Bavely v. Daniels (In re Daniels)
| Decision Date | 23 March 2022 |
| Docket Number | 19-1065,Adv. Pro. 19-1042,18-13837 |
| Parties | In re: MATTHEW C. DANIELS, Debtor. v. Matthew C. Daniels, Defendant. E. Hanlin Bavely, Plaintiff, E. Hanlin Bavely, Plaintiff, v. LAD Holdings LLC, et al., Defendants. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio |
E Hanlin Bavely, Plaintiff and Attorney for Plaintiff
Nicholas A. Zingarelli, Attorney for Defendant
Prior to filing bankruptcy, Matthew Daniels-the Debtor in the underlying bankruptcy case and a defendant in both of these consolidated proceedings-managed multiple commercial real estate development and holding companies. These companies brought in substantial revenue and supported a lavish lifestyle for the Debtor. Among other things, the Debtor lived in a million-dollar home, drove a high-end Mercedes, and paid for expensive vacations. But when the Debtor filed this bankruptcy case-seeking to discharge some $17 million in debt-he claimed to have virtually nothing to his name. The companies he managed, his house, his car, his household goods-all were owned or leased by the Lori A. Daniels Irrevocable Trust (the "Trust") or defendant LAD Holdings.
Before this bankruptcy case, the Debtor blurred the lines between his personal expenses and those of the companies he managed. And when he filed, he failed to provide comprehensive records that would permit the Trustee and the Debtor's creditors to paint a clear picture of the Debtor's finances and dealings with his companies. Specifically, the Debtor failed to provide (because he also failed to file) multiple years' worth of tax returns. Indeed, despite reaping substantial benefits from the relative success of the businesses, neither the Debtor nor the companies he managed had filed tax returns since 2012-a failure that the Debtor attempts to justify with the excuse that he could not afford to pay his CPA.
The Bankruptcy Code imposes an obligation on debtors to maintain records sufficient for the trustee and creditors to obtain an accurate view of the debtor's financial condition and business transactions. And the case law makes clear that for a sophisticated business debtor like the Debtor, that obligation includes business records. (Indeed, it defies credulity to think that the Debtor could operate numerous sophisticated businesses without any or very little record keeping). The Plaintiff, the Chapter 7 trustee in the underlying bankruptcy case, seeks to deny the Debtor a discharge for his failure to satisfy that obligation. Because the Court finds the Debtor's records to be inadequate and his justifications unconvincing, it will deny the Debtor's discharge.
Faced with a wealthy debtor in an otherwise no-asset Chapter 7 case, the Plaintiff also seeks to reach the assets of the Trust and LAD Holdings in order to pay the Debtor's creditors. But the theory on which the Plaintiff relies, substantive consolidation, is an extreme remedy that the Plaintiff has fallen well short of proving.
The Court has jurisdiction to hear and determine these adversary proceedings under 28 U.S.C. § 1334(b) and the general order of reference entered in this district under 28 U.S.C. § 157(a). This is a core proceeding. 28 U.S.C. § 157(b)(2)(A), (H), (J), and (O). Because a debtor's entitlement to a discharge and the issue of substantive consolidation both "stem[] from the bankruptcy itself," Stern v. Marshall, 564 U.S. 462, 499 (2011), this Court has the constitutional authority to enter a final judgment in these adversary proceedings. See SE Prop. Holdings, LLC v. Stewart (In re Stewart), 571 B.R. 460, 463-64 (Bankr. W.D. Okla. 2017) (); Yaquinto v. Ward (In re Ward), 558 B.R. 771, 777-78 (Bankr. N.D. Tex. 2016) (same).
The Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on October 18, 2018 (the "Petition Date"), and the Plaintiff was appointed trustee for the Debtor's estate. Following multiple extensions of time, the Plaintiff timely commenced the first of these adversary proceedings, seeking to deny the Debtor's discharge under § 727. Adv. No. 19-1042. Although the Plaintiff's complaint alleged that the Debtor's discharge should be denied on multiple grounds, the Plaintiff proceeded to trial solely on § 727(a)(3)-the failure to maintain records.
