Faulkner et al v. Kornman et al

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IN THE UNITED STATES BANKRUPTCY COURT
FOR THE SOUTHERN DISTRICT OF TEXAS
HOUSTON DIVISION
Dennis Faulkner, Plaintiff,
§
§
v.
§
§
Miscellaneous Proceeding
10-301
Gary Kornman, et al, Defendants.
§
§
MEMORANDUM OPINION
Dennis Faulker seeks a finding that Gary Kornman violated the Court’s Amended Order,
(ECF No. 719), by failing to file sufficient monthly financial reports.
Faulkner has shown a sufficient factual basis for his allegation that Kornman’s monthly
financial reports are insufficient. Within fourteen days of the entry of the Order accompanying
this Memorandum Opinion, Kornman must either: (i) amend his previously filed monthly reports;
or (ii) demonstrate that the monthly financial reports comply with all aspects of the Amended
Order.1 Otherwise, a contempt hearing will be scheduled.
The Court will schedule a status conference to determine whether the Injunction and Case
Management Order, (ECF No. 74), and the Amended Order, (ECF No. 719), should be modified
after entry of the Findings of Fact and Conclusions of Law, (ECF No. 852-1), in the related state
court proceedings. The outcome of the status conference will not affect Kornman’s duty to file
amended monthly financial reports (or otherwise demonstrate compliance with the Amended
Order) for periods prior to the status conference.
All other relief requested by Faulkner is denied.
1 As discussed in further detail below, the Court did not intend for the Amended Order to require Kornman to list
every nominal cash expenditure. In the amended reports, Kornman is not required to list every nominal cash
expenditure.
ENTERED
10/25/2012
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Background
This dispute arises in the context of a proceeding to enforce a judgment.
Dennis Faulkner obtained a judgment against Gary Kornman (and various corporate
entities) in the United States Bankruptcy Court for the Northern District of Texas. (ECF No. 1).2
On March 9, 2010, Faulkner registered the judgment in the Southern District of Texas pursuant to
28 U.S.C. § 1963. (ECF No. 1). The proceeding was referred to this Court pursuant to the
Southern District’s General Order of Reference (General Order 2005-6) and 28 U.S.C. § 157(a).
On July 14, 2010, the Court entered an Injunction and Case Management Order, which
stated in relevant part that:
[N]either Kornman nor any other person acting with his authority may
spend more than $9,000.00 per month in total (starting July 14, 2010) for
living expenses out of the property identified by him, with such living
expenses to be for any purpose that he deems appropriate. Not more than
$9,000.00 may be spent per month, in total.
The Judgment Debtors may seek authority from this Court to expend
sums in excess of the $9,000.00 total, for purposes deemed appropriate by
the Judgment Debtors. These purposes may include legal fees, business
expenses or other expenses. No funds may be expended for these requests
unless so ordered by this Court.
(ECF No. 74 at 2). This spending injunction remains in place.
Extensive discovery disputes have complicated this proceeding to enforce a judgment.
(ECF Nos. 509, 571, 597, 649, 663). This Court has repeatedly found Kornman in contempt.
(ECF Nos. 509, 571, 719).
On April 5, 2012, during a hearing related to a separate contempt motion, this Court again
found Kornman in contempt. Subsequently, the Court entered an Order sanctioning Kornman for
his contempt. (ECF No. 711). This Order was superseded by an Amended Order dated April 9,
2 The judgment was entered in Faulker v. Kornman, Case No. 06-3377, which is an adversary proceeding related to
the main bankruptcy case of The Heritage Organization, LLC, Case No. 04-35574. Kornman is not a debtor in a
bankruptcy case.
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2012. (ECF No. 719).
The Amended Order required the following:
In addition, Kornman must file monthly reports with this Court not later
than 15 days after the close of each month. These reports will list all funds
spent and received by Kornman during the prior month and will include
copies of all bank account statements, credit card statements, and all other
financial records reflecting receipts and disbursements.
(ECF No. 719). In other words, the Amended Order requires Kornman to:
• list all of Kornman’s expenditures each month (whether or not supporting financial
records of these expenditures exist);
• list all funds received by Kornman each month (whether or not supporting financial
records exist); and
• include copies of all financial records reflecting receipts or disbursements3 of funds by
Kornman.
(ECF No. 719). Kornman filed his first monthly report on April 16, 2012. (ECF No. 731).
Kornman filed a financial report each subsequent month. (ECF Nos. 775, 797, 811, 834, 847,
851).
