O'Connor v. Leone (In re Leone)

• Decision Date: 09 December 2011
• Docket Number: Adversary No. 07–90199.,Bankruptcy No. 05–16603.
• Citation: 463 B.R. 229
• Parties: In re Dennis V. LEONE and Susan Leone, Debtors.Michael J. O'Connor, Chapter 7 Trustee, Plaintiff, v. Dennis V. Leone and Susan Leone, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of New York

463 B.R. 229

In re Dennis V. LEONE and Susan Leone, Debtors.Michael J. O'Connor, Chapter 7 Trustee, Plaintiff,

v.Dennis V. Leone and Susan Leone, Defendants.

Bankruptcy No. 05–16603.

Adversary No. 07–90199.

United States Bankruptcy Court, N.D. New York.

Dec. 9, 2011.

The Law Office of Richard Croak, Richard Croak, Esq., Albany, NY, for Debtors–Defendants.

O'Connor, O'Connor, Bresee & First, PC, Michael J. O'Connor, Esq., Albany, NY, for Chapter 7 Trustee–Plaintiff.

MEMORANDUM–DECISION AND ORDER

ROBERT E. LITTLEFIELD, JR., Chief Judge.

Before the court is the adversary proceeding commenced by the Chapter 7 trustee, Michael J. O'Connor, Esq. (the “Trustee”), against Dennis V. Leone and Susan Leone (the “Debtors”) objecting to the Debtors' claim of an annuity exemption pursuant to New York Debtor and Creditor Law section 283 and seeking denial of the Debtors' discharge pursuant to § 727(a)(2)(A), (a)(2)(B), (a)(3), (a)(4), (a)(5), and (a)(6).¹

In the amended adversary complaint, filed December 4, 2007, the Trustee asserts, inter alia, that the Debtors failed to disclose the purchase of an annuity with the cash set forth as an asset on Schedule B of their petition. On December 7, 2007, the Debtors filed an answer to the amended complaint asserting a counterclaim for attorney's fees, which was eventually withdrawn. The Debtors filed a motion to dismiss the complaint arguing the Trustee's objections to discharge and to the Debtors' exemption were time-barred and that the complaint failed to state a cause of action. The motion was denied. A trial in this proceeding was conducted on June 9, 2008, at which time the court received a number of exhibits into evidence. In addition, the Trustee called Andrea E. Celli, the Chapter 13 trustee, to testify. The Trustee did not call the Debtors to testify and instead indicated he was relying on his exhibits, including the answers to interrogatories and letters written by the Debtors, to provide the evidence needed for the court to find in his favor. The Debtors declined to call any witnesses or take the stand in their own defense, believing the Trustee had failed to meet his burden. Following the trial, the court provided the parties with the opportunity to file memoranda of law in support of their positions.

The court, having heard the sworn testimony and arguments of counsel and having considered the parties' pleadings and submissions, makes the following findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

JURISDICTION

The court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157(a), 157(b)(1), 157(b)(2)(B), 157(b)(2)(J), and 1334.

FACTS

The Debtors refinanced the mortgage against their residence on or about July 18, 2005, and received $35,573.95. (Pl.'s Ex. D.) Approximately $35,559 was deposited into the Debtors' checking account at Wilber National Bank on July 25, 2005 and, then, approximately $33,000 was moved a few days later into a savings account. (Pl.'s Ex. I.) The Debtors had hoped to pay off their debt with the proceeds from the refinancing and get back on their feet. (Pl.'s Ex. G.) Instead, the Debtors found themselves getting deeper into debt. ( Id.) The Debtors sought the advice of bankruptcy counsel in early September 2005. ( Id.) According to the Debtors, they were advised “to put as much money as possible from the refinance, into an annuity” as it “would be safe and protected from bankruptcy.” ( Id.)

The Debtors signed their chapter 13 petition on September 12, 2005, declaring under penalty of perjury that they had read the petition and the information contained therein was true and correct to the best of their knowledge. (Pl.'s Ex. A.) They listed a savings account at Wilber National Bank with a balance of $27,500 as an asset on Schedule B, Personal Property. ( Id.) The Debtors did not claim an exemption for the cash. Checking account records produced by the Debtors establish that on September 12, 2005, a total of $24,920 was deposited into their account. (Pl.'s Ex. I.) Meanwhile, on that same date, Mr. Leone issued a check payable to Northwestern Mutual for $21,000 and indicated on the memo line that it was for the opening of an annuity account. ( Id.) An account statement issued by Northwestern Mutual confirms receipt of $21,000 to fund an annuity with a contract date of September 16, 2005, in the name of Mr. Leone. (Pl.'s Ex. J.) The Debtors' chapter 13 petition was filed on September 17, 2005. (Bankruptcy Case No. 05–16603 (“Main Case”), ECF No. 1.) The Debtors' check payable to Northwestern Mutual cleared their account on September 21, 2005, four days after their petition was filed. (Pl.'s Ex. I)

At the time the Debtors' petition was filed, Mr. Leone had been employed as a school bus driver for approximately four years, and Mrs. Leone was self-employed as a cleaning woman. (Pl.'s Ex. A.) In addition, the Debtors were attempting to operate a small Bed and Breakfast, which at the time had not generated any income. ( Id.) The Debtors' combined net monthly income was $3,503. ( Id.)

