Opinion
NOT FOR PUBLICATION
DATE: November 17, 2011
MEMORANDUM DECISION RE MOTION FOR SUMMARY JUDGMENT
MARGARET M. MANN, JUDGE United States Bankruptcy Court
Plaintiff Miklos Osz ("Osz") filed an adversary complaint on March 25, 2011 against Ronald Lynn Spilsbury and Stacey Lynne Pittman ("Debtors") alleging two claims. First, Osz sought to have his $77,280.60 debt based upon a state court default judgment excepted from discharge under 11 U.S.C. § 524(a)(2)(a), claiming it was incurred as a result of false pretenses and false representations by the Debtors. Second, Osz sought to deny the Debtors their discharge under 11 U.S.C. §§ 727(c), (d) and (e) for making false oaths and accounts in this bankruptcy case. Osz' motion for summary judgment ("Motion") concerns only the second cause of action.
Having considered Osz' and the Debtors' properly admitted evidence in connection with this Motion, the Court declines to grant summary judgment under 11 U.S.C. § 727(a)(2) because the material facts as to the Debtors' intent are disputed.
I. FACTUAL BACKGROUND
On May 1, 2008, Osz began his employment as Senior Vice President of Clinical Operations of ClinAssure, Inc. ("ClinAssure"). The Debtors were the CEO, CFO and co-founders of ClinAssure, which is now only a business name for the Debtors. ClinAssure was to pay Osz $7,500, less certain deductions, every two weeks for his wages. In October 2008, Osz and ClinAssure agreed in writing to defer payment of Osz' remaining 2008 wages of $77,280.60 until April or June 2009. Osz' regular biweekly payments were to resume January 2009.
Osz was terminated in February 2009 due to a reduction in workforce and was not paid his deferred wages. Osz sued ClinAssure and the Debtors for fraud and breach of contract and obtained a default judgment on February 3, 2010 from the Orange County Superior Court on unidentified theories relating to the $77,280.60 of deferred wages.
To satisfy the judgment, Osz levied a $15,000 account receivable owed to the Debtors by Allergan, Inc. in February 2011 precipitating the Debtors' bankruptcy filing. Osz then filed this adversary complaint on March 25, 2011 and this Motion followed seven months later.
II. ANALYSIS
For Osz to be entitled to summary judgment on his claims under 11 U.S.C. § 727, he must demonstrate that "there is no genuine dispute as to any material fact" and that he "is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a) (applicable in adversary proceedings per Fed.R.Bankr.P. 7056). Osz bears the burden of persuasion at trial and must establish that each essential element of his claim is undisputed to prevail on his Motion. See Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). In evaluating his Motion, the Court is "required to view all facts and draw all reasonable inferences in favor of the nonmoving party..;" here, the Debtors. Brosseau v. Haugen, 543 U.S. 194, 195 n.2 (2004).
Not only are all inferences to be drawn in favor of the Debtors, the Court also undertakes its review of the Motion cognizant that the underlying purpose of the bankruptcy code is to grant the debtor a "fresh start." In re Retz, 606 F.3d 1189, 1197 (9th Cir. 2010) (quoting Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279, 1281 (9th Cir. 1996)). To that end, the Ninth Circuit has cautioned that '"courts should construe § 727 liberally in favor of debtors and strictly against parties objecting to discharge.'" Id. Section 727(a)(2) prohibits the Court from granting the debtor a discharge if "the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed property of the debtor, within one year before the date of the filing of the petition."
Applying these standards to his 11 U.S.C. § 727 claim, Osz must demonstrate that there are no genuine disputes to the following material facts: (1) The Debtors made '"a disposition of property, such as transfer or concealment, '" with (2) "'a subjective intent... to hinder, delay or defraud a creditor through the act [of] disposing of the property."' In re Retz, 606 F.3d at 1200 (quoting Hughes v. Lawson (In re Lawson), 122 F.3d 1237, 1240 (9th Cir. 1997)). Osz points to certain assets that he claims were insufficiently disclosed in the Debtors' Schedules of Assets and Liabilities and Statement of Financial Affairs (collectively "schedules") and also to a discovery battle between the parties that he claims is definitive proof of fraudulent intent.
