Agai v. Mihalatos (In re Mihalatos)Agai v. Mihalatos (In re Mihalatos)
MEMORANDUM DECISION
Before the Court is a motion for summary judgment by the Plaintiffs, Jacob Agai, 291 Avenue P, LLC and Summer-field Developers, Inc. (collectively, the “Plaintiffs” or “Agai”), seeking judgment as a matter of law that the Debtor, Dennis Mihalatos (“Debtor” or “Mihalatos”), should be denied his discharge pursuant to 11 U.S.C. §§ 727(a)(3), (a)(4)(A) and (a)(5) of the Bankruptcy Code.
With respect to the remainder of the Plaintiffs’ arguments in favor of denial of the discharge, the Court finds that there are material facts in dispute which preclude summary judgment. While the Court finds the allegations of the complaint to be compelling and if proven at trial would tend to warrant denial of the discharge, the Court is unable to find as a matter of law that the Plaintiffs are entitled to the relief sought. For these reasons and as more fully stated below, the Plaintiffs’ summary judgment motion is denied.
Procedural History
On February 25, 2013 (the “Petition Date”), the Debtor filed a petition for relief under chapter 7 of the Bankruptcy Code, and Kenneth Kirschenbaum, Esq. (“Trustee”) was subsequently appointed as trustee. On June 3, 2013, the Plaintiffs filed the instant complaint seeking to deny the Debtor’s discharge in its entirety and/or seeking to except the Plaintiffs’ debt from discharge under §§ 523(a)(2), (4) and (6). The Debtor filed an answer on July 5, 2013, and an amended answer August 8, 2013. On December 9, 2013, Plaintiffs filed a Memorandum in Support of Motion for Leave to Amend the Complaint to add a claim under § 727(a)(2)(A), and for Summary Judgment on Plaintiffs’ § 727 Claims as to Counts One (§ 727(a)(3)), Two (§ 727(a)(4)(A)) and Three (§ 727(a)(5)). The Debtor filed opposition to the motion on April 16, 2014, and the Plaintiffs filed a reply on April 18, 2014. On April 21, 2014, the Court granted the Plaintiffs’ Motion for Leave to Amend the Complaint, and Plaintiffs filed an amended complaint on May 29, 2014, alleging an additional cause of action under § 727(a)(2). A hearing on the Plaintiffs’ Motion was held June 2, 2014, at which time this matter was taken under submission.
Facts
From about 1999 to 2008, the Debtor was a one-third owner of a construction company called Diontech Consulting, Inc. (“Diontech”) (Am. Schedule B, 13-70900-REG, ECF. No. 20); (Defs Mem. of Law in Opp’n, 13-08088-REG, ECF. No. 23 at 2); (Pis’ EDNY Local Bankr.Rule 7056.1 Statement of Undisputed Material Facts, 13-08088-REG, ECF. No. 18 ¶ 18.) The other two owners of Diontech were Sokra-tis Antoniou (“Sokratis”) and Stylianos An-toniou (“Stylianos”), both of whom are debtors before this Court.
While the Plaintiffs’ lawsuit was pending, around the end of 2008, Diontech ceased doing business, and the company was dissolved around 2009. (Pis’ EDNY Local Bankr.Rule 7056.1 Statement of Undisputed Material Facts, 13-084088-REG, ECF. No. 18 ¶ 21.) The Diontech general ledgers for 2007 and 2008 show total cumulative “loans” to the Debtor in the amount of $140,000. (Plaintiffs’ Mot. for Leave to Amend the Compl. and Summ. J., 12-08088-REG, ECF No. 17 at 7.) - Diontech’s 2008 Tax Returns report total “Loans to shareholders” in an amount of $1,001,768 at the end of the tax year. (Decl. of Michael Paul Bowen, Ex. 38, Part 1, 13-08088-REG, ECF No. 19-47 at 4.) Despite these documents, the Debtor claims that that these transfers to him were not loans but rather salary payments. (Defs Aff. Regarding Loans to Shareholders, 13-08088-REG, ECF. No. 27 ¶12.) In an affidavit filed with the Court, the Debtor attempts to explain the transfers and the use of the funds. (Defs Aff. Regarding Loans to Shareholders, 13-08088-REG, ECF. No. 27.)
