Appeal from the United States Bankruptcy Court for the District of Arizona Honorable Redfield T. Baum, Sr., Bankruptcy Judge, Presiding Bk. No. 09-10576-RTB Adv. No. 09-01383-RTB
U.S. Bankruptcy Appellate Panel for the Ninth Circuit Cummings_Memo_12_1114.doc
SUSAN M SPRAUL, CLERK U.S. BKCY. APP. PANEL OF THE NINTH CIRCUIT
Argued and Submitted on September 20, 2012 at Phoenix, Arizona
Before: DUNN, JURY and HOULE,*fn2 Bankruptcy Judges.
The debtors, Clarence Thomas ("Thomas") and Pamela K. Cummings ("Pamela")(collectively, "the Cummings"), appeal the bankruptcy court's order denying their chapter 7 discharge*fn3 under § 727(a)(4)(A).*fn4 We AFFIRM.
Thomas has worked in real estate management for over forty years. Thirty-two years ago, Thomas became owner of All State Management Co., Inc. ("All State"),*fn5 which managed various apartment complexes and small commercial buildings in several states, including Arizona.*fn6 All State continued to operate until June 2009.*fn7
On March 2, 2009, approximately two months before the Cummings filed for bankruptcy, Thomas formed First Beacon
Management Co., LLC ("First Beacon"), another real property management company.*fn8 Thomas held a 45% member interest and Pamela held a 50% member interest in First Beacon. Jeannie Wetzel, president of All State (and later of First Beacon), held the remaining 5% member interest. Thomas entered into a management agreement with First Beacon on May 1, 2009.
According to Thomas, First Beacon commenced operations in June 2009.*fn9 He later revealed, however, that First Beacon already was operating when he received and reviewed an initial draft of the Cummings' bankruptcy schedules sometime before May 2009.
As part of setting up First Beacon, Thomas transferred client accounts, including escrow accounts,*fn10 from All State to First Beacon.*fn11 He also opened a bank account for First Beacon in March 2009.
First Beacon's bank account had a closing balance of $1,100, as of March 31, 2009, a closing balance of $121,618.33, as of April 30, 2009, and a closing balance of $130,810, as of May 29, 2009. On May 15, 2009, First Beacon's bank account had a balance of $169,238.98. Five deposits totaling $137,871.66 were made into First Beacon's bank account between May 6 and May 19, 2009.
The funds in First Beacon's bank account rapidly dwindled. It had a closing balance of $94,387.54, as of June 30, 2009, a closing balance $1,090.32, as of July 31, 2009, and a closing balance of $7,155.56, as of August 31, 2009.
Thomas initially claimed that he did not know the source of the deposits in First Beacon's bank account. He later explained that some of the funds in First Beacon's bank account had belonged to Nottingham Place Apartments, one of First Beacon's clients. Thomas acknowledged that he had an interest in Nottingham Place Apartments. He stated, however, that First Beacon returned the funds to Nottingham Place Apartments.*fn12
Thomas leased an office space on First Beacon's behalf in April 2009; All State formerly had occupied the office space. He also entered into lease agreements with First Beacon on May 1, 2009, as to two Lincoln Navigators, a Mercury Mountaineer and a "Toyota SUV" for use by First Beacon's employees ("First Beacon vehicle leases").*fn13
The Cummings filed their chapter 7 petition on May 15, 2009. They filed their original schedules and statement of financial affairs ("SOFA") on June 1, 2009. They did not disclose in their original schedules their interests in First Beacon or the First Beacon vehicle leases. In fact, the Cummings did not mention First Beacon at all in the two amendments to their Schedule B filed on June 15, 2009, and June 22, 2009. They finally disclosed Thomas's interest in First Beacon in their third amended Schedule B and second amended SOFA filed on August 20, 2009. Notably, the Cummings did not ever mention Patricia's interest in First Beacon in any of the Schedule B's they filed.
The Cummings did disclose in their Schedule G, however, leases with Ford Motor Credit and Toyota Financial Services as to a 2008 Lincoln Navigator and a 2008 Toyota Highlander, respectively. The Cummings also reported in their Schedule I that they made monthly installment payments of $533.46 for a lease on a Toyota.
They later disclosed in their second amended Schedule G filed on June 15, 2009, leases with Ford Motor Credit as to two 2008 Lincoln Navigators and a 2008 Mercury Mountaineer, and a lease with Toyota Financial Services as to a 2008 Toyota Highlander. The Cummings again failed to mention the First 1 Beacon vehicle leases in the second amended Schedule G. 2 Although Thomas had reviewed the original schedules, he 3 stated that did not notice that they did not mention his interest 4 in First Beacon. He assumed that the original schedules 5 disclosed his interest in First Beacon because his attorneys at 6 Polsinelli Shughart PC ("Polsinelli law firm"), who knew of First 7 Beacon and in fact, had helped him prepare its operating 8 agreement, would have "picked up on the fact that First Beacon 9 should have been - should have been added to the schedules." Tr. 10 of January 5, 2012 hr'g, 39:24-25, 40:1.
11 Thomas believed that his attorneys would include his 12 interest in First Beacon in the original schedules so as to place 13 the chapter 7 trustee on notice. He moreover maintained that 14 though the original schedules failed to disclose his interest in 15 First Beacon, it had been disclosed and discussed by his 16 attorneys with the chapter 7 trustee before the filing of the 17 third amended Schedule B. In fact, Thomas averred, he and his 18 attorneys discussed First Beacon with the chapter 7 trustee at a 19 meeting with him that took place sometime in June 2009.
20 In their original and in all of their amendments to 21 Schedule B, the Cummings disclosed that the value of Thomas's 22 interest in All State was "unknown." Thomas explained that he 23 did so because 24 [he] didn't know what it was - what [he] could get - [he] didn't think [he] could get anything for it, cause 25 [sic] we were losing money, so - but [he] didn't know, so [he] just used "unknown."
27 Tr. of January 5, 2012 hr'g, 37:22-25. He contended that it was 28 difficult to determine the value of his interest in All State 7 1 because the prospect for All State's "future revenues [was] 2 questionable." Tr. of January 5, 2012 hr'g, 38:9-10. He 3 explained that All State 4 had no fixed assets, plus the management agreements were only 30 days. So anybody that's going to look at 5 buying a management company would not - wouldn't do so with a 30-day contract. This would - you know, that's 6 the nature of the business.
7 Tr. of January 5, 2012 hr'g, 38:4-8. Thomas further explained 8 that though All State had funds in its bank account, those funds 9 were earmarked for expenses, such as property taxes and insurance 10 escrows. Moreover, All State's liabilities exceeded the funds in 11 its bank account. The Cummings asserted the same "unknown" value 12 for Thomas's interest in First Beacon.
13 Despite the fact that the Cummings had valued Thomas's 14 interests in All State and First Beacon as "unknown," they 15 offered to purchase them from the bankruptcy estate. In a letter 16 dated July 21, 2009 ("offer letter"), the Cummings advised the 17 chapter 7 trustee that All State and First Beacon 18 [were] of essentially no value absent [Thomas's] ongoing involvement. All State . . . and now First 19 Beacon Management Company, LLC, [were] management companies which provide a service and [had] no 20 intrinsic value. The management contracts [were] by their terms, terminable by one party on thirty days' 21 notice, which [made] the service provided even more fragile. All of those management relationships [were] 22 based more on ...