United States Tr. v. Zhang (In re Zhang)

• Citation: 463 B.R. 66
• Decision Date: 10 January 2012
• Docket Number: Adversary No. 10–3141.,Bankruptcy No. 09–31153.
• Parties: In re Evan ZHANG, Debtor.United States Trustee, Plaintiff v. Evan Zhang, Defendant.
• Court: United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Southern District of Ohio

463 B.R. 66

In re Evan ZHANG, Debtor.United States Trustee, Plaintiff

v.Evan Zhang, Defendant.

Bankruptcy No. 09–31153.

Adversary No. 10–3141.

United States Bankruptcy Court, S.D. Ohio, Western Division,

Jan. 10, 2012.

Jerry A. Meadows, Dayton, OH, for Defendant.

Decision Denying the Debtor's Chapter 7 Discharge Pursuant to 11 U.S.C. §§ 727(a)(2)(A) and (B) and 727(a)(4)

GUY R. HUMPHREY, Bankruptcy Judge.

The issue in this adversary proceeding is whether the debtor should be denied a discharge pursuant to 11 U.S.C. §§ 727(a)(2)(A) and (B), 727(a)(3), 727(a)(4)(A) and 727(a)(5). For the reasons set forth below, the court determines that the debtor's discharge should be denied pursuant to §§ 727(a)(2) and 727(a)(4), but not as to the other bases requested by the United States Trustee. This decision constitutes the court's findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.

I. Procedural Background

On March 6, 2009 the debtor, Evan Zhang (“Zhang”), filed a Chapter 13 petition (estate doc. 1), but the case was converted to Chapter 7 on October 2, 2009 (estate doc. 53). Daniel McDermott, the United States Trustee for Region 9 (the “UST”), timely filed his complaint requesting the court to enter a judgment denying Zhang his discharge (Adv. Doc. 1) and Zhang answered, generally denying the UST's allegations (Adv. Doc. 4). The court conducted the trial on August 9, 2011.

II. Findings of FactA. Introduction

Zhang's complex financial history involves the interrelationship and transfer of funds between three separate corporations, one of which is wholly owned by Zhang's non-filing spouse, one of which is partially owned by Zhang, and a third wholly owned by Zhang; assets of those corporations; bank accounts associated with those corporations; his personal bank accounts; and, to some extent, vaguely explained family and marital issues. The story also concerns Zhang's paid employment and volunteer work in the field of military defense research. As the UST essentially concedes, Zhang's financial picture is incomplete and, at times, confusing. Military contracts, loans and other banking transactions were referenced throughout the trial, sometimes with little or no documentation. Nevertheless, as will be detailed, the UST has met his ultimate burden of establishing that Zhang is not entitled to a discharge due to certain material false oaths and the concealment of Zhang's income and other funds from creditors.

B. Background of Zhang and his Wife, Junquiao Wu

The Debtor is Evan You Wen Zhang, commonly known as Evan Zhang (Trial Transcript (doc. 26) (“Tr.”), p. 36). He has advanced education and expertise that has allowed him to research and develop technologically advanced products and systems with both military and commercial applications (Tr., pp. 93 & 131).

Zhang was divorced and is now re-married (Tr., p. 126). His current wife, who is not a debtor in this bankruptcy, is named Junquiao Wu (“Wu”).¹ Wu has a high school education (Pl. Exh. 3, p. 14). She testified she had some management experience in China and also “some experience making a machine.” (Pl. Exh. 3, p. 15). Wu's deposition, admitted at trial, does not provide much detail as to the role she plays with the two corporations she owns, other than the fact that she has an equity interest in those entities, nor does it explain her role as the controlling officer of Eyztek Corporation (“Eyztek”) and Zybron Optical Electronics, Inc. (“Zybron Optical”). C. The Zhang and Wu Entities

1. Zybron, Inc.

At all times, Zhang has wholly owned and, therefore, controlled a corporation called Zybron, Inc. (“Zybron”). Zhang's Schedule B disclosed “Sole ownership of Zybron, Inc. (no shares of stock ever issued); assets (three (3) patents, and optical lab, worth subjective estimated value of $400,000, more or less).” Zhang's Schedule B also states that the value of Zybron's assets was exceeded by the liabilities that were owed to Dan Joint Ventures III, L.P. and Uniform CCR Partners, and Capital 1 Bank, on the petition date. (Pl. Exh. 1, p. 23). The value of Zybron was listed as “unknown.” While Zhang described Zybron's illiquid assets on Schedule B, he did not list any funds held in the Zybron bank accounts on the petition date.

In 2003 Fifth Third Bank loaned Zybron $254,500, which was guaranteed by Zhang. According to the statement of financial affairs and Zhang's testimony, Zybron ceased operating about 2004 because it had no contracts to complete (Pl. Exh. 1, p. 41; Tr., p. 94). (Zybron was formed prior to the other corporations discussed at trial, Zybron Optical and Eyztek.) Zhang referred to Zybron as “dissolved,” meaning not that its corporate form was formally ended with the state of Ohio, but simply that is was not currently operating (Tr., p. 94).

