Schoenmann v. Chen et al

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26 1 Unless 	otherwise 	indicated, 	all 	chapter, 	section 	and 	rule
references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and to
the Federal Rules of Bankruptcy Procedure, Rules 1001-9037 in effect
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	) Bankruptcy Case
) No. 03-32157DM
GEORGE QUINN CHEN, 	)
) Chapter 7
Debtor. 	)
___________________________________)
E. LYNN SCHOENMANN, as Trustee of 	) Adversary Proceeding
the Chapter 7 Estate of George 	) No. 07-3108DM
Quinn Chen, Debtor, 	)
)
Plaintiff, 	)
)
v. 	)
)
GEORGE QUINN CHEN, an individual, 	)
CYNTHIA WONG, an individual, 	)
SHANGHAI 1930 LLC, a California 	)
limited liability company, and 	)
SHANGHAI 1930 RESTAURANT PARTNERS, )
L.P., a California limited partner-)
ship, 	)
)
Defendants. 	)
___________________________________)
MEMORANDUM DECISION ON COMPLAINT TO REVOKE
DISCHARGE AND TO RECOVER MONEY
I. INTRODUCTION.
E. Lynn Schoenmann, the Chapter 7 1 trustee (“Trustee”),
Signed and Filed: November 09, 2009
________________________________________
DENNIS MONTALI
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
November 10, 2009
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 07-03108 Doc# 80 Filed: 11/09/09 Entered: 11/10/09 08:47:16 Page 1 of 15

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prior 	to 	October 	17, 	2005, 	the 	effective 	date 	of 	most 	of 	the
provisions 	of 	the 	Bankruptcy 	Abuse 	Prevention 	and 	Consumer
Protection Act of 2005, Pub. L. 109-8, April 20, 2005, 119 Stat. 23,
as Debtor’s case was filed prior to its effective date.
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initiated this adversary proceeding by filing a complaint (the
“Complaint”) against George Q. Chen (“Debtor”), his wife, Cynthia
Wong (“Wong”), Shanghai 1930 LLC (“Shanghai LLC”), and Shanghai
1930 Restaurant Partners, L.P. (“Shanghai LP”) on September 24,
2007. 	The Complaint sought declaratory relief regarding Debtor’s
ownership interest in Shanghai LLC, the avoidance of postpetition
transfers and revocation of the Debtor’s discharge.
More specifically, the Complaint sought a determination that
as of July 23, 2003, the date of commencement of this bankruptcy
case (the “Petition Date”), the Debtor was the sole member of
Shanghai LLC. 	The Debtor contended that as of the Petition Date,
Wong owned a 51% membership interest in Shanghai LLC, by way of
transfer from the Debtor. 	On this claim for relief the parties
brought cross motions for summary judgment and the Court granted
summary judgment in favor of the Trustee on November 14, 2008,
determining that all membership interests in Shanghai LLC were
owned by the Debtor as of the Petition Date.
On October 21, 2008, Shanghai LLC and Shanghai LP were
eliminated as defendants by way of their summary judgment motion
that was not opposed by the Trustee.
On April 20, 2009, the Debtor and Wong, the only remaining
defendants, filed a motion seeking reconsideration of the court’s
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ruling in favor of the Trustee on the first claim for relief. 	On
August 4, 2009, the court issued its Memorandum Decision on Motion
to Reconsider, stating its reasons for denying the motion. 	That
denial will be incorporated into the Final Judgment to be issued.
By the second claim for relief, the Trustee seeks to avoid
and recover numerous postpetition transfers made by Shanghai LP
(under the Debtor’s and Wong’s control and direction) to the
Debtor and Wong during the period between the Petition Date and
the date of sale of the estate’s ownership interest in the
Restaurant (as hereafter defined) to Wong.
In the third claim for relief, the Trustee seeks revocation
of Debtor’s discharge.
