528 B.R. 211
Bankr. D. Mass.2015Background
- Debtor Michael G. Dewhurst solicited and received twelve personal loans from creditor Gerard Knappik between July 2009 and May 2011, totaling $220,000, ostensibly to fund a Facebook poker application developed through GlobalStar LLC. Dewhurst repaid only $9,000.
- Many advances were memorialized by signed loan agreements stating funds would be used solely for the Project; later advances were for smaller or unspecified amounts. Knappik relied on Dewhurst’s representations in making the loans.
- GlobalStar contracted with Acadia Edge Group (AEG) to develop the application; AEG was paid approximately $38,300 (supported by bank records), delivered a working product in mid-2010, and performed sporadic further work in 2011 after a $1,000 deposit. AEG denied many other alleged payments.
- Dewhurst converted each loan check to cash and kept the cash at home; he produced no contemporaneous cash disbursement records and provided a post hoc worksheet that the court found partially fictitious. The court could account for at most about $34,000 of the loans as Project expenditures.
- In his bankruptcy schedules Dewhurst omitted a $4,500 receivable and a $39,000 insider loan payable; he testified these omissions were inadvertent but the court found them knowing and fraudulent.
Issues
| Issue | Knappik's Argument | Dewhurst's Argument | Held |
|---|---|---|---|
| Whether debt is nondischargeable under 11 U.S.C. § 523(a)(2)(A) for false representations inducing loans | Dewhurst falsely represented funds would be used solely for the Project for each loan; fraud excepts the debt from discharge | He intended to use the funds for the Project and did so; many payments were made to vendors | Court found nine of twelve loans (totaling $120,000) were obtained by false representations of intent; that portion is nondischargeable; other misrepresentation claims failed |
| Whether to deny discharge under § 727(a)(3) for failure to keep or preserve records | Dewhurst failed to keep/preserve records from which his financial transactions could be ascertained (no cash books, receipts) | He kept cash for operational expediency and used various payment methods; records were unnecessary or unavailable | Court sustained objection: failure to keep/preserve records proved and unjustified; discharge denied on this ground |
| Whether to deny discharge under § 727(a)(5) for failure to satisfactorily explain loss of assets | The $220,000 disappearance must be explained; Dewhurst’s unsupported testimony and deficient accounting are insufficient | He spent the funds on the Project; his testimony suffices to explain loss | Court held explanation unsatisfactory; only ~$34,000 plausibly accounted for; objection sustained |
| Whether to deny discharge under § 727(a)(4)(A) for false oaths in schedules | Dewhurst knowingly and fraudulently omitted a $4,500 receivable and a $39,000 insider debt from schedules | Omissions were trivial, inadvertent, or attorney-related errors | Court found omissions material, knowing and fraudulent; objection sustained |
Key Cases Cited
- Grogan v. Garner, 498 U.S. 279 (U.S. 1991) (plaintiff must prove nondischargeability by preponderance)
- Palmacci v. Umpierrez, 121 F.3d 781 (1st Cir. 1997) (elements and proof of fraud for § 523(a)(2)(A))
- McCrory v. Spigel (In re Spigel), 260 F.3d 27 (1st Cir. 2001) (fraud elements under § 523(a)(2)(A))
- Razzaboni v. Schifano (In re Schifano), 378 F.3d 60 (1st Cir. 2004) (record-keeping requirement and discharge implications under § 727(a)(3))
- Boroff v. Tully (In re Tully), 818 F.2d 106 (1st Cir. 1987) (standards for false oaths under § 727(a)(4)(A))
- Chalik v. Moorefield (In re Chalik), 748 F.2d 616 (11th Cir. 1984) (materiality standard for false oaths)
- Matter of Mascolo, 505 F.2d 274 (1st Cir. 1974) (materiality of false statements in bankruptcy filings)