Ne. Cmty. Bank v. Manfredonia (In re Manfredonia)

561 B.R. 1

In re Joseph M. Manfredonia, Debtor

Northeast Community Bank, Plaintiff,

v.Joseph M. Manfredonia, Defendant

Case No. 14–13014–JNF

Adv. P. No. 15–1053

United States Bankruptcy Court, D. Massachusetts.

Signed November 16, 2016

John C. Ottenberg, Ottenberg & Dunkless LLP, Boston, MA, for Plaintiff.

Joseph G. Butler, Law Office of Joseph G. Butler, Westwood, MA, Christopher J. Fein, Fein Law Office, Braintree, MA, for Defendant.

MEMORANDUM

Joan N. Feeney, United States Bankruptcy Judge

I. INTRODUCTION

The matter before the Court is the Complaint filed by the Plaintiff, Northeast Community Bank (the "Plaintiff" or the "Bank"), a creditor of the debtor, Joseph M. Manfredonia (the "Debtor," the "Defendant," or "Mr. Manfredonia") through which it seeks denial of the Debtor's discharge pursuant to 11 U.S.C. § 727(a)(3) and (a)(4)(A) on grounds that the Debtor failed to keep and preserve adequate books and records and knowingly and fraudulently made false oaths in his sworn documents filed in his bankruptcy case. Specifically, through Count I, the Plaintiff alleges that the Debtor made false oaths by failing to disclose in his Statement of Financial Affairs ("SOFA"), as well as two amended SOFAs, which he executed under the penalty of perjury, that he made monetary transfers from his bank accounts to bank accounts owned by his spouse, Lauren Totman–Manfredonia ("Mrs. Manfredonia" or "spouse") at various times in 2014. Through Count II, the Plaintiff complains that the Debtor either failed to keep books and records or concealed records from which his income and that of his non-debtor spouse could be ascertained. In his Answer, the Defendant denied the material allegations of the Complaint.

The Court entered a pretrial order, and the parties, in compliance with that order, filed a Joint Pretrial Memoranda in which they agreed to numerous facts. The Court held a trial on May 9 and 10, 2016 and June 16, 2016 at which four witnesses testified. The Court admitted into evidence over 40 exhibits, all of which were introduced by the Plaintiff, consisting primarily of bank and investment account statements from various financial institutions maintained by the Debtor, by the Debtor and his spouse, by his spouse, or by business entities controlled by the Debtor and his spouse.

Following the trial, both parties submitted Proposed Findings of Fact and Conclusions of Law. Based upon the agreed facts, testimony, exhibits, and applicable law, the Court makes the following findings of fact and conclusions of law in accordance with Fed. R. Bankr. P. 7052. This is a core proceeding in which this Court has authority to enter a final order and judgment. See 28 U.S.C. § 157(b)(2)(J).

II. FINDINGS OF FACT

A. The Debtor, His Companies and the Properties

The Debtor filed a voluntary Chapter 7 petition on June 25, 2014, and John O. Desmond was appointed the Chapter 7 Trustee. Mrs. Manfredonia is not a debtor in this or any other bankruptcy case.

The Debtor is a college graduate and also a certified public accountant. He was employed as an accountant and auditor for two accounting firms for several years, including the firm of Jacobs, Velella & Kerr, P.C., the accounting firm which prepared tax returns for limited liability companies formed by the Debtor (Exhibits 45 and 46). In addition, the Debtor served as a comptroller for a publicly traded, international company which he identified only as "ADE." He also held the positions of chief financial officer at companies he identified as "Berringer" and "INMED" before establishing his own commercial real estate management and consulting businesses. The Debtor admitted that he is "pretty sophisticated with financial accounting."

In 2002, the Debtor founded Bettencourt Realty, LLC ("Bettencourt") and BMC Realty LLC ("BMC"), both Massachusetts limited liability companies which have a usual place of business at the Debtor's residence located in Lynnfield, Massachusetts. BMC is the manager of Bettencourt and Manfredonia is the manager of BMC. BMC and Manfredonia are the sole members of Bettencourt, and BMC is owned by the Debtor and a number of other individuals, including members of his family. Bettencourt and BMC owned and operated real estate in Peabody, Massachusetts and also provided bookkeeping and consulting services to third party clients. Neither the Debtor nor Mrs. Manfredonia could credibly substantiate the amount of income Bettencourt and BMC derived from bookkeeping and consulting.

