2012 Chief Judge Burns - Opinions
Chief Judge Gloria Burns -- Opinions signed in 2012
A law firm, as third party beneficiaries of the claims of an individual creditor, sought nondischargeability under § 523(a)(2)(A) and to deny the debtor his discharge under § 727(a)(3). With respect to the § 523(a)(2)(A) claim, the court held that while the individual creditor had received a $1.8 million default judgment in state court against the debtor in 2005 on account of debtor's allegedly fraudulent conduct, the court found that the plaintiff failed to put forth facts in the bankruptcy case showing that debtor made fraudulent misrepresentations, engaged in fraud, or obtained money based upon the false pretenses for the purposes of § 523(a)(2)(A).
The court did find, however, that the debtor should be denied his discharge under § 727(a)(3) because the debtor failed to keep or preserve any recorded information from which his financial condition might be ascertained, and Debtor's proffered justification for such failure was unreasonable and unbelievable. The Debtor's claim that he had a severe neurological disorder and brain surgery that prevented him from keeping records or other documentation regarding his business dealings and financial condition were unbelievable in light of the fact that debtor was able to own and operate a business, engage in business dealings to sell the business, continue to manage the business, file tax returns and generally support himself during the same time; yet, the debtor was unable to produce any documents pertaining to his alleged medical condition.
In this adversary the chapter 7 trustee objected to the debtor's discharge pursuant to §§ 727(a)(2)(A), (a)(2)(B), and (a)(4)(A) of the Bankruptcy Code. After a one-day trial on the matter, the Court found that the Debtor should be denied his discharge under all three subsections of § 727 due to his failure to disclose significant financial transactions made on the eve of and directly after the bankruptcy filing and material misrepresentations and omissions made by the Debtor under oath. Specifically, the Debtor withdrew in excess of $140,000 immediately before and after filing the bankruptcy petition from certain life insurance policies that he was required to maintain for the benefit of his children, and he also transferred assets and funds from a sole proprietorship owned by Debtor in New Jersey, to a newly formed corporation in Maryland that was solely owned by the Debtor.
Before the Court was a Motion for Relief from Stay by a creditor seeking, inter alia, a declaration that the stay did not apply to its attempt to collect from a trust account held for the benefit of the Debtor in a Cook Islands Trust (the "Property"), or, in the alternative, seeking relief from the automatic stay to continue collection efforts against the Debtor by reaching the Property. ATN, the creditor seeking relief and also a former chapter 11 debtor, argued that because it had been previously determined by a bankruptcy court in the Middle District of Florida that the Debtor was the recipient of a constructively fraudulent transfer in 1999 of $6 million from ATN, any remaining amount of said funds in Debtor's possession were property of the ATN estate and not property of the Debtor. ATN alternatively argued that, if the Property were held not to be property of the ATN estate, then it was entitled to the imposition of a constructive trust over the Property remaining, if any, post-petition.
Thus, the Court had to determine first, whether fraudulently transferred property becomes property of the bankrupt's estate under § 541 at the moment the transfer is avoided, or whether the property must actually be recovered by the trustee under § 550 for the property to become property of the ATN estate pursuant to § 541. Having concluded that property does not become property of the estate under § 541 until recovered by the trustee or debtor-in-possession, the Court next had to determine whether ATN was entitled to the imposition of a constructive trust over the property post-petition, thereby rendering ATN's equitable interest superior to that of the Debtor's interest pursuant to § 541(d). While the Court concluded that the imposition of a constructive trust post-petition in bankruptcy is permissible, the Court also recognized the inherent tension between the bankruptcy code and the equitable remedy of a constructive trust, noting that such remedy could wreak havoc with the priority system ordained in the Code. The Court concluded that the movants had failed to establish that a "wrongful act" led to "unjust enrichment" for the purposes of the imposition of a constructive trust under New Jersey law and that principles of res judicata were not applicable in this instance. Therefore, the Court denied the Motion for Relief from Stay filed by ATN.