Rossi v. Moreo et al

UNITED STATES BANKRUPTCY COURT
EASTERN DISTRICT OF NEW YORK
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In re
Case No.: 07-71258-478
VINCENT MOREO and
MARIAN NORMA MOREO,
Chapter 7
Debtors.
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FRANK J. ROSSI, JR.,
Adv. Pro. No.:07-8256-478
Plaintiff,
- against -
VINCENT MOREO and
MARIAN NORMA MOREO,
Defendants
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MEMORANDUM DECISION
Appearances:
The Law Offices of Avrum J. Rosen, PLLC
Attorney for Plaintiff
By: Fred S. Kantrow, Esq.
38 New Street
Huntington, New York 11743
Phillips, Weiner, Quinn & Artura
Attorney for Defendants
By: Richard F. Artura, Esq.
165 South Wellwood Avenue
P.O. Box 405
Lindenhurst, New York 11757
Honorable Dorothy T. Eisenberg, United States Bankruptcy Judge
Before the Court is Plaintiff’s action seeking a determination that the Defendants should
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be denied a discharge of their debts. This Court has jurisdiction pursuant to 28 U.S.C. §§ 1334.
This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(J) and 11 U.S.C. §§ 727(a)(3) and
727(a)(4)(A). Based upon the record before the Court and the relevant case law, the Court finds
that the denial of the Defendants’ discharge is warranted. The following constitutes the Court’s
finding of fact and conclusions of law as mandated by Rule 7052 of the Federal Rules of
Bankruptcy Procedure.
FACTS
In June of 2003, the Defendants purchased North Fork Bagel, Inc. for $125,000 from
Craig Grossetto and renamed it Moreo’s Bagel & Café (the “Bagel Store”). The Defendants
purchased the Bagel Store with a $50,000 home equity loan and a $75,000 note given in favor of
Mr. Grossetto. The Defendants did not review the books and records of North Fork Bagel or do
any due diligence prior to purchasing the bagel store. Mr. Moreo established a checking account
at Washington Mutual for the Bagel Store but Mrs. Moreo was the one that made the deposits
and issued checks from the checking account. Mrs. Moreo ran the day to day operations of the
Bagel Store, met with the accountant and reviewed the tax returns relating to the Bagel Store.
Mr. Moreo had limited or no knowledge of the administrative and financial operations of the
Bagel Store.
Prior to running the Bagel Store, Mrs. Moreo was a part-time counter-person at another
bagel store known as Bagel Buddies. She previously worked for Frank Rossi, the Plaintiff, ten
years ago for six to eight months at Price Rite Carpets where she handled floor sales. She left
Price Rite Carpets because she was diagnosed with multiple sclerosis and did not work for
several years prior to taking the position at Bagel Buddies.
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Mrs. Moreo operated the Bagel Store 7 days a week. It had wholesale accounts whereby
it would sell bagels to restaurant and delicatessens. The wholesale customers would pay for their
purchases in cash and/or by check. The Bagel Store also operated a retail business selling bagels
and pastries to individual customers who entered the store. Other than $100 a week for 6 months
in 2005, Mrs. Moreo stated that she did not take any salary or compensation for her work at the
Bagel Store. Aside from Mrs. Moreo, the Bagel Store had one full time baker and at least one
part-time employee who worked during the summers. Mrs. Moreo was paid “off the books” at
Bagel Buddies and she adopted that practice to the Bagel Store. For the most part, she paid her
employees “off the books” so not all of the wages for her employees were reported to the taxing
authorities. For example, Defendants reported that the Bagel Store paid salaries and wages in
the amount $10,750 for all of 2004 but Mrs. Moreo testified that she actually paid about $35,000
in wages to her employees.
Mrs. Moreo did not keep any ledger or formal records of her receipts, expenses or
payments. As Mrs. Moreo testified, there was not an exact ledger; it was very chaotic; and she
did not know how to take care of the books. Mrs. Moreo did not make daily deposits of her cash
receipts from the Bagel Store into the bank account and any deposits into the business account
was infrequent. At times, Mrs. Moreo would take the money at the Bagel Store home rather than
deposit the money into the business checking account.
