Fitzgerald v. Bin Hao (In re Bin Hao)

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In re: BIN HAO, Debtor.

JOHN P. FITZGERALD, III, Plaintiff, v. BIN HAO, Defendant.

No. 22-10478-BFK

Adversary Proceeding No. 22-01095-BFK

United States Bankruptcy Court, E.D. Virginia, Alexandria Division

May 16, 2023

Chapter 7

Jack Frankel, Esq. Counsel for Plaintiff

John P. Fitzgerald, III, Esq. Plaintiff

John P. Forest, II, Esq. Counsel for Debtor/Defendant

Bin Hao Debtor/Defendant

AMENDED MEMORANDUM OPINION ^[1]

Honorable Brian F. Kenney, United States Bankruptcy Judge

This matter comes before the Court on the Plaintiff's Motion for Summary Judgment. Docket No. 7. The Motion is supported by two Affidavits, one from the former Subchapter V Trustee Angela Shortall, the other from the current Chapter 7 Trustee, Janet Meiburger. Docket No. 7, Exhibits 3-4. The Defendant filed a Response to the Motion. Docket No. 20. His Response is supported by his own Affidavit. Docket No. 20 Exhibit 1. The Court heard the parties' arguments on April 18, 2023. Docket No. 27. For the reasons stated below the Court will: (a) deny the Plaintiff's Motion on Count I, under 11 U.S.C. § 727(a)(3) (Failure to Maintain Books and Records); (b) grant in part and deny in part the Plaintiff's Motion on Count II, under 11 U.S.C. § 727(a)(4) (False Oaths or Accounts); and (c) grant the Plaintiff's Motion on Count III under 11 U.S.C. § 727(a)(5) (Failure to Satisfactorily Explain Losses). Counts I and II will be dismissed without prejudice. The Debtor will be denied a discharge under Count III.

Undisputed Facts

The Court finds that the following facts are not genuinely disputed.

A. The Debtor's Bankruptcy Case.

1. The Debtor is an individual residing in Fairfax County, Virginia. He is highly educated and financially sophisticated. He has a master's degree in aerospace engineering and a master's degree in business administration. He is a licensed real estate broker. He was employed by a hedge fund for ten years trading futures and commodities.^[2]

2. The Debtor operated a business known as Qidian, LLC ("Qidian"). Through Qidian, he solicited funds from individual investors which were then invested into special purpose vehicles ("SPV's"). The SPV's made mezzanine funding loans to various real estate projects. The largest of the SPV's invested in a real estate project in Miami, which suffered a foreclosure on its property by the senior mortgage lender, resulting in a loss of the SPV investors' money.

3. The Debtor filed a Voluntary Petition under Chapter 11 with this Court on April 20, 2022. Case No. 22-10478, Docket No. 1.

4. The case was filed under Subchapter V of Chapter 11. Id. at 1. Angela Shortall was appointed as the Subchapter V Trustee. Case No. 22-10478, Docket No. 10.

5. The Debtor represented in his initial filings that "there is no Balance Sheet, Statement of Operations, or Cash-Flow Statement." Case No. 22-10478, Docket No. 6.

6. The Debtor filed his first set of Schedules and his Statement of Financial Affairs (hereinafter "SOFA") on May 16, 2022. Case No. 22-10478, Docket Nos. 46, 49. The Schedules and/or the SOFA were amended four times since the initial filings. Case No. 22-10478, Docket Nos. 82, 83, 85, 94, 106, 158, 159.

7. The first meeting of creditors was scheduled for May 26, 2022. Case No. 22-10478, Docket No. 11. It was adjourned for the production of additional information four times, to June 8, 2022, June 23, 2022, July 5, 2022, and August 2, 2022. Case No. 22-10478, Docket Nos. 61, 70, 97, 110.

8. The Debtor did not disclose a PayPal account, nor did he disclose two cryptocurrency accounts with Coinbase and Kraken in his Schedules. Case No. 22-10478, Docket Nos. 82, 83, 85, 94, 106, 158. The Debtor disclosed these accounts in his Amended Schedules. Case No. 22-10478, Am. Schedules/Statements at 9, Docket No. 159.

9. The Debtor also had an account at Citizens Bank, which he did not disclose. He testified that the account was originally with HSBC and that he did not realize that he had an account with Citizens. He disclosed this account in his Amended Schedules. Id. at 4.

10. The Debtor owned membership interests in Qidian and in six limited liability companies: BAH Investments, LLC, Weymoore Ventures, LLC, Binhai Invetments, LLC, Qpoint 21, LLC, HH Little Havana, LLC and 1407 Kindred, LLC. Case No. 22-10478, UST's Ex. 3 at 12, Docket No. 148.

