Docket: Case No. 14-45637-NHL; Adv. Pro. No. 15-01039-NHL
Court: United States Bankruptcy Court, E.D. New York; March 31, 2016; Us Bankruptcy; United States Bankruptcy Court
Richard Pu filed a motion for summary judgment seeking to deny Apostólos and Efrosini Mitsopoulos a discharge in their bankruptcy case under sections 727(a)(5), 727(a)(3), and 727(a)(4) of the Bankruptcy Code. For the claim under 727(a)(5), Pu argued the Debtors could not satisfactorily explain the loss of their primary asset, their home equity. However, the Court denied this claim, finding the Debtors adequately explained the loss through a mortgage loan and home equity line of credit used to pay a debt.
Regarding the 727(a)(3) claim, Pu alleged the Debtors failed to provide adequate financial records. Additionally, under 727(a)(4), Pu claimed Efrosini Mitsopoulos made a false oath during a Rule 2004 examination. The Court found that there were contested factual issues concerning these claims, which precluded granting summary judgment.
The background details included the Debtors’ son George Mitsopoulos entering a franchise agreement with Medicine Shoppe, which led to joint liabilities for legal fees incurred while defending against an arbitration action. The Debtors settled with Medicine Shoppe for $570,000, financing the settlement through loans secured by their home. Pu, who previously represented the Clients, claimed he was discharged without cause, while the Clients contended they replaced him due to his refusal to settle. Pu also pursued legal fees in his individual capacity due to a suspension from practicing law.
Pu alleges that A. T committed malpractice by not filing a motion in the 2006 Collection Action, arguing that Pu, P.C. was the proper plaintiff and that he, as a suspended attorney, could not represent it. Pu believes that had the motion been made, it would have been granted and is valuable because he claims it contributed to the serious health decline and eventual death of Apostólos Mitsopoulos. Following a loan modification in April 2012 and the Debtors' Chapter 7 bankruptcy filing in November 2014, Pu initiated an adversary proceeding in March 2015 to deny the Debtors’ discharge, intending to recover from the 2006 Collection Action despite acknowledging his prior actions were improper. He suggests that denying the Debtors’ discharge would allow him to access their malpractice claim against A. T as a potential source of funds for his claim.
The Court has jurisdiction under 28 U.S.C. 1334(b) and views this as a core proceeding per 28 U.S.C. 157(b)(2)(J). Under Federal Rule of Civil Procedure 56, summary judgment is granted if no genuine dispute of material fact exists. The court assesses evidence favorably toward the non-moving party, requiring them to identify disputed facts that could influence the case's outcome.
Pu seeks summary judgment against the Debtors under 727(a)(5), claiming they failed to satisfactorily explain the loss of $600,000 in home equity, which is a basis for denying discharge as outlined in Section 727(a)(5). The statute mandates that a discharge will be granted unless the debtor cannot adequately explain asset losses before the determination of discharge denial.
The section aims to prevent debtors from misusing the bankruptcy process by obscuring their financial situations and not providing credible explanations for asset losses. Under Section 727(a)(5), the plaintiff must first prove that: 1) the debtor once had substantial and identifiable assets; 2) those assets are now missing, with their whereabouts unknown; and 3) the debtor has not offered a plausible explanation for this loss. The court's inquiry focuses on the fate of the assets rather than the reasons behind their disappearance. An explanation need only be satisfactory, not necessarily meritorious. The burden of proof shifts to the debtor only after the plaintiff establishes an unexplained asset loss.
In this case, the plaintiff argues that the debtors did not adequately explain the loss of equity in their home, challenging the legitimacy of a $600,000 loan from Chase used to pay debts to Medicine Shoppe. However, the plaintiff misinterprets the court's focus, as he does not dispute the actual disposition of the home's equity. The debtors accounted for a majority of the loan proceeds through checks totaling $515,193 paid to Medicine Shoppe, and their claim that these funds were used to cover a $570,000 debt warrants denial of the plaintiff's summary judgment motion.
Additionally, under Section 727(a)(3), the plaintiff contends that the debtors failed to maintain adequate records relevant to their financial transactions, including those related to their son's pharmacy and the Chase loan. Section 727(a)(3) states that a discharge will be granted unless the debtor has concealed or destroyed pertinent records, unless justified by the circumstances.
To establish a prima facie claim under 727(a)(3), the Plaintiff must demonstrate two elements: the debtor's failure to maintain adequate records and that this failure prevents the determination of the debtor's financial condition and business transactions. The initial burden lies with the creditor to prove the absence of records; thereafter, the burden shifts to the debtor to justify their failure to produce them. The bankruptcy court has broad discretion to assess if the records provided are adequate, generally allowing for discharge in consumer bankruptcy cases if the debtor can show sufficient records reflecting their financial condition during the case and prior to filing.
Factors considered in evaluating record sufficiency include the debtor’s business involvement, the complexity and volume of the business, the debtor’s obligations, culpability for record-keeping failures, educational background, customary practices in their business sector, accuracy of existing records, any egregious behavior, and courtroom demeanor.