In the latter part of 2008, the Debtor sought the assistance of a company called People’s Management Resources, Inc. (“PMRI”) to raise additional capital for a failing Diontech. According to the Debtor, PMRI represented that it could raise the necessary funds but the funds would have to be loaned indirectly to Diontech through a new entity funded with new capital from the principals of Diontech. To that end, according to the Debtor, he and his partners created, and contributed capital to, an entity called AVN Enterprises (“AVN”). According to the Debtor each of he and his partners contributed approximately $44,-416.666 to AVN. (Defs Aff. and Counter-statement of Facts, 13-08088-REG, ECF. No. 22 ¶ 18.) After receiving the necessary contributions from its principals, AVN received a check from PMRI December 12, 2008, for $500,000, (Defs Aff. and Counterstatement of Facts, Ex. H, 13-
The Debtor does not dispute his involvement with AVN. The Debtor admits that he was a signator on the bank account held by AVN. (Def s Aff. and Counterstatement of Facts, 13-08088-REG, ECF. No. 22 at 4.) In an exhibit provided by the Debtor, his name appears next to AVN in an “Agreement for SBLC.” The document reads: “AVN Enterprises, Inc., Dennis Mihalatos.” (Def s Aff. and Counterstatement of Facts, Ex. G, 13-08088-REG, ECF. No. 22-8.) Despite this, the Debtor maintains that Sokratis Antoniou “was the sole 100% owner” of AVN. (Def s Aff. and Counterstatement of Facts, 13-08088-REG, ECF. No. 22 ¶ 17.) The Debtor failed to include his role in AVN in response to Question 18 of the Statement of Financial Affairs which asks the Debtor to list the companies for which he was an “officer, director, partner, or managing executive of a corporation ... within the last six years.” (See Am. Statement of Financial Affairs, 13-70900-REG, ECF, No. 21.)
At the end of 2008, after Diontech ceased operations, the Debtor was employed by Centex Builders, a company owned solely by Diontech’s former accountant, Kyriacos Skevas. (Defs Aff. and Counterstatement of Facts, 13-08088-REG, ECF. No. 22 ¶ 120.) The Plaintiffs obtained financial records from Centex which show that from March 2011 to May 2011 the Debtor received five payments from Centex totaling $5,837,50
In connection with his bankruptcy case and this adversary proceeding, the Debtor “produced just one banker’s box ... of documents, including many documents that had previously been obtained by the Agai Creditors pursuant to third-party subpoenas.” (Pis’ Mot. for Leave to Amend the Compl. and Summ. J., 13-08088-REG, ECF No. 17 at 30.) In this turnover, the Debtor produced bank statements from two Sovereign Bank accounts, one account ending in 4104 in the name of the Debtor and his spouse, Elizabeth Mihalatos, (Decl. of Michael Paul Bowen, Ex. 34, 13-08088-REG, ECF No. 19-41), and another ending in 2118 solely in the name of the Elizabeth Mihalatos. (Decl. of Michael Paul Bowen, Ex. 35, 13-08088-REG, ECF No. 19-42.)
On March 11, 2013, the Debtor filed his schedules, Statement of Financial Affairs (“SOFA”), and other required filings. On March 12, 2013, he submitted amended filings. All of these filings were made under oath. He did not disclose his inter
Legal Analysis
Standard for Summary Judgment
Rule 56 of the Federal Rules of Civil Procedure states, in pertinent part, that summary judgment is appropriate “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ.P. 56(a).
Alter ego finding
Much of the Plaintiffs’ complaint alleges record-keeping, disclosure and accountability failures by the Debtor with respect Diontech. The Plaintiffs base these allegations on the Veil Piercing Order entered in the Article 52 proceedings commenced to enforce the Plaintiffs’ judgment. Judgment was granted against the Debtor by default in the Article 52 proceedings. According to the Debtor, he did not raise opposition in those proceedings because he was already liable for the Diontech judgment and so piercing the veil against him would expose him to no greater liability than he already had.
In order to find the Debtor liable for his disclosure failures with respect to Dion-tech in the context of this § 727 complaint, this Court must find that the Veil Piercing Order rendered Mihalatos the “alter ego” of Diontech. The Plaintiffs assert that the findings and conclusions made by the state court in the Veil Piercing Order are res judicata as to alter ego, and the Debtor should not be permitted to re-litigate this finding. (Pis’ Mot. for Leave to Amend the Compl. and Summ. J., 13-08088-REG, ECF No. 17 at 19-20.) The Debtor argues that the Veil Piercing Order is not res judicata on the issue of alter ego, because no specific findings were made as to him.
