Ruiz v. Kennedy (In re Kennedy)

566 B.R. 690

IN RE: Stewart and Samantha KENNEDY, Debtors.

Frank Ruiz, Plaintiff,

v.Stewart and Samantha Kennedy, Defendants.

John Lira, Plaintiff,

v.Stewart and Samantha Kennedy, Defendants.

Laila Cristobal, Plaintiff,

v.Stewart and Samantha Kennedy, Defendants.

Case No.: 10–24535 (VFP)

Adv. No.: 10–02633 (VFP)

Adv. No. 10–02634 (VFP)

Adv. No. 10–02635 (VFP)

United States Bankruptcy Court, D. New Jersey.

Signed February 8, 2017

Thomas J. Romans, Esq., 27 Warren Street, Suite 103, Hackensack, New Jersey 07601, Attorney for Plaintiffs, Frank Ruiz, Laila Cristobal, and John Lira

Santo J. Bonanno, Esq., 1430 Route 23 North, Wayne, New Jersey 07470, Attorney for Debtors and Defendants, Stewart and Samantha Kennedy

OPINION

THE HONORABLE VINCENT F. PAPALIA, U.S.B.J.

This matter is before the Court following a consolidated trial of three adversary proceedings by plaintiffs challenging the rights of Stewart and Samantha Kennedy (the "Debtors ") to discharge their debts under chapter 7 of the Bankruptcy Code. Laila Cristobal ("Cristobal "), Frank Ruiz ("Ruiz "), and John Lira ("Lira ") and, together with Ruiz and Cristobal, the "Plaintiffs ") also assert that the Debtors' obligations to them are nondischargeable under 11 U.S.C. § 523(a) because they were incurred by way of fraud, false pretenses or embezzlement. Cristobal, Lira and Ruiz (at least initially) further asserted that the Debtors are not entitled to a discharge under 11 U.S.C. § 727(a) because they fraudulently failed to disclose assets in their bankruptcy petition, made unauthorized post-petition transfers of property, made false oaths in connection with the case, and failed to properly maintain and destroyed records from which their financial dealings can be ascertained.¹

As set forth below, the Court will enter judgment denying Stewart Kennedy's discharge pursuant to sections 727(a)(2), (a)(3), (a)(4) and (a)(7). Judgment denying Samantha Kennedy's discharge under sections 727(a)(3), (a)(4) and (a)(7) will also be entered. Because this Court has determined that Mr. and Mrs. Kennedy are not entitled to a discharge, it is not technically necessary to decide whether any of Plaintiffs' individual claims are nondischargeable under 11 U.S.C. §§ 523(a)(2)(A), (4) or (6), except to the extent that (i) the Plaintiffs seek a determination as to the amount of their claims; and (ii) the Kennedys have asserted that Lira released his claims against them. Cristobal's claim against Mr. and Mrs. Kennedy is determined to be in the amount of $155,037, plus legal interest from January 1, 2012 going forward. Ruiz's claim against Mr. Kennedy is determined to be in the amount of $503,101, plus legal interest from January 1, 2014 going forward. The Court further determines that Ruiz has no claims against Mrs. Kennedy, who was not directly or indirectly involved in the loans and transactions between Ruiz and Mr. Kennedy. Lira's causes of action under section 523(a) will be dismissed since his claims against the Kennedys are barred by a release dated October 29, 2007 and for the other reasons set forth in this Opinion.

JURISDICTION

This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334(b), 157(a), and the Standing Order of Reference from the United States District Court for the District of New Jersey. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) (determination as to dischargeability of certain debts) and (J) (objections to discharge). Venue is proper under 28 U.S.C. §§ 1408 and 1409(a). The following constitutes the Court's findings of fact and conclusions of law pursuant to FEDERAL RULE OF BANKRUPTCY PROCEDURE 7052.

FACTS AND PROCEDURAL HISTORY

I. Overview of Debtors' Business

On May 12, 2010, the Debtors filed a joint petition under chapter 7 of the Bankruptcy Code. The petition listed assets of $239,000 and debts of $8,662,387, approximately three million of which was scheduled as secured.² Although the petition states that the Debtors' obligations consisted primarily of consumer debts, the vast majority of this debt was in fact incurred in connection with their various real estate ventures.

