Doeling v. Peluso (In re Peluso)

592 B.R. 684

IN RE: Michael J. PELUSO, Debtor.

Gene W. Doeling, as Bankruptcy Trustee, Plaintiff,

v.Michael J. Peluso, Defendant.

Bankruptcy No. 17-30413

Adversary No. 17-7023

United States Bankruptcy Court, D. North Dakota.

Signed October 18, 2018

Gene W. Doeling, Kaler Doeling Law Office, Fargo, ND, pro se.

Thomas A. Dickson, Dickson Law Office, Bismarck, ND, Timothy P. Hill, Hill Law Office, Fargo, ND, for Defendant.

MEMORANDUM AND ORDER

SHON HASTINGS, JUDGE

I. INTRODUCTION

Gene W. Doeling, Chapter 7 Trustee, filed a Complaint seeking a denial of Debtor/Defendant Michael J. Peluso's discharge under 11 U.S.C. § 727(a)(2) and (4). The Trustee alleges that Debtor: (1) transferred funds to his mother prepetition and postpetition with the intent to hinder, delay or defraud creditors; and (2) knowingly and fraudulently made false oaths or accounts in connection with this case by failing to disclose the transfers to his mother and assets he owned on the date of petition. Doc. 1.

Debtor filed an Answer to the Complaint, asserting that: (1) he did not transfer assets to his mother but simply gave her authority to disperse Debtor's funds as he directed; and (2) any omissions were inadvertent, unintentional and based on "nominal oversights." Doc. 4 at 3.

For the following reasons, the Court finds in favor of the Trustee and orders that Debtor is denied a discharge.

II. FACTS

A. Debtor's Failed Business Venture

In 2011, Debtor purchased and became the sole owner of RJKL Corporation. RJKL operated Zachmeier Manufacturing, which constructed boat docks and ice fishing houses. Debtor purchased RJKL from Russell and Jennifer Smith, who previously purchased it from Leo Zachmeier and Tony Wald. Debtor was not represented by counsel in connection with his purchase of RJKL.

After purchasing RJKL, Debtor discovered many challenging issues with the business. Debtor claimed the previous owners left a "lot of loose ends" as well as "ratty books so it was hard to get a good grip on what was actually there and what wasn't." According to Debtor, he "assumed liabilities of hundreds of thousands of dollars" under the purchase agreement with the Smiths. He also assumed responsibility for building $100,000 in docks to fulfill prior commitments made by the Smiths.

Adding to these difficulties, the Missouri River flooded Bismarck in 2011 which affected both the business and Debtor personally.

Debtor addressed these challenges by seeking professional advice from accountants and bankers. He discontinued the dock business and focused on manufacturing ice fishing houses. He reduced the number of employees to streamline the business and minimize overhead, and he performed "lots of work on his own dime." Despite his efforts, Debtor "never could gain traction." The business was never profitable while Debtor owned it. Ultimately, Debtor could not save the business. Debtor did not operate the business in the year and a half prior to July 5, 2017, the date he petitioned for bankruptcy relief.

Attorney LaRoy Baird, who represented Debtor in his bankruptcy case, testified at the trial in this case. Attorney Baird characterized Debtor's purchase of the business as a "terrible decision." The business owed large debts when Debtor purchased it, and Debtor assumed this debt. Debtor then personally guaranteed additional debt trying to keep the business operating.

At some point, Debtor could no longer make the payments for his purchase of the business. Zachmeier and Wald sued the Smiths, who commenced a third-party action against Debtor. Ex. 6. On June 13, 2017, Zachmeier and Wald obtained an amended judgment in state court against the Smiths. Ex. 6. The court found that Debtor "contractually agreed to indemnify and hold Smiths harmless with respect to any financial obligations of RJKL, including the Promissory Note" signed by the Smiths when they purchased the business from Zachmeier and Wald. Ex. 6. Accordingly, the state court found Debtor liable to the Smiths for $232,147.65, the total sum of the judgment awarded to Zachmeier and Wald, plus interest. Id. The court also found Debtor liable for the Smiths' attorney's fees and costs totaling $48,205.28. Id. To satisfy the judgment, the Smiths pursued a wage garnishment against Debtor.

B. The Months Before Bankruptcy: The Edward Jones Account and Fishing Guide and Tournament Earnings

After he stopped operating his dock and fish house manufacturing business, Debtor held various jobs. In the summer of 2017, Debtor competed in professional fishing tournaments and worked as a fishing guide on Devils Lake for Perch Eyes Outfitters in addition to his regular employment as a substitute teacher and instructional aid for handicapped students. He did not have a set schedule as a fishing guide. Instead, Jason Feldner, the owner of Perch Eyes, contacted Debtor as needed. The fishing clients paid Perch Eyes, and Feldner paid Debtor. Feldner left checks for Debtor and the other guides in the Perch Eyes shop, and the guides "fetched them" at their convenience.

