In re Warren
| Decision Date | 07 January 2008 |
| Docket Number | No. 06-4278.,06-4278. |
| Citation | 512 F.3d 1241 |
| Parties | In re Daniel David WARREN; Kathleen Ann Warren, also known as Kathleen Ann Chalk, Debtors. Adrian Mathai; Zubin Mathai; OTE Development USA, Inc.; 9056-0556 Quebec, Inc., doing business as OTE Canada, Plaintiffs-Appellees, v. Daniel David Warren; Kathleen Ann Warren, Defendants-Appellants. |
| Court | U.S. Court of Appeals — Tenth Circuit |
Sherilyn A. Olsen (Mona L. Burton with her on the brief), Holland & Hart LLP, Salt Lake City, UT, for Defendants-Appellants.
Jerome Romero, Jones, Waldo, Holbrook & McDonough, PC, Salt Lake City, UT (Michael Jason Lee, Law Offices of Michael Jason Lee, Irvine, CA, with him on the brief), for Plaintiffs-Appellees.
Before HARTZ, McCONNELL, and TYMKOVICH, Circuit Judges.
Adrian and Zubin Mathai were once business associates of Daniel and Kathleen Warren. After they had a falling out, the Mathais sued the Warrens and vice versa. Before the litigation got very far, the Warrens filed for bankruptcy under Chapter 7 of the Bankruptcy. Code. Their filings indicated that they had essentially no assets available for creditors. Skeptical, the Mathais filed a complaint to prevent the Warrens from obtaining a discharge in bankruptcy on the grounds that the Warrens had transferred and concealed property to "hinder, delay, or defraud" creditors, 11 U.S.C. § 727(a)(2)(A), and had "made a false oath or account" in the bankruptcy proceeding, id. § 727(a)(4)(A). The bankruptcy court agreed with both grounds and denied a discharge. The Warrens appealed to the Tenth Circuit Bankruptcy Appellate Panel (BAP), which affirmed the denial of a discharge under § 727(a)(2)(A) and did not reach the § 727(a)(4)(A) claim. The Warrens now seek relief in this court, but we agree with the BAP. On the record before it the bankruptcy court could properly find that the Warrens had engaged in a variety of unreported or otherwise deceitful transactions whose overriding purpose was to prevent the Mathais from recovering any money from the Warrens' bankruptcy estate.
We begin with a brief history of the Warrens' business relationship with the Mathais, which suggests the Warrens' motivation for their actions. Mr. and Mrs. Warren are both certified public accountants. He was licensed in 1985 and has. 11 years' experience with Big Five accounting firms. She was licensed in 1989. In 1998 Mr. Warren, through his company, General Business Services, began performing accounting services for SyPRO, LLC, owned and operated by brothers Adrian and Zubin Mathai. SyPRO helped, webmasters charge customers for internet usage through credit-card billings. It processed the, transactions through a merchant account, an account with a bank that provides a business with the means to handle credit-card transactions. The customer paid SyPRO; after deducting its share of the payment, SyPRO would remit the balance to the website owner.
In March 1999 SyPRO lost its merchant account, and SyPRO and Adrian Mathai were placed in MasterCard's Terminated Merchant File. This halted all SyPRO's business activity. Mr. Warren proposed the creation of a new company, GloBill.com, LLC. As the bankruptcy court observed, GloBill was formed with the purpose of "carry[ing] on SyPRO's business, resolv[ingl the merchant account issue, and conceal[ing] the Mathai Brothers' affiliation with the merchant account process." Mem. Decision (Bankr.Op.) at 4, Mar. 28, 2005 (Aplt.App. Vol. 1 at 31). (Citations to the Bankr.Op., Aplt.App. Vol. 1 at 28-67, will refer to pages of the decision rather than pages of the appendix.) Mr. Warren was managing member and chief executive officer, Mrs. Warren was chief financial officer, Adrian Mathai was director of operations, and Zubin Mathai served as senior programmer. On paper Warren Associates owned GloBill. But according to the Mathais, Mr. Warren had advised them that they were the true owners, that all invested funds Were subject to Adrian's oversight, and that the Warrens' involvement was solely for administrative purposes, The Mathais were granted a permanent option to acquire 95% of GloBill.
Although GloBill's customer base was growing, by August 2002 Mr. Warren notified the Mathais that it was experiencing severe cash shortages. The Mathais claimed that Mr. Warren demanded that they make cash contributions to cover operating expenses and repeatedly threatened to take GloBill into bankruptcy if the deposits were not made. The Mathais became suspicious of the Warrens' management of GloBill and hired a private investigator to pose as a prospective purchaser of the company. Based on the investigator's report, the Mathais concluded that the Warrens were embezzling money from GloBill, including $1.3 million that belonged to webmasters for whom GloBill processed online payments.
On September 26, 2002, the Mathais filed suit in Pennsylvania state court, asserting various claims (apparently including fraud, conversion, and breach, of contract) against the Warrens. Also, as GloBill's administrators they began to redirect its revenues to an off-shore account, effectively stopping GloBill's cash flow. Although the Mathais allege that on September 27, 2002, they exercised their option to purchase GloBill, Mr. Warren caused GloBill to sue the Mathais in October 2002 in federal court in California for, among other things, damages and an injunction barring them from diverting GloBill's revenue. The Mathais voluntarily dismissed their complaint in Pennsylvania, choosing instead to assert their claims as third-party claims against the Warrens in the California litigation.