In the late 1990s, Mr. Kennedy, then a full-time detective sergeant for the City of Passaic Police Department, began acquiring properties at foreclosure sales with his friend Danny Colon, rehabilitating them, and selling them for profit.³ The business was funded through mortgage and construction loans from banks and institutional lenders, as well as friends, relatives or colleagues of the Debtors. Due to Mr. Kennedy's previous bankruptcy filing and poor credit, many of these properties were financed and titled in Mrs. Kennedy's name, with her knowledge and consent.⁴ Mrs. Kennedy would participate in loan and mortgage closings when necessary, but gave her husband unlimited authority to sign her name on documents and checks in connection with the business.⁵ The Debtors considered themselves partners in the business.⁶

In the years leading up to the filing of their petition, the real estate business expanded and, at times, appeared to thrive. Mr. Kennedy participated in the purchase and rehabilitation of thirty to forty properties, ranging from single-family homes to an eighty-three-unit condominium complex at 447 Van Houten Avenue in Passaic. Some of these properties were developed by entities in which one of the Kennedys held an interest, including:

• 447 Van Houten, LLC : eighty-three-unit condominium complex at 447 Van Houten Avenue in Passaic. Owned in equal one-third shares by Mrs. Kennedy, John Lira and Suzette Colon.⁷

• DCL, LLC : twelve-townhome development on Lafayette Street in Passaic. Mrs. Kennedy owned a twenty-five percent interest.⁸

• Lircostew, LLC : owned in equal shares by Mr. Kennedy and Lira to develop various properties in Passaic.

Although these entities were not listed in the Debtors' petition, they were added in a January 2011 amendment which also included entities known as: Shannon G, LLC, GGL Capital, and Bella Vista Estates.⁹ Mr. Kennedy had exclusive control over the checking accounts for 447 Van Houten, LLC and Lircostew, LLC and was a dual signatory on the DCL, LLC checking account with Michael Simone, another owner.¹⁰

In addition to the properties owned by the above-mentioned entities, Mr. or Mrs. Kennedy acquired real estate in their individual capacity, owning certain properties outright (such as their home in Wayne) or through informal partnerships with others, such as their shore house in Ocean Gate, New Jersey. Loans and investments in the properties were administered through the Debtors' personal bank accounts with Valley National Bank.¹¹ The Debtors deposited all such investments into a joint personal account in both of their names until November 2005, when they opened a joint business account using the trade name "S & S Development" at the request of the bank.¹² From April 2006 to May 2010, approximately $2,286,950 was deposited into the S & S Development account, which was used in connection with at least sixteen properties in Passaic¹³ and to pay personal expenses of the Kennedys. No funds were left in this account on the petition date.¹⁴ Although Mrs. Kennedy testified repeatedly that she had no access to and did not use or write checks from the S & S Development account (or its predecessor account), and that the account was used only for business purposes, cross-examination revealed that the S & S Development account was used to pay personal expenses of the Kennedys and that Mrs. Kennedy wrote at least some of the checks from that account.¹⁵

Although he was in charge of the financial aspects of S & S Development, 447 Van Houten, and Lircostew and controlled their bank accounts, Mr. Kennedy testified that he did not maintain any records for these businesses other than copies of checks and check registers. These were generally kept in the trunk of his car, which he testified enabled him to visit and pay contractors at various construction sites in Passaic.¹⁶ Kennedy's method of record-keeping was as follows: upon writing a check for a certain expense, he would typically record what the check was for in the "memo" space on the check and make an accompanying notation in the checkbook register.¹⁷ But this method was far from perfect and many checks and entries in the checkbook register were not accompanied by notations and some of the notations were inconsistent with the check-cashing information on the back of the checks and the testimony of third parties, as is explained in more detail below. Due to, at least in part, this sloppy and incomplete record-keeping, the Debtors did not file tax returns in the six years that preceded the filing of the petition. This is another example of the Debtors'—and particularly Mr. Kennedy's—inadequate and unsatisfactory record-keeping.

Mr. Kennedy also did not employ any mechanism for tracking or allocating expenses among different projects. Adding to the confusion, he and Mrs. Kennedy commingled business and personal expenses in the S & S Development account, as was noted above. Of the $2,286,950.27 deposited into the S & S Development account between April 2005 and May 2010, $438,430 came from the Kennedys' personal funds. However, during the same period approximately $859,463 of S & S Development funds—some $400,000 more than the Kennedys' deposits—were devoted to the Kennedys' personal expenses, including, among other things, $321,244 on renovations to their home, $58,700 on jewelry, and $62,321 on their beach house.¹⁸ As was also noted above, while Mrs. Kennedy had little direct involvement in the real estate business, she regularly used the S & S Development account to pay personal expenses.¹⁹

The Plaintiffs filed separate adversary proceedings against the Debtors in December 2010.²⁰ Around the same time, the Plaintiffs served the Debtors with a Rule 2004 subpoena requesting all business and property records related to their real estate businesses. Although Mr. Kennedy later...