In re Pulos

• Decision Date: 21 June 1994
• Docket Number: 4-93-442 and 4-93-486.,Bankruptcy No. 4-93-4493. Adv. No. 4-93-441
• Citation: 168 BR 682
• Parties: In re Gregory T. PULOS and Patricia A. Pulos, Debtors. Thomas F. MILLER, as Trustee of the Estate of Gregory T. Pulos and Patricia A. Pulos; and Norwest Bank Minnesota, National Association, Plaintiffs, v. Gregory T. PULOS and Patricia A. Pulos, Defendants. NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, Plaintiff, v. Gregory T. PULOS and Patricia A. Pulos, Defendants. Timothy D. MORATZKA, Trustee for the Bankruptcy Estate of Computer Designed Systems, Inc. and CDS Financial Corp., Plaintiff, v. Gregory T. PULOS and Patricia A. Pulos, Defendants.
• Court: U.S. Bankruptcy Court — District of Minnesota

168 B.R. 682 (1994)

In re Gregory T. PULOS and Patricia A. Pulos, Debtors.

Thomas F. MILLER, as Trustee of the Estate of Gregory T. Pulos and Patricia A. Pulos; and Norwest Bank Minnesota, National Association, Plaintiffs, v. Gregory T. PULOS and Patricia A. Pulos, Defendants.

NORWEST BANK MINNESOTA, NATIONAL ASSOCIATION, Plaintiff, v. Gregory T. PULOS and Patricia A. Pulos, Defendants.

Timothy D. MORATZKA, Trustee for the Bankruptcy Estate of Computer Designed Systems, Inc. and CDS Financial Corp., Plaintiff, v. Gregory T. PULOS and Patricia A. Pulos, Defendants.

Bankruptcy No. 4-93-4493. Adv. Nos. 4-93-441, 4-93-442 and 4-93-486.

United States Bankruptcy Court, D. Minnesota.

June 21, 1994.

COPYRIGHT MATERIAL OMITTED

Garrett M. Vail, Christoffel & Elliott, P.A., St. Paul, MN, for debtors.

Thomas F. Miller, Trustee, Minneapolis, MN.

Timothy D. Moratzka, Mackall, Crounse & Moore, Minneapolis, MN, trustee for defendant Computer Designed Systems, Inc. and CDS Financial Corp.

Bradley Halberstadt, Mackall, Crounse & Moore, Minneapolis, MN, for trustee of Computer Designed Systems, Inc. and CDS Financial Corp.

Dennis Ryan, Faegre & Benson, Minneapolis, MN, for Norwest Bank.

FINDINGS OF FACT, CONCLUSIONS OF LAW AND ORDER GRANTING MOTION FOR SUMMARY JUDGMENT

NANCY C. DREHER, Bankruptcy Judge.

The above-entitled matter came on for hearing before the undersigned on the 19th day of May, 1994, on a motion by Thomas Miller ("trustee"), Timothy Moratzka ("Moratzka") and Norwest Bank Minnesota, National Association ("Norwest Bank") (collectively "the Movants") for summary judgment. Appearances were as follows: Thomas Miller as and for the trustee; Bradley Halberstadt for Moratzka; Dennis Ryan for Norwest Bank; and Garret Vail for the defendants Gregory Pulos ("Gregory") and Patricia Pulos ("Patricia") (collectively the "Debtors").

The Court, having considered the pleadings in the action, memoranda of law, all affidavits, and the arguments of counsel, concludes that the motion for summary judgment should be granted, and makes the following:

FINDINGS OF FACT

1. Debtors, who have been married for 25 years, filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code on July 30, 1993 ("petition date").

2. Gregory was formerly President and CEO of a publicly held company, Computer Designed Systems, Inc. ("CDS"), that was engaged in the manufacture and sale of computer hardware to end users. Gregory started CDS in 1974. CDS was incorporated in 1977. Gregory was also President and CEO of a related financing company, CDS Financial Corp. ("Financial"), which was engaged primarily in financing leases between CDS and end users. Debtors were the sole shareholders and officers of both CDS and Financial.

3. On February 15, 1991, CDS and Financial filed a voluntary petition for relief under chapter 11 of the Code. On April 17, 1991, the cases were converted to chapter 7. Moratzka was then appointed the chapter 7 trustee of the combined estates of CDS and Financial. In April, 1991, Moratzka evicted Debtors from the premises of CDS. They have not had access to the building since.

4. In April, 1993, in connection with the CDS and Financial bankruptcies, Moratzka filed a complaint against the Debtors seeking in excess of $1.5 million, which Moratzka alleges was fraudulently diverted from CDS and Financial. Approximately three months later, Debtors filed their petition for relief.

5. On the petition date, Gregory was Vice President of Migrations Solutions, Inc. Patricia was Vice President of Information Systems at Harmon Glass. In their Third Amended Statement of Financial Affairs ("Statement") that accompanied their schedules, Debtors indicated that Gregory's salary for 1993 was $56,675, and that Patricia's salary for 1993 was $62,104. According to the Statement, Debtors' combined yearly income for 1992 was $224,250, and their combined yearly income for 1991 was $248,791.