The matter was tried to the court on June 1 & 2, 2009;
appearances were noted in the record. 	Having considered the
testimony of the witnesses, the documentary evidence, and the
arguments of counsel, the court now issues it decision, subject to
further consideration of the evidence as discussed below.
For the reasons to be explained, on the second claim for
relief the court will award Trustee damages in the sum of
$38,806.84 against Debtor based upon his receipt of that amount by
way of two equity distributions that were property of the estate
and in the sum of $729,044.19 based upon proof that he received at
least that amount on account of a prepetition loan owed to him
that also was property of the estate. 	The court will award
Trustee damages in the sum of no less than $11,000 against Wong
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2 The 	following 	discussion 	constitutes 	the 	court's 	findings
of fact and conclusions of law. 	Fed. R. Bankr. P. 7052(a). 	Some of
the findings are based upon the parties’ Stipulation Of The Parties
To Undisputed Facts filed May 29, 2009 (docket # 76).
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based upon her receipt of a portion of the debt owed to Debtor.
It will not award damages against Wong based upon her receipt of
two equity distributions.
On the third claim for relief, Debtor’s discharge will be
revoked.
II. FACTS. 2
The Debtor filed for chapter 13 relief on July 25, 2003 (the
“Petition Date”). 	The Debtor’s case was converted to chapter 11
on August 13, 2003, and Trustee was appointed. 	Then on July 15,
2005, the Debtor’s case was converted to chapter 7; the Trustee
continues to serve as trustee. 	The court entered an order
discharging the Debtor on October 26, 2005.
Debtor founded a restaurant known as “Shanghai 1930” in 1997
in San Francisco, California (the “Restaurant”). 	It has operated
ever since, and is owned and operated by Shanghai LP, the general
partner of which is Shanghai LLC. 	Debtor was the 100% separate
property owner of Shanghai LLC. 	Debtor and Wong are also 	limited
partners in Shanghai LP.
On April 25, 2007, Debtor filed a motion seeking the estate’s
abandonment of his interest in Shanghai LP. 	His expert appraisal
witness concluded that that interest had a nominal or no value as
of February 28, 2007.
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In opposition the Trustee located a third-party buyer willing
to buy the estate’s interest for $25,000. 	Wong objected to the
sale and ultimately purchased the estate’s interest for $50,000.
With the approval of the court, Trustee sold all of the
estate’s interests in Shanghai LP and Shanghai LLC to Wong on
November 14, 2007 (the “Sale Date”). 	The sale did not include any
claims held by the estate against the Debtor or Wong with respect
to payments made by either Shanghai LP or Shanghai LLC prior to
the Sale Date. 	At issue before the court are activities that
occurred between the Petition Date and the Sale Date (the “Subject
Period”).
As of the Petition Date there was an outstanding amount owed
by Shanghai LP to the Debtor of no less than $935,709.98 (the
“Chen Loan”). 	The Chen Loan is reflected in Shanghai’s general
ledger as a liability account (Loan from George Chen - Account
2300, or “Chen Loan Account”). 	Most, if not all, of the Chen Loan
represents cash advances Debtor made prior to the Petition Date to
help the Restaurant deal with cash flow needs, including covering
employees’ tips, cash purchases, etc. 	The Trustee was unaware of
the existence of or the outstanding balance on the Chen Loan until
conducting discovery involving the sale of the estate’s interest
in Shanghai LP because the Debtor did not list it on his
schedules. 	The Trustee has received no payments from Shanghai or
anyone else on account of the Chen Loan.
A. Equity Distributions.
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During the Subject Period, and disregarding management fees
and salary payments, $20,880 was paid to the Debtor in December,
2005 and $17,926.84 more in April 2007. 	The same amounts were
paid to Wong on the same dates, and all four payments were
distributions on equity interests in Shanghai LP (the “Partner
Distributions”). 	The Partner Distributions to Debtor were
property of the estate, as the estate owns the entirety of
Shanghai LLC and Debtor’s limited partnership interest in Shanghai
LP. 	Trustee did not prove that Wong’s Partner Distributions were
on account of her own interest as a limited partner in Shanghai
LP.
