Jenzack Partners, LLC v. Rothmund (In re Rothmund), 18-12225-MDC

In re Daryl R. Rothmund, Debtor.

Jenzack Partners, LLC Plaintiff, v. Daryl R. Rothmund, Defendant.

No. 18-12225-MDC

Adversary No. 19-00143-MDC

United States Bankruptcy Court, E.D. Pennsylvania

August 31, 2021

Chapter 7

Magdeline D. Coleman Chief U.S. Bankruptcy Judge Dana S Plon, Esquire Patrick J. Troy, Esquire Sirlin Lesser &amp Benson, PC

Thomas D. Bielli, Esquire Cory P. Stephenson, Esquire Bielli &amp Klauder, LLC

MEMORANDUM

Hon. Magdeline D. Coleman, Chief United States Bankruptcy Judge

I. INTRODUCTION

The plaintiff, Jenzack Partners, LLC (the "Plaintiff"), filed this adversary proceeding ("Adversary Proceeding") seeking a revocation of the discharge that debtor Daryl R. Rothmund (the "Debtor-Defendant") obtained in his chapter 7 bankruptcy case (the "Discharge"). The Plaintiff has moved for summary judgment, asserting that the undisputed facts show that the Debtor-Defendant obtained his discharge through fraud of which the Plaintiff only became aware after the Discharge was granted, entitling the Plaintiff to judgment as a matter of law pursuant to §727(d) of the United States Bankruptcy Code, 11 U.S.C. §§101, et seq. (the "Bankruptcy Code"). The Debtor-Defendant opposes summary judgment, arguing the facts support a finding that before the Discharge was granted the Plaintiff should have filed an action pursuant to §727(a) of the Bankruptcy Code seeking to bar the Discharge, and therefore cannot now seek its revocation. For the reasons set forth below, the Court will grant summary judgment in favor of the Plaintiff and enter an order revoking the Discharge pursuant to §727(d)(1) of the Bankruptcy Code.

II. RELEVANT PROCEDURAL BACKGROUND

On April 2, 2018, the Debtor-Defendant filed his voluntary chapter 7 bankruptcy petition.^[1] The Plaintiff holds a claim of almost $800, 000.00 against the Debtor-Defendant based on a 2011 judgment (the "Judgment") against the Debtor-Defendant entered by the Court of Common Pleas of Bucks County, Pennsylvania in favor of Sovereign Bank, which was subsequently assigned to the Plaintiff in 2014 (generally, the "State Court Litigation").^[2]

In the years prior to the Debtor-Defendant's 2018 bankruptcy filing, the Plaintiff had engaged in extensive discovery in aid of execution on the Judgment. Supplementing those efforts, approximately two months after the bankruptcy filing, on June 7, 2018, the Plaintiff filed the Motion for Entry of Order Directing Rule 2004 Examination and Production of Documents (the "Rule 2004 Motion"), ^[3] seeking an examination of the Debtor-Defendant and his production of documents pursuant to Federal Rule of Bankruptcy Procedure 2004, "to investigate and examine the Debtor and the Debtor's fraudulent transfer of assets and contracts…." The Debtor-Defendant objected to the Rule 2004 Motion, ^[4] generally grounded on the scope and relevance of the requested documents and the contemplated examination, but on July 25, 2018, the Court entered a consent order granting the Rule 2004 Motion (the "Rule 2004 Order").^[5] The Rule 2004 Order directed the Debtor-Defendant to testify at an examination (the "Rule 2004 Examination") on September 6, 2018, and to produce certain documents to the Plaintiff in advance of the Rule 2004 Exam. Pursuant to the Rule 2004 Order, the Debtor-Defendant produced certain documents in August 2018 and testified at the Rule 2004 Examination.

In the meantime, on July 12, 2018, the Debtor-Defendant received the Discharge in his bankruptcy case.^[6] After engaging in the discovery pursuant to the Rule 2004 Order, on July 10, 2019, the Plaintiff initiated this Adversary Proceeding against Daryl R. Rothmund (the "Debtor-Defendant," and together with the Plaintiff, the "Parties") by filing a Complaint seeking revocation of the Debtor-Defendant's discharge pursuant to §727 of the Bankruptcy Code (the "Complaint").^[7] The Complaint alleges that through the Debtor-Defendant's post-Discharge document production and testimony at the Rule 2004 Examination, the Plaintiff first learned that the information the Debtor-Defendant had provided prior to his Discharge in (i) the State Court Litigation, (ii) his bankruptcy case (including in his bankruptcy schedules, his testimony at the meeting of creditors, and his document production in response to the Rule 2004 Order), and (iii) his pre-petition tax returns, was false, fraudulent, and/or woefully incomplete, particularly with respect to his income and the assets and liabilities of his various entities.^[8] The Plaintiff asserts that the Debtor-Defendant's false representations and omissions with respect to his income and assets were an attempt to defraud creditors, the chapter 7 trustee, and this Court, warranting revocation of the Discharge.

