Gordon v. Mackey (In re Mackey)

562 B.R. 408

IN RE: Roberta MACKEY, Debtor(s).

William M. Gordon, Jacquelynn Y. Gordon, Plaintiff(s),

v.Roberta Mackey, Defendant(s).

Case No.: 1:15–bk–12309–VK

Adv No: 1:15–ap–01221–GM

United States Bankruptcy Court, C.D. California, San Fernando Valley Division .

Signed January 4, 2017

Ray B. Bowen, Jr., Law Offices of Ray B. Bowen Jr., Tarzana, CA, for Plaintiff(s).

David Brian Lally, Law Office of David B. Lally, Aliso Viejo, CA, for Defendant(s).

MEMORANDUM OF DECISION GRANTING JUDGMENT TO DEBTOR/DEFENDANT ROBERTA MACKEY

Geraldine Mund, United States Bankruptcy Judge

On July 6, 2015, Roberta Mackey ("Roberta" or the "Debtor") filed the above chapter 7 bankruptcy petition. At that time there was a pending superior court case brought by Jacquelynn ("Jacquelynn") and William ("William") Gordon against Roberta for breach of written contract, fraud and deceit, and financial abuse of elder under Welfare & Institutions Code § 15600 et seq . ("the Superior Court Case").¹ Relief from stay was granted to proceed to trial and on December 31, 2015 judgment was entered against Roberta for $125,000 of compensatory damages and prejudgment interest of $39,902.62 on the grounds of elder abuse under Welfare & Institutions Code §§ 15610.30 and 15657.5(A) (the "Superior Court Judgment").²

The present adversary proceeding was filed on October 7, 2015 and sought a determination that the debt to the Gordons represented by the Superior Court Judgment would not be discharged under 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(6). It further objected to the Debtor's discharge pursuant to 11 U.S.C. §§ 727(a)(2) and 727(a)(4).

On February 2, 2016, Roberta filed a motion for summary judgment and on February 29, 2016, the Gordons filed their motion for summary judgment.³ Hearings were held before Judge Kaufman, who—in a group of extensive rulings—granted judgment to the Defendant as to § 727(a)(2) and § 523(a)(2)(A), but denied it to both parties as to § 727(a)(4) and § 523(a)(6).⁴ This proceeding was transferred to Judge Mund on August 8, 2016 and the remaining issues went to trial on October 27 and November 7, 2016.

CLAIM FOR RELIEF UNDER § 727(a)(4)

Basic Facts and Timeline as to § 727(a)(4)

In or about May 2007, Roberta incorporated her business as Roberta Mackey Insurance, Inc. ("the Agency") and became the sole shareholder and owner of 1,000 shares of stock. Roberta was the president and treasurer and her husband Fredric Robin ("Fred")⁵ was the vice-president and secretary. Both were signatories to the Agencies' bank account, but there is no evidence that Fred ever participated in the insurance business. Roberta was a Life and Heath Agent and in 2012 she decided to also become a Property/Casualty Agent.

Starting in at least 2010, Roberta's daughter Sarah Robin ("Sarah") began working for the company and that year Roberta brought Sarah into corporate governance as vice-president and treasurer—Fred having resigned from those positions. The next year Fred was removed as a signatory on the corporate bank account and Sarah took his place. By 2013, Roberta decided to make Sarah a corporate director and—at the annual meeting on May 8, 2013—she "discussed issuing stock to Sarah Robin." This was discussed again at the May 9, 2014 annual meeting and it was decided that "Roberta Mackey would transfer to Sarah Robin 50% of her stock (500 shares) in Roberta Mackey Insurance Agency, Inc. to be issued during the month of May, 2014."⁶ However, according to Roberta's testimony, the corporation did have the ability to issue additional shares and was not limited to a total of 1,000 shares.

On May 19, 2014, Roberta cancelled her stock certificate and issued two new ones, each for 500 shares—one to herself and one to Sarah.⁷ This transfer was partially a gift and partially an incentive to Sarah, who had a very large client from which the agency may or may not have received part of the commission. At some point it was agreed that Sarah would pay part of her commissions to the Agency as compensation for her stock: she paid $50,650, but this figure was not linked to the actual value of the shares she received.⁸

Roberta filed her chapter 7 petition, schedules, and statement of financial affairs on July 6, 2015. In her schedules and statement of affairs, she showed that she owned one-half of the Agency, but did not list the transfer of her other one-half interest to Sarah even though it had taken place within two years before the bankruptcy was filed.