Debtor attempts to justify his Partnership Distributions on
the basis of his apparent belief that Trustee told him after entry
of his discharge that he could build the Restaurant. 	The Trustee
did not authorize him to withdraw and keep any Partner
Distributions as Debtor never asked Trustee about them.
B. Payments on the Chen Loan.
Trustee contends that during the Subject Period the Debtor
and Wong caused Shanghai LP to repay the entire balance of the
Chen Loan to the Debtor and Wong, in the amount of $935,709.98.
She maintains that Shanghai had sufficient cash to make those
payments from its cash sales to customers. 	Debtor contends that
these payments to him were on account of post-petition loans or
alternatively that the Restaurant lacked sufficient cash to make
any payments on the Chen Loan. 	He contends that the Restaurant’s
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outside bookkeeper simply used the Chen Loan Account to post
transactions that were not otherwise documented, primarily cash
the Restaurant needed to pay weekly to its servers as tips that
were given by customers via credit card charges. 	The bookkeeper,
only a few weeks prior to trial, came to realize that cash used to
pay those tips to the servers should have been posted as such,
rather than shown as advances by Debtor, increasing the Chen Loan.
These were described at trial as “unsubstantiated entries.”
Similarly, she maintains that reductions in the Chen Loan account
were not that at all, but were simply incorrect postings.
The Trustee’s accounting expert prepared a report that
demonstrated that Debtor received transfers during the Subject
Period by checks to various payees, including the Debtor, Wong,
“cash,” and “Shanghai 1930.” 	Some of those payments were debited
to sales and sales tax accounts, resulting in a reduction of
reported sales.
If the journal entries that resulted in an increase to the
Chen Loan account actually reflected reimbursements to the Debtor,
such reimbursements would be posted as costs in the “costs of
sale” or “operating expenses” accounts.
Although the Chen Loan account balance increased during the
Subject Period, the increases were largely based on the
unsubstantiated entries made by the bookkeeper on the books.
Basically, because she was not aware of the Restaurant’s recording
of tips, she increased the Chen Loan balance for any otherwise
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undocumented receipts. 	Actual restaurant sales were reported to
her on a reliable point-of-sale system; credit card receipts,
representing 95% of all Restaurant revenues, were greater than
reported sales because customers included sales taxes and tips;
sales taxes were easily calculated and paid by the bookkeeper, but
since she did not know about the tips, she assumed the additional
cash came from Debtor and posted it accordingly. 	In fact, five
percent of the Restaurant’s sales revenues came from cash-paying
customers.
When she had more money on hand than was reported in sales of
the Restaurant, the bookkeeper automatically attributed that
excess to monies that came from Debtor by posting increases in
Account 2300, using it as a balancing account because of the lack
of credible documentation. 	However, the Debtor, Wong nor the
bookkeeper provided documents to substantiate such a practice.
Debtor’s claims that he advanced monies to the Restaurant
post-petition, but he has offered no documentary evidence or
entries in the Restaurant’s books and records to support that
contention. 	The evidence establishes that what the bookkeeper
posted as postpetition payments on the Chen Loan should have been
booked as expenses. 	Further, Trustee’s expert examined the
records and concluded, convincingly, that Debtor did not make any
significant advances to increase the Chen Loan. 	They cannot be
verified through corresponding bank deposits.
The court is faced with the task of determining whether there
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were in fact payments to Debtor and/or Wong on the Chen Loan
during the Subject Period. 	On the Trustee’s side there is an
expert report (Exhibit 14), modified by and adjusted after
accepting the bookkeeper’s concessions of erroneous postings of
unsubstantiated transactions and cash payments (Exhibit 19); on
the Debtor’s side there is no expert witness, inconclusive and
somewhat confusing financial accounting, and capable counsel’s
creative arguments and speculation about large amounts of unproven
tip receipts that do not amount to evidence. 	On balance, the
preponderance of the evidence supports the court’s acceptance of
the Trustee’s accountant’s opinion that at least $729,044.19 of
the Chen Loan was paid to Chen or Wong during the Subject Period.