In this case, while the Plaintiff assumes that the Debtors were closely involved in their Son's pharmacy, there is no evidence supporting significant engagement. Although the Debtors guaranteed a loan for their Son's business, this does not legally classify them as principals responsible for the business records under 727(a)(3). The Court has yet to decide on the Debtors' accountability for preserving Titan's records, making a ruling on their adequacy premature.
The Debtors submitted proof of income, recent bank statements, tax returns, and additional documents related to a loan, which the Plaintiff argues are insufficient compared to records produced by Chase. However, considering the evidence presented and favoring the non-moving party, the Debtors’ records allow for a reconstruction of their financial position, thus summary judgment is not appropriate. The Plaintiff must prove at trial that the Debtors' production is inadequate, and if found insufficient, the Debtors retain the right to justify their record-keeping at trial.
Plaintiff's motion for summary judgment regarding the denial of the Debtors' discharge under 11 U.S.C. § 727(a)(3) is denied. The Plaintiff also seeks summary judgment under § 727(a)(4), claiming the Debtors made a false oath. For a successful objection under § 727(a)(4)(A), the objecting party must prove by a preponderance of the evidence that the debtor made a false oath knowingly and with intent to deceive, and that the statement materially related to the bankruptcy case. The Fourth Circuit emphasizes the necessity of proving that the debtor's false statement was made willfully and with intent to defraud. The determination of a false oath is a factual question.
The Plaintiff argues that Ms. Mitsopoulos provided false testimony during her Rule 2004 examination and made false statements at the 341 meeting and in the bankruptcy petition, stating she had no recollection of the circumstances surrounding significant mortgage signings and loan applications. The Plaintiff finds her claims of forgetfulness implausible, suggesting they indicate fraudulent intent. However, the Debtors counter that Ms. Mitsopoulos, being an elderly woman with limited education and English comprehension, relied on her family for financial decisions, which could explain her lack of memory.
Despite the Plaintiff's assertions, the court notes that even if Ms. Mitsopoulos' statements were untruthful, the crucial issue of her intent to defraud remains a factual question. A reasonable jury could conclude in favor of the Debtors, thus negating the Plaintiff's motion for summary judgment. The evidence does not conclusively establish the existence of a false oath under § 727(a)(4)(A).
Summary judgment cannot be granted when necessary inferences are not clearly supported by the record. The Plaintiff claims Ms. Mitsopoulos committed perjury during her 341 meeting regarding the source of her mortgage payments, which she attributed to retirement funds. However, this assertion does not constitute a false oath under 11 U.S.C. § 727(a)(4), as the Plaintiff failed to demonstrate that her statement was false. The Plaintiff also alleges five false statements in the Debtors’ bankruptcy petition intended to conceal a $600,000 conveyance. Yet, the Plaintiff does not provide evidence proving these statements were false or made with intent to defraud, which is required for claims under § 727(a)(4)(A). This claim necessitates a detailed factual analysis, and the Court finds that the Plaintiff's interpretations and inferences from undisputed facts are insufficient. Consequently, the Plaintiff's motion for summary judgment on claims to deny the Debtors' discharge under §§ 727(a)(5), 727(a)(3), and 727(a)(4)(A) is denied. All statutory references are to the Bankruptcy Code, and references to Rules pertain to the Federal Rules of Bankruptcy Procedure. The document also notes that Apostólos Mitsopoulos passed away during the case, but his status as an individual debtor remains relevant for discharge eligibility. Other references include ongoing arbitration proceedings involving the Debtors and a suspension from legal practice for the Plaintiff. The Debtors have adjusted their Schedule B in response to these proceedings, and George filed for bankruptcy in 2011.
In July 2011, Pu initiated an adversary proceeding against George, successfully obtaining a judgment that denied George a discharge under 11 U.S.C. § 727(a)(3). A key allegation, not included in the Complaint, concerns the denial of discharge under § 727(a)(4), with Pu asserting that the Debtors made false statements in their 2007 $600,000 Loan application. The Complaint does not address this allegation in relation to § 727(a)(4). Ms. Mitsopoulos, during her deposition, inconsistently stated her age, claiming to be both eighty-nine and eighty-four, while her attorney claimed she was eighty-one at a subsequent hearing. Pu also highlights inconsistencies concerning who paid the mortgage during Ms. Mitsopoulos' Rule 2004 examination; however, a review of the transcript does not support claims of inconsistency warranting summary judgment. Pu identifies five statements in the Debtors’ petition as potentially misleading: 1) no related bankruptcy case exists; 2) the Debtors’ debts are primarily consumer debts; 3) no “other contingent and unliquidated claims” exist; 4) the amount of Pu’s claim is unknown; and 5) no individual or firm possesses the Debtors’ books and records. Pu claims George’s bankruptcy (Case No. 11-41911CEC) is a related case, but fails to establish it meets the criteria under Local Bankruptcy Rule 1073-2a. Regarding point 3, Pu seems to reference a potential malpractice claim against A. T. Although the Debtors have amended Schedule B to include this claim in Case No. 14-45637-NHL, there has been no evidence presented that this omission was intentional or fraudulent.
