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In re Cork

United States District Court, D. Arizona

January 31, 2017

In Re John E. Cork, Debtor.
v.
Gun Bo, LLC, Appellee. John E. Cork, Appellant, BK No. 2:11-bk-33110-DPC Adv. No. 2:12-ap-1675-DPC

          MEMORANDUM OF DECISION AND ORDER

          Stephen M. McNamee Senior United States District Judge

         Debtor John Cork (“Cork”) filed a voluntary Chapter 11 bankruptcy petition in the Bankruptcy Court, which was later converted to a Chapter 7 liquidation petition. Subsequently, Plaintiff Gun Bo, LLC (“Gun Bo”) initiated a § 727 adversary complaint against Cork seeking to deny Cork a denial of discharge of his debts. (Case No. 2:12-ap-1675-DPC.) Ultimately, the Bankruptcy Judge conducted a two-day bench trial on the § 727 adversary complaint, followed by final briefs, and then closing arguments. In a thorough 47-page Order, the Bankruptcy Judge found for Gun Bo, and denied Cork a discharge of his debts. Cork appeals from the Bankruptcy Judge's judgment denying him discharge pursuant to 11 U.S.C. §§ 727(a)(2)(A), 727(a)(2)(B), and 727(a)(4)(A). (Doc. 1.)

         This Court has jurisdiction pursuant to 28 U.S.C. § 158(a)(1). The Bankruptcy Code allows a debtor to get a fresh start by discharging the debtor's pre-petition debts. But that fresh start comes with a condition: the debtor must play by the rules. If the debtor does not, then the Bankruptcy Code provides that the debtor will be denied the discharge of his debts. Here, the Bankruptcy Judge found that Cork hid assets and lied under oath in his bankruptcy filings and in proceedings on material issues. The evidence supports the findings and conclusions of the Bankruptcy Judge; therefore, this Court will affirm the Bankruptcy Court's final judgment denying Cork's discharge.

         BACKGROUND[1]

         Since the late 1990's, Debtor Cork, through his various development and management companies, was involved in numerous land development projects as a land banker. (Doc. 9 at 6.) As a land banker, Cork had partnered with over 50 investors in various projects representing more than $50 million of subordinated loans. (ER 4.) Cork facilitated the development of real estate by working with builders and putting together the financing for development projects. (ER 216-17.) Typically, a builder would provide a deposit of generally around 20%, and the land banker would secure the rest of the financing to purchase the desired land, which consisted of some portion of institutional financing, generally anywhere from 50-65%. (ER 219.) The rest of the funds to purchase the undeveloped property would generally come from loans from private investors which would be subordinate to institutional financing. (ER 219-20.)

         In 2007, Cork agreed to provide land banking services to develop over 200 lots in Maricopa County on a project designated as Rancho Cabrillo. (ER 224.) At first, the institutional lender, JP Morgan Chase (“Chase”), financed 70% of the project. (ER 224-25.) Later, Chase indicated that it wanted its loan paid down to roughly 50%. (Id.) Cork obliged and sought investors to loan the money necessary to pay down the Chase loan. (Id.) Mr. Park, an individual with whom Cork had developed a business relationship, agreed to invest in the project through a separate entity called Gun Bo LLC. (Id.) Gun Bo loaned $5.6 million to Cork to pay down Chase's loan on the project and take a second mortgage on the property. (ER 310.) Cork signed a personal guaranty for the Gun Bo loan. (Id.)

         In 2008, when the real estate market collapsed, Cork faced massive defaults, the prospect of litigation, and serious tax consequences. (Doc. 9 at 6.) Many of the builders with which Cork was doing business defaulted on their land banking agreements, leaving Cork with bank debt that he had personally guaranteed for land loans all over the United States. (ER 5.) The Bankruptcy Judge found that Cork “was more than $250 million underwater.” (Id.)

         As a result, Cork and his advisors developed an out-of-court, global restructuring concept to salvage the development projects and preserve the investments of various creditors and investors. (Doc. 9 at 6.) Under the Plan, Cork would try to preserve those development projects which could be purchased at the depressed market value using new money from investors, which would be given a higher priority than the loans they had previously made. (Id. at 11.) Almost all of the investors agreed to sign onto the plan developed by Cork and his advisors. (Id.) Gun Bo chose not to agree to the plan and instead pursued litigation against Cork in state court. (Id. at 12.)

         In July 2009, Gun Bo obtained a $7, 047, 599.30 judgment against Cork, plus post-judgment interest at the rate of 20%. (Id. at 8; ER 6, 283.) Gun Bo then began proceedings to satisfy its judgment, in which it was partially successful in reaching Cork's assets. (ER 16.)

         In September of 2010, Cork formed Tiburon Management Company, Inc. (“Tiburon”) because he “wanted an entity that - that [he] could use away from litigation, and [he] wanted to continue to manage the assets that [he] had free of any lawsuits.” (SER 129-30.) Tiburon was formed as an Arizona limited liability company. (ER 7.) Tiburon was owned by Cork's children, Emilie and Nathan Cork; Cork had no ownership interest in the entity. (Id.)