The court rejects the Trustee’s suggestion that under a last-in,
first out theory, Chen should be liable for the entire amount of
the prepetition Chen Loan, $935,709.98.
At the minimum, Chen is liable to the estate in this amount
of repayments of the Chen Loan. 	As to Wong, the specific
evidence alluded to by Trustee’s counsel during argument is found
in Exhibit 1, p. 1147. 	There the court notes a total of $11,000
paid to Wong and booked as payments on the Chen Loan. 	As such,
Wong had no right to that money, has not proven that she was
otherwise entitled to it, and must reimburse the estate for it.
Whether Wong received more than $11,000 on the Chen Loan may
have been established in the documentary evidence, but the court
will not wade through that detailed evidence to find other similar
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entries to make out the case against Wong. 	But to the extent the
admitted evidence does show similar disbursements, the court will
permit the Trustee to point out such disbursements and add them to
the amount of Wong’s liability, as discussed in the Conclusion to
this Memorandum Decision.
Postpetition, the Debtor claims that he has had an ongoing
relationship with the Restaurant whereby he purchases wine,
restaurant supplies and other merchandise and is reimbursed for
it. 	These “reimbursements’’ are reflected on the Restaurant’s
books and records as payments on the Chen Loan. 	There is no
indication to which debt the payment is applied. 	Accordingly,
when payment is made on an obligation, unless there is some
indication to the contrary, the practical and ordinary
interpretation must “undoubtedly be that payment is to be applied
to the part first coming due to be paid.” Smith v. Renz, 122 Cal.
App. 2d 535, 538 (Cal. App. 1st Dist. 1954).
The Petition Date balance of the Chen Loan of $935,709.98 is
an earlier obligation than any postpetition advances, and
therefore any pay-down of the Chen Loan must be credited to the
prepetition debt. No logical reason has been offered as to why, in
the ordinary course of events, it should be approached in inverse
order. 	Therefore, it must be assumed that if the parties intended
to “depart from the ordinary” they would have specifically so
provided. Id.
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Because general credits on open accounts stand as payments on
the oldest items of such accounts, the Debtor's contention that
the payments made were post-petition reimbursements for post-
petition advances is incorrect. Jessup Farms v. Baldwin, 33 Cal.
3d 639, 190 (Cal. 1983).
The Trustee’s counsel asked that all of the amounts repaid
Chen Loan during the Subject Period be declared as a joint and
several liability of Chen and Wong. 	Absent facts and law to
support such a result, the court will not do that. 	Wong’s
liability is limited to distributions to her on the Chen Loan.
C. Revocation of Discharge.
The Debtor was aware of the Chen Loan when he filed his
bankruptcy petition, related schedules and statement of financial
affairs, but he failed to disclose this substantial debt owed to
him. 	His Schedule B declared no debt owing. 	It showed
$228,141.17 in personal property, $200,000 of which was stock in
an unrelated company that has since been sold. 	Debtor also knew
that payments on the Chen Loan and the Partnership Distributions
made during the Subject Period belonged to the estate, but he
knowingly failed to report them or turn them over to the Trustee.
Debtor also misled the Trustee when he argued that the
estate’s interest in Shanghai LLP had a nominal value at best and
the Restaurant was operating at a loss when in the same year he
and received a Partnership Distribution of $17,926.,84, having
earlier received a Partnership Distribution of $20,880.
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Property of the estate includes money that a debtor has a
right to receive. 	In re Crysen/Montenay Energy Co., 902 F.2d
1098, 1101 (2d Cir. 1990) (debtor's right to collect accounts
receivable is “property of the estate”). 	An outstanding loan that
a debtor expects to be repaid is property of the debtor's
bankruptcy estate. 	In re Martin, 141 B.R. 986, 993 (Bankr. N. D.
