US Trustee v. Cortes

UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In re:
PAUL L. CORTES,
Debtor. 	No. 7-10-10294 SS
US TRUSTEE,
Plaintiff,,
v. 	Adv. No. 10-1149 S
PAUL L. CORTES,
Defendant.
MEMORANDUM OPINION AFTER TRIAL ON THE
MERITS OF PLAINTIFF’S COMPLAINT SEEKING
TO DENY DISCHARGE UNDER SECTION 727
This matter came before the Court for trial on the merits of
Plaintiff’s Complaint to deny Debtor a discharge under 11 U.S.C.
§ 727 (“Complaint”). 	The United States Trustee, Plaintiff,
appeared through its attorney Leonard Martinez-Metzgar.
Defendant Paul L. Cortes appeared through his attorney William H.
Ivry. 	For the reasons set forth below, the Court finds that it
should enter judgment in favor of Defendant and dismiss
Plaintiff’s case. 1
Bankruptcy Code section 727 governs discharges of Chapter 7
debtors. 	It states, in relevant part:
§ 727. Discharge
(a) The court shall grant the debtor a discharge,
unless--
...
1The Court has subject matter and personal jurisdiction
pursuant to 28 U.S.C. §§1334 and 157(b); this is a core
proceeding pursuant to 28 U.S.C. §§157(b)(2)(J);
and these are findings of fact and conclusions of law as may be
required by Rule 7052 F.R.B.P.
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(2) 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--
(A) property of the debtor, within one year
before the date of the filing of the
petition; or
(B) property of the estate, after the date of
the filing of the petition;
...
(4) the debtor knowingly and fraudulently, in or
in connection with the case--
(A) made a false oath or account[.]
PLAINTIFF’S COMPLAINT
The Complaint seeks to deny Debtor’s discharge under the two
quoted subsections of section 727. 	Under the first subsection,
Plaintiff alleges that Debtor transferred assets and concealed
them into the one year preceding his bankruptcy filing, which
occurred on January 27, 2010. 	Under the second subsection,
Plaintiff alleges that by omitting the concealed assets from the
documents on file with the Court and misstating his ownership
thereof at the first meeting of creditors he has made a false
oath.
SECTION 727(a)(2) CLAIM
For its section 727(a)(2) claim, Plaintiff alleges
concealment of two different assets.
1. 	BUSINESS PROPERTY
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Defendant was the 100% owner and sole member of Chasing
Skirts, LLC, which operated a women’s clothing store in Santa Fe,
New Mexico from approximately March 2004 through August 2008.
The business location was 66 E. San Francisco Street, #15.
Defendant lives with Tabatha Wickleff, his girlfriend, who
is his ex-wife’s daughter from a previous marriage. 	Ms. Wickleff
opened a women’s clothing store called “Desires” in August 2008.
Desires is located at 66 E. San Francisco Street, #14, in the
suite next to the former location of Chasing Skirts, LLC.
Plaintiff also alleges that Defendant is a joint signatory
on the Desires business bank account. 	It alleges that Defendant
admitted in an unrelated state court proceeding that he
transferred his business to Ms. Wickleff in September 2008 after
several lawsuits were filed against him. 	And, finally, the
Plaintiff alleges that Defendant has disregarded the separate
legal structure of Chasing Skirts LLC and has in fact operated as
a sole proprietor. 	Therefore, the Plaintiff claims Defendant has
retained the benefits of a continuing ownership of the Chasing
Skirts business.
2. 	THE RED PORSCHE
During an examination Defendant admitted that he owned a red
Porsche but stated that it had been repossessed in the summer of
2009. 	Plaintiff alleges, however, that on August 12, 2008
Defendant transferred the title of the 1994 red Porsche to his
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brother Rudy DeVargas. 	Plaintiff also claims that on July 12,
2010, Defendant had a red Porsche parked in his garage.
Plaintiff was informed that Defendant continued to drive the red
Porsche after January 27, 2009 and has continued to enjoy the
benefits of ownership after January 27, 2009.
SECTION 727(a)(4) CLAIM
For its section 727(a)(4) claim, Plaintiff alleges that at
the first meeting of creditors the Defendant testified under oath
that the information contained in his schedules and statement of
financial affairs was true and correct. 	The schedules and
statement of financial affairs do not disclose ownership of a red
Porsche, nor do they disclose business interests. 	Question 10 of
the Statement of Financial Affairs discloses only a transfer of a
1998 GMC Sierra pickup within two years of his bankruptcy filing.
DISCUSSION
Debtor filed his bankruptcy on January 27, 2010. 	The
alleged transfer of business assets to Ms. Wickleff was in August
2008. 	The transfer of the red Porsche was in August 2008. 	Both
of these transfers were before one year before the filing of the
bankruptcy. 	The Plaintiff relies, however, on the doctrine of
“continuing concealment.”
