Hutton v. Vasa (In re Vasa)

In re GLEN R. VASA, Debtor

DANIEL M. HUTTON, Plaintiff, v. GLEN R. VASA, Defendant

Case No. 14-12324-JNF

Adv. P. No. 14-1173

UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF MASSACHUSETTS

March 8, 2016

Chapter 7

MEMORANDUM

I. INTRODUCTION

The matter before the Court is the Complaint filed by Daniel M. Hutton (the "Plaintiff" or "Hutton") against Glen R. Vasa (the "Debtor," the "Defendant" or "Vasa"). The Court conducted a trial on December 7 and 8, 2015 and, at its conclusion, directed the parties to submit proposed requests for findings of fact. The issue presented is whether the Plaintiff sustained his burden of proof that certain obligations allegedly owed to him by the Debtor are nondischargeable under 11 U.S.C. § 523(a)(2)(A), (a)(4) or (a)(6).

II. BACKGROUND

The Debtor filed a voluntary Chapter 7 petition on May 8, 2014.¹ On amended Schedule B-Personal Property, the Debtor listed interests in two law firms to which he ascribed no value: Vasa & Hutton LLC [sic] located at 6 Cabot Place, Unit 8, Stoughton, Massachusetts 02072, and the Law Office of Glen Vasa, P.C. located at 1106 Main Street, Suite 102, Brockton, Massachusetts 02301. The Debtor did not disclose interests in either Platinum Merchants Solutions or Grand Realty Group, Inc. because, as he testified, neither entity made any profits. On amended Schedule E-Creditors Holding Unsecured Priority Claims, the Debtor reported no tax obligations. On amended Schedule F-Creditors Holding Unsecured Nonpriority Claims, he listed the Plaintiff as the holder of a claim in the sum of $60,000.00. On amended Schedule I-Your Income, he disclosed "gross wages, salary, and commissions" from employment at "Vasa & Hutton" in the monthly amount of $2,791.00, but, at trial, he testified: "that might have been in error" and "that would have been an estimate." In addition, although the Debtor revealed in his testimony that he has two children, he indicated that he had no dependents on Schedule I.

On July 25, 2014, the Chapter 7 Trustee filed a Report of No Distribution. On August 26, 2014, the Court entered an order of discharge. On August 25, 2014, however,the Plaintiff timely filed a Complaint under 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6). The Plaintiff, however, did not set forth separate counts in his Complaint.

At the trial, four witnesses testified, including the Plaintiff and the Debtor, and 15 exhibits were admitted into evidence. The Court now makes its findings of fact and rulings of law in accordance with Fed. R. Bankr. P. 7052.

III. FACTS

Both the Plaintiff and the Debtor testified that they were equal stockholders of a Massachusetts professional corporation, not a limited liability company, incorporated as the law firm of Lipis, Vasa and Hutton P.C., although the Articles of Organization were not introduced into evidence. The name of the professional corporation was never changed, but after the disbarment of Attorney Jay Lipis ("Lipis") the firm's letterhead was changed to Vasa & Hutton, P.C. ("V & H" or the "firm") at the insistence of the Massachusetts Board of Bar Overseers. Vasa and Hutton purchased the personal injury law practice from Lipis in 2006 for $1,000,000.00. Lipis provided purchase money financing, but few details about, or documents pertinent to, the terms of the purchase and sale were introduced into evidence.

Jeffrey Cohen ("Cohen"), an attorney with a master's degree in taxation from Boston University, served as the firm's accountant from its inception. In his words, he was the attorney for both Lipis, on the one hand, and Vasa and Hutton, on the other, regarding the purchase and sale of the Lipis's personal injury practice to Vasa and Hutton in mid-2006. In subsequent years, Cohen, working for V & H, did the payroll tax returns, the corporate tax returns and "the individual tax returns for both partners." Thus, Cohenprepared all Form W-2s and Form W-3s for V & H and was aware of the firm's financial health and eventual cash flow problems.

Hutton testified that V & H was a partnership, but then immediately retracted that contention insisting it was a professional corporation. The agreement to purchase the law practice required Vasa and Hutton to make bi-monthly payments to Lipis in the sum of $6,000.00. V & H also made monthly rental payments to Lipis in the sum of $2,100.00 either because he was the firm's landlord or he was the signatory on the lease for the firm's premises. In addition, Hutton made his home in Lipis's personal residence, paying him rent for the space he utilized. In accordance with the purchase agreement, V & H paid Lipis $6,000.00 every two weeks until mid-2012 when Lipis agreed to reduce the amount of the bi-monthly payments from $6,000.00 to $4,000.00 and also agreed to a principal reduction of $60,000.00, leaving an outstanding principal balance of $135,000.00. In the year 2012 alone, V & H paid Lipis approximately $140,000.00 toward the purchase price for the law practice and rent.