At the § 341(a) meeting, Roberta told the Trustee about the details of the transfer of stock. She had also revealed these to her attorney, who met with her twice—for about two hours each time—while preparing her bankruptcy filing. Her attorney knew that the Trustee would be interested in the transfer of stock as a possible asset, but he either failed to ascertain the date or simply missed adding it to the schedules and statement of affairs. Her attorney told the Trustee about the transfer during a conversation a week before the § 341(a) and provided the Trustee with documentation. The Trustee decided not to pursue the transfer.

Because the transfer was discussed at the § 341(a) meeting, Debtor's counsel felt there was no need to amend the schedules, although he might have done so had he been aware of the $50,000 amount.

Law and Analysis as to § 727(a)(4)

11 U.S.C. § 727 provides, in part:

(a) 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.

Thus, § 727(a)(4)(A) denies a discharge to a debtor who "knowingly and fraudulently" makes a false oath or account in the course of the bankruptcy case. Id. A false statement or an omission in the debtor's bankruptcy schedules or statement of financial affairs can constitute a false oath. Khalil v. Developers Surety and Indemnity Company (In re Khalil), 379 B.R. 163, 172 (9th Cir. BAP 2007) (citing Searles v. Riley (In re Searles), 317 B.R. 368, 377 (9th Cir. BAP 2004) ), aff'd , 578 F.39 1167 (9th Cir. 2009)."The fundamental purpose of § 727(a)(4)(A) is to insure that the trustee and creditors have accurate information without having to conduct costly investigations." Id. (quoting Fogal Legware of Switz., Inc. v. Wills (In re Wills), 243 B.R. 58, 63 (9th Cir. BAP 1999) ). "That said, a false statement or omission that has no impact on a bankruptcy case is not material and does not provide grounds for denial of a discharge under § 727(a)(4)(A)." Id.

For discharge to be denied, the Gordons must show by a preponderance of the evidence that: (1) Debtor made such a false statement or omission, (2) regarding a material fact, and (3) did so knowingly and fraudulently. Id.

Here, the first element, the Debtor's omission, has been satisfied. When Roberta filed her bankruptcy schedules, she included the fact that she owned one-half of the Agency. However, she failed to list the prior transfer of her other one-half interest to her daughter Sarah. Other transfers were noted in the schedules and statement of financial affairs; however this transfer was not listed nor were amended schedules ever filed to reflect the transfer to Sarah.

The second element, that the omission relates to a material fact, is arguably satisfied, as well. A fact is material "if it bears a relationship to the debtor's business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of the debtor's property." Khalil v. Developers Sur. & Indemnity. Co., 379 B.R. at 173 (quoting Wills, 243 B.R. at 62 ). Since the transfer relates to shares of Debtor's business, the Court finds the omission of the transfer is a material fact.

The third element of intent asks whether Roberta, when she filed her bankruptcy schedules and statement of financial affairs, knowingly and fraudulently omitted the transfer of the shares to Sarah. "A debtor ‘acts knowingly if he or she acts deliberately and consciously.’ " Id. (quoting Roberts v. Erhard (In re Roberts), 331 B.R. 876, 883 (9th Cir. BAP 2005) ). In this case, there is no evidence that Roberta made a deliberate attempt to omit the transfer to her daughter. In her schedules, Roberta clearly disclosed she owned 50% of the corporation. She did not attempt to hide the fact that someone else owned the remaining 50%. She had told her attorney about the transfer, although he did not include it in her schedules. Her attorney told the Trustee about the transfer at her § 341(a) meeting and the Trustee was able to collect sufficient information about the corporation and whether to pursue the assets of the corporation. Therefore, the Court finds that the Gordons have failed to satisfy this third element under § 727(a)(4)(A). The Gordons' request to deny Roberta's discharge under § 727(a)(4)(A) is denied.

CLAIM FOR RELIEF UNDER § 523(a)(6)

Basic Facts and Timeline as to § 523(a)(6)

In December 2004, Roberta Mackey married Fred Robin. In 2007, Roberta met the Gordons. Fred and William Gordon became quite friendly and the two couples socialized on a regular basis, having dinner together once or twice a month. In the spring of 2012, Fred approached William for a loan. Fred told William that he would repay the loan with interest in August.

Although the purpose of the loan was not specifically discussed in the bankruptcy trial, it clearly was intended to be a business loan for Fred.

A note was created and William insisted that both Fred and Roberta sign it. William appears to have given the check to Fred before the note was signed, but it was understood that cashing it was contingent on William receiving the note signed by both Fred and Roberta.⁹

The check was made out to Fred, who endorsed it to Roberta¹⁰ and obtained her signature on the note. The money went into Roberta's personal account, from which she disbursed some $70,000 to or for the benefit of Fred's business.¹¹ The parties stipulated that on August 1, 2012—the date that the loan was due—some...