In re Aqua Clear Technologies, Inc., Bankruptcy No. 04-27388-BKC-JKO.

• Decision Date: 31 January 2007
• Docket Number: Adversary No. 05-2092-BKC-JKO-A.,Bankruptcy No. 04-27388-BKC-JKO.
• Citation: 361 B.R. 567
• Parties: In re AQUA CLEAR TECHNOLOGIES, INC., Debtor. Kenneth A. Welt, as Trustee for the Estate of Aqua Clear Technologies, Inc., f/k/a EcoWater of South Florida, Inc., Plaintiff, v. Harvey Jacobson, Barbara Jacobson and Discount Water Services, Inc., Defendants.
• Court: U.S. Bankruptcy Court — Southern District of Florida

361 B.R. 567

In re AQUA CLEAR TECHNOLOGIES, INC., Debtor Kenneth A. Welt, as Trustee for the Estate of Aqua Clear Technologies, Inc., f/k/a EcoWater of South Florida, Inc., Plaintiff, v. Harvey Jacobson, Barbara Jacobson and Discount Water Services, Inc., Defendants.

Bankruptcy No. 04-27388-BKC-JKO.

Adversary No. 05-2092-BKC-JKO-A.

United States Bankruptcy Court, S.D. Florida, Fort Lauderdale Division.

January 31, 2007.

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COPYRIGHT MATERIAL OMITTED

Susan D. Lasky, Ft. Lauderdale, FL, for Debtors.

David N. Stern, Katie A. Lane, Thomas M. Messana, Ft. Lauderdale, FL, for plaintiff.

Kevin C. Gleason, Hollywood, FL, John G. Bianco III, Ft. Lauderdale, FL, for defendants.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND MEMORANDUM OPINION

JOHN K. OLSON, Bankruptcy Judge.

This adversary proceeding was tried before me on October 11 and 27, 2006. Having considered the pleadings, the pretrial order, the testimony of witnesses, the exhibits entered into evidence and the arguments of counsel, I make the following findings of fact and conclusions of law:

I. INTRODUCTION

Harvey and Barbara Jacobson, the individual defendants in this case, operated a small business installing and servicing home water softening systems through the Debtor, Aqua Clear Technologies, Inc. ("Aqua Clear") and, after its bankruptcy filing in December 2004, through the defendant Discount Water Services, Inc. In the course of doing so, the Jacobsons disregarded corporate formalities, made whole series of false statements to the United States and to various banks, ignored creditors, and stripped the Debtor of what little value it had. The Jacobsons' behavior in doing so was fundamentally dishonest. No great amounts of money were involved, but even petty cheating of the sort engaged in by the Jacobsons diminishes civil society and the rule of law.

Kenneth A. Welt, the Trustee for Aqua Clear, brought this action seeking to avoid and recover preferential and/or fraudulent transfers and seeking turnover of property to the estate pursuant to 11 U.S.C. §§ 542, 544, 547, 548 and 550, and Fla. Stat. Chapter 726. This adversary proceeding also alleges conversion and breach of fiduciary duty claims and seeks injunctive relief. (Pretrial Order [see A.C.P. # 102] at 1).

A. Jurisdiction and venue

This Court has subject matter jurisdiction pursuant to 28 U.S.C. § 1334(b), as this is a civil proceeding arising in or related to a case under the Bankruptcy Code. This Court also has jurisdiction under 28 U.S.C. § 1334(e), as this adversary proceeding, involves property of the Debtor's estate. This adversary proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b).

Venue of this proceeding is properly before the Court pursuant to 28 U.S.C. § 1409. (See Pretrial Order at ¶ 5).

B. Findings of fact

The Debtor is a Florida corporation. (See Ex. 5). While it operated, the Debtor was in the business of selling and servicing water softening systems. It filed this voluntary Chapter 7 bankruptcy proceeding on December 8, 2004. Kenneth A. Welt (the "Trustee") has been appointed and serves as the Chapter 7 Trustee. The Trustee filed this adversary proceeding against Harvey Jacobson, Barbara Jacobson and Discount Water. Services, Inc. ("Discount Water") on behalf of the Debtor's bankruptcy estate.

Defendants Harvey Jacobson and Barbara Jacobson are husband and wife. (Trial Transcript [A.C.P. # 123] at 64, lines 13-24).

Barbara Jacobson was the President of the Debtor. Barbara Jacobson admits, however, that "she is a housewife and has `nothing to do with the [Debtor's] business whatsoever'." (Pretrial Order at ¶ 15). When asked, "What did you do as President [of the Debtor]? What were your duties?", Ms. Jacobson testified, "I was in there every so often. I went in, I spoke to Augie [Fartro]. I spoke to Harvey, I brought in cookies. I brought in muffins." (Trial Transcript [A.C.P. # 123] at 57, lines 30-35).

Barbara Jacobson had no responsibilities for the operations, finances, or record keeping of the business. She did not review the Debtor's invoices, accounts receivable or accounts payable, keep apprised of checks written on the Debtor's bank accounts or the status of the Debtor's bank accounts, or keep the Debtor's books and records. (Trial Transcript at 60, line 22 through 63, line 16). She had virtually no participation in any aspect of the Debtor's business. (Trial Transcript at 72, lines 22-23 "If my [signature] appears on a [Debtor] check, it's probably purely by accident."). She left the business of the Debtor to Harvey Jacobson and Augusto "Augie" Fartro.¹ (Trial Transcript p. 62, lines 6-10 and 65, line 5 through 66, line 9).

