Cohen v. Sikirica

487 B.R. 615

David I. COHEN and Elaine Cohen, husband and wife, Appellants,

v.Jeffrey J. SIKIRICA, Chapter 7 Trustee, Appellee.

No. 12cv1797.

United States District Court, W.D. Pennsylvania.

Feb. 28, 2013.

Robert O. Lampl, Pittsburgh, PA, for Appellants.

John P. Vetica, Jr., Moon Township, PA, for Appellee.

MEMORANDUM OPINION

ARTHUR J. SCHWAB, District Judge.

I. Introduction

David I. Cohen and Elaine Cohen ¹ (“Appellants”) appeal from a Final Order of the United States Bankruptcy Court for the Western District of Pennsylvania finding them liable to Appellee Jeffrey J. Sikirica (“the Trustee”) in the amount of $488,615.79.² The Bankruptcy Court held that Mr. Cohen fraudulently transferred the funds by depositing the funds into Appellants' marital account at PNC Bank (the “Entireties Account”).³ After careful consideration of Appellants' Brief (Doc. No. 4), the Trustee's Brief (Doc. No. 5),⁴ and all of the relevant documents in the Bankruptcy Court, and for the reasons set forth below, the decision of the Bankruptcy Court will be AFFIRMED IN PART, VACATED IN PART, and REMANDED for further proceedings consistent with this Opinion.

II. Procedural and Factual Background

The following facts are taken from the Bankruptcy Court's Memorandum Opinion, Adversary Proceeding, 2012 WL 5360956, at *1–3, which the parties do not dispute. On March 30, 2005, a verdict was entered against Mr. Cohen (and other defendants) in the Court of Common Pleas of Allegheny County for breach of a commercial lease.⁵ On October 14, 2005, Mr. Cohen filed for bankruptcy. On June 7, 2006, the Court of Common Pleas of Allegheny Court entered a final amended judgment in favor of TrizecHahn Gateway, LLC (“Trizec”) and against Mr. Cohen (and other defendants), jointly and severally, for approximately $3,274,000.

On October 11, 2007, the Trustee initiated the adversary proceeding by filing his Complaint against Appellants. On February 14, 2010, the Trustee filed his Amended Complaint. In his Amended Complaint, the Trustee alleged that the portions of Mr. Cohen's deposits into the Entireties Account, not subsequently spent on necessary living expenses, constituted fraudulent transfers under Pennsylvania law, and therefore he sought recovery of $1,190,734.74. A trial was held on October 19, 2011. On October 31, 2012, the Bankruptcy Court entered judgment in favor of Appellants on the actual fraudulent transfer count and in favor of the Trustee on the constructive fraudulent transfer counts in the amount of $488,615.79. Appellants filed a timely Notice of Appeal. Doc. No. 1.

III. Jurisdiction and Standard of Review

The Bankruptcy Court had jurisdiction pursuant to 28 U.S.C. § 157(a).⁶ This Court has jurisdiction pursuant to 28 U.S.C. § 158(a). The standard of review is the same for the District Court and for the United States Court of Appeals, both of which review findings of fact for clear error and exercise plenary review over questions of law. Mintze v. Am. Gen. Fin. Servs., Inc. (In re Mintze), 434 F.3d 222, 227–28 (3d Cir.2006); In re Schick, 418 F.3d 321, 323 (3d Cir.2005). When considering a mixed question of fact and law, the issue must be broken down into its component parts, with underlying questions of fact being reviewed for clear error and underlying questions of law being reviewed de novo. Young v. 1200 Buena Vista Condominiums, 477 B.R. 594, 596 (W.D.Pa.2012) (Schwab, J.) (citing First Jersey Nat. Bank v. Brown (In re Brown), 951 F.2d 564 (3d Cir.1991)).

IV. Discussion

Appellants raise eight issues on appeal: (1) did the Bankruptcy Court apply the correct burden of proof; (2) did the Trustee fail to meet his burden with respect to the amount of deposits; (3) are Appellants liable for unexplained expenditures from the Entireties Account; (4) did the deposits made by Ms. Cohen constitute reasonably equivalent value for Mr. Cohen's deposits; (5) was the Trustee and/or Trizec required to object to the discharge of Mr. Cohen's debts; (6) was Mr. Cohen insolvent; (7) was the Bankruptcy Court bound by the Court of Common Pleas of Allegheny County's decision; and (8) does the deposit of wages into an entireties account constitute the transfer of an asset under the Uniform Fraudulent Transfer Act (“UFTA”)?

A. Burden of Proof

The Bankruptcy Court adopted the following burden of proof:

Trustee must prove by the preponderance of the evidence that (1) the Debtor failed to receive reasonably equivalent value in exchange for the direct deposits of his wages in to the Entireties Account, and (2) he was either insolvent at the time of, or was rendered insolvent by, such transfers. However, this Court will impose on the defendants the burden of producing at least some useful evidence to demonstrate how they spent the deposited funds. Absent the production of some evidence, the Trustee will be deemed to have met his burden of proof.