On March 16, 2004, about four months before the California trial was set to begin, the Mathais and Warrens met with a magistrate judge for a settlement conference. The Warrens had already incurred substantial legal expenses and anticipated that they would not be able to continue to pay for the litigation. They offered to pay the Mathais $100,000 and drop all their claims in return for the dismissal of all claims against them. The Mathais rejected the offer; Mrs. Warren was frustrated and upset.
Perhaps at the suggestion of the magistrate judge, the Warrens met with bankruptcy counsel two or three days later. The lawyer explained that if they filed for bankruptcy, certain assets would be surrendered to a trustee for liquidation to pay creditors and certain assets would be exempt and thus not seized. According to the bankruptcy court, Mrs. Warren "did not believe that [the Warrens] owed the Mathai Brothers and she did not want any of their assets liquidated by the chapter 7 trustee to pay the disputed claim." Bankr. Op. at 8. By the time the Warrens filed their Chapter 7 petition on April 22, it appeared that this goal had been accomplished. During the prior months they had sold various assets, spent about $116,000, acquired assets exempt from creditors' claims, and left themselves with $20 cash on hand. We now describe the Warrens' relevant financial transactions in more detail.
In late December 2003, before the settlement conference and the meeting with bankruptcy counsel, the Warrens refinanced their 6,000-square-foot home; about $77,000 went directly to credit-card companies, and they received $48,000 in cash. The Warrens testified that they used most of the cash to pay the California attorneys, leaving them with $11,000. On March 29, 2004, the Warrens purchased a more modest home for $169,000 under a real-estate-purchase contract with the seller, Brooke Roney. They made a $5,000 cash down payment and received a $25,000 credit toward the purchase price by transferring a portion of the Warrens' collection of coins to Roney's brother, Burke (more on the coin collection later). As part of the agreement, Brooke agreed to spend $5,000 on repairs. The Warrens also spent 83,000 to $5,000 in repairs.
After meeting with bankruptcy counsel in March 2004, the Warrens obtained additional cash by selling various personal property in arms-length transactions not questioned by the Mathais. On March 22 they sold a 2001 GMC truck for $13,000. Eight days later they sold two more vehicles for $20,500. Between April 13 and 17 they sold jewelry for $500, a piano for $1,419, and miscellaneous property for $1,905.
What the Warrens did with the cash from the above transactions (plus essentially all their cash from bank accounts) appears less innocent. In particular, during the month preceding their bankruptcy filing they prepaid about $15,000 in expenses. The prepayments included $900 in 2004 property taxes and 84,080 for four months of real-estate-contract payments on their new home; over $5,000 in health insurance premiums for a family policy; $977 for dental insurance; $400 in health insurance premiums for Mr. Warren's mother; $1,500 for home and auto insurance; and $1,500 in prepaid malpractice premiums. The Warrens also prepaid creditors including Questar ($240.37), Provo Utilities ($389.89), Qwest ($10.45), and Chase Manhattan Bank ($145.51). Such prepayments were unusual for the Warrens. Although the Warrens, as CPAs, surely knew that the prepayments were assets (at trial they both acknowledged that they knew that prepayment of insurance was an asset), the prepayments were not listed on their original schedules filed with the bankruptcy court on May 7, 2004. The prepayments were uncovered in late June when the Mathais conducted an examination of the Warrens' finances, see Fed. R. Bankr.P.2004. And not until July 16—after the Mathais had filed their complaint seeking denial of the Warrens' discharges—did the Warrens amend their schedules to reflect payments to 12 creditors; even then, the prepayments were not reported as assets (but only as payments to creditors) and the $400 prepayment of health insurance for Mr. Warren's mother (a gift, not an asset) and $900 prepayment of 2004 property taxes were still not reported in any fashion. The Warrens were later refunded...
To continue reading
Request your trial
-
Kind Operations, Inc. v. Cadence Bank, N.A. (In re Pa Co-Man, Inc.), Bankruptcy No. 20-20422-JAD
...to intent, rarely does a party to litigation ever admit an intent to hinder, delay, or defraud creditors. See Mathai v. Warren (In re Warren), 512 F.3d 1241, 1249 (10th Cir. 2008) (citation omitted). While subjective intent is difficult to prove, it may be established by circumstantial evid......
-
Grassmann v. Brown (In re Brown)
...admit intent so courts often rely on circumstantial evidence or on inferences drawn from a course of conduct. Mathai v. Warren (In re Warren ), 512 F.3d 1241, 1249 (10th Cir. 2008). In such situations, courts often look to so-called "badges of fraud" to determine intent for purposes of Sect......
-
First Nat'l Bank of Durango v. Woods (In re Woods)
...tribunal whose rulings are not entitled to any deference (although they certainly may be persuasive).” Mathai v. Warren (In re Warren), 512 F.3d 1241, 1248 (10th Cir.2008); accord Parks v. Dittmar (In re Dittmar), 618 F.3d 1199, 1204 (10th Cir.2010). First National Bank contends that the ba......
-
Schultz v. Layng (In re Suazo)
...A bankruptcy court's legal conclusions are reviewed de novo, and factual findings are reviewed for clear error. In re Warren, 512 F.3d 1241, 1248 (10th Cir. 2008). On mixed questions of law and fact, the Court reviews novo any question that primarily involves the consideration of legal prin......