On August 12, 2019, the Debtor-Defendant filed an Answer to the Complaint (the "Answer"), ^[9] consisting largely of form denials of the Complaint's allegations.

The Plaintiff then moved for summary judgment (the "Summary Judgment Motion").^[10] The Summary Judgment Motion reiterates the Complaint's allegations that the Plaintiff first learned of the Debtor-Defendant's alleged hidden income and assets after the Discharge was granted, by virtue of the discovery conducted pursuant to the Rule 2004 Order, as well as from materials produced in September 2019 by the Debtor-Defendant's Automatic Empire LLC entity ("Automatic Empire") in a state court action against the Debtor-Defendant's business partner (the "Third Party Production"). The Summary Judgment Motion argues that the information obtained through this discovery shows "the actual state of Debtor's financial affairs is favorable and inconsistent with Debtor's statements in the state court actions and to this Court." The Summary Judgment Motion attached 14 exhibits which the Plaintiff argues support the conclusion that the Debtor-Defendant misled creditors, the chapter 7 trustee, and the Court prior to the Discharge regarding his income, assets, and liabilities. The Plaintiff therefore asks that the Court revoke the Discharge pursuant to §727(d) of the Bankruptcy Code based on the Debtor-Defendant's alleged scheme to defraud the Plaintiff and conceal assets.

The Debtor-Defendant filed an opposition to the Summary Judgment Motion (the "Summary Judgment Opposition"), ^[11] arguing that the Plaintiff failed to file a nondischargeability action with respect to its claim prior to the expiration of the deadline, and now improperly seeks revocation of the Discharge based on fraud allegations it made or should have made prior to the Discharge: "Here, the creditor clearly had notice of the alleged fraud prior to the discharge, even if not in possession of the documentation … through the state court litigation. The Creditor had documents and financial documents, pursuant to the ongoing state litigation, to make it aware of any irregularities it is [now] alleging. Even if the documents were not obtained until receipt of discovery, as claimed, the Creditor should have been aware of its complaints to the discharge and should have filed those disputes then …."^[12] The Debtor-Defendant argues that the Plaintiff therefore does not meet the standard for revocation of the Discharge under §727(d) of the Bankruptcy Code.^[13]

On February 17, 2021, the Court held a hearing (the "Hearing") on the Summary Judgment Motion, during which the Court sua sponte raised the Debtor-Defendant's failure, in opposing the Summary Judgment Motion, to comply with Federal Rule of Civil Procedure 56(c)'s requirement that assertions of disputed fact be supported by the record.^[14] After colloquy with the Parties, the Court entered an Order^[15] pursuant to Rule 56(e)(1) giving the Debtor-Defendant the opportunity to submit an affidavit in support of the Summary Judgment Opposition.^[16]

Consequently, on June 4, 2021, the Debtor-Defendant filed an affidavit in support of his Summary Judgment Opposition (the "Affidavit").^[17] The Affidavit addresses the various entities and trusts in which the Debtor-Defendant holds an interest, the State Court Litigation through which the Plaintiff acquired its claim against the Debtor-Defendant and the discovery the Plaintiff took in aid of execution, the Debtor-Defendant's representations in this bankruptcy case regarding his income and assets, and the Plaintiff's allegations regarding the Debtor-Defendant's fraudulent and false representations prior to and in connection with the bankruptcy case. As is the Debtor-Defendant's position in the Summary Judgment Opposition and in oral argument at the Hearing, the Affidavit includes argument that the Plaintiff had sufficient information regarding the Plaintiff's alleged fraudulent disclosures of income and assets prior to the Discharge to have required the Plaintiff to object to the Discharge before it was granted, rather than seek its revocation under §727(d).

On July 28, 2021, with leave of the Court, the Plaintiff filed a sur-reply (the "Sur-Reply Brief")^[18] to address the issues raised in and by the Affidavit. In its Sur-Reply Brief, the Plaintiff addresses what it argues are the Affidavit's deficiencies in establishing a dispute as to a material fact that would preclude summary judgment, including that it "does not attach any materials showing that Defendant provided accurate financial information to the Court, the trustee or to the Plaintiff, prior to [the Discharge] or the [Third Party Production]."^[19] The Plaintiff also attached additional exhibits to the Sur-Reply Brief that it argues support the entry of summary judgment in its favor.

III. LEGAL STANDARD FOR SUMMARY JUDGMENT

Rule 56(a) of the Federal Rules of Civil Procedure, made applicable to this Adversary Proceeding pursuant to Rule 7056 of the Federal Rules of Bankruptcy Procedure, requires the Court...