Fitzgerald v. Gorman

In re
DAVID C. GORMAN,
Debtor
JOHN P. FITZGERALD, ACTING UNITED
STATES TRUSTEE,
Plaintiff
v.
DAVID C. GORMAN,
Defendant
UNITED STATES BANKRUPTCY COURT
DISTRICT OF MASSACHUSETTS
EASTERN DIVISION
Chapter 7
Case No. 08-13736-FJB
Adversary Proceeding
No.08-1296
MEMORANDUM OF DECISION
INTRODUCTION
In this adversary proceeding the United States Trustee (the “U.S. Trustee”) objects to
the receipt by debtor David C. Gorman (the “Debtor”) of a discharge in this chapter 7 case. The
bases for objection to discharge are 11 U.S.C. §§ 727(a)(2)(B) and 727(a)(4)(A). The court held
a trial at which three witnesses testified. Those witnesses were John Desmond (“Desmond”),
who is the chapter 7 trustee, Linda Rogers, a licensed CPA employed as a bankruptcy analyst
in the U.S. Trustee’s office, and the Debtor himself. In addition, in the parties’ pretrial
memorandum, they stipulated to certain facts that were set forth in eighty-two separate
paragraphs. Further, the parties agreed to the admissibility of sixty-five documentary exhibits.
The stipulated facts and exhibits essentially establish the Trustee’s claim that the debtor failed
to disclose property of the estate and that he made false oaths on his schedules and statement
of financial affairs. Accordingly, the principal issue at trial was whether the Debtor made these
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omissions and false statements with fraudulent intent. Following are the findings of fact and
conclusions of law required by F ED. R. BANKR. P. 7052.
FACTS
The Debtor filed a voluntary petition (the “Petition”) for relief under Chapter 7 of the
Bankruptcy Code on May 22, 2008 (the “Petition Date”). On the same day, the Debtor filed his
schedules of assets (“Schedules”) and statement of financial affairs (“SOFA”), each of which he
signed under the penalties of perjury, and Desmond was appointed chapter 7 trustee.
The Debtor is well educated and experienced in business and finance. He holds a
Bachelor of Science degree and a Masters degree, both in accounting. He has worked as a
controller for four different companies. In that role he has prepared financial statements for use
in the businesses. He has also prepared a payroll and tax returns for corporate employees.
When not employed by a company, the Debtor has owned and operated a professional services
company that provides accounting and tax services to a variety of clients, both individuals and
businesses. In all of these positions the Debtor either prepared financial reports and required
financial forms or he arranged for their preparation. In short, and I find, the Debtor is financially
sophisticated.
In addition to his work in accounting and finance, the Debtor has been engaged in
numerous business ventures, principally in real estate development and investment. At the time
the petition was filed, he owned equity interests in no fewer than ten closely-held corporations,
with those interests ranging from twenty to one hundred percent of the equity in the entity. The
entities in which the Debtor had an ownership interest included the following (collectively
referred to as the “Operating Entities”):
1. 	Expert Tax Solutions, Inc. (“ETS”), through which the Debtor provided tax
and accounting services;
2. 	Gordon Realty Partners, LLC (“GRP”), which owned real estate
investments;
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3. 	D&C Realty Partners, LLC (“D&CRP”), which owned real estate
investments;
4. 	Boston Solar Living, Inc. (“BSL”), which sold passive solar energy
systems; and
5. 	69-71 Academy Street Realty Partners, LLC (“69-71 ASRP”),
which owned real estate investments.
Each of these entities continued to operate after the Petition Date. The Debtor also owned
interests in several non-operating entities (the “Non-Operating Entities”), mostly involved in real
estate development. Finally, the Debtor owned an interest in Gorman and Silvano Construction
(“GSC”), a construction company that had ceased to operate before the Petition Date.
Several of the Operating Entities reported net operating income on contemporaneously
filed tax returns for the years immediately preceding the Petition Date. The Debtor maintained
accounting information systems and prepared financial statements for the Operating Entities.
Certain of the Operating Entities maintained web sites both before and after the Petition Date.
Each of GRP, D&CP and 69-71 ASRP owned and operated apartment buildings in Fitchburg,
Massachusetts. Those entities were operating at a net loss immediately before the Petition
Date but were mostly current on their mortgage payments; at most they were in technical default
on their loan agreements, meaning that there were past due tax and water and sewer charges
on the properties securing the loans, but there were no monetary defaults to the lenders. BSL
appears to have been operating at a loss on or immediately before the Petition Date. Each of
the real estate operating entities maintains an account at a federal credit union, and their rents
were deposited into those accounts. The Debtor had signing authority on two of those
accounts. The Debtor also prepared tax returns for each of the Operating Entities as well as for
several of the Non-Operating Entities.