Perhaps the most widely known case of continuing concealment
is Thibodeaux v. Olivier (In re Olivier), 819 F.2d 550, 554-555
(5 th Cir. 1987):
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On its face, section 727(a)(2)(A) addresses only
transfers or concealment of property occurring within a
year before bankruptcy. 	Here the purported transfer by
appellants occurred more than a year before bankruptcy,
but appellants continued the concealment of their
secretly retained interest in the property. 	The courts
below relied on the well-settled doctrine that in this
character of situation the concealment of an interest
in an asset that continues, with the requisite intent,
into the year before bankruptcy constitutes a form of
concealment which occurs within the year before
bankruptcy and, therefore, that such concealment is
within the reach of section 727(a)(2)(A).
The doctrine of continuing concealment developed
and was followed under predecessor provisions of the
bankruptcy lawsFN7 and continues to be followed in more
contemporary decisions.FN8 	Recognizing that we have not
heretofore addressed whether the continuing concealment
doctrine will be followed within this Circuit in
discharge cases involving 11 U.S.C. § 727(a)(2)(A), we
now hold that it may be appropriately applied to such
cases.FN9
FN7. E.g., Green v. Toy, 171 F.2d 979, 979 (1st Cir.
1949) (ruling that transfers of real estate to a dummy
corporation held by the bankrupts' sons more than a
year before bankruptcy filing were “a continuing
concealment of assets”); In re Groth, 36 F.2d 41, 42
(7th Cir. 1929)( “[I]f these acts had as their purpose
the concealment of assets ..., which concealment
continued during the period when these proceedings in
bankruptcy were contemplated, the lapse of a year
[between the acts and bankruptcy] would not prevent
such concealment from coming within the condemnation of
the statute.”); In re Ulrich, 18 F.Supp. 919, 920 (S.D.
N.Y. 1937)(holding that placing ownership of all stock
for the bankrupt's corporation in the name of an
employee without a real ownership interest five years
before bankruptcy prevented discharge; “While the
concealment commenced several years before bankruptcy,
it continued down to the time of bankruptcy and is
within the scope of the statute.”), aff'd without
opinion, 95 F.2d 1018 (2d Cir. 1938).
FN8. E.g., [Friedell v. Kauffman (] In re Kauffman,[675
F.2d 127, 128 (7 th Cir. 1981)(per curium)] supra;
[Sacklow v. Vecchione (] In re Vecchione, [407 F.Supp.
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609, 615 (E.D. N.Y. 1976)] supra. 	See also cases cited
supra notes 5-6.
FN9. Again, we do not purport to speak to the
applications of the doctrine in all its possible
ramifications under section 727(a)(2)(A) or in
significantly different factual contexts.
See also Keeney v. Smith (In re Keeney), 227 F.3d 679, 684 (6 th
Cir. 2000)("Under the ‘continuing concealment’ doctrine, a
transfer made and recorded more than one year prior to filing may
serve as evidence of the requisite act of concealment where the
debtor retains a secret benefit of ownership in the transferred
property within the year prior to filing.”)(Quoting Hughes v.
Lawson (In re Lawson), 122 F.3d 1237, 1240 (9 th Cir. 1997)).
“What is critical under the concealment provision of §
727(a) is whether there is concealment of property, not whether
there is concealment of a transfer.” 	Rosen v. Bezner (In re
Rosen), 996 F.2d 1527, 1532 (3 rd Cir. 1993).
In a situation involving a transfer of title
coupled with retention of the benefits of ownership,
there may, indeed, be a concealment of property. 	Where
this is the case, however, the concealment is present
not because retention of the benefits of ownership
conceals the fact that the debtor no longer has legal
title, but rather because the transfer of title
represents to the world that the debtor has transferred
away all his interest in the property while in reality
he has retained some secret interest-a secret interest
of which retention of the benefits of ownership may be
evidence. 	A legally relevant concealment can exist,
however, only if there is, in fact, some secret
interest FN4 in the property retained by the debtor.
See, e.g., In re Smith, 11 B.R. 20, 22 (Bankr. N.D.
Ohio 1981)(“Concealment has generally been defined as
the transfer of legal title to property to a third
party with the retention of a secret interest by the
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Bankrupt.”) (quoted in Olivier, 819 F.2d at 553); In re
Vecchione, 407 F.Supp. 609, 614 (E.D. N.Y. 1976)
(same); cf. Thompson v. Eck, 149 F.2d 631, (2d Cir.
1945)(noting that “the bankrupt must have some legal
interest in the property before he can be charged with
its concealment” (citation omitted)).