A failure to list valuable assets is a classic reason why debtors may be denied the discharge of their debts under 11 U.S.C. § 727(a)(2). In re Searles, 317 B.R. 368, 377-79 (B.A.P. 9th Cir. 2004), ajfd 2\2 Fed.Appx. 589 (9th Cir. 2006). Osz avows various items were missing from the Debtors' schedules including a $3,000 account receivable from Allergan, Inc., a Citibank checking account, and an assortment of domestic items such as a hot tub, an electric scooter, washer/dryer, patio furniture and a television, some of which were found in a storage unit. Osz also asserts the Debtors underestimated the value of the items in their storage unit by scheduling the value as $2,000, which he claims is demonstrated by the Debtors' later purchase of these items from the Trustee for $11,500.
While what was in or out of the schedules is not disputable, Osz must also demonstrate the facts are not disputed for the second required component of 11 U.S.C. § 727(a)(2); i.e. the Debtors' intent to hinder, delay or defraud creditors. This element requires Osz to prove the Debtors' '"actual, rather than constructive, intent'" to delay, hinder or defraud creditors. Retz, 606 F.3d at 1197 (quoting In re Khalil, 379 B.R. 163, 172 (B.A.P. 9th Cir. 2007)); In reAdeeb, 787 F.2d 1339, 1343 (9th Cir. 1986); In re Beauchamp, 236 B.R. 727, 733-34 (B.A.P. 9th Cir. 1999). "Intent to hinder, delay, or defraud may be inferred from [both] circumstantial evidence, " In re Hansen, 368 B.R. 868, 876 (B.A.P. 9th Cir. 2007), and "course of conduct." In re Beverly, 374 B.R 221, 243 (B.A.P. 9th Cir. 2007) (debtor's fraudulent intent in transferring his interest in $1 million of nonexempt funds to his ex-wife, in exchange for exempt assets could be inferred).
However, "(s)ummary judgment is ordinarily not appropriate in a § 727 action where there is an issue of intent." In re Wills, 243 B.R. 58, 65 (B.A.P. 9th Cir. 1999). In Wills, like here, the debtors admitted they did not disclose certain transfers of property. The issue before the court was solely whether the debtors had the requisite fraudulent intent. Because the Wills debtors presented evidence that they had followed the advice of a tax accountant in making their disclosures, the debtors' intent was disputed and summary judgment was not appropriate. Id.
The Debtors here have presented evidence as to each of the assets at issue explaining why they did not list the assets at issue. These explanations, each analyzed below, provide potential benign rather than fraudulent reasons for the non-disclosures in the Debtors' schedules, and render the intent issue disputes.
Account Receivable
The Debtors contest Osz' allegations with evidence that the Account Receivable was billed after the petition date of March 4, 2011. There is a triable issue of fact on this asset, since the bankruptcy schedules are prepared as of the petition date.
Citibank Account
The Debtors presented evidence that the Citibank account ending 6862 was closed one year prior to filing for bankruptcy despite Osz producing a bank statement showing a zero balance within one year of filing bankruptcy. Docket 12-6. The statement itself reflects that although account activity occurred during the year before the petition, that activity looks to be the result of a bank clerical error. Service charges for the months of May and June, 2010 were imposed by the bank but then credited back to the account in July, 2010. Triable issues of fact exist on whether not listing this asset was a material omission undertaken with wrongful intent.
Items in Storage
Osz contends the Debtors listed the value of the storage unit items in their schedules at $2,000, when these items were later sold to the Trustee for $11,500. This contention is inaccurate. This Court's settlement approval order reflects that the Debtors paid the Trustee $11,500 to purchase much more than just the contents of their storage unit. The Debtors also purchased from the Trustee any non-exempt equity in a 2001 Mercedes S430, two 2008 and 2002 Harley Davidson motorcycles, a 2004 Triumph, a 951 Daytona, and other office equipment for the $11,500 payment. Osz did not object to the settlement and the Court will not reconsider it further.
III. Conclusion
Even without drawing all inferences in their favor, the Court finds the Debtors have presented sufficient evidence to establish genuine factual disputes as to whether material assets were concealed, as well as whether they acted with fraudulent intent. The Court also rejects Osz' suggestion that the discovery dispute is somehow determinative of fraudulent intent. Accordingly, Osz' motion for summary judgment is denied. This Memorandum Decision constitutes this Court's findings of fact and conclusions of law as required by Bankruptcy Rule 7052. Counsel for the Debtors is directed to submit an order denying the Motion.