Under New York law, res judicata may be applied where the claim sought to be precluded was “necessarily decided” by the prior court and the party against whom res judicata is being applied had a “full and fair opportunity” to litigate the issue in the prior proceeding. Nate B. and Francis Spingold Found. v. Halperin (In re Halperin),
The Court is not prepared to find that the ■ Veil Piercing Order should be given preclusive effect here on the issue of alter ego. The Plaintiffs conflate the distinction between veil piercing and an alter ego finding. However, the effects of the
The Court finds that the Veil Piercing Order did not conclusively render the Debtor to be the alter ego of Diontech. After reviewing the Veil Piercing Order, this Court finds the state court determined that the corporate veil of Diontech should be pierced to hold the Debtor personally liable for the judgment. However, the state court did not conclusively determine, nor was the issue clearly raised, that Dion-tech was the alter ego of the Debtor. While the state court did find that “Dion-tech was a sham entity,” (Decl. of Michael Paul Bowen, Ex. 7, 13-08088-REG, ECF No. 19-9 at 4), this Court cannot read the state court decision to have found that the Debtor and Diontech to be one and the same, thus imposing upon the Debtor obligations to disclose assets, liabilities, and account for the loss of assets of Diontech’s in his individual bankruptcy petition. See In re Adler,
The Plaintiffs attempt to draw many parallels to this Court’s decision in In re Adler,
Here, the Plaintiffs argue that the Debt- or’s disclosure failures and other acts and omissions with respect to Diontech assets warrants denial of the discharge under various subsections of § 727(a). Because this Court finds that it will not give res judicata effect to the state court decision
1. Denial of Discharge under 11 U.S.C. § 727
It is well-settled law that the denial of a debtor’s discharge is a drastic remedy that “must be construed strictly against those who object to the debtor’s discharge and ‘liberally in favor of the bankrupt.’ ” State Bank of India v. Chalasani (In re Chalasani),
Although the allegations of the complaint are compelling and if proven at trial would tend to warrant denial of the discharge, the Court finds that there are material facts in dispute which preclude summary judgment on all three claims.
a. Count 1 — denial of the Debtor’s discharge under § 727(a)(3)
Section 727(a)(3) provides that a debtor shall not be granted a discharge if the Debtor has “concealed, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debt- or’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case.” 11 U.S.C. § 727(a)(3). The Debtor must provide enough information “to trace the debtor’s financial history, to ascertain the debtor’s financial condition, and to reconstruct the debtor’s business transactions,” as required by § 727(a)(3). Schackner v. Breslin Realty Dev. Corp., No. 11-CV-2734 (JS),
i. Inadequate Records: Plaintiffs’ Burden under § 727(a)(3)
First, a plaintiff must prove “that the debtor failed to keep and preserve any books or records from which the debtor’s financial condition or business transactions might be ascertained.” In re Cacioli,
The Court finds that there are material facts in dispute which preclude a finding as a matter of law that the Debtor failed to keep or preserve any recorded information from which his financial condition or business transactions might be ascertained. Concerned largely with the Debtor’s failures with respect to Dion-tech’s record-keeping, the Plaintiffs have failed to state with specificity what is lacking in the Debtor’s personal financial disclosures. By and large, the Plaintiffs intertwine requests for the Debtor’s personal financial records with documents “concerning money he ‘borrowed’ or otherwise received from Diontech and from his myriad of business ‘ventures.’ ” (Pis’ Reply Br., 13-08088-REG, ECF. No. 25 at 7.)
In May 2013, the Debtor turned over a box of over one thousand six hundred (1,600) pages of documents. (Defs Mem. of Law in Opp’n, 13-08088-REG, ECF. No. 23 at 23.)
In the way of personal financial records, the Debtor produced statements from two Sovereign Bank accounts for 2009 through 2013. The account ending in 4104 was in the name of the Debtor and his spouse,
Plaintiffs argues that they served the Debtor with a document discovery demand on November 4, 2013, requesting “[a]ll financial documents related to defendant and/or his spouse ... including ... all personal tax returns for defendant and all personal tax returns for defendant’s spouse” and “[a]ll bank records related to or involving in any way debtor [or] his spouse.” (Decl. of Michael Paul Bowen, Ex. 8, 13-08088-REG, ECF No. 19-12.). Although the Debtor appears not to have responded to this request or provided any new documents, (Defs Aff. and Counter-statement of Facts, 13-08088-REG, ECF. No. 22 ¶¶ 97-98), the Court is unable to ascertain what is still lacking and why those documents are necessary to ascertain the Debtor’s financial condition or business transactions. Based on the allegations contained in the Plaintiffs’ papers most of what they seem to be requesting and have yet to receive relate to business entities that the Debtor was involved in pre-2011.
