In re Arcuri

• Decision Date: 30 June 1990
• Docket Number: Bankruptcy No. 88-30531,Adv. No. 88-7047.
• Citation: 116 BR 873
• Parties: In re Gabriel A. ARCURI, Jr., Debtor. James MacLEOD, Plaintiff, v. Gabriel A. ARCURI, Jr., Defendant.
• Court: U.S. Bankruptcy Court — Southern District of New York

116 B.R. 873 (1990)

In re Gabriel A. ARCURI, Jr., Debtor James MacLEOD, Plaintiff, v. Gabriel A. ARCURI, Jr., Defendant.

Bankruptcy No. 88-30531, Adv. No. 88-7047.

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

June 30, 1990.

Victor M. Meyers, Rapport, Meyers, Griffen & Whitbeck, Hudson, N.Y., for plaintiff.

Lewis D. Wrobel, Wrobel & Genova, Poughkeepsie, N.Y., for debtor-defendant.

DECISION ON OBJECTION TO DISCHARGE PURSUANT TO 11 U.S.C. § 727(a)(4)(A) and (B)

JEREMIAH E. BERK, Bankruptcy Judge.

This is an objection to discharge pursuant to Section 727(a)(4)(A) and (B) of the Bankruptcy Code ("Code"), 11 U.S.C. § 727(a)(4)(A) and (B), by James MacLeod ("Plaintiff") against the Debtor, Gabriel A. Arcuri, Jr. ("Debtor"). Plaintiff is a disputed unsecured creditor holding a claim in the amount of $15,000,000 arising out of personal injuries sustained in an automobile accident.

Plaintiff alleges that the Debtor gave false information on the schedules appended to his bankruptcy petition either intentionally or with such reckless indifference to the truth as to constitute fraud. Plaintiff claims that the Debtor falsely listed a secured obligation owing to Geygln Corporation ("Geygln"), a family owned enterprise, on the Schedule of Creditors Holding Security ("Schedule A-2") filed with his Chapter 7 petition on September 19, 1988. Plaintiff asserts that the Debtor owes no money to Geygln, and that even if he did, the obligation is unsecured. Further, Plaintiff claims that the Debtor misrepresented the value of his 20 percent ownership of Geygln, listed as an asset on his Schedule of Personal Property ("Schedule B-2").

Prior to the commencement of trial, the Debtor moved to dismiss a portion of the complaint, but the motion was denied. Plaintiff then moved for summary judgment, but this motion was also denied. Trial was held on the first claim of the complaint. A summary of the pertinent facts adduced at trial on Plaintiff's objection to discharge follows.

I. FINDINGS OF FACTS

The parties agreed to the following facts. Tr. at 11-13 (Nov. 15, 1989). The Debtor filed a voluntary petition for relief under Chapter 7 on September 19, 1988. At all times relevant to this proceeding, the Debtor owned 20 percent of the stock of Geygln, a non-publicly traded corporation owned solely by members of the Debtor's family. The Debtor's ownership of Geygln is represented by stock certificate number 7 which did not bear any notation that it was subject to a security interest. Plaintiff's Exhibit 4. The parties agreed that the Debtor was neither an officer nor a director of Geygln for the period in question.

In addition we make the following findings. The Debtor listed Geygln as a secured creditor holding an undisputed, non-contingent claim in the approximate amount of $50,000. Plaintiff's Exhibit 1. Under that portion of Schedule A-2 requiring disclosure of the security, the Debtor stated: "Loan against shares in family corporation", and indicated the approximate market value of the stock to be $45,000. In response to the requirement on Schedule B-2 to identify all stock interests, the Debtor reported: "Family Corporation — 20% ownership, used as collateral on loan", but stated the market value at "0.00". By amendment filed September 15, 1989, the Debtor reduced his obligation to Geygln to $19,329 and again reported that the market value of the stock was "0.00". Plaintiff's Exhibit 3.

The Debtor, 34 years old at the time of trial, testified that he had completed four years of college, but did not obtain a degree. Tr. at 17 (Nov. 15, 1989). Although his college major was biology, in 1981 he became a securities salesperson after taking several qualifying exams. Id. at 18-19, 72. As a result of successfully completing these and other exams, he was permitted to sell both retail and wholesale stocks, bonds, mutual funds and life insurance. Id. at 19-22. Working successively at various investment firms, he eventually attempted to purchase an investment business in Albany during 1984. Id. at 21-23, 42-45. Ultimately, he terminated this business endeavor and went to work for the family corporation, Geygln. Id. at 23.

During the time the Debtor was employed by Geygln, he served in various capacities. Id. at 23, 29-32, 74-76. He received $19,600 from Geygln as annual salary in 1986 and 1987. Id. at 56-58. In addition, he received from Geygln in January, 1987 a "bonus" of $37,000, although he did not know why it was paid or who made the decision to issue it. Id. at 58-61, 85; Plaintiff's Exhibit 6.

