L. Alamos Nat'l Bank v. Wreyford (In re Wreyford)

• Decision Date: 04 February 2014
• Docket Number: Adversary No. 12–1312 J.,Bankruptcy No. 7–12–12413 JS.
• Citation: 505 B.R. 47
• Parties: In re Joe Alan WREYFORD and Mary M. Wreyford, Debtors. Los Alamos National Bank, Plaintiff, v. Joe Alan Wreyford and Mary M. Wreyford, Defendants.
• Court: U.S. Bankruptcy Court — District of New Mexico

505 B.R. 47

In re Joe Alan WREYFORD and Mary M. Wreyford, Debtors.Los Alamos National Bank, Plaintiff,

v.Joe Alan Wreyford and Mary M. Wreyford, Defendants.

Bankruptcy No. 7–12–12413 JS.

Adversary No. 12–1312 J.

United States Bankruptcy Court,

D. New Mexico.

Feb. 4, 2014.

James Jurgens, Santa Fe, NM, for Plaintiff.

Donald A. Walcott, Walcott & Henry PC, Santa Fe, NM, for Defendants.

MEMORANDUM OPINION

ROBERT H. JACOBVITZ, Bankruptcy Judge.

THIS MATTER is before the Court following a two-day trial on the merits of this adversary proceeding. Los Alamos National Bank (“LANB”) seeks to deny the discharge of Joe Alan Wreyford and Mary M. Wreyford pursuant to 11 U.S.C. § 727(a)(2)(A)(transfer of estate property made with intent to hinder, delay, or defraud a creditor); 11 U.S.C. § 727(a)(3)(failure to preserve financial records); 11 U.S.C. § 727(a)(4)(false oaths); and 11 U.S.C. § 727(a)(5)(failure to explain loss of assets). Mr. and Mrs. Wreyford own and operate a retail sales business in Santa Fe, New Mexico. They operated the business as a sole proprietorship for many years, but formed a limited liability company after LANB filed a lawsuit against the Wreyfords seeking a money judgment of over $2,000,000. The Wreyfords transferred the business assets they owned personally to their limited liability company after LANB obtained a judgment against the Wreyfords in the amount of $2,293,835.70 and after counsel for LANB contacted the Wreyfords' counsel in an effort to locate assets from which LANB could seek to satisfy its judgment. As explained below, the Court finds that these transfers satisfy the requirements to deny the Wreyfords' discharge under 11 U.S.C. § 727(a)(2)(A).¹

FINDINGS OF FACT

The Business

The Wreyfords have operated a retail sales business in Santa Fe, New Mexico since approximately 1996, doing business as Xanadu. The business sells furniture, rugs, folk art and jewelry to the public. The Wreyfords operated their business as a sole proprietorship for many years. At one time the business had three locations, but because of the economic downturn, the Wreyfords down-sized their business to one location on Cerrillos Road. The tax returns for the Wreyfords' sole proprietorship for tax years 2006 and 2007 reflect business losses. See Exhibits 46 and 48. The building where the Wreyfords' business is currently located is leased and has an apartment attached to it. The Wreyfords reside there.

Since about 2005, the Wreyfords' accountant advised them from time to time that they should form a corporation or limited liability company for their business to protect their personal assets from business debts. The Wreyfords did not seek to form a business entity for their sole proprietorship until December of 2011, after LANB had initiated a lawsuit against the Wreyfords individually in 2010 and within three months of the trial in that action.

The Wreyfords' Investment in Santa Fe Capital Equities, LLC and the Subsequent Litigation with LANB

Sometime in 2008, the Wreyfords invested approximately $125,000 in Santa Fe Capital Equities, LLC (“SFCE”). SFCE was formed for the purpose of completing the development of certain real property in Santa Fe, New Mexico. The Wreyfords held a 25% interest in SFCE. The funds the Wreyfords invested in SFCE constituted the majority, if not all, of their retirement savings. SFCE obtained a loan from LANB, which the Wreyfords personally guaranteed.² LANB loaned the money to SFCE at a time when the Wreyfords were operating their business as a sole proprietorship.³ SFCE's real estate development project was not successful and the Wreyfords lost their entire investment.

LANB filed a lawsuit against SFCE, the Wreyfords, and other guarantors in the First Judicial District Court in the State of New Mexico as Case No. D–101–CV–2010–1503 (“State Court Lawsuit”) in 2010 seeking a judgment of over $2,000,000. SFCE asserted counterclaims against LANB in the State Court Lawsuit.

By September of 2011, the Wreyfords knew that the pre-trial conference in the State Court Lawsuit was continued to January of 2012, and that the non jury trial, originally scheduled for October of 2011, was rescheduled for February of 2012. See Exhibit 1. On March 1, 2012, LANB obtained a judgment in the State Court Lawsuit against the Wreyfords and others, jointly and severally, in the amount of $2,293,835.70, plus interest from February 15, 2012 at the rate of 16% per annum. See Exhibit 5. The Wreyfords received a copy of the judgment from the State Court Lawsuit shortly after it was entered. As of April 2012, after LANB's foreclosure of real property pursuant to a foreclosure judgment entered in the State Court Lawsuit, a deficiency judgment remained against the Wreyfords in the amount of approximately $1,400,000.