Retail sales would be recorded on the cash register but there is no evidence that all cash
transactions relating to the wholesale customer accounts were recorded. Sometimes vendors or
employees were paid in cash from the cash register and not all cash payments to employees were
written down. Mrs. Moreo stated that on a weekly basis, she would write down on a piece of
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paper what she received relating to the wholesale accounts and her expenses and would put the
piece of paper, along with the register tape and any receipts in an envelope to be given to her
accountant once a month or every other month. The accountant would transfer the information
given to him onto a formal ledger. None of these envelopes or receipts were produced at trial.
In January 2005, the Bagel Store had problems meeting its expenses and was in danger of
being evicted by its landlord for failure to pay rent. A mutual friend contacted Plaintiff
(“Rossi”) to have him look at the business. He came in and determined that the business could
be made profitable and agreed to provide funds to enable the Bagel Store to continue operations.
There is some uncertainty as to whether he decided to provide funds as a partner, a lender, or as
a creditor. There is neither a written agreement between the parties that Rossi would be viewed
as a partner in the business with a right to a share of the profits, if any, nor any promissory note
provided in 2005 evidencing that the funds constituted a loan. Rossi used his personal funds to
pay off approximately $30,000 of the Bagel Store’s rent arrears. He worked at the Bagel Store
from January 2005 to approximately June 2005 and some of his work included making bagel
deliveries to the wholesale customers and collecting payment from them, and picking up supplies
for the inventory. Whenever the Bagel Store could not pay a bill, Rossi provided the funds to
make the payment. During the first 4 months of 2005, Rossi invested more than $50,000 in the
Bagel Store. Rossi did not draw any paycheck or salary for the time he worked at the Bagel
Store.
Rossi never saw any of the books and records of the Bagel Store and did not see Mrs.
Moreo prepare a ledger. He attempted to show Mrs. Moreo some simple bookkeeping skills to
keep track of sales and receipts. He allegedly did his own bookkeeping with respect to the Bagel
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Store to determine how the business was doing although the Court does not have any evidence of
such bookkeeping. In June of 2005, Rossi stated that he left because he was in poor health and
because he suspected that Mrs. Moreo was improperly running the Bagel Store. By his own
bookkeeping, the Bagel Store should have been profitable yet it was still unable to meet all of its
expenses. The Court, however, has no evidence to support this representation.
He commenced an action in state court against the Defendants in 2006 to recover
$56,000 he had put into the Bagel Store. The Defendants needed $3,000 to make a rent payment
and approached Rossi for the necessary funds. Rossi allegedly required Mr. Moreo to sign a
statement before he would provide the additional $3,000. Mr. Moreo signed a handwritten letter
dated June 9, 2006 stating that he agrees to pay Rossi $56,000 upon the sale of the Bagel Store
with the amount to be payable in cash. The letter also states that Craig Grossetto would be paid
first. On June 13, 2006, the Debtors signed an Affidavit of Confession of Judgment in favor of
Rossi in the sum of $56,000 arising from loans made by Rossi to the Defendants and a Judgment
By Confession was entered by the state court on August 22, 2006.
The Debtors sold the business on November 13, 2006 to Graziano & Son Enterprise for
approximately $72,700. The consideration consisted of $3,000 in cash, the assumption and
satisfaction of the note given in favor of Craig Grossetto with an outstanding balance of
approximately $52,000, the satisfaction of a debt in the approximate amount of $10,000 to
Empire Bakery Equipment, Inc., the satisfaction of the Defendants’ outstanding rent obligation
in the approximate sum of $7,500, and the satisfaction of an outstanding $200 telephone bill.
The Defendants filed for Chapter 7 relief on April 13, 2007 (the “Petition Date”). For
Mr. Moreo, this was his second chapter 7 case as he previously filed an individual bankruptcy
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case in 1998 and was granted a discharge in that case.
The highest level of education obtained by both Defendants was a high school education.
On the Petition Date, Mr. Moreo was employed by Wendys International as a service technician
doing heating and air conditioning work. Currently, he is employed by Lane Associates doing
the same type of work. According to the Defendants’ Schedule I to the bankruptcy petition, Mr.