One Operating Entity, ETS, was the entity through which the Debtor operated his
accounting practice. In 2008, the year the petition was filed, the Debtor prepared at least 250
tax returns for clients of ETS. According to a profit and loss statement prepared by the Debtor,
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ETS had net income in the first half of 2000 in the amount of $10,307.74. ETS maintained a
checking account at a federal credit union, and the Debtor had sole check signing authority on
the ETS checking account.
As noted above, the Debtor filed his Schedules and SOFA at the time he filed the
Petition. Schedule B, the schedule of personal property, at Question 13 directs the Debtor to
disclose his “[s]tock and interests in incorporated and unincorporated businesses.” Question 14
seeks disclosure of “[i]nterests in partnerships or joint ventures.” In response to Question 13
the Debtor indicated that he had “None.” In response to Question 14 the Debtor disclosed his
interest in one Non-Operating Entity, GSC, and he stated its value was “0.00.” The parties have
stipulated that in response to Questions 13 and 14 the Debtor failed to disclose his ownership
interests in GRP, D&CR, 69-71 ASRP, ETS, and BSL.
The SOFA seeks, among other things, disclosure of information regarding a debtor’s
businesses. It defines “[i]n business” broadly, as including, for debtors who are individuals, any
instance in which, in the prior six years, the debtor has been an officer, director, managing
executive, or owner of five percent or more of the voting or equity securities of a corporation. It
also includes in its definition any instance in which the debtor is a partner or a sole proprietor or
is self-employed full time or part time. It expressly includes situations where the work is to
“supplement income from the debtor’s primary employment.” The SOFA at Question 18
requires a debtor to disclose the name, address, and nature of any such business. The parties
stipulate that the Debtor failed to disclose his ownership interests in GRP, D&CR, 69-71 ASRP,
ETS, and BSL in response to Question 18. The Debtor did disclose his interest in GSC.
Question 2 in the SOFA requests that the Debtor list bank accounts in which he has any
interest. As to bank accounts, the Debtor admitted that he used the ETS bank account at the
credit union to pay personal expenses and that he made deposits to that account. In fact, he
paid his bankruptcy counsel from that account. The Debtor agrees that he failed to disclose the
ETS bank account in response to Schedule “B.” The U.S. Trustee argues that it should have
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been disclosed because funds in the account were the debtors and being held for the debtor by
ETS; Schedule B, in its initial instructions, expressly required the Debtor to list all of his assets,
even those being held for him by another. 1 In addition the Debtor admitted in the Pretrial
Memorandum that at the time of his bankruptcy filing, he maintained a personal bank account at
the Somerville Municipal Credit Union, which account was not disclosed in the Schedules and
SOFA.
Ms. Rogers, the bankruptcy analyst called as a witness by the U.S. Trustee, testified that
she reviewed the financial records of ETS, the wholly-owned entity that the Debtor used to
operate his accounting practice. She testified that ETS generated $18,000 in cash from April
2008 through December 2008 through its operations.
The Debtor testified at trial that he failed to disclose the existence of the Operating and
Non-Operating Entities except GSC because, in his view, none of the entities had any equity or
value. The Debtor also conceded on cross-examination that he disclosed his interest in GSC
even though it had no equity or value. He explained that he failed to disclose the ETS checking
account, as well as another account at Somerville Municipal Credit Union, because he
determined that the accounts together had only slightly more than $2,000.00 in funds, which he
viewed as “immaterial.”
He also emphasized at the trial that, although he has education and experience as an
accountant, he has no experience in bankruptcy. In fact, he suggested that his confusion and
misunderstanding about what he had to disclose on his Schedules and SOFA was attributable
to his accounting background, which he contends taught him to recognize assets only if they
have economic value. Finally, the Debtor testified that at the section 341 meeting, the first
meeting of creditors, he disclosed the existence of several of the Operating and Non-Operating
Entities. He also says that he provided tax returns to Mr. Desmond that revealed his interests in
1 It states: “List all property of the debtor of whatever kind. . . . If the property is being held for the
Debtor by someone else, state that person’s name and address[.]”
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those entities.
On another note, the Debtor testified that at the time he was completing his Schedules
and SOFA, he was highly distracted. The Debtor’s parents, with whom he lived at the time he
filed his petition, were both terminally ill, and he was their primary caretaker. This caused him
great stress and worry. Thus, he maintains that he was unable to focus on properly completing
the Schedules and SOFA so as to make the necessary disclosures, if in fact such disclosures
were indeed necessary. I find that whatever distraction the Debtor may have suffered on the
basis of his parents’ illnesses had no affect on his decision not to disclose the omitted entities
and positions.
