Chlad v. Mitchell Chapman & Semy Invs. Ltd.

MONIK CHLAD and ERIC VEHOVC, Debtors—Appellants, v. MITCHELL CHAPMAN and SEMY INVESTMENTS LTD., Creditors—Appellees.

No. 17 C 5198

UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS EASTERN DIVISION

August 30, 2018

Judge John J. Tharp, Jr.

MEMORANDUM OPINION AND ORDER

Monik Chlad and Eric Vehovc (the "debtors") filed a joint petition for relief under Chapter 7 of the Bankruptcy Code ("Code"). In an adversary proceeding in the bankruptcy court, two creditors, Mitchell Chapman and Semy Investments Ltd. (collectively, "Chapman"), objected to the discharge of the debtors' debts, claiming that the debtors omitted certain assets and debts from their required disclosures and misstated other information. Following a bench trial, the bankruptcy court concluded that the errors in the debtors' submissions amounted to false oaths under 11 U.S.C. § 727(a)(4) and denied a discharge. The debtors appeal that ruling,¹ arguing that the bankruptcy judge made numerous factual and legal errors. This Court affirms the denial of discharge.

BACKGROUND

Chlad and Vehovc are married but have been separated since 2012. Divorce proceedings have been stayed pending their bankruptcy filing in 2013. Chlad holds a degree in finance from the University of Illinois at Chicago and is a licensed real estate broker. Before they separated in 2012, the debtors ran a real-estate company named Lockwood Development, Inc. ("Lockwood"). Chlad is the sole owner of Lockwood, but both she and Vehovc worked for Lockwood and shared responsibility for running the company. Lockwood's business included property management, general contracting, and purchasing real estate for investment or to flip. The debtors also owned several parcels of real estate in their own names. As part of their business—for both Lockwood and their personal interests—the debtors purchased and sold real estate, researched real property records, prepared loan documents and deeds, and maintained a ledger of business transactions.

The debtors filed a joint petition for Chapter 7 bankruptcy on October 14, 2013, seeking to discharge close to $5 million in secured and unsecured debt. In connection with their petition, the debtors also filed their required schedules and Statement of Financial Affairs ("SOFA"). See 11 U.S.C. § 521(a)(1)(B). In 2015, Chapman filed an adversary complaint objecting to the discharge of the debtors' obligations. He alleged, and the bankruptcy court later concluded, that there were seven categories of false oaths in the debtors' petition, schedules, and SOFA.

The first false oath was an omission of real estate in Schedule A, which required the debtors to list "all real property in which the debtor has any legal, equitable, or future interest." R. 1223.²Although the debtors listed their interest in several properties, they failed to disclose that they jointly owned real estate located at 3928 West Van Buren Street (the "Van Buren Property").³

The second false oath concerned the debtors' failure to identify all creditors in their schedules. Prior to the petition date, Lockwood had executed a promissory note in favor of Edgebrook Bank ("Edgebrook") in the amount of $812,000. The note was secured by a mortgage on a property located at the intersection of St. Louis Avenue and Flournoy Street (the "Flournoy Property"). Although Lockwood executed the note, the debtors both executed a commercial guarantee on the note; that is, they personally guaranteed the note's repayment. The debtors failed to disclose either the guarantee or that Edgebrook was a creditor.

The third and fourth omissions found to be false oaths are related. The debtors omitted two bank accounts in Schedule D, as well as failed to disclose transfers made to others using those accounts in response to Questions 7 and/or 10(a) in their SOFA. The first account was one Chlad owned jointly with her mother, Jadwiga Chlad (the "Jadwiga Account"). Chlad deposited funds into the account and her mother, who lived in Poland, drew on the account from ATMs using her debit card. In the two years leading up to the filing of the petition, Chlad transferred $2,648 to her mother in this manner. The second account was one Chlad owned jointly with Mariusz Furca, a subcontractor who worked for Lockwood (the "Furca Account"). Much like the account with her mother, Chlad used the account to transfer payments to Furca by depositing funds into the account and allowing Furca to draw on the account using his own debit card. Through this process, Chlad transferred $21,339 to Furca in the two years prior to the petition date.