In the summer of 2017, Debtor owned two Edward Jones accounts opened in 2004 through his previous employment. Only one of the accounts was a qualified retirement account. Prior to June 2017, he did not withdraw any funds from the accounts.

On June 2, 2017, Debtor withdrew the full balance of funds in the account that did not qualify as a retirement account.¹ Ex. 1 at T-3. Edward Jones mailed Debtor a check in the sum $15,258.24 which Debtor received a few days later. Although Debtor held a business account at American Bank Center, he did not deposit the proceeds into this account, add his mother's name to the American Bank Center account or open a new account under his name. Instead, he endorsed the check, gave it to his mother and asked her to pay his bills with the proceeds. Debtor also gave his mother an $800.00 check he had recently earned either as a fishing guide or received as a prize for winning a fishing tournament and asked her to pay bills with this money as well. Debtor gave his mother a handwritten list of bills to pay, including his mortgage, taxes, child support and Attorney Baird's fees. Ex. 106.

Debtor claims he asked his mother to pay his bills because he was out of town during most of this period either competing in fishing tournaments or providing guide services. According to his mother, Debtor was trying to make enough money to pay his mortgage and child support obligations. Debtor, who was newly divorced at the time, depended on his mother to ensure his bills were paid. Debtor wanted to pay his bills and knew his mother—whom Debtor characterized as "like a secretary" for him—would do it for him.

Debtor's mother opened a checking account in her name only at Kirkwood Bank & Trust on June 21, 2017. Ex. 9. She explained that she opened the account because she did not want Debtor's money in her personal account. She felt she could be "accountable" for the money if she used a separate account. She deposited the two checks in the sums of $800.00 and $15,258.24 on June 21, 2017, and another check for $800.00 from guide services on July 6, 2017. Ex. 9 at T-46. According to a handwritten ledger she kept, Debtor's mother wrote 14 checks on June 26, 2017, leaving $4,696.84 in the account. Ex. 118.

Debtor's mother did not use any of the money for personal expenses or purchases. She insisted neither she nor Debtor were trying to hide the money; they were just trying to pay his bills.

Debtor's mother confirmed that Debtor was rarely in Bismarck at that time and explained that she opened the account in her name only because she signed all the checks. Although Debtor was not named on the account and was not granted signature authority for it, Debtor's mother gave him the debit card for the account when Kirkwood Bank sent it to her two weeks after she opened the account. Debtor began using the debit card for purchases on July 2, 2017. Ex. 9. He was the only person who used the debit card for purchases.

C. Debtor's Statements on His Bankruptcy Schedules and SOFA

Debtor filed a voluntary petition for bankruptcy relief under Chapter 7 of the Bankruptcy Code on July 5, 2017. Debtor understood that he was required to disclose all his assets and "spent quite a bit of time" reviewing the information in his bankruptcy petition before signing it. Despite acknowledging his duty to disclose, Debtor omitted assets from his schedules, including a trolling motor, a depth finder, a portable ice house, an auger, a golf cart, archery equipment and income from fishing guide services and fishing tournaments.

Debtor also failed to disclose the liquidated Edward Jones investment account or its proceeds on his schedules. Although he properly listed the Edward Jones IRA account valued at $10,032 on his Statement of Financial Affairs (SOFA) under the question related to retirement or pension accounts, he neglected to disclose the other Edward Jones account or the proceeds which were deposited in the Kirkwood Bank account.² On the question on the schedules referring to "Deposits of money," Debtor explained that he listed only the checking account at American Bank Center with a balance of $181.79 because it was his only account. He claimed he did not list the Kirkwood Bank account because, "It was my money, but in my mind, it was not my money because it was all going towards child support, house payments, insurance, bills, all that stuff." Pushed for clarification about whether it was his money, Debtor again acknowledged it was his money and that he knew it was deposited in the Kirkwood account. The balance in the Kirkwood Bank account in his mother's name on the date of petition totaled $6,361.89. Ex. 9 at T-43.

Likewise, Debtor gave incorrect or, at the very least, misleading answers to the following questions on the SOFA:

Within 2 years before you filed for bankruptcy, did you sell, trade, or otherwise transfer any property to anyone, other than property transferred in the ordinary course of your business or

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