Chorches v. Licata (In re Licata), CASE No. 02-51167 (JJT)
| Decision Date | 14 June 2017 |
| Docket Number | CASE No. 02-51167 (JJT),ADV. PRO. No. 16-05016 |
| Court | U.S. Bankruptcy Court — District of Connecticut |
| Parties | In re: JAMES J. LICATA, DEBTOR. RONALD I. CHORCHES, TRUSTEE, PLAINTIFF v. JAMES J. LICATA, DEFENDANT. |
Before the Court is James J. Licata's ("Mr. Licata", "Debtor" or "Defendant") Motion to Dismiss Counts Two and Three of the Trustee's Nondischargeability Complaint pursuant to Fed. R. Bankr. P. 7012(b)(6) (ECF No. 8, the "Motion" or "Motion to Dismiss"). Counts Two and Three of the Complaint seek to deny Mr. Licata's discharge, pursuant to 11 U.S.C. §§ 727(a)(3) or 727(a)(4)(D), respectively, on account of his alleged failure to provide the Trustee with an analysis of his tax liabilities (the "Tax Analysis"), or sufficient underlying information, necessary to complete a forensic analysis determining the value of the Debtor's investment in certain real estate assets located in New Jersey (the "Real Estate Assets"). The Defendant asserts that both claims must fail because he disclosed the existence of the Tax Analysis - a postpetition analysis of prepetition financial information regarding his investments in the Real Estate Assets - to the Trustee, who then failed to compel its production by subpoena or other formal demand. Therefore, the Defendant posits, the Trustee has not properly alleged that Mr. Licata "concealed, destroyed, mutilated, falsified, or failed to keep or preserve" the Tax Analysis, as required under section 727(a)(3), nor can he establish that Mr. Licata "fraudulently . . . withheld" the Tax Analysis from "an officer of the estate entitled to possession", under section 727(a)(4)(D). While the Defendant's disclosure-based arguments may hold some superficial appeal, they misconstrue Mr. Licata's obligations as a Chapter 7 Debtor and mischaracterize the Complaint's allegations supporting Counts Two and Three, which, contrary to the Motion's selective reading, extend beyond the Defendant's failure to produce the Tax Analysis.
Accordingly, the Motion to Dismiss is denied.
On June 27, 2002, Mr. Licata filed a voluntary petition for bankruptcy relief under Chapter 11 of the Bankruptcy Code. The Debtor's bankruptcy was converted to a Chapter 7 case on June 28, 2006, (the "Conversion Date") at which time, Ronald I. Chorches was appointed as the estate's duly authorized trustee (the "Trustee"). The Trustee commenced this adversary proceeding on March 30, 2016, asserting five counts, each of which seeks to deny the Debtor's discharge pursuant to various provisions of 11 U.S.C. § 727 (ECF No. 1, the "Complaint" or "Compl.").
Prior to commencing his Chapter 11 case, Mr. Licata was engaged in protracted litigation against a former business partner, Peter Mocco, in the State of New Jersey (the "New Jersey Litigation"). The central dispute in the New Jersey Litigation was the identity of the owner(s) of the Real Estate Assets. On the Conversion Date, the Trustee stepped into the Debtor's role in the New Jersey Litigation representing the interests of the bankruptcy estate.
In 2013, the presiding judge in the New Jersey Litigation, the Hon. James Rothschild, requested that the Trustee provide a forensic analysis evidencing the amount of money Mr. Licatahad invested in the Real Estate Assets (the "Forensic Analysis").1 Judge Rothschild informed the Trustee that this information would be important to his determination on the merits as to the legal owner of the Real Estate Assets.2 Mr. Licata then "informed counsel for the Trustee that he had recently completed an analysis for the IRS (the "[Tax Analysis]") that would either serve as the Forensic Analysis or greatly assist in the drafting of the Forensic Analysis."3 Though Mr. Licata voluntarily disclosed the existence of the Tax Analysis, he never provided the document to the Trustee,4 nor did Mr. Licata, at any time, provide information to the Trustee that was sufficient to complete the Forensic Analysis without relying on the Tax Analysis.5 As a result, the Trustee was forced to renege on his offer to provide Judge Rothschild with the Forensic Analysis, severely prejudicing the Trustee's likelihood of success in the New Jersey Litigation.6
The Defendant brought the instant Motion to Dismiss on June 1, 2016. Not long thereafter, the matter was reassigned to this Court. On February 1, 2017, the Court heard oral argument on the Motion, and took the matter under advisement.