Chapman's objection also rested on the failure to schedule a shareholder loan Chlad had received from Lockwood. According to Lockwood's 2010 tax return, Chlad owed Lockwood around $1.2 million. The entity's 2012 tax filing shows that the shareholder loan was paid down to around $51,00 by December 31, 2012. Then, as reflected on Lockwood's tax return for 2013—the year the debtors filed for bankruptcy—the loan was reduced from $51,000 at the beginning of the year to zero at the end of that year. As noted above, the debtors' schedules required them to identify all creditors. Moreover, Question 3(c) in the SOFA calls for debtors to "[l]ist all payments made within one year immediately preceding the commencement of this case to or for the benefit of creditors who are or were insiders." R.1245. The debtors neither disclosed Lockwood as a creditor or any transfers to Lockwood in the year prior to the petition date. According to the bankruptcy court, "[e]ither the shareholder loan existed as of the Petition Date and the Schedules are false, or Chlad repaid the loan prior to the Petition Date and the Statement of Financial Affairs is false." In re Chlad, Adv. No. 15 AP 289, 2017 WL 2861104, at *7 (Bankr. N.D. Ill. June 29, 2017).

The sixth false oath stems from misstatements about the sources of income the debtors had received prior to filing for bankruptcy. Vehovc reported that he earned $15,500 in 2012 but attributed all of that income to his employment with American Enterprise Bank, a company he worked for at the time of the petition. In reality, Vehovc earned much of that income from Lockwood, as he did not leave Lockwood and begin working for the bank until late 2012. Chlad, for her part, failed to disclose in response to Question 2 of the SOFA that she received income from sources other than Lockwood. In particular, she omitted that she received $2,750 per monthin rental income and that she received (from Vehovc) $1,700 per month in alimony, maintenance and support payments.⁴

The seventh and final false oath was an omission in the debtors' petition of an alias Chlad used. Chlad identified herself only as "Monik"—her given name—but omitted that she also goes by "Monika." Chlad regularly used the name Monika in her business and financial affairs prior to filing for bankruptcy, including on bank accounts and in filing her personal tax returns.

The bankruptcy court held a bench trial between November 28 and December 2, 2016. The debtors testified and offered explanations for each omission and misstatement, which are discussed below. The debtors' bankruptcy attorney, Peter Nabhani, also testified on his clients' behalf. Nabhani testified that several of the errors were his fault; the debtors had disclosed much of the omitted information to him, but he failed to incorporate that information into their filings. Finally, the court heard testimony from the debtors' tax preparers, Chlad's personal assistant, and a representative from Edgebrook who had knowledge of the debtors' personal guarantees.

Following trial, the bankruptcy court entered judgment in Chapman's favor and denied debtors a discharge under 11 U.S.C. § 727(a)(4). The court determined that the above errors were false statements made under oath, that the debtors knew or should have known they were false, and that the errors were material to the bankruptcy case. Moreover, the court concluded that, taken together, the errors demonstrated a reckless disregard for the truth, which was sufficient to support a finding of fraudulent intent under the statute. This appeal followed. This Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158(a).

DISCUSSION

I. Violations of Appellate Rules

Before addressing the merits of the appeal, Chapman argues that summary affirmance is warranted based on the debtors' failure to comply with several procedural rules. Chapman Br. 16-17, ECF No. 58. The most serious violation is their initial failure to file an appendix, as required by Federal Rule of Bankruptcy Procedure 8018(b). Both debtors also failed to include a statement of the case, Chlad omitted certain cases from her table of authorities, and Vehovc omitted a required certification concerning the length of his brief. See Fed. R. Bankr. P. 8014(a)(3), (6), (10). Chapman contends that those errors are so egregious that the Court should not reach the merits of this appeal. Although, for the reasons set forth immediately below, the Court declines to dismiss this appeal based on those errors, it is disappointing to find that, in an appeal in which the fundamental question is whether the debtors' myriad errors and omissions in completing required schedules warrant a finding of reckless disregard, the debtors and their counsel failed to comply with fundamental procedural rules governing the appeal. In the context of an appeal like this one, one might expect to see hyper-vigilance to ensure that all required information was supplied to the court, but instead the debtors' submissions present a host of problems that suggest, at best, continued inattentiveness and carelessness.

A district court has the authority to summarily affirm a bankruptcy court's judgment as a sanction for serious non-jurisdictional, procedural defects. See Telesphere Commc'ns, Inc. v. 900 Unlimited, Inc., 177 F.3d 612, 616-17 (7th Cir. 1999) (affirming summary dismissal of bankruptcy appeal...