Harvey Jacobson was not an officer, director or employee of the Debtor. Rather, he purported to serve as an independent contractor to the Debtor. However, he controlled the Debtor and its day-to-day operations. (Pretrial Order at ¶ 28). Harvey Jacobson testified that he provided the Debtor's attorney with all of the information contained on the Bankruptcy Petition, Bankruptcy Schedules, Amended Bankruptcy Schedules and Debtor's Statement and Amended Statement of Financial Affairs. Barbara Jacobson knew nothing about the Debtor's business affairs and merely affixed her name to the bankruptcy documents without knowing anything about their contents.

No compensation agreement or formula set a salary for Harvey or Barbara Jacobson. Rather, Harvey Jacobson testified that he and his wife took cash out of the business and received compensation whenever he decided that the Debtor had sufficient funds available for them to do so. According to Barbara Jacobson, she never received a salary. (Trial Transcript at 73, lines 10-21). The Debtor's 2003 and 2004 Federal Income Tax Returns report "$0" for Salaries and Wages. (See Ex. 13 at HRB 34, lines 7-8 and Ex. 14 at HRB 5, lines 7-8, and Testimony of Mary McWhertor, Certified Public Accountant and Mary McWhertor, H & R Block, the Debtor's pre-petition tax preparer).

While the Jacobsons may not have drawn "salaries or wages" from the Debtor, they caused the Debtor's funds to be expended for their personal expenses. (Trial Transcript at 73, lines 19-21). Among other expenses, during the years preceding the bankruptcy filing, the Debtor paid for the maintenance and utilities of the Jacobson's home and personal needs, e.g., its lawn care and pool service, telephone, water and electric service, a personal computer given as a gift to a family member and other personal expenses. (See Testimony of Harvey and Barbara Jacobson, and Exs. 70 (Affordable Lawn Care), 77 (BellSouth), 81 (Complete Pool Service), 91 (FP & L) and 102 (North Sprigs Improvement District)). The Debtor also paid Harvey and Barbara Jacobson's personal credit card bills or reimbursed Harvey and Barbara Jacobson for such expenses. Mr. Fartro testified that, at all times when he was employed by the Debtor, the Debtor maintained organized business records in files. (Trial Transcript at 200, line 20 through 202, line 15). However, Mr. Fartro ceased to be employed by the Debtor a year prior to the commencement of the Debtor's bankruptcy case. (See Trial Transcript at 99, lines 7-15). Mr. Jacobson has destroyed² almost all of the credit card statements which the Debtor paid, making it impossible to evaluate the claim that these expenses were for the Debtor's legitimate business-related expenses. Hence, there is no evidence, other than post hoc self-serving statements, that the Debtor's payments of the personal credit card bills were `appropriate here.

The Debtor's bank records further show that the Debtor made recurring payments to "Ford Motor Credit" (see Ex. 90) and "Mazda American Credit" (see Ex. 101). The Debtor claimed business deductions for "vehicle" in its 2003 and 2004 Federal Income Tax Returns, claiming "100% Business Use."³ (See Ex. 13 at HRB 47, 49 & 50, item no. 10 and Ex. 14 at HRB 14, line 26). The Debtor did not own any such vehicle. However, a 2000 Mazda vehicle bearing the VIN number 4F4YR16V9YTM05597 was titled in Harvey Jacobson's name. Harvey Jacobson traded in the 2000 Mazda vehicle for a Mitsubishi vehicle that is titled in his name. (See Ex. B). The Mitsubishi vehicle is used for the business purposes of a company called Discount Water. There was no transfer of a vehicle listed on the Debtor's Statement of Financial Affairs. (See Ex. 1 at PLE 49 and Ex. 2 at PLE 17).

The Debtor paid for numerous other personal expenses of the Jacobsons. For example, the Debtor paid health insurance premiums which covered Harvey and Barbara Jacobson and their adult daughter Sharon Jacobson. (See Ex. 107). Harvey Jacobson admitted, however, that Sharon Jacobson had no role in, and performed no function at, the Debtor. Barbara Jacobson testified that Sharon Jacobson was listed as an employee of the company so that she could be covered by the Debtor's health insurance. (See Trial Transcript at 88, line 22 through 90, line 8). Sharon Jacobson was also listed as an officer of Discount Water although, again, she provided no services to Discount Water, yet received paid health insurance. Id.

On December 8, 2004, the Debtor filed a bankruptcy petition. Twenty-one days later, Harvey Jacobson caused Defendant Discount Water Services to be incorporated. (Pretrial Order at ¶ 11). Discount Water is in the business of servicing water softening systems. It services some of the same customers that the Debtor serviced in the same geographic area: Miami-Dade, Broward and Palm Beach Counties. Barbara Jacobson and Sharon Jacobson were Discount Water officers from its inception through April 27, 2006. After April 27, 2006, Harvey Jacobson became Discount. Water's sole officer. (See Pretrial Order at ¶ 25, and Ex. 3).

Harvey Jacobson admitted that Discount Water appropriated certain equipment and inventory belonging to the Debtor. Harvey Jacobson claimed that this equipment and inventory had little to no value, but has...