The Debtor and his four siblings each owned 20 percent of the corporation's stock. Tr. at 25-26 (Nov. 15, 1989); Tr. at 69-70 (Dec. 20, 1989). It appears that either his father, Gabriel Arcuri, Sr., or his brothers, Graig and Gary Arcuri, were the chief officers of Geygln. Tr. at 28-29 (Nov. 15, 1989); Tr. at 64-65, 102-05 (December 20, 1989). Throughout his employment, the Debtor was neither an officer nor a director of Geygln. Tr. at 26, 73 (Nov. 15, 1989). At no time during the period in question was he involved in the decision-making processes nor did he have any authority to make loans or write checks for the corporation. Id. at 73, 84-85.

The Debtor began to borrow money from Geygln in late 1984 or early 1985 in order to pay for various legal fees incurred in defending against criminal charges resulting from an automobile accident and for expenses associated with the Albany investment firm he attempted to establish. Id. at 42, 44-49, 80-82. He also used Geygln loan proceeds to pay legal fees to defend against a disciplinary proceeding before the National Association of Securities Dealers. Id. at 82-84.

The Debtor could not recall the terms of the loans, but knew that Geygln had not charged any interest nor made any demand for repayment. Id. at 49-50, 55-56. He recalled that he had not signed any promissory notes or other documents memorializing the loans. Id. at 50, 55, 107-08. The loan proceeds were either paid to him or to third parties, although the Debtor did not know the amounts or dates of payment. Id. at 52, 55. At one point he testified that he was still borrowing from the corporation, but later stated that he was no longer borrowing from Geygln, but rather from his family members directly. Id. at 55, 107.

The Debtor testified that he believed his stock was retained by Geygln as collateral for his loans, although there was no agreement documenting this. Id. at 64-68. The stock certificate was maintained by Geygln with the corporate books and he never took possession of it. Id. at 26-27, 90-91. His brother Graig, an officer of Geygln during the time the loans were made, also testified that these loans were made "against the stock". Tr. at 70, 96-97 (Dec. 20, 1989). He too stated that there was no writing evidencing the pledge of stock as security for the loans, but noted that all of the outstanding stock was held by Geygln. Id. at 70, 98.

The Debtor was confused about how much he had borrowed from the family corporation. While aware that his creditors would rely on his bankruptcy schedules, he admitted that he read the Chapter 7 petition and supporting schedules "quickly" and was not sure of some responses. Tr. at 34-36 (Nov. 15, 1989). He explained that the petition was prepared in haste to prevent the continuation of an arbitration hearing on a securities disciplinary complaint. Id. at 76-78, 82-83. Although he subsequently reduced the amount shown on Schedule A-2 from $50,000 to $19,329, the Debtor nevertheless maintained at trial that he was unsure of the actual amount owed to Geygln and still believed that he owed Geygln $50,000. Tr. at 39-41 (Nov. 15, 1989); Plaintiff's Exhibit 1 and 3. He stated:

A. I don\'t know what the actual value of the loan is. I know in my mind what it should be. I can\'t tell you exactly what it is.

Q. Well, is it $50,000 or is it $19,000?

A. I don\'t know.

Q. So that isn\'t accurate either then, is it, the amended schedule?

A. I don\'t know.

Q. You don\'t know whether it is accurate?

A. I don\'t know whether it is accurate.

Q. Well, you claim that you owe Geygln some money, is that right?

A. That\'s correct.

Q. You don\'t know the amount that you owe them, though, is that correct?

A. The exact amount I don\'t know.

Tr. at 41 (Nov. 15, 1989).

The Debtor explained that he calculated the $50,000 debt "in his head" primarily based on what he was told by Geygln's bookkeeper, Kay Laraway, approximately one year before he filed the Chapter 7 petition. Id. at 78. He "had heard" that the corporation's accountant, Richard Koskey, had fixed the market value of his shares at $45,000. Id. at 89-90. Thereafter, he obtained the information used to amend Schedule A-2 to show the reduced obligation to Geygln and to value his stock at zero directly from the accountant. Id. at 86-87, 89.

Although his recollection was poor and frequently inconsistent regarding dates of loan transactions and related facts, id. at 32, 40-46, 49-55, other witnesses corroborated the essential facts of the Debtor's testimony.

For example, Richard Koskey, the accountant responsible for preparing Geygln's tax returns, testified that the corporation's 1985 tax return reflected year-end loans from the corporation to shareholders in the amount of $55,426. Tr. at 5-7, 23 (Dec. 20, 1989); Defendant's Exhibit A. In 1986, the corporation reported year-end shareholder loans of $55,226. Tr. at 22-23 (Dec. 20, 1989); Defendant's Exhibit B. Although Geygln's 1987 tax return did not show any shareholder loans at year-end, Koskey explained that the shareholder obligations could have been reported under the category of trade notes and accounts receivable elsewhere on the tax return. Tr. at 26-27, 32 (Dec. 20, 1989); Plaintiff's Exhibit 7.

To substantiate these loans, Kay Laraway, Geygln's bookkeeper, and Graig Arcuri, the officer responsible for approving most of the advances, testified. Through these witnesses, seven checks from...