Vara v. McDonald
| Decision Date | 28 June 2021 |
| Docket Number | Case No. 5:20-cv-1209 |
| Citation | 631 B.R. 713 |
| Parties | Andrew R. VARA , United States Trustee, Region 9, Plaintiff-Appellee, v. Steven P. MCDONALD, Defendant-Appellant. |
| Court | U.S. District Court — Northern District of Ohio |
Amy Leizman Good, Office of the U.S. Trustee, Cleveland, OH, for Plaintiff-Appellee.
Matthew B. Abens, Harvey & Abens, Middleburg Heights, OH, David L. Harvey, III, Cleveland, OH, for Defendant-Appellant.
This matter is before the Court on an appeal filed by defendant-appellant Steven P. McDonald ("Debtor") from an order of the U.S. Bankruptcy Court for the Northern District of Ohio granting summary judgment in favor of plaintiff-appellee Andrew R. Vara ("Trustee") and denying the Debtor discharge under 11 U.S.C. § 727(a)(5). As the bankruptcy court's order granting summary judgment is a final appealable order, the Court has jurisdiction over this appeal pursuant to 28 U.S.C. § 158(c)(1)(B). See id. ; Gen. Motors Acceptance Corp. v. Flynn (In re Midway Motor Sales, Inc. ), 407 B.R. 442 (Table), 2009 WL 1940719, at *1 (6th Cir. July 6, 2009) () For the reasons that follow, the bankruptcy court's decision is affirmed.
Debtor has appealed the April 17, 2020 decision of the bankruptcy court granting the Trustee's motion for summary judgment. McDermott v. McDonald (In re McDonald ), 614 B.R. 801 (Bankr. N.D. Ohio 2020). As set forth in the bankruptcy court's memorandum opinion, on November 1, 2015, Debtor commenced the bankruptcy case underlying this adversary proceeding by filing a voluntary petition under Chapter 7. Prior to filing for bankruptcy, Debtor had served as a loan officer and a vice president of Hometown Bank. He also had previous experience as a financial institutions examiner for the Ohio Department of Commerce and as a loan officer for the Portage Community Bank.
On June 20, 2016, the Trustee initiated an adversary proceeding seeking denial of Debtor's discharge. In its summary judgment motion, the Trustee sought judgment as a matter of law on two separate bases: (1) that Debtor knowingly and fraudulently made false oaths regarding the dissipation of his assets, in violation of 11 U.S.C. § 727(a)(4)(A), and (2) that Debtor failed to satisfactorily explain the dissipation of certain cash assets, in violation of 11 U.S.C. § 727(a)(5).
The focal point of the adversary proceeding concerned two financial transactions: (1) a February 2010 loan for $165,000.00 extended to Debtor and his wife by a customer of Hometown Bank (hereinafter "Lally Loan"), and (2) a $225,000.00 line of credit Debtor duped another Hometown customer into unwittingly extending to him in January 2011 (hereinafter "Loftin Line of Credit") to cover Debtor's gambling debts.2
With respect to the § 727(a)(4)(A) claim (Count I), the bankruptcy court found that genuine issues of material fact precluded summary judgment because proof of Debtor's intent was a required element under that statutory provision. McDonald , 614 B.R. at 811. Though it found Debtor's explanation of the dissipation of the proceeds from the two transactions to be inconsistent and vague, it determined that Debtor's reliance on his gambling addiction as the basis for his failure to fully recall the disposition of the proceeds left "room for plausible inferences of honest intent" on Debtor's part. Id.
With respect to the § 727(a)(5) claim (Count II), however, the bankruptcy court found that the Trustee's evidence demonstrated beyond dispute that a denial of discharge was appropriate. Recognizing that § 727(a)(5) contained no wrongful intent element, the bankruptcy court found that the explanation offered by Debtor—who the court noted was well-educated and experienced in banking transactions—as to the dissipation of the proceeds from the loan and credit line was vague, speculative, and entirely unsatisfactory. Id. at 816–18. In reaching this conclusion, the bankruptcy court found that Debtor failed to account in any way for $76,761.10 of the original Lally Loan amount,3 ( id. at 807 ), and that Debtor was unable to account for approximately $128,000.00 of the $225,000.00 line of credit from the Loftin Line of Credit4 ( id. at 809 ). Overall, the bankruptcy court found that Debtor failed to account for more than two-thirds of the combined $390,000.00 in proceeds from the two transactions.
According to the bankruptcy court, these deficiencies rendered Debtor's explanations wholly unsatisfactory under § 727(a)(5) as they were vague and largely unsubstantiated or verified, leaving the court and the Trustee to speculate as to what occurred with most of the proceeds. In announcing its decision, the bankruptcy court stressed that its conclusion was not influenced by the illegality of the debtor's activities, noting that "[t]he denial of the Debtor's discharge in this case is about accounting, not morality judgment." McDonald , 614 B.R. at 818. The bankruptcy court underscored that "[r]egardless of the propriety of entering into self-dealing loan agreements or opening a line of credit under another person's name in pursuit of paying off gambling debts, it is the Debtor's unacceptably vague accounting for the missing cash provided ... over the course of this case and adversary proceeding that is not legally satisfactory under Section 727(a)(5) and results in the denial of discharge." Id.