2. Zybron Optical Electronics, Inc.

Zybron Optical Electronics, Inc. (“Zybron Optical”) was formed in 2006 (Tr., p. 115). Zhang testified Zybron Optical received an Air Force contract in 2007. Id. In 2008, Zybron Optical received a contract from the Army. Id.

Zhang's Schedule B stated he owned “2 shares (20% ownership), Zybron Optical Electronics, Inc. (spouse of Debtor owns 8 shares, or 80%) (assets of corporation are government services contracts requiring work to be done to entitle corporation to payments; computer equipment, desks and chairs comprise remainder of assets.”) (Pl. Exh. 1). The value was listed as $100. Zhang testified the $100 listed value was a “mistake” and it was based on the total consideration which he and Wu paid for the stock and not the value of the corporation. (Zhang contributed $20 for his stock and Wu contributed $80 for her stock.) (Tr., p. 101). He testified the value of the company is based on military or other contracts it receives and when a contract is finished, the company has no remaining value. Id.

On his Schedule I Zhang listed his occupation as “Senior Engineer” of Zybron Optical and Wu was listed as the “Senior Officer.” (Pl. Exh. 1). Wu testified that she held an 80 percent interest in Zybron Optical because of a “family issue” related to Zhang's prior marriage (Pl. Exh. 3, p. 13). An employment agreement dated October 12, 2007 provided that Zhang would receive $123,760 each year as an employee and principal investigator for an Air Force contract (Debtor Exh. B). According to that employment agreement, Zhang could not work for any other companies, excepting volunteer work, in order to avoid a conflict of interest.

3. Eyztek, Inc.

The third corporation, Eyztek, Inc. (“Eyztek”), was formed in September 2008 (Debtor Exh. A), with its shares being solely owned by Wu (Debtor Exh. D). Wu's testimony did not indicate she had any particular expertise in military research, relevant scientific background, or any experience with military contracts (Pl. Exh. 3). According to Zhang and Wu, Eyztek's shares were held in Wu's name because “Zybron is being built before the marriage and they had some family issues, so she's not really happy about that. So after they decide that they have another company and she's—she own one company and her spouse own another company.” (Pl. Exh. 3, p. 16). Zhang also testified that Wu was “unhappy” because Zhang had been sued by his former wife, his son, and DAN Joint Venture (“DAN”) and because of having been indicted by the United States Attorney (Tr., pp. 126–27).

According to Wu, Eyztek did not have any government contracts since May 2009 when it concluded a Navy contract (Pl. Exh. 9, p. 19). In addition, Ronald Fletcher, although listed as a vice president, did not receive any income from Eyztek and only helped with the company's operations as Wu's friend (Pl. Exh. 9, p. 17). Despite the fact that Eyztek was purportedly created so Wu could own her own company, the first three letters of Eyztek are consistent with the initials of Zhang (Evan You Wen Zhang). Zhang did not refute this apparent contradiction nor provide any explanation for the name chosen.

Eyztek was seeking a commercial contract concerning LED traffic light technology, and, as discussed below, received almost $100,000 in funds from Zybron Optical, but as of the trial nothing had materialized.

D. Zhang's and the Entities' Financial Accounts

1. The Wright–Patt and Ameritrade Accounts Identified as Zhang's Personal Accounts

Zhang's Schedule B stated that the balance in his personal Wright–Patt Credit Union bank accounts (checking, savings and money market) totaled $675.55 on the petition date, but the account statements showed the most recent prepetition balance for the checking account was $3,397.40. The savings account petition date balance was $136.64 and the money market petition date balance was $346.51 (Pl. Exh. 8, pp. 11–12). Zhang's explanation was that he used the March 6, 2011 checking account balance of $297.40 and did not include the $1,500 deposit on March 10, 2011 (Tr., pp. 83–84). Using that figure, the correct balance of all three accounts would have been $780.55.

Zhang also had an Ameritrade IRA account to which he deposited and from which he withdrew funds both prior to and during the pendency of this bankruptcy case. See Pl. Exh. 9. In September 2008 Zhang transferred $60,000 from the Zybron Optical bank accounts he controlled to the Ameritrade IRA account. Further, with respect to a judgment of DAN, Zhang withdrew $20,000 on April 14, 2010 and another $15,000 on August 3, 2010 from his Ameritrade IRA account and later deposited those sums in his Wright–Patt account to pay the $35,000 settlement with DAN.

The post-petition balance for the Ameritrade IRA account reflected on the statement for the period ending September 30, 2009 (about the time of the conversion of the case from Chapter 13 to Chapter 7) was $76,508.50, contrasted with an approximate petition date balance of $30,000 (Tr., p. 41).

2. The Zybron Bank Accounts

Despite that Zybron in fact had no contracts after 2004, the evidence showed checking and money market bank...