In determining a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6), made applicable here under Fed. R. Bankr. P. 7012, the court must "constru[e] the complaint liberally, accepting all factual allegations in the complaint as true, and drawing all reasonable inferences in the plaintiff's favor." Gibbons v. Malone, 703 F.3d 595, 599 (2d Cir. 2013) (quoting Chase Grp.Alliance LLC v. City of N.Y. Dep't of Fin., 620 F.3d 146, 150 (2d Cir. 2010) (internal quotation marks omitted)). To survive such a motion, "a complaint must contain sufficient factual matter, accepted as true, to state a claim of relief that is plausible on its face." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 (2009).
At its core, the Motion - and its narrow focus on Mr. Licata's disclosure of the Tax Analysis' existence - is premised on a misreading of the Complaint. The Defendant does not dispute that the Trustee was entitled to any underlying information necessary to complete the Forensic Analysis requested by Judge Rothschild, nor could he credibly do so, given the sweeping breadth of a Chapter 7 debtor's disclosure obligations and the clear import of such information to elucidating the Debtor's material business transactions and substantial litigation flowing therefrom. Instead, Mr. Licata asserts that the Complaint contains "no allegation about . . . whether the Trustee[] could have compiled the [Forensic Analysis] requested by the judge in New Jersey from records within [his] possession."7
The Defendant is plainly mistaken. The Complaint states unequivocally, "Licata never provided information to the Trustee that would have permitted him to complete the Forensic Analysis".8 In this context, there can be no doubt that the Motion must be denied.
As detailed further below, the Trustee has adequately pled his claims for relief under both 11 U.S.C. §§ 727(a)(3)and 727(a)(4)(D).
Section 727(a) provides, in pertinent part, that a "court shall grant the debtor a discharge, unless":
(3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case
11 U.S.C.A. § 727(a)(3) (emphasis added). In light of the provision's harsh penalties, the Second Circuit has "held that it must be construed strictly against those who object to the debtor's discharge and liberally in favor of the bankrupt." In re Chalasani, 92 F.3d 1300, 1310 (2d Cir. 1996) (internal quotation omitted).
Nonetheless, "[i]t has long been law that the privilege of discharge depends upon the debtor's disclosure of a true and accurate picture of its financial affairs." Id. at 1309 (citing In re Underhill, 82 F.2d 258, 260 (2d Cir.), cert. denied, 299 U.S. 546, 57 S.Ct. 9, 81 L.Ed. 402 (1936)). "Section 727(a)(3) is designed to insure that the trustee and creditors will have sufficient information to permit an effective evaluation of the debtor's estate." In re Moreau, 161 B.R. 742, 746 (Bankr. D. Conn. 1993); see also In re Kran, 760 F.3d 206, 211, n. 2 (2d Cir. 2014) (); D.A.N. Joint Venture v. Cacioli (In re Cacioli), 463 F.3d 229, 234 (2d Cir. 2006) () (quoting Meridian Bank v. Alten, 958 F.2d 1226, 1230 (3d Cir.1992)).
Interpreting section 727(a)(3)'s predecessor provision under the Bankruptcy Act, the Second Circuit concluded: "Complete disclosure is in every case a condition precedent to thegranting of the discharge, and if such a disclosure is not possible without the keeping of books or records, then the absence of such amounts to that failure to which the act applies." Underhill, 82 F.2d at 260. "The complete disclosure requirement of In Re Underhill extends to all material business transactions of the debtor, including those pertaining to another's property, such as trust property or promissory notes." Office of the Comptroller Gen. of Republic of Bolivia on Behalf of Gen. Command of Bolivian Air Force v. Tractman, 107 B.R. 24, 27 (S.D.N.Y. 1989). This disclosure and the concomitant documentation requirement encompasses the Debtor's financial affairs "during the pendency of the bankruptcy proceedings and those obtaining for a reasonable period prior to the filing of the bankruptcy petition." Kran, 760 F.3d at 210 (internal quotations omitted).
In this Circuit, courts considering whether to deny a debtor's discharge pursuant to section 727(a)(3) follow a two-step inquiry. Cacioli, 463 F.3d at 235. The initial burden lies with the claimant to establish that "the debtor failed to keep and preserve any books or records from which the debtor's financial condition or business transactions might be ascertained." Id. "If the creditor shows the absence of records, the burden falls upon the bankrupt to satisfy the court that his failure to produce them was justified." Ibid.
According to Mr. Licata, the Complaint does...
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