The Debtor contends that he cured any deficiency in his disclosures when he attended
the section 341 meeting of creditors and produced tax returns that listed the entities that he had
failed to disclose. The evidence shows the following. A couple of days before the meeting of
creditors, the Debtor provided a partial copy of his 2007 personal federal income tax return to
Mr. Desmond. The return contained some information about the omitted entities. The Debtor
supplied this tax return pursuant to 11 U.S.C.§ 521(e)(2)(A), which obligates a debtor to provide
a copy of his or her most recent federal income tax return to the trustee. He did not also provide
tax returns for the various entities and provided no additional information regarding those
entities until that information was specifically requested by Mr. Desmond. It was also
established at the trial that the Debtor failed to attend a Rule 2004 examination of the Debtor
that Mr. Desmond had scheduled after the section 341 meeting itself, to make further inquiry
about the omitted entities. On these facts, it appears that the only disclosure the Debtor made
at the first meeting of creditors was that which he made by complying with his obligation to
supply the tax return.
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POSITIONS OF THE PARTIES
The Trustee argues that the Court should deny the Debtor’s discharge because the
Debtor made false oaths in his schedule “B,” the schedule of personal property, at questions 2,
13, and 14 and in his SOFA at question 18 by failing to disclose estate property, namely his
interests in the omitted entities and the two bank accounts. The Trustee points out that the
Debtor admitted in the Pretrial Memorandum that he failed to disclose his interests in GRP,
D&CRP, 69-71 ASRP, ETS, and BSL. The Trustee points out that in the Pretrial Memorandum,
the Debtor admitted that in personal income tax returns that he had filed shortly before he
completed his Schedules and SOFA, he had reported income or losses related to many of the
entities that he omitted from his bankruptcy filings. This, he argues, establishes that the Debtor
knowingly failed to disclose those entities in his bankruptcy filings. As to bank accounts, the
Trustee argues that the Debtor’s failure to list the ETS bank account and the Somerville
Municipal Credit Union Bank Account in response to Question 2 on Schedule “B” constituted a
knowing failure to disclose.
The Debtor advances essentially four defenses to the Trustee’s complaint. First, he
argues that he believed he only had to list entities in which he had an interest that had actual
economic value and that the Trustee bears the burden of establishing that the entities he
omitted had “substantial value.” 	Second, he states that he misunderstood the questions that
were posed in the Schedules and SOFA. Third, the Debtor argues that he cured any deficiency
in his disclosures when he attended the 341 meeting and produced tax returns that listed the
entities that he had failed to disclose. And finally, as noted above, the Debtor says that his
failures should be excused because, at the time he was preparing his bankruptcy disclosures,
he was “distracted” by personal losses and challenges.
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DISCUSSION
The Bankruptcy Code provides at 11 U.S.C. § 727(a) in relevant part as follows:
(a) The court shall grant the debtor a discharge, unless -
(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—
(B) property of the estate, after the date of the filing
of the petition . . . [or]
(4) the debtor knowingly and fraudulently, in or in connection with
the case—
(A) made a false oath or account[.]
11 U.S.C. § 727(a). The U.S. Trustee argues that the court should deny the Debtor a discharge
because he has established by a preponderance of the evidence that the Debtor has concealed
property of the estate and has done so with the intent to hinder, delay, or defraud his creditors
and the chapter 7 trustee. 11 U.S.C. § 727(a)(2)(B). Alternatively, the U.S. Trustee argues that
the court should deny the Debtor a discharge because he has established by a preponderance
of the evidence that the Debtor made false oaths by failing to disclose estate property in his
Schedules and SOFA. 11 U.S.C. § 727(a)(4)(A).
False Oaths under § 727(a)(4)(A)
I begin with the false oaths count under § 727(a)(4)(A). The leading case in this Circuit
on interpretation and application of § 727(a)(4)(A) is the case of Boroff v. Tully (In re Tully), 818
F.2d 106 (1st Cir. 1987). In Tully, the court set forth a two-part test: “the debtor can be refused
his discharge only if he (i) knowingly and fraudulently made a false oath, (ii) relating to a
material fact.” Id. at 110. Once it reasonably appears that the debtor made a false oath, the
burden shifts to the debtor to establish that he or she did not commit the offense or has a valid
excuse for doing so. In re Mascolo, 505 F.2d 274, 276 (1st Cir. 1974). Nonetheless, the
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ultimate burden of proof remains on the party objecting to discharge. Tully, 818 F.2d at 110; In
re Burgess, 955 F.2d 134, 136 (1st Cir. 1992).