Moreo earned approximately $4,593 a month from his employment at Wendys International and
received a $1,000 a month contribution from his mother. Mrs. Moreo is unemployed and was
receiving $400 a month on the Petition Date from worker’s compensation and for permanent
partial disability.
The initial meeting of creditors pursuant to 11 U.S.C. § 341 was conducted on May 15,
2007. On May 18, 2008, the Defendants filed Amended Schedules C, D, and F, an Amended
Summary of Schedules, and Amended Statistical Summary of Certain Liabilities and Related
Data. The Defendants modified their homestead exemption on Schedule C to reduce the claimed
exemption from $122,551 to the statutorily permitted amount of $100,000 and to correct errors
regarding which creditors listed on Schedule F relating to unsecured creditors should have been
listed on Schedule D because these creditors held judgment liens. As amended, the Defendants
scheduled $440,315 in secured debts, $62,015.71 of which is with respect to the funds given by
the Plaintiff to the Bagel Store. The Defendants also scheduled $77,231.22 in unsecured debt
some of which relate to the Bagel Store.
On May 23, 2007, the Trustee filed his report of no distribution stating that there was no
non-exempt property to distribute. As a result, no deadline for filing proofs of claims has been
set. The Trustee’s report has not been rescinded and the time for the Trustee to object to
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discharge has passed.
On October 5, 2007, Plaintiff timely filed this adversary proceeding seeking a
determination that the Defendants should be denied a discharge of debts on the grounds that 1)
the Defendants transferred, removed, destroyed, mutilated, or concealed property within one
year of the Petition Date with the intent to hinder, delay or defraud a creditor under 11 U.S.C. §
727(a)(2)(A); 2) the Defendants falsified and failed to keep or preserve adequate records from
which the Debtors’ financial condition or business transactions might be ascertained under 11
U.S.C. § 727(a)(3); 3) the Defendants knowingly and fraudulently made a false oath or account
in connection with their bankruptcy case under 11 U.S.C. § 727(a)(4)(A); and 4) the Defendants
failed to explain satisfactorily any loss of assets or deficiency of assets to meet the debtors’
liabilities under 11 U.S.C. § 727(a)(5). The Defendants filed an Answer on November 27, 2007.
On January 31, 2008, the Defendants filed Amended Schedules B and C and an Amended
Means Test Calculation. The Schedule B was amended to disclose the following assets: a) Mr.
Moreo’s 100% shareholder interest in the Bagel Store with no value, and b) three lawsuits. The
three lawsuits consisted of a personal injury lawsuit against Frank Capella relating to a motor
vehicle accident on July 23, 2003 with a value of $7,500, a personal injury lawsuit against Beach
Bar, Inc. for an accident that occurred on February 23, 2005 with a value of $15,000, and a
workers’ compensation claim against his employer for an accident that occurred on February 23,
2005 with a value of $7,500. The Defendants amended their Schedule C to include a $7,500
personal injury exemption with respect to each of the three lawsuits added to Schedule B. These
assets were not raised in the Complaint and were voluntarily disclosed by the Defendants after
they went over their schedules again with new bankruptcy counsel.
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The Defendants also amended their Means Test Calculation to include a $3,500 loan
from Mrs. Moreo’s brother which averaged $583.33 a month over a 6 month period, $308.38 in
income from the operation of the Bagel Store, and an additional child that was mistakenly
excluded from the Defendants’ household size. While the original Means Test showed that the
Defendants’ annualized current monthly income was less than the applicable median family
income, the amendments resulted in the Defendants’ annualized current monthly income being
more than the applicable median family income and necessitated a calculation of allowed
deductions under § 707(b)(2). One of the deductions listed in the amended Means Test is a $175
expense allegedly relating to the average monthly amount the Defendants actually paid for
telecommunication services other than basic home telephone service, such as cell phones,
pagers, call waiting, caller id, special long distance, or internet service, to the extent necessary
for the Defendant’s health and welfare or that of the Defendants’ dependents. Although Mrs.