After Kornman filed the third monthly report on July 16, 2012, (ECF No. 811), Faulkner
filed this Motion for Contempt and Motion to Compel, (ECF No. 825). Kornman filed a response
on August 24, 2012. (ECF No. 840).
Analysis
I. Motion for Contempt
Kornman’s monthly financial reports typically contain: (i) a copy of his monthly $2,004.00
social security check; (ii) copies of all of his credit card statements (including expenses, interest
charged, and payments received by the credit card company); (iii) receipts for cash expenditures of
3 The term disbursement encapsulates both amounts spent by Kornman and amounts that Kornman caused to be paid.
Therefore, Kornman must disclose any financial records relating to amounts spent, received, or disbursed. (ECF No.
719) (“financial records reflecting the receipts and disbursements”).
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more than $50.004; and, (iv) copies of any invoices from Kornman’s counsel’s firm. (ECF
Nos. 731, 775, 797, 811, 834, 847, 851).5
Faulkner argues that Kornman violated the Amended Order because the monthly filing
reports are insufficient. Specifically, Faulkner argues that the monthly filing reports do not:
• disclose Kornman’s receipts of funds;
• document expenses paid by Kornman in cash;
• include any information regarding whether other persons or entities have been
incurring or paying expenses on Kornman’s behalf (and, if so, the source of such
funds) or at Kornman’s direction; or
• provide bank statements or other financial records of any kind, other than credit card
statements.
(ECF No. 825 at 2). Faulkner requests that a hearing be held and that Kornman be found in
contempt. (ECF No. 825 at 6). As discussed below, a contempt hearing will be scheduled only if
Kornman fails to properly amend the previously filed monthly reports or fails to demonstrate that
the previously filed monthly reports comply with the Amended Order.
A. Failure to Disclose Funds Received
Faulkner has set forth no factual support for his allegation that Kornman failed to disclose
funds received.
Kornman has submitted copies of his monthly social security check with each financial
report. Faulkner does not allege that Kornman directly received additional funds in any month.
A separate issue is whether payments made by third-parties directly to credit card
companies on Kornman’s behalf constitute funds received by Kornman. If so, Kornman would be
4 The term “nominal cash expenditures” will be used to refer to cash expenditures of less than $50.00.
5 On occasion the monthly reports contain additional financial records. For instance, the May 2012 financial report
contained financial records related to Kornman’s exempt IRA account. (ECF No. 797-1). The Court allowed
Kornman to pay his counsel $120,000.00 using these exempt assets. (ECF No. 722). Most monthly reports, however,
stick to this general formula.
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required to produce the financial records related to these payments.
This issue relates to the third alleged violation (that Kornman has not identified or
otherwise provided information regarding third-parties who are incurring or paying expenses on
his behalf). This issue will be addressed in that later section.
B. Failure to Document Cash Expenditures
Faulkner’s second allegation is that “Kornman failed to document . . . expenses paid by
Kornman in cash, including any information regarding whether other persons or entities have been
incurring or paying expenses on Kornman’s behalf (and, if so, the source of such funds) or at his
direction.” (ECF No. 825 at 5).6
Kornman’s response argues, and Faulkner does not dispute, that the monthly financial
reports include receipts for all cash expenditures over $50.00 made after imposition of the
reporting requirement in mid-April 2012. (ECF No. 840 at 7). Kornman states that there are no
records for nominal cash expenditures and therefore he has no additional records to turn over.
(ECF No. 840 at 7).
The Amended Order does not include an exception for nominal cash expenditures. (ECF
No. 719). Therefore, read as is, the Amended Order requires that Kornman list his monthly
nominal cash expenditures and turn over any related financial records.
There is no evidence that financial records of these nominal cash expenditures exist. In
other words, there is no evidence Kornman refuses to turn over relevant financial records (at least
as it relates to these nominal cash expenditures).
6 This allegation comprises two arguments. Faulkner argues that Kornman violated the Amended Order both for
failing to properly document his own cash expenditures and for failing to produce information on individuals who are
paying expenses in cash on Kornman’s behalf. The second portion of this allegation will be addressed in the next
section, as it is essentially the same as Faulkner’s third allegation (that Kornman has failed to turn over financial
records relating to payments made by third-parties on his behalf).
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The Court finds that the Amended Order should not require Kornman to list nominal cash
expenditures. If the Injunction and Case Management Order, (ECF No. 74), and the Amended
Order, (ECF No. 719), remain in effect after the status conference, the Amended Order will be
modified to exclude Kornman’s obligation to account for every nominal cash expenditure.