Adversary Proceeding, 2012 WL 5360956, at *7. Appellants argue that the Trustee has the burden of proof for all elements of the claim, including how funds in the Entireties Account were spent. As this is a question of law, this Court reviews the Bankruptcy Court's decision de novo.

Appellants rely heavily on the related case ⁷ of Cardiello v. Arbogast (In re Arbogast) (“ Arbogast II”), 479 B.R. 661 (W.D.Pa.2012) (McVerry, J.). However, Judge McVerry affirmed the decision of the Bankruptcy Court to “place[ ] the burden to produce evidence regarding the use of funds from the entireties account upon the [defendants].” Id. at 666.

The Court agrees with Judge McVerry, and the Bankruptcy Court, that Appellants had the burden to produce some useful evidence regarding the use of funds from the Entireties Account. As the Bankruptcy Court noted, “ ‘[s]hifting the burden of producing evidence is not the same things [sic] as shifting the burden of persuasion,’ [and the Arbogast I Court thus] imposed on the defendants ‘the burden of producing at least some useful evidence regarding what the funds deposited into an entireties bank account are ultimately spent on.’ ” Adversary Proceeding, 2012 WL 5360956, at *6 (alteration in original) (quoting Cardiello v. Arbogast (In re Arbogast) (“ Arbogast I”), 466 B.R. 287, 307–08 (Bankr.W.D.Pa.2012)). As the Bankruptcy Court in Arbogast I stated, this approach “is appropriate given that constructive fraudulent transfer defendants will often possess complete control over information as to the ultimate use of bank deposits.” Abrogast I, 466 B.R. at 308. Accordingly, the Bankruptcy Court applied the correct burden of proof.

B. Amount of Wages Attributable to Mr. Cohen

Appellants argue that the Trustee failed to satisfy his burden of proof because he did not prove the amount of Mr. Cohen's wages that were deposited into the Entireties Account. As this is a question of fact, this Court reviews the Bankruptcy Court's determination for clear error.

Mr. Cohen's own testimony during the trial before the Bankruptcy Court was that his practice was to deposit all of his salary and wages into the Entireties Account. Doc. No. 4, 7 (citing Trial Transcript p. 131). His testimony is supported by the documentary evidence that was submitted to the Bankruptcy Court by the Trustee. In particular, the Trustee's Exhibit 26 includes a compilation of deposits into the Entireties Account that are attributable to Mr. Cohen through November 2003. The remainder of Exhibit 26 consists of bank statements from the Entireties Account that proves the amounts of the deposits. Documentation in Exhibit 29 includes additional bank statements for periods after November 2003 and Appellants' tax returns for the relevant time periods and shows that Mr. Cohen received over $700,000 in wages. The evidence as to this fact is overwhelming. Thus, the Bankruptcy Court did not commit clear error in finding that the Trustee had met his burden of proof with respect to the amount of wages attributable to Mr. Cohen.

C. Unexplained Expenditures

Appellants next argue that the Bankruptcy Court erred in finding Appellants liable for unexplained expenditures from the Entireties Account.

1. Admission of Exhibit 25

Appellants first challenge the Bankruptcy Court's decision to admit into evidence Exhibit 25, which consisted of a list of expenditures made from the Entireties Account. This Court reviews evidentiary rulings for an abuse of discretion. Data Sys. Network Corp. v. Memorex Telex Corp. (In re Memorex Telex Corp.), 242 B.R. 826, 830 (D.Del.1999) (citation omitted); see United States v. DeMuro, 677 F.3d 550, 557 (3d Cir.2012) (citation omitted).

Appellants objected to the authenticity of Exhibit 25. Federal Rule of Evidence 1006 provides, in relevant part, that “[a party] may use a summary, chart, or calculation to prove the content of voluminous writings ... that cannot be conveniently examined in court....” In this case, it would not have been convenient to have bank statements for all of the unexplained expenditures from the Entireties Account examined by Mr. Cohen. Thus, the Trustee's use of a Rule 1006 exhibit was appropriate. The Trustee also complied with the remainder of Rule 1006, which mandates that all parties be permitted to access the records upon which a Rule 1006 is based. Thus, the Bankruptcy Court did not abuse its discretion by admitting Exhibit 25 into evidence.

2. Burden of Proof

Appellants also argue that the Bankruptcy Court applied the incorrect burden of proof. This is a question of law which the Court reviews de novo. The Bankruptcy Court stated that: “[t]he Trustee must prove by the preponderance of the evidence that the Defendants failed to use the deposited funds to purchase necessities. However, as asserted in Arbogast [ I ], the burden is on the defendants to produce at least some evidence regarding what they purchased with the deposited funds.” Adversary Proceeding, 2012 WL 5360956, at *13.

In accordance with Section IV(A) supra, this Court finds that the Bankruptcy Court made the correct determination with...