Moreo suffers from multiple sclerosis, Mr. Moreo testified that the expense comprised of a $40
cell phone bill and $135 for the family’s cable television service. There was no evidence that the
cell phone and cable television expenses were related to the health and welfare of the Defendants
or that of their dependents. Even with the corrections, the Defendants passed the Means Test for
purposes of 11 U.S.C. § 707.
On July 31, 2008, the Plaintiff filed a motion for summary judgment. On September 12,
2008, the Defendants filed a cross motion for summary judgment and opposition to the
Plaintiff’s motion. While the Court found the Defendants to be somewhat unsophisticated with
respect to business dealings, the Court preferred to determine the degree of sophistication and
other abilities of the parties and their intent by observing their testimony rather than from a
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reading of deposition testimony which may result in a different determination. Moreover, the
Court was unable to determine from the financial documentation presented for parties’ respective
motion for summary judgment whether the documents were sufficient for a creditor to put
together a factually accurate scenario of the Bagel Store’s business. Accordingly, pursuant to a
Memorandum Decision and Order, dated December 1, 2008, the Court denied the motion and
cross motion for summary judgment.
The case proceeded to trial which was held on June 1, 2009 on the causes of action
relating to denial of discharge under § 727(a)(3) and (a)(4)(A). As the Plaintiff did not make any
prima face case regarding § 727(a)(2)(A) and 727(a)(5), the Court will not consider those causes
of action.
With respect to 11 U.S.C. § 727(a)(3), Plaintiff argued that the Defendants falsified their
records in that the corporate tax returns relating to the Bagel Store contained false statements
with respect to the wages paid to employees, the payments made to vendors, the payments made
to the landlord and the actual revenue receipts of the Bagel Store. In addition, the corporate tax
returns of the Bagel Store did not reconcile with the various journals and bank statements
relating to the Bagel Store.
With respect to 11 U.S.C. § 727(a)(4)(A), Plaintiff argued the Defendants omitted assets
from their original and first amended Schedules and income from the Defendants’ amended
Means Test and included inappropriate deductions in the Means Test with the reckless
indifference to the truth with regard to the information contained in their schedules and on the
Means Test. Plaintiff alleges that the Defendants only made corrections to their Schedules to
disclose the Defendants’ interest in the Bagel Store and three lawsuits by the Defendants in
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response to this adversary proceeding and that the debtors could not adequately explain
discrepancies found in their amended Means Test and Schedules.
DISCUSSION
I. 	Applicability of 11 U.S.C. § 727(a)(3).
Section 727(a)(3) of the Bankruptcy Code provides that the court shall grant the debtor a
discharge, unless:
the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or
preserve any recorded information, including books, documents, records, and
papers, from which the debtor’s financial condition or business transactions might
be ascertained, unless such act or failure to act was justified under all the
circumstances of the case.
11 U.S.C. § 727(a)(3). The purpose of § 727(a)(3) is to “insure that the trustee and the creditors
receive sufficient information to enable them to trace the debtor’s financial history, to ascertain
the debtor’s financial condition, and to reconstruct the debtor’s business transactions.” State
Bank of India v. Sethi (In re Sethi), 250 B.R. 831, 837 (Bankr. E.D.N.Y. 2000)(citations
omitted); see also In re Underhill, 82 F.2d 258, 260 (2d Cir.), cert. denied, 299 U.S. 546, 57
S.Ct. 9, 81 L.Ed. 402 (1936).
To determine whether denial of a debtor’s discharge is appropriate under § 727(a)(3), the
plaintiff must prove that 1) the debtor failed to keep or preserve books and records, and 2) this
failure must make it impossible to ascertain the debtor’s true financial condition. See Doublet,
LLC v. Palermo (In re Palmero), 370 B.R. 599, 612 (Bankr. S.D.N.Y. 2007); In re Sethi, 250
B.R. at 838. Although the plaintiff has the burden of proof, it is the debtor who must provide
adequate financial records in the first instance. In re Sethi, 250 B.R. at 838. A creditor is not
required to sift through the documents and attempt to reconstruct the debtor’s business affairs.
