Am. Eagle Bank v. Friedman (In re Friedman)

• Citation: 543 B.R. 833
• Decision Date: 29 December 2015
• Docket Number: Bankruptcy No. 12–bk–40168,Adversary No. 13–ap–01199
• Parties: In re: Arthur Friedman, Debtor. American Eagle Bank, Plaintiff, v. Arthur Friedman, Defendant.
• Court: United States Bankruptcy Courts. Seventh Circuit. U.S. Bankruptcy Court — Northern District of Illinois

543 B.R. 833

In re: Arthur Friedman, Debtor.

American Eagle Bank, Plaintiff,

v.Arthur Friedman, Defendant.

Bankruptcy No. 12–bk–40168

Adversary No. 13–ap–01199

United States Bankruptcy Court, N.D. Illinois, Eastern Division.

Signed December 29, 2015

Christopher H. Purcell, Sherman & Purcell LLP, Chicago, IL, for Plaintiff.

Neil P. Gantz, Neil Gantz Law Offices, Chicago, IL, for Defendant.

MEMORANDUM OPINION ON AMERICAN EAGLE BANK'S MOTION FOR SUMMARY JUDGMENT

Jack B. Schmetterer, United States Bankruptcy Judge

This Adversary Proceeding relates to the bankruptcy case filed by debtor-defendant Arthur Friedman (the "Debtor") under Chapter 7 of the Bankruptcy Code. Creditor-plaintiff American Eagle Bank (the "Plaintiff") filed its three-count Complaint (Adv. Dkt. 1)¹ on September 30, 2013. Counts I and II seek to determine the dischargeability of the Plaintiff's debt under 11 U.S.C. §§ 523(a)(2)(A) and (a)(6), respectively, and Count III objects to the Debtor's discharge under 11 U.S.C. §§ 727(a)(3) and (a)(5). On March 25, 2015, the Plaintiff filed an Amended Complaint (Adv. Dkt. 26), adding a Count IV objecting to the Debtor's discharge under 11 U.S.C. §§ 727(a)(2), (a)(4), (a)(5) and (a)(7). The Debtor filed an answer to the Complaint on October 31, 2013 (Adv. Dkt. 5) and an answer to the Amended Complaint on April 24, 2015 (Adv. Dkt. 31).

On or about August 4, 2015, the Plaintiff served the Debtor with Requests for Admission under Fed.R.Civ.P. 36, made applicable by Fed. R. Bankr.P. 7036. The Debtor never responded to the Plaintiff's Requests for Admission. The Plaintiff then brought this Motion for Summary Judgment as to Count IV of the Amended Complaint based on the Requests for Admission having been deemed admitted under Fed.R.Civ.P. 36(a)(3). For following reasons, summary judgment will be granted in favor of the Plaintiff on Count IV.

I. JURISDICTION AND VENUE

Subject matter jurisdiction lies under 28 U.S.C. § 1334. The district court may refer bankruptcy proceedings to a bankruptcy judge under 28 U.S.C. § 157, and this proceeding is thereby referred here by District Court Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. Venue lies under 28 U.S.C. § 1409. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (I), and (O). It seeks to determine the dischargeability of a debt. Therefore, it "stems from the bankruptcy itself," and may constitutionally be decided by a bankruptcy judge. Stern v. Marshall, ––– U.S. ––––, 131 S.Ct. 2594, 2618, 180 L.Ed.2d 475 (2011).

II. UNCONTESTED FACTS

The Plaintiff filed its Statement of Material Facts as required by Rules 7056–1 of the Local Bankruptcy Rules for the Northern District of Illinois. The Debtor, however, failed to file an opposing statement of material facts as required by Local Rule 7056–2. Because the Debtor did not provide a statement of facts controverting the Plaintiff's statement, "[a]ll material facts set forth in the [Plaintiff's] statement ... will be deemed to be admitted...." Local Rule 70562(B); see also Smith v. Lamz, 321 F.3d 680, 683 (7th Cir.2003) ("We have consistently held that a failure to respond by the nonmovant as mandated by the local rules results in an admission."). Therefore, the following facts are taken from the Plaintiff's Statement of Material Facts, as well as from documents referenced therein, mainly the Debtor's Answer to the Amended Complaint and the Requests for Admission.

The Debtor was one of the principal owners and president of an automobile leasing company known as Prestige Leasing, Inc. ("Prestige"). Statement of Material Facts, ¶¶ 13–14 (Adv. Dkt. 39–1). Prior to the Debtor filing for bankruptcy, the Debtor was a party to a lawsuit that was ultimately settled (hereinafter "Lawsuit Settlement" or "Settlement"). Id. at ¶¶ 15–17. As part of the Settlement, the Debtor received $75,000 annually, minus his attorneys' fees. Id. at ¶ 18. Payments were made biannually on April 15 and September 15. Id. at ¶¶ 18–19. The Debtor received these payments from 2006 through 2013. Id.

The Settlement payments were made to Prestige until it closed in 2011, after which payments were paid to the Debtor. Id. at ¶ 22. However, the Debtor made specific instructions as to how he would receive the payments. Id. at ¶ 23. The payments were directed by the Debtor to his wife's bank account, but the Debtor had access to that account at all times. Id. at ¶¶ 24–27. The Debtor was thereby able to use and spend the funds as he wished. Id. The Debtor thereby received Settlement payments in 2012 and 2013. Id. at ¶ 23.