The Plaintiff commenced the second adversary proceeding against the Debtor, LAD Holdings, and Patrick McCluskey and Lori A. Daniels in their capacity as co-trustees of the Trust.[1]See Adv. No. 19-1065, Doc. 1. In this action, the Plaintiff requests entry of an order consolidating the assets of LAD Holdings and the Trust with the assets of the Debtor, asserting theories of substantive consolidation and alter ego. The complaint also seeks "to avoid preferences and post-petition transfers, . . . to compel turnover of property, and to secure [a] money judgment," but the Plaintiff did not (and still today has not) set forth what transfers he seeks to avoid. With the agreement of the parties, the Court determined that the adversary proceedings would be tried concurrently.
The trial was held over the course of two days.[2] In each adversary proceeding, the transcript of the first day of the trial is docketed at Doc. 51 ("Transcript I") and the transcript of the second day is at Doc. 53 ("Transcript II"). In advance of the trial, the parties stipulated to certain facts applicable to the proceedings. See Adv. No. 19-1065, Doc. 38 (the "Stipulations"); Adv. No. 19-1042, Docs. 20-22 & 40. The parties also resolved a pretrial evidentiary dispute regarding the admission of summaries of Quicken data (Pl. Exs. 1065-12A through 12M) (the "Quicken Summaries") under Rule 1006 of the Federal Rules of Evidence (the "Evidence Rules") by stipulation. Adv. No. 19-1065, Doc. 46.[3] During trial, the Court heard the testimony of two live witnesses: the Plaintiff, in his capacity as Chapter 7 Trustee, and the Debtor. The Plaintiff chose not to present any other live witnesses, instead employing the unusual stratagem of reading deposition testimony into the record. Specifically, the Plaintiff read portions of deposition testimony of the Debtor, Mrs. Daniels, and Mr. McCluskey into the record as a substantial portion of his case-in-chief.
In the § 727 action, Plaintiff's Exhibits 1-4 and 8-13 and the Debtor's Exhibits 1 and 3[4]were admitted into evidence. In the substantive consolidation action, Plaintiff's Exhibits 1-2, 5- 6, 10, and 12A-12M were admitted into evidence. Because the two actions were tried together, and to avoid confusion with the Plaintiff's overlapping exhibit designations, the Court will refer to the Plaintiff's exhibits in the § 727 action as "Plaintiff's Exhibit 1042-__" and his exhibits in the substantive consolidation action as "Plaintiff's Exhibit 1065-__."
Based on the parties' stipulated facts and the evidence adduced at trial, including the documentary evidence and the testimony provided, and having considered the demeanor and credibility of the witnesses, the Court makes the findings of fact set forth below.
The Debtor testified that he grew up with a learning disability, and he graduated high school with a C-average. Tr. I at 193-94 (); see also Debtor Ex. 2. The Debtor attended the University of Pittsburgh on a football scholarship, and after marrying his wife, he transferred to the University of Cincinnati. Tr. I at 194; Debtor Ex. 2. The Debtor "did fairly well in college" despite his learning disability, because he "could kind of learn [his own] way." Id. But when he and his wife had their first child, the Debtor dropped out of college after only two years, because "[i]t was time to go to work." Id. at 194-95. The Debtor "worked [his] way up from the bottom," beginning his career cleaning job sites for home builders. He moved on to managing construction projects for home builders and eventually transitioned into real estate development-first residential, then commercial. Id. at 195.
Before filing bankruptcy, the Debtor was involved with a number of different business entities. See id. at 197-206; Pl. Ex. 1042-2. Although he had once owned several of his affiliated LLCs, the Debtor had assigned his membership interest to other entities prepetition, including the Trust. As of the Petition Date, the Debtor was the manager of at least eight different businesses. Id. at 198, 200-02, 204-06; Pl. Ex. 1042-2. Two other individuals were regularly involved in at least some of those businesses: Lisa Janusik and Donna Lunic. See Tr. I at 223; Debtor Ex. 2. Ms. Janusik was the Debtor's assistant and the secretary or business manager of several of the businesses.[5] See Stips. ¶ 14 (identifying Ms. Janusik as the Debtor's "assistant"); Debtor Ex. 2 (same); Pl. Ex. 1065-1 (LAD Holdings signature card showing Ms. Janusik as "secretary"); Pl. Ex. 1065-2 (). Ms. Lunic acted as the bookkeeper for at least some of the businesses, but she left in 2017 because they "couldn't afford to pay her." Tr. I at 207-08, 213.
During trial, the parties submitted into evidence-and the Debtor provided extensive testimony on-an organizational chart that set forth the relationships between the Debtor and over a dozen entities with which he was affiliated as of and prior to the Petition Date. See Pl. ...
To continue reading
Request your trial