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In re Juzwaik, 89 F.3d 424, 429 (7th Cir. 1996)(citing In re Frommann, 153 B.R. 113, 118
(Bankr. E.D.N.Y. 1993)). In determining whether the debtor has provided adequate records to
enable the trustee and creditors to trace the debtor’s financial history and business transactions
and to ascertain the debtor’s financial condition, the Court may consider the following: 1) the
complexity and volume of the business; 2) the amount of the debtor’s obligations; 3) whether the
debtor’s failure to preserve books and records was due to the debtor’s fault; 4) the debtor’s
education, business experience and sophistication; 5) the customary business practices for record
keeping in the debtor’s type of business; 6) the degree of accuracy disclosed by the debtor’s
existing books and records; 7) the extent of any egregious conduct on the debtor’s part; and 8)
the debtor’s courtroom demeanor. In re Frommann, 153 B.R. at 117.
If the Court finds that the records were inadequate, then the burden shifts to the debtor to
justify any deficiencies. In determining whether the failure is justified the Court should take into
account the reasonableness of the debtor’s failure in the particular circumstances, such as the
debtor’s education, experience, the sophistication of the debtor’s business, the debtor’s personal
financial structure, and any special circumstances that may exist. In re Sethi, 250 B.R. at 839.
In the case before this Court, Mrs. Moreo operated a single business in which she was
actively involved on an operational, administrative and financial basis. Although Mr. Moreo
was the 100% shareholder and the signatory on the business bank account, it was Mrs. Moreo
who paid the employees and vendors, wrote the checks, met with the accountant, and determined
what inventories were needed. While operating the Bagel Store required hard work on Mrs.
Moreo’s part, the complexity and volume of the Bagel Store business should have been
manageable as she had employees and an accountant. As the responsible person for the Bagel
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Store, Mrs. Moreo was responsible for the store’s books and records. She was obligated to keep
track of the sales and expenses and the payments as such record keeping is required of any
business owner regardless of the size of the business. In a cash-based business such as the Bagel
Store, accurate and complete record keeping is necessary in order for creditors to determine the
financial condition and business transactions of the business and to determine the sales and
withholding taxes that are due to the taxing authorities.
It is clear that Mrs. Moreo failed to keep accurate and complete financial records of the
business transactions of the Bagel Store. The financial records produced at trial were incomplete
and the information reflected in those documents were inaccurate as the records did not fully
reflect all the payments made. Mrs. Moreo often paid vendors and her employees by cash from
the cash register as opposed to checks and knowingly reported only some and not all of the
wages paid. Although Mrs. Moreo stated that she had a book that kept track of how much
money came in and how much money went out each day, she did not submit any such book into
evidence. Moreover, the monthly handwritten journals that were admitted into evidence
contained only one cash receipt number and one cash disbursement number for each month.
There were no separate entries for each day or week. The cash disbursement entries also lacked
any description as to what expenses were paid by cash. The Defendants did not retrieve the
receipts and other information previously given to the accountant in the envelopes after he went
through the information that would support the handwritten journals. In addition, the Court
cannot reconcile the amounts on the journals with the Defendants’ bank statements.
Accordingly, neither the Plaintiff nor the Court can be certain that Mrs. Moreo properly recorded
all the sales, especially the commercial, wholesale accounts, and that she accounted for the
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payment of all the expenses.
While Mrs. Moreo paid her employees off the books because she learned about the
practice at her prior employment, what was done at her prior place of employment does not
render it a customary and acceptable business practice. Moreover, Mrs. Moreo was untruthful
when she filed tax returns based upon inaccurate financial records. Although an accountant
prepared the tax returns and journals, those documents were inaccurate and unreliable because
the accountant relied upon inaccurate and incomplete receipts and documents Mrs. Moreo gave
him. Based upon the documents provided by the Defendants, the Court is unable to determine
how much revenue the Bagel Store generated, what expenses were incurred, which expenses
were paid in cash and which were paid by check, the amount of those payments and whether
those payments were appropriate, the net profit/loss generated by the Bagel Store and the cash
flow of the business. Because some of the Defendants’ unsecured debt that the Defendants seek
to discharge relates to their liability with respect to the Bagel Store, the inability of the Court and
creditors to determine the Defendants’ business transactions is material. Accordingly, the Court
finds that the books and records provided by the Defendants to be inadequate and unreliable.
