U.S. Tr. v. Varner (In re Varner), CASE NO. 14-61103

IN RE: RICHARD W. VARNER, Debtor.

UNITED STATES TRUSTEE, Plaintiff, v. RICHARD W. VARNER, Defendant.

CASE NO. 14-61103

ADV. NO. 14-6021

UNITED STATES BANKRUPTCY COURT NORTHERN DISTRICT OF OHIO EASTERN DIVISION

June 30, 2015

CHAPTER 7

JUDGE RUSS KENDIG

MEMORANDUM OF OPINION (NOT INTENDED FOR PUBLICATION)

Currently before the court is the United States Trustee's ("UST") complaint seeking to deny Richard W. Varner's ("Debtor") bankruptcy discharge under 11 U.S.C. § 727(a)(2)(A) and (a)(4)(A). Specifically, UST claims Debtor made false oaths within his bankruptcy petition in violation of § 727(a)(4)(A) and transferred or concealed assets within one year of bankruptcy with the intent to hinder, delay, or defraud creditors in violation of § 727(a)(2)(A). In contrast, Debtor argues that any false statements or concealment of assets are the result of innocent mistakes, and therefore do not rise to the level necessary to deny discharge. The court held a trial on March 31, 2015, after which the court set a post-trial briefing schedule. UST and Debtor havefiled their post-trial briefs and the matter is properly before the court. Based on the ensuing analysis, the court finds that Debtor lacked the requisite intent needed for a denial of discharge.

The court has jurisdiction of this case under 28 U.S.C. § 1334 and the general order of reference dated April 4, 2012. In accordance with 28 U.S.C. § 1409, venue in this district and division is proper. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(J).

This opinion is not intended for publication or citation. The availability of this opinion, in electronic or printed form, is not the result of a direct submission by the court.

Facts

Before filing for bankruptcy, Debtor was a successful business person owning and operating approximately twenty car dealerships under the Courtesy Auto Group ("Courtesy") umbrella. Trial Tr. 92-93, ECF No. 62. Courtesy generated millions in annual revenue, and for a time, was very successful. However, two unrelated issues lead to Courtesy's downfall, ultimately resulting in Debtor's current bankruptcy.

First, the "Great Recession" of 2008 caused a downturn in consumer demand for vehicles and a reduction in available commercial credit. Due to Courtesy's size, Debtor had numerous lines of credit, many of which were quite large, used to purchase new and used vehicle inventory. During the "Great Recession," Flex Funds, Debtor's single largest creditor providing over $68 million in financing, declared bankruptcy. Id. at 93. Debtor attempted to obtain replacement financing, but most banks and other lending institutions were fleeing the automobile financing industry at the time. Id. at 94. With the inability to obtain replacement financing, Flex Funds and many of Debtor's other financing sources began demanding payment on their loans. Id. Debtor started liquidating his inventory to meet creditor demands, suffering huge losses in the process. Id. at 95. Even after Debtor's creditors retrieved all of their collateral, millions of dollars remained outstanding on the lines of credit. Id.

Second, Courtesy's accountant engaged in activities unbeknownst to Debtor that doomed the business. Each year, Courtesy's accountant completed both Courtesy's business tax returns and Debtor's personal tax returns, showed the finished returns to Debtor, and claimed to file the returns electronically. Id. at 96-97. However, for reasons not made clear at trial, Courtesy's accountant never actually filed Courtesy's business tax returns or Debtor's personal tax returns with the IRS. Id. Sometime in 2006, an IRS agent arrived at Courtesy and informed Debtor of his failure to file tax returns with the IRS. Id. At this point, Debtor and the IRS agent walked to the accountant's office, but before reaching the office the accountant locked the door and fled the premises. Id. at 98. After unlocking the door, Debtor and the IRS agent found drawers full of IRS letters concerning the missing tax returns. Id. According to Debtor, he had no knowledge his accountant failed to file the tax returns. Id. At this point, Debtor hired a new accountant, Phil Modie ("Modie"), who began filing the missing tax returns, eventually calculating Courtesy and Debtor's unpaid IRS tax liability at approximately $8 million dollars. Id. at 99. As part of the repayment process, the IRS foreclosed upon Debtor's home, insurance accounts, stock accounts, sports memorabilia collection, as well as other items, ultimately reducing Debtor's IRS liabilityto approximately $1.6 million. Id. at 98-99. Debtor and the IRS were working towards an offer and compromise regarding the remaining balance when Debtor filed for bankruptcy. Id. at 100.

