Suarez v. Alonso (In re Alonso), Case No. 11-19198 (RG)
| Decision Date | 04 December 2012 |
| Docket Number | Adversary Proceeding Case No.11-2190 (RTL),Case No. 11-19198 (RG) |
| Parties | In re: ROSA V. ALONSO, Debtor AUREA SUAREZ, Plaintiff, v. ROSA V. ALONSO, Defendant. |
| Court | U.S. Bankruptcy Court — District of New Jersey |
NOT FOR PUBLICATION
APPEARANCES:
McCarter & English, LLP
Joseph Lubertazzi, Jr., Esq.
Alyse M. Aruch, Esq.
Attorneys for Plaintiff
Baum & Bailey, P.C.
Christopher James Baum, Esq.
Attorney for Defendant
Plaintiff seeks a judgment denying the Debtor a discharge under 11 U.S.C. § 727(a)(2) - (6) primarily because the Debtor's schedules confuse the assets, liabilities, income and expenses of her wholly-owned corporation with her personal financial information. The court finds that anyerrors on the Debtor's schedules and statement of financial affairs were not intentional and that her testimony has been truthful. A judgment of no cause to deny discharge will be entered in favor of the Debtor and an order for discharge shall be entered forthwith.
This court has jurisdiction of this adversary proceeding under 28 U.S.C. § 1334(b), 28 U.S.C. § 157(a) and the Standing Order of Reference by the United States District Court for the District of New Jersey dated July 23, 1984, as Amended on September 18, 2012, referring all proceedings arising under Title 11 of the United States Code to the bankruptcy court. This is a core proceeding within the meaning of 28 U.S.C. § 157(b)(2)(J) objections to discharge.
Rosa V. Alonso (the "Debtor") filed a voluntary petition under chapter 7 of the Bankruptcy Code on March 28, 2011. Plaintiff, Aurea Suarez, is a creditor by reason of the Debtor's guaranty of a loan to her business.
Debtor is a highly educated and experienced business person. She received a bachelor's degree and a master's in business administration with a specialty in marketing from prestigious universities in New York. After receiving her MBA in 1994, she worked in marketing until she started her own business in early 2007. The business concept was to establish an English language website geared to the Latino market and to sell advertising as the revenue source. The Debtor formed a corporation in January, 2007 named Mi Apogeo, Inc. (the "Company") and became the sole owner. The Company started a website called My Latino Voice. Funding came from the Debtor's savings and a line of credit secured by her residence. She also owns anapartment next to her residence that she rents out. She purchased that for cash but took out a mortgage when she started the Company and invested the mortgage proceeds in the Company. The Debtor estimates that she invested several hundred thousand dollars in the Company. The Debtor's parents lent $35,000 and an editor who worked with her (the "Editor") lent $100,000 to the Company secured by all the Company's assets.
The Debtor drew no salary or other compensation from the Company. She used her savings, IRA and line of credit for her household expenses while trying to get the business off the ground. Occasionally, the Debtor used the Company credit card for personal expenses such as groceries. On the Company's tax returns, the accountant treated those personal items as repayment of loans.
Although the website was able to generate some advertising revenue, the Company never earned a profit. Net operating losses were in the hundreds of thousands of dollars. In December 2008, Plaintiff loaned $242,000 to the Company. Because the Company's assets had been pledged to the Debtor's parents and the Editor, the Debtor agreed to guarantee the loan and grant a junior lien on her residence. The source of Plaintiff's loan to the Company was a mortgage she obtained on her residence. The Company made monthly payments to Plaintiff equal to the amount of her mortgage payments.
The Company operated with all formalities. It had separate bank accounts, computerized books and records and filed state and federal tax returns. It also engaged outside counsel and a certified public accountant. Nevertheless, the Company continued to lose money. Plaintiff's loan matured in December 2010 and when the Company failed to pay, Plaintiff initiated suit inNew York State court against the Company and the Debtor.1
In a January 2011, the Debtor sought counsel from a New York bankruptcy attorney (the "NY Bk Atty") regarding her corporate and personal financial problems. She supplied him with extensive documentation regarding her business and personal financial affairs including all the loan documents with her parents, the Editor and the Plaintiff, and financial information from the Company's CPA. The NY Bk Atty determined that, although the Company had signed security agreements with the Debtor's parents and the Editor, the security interests were not perfected by the filing of UCC-1 financing statements. The Debtor relayed this information to the Company's attorney as well as her parents and the Editor. The Company's attorney prepared and filed the appropriate financing statements.