The inadequacy and unreliability of the Bagel Store’s business records were a result of
Mrs. Moreo’s failure to maintain accurate bookkeeping. Mrs. Moreo has completed only a high
school education and lacked prior business and accounting experience. However, Mrs. Moreo’s
lack of business or accounting sophistication was not justified under the circumstances. Mrs.
Moreo hired an accountant who stopped by the Bagel Store every month or two to discuss the
Bagel Store’s business and collect the receipts and whatever information she provided him to
created the general journals, balance sheets, income statements and tax returns. Mrs. Moreo did
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not need to be familiar with the accounting rules in order to keep a record of her sales to retail
and wholesale customers, the business expenses and the payments she made. She knew she had
to keep some journal or record of such information. Indeed, she submitted into evidence some of
the handwritten journals that she had given her accountant to transfer onto a formal general
journal and balance sheet. Some of those handwritten journals have the name “Bagel Buddies”
written on top indicating that Mrs. Moreo may have borrowed the forms for record keeping from
her prior place of employment. “Where the nature of a debtor’s business operations indicates
that others in like circumstances would ordinarily keep financial records, a debtor cannot justify
his failure to maintain records merely by stating that he did not comprehend the need for them or
that it was not his practice to keep business record.” Bay State Milling Co. v. Martin (In re
Martin), 141 B.R. 986, 997 (Bankr. N.D. Ill. 1992). Moreover, while Rossi worked at the Bagel
Store in 2005, he attempted to show Mrs. Moreo basic bookkeeping skills. Mrs. Moreo’s lack of
prior business experience and sophistication does not justify her failure to keep accurate books
and records and she has not presented any special circumstance that would justify otherwise.
Because Mrs. Moreo’s failure to keep adequate books and records of the Bagel Store
makes it impossible to ascertain the Defendants’ true financial history and to reconstruct the
business transactions of the Bagel Store, a denial of Mrs. Moreo’s discharge under 11 U.S.C. §
727(a)(3) is appropriate.
II. 	Applicability of 11 U.S.C. § 727(a)(4)(A).
Section 727(a)(4) provides that a debtor would be denied a discharge if the debtor
knowingly and fraudulently, in or in connection with the case made a false oath or account. 11
U.S.C. § 727(a)(4)(A). The party objecting to discharge must prove by preponderance of the
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evidence that “(1) the debtor made a statement under oath; (2) the statement was false; (3) the
debtor knew that the statement was false; (4) the debtor made the statement with intent to
deceive; and (5) the statement related materially to the bankruptcy case.” Pergament v. Smorto
(In re Smorto), No. 07-CV-2727 (JFB), 2008 WL 699502, *4 (E.D.N.Y. March 12, 2008)
quoting Dubrowsky v. Estate of Perlbinder (In re Dubrowsky), 244 B.R. 560, 572 (E.D.N.Y.
2000). In determining whether the debtor made a false statement with the intent to deceive, the
court can consider, among other factors, the debtor’s level of financial sophistication. In re
Smorto, 2008 WL 699502, *5. Even though actual intent must be established, the aggregate of
misstatements and omissions of fact can demonstrate a pattern of reckless disregard for the truth
and intent of concealing information from the Court and its creditors. Micro Connections, Inc. v.
Shah (In re Shah), 388 B.R. 23, 38 (Bankr. E.D.N.Y. 2008)(citing Bank of India v. Sapru (In re
Sapru), 127 B.R. 306, 317 (Bankr. E.D.N.Y. 1991)).
Where information is omitted, the party objecting to discharge must show that the
information was material and was omitted for the purpose of perpetrating a fraud and not simply
as a result of carelessness or failure to understand his counsel. In re Smorto, 2008 WL 699502,
*6. A matter is material if it bears a relationship to the debtor’s “business transactions or estate
which would lead to the discovery of assets, business dealings or existence or disposition of
property.” In re Murray, 249 B.R. 223, 228 (E.D.N.Y. 2000). ‘The fact that the Debtor has
failed to disclose its interest in property that turns out to have little or no value to the estate may
be the basis for denying the debtor its discharge because “the determination of relevant and
importance of the question is not for the Debtor to make. It is the Debtor’s role simply to
consider the question carefully and answer it completely and accurately.”’ In re Sapru, 127 B.R.