Ill. 1992). 	The Chen Loan and the right to collect it became
property of the Estate as of the Petition Date. 	All payments made
on account of that loan prior to the Sale Date, therefore,
belonged to the estate. 	Debtor and Wong had no right to retain
the payments on the Chen Loan that they received.
Similarly, the two Partner Distributions to Chen made prior
to the Sale Date constituted property of the estate as well and
Debtor has no right to retain them.
The benefit of discharge is reserved for “the honest but
unfortunate debtor.” 	In re Holstein, 299 B.R. 211, 233 (Bankr.
N.D. Ill. 2003). 	If section 727(d) is satisfied, the debtor has
been less than honest and deserves no discharge. In re Barr, 207
B.R. 160, 165 (Bankr. N.D. Ill. 1997).
To warrant revocation under section 727(d), the Trustee must
show that (1) such discharge was obtained through the fraud of the
debtor, and the requesting party did not know of such fraud until
after the granting of such discharge; (2) the debtor acquired
property that is property of the estate, or became entitled to
acquire property that would be property of the estate, and
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knowingly and fraudulently failed to report the acquisition of or
entitlement to such property, or to deliver or surrender such
property to the trustee. 11 U.S.C. §727(d)(1)-(2).
Debtor failed to report the Chen Loan on his schedules when
his petition was filed and at no point did he amend his schedules
to reflect the debt. 	The evidence shows that the Trustee did not
learn of the Chen Loan until it was revealed in through discovery
in 2007. 	This was after the court discharged the Debtor. 	By
then, a substantial portion of the Chen Loan outstanding as of
Petition Date had already been paid to the Debtor. 	Debtor also
made no attempt to disclose the 2005 and 2007 Partnership
Distributions he received. 	These facts establish all the
necessary elements under both Sections 727(d)(1) and (2).
The Debtor possessed the necessary intent because he procured
his discharge by “fraud” or that he “knowingly and fraudulently”
failed to schedule the debt, report the payments or deliver the
monies to the Trustee. Section 727(d) does not require direct
evidence of intent.
The Debtor's fraudulent intent is clear from the fact that he
was aware of the omitted assets and knew his failure to list the
assets could seriously mislead the Trustee; in the alternative,
Debtor acted so recklessly in not reporting the asset that fraud
is implied.
Based on the behavior of the Debtor, his discharge should be
revoked pursuant to Section 727(d).
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IV. CONCLUSION.
Trustee is entitled to a judgment on the second claim for
relief against Debtor in the amount of $729,044.19 (for repayments
of the Chen Loan) and $38,806.84 (for the Partnership
Distributions), plus costs. 	She is entitled to judgment against
Wong in the amount of at least $11,000, plus costs.
At the time her counsel submits a form of judgment he may
also submit (without argument) a list of citations to the
appropriate exhibit number, page and entries where additional
payments on the Chen Loan to Wong have been documented. 	The list
should include a total dollar amount Trustee contends the judgment
against Wong should be. 	Counsel for Wong will then have ten days
to file a designation (also without argument) of any of the
Trustee’s citations to the record he believes do not show a
payment to Wong on the Chen Loan. 	The court will determine
whether Trustee is entitled to a judgment against Wong in excess
of $11,000.
On the third claim for relief, Trustee is entitled to a
judgment revoking Chen’s discharge.
Counsel for the Trustee should submit and serve in accordance
with B.L. R. 9021-1 a form of final judgment consistent with the
foregoing and for the reasons stated in this Memorandum Decision
(with the amount to be awarded against Wong left blank so the
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court may insert an amount) and consistent with the court’s denial
of the motion to reconsider the grant of summary judgment in her
favor on the first claim for relief.
* * * 	END OF MEMORANDUM DECISION * * *
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