11. On June 22, 2022, the Debtor filed Amended Schedules. Case No. 22-10478, Docket No. 94. In the Amended Schedules, he disclosed a 50% membership interest in Prolandian, LLC, which was not previously disclosed. Id. at DR's Ex. 1. Prolandian was established as a construction business when the Debtor and his ex-wife were married. They each own 50% of Prolandian.

12. The total amount of unsecured claims in the case has never been clear. The Debtor's estimate of the claims has varied. The Debtor's Amended Schedules indicate that there may be as much as $41,197,667.11 in claims. Case No. 22-10478, Am. SOFA, Official Form 106Sum at 1, Docket No. 159. Claims totaling $12,747,829.11 have been filed in the case. Case No. 22-10478, Claims Register as of May 8, 2023. The Debtor disputed a number of these claims, stating that for many of them he did not sign a personal guaranty (although this might not preclude liability based on alleged fraud or securities laws theories). The Debtor testified that, in his best judgment, there were probably about $3,600,000.00 in allowable unsecured claims in the case.

B. The U.S. Trustee's Motion to Convert or Dismiss the Case.

13. The U.S. Trustee filed a Motion to Convert or Dismiss the case in June 2022, and an Amended Motion to Convert or Dismiss in July 2022. Case No. 22-10478, Docket Nos. 78, 120.

14. The Court held an evidentiary hearing on the U.S. Trustee's Motion on July 26, 2022. Case No. 22-10478, Docket No. 147. The Debtor was present at the hearing, was represented by counsel, and testified on his own behalf. Id.

15. The Court granted the U.S. Trustee's Motion and converted the case to Chapter. 7. Case No. 22-10478, Docket Nos. 254-55.

16. The Court found that "the Debtor has not accurately and timely disclosed all of his assets." Case No. 22-10478, Docket No. 254 at 11.

17. The Court further found: "At this point, four months into the case, the Court has no confidence that the Debtor's filings are accurate and complete." Id. 18. The case was converted to Chapter 7. Case No. 22-10478, Docket No. 255. Ms. Shortall's duties as Subchapter V Trustee terminated, and Ms. Meiburger was appointed as the Chapter 7 Trustee. Case No. 22-10478, Docket No. 258.

C. The U.S. Trustee's Adversary Proceeding.

19. The U.S. Trustee filed a Complaint objecting to the Debtor's discharge on November 30, 2022. Docket No. 1.

20. The U.S. Trustee filed a Motion for Summary Judgment on February 14, 2023.^[3]Docket No. 7.

21. In support of the Motion, the U.S. Trustee filed Affidavits from Ms. Shortall and Ms. Meiburger. Docket No. 7, Exhibits 3-4. Ms. Shortall stated that she "routinely requested information from the Debtor or the Debtor's attorney regarding the Debtor's financial affairs and business dealings," and that "[c]onsistently, the information that was provided resulted in additional questions and discovery of assets or transactions." Docket No. 7, Exhibit 3 at 2. She further stated: "Repeated requests for information to enable myself and the U.S. Trustee to untangle the financial relationships between these entities, and the potential value to the estate yielded information inadequate and insufficient information to complete these analyses." Id. Additionally, she stated: "This failure to maintain records makes it impossible to ascertain what happened to all the creditors' money and account for the losses." Id. at 3.

22. Ms. Meiburger stated in her Affidavit that there were five meetings of creditors while the case was in Chapter 11, and an additional four meetings of creditors after the case was converted to Chapter 7. Docket No. 7, Exhibit 4 at 2. She stated that she "made multiple requests for documentation and information from the Debtor," and that she "cannot develop an accurate picture of the Debtor's financial information based on the information I have." Id. at 2-3.

23. The Defendant filed a Response to the U.S. Trustee's Motion. Docket No. 20. He included his own Affidavit in the Response. Id. at 13-17.

24. The Debtor stated in his Affidavit that Qidian and the SPV's were out of business by January 2020, and that the two Trustees and the U.S. Trustee never requested the business records for these entities for 2017 through early 2020, when they were conducting business. Id. at 15.

25. He further stated that the only request for banking information he received was a single e-mail from the U.S. Trustee dated May 27, 2022, requesting banking records for the period of one year before his bankruptcy filing. Id.

26. Finally, the Debtor stated that he "inadvertently" failed to include the PayPal account, the cryptocurrency accounts, the Citizens Bank account and the 50% interest in Prolandian, LLC, in his Schedules and Statement of Financial Affairs. Id. at 16.

Conclusions of Law

The Court has jurisdiction over this matter pursuant to 28 U.S.C § 1334 and the Order of Reference entered by the U.S. District Court for this District on August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(J) (objections to discharges).

I. The Standard on Summary Judgment.

Summary judgment is appropriate where there is no genuine dispute as to any material fact, and the moving party is entitled to judgment as a matter of law. Fed.R.Bankr.P. 7056. The moving party has the initial burden of showing that there are no material facts in dispute, and that it is entitled to judgment as a matter of law....