While the statutory right to a discharge is to be liberally construed in favor of the debtor,
the Tully court underscored that the reason for § 727 is to ensure that those who seek
protection under the Bankruptcy Code do not play “fast and loose” with their assets or with the
reality of their affairs. Tully at 110. “The statutes are designed to insure that complete, truthful,
and reliable information is put forward at the outset of the proceedings, so that decisions can be
made by the parties in interest based on the facts rather than fiction.” Id. “Neither the trustee
nor the creditors should be required to engage in a laborious tug of war to drag the simple truth
into the glare of daylight.” Id. (citations omitted).
The Trustee has established, and the court finds, that the Debtor knowingly and
fraudulently made false oaths on his Schedules and SOFA by failing to disclose his interests
and positions in the Operating and Non-Operating Entities. In the face of clear and
unambiguous directions on the Schedules and SOFA calling for disclosure of the identities of
his stock ownership in corporations, the Debtor failed to disclose the identity of several
corporations in which he had an interest as of the Petition Date. I find not credible the Debtor’s
testimony that, by virtue of his training as an accountant and the alleged lack of value of his
interests in the omitted entities, he did not appreciate the need to disclose these entities in his
schedules. However, even if this testimony were true, he also inexplicably failed to disclose the
corporate offices and ownership positions that he held in those entities, as required by the
SOFA. In fact, as of the Petition Date, the Debtor owned twenty percent of each of GRP,
D&CRP and 69-71 ASRP, one hundred percent of ETS, and thirty percent of BLS, but he failed
to reveal these interests. The fact that the Debtor had recently identified his interests in many of
these entities in his personal tax returns, coupled with his less than convincing testimony about
this subject at the trial, establishes that his omission of these entities was knowing and
intentional. In addition, the Debtor failed to reveal that he held corporate offices and positions in
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several of the Operating and Non-Operating Entities, which information was called for plainly
and directly by the SOFA. Again, the Debtor did not credibly establish that he was unaware of
these positions and did not explain why he left them off of his SOFA.
I also find that failing to disclose these interests was material. Several of these entities
were operating as of the Petition Date. The real estate entities owned apartment buildings and
were not in financial default. Although the real estate may have declined in value in the months
and years in advance of the Petition Date, it nonetheless was the duty of the chapter 7 trustee
to determine whether there was value in these interests for the estate, and he was denied that
opportunity when the Debtor elected not to disclose them. Similarly, the Debtor’s interests in
ETS and BLS should have been disclosed. Although ETS is a professional services company
offering only the services of the Debtor, disclosure of that entity could well have led to the
identification of other assets, for example receivables, in which the estate may have had an
interest. And although BLS was no longer operating, the Debtor’s interest in that entity may well
have had value if that entity had any assets. Again, it was the chapter 7 trustee’s job to make a
determination of the value of BLS, but he could not make that determination because its
existence was not disclosed.
The Debtor responds that he decided not to disclose these interests because he felt they
did not have any economic value and therefore nothing could be gained by disclosing their
existence. The Debtor argues that the failure to disclose such assets could not be material. The
Court rejects this position for a variety of reasons. First, the Schedules and SOFA do not limit
themselves to the disclosure of entities that have economic value. Nor should they, because
those that are relying on disclosure in the schedules and SOFA should have the ability to decide
for themselves what value there is in the estate. Second, this argument has been rejected by the
courts in this district. Most recently, when addressing a debtor’s argument that his failure to
disclose was immaterial, the First Circuit Bankruptcy Appellate Panel responded as follows: “[t]he
standard to determine whether an omission is material is generally whether the ‘subject matter
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bears a relationship the bankrupt’s business transactions or estate, or concerns the discovery of
assets, business dealings, or the existence and disposition of his property.’” McClure v. Cormier
(In re Cormier), BAP No. MW 10-002 (1st Cir. BAP 2010), citing In re Tully, 818 F.2d at 111. The
corporate interests and bank accounts that the Debtor failed to disclose in this case plainly
involve the Debtor’s business dealings, his estate, and his business transactions. Finally, in the
Tully case the debtor disputed the value of certain of the assets that he failed to disclose,
arguing that those assets had no value and were therefore not material. Id. at 111 n.4. 	The
court responded that “valuation is not really the point.” Id. “Matters are material if pertinent to
the discovery of assets, including the history of a bankrupt’s financial transactions[.]” Mascolo,
505 F.2d at 277-78. It follows that the Debtor’s failure to disclose his business interests and
bank accounts was material even if they had little current value. This is equally true of the
Debtor’s failure to identify his corporate positions and ownership rights in the SOFA. Again,
disclosure of these positions and interests may have been the source of inquiry that could have
led to additional assets or rights.