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at 315 (quoting In re Diodati, 9 B.R. 804, 808 (Bankr. D. Mass. 1981)).
In the case before the Court, the Defendants exhibited a reckless disregard for the truth
with respect to the information contained in the Schedules and amended Means Test Calculation.
Both Defendants were represented by experienced bankruptcy counsel and had the time to
carefully complete the Schedules and Means Test Calculation. The Defendants failed to list the
personal injury action and worker’s compensation claims relating to accidents that occurred in
July 2003 and February 2005. These were prepetition claims that the Defendants knew about
and failed twice to list in their Schedules when asked about whether they had any contingent and
unliquidated claim of any nature. The failure of the Trustee at the meeting of creditors to
question whether the Defendants had any potential or existing claims against third parties does
not excuse the Defendants’ failure to disclose such potential assets. Such failure could prevent a
trustee from timely investigating the value of such claims. While corrective disclosure was made
before the Plaintiff discovered the omission, the effect of a false statement is not cured by
correction in an amended schedule or by subsequent testimony. In re Tabibian, 289 F.2d 793,
797 (2d Cir. 1961); see also In re Ingle, 70 B.R. 979, 984 (Bankr. E.D.N.C. 1987)(“The fact that
the property in question is included in the debtor’s amended petition does not excuse its original
omission.”).
Similarly, the Defendants failed to list Mr. Moreo as a 100% shareholder of Moreo’s
Bagel & Café in their Schedule B. Although the value of Mr. Moreo’s shares is of no value
given that the Defendants sold the assets of the Bagel Store prepetition, the determination of
whether Mr. Moreo’s shares are relevant or important to the bankruptcy is one that the Trustee
should make and not the Defendants.
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In addition, the Defendants’ inclusion of a cable television bill in their amended Means
Test without a reasonable explanation as to why such an expense would be related to the health
and welfare of the Defendants or their dependents is another example of the Defendants’ reckless
disregard for the truth. While the Court observed that the Defendants appeared confused at times
during the trial and may be somewhat unsophisticated about financial matters, the Defendants’
inclusion of such an expense on their amended Means Test is not a result of carelessness or
confusion but rather demonstrates an indifference and disregard of the Bankruptcy Code. This
behavior is also evidenced and supported by the Defendants’ similar disregard for the federal and
local tax laws when they deliberately paid employees of the Bagel Store off the books and failed
to report these payments as discussed above. The Defendants have not provided any evidence
that such false statements were not intentional misrepresentations.
These misrepresentations relate materially to the Defendants’ bankruptcy estate. While
each of the misstatements and omissions taken individually may not rise to the level of
materiality, cumulatively, they show a pattern of untruth and deceit. These misstatements and
omissions failed to give the Trustee, creditors and the Court a clear picture of the Defendants’
financial condition and their assets.
The court finds that the Plaintiff has established that the Defendants intentionally made a
false oath by a preponderance of evidence and the Defendants have failed to provide credible
justifications for their erroneous and misleading statements in the Schedules and amended Means
Test. While Mr. Moreo had minimal involvement with the Bagel Store and a denial of his
discharge is not warranted 11 U.S.C. § 727(a)(3), based upon the factors discussed above and the
totality of circumstances, the Court finds that both Defendants’ discharge should be denied
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pursuant to 11 U.S.C. § 727(a)(4)(A).
CONCLUSION
Based upon the foregoing, Mrs. Moreo’s discharge is denied pursuant to 11 U.S.C.
§ 727(a)(3), and Mr. Moreo’s and Mrs. Moreo’s discharge is also denied pursuant to 11 U.S.C.
§§ 727(a)(4)(A).
Dated: Central Islip, New York
September 10, 2009
s/Dorothy Eisenberg____________
Dorothy Eisenberg
United States Bankruptcy Judge
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