The Formation of the Wreyfords' LLC

In December of 2011, the Wreyfords sent to the New Mexico Public Regulation Commission (“PRC”) business formation documents to form a limited liability company called Xanadu Santa Fe, LLC (“Xanadu, LLC”). The Wreyfords were forming Xanadu, LLC to operate their sole proprietorship business. After not hearing back from the PRC regarding the formation of Xanadu, LLC, Mr. Wreyford went to the PRC office in early 2012, before the trial in the State Court Lawsuit, to follow up on the business formation documents for Xanadu, LLC.

By letter dated February 29, 2012, the Wreyfords received notice from the PRC stating that the organizational papers for Xanadu, LLC had been approved. See Exhibit 4. The Certificate of Organization for Xanadu, LLC is dated December 23, 2011. The Wreyfords are the sole members of Xanadu, LLC, each owning a 50% membership interest. See Exhibit 3—Operating Agreement of Xanadu, LLC. The Operating Agreement of Xanadu, LLC has an effective date of December 31, 2011. Id. The Wreyfords did not close the sole proprietorship bank accounts at that time or prior to the trial in the State Court Lawsuit.

Mr. Wreyford testified that he did not form Xanadu, LLC because of the State Court Lawsuit. He testified that he “was not concerned about losing [the State Court Lawsuit]” and that he is “positive that [he] was not worried about an adverse judgment” being entered against him. The Court does not find this testimony credible. The Court finds that although the Wreyfords formed Xanadu, LLC consistent with the advice of their professional advisors over the years to form an entity to protect personal assets from claims to collect business debts and business assets from claims against them personally, they formed Xanadu, LLC when they did to protect their business assets from LANB.

The Wreyfords' Actions after LANB Obtained its Judgment in the State Court Lawsuit

By March 7, 2012, and possibly earlier that month, the Wreyfords were aware that LANB had obtained a judgment against them. Over the years, the Wreyfords had assisted Mr. Patra, who is not a resident or citizen of the United States, by holding funds Mr. Patra earned from trade shows in one of the Wreyfords' sole proprietorship business accounts. On March 7, 2012, Mr. Wreyford sent an e-mail message to Mr. Patra indicating that “our situation has changed here and having any of your funds in one of our accounts or even your account that has my name associated with it has become a problem.” See Exhibit 7. The Wreyfords understood that any funds held in a bank account owned by them individually or as a sole proprietorship could be seized or attached by LANB. Mr. Wreyford sent the e-mail message to Mr. Patra because he was concerned that LANB might attach funds that actually belonged to Mr. Patra.

On or about March 7, 2012, the Wreyfords consulted bankruptcy counsel, Moore, Berkson & Gandarilla, P.C. See Exhibit 6, Statement of Financial Affairs, reflecting a payment to Moore, Berkson & Gandarilla, P.C. dated March 14, 2012; Testimony of Mr. Wreyford that the Wreyfords sought legal advice about a week earlier. On March 8, 2012, counsel for LANB sent an e-mail message to the Wreyfords' counsel in the State Court Litigation requesting to take the Wreyfords' depositions in aid of execution of judgment. See Exhibit 8. Mr. Wreyford was not copied on the e-mail but at some point became aware that LANB was asking to take his deposition for the purpose of asking where his assets were located. Mr. Wreyford testified that he did not fully understand what that process would entail. On March 13, 2012, counsel for LANB sent another e-mail message to the Wreyfords' counsel again seeking to schedule the Wreyfords' depositions and expressing a concern about asset transfers. See Exhibit 15, e-mail from Jim Jurgens to Donald Walcott stating, “I don't want to delay the depositions any longer than is necessary as I am concerned about asset transfers.”

On March 15, 2012, LANB filed a notice to take Mr. Wreyford's deposition, duces tecum in April 2012 as part of its collection efforts. See Exhibit 16. The Wreyfords did not appear for their depositions. The Wreyfords mistakenly believed that one of the other defendants in the State Court Litigation had filed bankruptcy, and that the automatic stay would apply to the Wreyfords as well. The Wreyfords did not produce any documents to LANB in April of 2012 in response to LANB's requests to take the Wreyfords' depositions, duces tecum.

The Bank Accounts

The Wreyfords' sole proprietorship maintained a bank account ending in 1382 at Bank of America (the “Sole Proprietorship Account”). See Exhibit 12. Mr. Wreyford had a money market account at Bank of America ending in 3857 (the “Money Market Account”). See Exhibit 11. The Wreyfords historically used the Money Market Account to cover shortfalls in their business operations.

The Wreyfords opened three accounts for Xanadu, LLC: a bank account at Bank of America ending in 4959 (the “Xanadu LLC Account”), opened on March 8, 2012 (the day after Mr. Wreyford's e-mail message to Mr. Patra motivated by Mr. Wreyford's concern about LANB seizing...