I also find that the Debtor’s failure to disclose the existence of the omitted entities was
done with fraudulent intent. Certain of these entities owned potentially valuable real estate. The
Debtor admitted at trial that if the market recovers for such real estate interests, these entities will
indeed be valuable and, depending on appraisals of value at the time of filing, may have current
value. The Debtor testified that his sister was the other owner of the real estate in question and
that he felt obligated to protect her interests in the real estate. From his testimony I conclude
that he was plainly attempting to protect her by keeping these properties out of the bankruptcy
proceeding, which he was not entitled to do.
As for the Debtor’s excuse that he was distracted by his personal circumstances at the
time he prepared the Schedules and SOFA, the Court cannot credit that excuse. Most, if not all,
consumer debtors suffer from distraction when they file their bankruptcy petitions. The
distractions suffered by the Debtor in this case, though different in kind from the ordinary
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economic stresses affecting debtors in bankruptcy, nonetheless did not affect his deliberation
about which assets and positions to disclose. His distraction did not cause him to omit his
assets and positions by inadvertence. His distractions notwithstanding, the Debtor’s omissions
from the Schedules and SOFA were knowing and deliberate, not inadvertent. Here, the Debtor
says he failed to disclose certain business interests because he was distracted, but he did in fact
remember to disclose his interest in the GSC business. That business, according to the Debtor,
had no value at the time he filed his case. Thus, it is difficult to distinguish GSC from the many
entities that the Debtor failed to disclose, many of which held potentially valuable interests in real
estate. Distraction under the circumstances of this case does not begin to excuse the Debtor’s
failure to disclose multiple business interests that may have led to the discovery of valuable
assets.
In addition, the Debtor’s two alleged excuses—(i) that he omitted these entities because
they had no value and (ii) that he omitted the entities because he was distracted—are
inconsistent with each other. According to the first, he made a considered decision not to list the
entities; according to the second, he was too distracted to remember them or to recognize the
need to list them. He has made no effort to reconcile the two. As they are offered in tandem,
each is made suspect by the other.
Finally, the Debtor’s argument that he cured his failure to disclose the aforementioned
information by revealing the omitted information at his first meeting of creditors, the so-called
“section 341 meeting,” is not tenable. The evidence shows that a couple of days before the
meeting of creditors, the Debtor provided a partial copy of his 2007 personal federal income tax
return to Mr. Desmond; and the return contained some information about the omitted entities.
The Debtor supplied this tax return pursuant to 11 U.S.C.§ 521(e)(2)(A), which obligates a debtor
to provide a copy of his or her most recent federal income tax return to the trustee. He did not
also provide tax returns for the various entities and provided no additional information regarding
those entities until that information was specifically requested by Mr. Desmond. It was also
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established at the trial that the Debtor failed to attend a Rule 2004 examination of the Debtor that
Mr. Desmond had scheduled after the section 341 meeting itself, to make further inquiry about
the omitted entities. In sum, I conclude that the Debtor’s disclosures at the first meeting of
creditors were limited and, in effect, compelled by § 521(e)(2)(A) and not the kind of full and
voluntary disclosures that might tend to show that his omission of the entities and positions from
the Schedules and SOFA were not made with fraudulent intent.
From the evidence adduced, the Court may and does infer that, in making his numerous
false oaths as to the omitted entities and his positions with those entities, the Debtor acted
knowingly and fraudulently. The evidence he has adduced in rebuttal is unavailing. I conclude
by a preponderance of the evidence that the Debtor made his numerous false oaths with
knowledge of their falsity and intent to defraud. The U.S. Trustee is therefore entitled to a
judgment of denial of discharge.
The above conclusion is based exclusively on the Debtor’s false oaths as to the omitted
entities and as to the Debtor’s positions with those entities. The Court does not rely on the
alleged false oaths as to two checking accounts. In view of the above conclusion, the court
deems it unnecessary to address the counts based on the checking accounts and to address the
U.S. Trustee’s separate counts under § 727(a)(2)(B).
CONCLUSION
In light of the Court’s determination that the U.S. Trustee has sustained his burden under
§ 727(a)(4)(A), the Court will enter a separate judgment denying the Debtor a discharge.
Date: September 15, 2010 	_______________________________
Frank J. Bailey
United States Bankruptcy Judge
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