge claims pursuant to Bankruptcy Code Sections 727(a)(2) and (a)(4). Accordingly, the Motion of the United States Trustee for Summary Judgment and Memorandum in Support [Docket Number 29] is DENIED.
SO ORDERED.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Beth A. Buchanan
United States Bankruptcy Judge Dated: October 18, 2018 Distribution List:
Monica Kindt, Esq.
Gerald Benjamin Bruce
316 Laurel Ave
Hamilton, OH 45015