Considering this Court’s finding that it will not give preclusive effect to the Veil Piercing Order on the issue of whether the Debtor is the alter ego of Diontech, the Court finds that it would be inappropriate to grant summary judgment with respect to § 727(a)(3) at this time. The Court is unable to find, as a matter of law, based on the undisputed facts, that the Debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information from which his financial condition or business transactions might be ascertained.
b. Count 2 — denial of the Debtor’s discharge under § 727(a)(4)(A)
Section 727(a)(4)(A) provides: “The court shall grant the debtor a discharge, unless — (4) the debtor knowingly and fraudulently, in or in connection with the case — (A) made a false oath or account.” Under this section, the party objecting to discharge must prove by a preponderance of the evidence that: (1) the debtor made a statement under oath; (2) the statement was false; (3) the debtor knew the statement was false; (4) the debtor made the statement with fraudulent intent; and (5) the statement related materially to the bankruptcy case. In re Moreo,
False Statements and Omissions
The Court has narrowed down the arguments made in Plaintiffs’ motion and has identified two allegedly false statements that the Debtor made in his petition, statement and schedules with respect to his assets and liabilities.
The Plaintiffs have in fact provided evidence that the Debtor’s wife and the Debt- or received at least five payments from Centex in the two year window prior to bankruptcy and all of these payments were deposited into the wife’s Sovereign Bank account. (Deck of Michael Paul Bowen, Ex. 27, 13-08088-REG, ECF No. 19-34.) With regard to checks made out to him from Centex, the Debtor “states that these checks represent Defendant’s salary for working at Centex and were deposited into the Sovereign account held in Defendant’s wife’s name to pay Defendant’s family’s ordinary living expenses.” (Defs Aff. and Counterstatement of Facts, 13-08088-REG, ECF. No. 22 ¶ 152.) While this may be true, the law requires that the Debtor disclose such bank account. The Court finds that the Plaintiffs have established that the Debtor made an omission under oath. While the Court agrees that the Debtor improperly omitted his wife’s Sovereign Bank account from his bankruptcy petition and schedules, the Court is unable
Second, in response to question 18 on the Debtor’s Statement of Financial Affairs, the Debtor did not list his role in AVN Enterprises. Question 18 asks a debtor to list the companies for which he was an “officer, director, partner, or managing executive of a corporation ... within the last six years.” The Debtor admits that he was a signator on the bank account owned by AVN, (Defs Aff. and Counter-statement of Facts, 13-08088-REG, EOF. No. 22 at 4), but maintains that “Socrates [Antoniou] was the sole 100% owner of AVN.” Id. ¶ 17. The Court finds that the Debtor’s ownership interest in and/or managerial role with respect to AVN is in dispute, and therefore cannot find on summary judgment that he improperly omitted AVN from his petition and schedules. Fraudulent Intent
The burden of showing actual fraudulent intent lies with the party objecting to the debtor’s discharge. Pergament v. Smorto (In re Smorto), No. 07-CV-2727 (JFB),
c. Count 3-denial of the Debtor’s discharge under § 727(a)(5)
Section 727(a)(5) provides the basis to deny a discharge if “the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities.” 11 U.S.C. § 727(a)(5). The purpose of this section is to deter and punish debtors from “abusfing] the bankruptcy process by obfuscating the true nature of their affairs, and then refusing to provide a credible explanation.” Nof v. Gannon (In re Gannon),
i. Missing Assets: Plaintiffs’ Burden under § 727(a)(5)
To carry the initial evidentiary burden under § 727(a)(5), a plaintiff must establish that: (1) the debtor at one time possessed or claimed to control substantial and identifiable assets; (2) those assets have disappeared, their disposition or placement now unknown; and (3) no plausible explanation for this deficiency is apparent from the submitted records or has been articulated by the debtor. See, e.g., Adams v. Inzero (In re Inzero),
ii. Satisfactory Explanation: Debtor’s Burden under § 727(a)(5)
Once the plaintiff has satisfied its initial burden, the debtor must supply a “satisfactory” explanation for the failure to account for the missing assets. Sonders v. Mezvinsky (In re Mezvinsky),