However, the proceeds of any cashed social security check will be automatically applied to his
$9,000.00 monthly spending limit.
C. Failure to Include Information about Persons or Entities Incurring or Paying
Kornman’s Expenses
Faulkner’s third allegation is that Kornman violated the Amended Order by failing to
produce financial records relating to third-parties who pay Kornman’s credit card bills directly (or
who pay or incur other expenses on Kornman’s behalf). (ECF No. 825 at 4, 5).
Faulkner does not provide any factual support for the allegation that third-parties are
incurring expenses on Kornman’s behalf.
There is factual support for the allegation that third-parties are paying Kornman’s expenses
on his behalf. The monthly financial reports include credit card statements which clearly indicate
that payments are being made. Kornman admits that these are third-party payments made by a
spendthrift trust. (ECF No. 840 at 6) (“As disclosed to [Faulkner’s counsel] on July 20, 2012, a
spendthrift trust of which Kornman is a beneficiary makes periodic disbursements to pay
Kornman’s credit card liabilities where such payments exceed the sum of Kornman’s monthly
social security check. The spendthrift trust pays the credit card company, and those payments are
reflected on the credit card statements provided to [Faulkner] by Kornman.”). Whether the
Amended Order requires Kornman to produce the related financial records depends on whether
these payments are made at Kornman’s direction. If so, he must turn over the financial records.
There is factual support for Faulkner’s allegation that Kornman disburses these funds by
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causing the spendthrift trust to pay his credit card bills directly. Although Kornman does not
identify the specific trust making these payments,7 he describes it as a spendthrift trust established
and funded by Kornman’s mother and governed by Alaskan law. (ECF No. 840 at 6 n.2). In his
response to Faulker’s contempt motion, Kornman acknowledges that he is a beneficiary of the
spendthrift trust making these payments but does not address whether he is also a trustee (and
thus, whether he has the ability to disburse these funds). (ECF No. 840 at 6). However, in his
initial declaration of assets, Kornman acknowledged that he is a trustee or co-trustee in various
trusts for which he is also a beneficiary. (ECF No. 109 at 3 n.1).
The Trust Agreement and Deed of Trust for the “Millennium 2000 Trust” provide an
example of a trust for which Kornman is both trustee and beneficiary. (ECF No. 380-1 at 4). The
Millenium 2000 Trust is governed by Alaskan law and the Grantor is Dorothy P. Kornman
(Kornman’s mother). (ECF No. 380-1 at 5). Gary M. Kornman is the “Family Trustee.” (ECF
No. 380-1 at 5). As the Family Trustee, Kornman has the capacity to distribute both the income
and principal to himself. (ECF No. 380-1 at 7).
Again, Kornman has not indicated which trust makes these payments. However, in the
initial declaration of assets, Kornman identifies only two types of trusts: (i) trusts set up by
Kornman’s father or mother, for which he is both trustee and beneficiary; and, (ii) trusts set up by
Kornman himself, for which Kornman is not a beneficiary. (ECF No. 109 at 3 n.1). Given this
7 Kornman acknowledged in his initial declaration of assets that he has beneficial interests in numerous trusts:
Gary Kornman is either a trustee or co-trustee of various trusts established by Grantors
other than himself. These various trusts are “spendthrift” trusts and as such are not subject
to any claims of his creditors, nor are they any assets of his. Most of these trust documents,
if not all, of these “spendthrift” trusts have already been produced to [Faulkner]. Other
than “spendthrift” trusts established from the estate planning of Mr. Kornman’s Father and
Mother, Mr. Kornman shares the beneficial interest in these trusts with Michael Kornman,
Grant Kornman, Claire Kornman and Katherine Kornman. Mr. Kornman is not a
beneficiary of any trusts of which he is the Grantor.
(ECF No. 109 at 3 n.1).
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prior statement, and Kornman’s description of the trust included in his response to this contempt
motion, it appears that these payments are indeed made from a trust for which Kornman is both a
trustee and beneficiary.
These payments constitute funds disbursed by Kornman. Kornman did not include
financial records related to these payments with his monthly reports. Kornman argues that there
are no such financial records.8 This is an incredible statement. The trust makes the payments by
check, wire transfer, cash withdrawal or in some other manner that should result in the existence
of a document.