FN4. It is undisputed that Rosen's transfer of legal
title to his wife was valid, even though it eventually
was avoided by the court on motion of the trustee.
Id. (Emphasis added.)
FACTS
At the start of trial the parties stipulated to admission of
all of both Plaintiff’s and Defendant’s exhibits. 	One of
Plaintiff’s exhibits was a garment purchased at Desires. 	Three
exhibits were depositions of witnesses. 	One is a transcript of
the first meeting of creditors. 	One is a transcript of a 2004
examination of Defendant. 	Plaintiff also presented nine
witnesses. 	At the start of trial, Defendant announced that he
would present three witnesses. 	At the conclusion of Plaintiff’s
case, however, Defendant moved for dismissal under Fed.R.Civ.P.
52(c), which the Court took under advisement. 	Defendant then
rested, as his witnesses had already presented his desired
evidence during their cross examinations.
1. 	The Court finds that Plaintiff did not establish by a
preponderance of the evidence that Defendant owned any interest
whatsoever in Desires or retained any interest whatsoever in
Chasing Skirts, LLC. 	Defendant and Ms. Wickliff both presented
uncontroverted testimony that 1) Defendant ceased operating
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Chasing Skirts, LLC in 2008, 2) Ms. Wickliff obtained a business
license and zoning clearance in August 2008 to commence her
business in September 2008, which she did, and 3) Defendant has
no ownership interest in Desires but is an employee. 	Neither
Defendant nor Ms. Wickliff concealed the fact that Defendant
helps keep Desires’ books, he is a signatory on the checking
account, he is free to write himself checks, or that the checks
he writes are probably for their joint expenses as well as
business expenses. 	They live together as a couple. 	Defendant
shared his knowledge and contacts with Ms. Wickliff when she was
establishing her business. 	Desires is Ms. Wickliff’s sole
proprietorship. 	The fact that one business terminated just
before the other one commenced was logically explained by the
testimony. 	Similarly, the Court found nothing nefarious about
the close physical locations of the two shops.
At the time Defendant filed bankruptcy, it is apparent that
there was nothing left of Chasing Skirts, LLC. 	His Schedule B
showed that he was in possession of inventory and equipment of
his “former business”, Chasing Skirts, LLC, with a listed value
of $2,325. 	His Statement of Financial Affairs question 4 lists a
lawsuit against him and Chasing Skirts, LLC for money owed,
foreclosure of personal property (the business assets), and post-
judgment writ of replevin, all for which a default judgment of
$102,688.82 was entered on November 18, 2009. 	Therefore, in
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reality, his (or Chasing Skirt’s) property had been foreclosed
before the bankruptcy and all business property was subject to
replevin. 	To the extent some similar inventory or fixtures were
transferred to Ms. Wycliff, the assets in her possession would
still be subject to the lender’s security interest and would have
been similarly foreclosed and subject to replevin. 	Plaintiff did
not offer sufficient proof that any assets of any material value
had been transferred in any event. 	Although the presence of some
garment labels for Chasing Skirts in the inventory of Desires
suggests that some inventory was transferred, the amount or
value, if any, was not established.
Plaintiff also presented considerable testimony about credit
card processing machines which Chasing Skirts, LLC had allowed
Desires to use on the condition that it continue to pay loans
outstanding against the machines. 	Plaintiff’s witness explained
the mechanics of these loans; after six months of sales history a
merchant could obtain a credit card processing machine and borrow
money on the condition that a percentage of credit card receipts
would repay the loan over time. 	Desires had no sales history,
and this arrangement 1) allowed Defendant to have payments made
on a machine he was responsible for making payments on, and 2)
allowed Desires to process credit cards. 	While this agreement
was probably violative of Defendant’s agreement with the credit
card companies, it does not prove or suggest that Defendant had
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any interest in Desires itself. 	Nor does it demonstrate that
sales made by Desires were, in fact, sales attributable to
Chasing Skirts simply because they were charged on Chasing Skirts
credit card machines. 	Plaintiff had access to all of Chasing
Skirts bank accounts and it did not demonstrate that Chasing
Skirts was actively engaged in anything, other than allowing
Desires to use the machines.
2. 	The Court finds that Plaintiff did not establish by a
preponderance of the evidence that Defendant owned any interest
whatsoever in the red Porsche he sold to his brother. 	The
uncontroverted evidence of both Defendant and his brother was
that in August 2008 his brother was in need of a car, had cash,
and was interested in buying Defendant’s red Porsche.
Defendant’s Exhibits B through D document the transfer of title
on August 13, 2008 in exchange for $5,000.00. 	The evidence is
uncontroverted that Defendant’s brother lives three doors away
from the Defendant and did not have his own garage. 	The Porsche
had a cloth top and was subject to leaking when it rained or
snowed. 	The Court can take judicial notice that Santa Fe, New
Mexico often has inclement weather, particularly in the winter. 2
Defendant had an empty garage attached to his house that did not
lock, and his brother was free to put the vehicle in there as he
2 “Inclement” is a relative term, of course. 	Most New
Mexicans welcome snow or rain.