Debtor filed for chapter 7 bankruptcy relief on October 2, 2013, listing non-exempt personal property of $10,789.59, unsecured priority claims of $3,757,003.86, and general unsecured claims of $23,341,774.26. Debtor's petition lists monthly gross income of $5,500.00, and after accounting for taxes and a domestic support obligation, average monthly income of $3,090.06. After subtracting monthly expenses of $7,791.00, Debtor's monthly net income on Schedule J was negative $4,700.94.¹ UST believes Debtor's income is actually significantly larger than that listed in his bankruptcy petition, a central issue in UST's current denial of discharge action.

After Debtor filed for chapter 7 relief, a chapter 7 panel trustee ("Trustee") was assigned to oversee Debtor's case. As part of her general review, Trustee reviewed Debtor's bankruptcy petition, bank statements, tax returns, among other documents. While reviewing this information, Trustee noted that Debtor's income information from his bankruptcy schedules did not align with deposits made into his bank accounts. For example, while Schedule I lists Debtor's monthly net income at $3,090.06, Debtor's bank statements from March to September of 2013, the seven months immediately preceding Debtor's bankruptcy, show monthly deposits of approximately $6,600.00, $7,800.00, $8,100.00, $9,500.00, $20,900.00, $16,000.00, and $1,200.00, respectively. Id. at 20; Pl.'s Ex. Q. Except for the month immediately preceding Debtor's bankruptcy filing, Debtor's bank statements show deposits well in excess of the monthly income listed in his bankruptcy petition. Trial Tr. 20. As one example, in the last few days of September 2013, Debtor deposited over $7,000.00 into his bank account. Pl.'s Ex. O 24, 27. Trustee, and later UST, began looking into Debtor's income, questioning how Debtor could make cash deposits significantly larger than his stated income, or how Debtor could afford monthly expenses exceeding his net income by over $4,500.00.

To understand Debtor's cash deposits, the form of Debtor's employment must first be evaluated. Even after Courtesy's downfall, Debtor continues to work in the automotive industry, and is the sole shareholder of Approved Acceptance Corporation ("AAC"), an S corporation doing business in Ohio. All of AAC's revenue is generated through a consulting contract with Underwood Motors ("Underwood"), which is a wholly owned subsidiary of PR, LLC ("PR"). PR is owned in part by Debtor's sister, Alma Horton ("Horton"). Under the consulting contract, PR makes monthly payments to AAC of approximately $12,000.00. Trial Tr. 103. In return, Debtor, who has extensive automotive experience, assists PR and Underwood in managing various automotive related businesses. Of PR's $12,000.00 monthly transfer to AAC, Debtor takes a salary of $5,500.00. Pl.'s Ex. T. After accounting for Debtor's salary and other business expenses, AAC's monthly profit is approximately $5,600.00. Id. Debtor also receives a weekly salary directly from Underwood of approximately $200.00. Trial Tr. 105. According to credible testimony, Debtor's direct employment with Underwood allows Debtor to maintain company health insurance. Id. This is a matter of central concern as Debtor has had cancer. While the Underwood income was not initially disclosed within Debtor's bankruptcy petition, Debtor voluntarily disclosed its existence at his § 341 meeting of creditors. Additionally, the $200.00per week received from Underwood is subtracted from Debtor's AAC consulting contract, resulting in no change to Debtor's monthly income. Id. at 106. At trial, Trustee stated that Debtor's initial failure to disclose his Underwood salary had no effect on her administration of the case. Id. at 36.

Debtor's schedule I only lists salary income, which cannot explain Debtor's large cash deposits. Trustee believes the excess money originated from AAC, but when she questioned Debtor, he initially appeared confused over the source of the deposits. According to Trustee, Debtor initially informed her that AAC's income, even though it was taxed to him as personal income, stayed with the business and therefore could not be the source of the additional deposits. Id. at 24. At trial, Debtor conceded that at least a portion of AAC's income was used for his personal benefit. Id. at 103. Debtor's bankruptcy petition only includes his AAC salary, not his use of AAC profits, meaning Debtor had access to and spent significantly more money than initially disclosed. Many of Debtor's normal day-to-day transactions were conducted in cash, and Debtor received his AAC salary and distributions of AAC profits in cash as well. The procedure for moving cash from AAC to Debtor occurred as follows: Debtor's grand-niece Ashley Mealey ("Mealey") would write a check to cash drawn from the PR account. Id. at 8-10. After receiving the cash, Mealey would distribute the cash to Debtor, Horton,² or into Debtor's bank account. Id. While the court can trace portions of the cash disbursements, large portions remain unaccounted for. For example, a spreadsheet compiled by UST shows approximately $91,000.00 in missing cash withdrawn from AAC's account. Pl.'s Ex. P. While Debtor has provided receipts and other documentation...