Within fourteen days of entry of the Order accompanying this Memorandum Opinion,
Kornman must either: (i) amend the previously filed monthly financial reports to include these
records; or, (ii) demonstrate that the previously filed monthly reports comply with the Amended
Order. Otherwise, the Court will schedule a contempt hearing.
D. Failure to Provide Financial Information Other than Credit Card Statements
The last alleged violation is that Kornman failed to “provide bank statements, or other
financial records of any kind, other than credit card statements.” (ECF No. 825 at 2).
The Amended Order requires Kornman to produce financial records reflecting funds
received, spent, or disbursed. (ECF No. 719). Faulkner provides no factual support for his
allegation that Kornman has additional such records that he refuses to produce (other than the
financial records related to payments made by the spendthrift trust).
By way of an example, Faulkner mentions Kornman’s failure to produce bank statements.
(ECF No. 825 at 2). Under the terms of the Amended Order, Kornman must produce bank
8 “The spendthrift trust pays cash directly to the credit card company, and those payments are reflected on the credit
card statements provided to the Creditor Trustee by Kornman. There are no other financial records or receipts of these
transactions to be produced.” (ECF No. 840 at 6).
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statements reflecting funds received, spent, or disbursed by him. (ECF No. 719). Kornman states
that his only income is his monthly social security check. (ECF No. 840 at 4-5). Instead of
depositing the check in a bank account, Kornman claims that he cashes the check and uses the
proceeds to cover cash expenditures. (ECF No. 731 at 1-2). Kornman alleges that he pays for
other nonlegal expenses only by cash or credit card, not by check. (ECF Nos. 731, 775, 797, 811,
834, 847, 851). Faulkner offers nothing substantive to disprove these allegations.
The Amended Order only requires the production of financial records reflecting funds
received, spent, or disbursed by Kornman. Faulkner has failed to demonstrate a violation of the
Amended Order in this respect (other than the financial records related to payments made by the
spendthrift trust).
II. Motion to Compel
Faulkner’s motion also requests that the Court provide the following relief:
• Compel Kornman to amend his monthly reports (past and ongoing) to (a) fully
document (1) Kornman’s receipt of funds; (2) expenses paid by Kornman in cash,
including any information regarding whether other persons or entities have been
incurring or paying expenses on Kornman’s behalf (and, if so, the source of such funds);
(3) expenses paid at Kornman’s direction or on his behalf, and (b) produce all bank
statements and other financial records of any kind relating to receipts and expenditures;
such amended reports should be filed within five business days after the Court’s order
and the Court should impose daily sanctions for failure to file timely and complete
reports;
• Supplement its prior orders [Dkts. #711, 719] to clarify that Kornman, in his monthly
reports, shall include information both as to expenses he incurs or accrues each month
and as to expenses he pays each month, and that Court permission is needed by
Kornman to either (a) accrue or incur more than $9,000 in expenses in any one month,
or (b) to make cash expenditures of more than $9,000 in any one month; . . . .
(ECF No. 825 at 7).
A. Amendments to the Previously Filed Monthly Reports
As stated above, within fourteen days of entry of the Order accompanying this
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Memorandum Opinion, Kornman must either: (i) amend the previously filed monthly financial
reports to include financial records related to all payments made by spendthrift trusts at his
direction; or, (ii) demonstrate that the previously filed monthly financial reports comply with the
Amended Order. Otherwise, the Court will schedule a contempt hearing.
B. Clarification of the Amended Order
As stated above, the Court will schedule a status conference to determine whether the
Injunction and Case Management Order, (ECF No. 74), and the Amended Order, (ECF No. 719),
should be modified after entry of the Findings of Fact and Conclusions of Law, (ECF No. 852-1),
in the related state court proceedings. At this status conference, the Court will consider proposed
modifications to the Amended Order.
The Court originally imposed a $9,000.00 monthly spending limit and deferred (at
Kornman’s request) to the state courts to determine which of Kornman’s property would be
exempt from creditor claims. The spending limit was an attempt to maintain the status quo
pending the outcome of the state court proceedings. Now that the state court has determined
Kornman’s exemptions, the Court questions the continued vitality of the monthly spending
restriction. The Court is inclined to allow Faulkner to seize all nonexempt property and for
Kornman to be able exercise unfettered control over his exempt property. The parties should be
prepared to discuss this issue at the status conference.
Conclusion
The Court will enter an Order in accordance with this Memorandum Opinion.
SIGNED October 25, 2012.
___________________________________
Marvin Isgur
UNITED STATES BANKRUPTCY JUDGE
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