Under Bankr. R. 7056, Fed. R. Civ. P. 56 governs motions for summary judgment in adversary proceedings in bankruptcy court. Summary judgment is proper if "the movant shows that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). When reviewing a motion for summary judgment, the evidence, all facts, and any inferences that may be drawn from the facts, must be viewed in the light most favorable to the nonmoving party. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp. , 475 U.S. 574, 587, 106 S. Ct. 1348, 89 L.Ed. 2d 538 (1986). To prevail, the non-movant must show sufficient evidence to create a genuine issue of material fact. Klepper v. First Am. Bank , 916 F.2d 337, 342 (6th Cir. 1990). A mere scintilla of evidence is insufficient; "there must be evidence on which the jury could reasonably find for the [non-movant]." Anderson v. Liberty Lobby, Inc. , 477 U.S. 242, 252, 106 S. Ct. 2505, 91 L.Ed. 2d 202 (1986). Entry of summary judgment is appropriate "against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett , 477 U.S. 317, 322, 106 S. Ct. 2548, 91 L.Ed. 2d 265 (1986).
Under this standard, a bankruptcy court's findings of fact are reviewed for clear error, and its conclusions of law are reviewed de novo. See Behlke v. Eisen (In re Behlke ), 358 F.3d 429, 433 (6th Cir. 2004). A finding of fact is clearly erroneous " ‘when although there is evidence to support it, the reviewing Court on the entire evidence is left with the definite and firm conviction that a mistake has been committed.’ " Anderson v. City of Bessemer City , 470 U.S. 564, 573, 105 S. Ct. 1504, 84 L.Ed. 2d 518 (1985) (quoting United States v. United States Gypsum Co. , 333 U.S. 364, 395, 68 S. Ct. 525, 92L.Ed. 2d 746 (1948) ). In a de novo review, the Court determines the legal issues independent of the trial court's determination. U.S. Trustee v. Eggleston Works Loudspeaker Co. (In re Eggleston Works Loudspeaker Co. ), 253 B.R. 519, 521 (B.A.P. 6th Cir. 2000). "No deference is given to the bankruptcy court's conclusions of law." Select Portfolio Servs., Inc. v. Burden (In re Trujillo ), 378 B.R. 526, 529 (B.A.P. 6th Cir. 2007) (citation omitted).
Under 11 U.S.C. § 727(a)(5), a bankruptcy court may deny the discharge of a debt if "the debtor has failed to explain satisfactorily ... any loss of assets or deficiency of assets to meet the debtor's liabilities[.]" 11 U.S.C. § 727(a)(5). Section 727(a)(5) contemplates a burden-shifting framework where the party objecting to the discharge has the initial burden to identify assets which the debtor at one time owned and claims, in his schedules, to no longer possess. See PNC Bank v. Buzzelli (In re Buzzelli ), 246 B.R. 75, 116 (Bankr. W.D. Pa. 2000).
Once this initial burden is met, the burden shifts to the debtor to offer a satisfactory explanation of the loss of assets. Id. The benchmark for a § 727(a)(5) satisfactory explanation is reasonableness. Lacy Wholesale & Main Factors v. Bell (In re Bell ), 156 B.R. 604, 605 (Bankr. E.D. Ark. 1993). "To be satisfactory, the explanation must demonstrate the debtor has exhibited good faith in conducting his affairs and explaining the loss of assets." Bay State Milling Co. v. Martin (In re Martin ), 141 B.R. 986, 999 (Bankr. N.D. Ill. 1992). Although the explanation does not necessarily need to be comprehensive, it must meet two criteria in order to be deemed "satisfactory." Subhash Saluja v. Mantra (In re Mantra ), 314 B.R. 723, 730 (Bankr. N.D. Ill. 2004) ; Clean Cut Tree Service Inc. v. Costello (In re Costello ), 299 B.R. 882, 901 (Bankr. N.D. Ill. 2003) ; Banner Oil Co. v. Bryson (In re Bryson ), 187 B.R. 939, 956 (Bankr N.D. Ill. 1995). First, it must be supported by at least some documentation. Costello , 299 B.R. at 901. Second, this documentation must be sufficient to eliminate the need for the court to speculate as to what happened to all the assets. See Baker v. Reed (In re Reed ), 310 B.R. 363, 370 (Bankr. N.D. Ohio 2004) ().
In making its determination, the court may consider such things as the nature of the debtor's business, as well as his education and...
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