The NY Bk Atty recommended that the Debtor file personal bankruptcy. He agreed to prepare all documents needed for her bankruptcy filing including the petition, schedules and statement of financial affairs. He charged $6,699 for his services, which the Debtor paid. The NY Bk Atty prepared all the bankruptcy documents and sent them to the Debtor for signature. She reviewed them, signed where required, and returned them to the NY Bk Atty. Since the Debtor is a New Jersey resident, the NY Bk Atty arranged for a New Jersey bankruptcy attorney ("NJ Bk Atty") to sign and file the petition using this court's electronic filing system. The NJ Bk Atty reviewed the bankruptcy papers but did not meet with the Debtor or review any supporting documentation before filing the petition. She agreed to accept a fee of $500 for her services including attending the hearing required under section 341(a) of the Bankruptcy Code.2
The Debtor's original schedules disclose the following information that the Plaintiff has called into question. Schedule B - Personal Property - discloses Debtor's ownership of the stock in Mi Apogeo, Inc. with a value of $75,000.00 and a notation "Subject to two (2) liens totaling $135,000." No entry was made on Schedule B for a loan receivable from the Company. Schedule C - Property Claimed As Exempt - lists the stock in Mi Apogeo, Inc. as exempt under 11 U.S.C. § 522(d)(5) at "Full fair market value (FMV)" with a value of $75,000.00. Schedule D - Creditors Holding Secured Claims - lists the Debtor's parents and the Editor as having liens on the stock in the Company. Schedule I - Current Income of Individual Debtors - discloses as the Debtor's primary source of income $12,500 per month as regular income from operation of a business. The form requests that a detailed statement of this business income be attached, but none was. Schedule J - Current Expenditures of Individual Debtors - claims regular expenses from operation of a business $10,719 per month. Again the form requests a detailed statement of these business expenses, but none was attached. On Form B22A - Chapter 7 Statement of Current Monthly Income and Means-Test Calculation - the Debtor disclosed $1,781.00 on the line for gross wages, salary, tips, bonuses, overtime, commissions and $21,372.00 as Annualized Current Monthly Income for § 707(b)(7).
The Debtor testified at the 341(a) meeting presided over by the chapter 7 trustee. In response to the trustee's question as to whether anyone had ever offered money for her stock in the Company, the Debtor answered, "No". Plaintiff also attended the 341(a) meeting and followed up by asking if someone had offered one million dollars for the Company. The Debtor testified that the statement was totally in jest.
Plaintiff issued a subpoena under Bankruptcy Rule 2004, requiring the Debtor to appear for an examination and to produce certain documentation. The Debtor gathered much of the information requested including banking records and income tax returns for herself and the Company. The documents amounted to thousands of pages and were too voluminous to attach to an email, so the Debtor used an internet service known as Drop Box to deposit all the documents so they could be accessed by her NJ Bk Atty. The NJ Bk Atty forwarded all the documentation to Plaintiff's attorney. The Debtor appeared for her examination under Rule 2004 on June 30, 2011. During the examination the Debtor was asked to identify the customers who had paid for advertising on the Company's website. The Debtor described several customers who had advertised during the previous year. When a question was asked about advertising customers from 2009, the NJ Bk Atty objected claiming that was irrelevant because it was too remote in time. Following the examination, by letter dated July 11, 2011, Plaintiff requested substantial additional documentation plus the names of all advertising customers and the amounts they paid for 2009, 2010 and 2011.
Before the Debtor could respond to the July 11th letter, on August 1, 2011, Plaintiff filed an adversary complaint objecting to discharge under 11 U.S.C. § 727(a)(2) - (6). Debtor answered through her NJ Bk Atty. In addition, on September 15, 2011, the Debtor supplied the additional documentation requested in the July 11th letter through her NJ Bk Atty. In regard to the request for the names and amount of advertising revenue from particular customers the NJ Bk Atty responded, "This request has been objected to previously."
A short time after the answer was filed, the Debtor retained a new attorney to represent her in the bankruptcy case and in defending the adversary proceeding. With the assistance of newcounsel, Debtor filed an amended Schedule B that deleted any reference to the UCC liens against her stock in the Company and an amended Schedule D that omitted her parents and the Editor as secured creditors. She also filed...
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