The Debtors' initial meeting of creditors with the Chapter 13 trustee was held on October 26, 2005.² There is no indication on the court's docket for the Debtors' underlying bankruptcy case that the meeting was adjourned. On December 1, 2005, the Chapter 13 trustee filed an objection to confirmation on the basis that she needed additional information regarding the money the Debtors received in connection with the refinancing of their mortgage, as well as documentation with respect to the cash listed on Schedule B and the answer to question three on the Statement of Financial Affairs.³ (Main Case, ECF No. 12.) According to the testimony of the Chapter 13 trustee, confirmation was adjourned to allow the Debtors time to provide her with the requested information.⁴ The Chapter 13 trustee testified further that in February 2006, she was informed by the Debtors' attorney that there was no money left in the savings account referenced on Schedule B and that it had been transferred to an annuity, which the Debtors were claiming as exempt. On February 16, 2006, the Debtors filed an amended Schedule B to indicate a reduction of their cash from $27,500 to $500 and the addition of a jointly owned $27,500 annuity. (Defs.' Ex. A.) They also filed an amended Schedule C on the same date to claim an exemption on behalf of Mrs. Leone of the $27,500 annuity pursuant to New York Debtor & Creditor Law section 283(1). ( Id.) Neither the Chapter 13 trustee nor any creditor filed an objection to the annuity exemption claimed by the Debtors.

The Debtors' chapter 13 plan was ultimately confirmed at a hearing held on February 2, 2006. The confirmation order was entered on March 14, 2006. (Pl.'s Ex. L.) The Debtors' confirmed plan provides for bi-weekly payments of $184.61 for a term of sixty months, with a dividend for unsecured creditors of not less than 10 percent. ( Id.) In addition, the confirmation order provides, in part:

IX. Notwithstanding any other provision of the plan or Order Confirming Plan, no article of property, real or personal, with a value of more than $2,500 may be sold or otherwise disposed of without prior consent of the Trustee.

( Id.)

The Debtors made post-petition payments on their refinanced mortgage through May 2006, when they came to the realization that they could no longer afford their residence. (Pl.'s Ex. F.) The Debtors' attempts to sell their home had proven unfruitful. ( Id.) As a result, the Debtors voluntarily converted their chapter 13 case to one under chapter 7 on September 12, 2006. (Main Case, ECF No. 24.) The Trustee was appointed on September 17, 2006. During the course of the chapter 7 proceeding, the Debtors' mortgage holder obtained an order permitting it to proceed with an action to foreclose the Debtors' mortgage. (Main Case, ECF No. 54.)

A meeting of creditors pursuant to 11 U.S.C. § 341 was conducted by the Trustee on October 20, 2006, and adjourned numerous times until it was eventually concluded on June 16, 2008. At the October 20, 2006, meeting of creditors, the Debtors informed the Trustee that the information on their original Schedule B was not accurate, because they had purchased an annuity, as reflected on their Amended Schedule B, with the cash prior to filing their chapter 13 petition on the advice of counsel. Upon learning of the conversion of the cash to the annuity, and subsequently learning that the Debtors had withdrawn the bulk of the money from the annuity post-petition, the Trustee began a quest to reconstruct the Debtors' financial history commencing with the refinancing of their mortgage.

In response to the Trustee's inquiries, the Debtors provided the Trustee with a letter and “Affidavit,” ⁵ both dated December 26, 2006 (the “Letter” and the “Affidavit,” respectively), attempting to explain and itemize how the money from the refinancing of their mortgage and the annuity was spent. (Pl.'s Exs. F and G.) The Debtors indicate in the Letter that the information was being provided for the fourth time and that copies of their mortgage and bank statements were enclosed. (Pl.'s Ex. F.)

According to the Debtors, the proceeds from their refinancing, namely $33,027, was deposited into their savings account. ( Id.) From this amount, $21,000 was used to purchase the annuity.⁶ ( Id.) The balance was used for repairs to their vehicle and their daughter's vehicle, car insurance, taxes owed to the Internal Revenue Service, mortgage payments, and credit card debt. Money was also invested in their failing Bed and Breakfast for things such as advertising and upkeep. (Pl.'s Exs. F and G.) The Debtors also advised the Trustee that they did not have mortgage statements after September 2005, because their mortgage company ceased sending them once the bankruptcy was filed. (Pl.'s Ex. F.) Instead, the Debtors produced their bank statements and cancelled checks to document that they were...