In the Answers to the Amended Complaint filed by the Debtor, he admitted:

(1) that the Debtor received the Settlement payments in 2012 and 2013 (Answer, ¶¶ 6061, 66 (Adv. Dkt. 31));

(2) that the Debtor directed how he was to receive the Settlement payments (Id. at ¶¶ 67, 70, 74);

(3) that the Debtor had the payments delivered to his wife's account (Id. at ¶¶ 71–73, 7577);(4) that the Debtor spent the funds (Id. at ¶¶ 69, 91);

(5) that the Debtor's Schedules and Statement of Financial of Affairs did not contain the Settlement payments (Id. at ¶¶ 78–81, 84);

(6) that the Debtor did not schedule the payments, albeit unintentionally (Id. at ¶ 86); and

(7) that the aforementioned acts were committed within a year of filing for bankruptcy (Id. at ¶ 92).

The Debtor filed under Chapter 7 of the Bankruptcy Code on October 10, 2012. The Debtor's schedules state that he has no account receivables or income. Id. at ¶ 28; see also Schedules B, I (Dkt. 1). Moreover, the Debtor's Statement of Financial Affairs state that he received income from employment or operation of business in 2009 and 2010, but nothing after that. Id. at ¶ 29; see also Statement of Financial Affairs (Dkt. 1). No other source of income is provided. Id. Neither the Settlement nor the Settlement payments were included on the Debtor's schedules. Moreover, the Debtor never amended the filings to include these assets.

On or about August 4, 2015, the Plaintiff served the Debtor with Requests for Admission. The Plaintiff requested that the Debtor admit, in relevant part, the following:

26. That Arthur Friedman directed funds from the settlement of lawsuit ... to be paid into an account held by his wife.

28. [That] Arthur Friedman intentionally failed to disclose the settlement of lawsuit ... on his bankruptcy schedules to hid (sic) the settlement from the trustee and creditors.

29. That Arthur Friedman concealed property of the debtor within one year prior to the date of filing the petition for relief under chapter 7 of the bankruptcy code with the intent to defraud a creditor.

30. That Arthur Friedman intended to defraud a creditor when [he] concealed, transferred or removed property o(sic) the estate after the filing of the petition for relief under chapter 7 of the bankruptcy code.

31. That Arthur Friedman spent some of the proceeds of the settlement of lawsuit ... during the one year before the petition for relief was field.

32. That Arthur Friedman spent the remaining proceeds of the settlement of lawsuit ... after the petition for relief was filed.

Plaintiff's Requests for Admission, Ex. A to Plaintiff's Statement of Material Facts, ¶¶ 26, 28–32 (Adv. Dkt. 39–2).²

The Debtor did not respond to these Requests for Admission within the 30–day time limit prescribed by Fed.R.Civ.P. 36(a)(3), or at any time. Instead, in his response to this Motion, the Debtor, for the first time, claimed that he is under investigation by the United States Attorney for the Northern District of Illinois and has been advised not to reply to the Requests for Admission as any reply could be deemed a violation of his Fifth Amendment right not to incriminate himself. Response to Motion for Summary Judgment and Motion to Dismiss, ¶¶ 5, 7 (Adv. Dkt. 44). The Debtor argues that the privilege prevents the Plaintiff's Requests for Admission from being deemed admitted. This, in turn, might create a genuine dispute of material fact that prevents entry of the Motion for Summary Judgment.³

Therefore, this inquiry begins with a discussion of the Debtor's Fifth Amendment rights.

III. FIFTH AMENDMENT

The Fifth Amendment provides that "[n]o person ... shall be compelled in any criminal case to be a witness against himself[.]" U.S. Const. amend. V. This privilege guarantees an individual's right "to remain silent unless he chooses to speak in the unfettered exercise of his own will, and to suffer no penalty ... for his silence." Schmerber v. California, 384 U.S. 757, 760–61, 86 S.Ct. 1826, 1830–31, 16 L.Ed.2d 908 (1966).

The privilege may be "asserted in any proceeding, civil or criminal, administrative or judicial, investigatory or adjudicatory; and it protects against any disclosures which the witness reasonably believes could be used in a criminal prosecution or could lead to other evidence that might be so used." Kastigar v. United States, 406 U.S. 441, 444–45, 92 S.Ct. 1653, 32 L.Ed.2d 212 (1972). The privilege not only extends to answers that would in themselves support a conviction but likewise embraces those which would furnish a link in the chain of evidence needed to prosecute a claimant for a crime. Hoffman v. United States, 341 U.S. 479, 486, 71 S.Ct. 814, 95 L.Ed. 1118 (1951). "This provision of the Amendment must be accorded liberal construction in favor of the right it was intended to secure." Id. at 486, 71 S.Ct. 814.

The privilege, however, is not without its limits. It "must be confined to instances where the witness has reasonable cause to apprehend danger from a direct answer." Id. An individual does not have a free hand to refuse to answer any and all questions by virtue of the Fifth Amendment's self-incrimination clause. In re High Fructose Corn Syrup Antitrust Litig., 295 F.3d 651, 663 (7th Cir.2002). Nor is an individual "exonerated from answering merely because he declares that in so doing he would incriminate himself – his say-so does not of itself establish the hazard of...