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chose. 	Both witnesses testified that after the sale Defendant
did not make any payments for insurance, maintenance,
registration, or otherwise. 	Defendant admitted to driving the
car a few times; his brother testified that he allowed his
brother to drive it “less than ten times.” 	The Court finds that
the transfer of the red Porsche was a bona fide transfer to
Defendant’s brother and Defendant retained no interest whatsoever
in the vehicle.
The Court further finds that any testimony regarding Porsche
vehicles that may have been unclear was not intentional.
Defendant’s uncontroverted testimony was that he had owned two
Porsche vehicles, one blue and one red. 	The red one was sold to
his brother; the blue one was repossessed by its lienholder.
Defendant believed the repossession was more than two years
before the case, and there was no better evidence offered. 	At
the first meeting of creditors, the following questions and
answers took place:
Trustee: 	You stated that the Porsche was repossessed
in June?
Answer: 	Uh-huh, yes.
Trustee: 	So it’s gone?
Answer: 	It’s gone.
The Trustee did not inquire about the color of the vehicle
repossessed in June.
3. 	The Court finds that Plaintiff did not establish by a
preponderance of the evidence that Defendant had an intent to
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hinder, delay, or defraud a creditor or an officer of the estate.
The Court readily concedes that a Debtor never would be expected
to confess to an intent to hinder, delay, or defraud a creditor.
Therefore, most denial of discharge cases also look to the facts
and circumstances surrounding any alleged misbehavior. 	See,
e.g., Rosen, 996 F.2d at 1533-34 (Third Circuit Court of Appeals
remands case to bankruptcy court for a factual determination if
the debtor in fact retained any secret interest during the
relevant period and also whether any concealment was accompanied
by an actual intent to hinder or defraud creditors. 	The Court
directed the bankruptcy court to consider Rosen’s own testimony
regarding his state of mind as well as the surrounding
circumstantial evidence of intent.) 	In this case, Defendant
testified about his situation in the summer of 2008; many
lawsuits were pending, his business had been declining for years,
his ex-wife had claimed that Defendant had sexually abused their
minor daughter with the consequential criminal charges pending
against him, and he needed money to live, to pay lawyers, and to
fund his business. 	He faced reality and ultimately decided to
file a bankruptcy petition. 	The Court finds nothing in that
situation which would suggest circumstantial evidence of intent
to defraud his creditors.
Plaintiff suggested that Defendant’s actions in transferring
the business property and the red Porsche were due to an upcoming
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child support modification hearing expected in the fall of 2008.
Defendant’s ex-wife’s attorney was called as a witness to present
evidence on this point. 	The attorney testified that he had been
hired after Defendant’s ex-wife had filed the motion to modify,
and he really did not recall any other details. 	Therefore, the
Court does not find it more likely than not that the child
support issue had anything to do with the closing of Chasing
Skirts. 	Furthermore, Defendant used an experienced bankruptcy
attorney who surely would have told him that a bankruptcy
petition does not stay an action “for the establishment or
modification of an order for domestic support obligations.” 	11
U.S.C. § 362(b)(2)(A)(ii).
4. 	The Court’s final finding is that Plaintiff did not provide
any evidence that Defendant disregarded the separate legal
structure of Chasing Skirts LLC and in fact operated as a sole
proprietor. 	The Court can find no reason to declare that the
assets of Chasing Skirts were in fact Defendant’s personal
assets. 	Consequently, any transfer of assets to Ms. Wickliff was
from Chasing Skirts rather than from Defendant.
CONCLUSIONS OF LAW
Defendant did not conceal any assets within one year before
the filing of his bankruptcy petition. 	The assets Plaintiff
attempted to demonstrate as property of Defendant were not
Defendant’s property during the one year before the bankruptcy
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and therefore he did not need to list them on the statements or
schedules. 	Any transfer of property from Chasing Skirts to Ms.
Wickliff was not a transfer of property of the Defendant.
Defendant did not knowingly or fraudulently make a false oath in
connection with his bankruptcy case.
The Court will enter a Judgment in favor of Defendant,
declaring that he will receive his bankruptcy discharge.
Plaintiff’s case will be dismissed with prejudice.
Honorable James S. Starzynski
United States Bankruptcy Judge
Date entered on docket: December 5, 2012
Copies to:
Leonard K Martinez-Metzgar
PO Box 608
Albuquerque, NM 87103-0608
William H Ivry
PO Box 263
Santa Fe, NM 87504-0263
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