6. On September 15, 1993, Debtors attended the § 341 Meeting of Creditors ("§ 341 meeting"). At the § 341 meeting, Debtors discussed their pre-bankruptcy planning and transfers of real and personal property. They also discussed their numerous bank and brokerage accounts.

7. On November 1, 1993, the trustee filed a complaint initiating this adversary proceeding seeking the denial of the Debtors' discharge. On the same day, Norwest also filed a complaint claiming that Debtors were liable to Norwest for approximately $2 million on a personal guaranty they executed on behalf of a loan to CDS, and seeking a denial of the Debtors' discharge. On December 20, 1993, Moratzka filed a complaint alleging that Debtors diverted from CD in excess of $1.5 million, and seeking a denial of the discharge. By Order dated February 1, 1994, these adversary proceedings were consolidated.

8. In response to the trustee's request for Debtors' financial records, Debtors produced two file boxes of documents. On April 22, 1994, the trustee went to Debtors' former counsel's office to review the documents. The trustee subsequently photocopied all the produced documents, which consisted of the following:

a. The Debtors\' federal and Minnesota tax returns from 1991 with all the schedules;

b. The Debtors\' federal and Minnesota tax returns from 1992 with all the schedules and attached copies of: (1) receipts for claimed deductible expenses; (2) 1098 and 1099 tax forms; (3) cancelled checks for deductible donations; (4) cancelled checks for accountants\' fees; (5) cancelled checks for attorneys\' fees; (6) cancelled checks relating to Lindawood Apartments expenses; (7) and a few cancelled checks pertaining to other properties owned by Debtors;

c. Various statements and information from 1986 through 1992 regarding Northwoods Apartments, an apartment complex owned by a partnership in which Debtors were once partners;

d. A one-page confirmation statement from a brokerage account reflecting a post-petition securities transaction;

e. American Express and Visa Account Summaries for 1992;

f. Patricia\'s check registers for checks written post-petition between August 16, 1993 and March 27, 1994.

9. Soon thereafter, the Movants brought this motion for summary judgment. The Movants argue that Debtors should be denied a discharge for failure to adequately keep records pursuant to § 727(a)(3) of the Code.

10. On May 19, 1994, I held a hearing on the motion for summary judgment. At the hearing, the trustee submitted into evidence copies of all the documents the Debtors had produced to the trustee in April, 1994 ("Exhibit C").¹ Debtors did not submit into evidence any financial records or documents.²

11. After the hearing, Debtors submitted to this Court an affidavit of Gregory Pulos stating that it was Debtors' regular practice to retain their monthly bank statements and cancelled checks for preparation of their income tax returns. At the end of each year, they delivered these records, along with other tax-related documents, to their accountant. After the tax return was filed, Debtors would keep a copy of the tax return and all documentation necessary to substantiate the return. Gregory stated that all "nonessential records, including non-tax or non-investment related cancelled checks" were discarded. Attached to the affidavit were copies of monthly statements and cancelled checks from their personal checking account from January 1, 1993 through January 1, 1994.³

12. Based upon all the evidence, including the Statement, Debtors' § 341 meeting testimony, Exhibit C and Gregory Pulos' affidavit with the 1993 documents, it is undisputed that Debtors had numerous bank and brokerage accounts, engaged in the sale of real property, and made extensive house payments prior to the petition date. The following is a list of the Debtors' activities between May, 1991 and the petition date.⁴ When applicable, reference is made to the records and documents Debtors have produced that relate to the transaction or activity described.

a. Accounts

1. Hayne Miller & Farni brokerage account. According to the Statement, Debtors sold $51,392 worth of stock through this account. The Statement does not indicate when the transfers occurred. Debtors have produced no records relating to pre-petition activities in this account. They have only produced a confirmation order reflecting a post-petition securities transaction dated September 15, 1993.

2. Citizens State Bank checking account ("Citizens account"). Debtors' used this personal checking account frequently. Debtors have produced no records relating to the pre-petition activity in this account between May, 1991 and December, 1992. They have now produced copies of the monthly statements, cancelled checks and deposit tickets for all of 1993.

3. NCR Credit Union savings account. This account was still open as of the petition date. Debtors have not produced any statements or related documents in connection with this account.

4. Canadian Imperial Bank of Commerce checking account. Debtors testified at the § 341 meeting that they opened a Canadian checking account in the late 1970's or 1980's for the convenience of buying groceries and other amenities when in Canada. According to Debtors, they last deposited money into the account in September, 1993. Debtors have produced no records regarding activity in this account, except for two "statements of interest credited" that were attached to the Debtors' 1991 and 1992 tax returns.

5. Closed accounts. Debtors closed four accounts in July, 1993 — the same month Debtors filed their petition. These accounts included: (1) a Citizens State Bank savings account and CD; (2) a First Bank savings account; (3) a VIP Metro Credit Union savings and checking account; and (4) a Piper, Jaffrey & Hopwood account in Duluth. Debtors have produced no records pertaining to these four accounts, except for the 1099 tax forms for the latter two accounts attached to their 1991 tax returns.

b. Credit Cards

1. American Express Gold...