Although there is no evidence that the Debtor personally received $1 million from Diontech, and the Court could not make such a finding on summary judgment despite the Diontech ledgers, the Debtor endeavored, in an affidavit dated May 1, 2014, to explain what happened to the $1 million booked as “loans to shareholders.” He explains, in sum, that: approximately $250,000 was used by him to purchase real property in Harlem; approximately $193,000 was used to purchase 24-65 46th Street, which was owned by 24-65 AMA, LLC, of which he was a 1/3 owner; some of the money was used to repay a commercial loan owed by Diontech ($21,500), and to make monthly lease payments for Diontech office space (approximately $10,500), and to pay down a corporate credit line ($35,000); miscellaneous payments were made for a business flight, to pay a subcontractor, and investments by Diontech in a company called New York Fashion. (Def s Aff. Regarding Loans to Shareholders, 13-08088-REG, ECF. No. 27.) There were also mortgage payments made on a house owned jointly by the Debtor, his mother and his sister, and other explanations for miscellaneous transfers booked as loans to shareholders. Id. The Debtor explains that the entries that are characterized specifically as “loans” to him are all actually salary payments and any further question about why these were booked as loans as opposed to salary should be directed toward Kyriaeos Skev-as, Diontech’s accountant in 2008. Id. ¶ 12. He maintains that these salary payments were spent on ordinary living expenses. Id.
Although the apparent mischaracterization of these “loans to shareholders” on the Diontech ledgers may create problems in another context, it does not provide a basis to deny the discharge as a matter of law. In re Devaul,
Summary judgment on the Plaintiffs’ § 727(a)(5) claim will be denied.
Conclusion
Based on all of the foregoing, the Plaintiffs’ motion for summary judgment is denied as to Count One (§ 727(a)(3)), Count Two (§ 727(a)(4)(A)), and Count Three (§ 727(a)(5)). The Court shall enter an order consistent with this Memorandum Decision and schedule a further pretrial conference to move this matter towards trial.
Notes
. All statutory citations are to Title 11, United States Code, unless otherwise indicated.
. Sokratis, the Debtor’s brother in law, filed a chapter 7 petition with this Court on July 31, 2012 (Case No. 12-74788). Stylianos filed a chapter 7 petition with this Court also on July 31, 2012 (Case No. 12-45622). The Plaintiffs, also creditors in the related cases, filed similar § 727 complaints against both Sokratis and Stylianos in adversary proceeding numbers 12-8400 and 12-1299, respectively. On August 14, 2014, Chief Judge Craig issued a Decision and Order granting Plaintiffs' motion for summary judgment against Stylianos, and denying Stylianos’s discharge pursuant to §§ 727(a)(2)(A), (a)(3) and (a)(4)(A), which
. This amount only indicates the payments made within the two years preceding the Debtor's bankruptcy filing. There were additional payments dating back to November 2009.
. Rule 56 governs the motion for summary judgment in this adversary proceeding by virtue of Fed. R. Bankr. P. 7056.
. The Debtor produced records previously obtained by the Plaintiffs from Diontech’s prior counsel, King & King, consisting of two ledgers, one handwritten and the other computer generated, and bank statements. The remainder of this production consists of: (1) one and two-page print outs of Diontech general journal entries for various months in 2009 and related bank statements; (2) Hudson Valley Bank records for 31-72 AMA, LLC; (3) Signature Bank account statements for 2009 and 2010; (4) Signature Bank account statements for only some months of 2008 through 2009 for DM Mihalatos Associates, Inc.; (5) Bank statements for a Sovereign Bank account in the name of both Debtor and his spouse (account ending 4104), for only sporadic months during the 2009 and 2010; and, (6) Bank statements for a Sovereign Bank account in Debtor's spouse’s name only (account ending 2118) (various statement from 2009 through January 2013). (Pis' EDNY Local Bankr.Rule 7056.1 Statement of Undisputed Material Facts, Exs. 30, 31, 32, 33, 34, and 35, 13-08088-REG, ECF. No. 18 ¶ 72.)
. " 'Badges of fraud’ include secreting proceeds of a transfer, transferring property to family members, the lack or inadequacy of consideration, the general chronology of the events or transactions in question, and the concealment of relevant facts.” Bub v. Rockstone Capital, LLC,
. The Plaintiffs also make claims related to Diontech tax returns which, for reasons previously stated, the Court will not address.