The Debtor testified that he worked for, and was paid by, Bettencourt and BMC. Mrs. Manfredonia testified that she worked for and was paid by BMC, but then indicated that she was employed by LTM Enterprises. The Debtor was primarily responsible for maintaining the records of the two entities. Neither the Debtor nor Mrs. Manfredonia produced W–2 statements or 1099s with respect to their compensation from Bettencourt, BMC or LTM Enterprises.

In 2005, Bettencourt acquired three adjacent buildings in Peabody, Massachusetts (the "Properties"), which, according to the Debtor, consisted of "a 6,000 square foot commercial site, another 4,000 square foot attached commercial site—residential site to that and a 16–unit residential site and a three-unit residential site was [sic] 111R Rear Main Street, 111 Front Main Street, 2 Washington Rear Main Street and 2 Washington Front Main Street." Bettencourt leased the units to residential and commercial tenants. To obtain the Properties, the Bank, in November of 2005, agreed to loan Bettencourt and Manfredonia $2,300,000 to be secured by a mortgage on the Properties. The loan agreement between the Bank and Bettencourt required Bettencourt and Manfredonia to submit periodic financial information to the Bank.

From 2005 to 2013, the Debtor made his living from ownership and management of BMC, Bettencourt, and the Properties, although he and his spouse also were active stock market investors, at least in 2013 and parts of 2014, as evidenced by their trading in their Fidelity Investments and TD Ameritrade accounts. They reported their occupations as "Investment" on their 2013 federal income tax return (Form 1040), which the Debtor prepared.

As noted above, the Debtor maintained the books and records of Bettencourt and BMC. He initially maintained paper records until 2006 or 2007 when he testified that he began using QuickBooks software. The Debtor testified that those records were lost in a computer crash. Thereafter, he kept records using a web-based system and paid bills and accessed records online. He testified that he never finished recreating the records he lost in the computer crash.

The Debtor annually would prepare trial balances for Bettencourt and BMC for his accountant, including trial balances for years 2012 and 2013. He did so by reviewing on line transactions, and sending the trial balances to the companies' accountant for preparation of tax returns. The Debtor and his spouse filed joint tax returns in 2012, 2013, and 2014. The Internal Revenue Service audited some of those returns but assessed no additional taxes.

The Debtor testified that BMC and Bettencourt maintained certain paper records, including leases, contracts, and statements from the municipal housing authority in several locations in one of the Properties. He also testified that those entities maintained certain records on a flash drive, all of which were stored in file cabinets in shared common space located in one of the Properties. The Debtor stated that in January 2014 he realized that the records had been destroyed by a tenant who vacated the premises in late 2013.

B. The Receivership and Foreclosure

Sometime in 2013, Bettencourt lost its primary commercial tenant, and it defaulted on the Bank's mortgage in the fall of 2013.¹ Bettencourt made its last mortgage payment to the Bank in October of 2013. As a result, approximately three months later, in February of 2014, the Bank filed a civil action in the Essex Superior Court, Department of the Massachusetts Trial Court, against Manfredonia and Bettencourt, requesting the appointment of a receiver over Bettencourt's assets. On March 20, 2014, the Superior Court entered an order appointing Peter Sutton, Esq. as Receiver for the Properties ("Sutton" or the "Receiver"). The Superior Court docket is unclear as to the effective date of the order as it was stayed for a short period of time. Thus, although the precise date when the Receiver assumed his duties is unknown, Sutton filed his first report in mid–May, 2014.

In his interim report filed with the Superior Court on May 14, 2014, the Receiver described the Properties, stating that the owner "has put little time or money into [the Properties]," and observing that extensive repair work was needed. He added that cash flow would not permit all repairs. He also stated that the Debtor "has been less than cooperative with the Receiver" and had delivered only "a few uncashed checks and the checking account statements from March, 2013, and some non-current real estate tax bills and liability policies." He added the following:

[H]e [the Debtor] failed, after numerous requests, to turnover Bettencourt's billing records, any personal property, any security deposits, rent rolls, leases, tax returns, and books and records, such as the operating or management agreements of Bettencourt or QuickBooks relating to Bettencourt

Sutton further reported that from March 2013 to March 2014 the Debtor used Bettencourt's cash for his personal use. Moreover, he stated that the Debtor caused Bettencourt to transfer a total of $16,000 to a checking account he controlled between February 6, 2014 and March 19, 2014, while the motion for appointment of a receiver was pending. In his report, the Receiver stated that certain tenants claimed that in April of 2014 they paid rent directly to the Debtor, but that the Debtor did not turnover the rental payments to him. The Receiver also noted that he had reviewed debit charges and canceled debit cards in the...