Both Vasa and Hutton testified that they were equal and sole shareholders of the professional corporation, although they frequently referred to themselves as partners during the trial. In 2012, the firm had five employees, as well as an associate, William Serwetman, Esq., and a payroll of approximately $156,000.00 per year, excluding distributions taken by Vasa and Hutton. They had a verbal agreement to share the firm's profits on an equal basis, although between 2006 and 2013, Vasa took $66,900.000 more in distributions from V & H than Hutton. The following chart summarizes the amount of income each received.

Year

Hutton

Vasa

2006

$15,317.50

$15,317.50

2007

$86,000.00

$86,000.00

2008

$88,000.00

$70,000.00

2009

$20,000.00

$18,000.00

2010

$ 6,000.00

$ 9,000.00

2011

$12,000.00

$25,500.00

2012

$ 3,000.00

$63,000.00

Hutton testified that, although he withdrew more income from the firm in 2008 than Vasa, it was because Vasa chose not to cash checks that year, presumably because of the death of his father. The level of income received by Vasa and Hutton between 2009 and 2012 is difficult to understand, and Hutton's income from the firm, at least in 2010 and 2012, was insubstantial. The business account for V & H reveals, however, that the firm made sizeable payments to American Express in 2011 in the approximate amount of $50,000.00 and in 2012 in the approximate amount of $65,000.00. There was no testimony as to who was authorized to use the American Express credit card or about the purposes for which its use was authorized.

With respect to liabilities, Vasa, in his post-trial Request for Findings of Fact, admitted that he and Hutton are "jointly and severally liable for the Corporation's debt." Hutton, however testified that "[t]here was always an assumption that the corporation would have enough money so we didn't - - so we believed ultimately all expenses would be paid, so there was no gentlemen's agreement with regards to who would incur what liability if expenses weren't paid." He further indicated that he did not meet with Vasa regularly to review either the firm's revenues or its expenses.

Hutton and Vasa divided the duties incident to operating their personal injury law firm. Hutton focused on litigation and settlement activities with respect to the firm's personal injury clients, while Vasa managed the office staff and kept the firm's books. His duties included managing the firm's IOLTA [Interest on Lawyer Trust Accounts] checking account and the firm's business checking account. Although both Hutton and Vasa had access to the the firm's IOLTA and business operating accounts, only Vasa had the ability to transfer funds electronically from the firm's IOLTA account to its operating account. Moreover, the firm's check books were kept in an unlocked safe next to Vasa's desk in his office. In addition, one of V & H's employees, Jenny Rosa, sometimes wrote checks for Vasa's signature and kept the office ledger. Portions of the ledger were introduced into evidence. In many instances, the hand written ledger entries are difficult to decipher.

The bank statements for the the IOLTA account and the operating account unequivocally establish that Vasa was the managing partner of V & H as he had control over the firm's finances. A comparison of the online transfers from the IOLTA account to the firm's operating account with the total deposits into the operating account as reflected on the bank statements for both the IOLTA and operating accounts establishes that the primary source, if not the sole source, of funds for the firm's operations resulted from online transfers from the IOLTA account to the business account. Only Vasa was able to make those online transfers. Hutton wrote just 4% of the 1,255 checks issued by V & H from the firm's operating account that were submitted into evidence for the period between November 2010 and September 2013. Moreover, the checks and electronic fundstransfers from the firm's business account confirm that tax obligations were not paid regularly in April, June, September, and January, despite evidence of checks made payable to Cohen for his services as an accountant.

Hutton testified that in 2011, the year in which he received $12,000.00 in income and Vasa received $25,500.00 in income, he was approached by Vasa to discuss the financial condition of the firm. According to Hutton, "[t]he conversation dealt with the fact that we had become behind on taxes and we both had to take out personal loans so that cash could accumulate in the corporation so we could start paying off these taxes." As a result of information provided to him by Vasa, Hutton testified that he obtained a $50,000.00 loan from his father and ceased withdrawing money from the firm. He testified, however, that he did not rely on Vasa's statement that the money would be used to pay off tax obligations, but rather on Vasa's previous $10,000.00 loan to V & H. Hutton stated: "[s]ince he gave us [sic] the loan, I thought he was...