         In November of 2010, Searchlight Fund, LLC (“Searchlight”) was created as a Nevada limited liability company. (Id.) Searchlight had an account at Charles Schwab (“Schwab Account”). (Id.) Emilie and Nathan were the authorized signatories on the Schwab Account. (Id.) Searchlight also had an account at IBC Bank (“IBC Account”). (Id.) Cork had more than a decade-long banking relationship with IBC. (Id.) Emilie and Nathan were the authorized signatories on the IBC Account. (Id.) As of December 1, 2010, the Schwab Account balance was $0.00. (Id.) Between December 3 and December 9, 2010, Cork deposited $2, 261, 551 in personal tax income refunds into the Schwab Account. (ER 7-8; SER 119-20.) There were no loan documents and Searchlight did not maintain any account payment ledgers or tax records showing interest earned or paid. (ER 29; SER 135.) About 1 million dollars of Searchlight Funds were transferred to Tiburon in the year prior to Cork's bankruptcy petition and post-petition. (ER 10, 13, 318-19.)

         Cork's children, Emilie and Nathan, testified by deposition at the Bench Trial. The Bankruptcy Judge found that Cork's children, who owned Searchlight and Tiburon, had very little involvement in managing Searchlight and Tiburon. (ER 14-15.) They went to the offices and signed checks and papers that they were directed to sign. (Id.) Emilie had no knowledge of Searchlight's principal assets, namely funds in the Schwab and IBC Accounts. (Id.) Similarly, Nathan testified that he did not know of or perform any management duties beyond signing the checks which he was directed to sign. (Id.) He knew nothing about the financial condition of Tiburon or Searchlight. (Id.) In the depositions taken of Searchlight and Tiburon, Cork appeared at the Rule 30(b)(6) depositions as the person most knowledgeable. (ER 9.)

         On December 2, 2011, Cork filed his voluntary Chapter 11 Petition with the District of Arizona Bankruptcy Court. (ER 6-7.) Cork's bankruptcy schedules listed $500, 000 of the Searchlight Funds as a liquidated debt owed by Searchlight to Cork. (ER 8.)[2] On June 20, 2012, Cork's bankruptcy was converted from Chapter 11 to Chapter 7. On September 24, 2012, Gun Bo commenced the 11 U.S.C. § 727 adversary proceeding against Cork. (ER 4, Case No. 2:12-ap-1675-DPC.)

         On June 28, 2013, the Chapter 7 Trustee filed an adversary proceeding against Cork. (Case No. 2:13-ap-761-DPC.)[3] Regarding the Trustee's adversary proceeding against Cork, on August 19, 2014, Cork entered into a settlement with the Trustee. (ER 10.) The Bankruptcy Judge approved the settlement between Cork and the Trustee on October 14, 2014. (Id.)

         STANDARD OF REVIEW

         The Bankruptcy Courts are statutorily organized pursuant to 28 U.S.C. §§ 151 et seq. Under 28 U.S.C. § 158(a)(1), “[t]he district courts of the United States shall have jurisdiction to hear appeals from final judgments, orders and decrees.” In its appellate capacity, this Court reviews the Bankruptcy Court's factual findings for clear error and legal conclusions de novo. Wegner v. Murphy (In re Wegner), 839 F.2d 533, 536 (9th Cir. 1988). A mixed question of law and fact occurs when the historical facts are established, the rule of law is undisputed, and the issue is whether the facts satisfy the legal rule. Bammer v. Murray (In re Bammer), 131 F.3d 788, 792 (9th Cir. 1997).

         First, the Court establishes “the basic, primary, or historical facts, facts in the sense of a recital of external events and the credibility of their narrators.” United States v. McConney, 728 F.2d 1195, 1200 (9th Cir. 1984) (en banc). Under the clearly erroneous standard, the Court accepts the Bankruptcy Court's findings of fact unless the Court based on its review of the “entire evidence is left with the definite and firm conviction that a mistake has been committed” by the bankruptcy judge. Anderson v. Bessemer City, 470 U.S. 564, 573 (1985). Due regard is given to the opportunity of the Bankruptcy Court to judge the credibility of the witnesses. See McConney, 728 F.2d at 1201. Thus, this Court does not conduct “a full-scale independent review and evaluation of the evidence.” Id.; see also Anderson v. City of Bessemer City, N.C. , 470 U.S. 564, 575 (1985) (stating that when factual findings are based on determinations regarding the credibility of witnesses, the reviewing court gives great deference to the trial court's findings because the trial court had the opportunity to note variations in demeanor and tone of voice that bear so heavily on the court's understanding of and belief in what is said).

         The second step is the selection of the applicable rule of law. See McConney, 728 F.2d at 1200. Questions of law are reviewed under the non-deferential de novo standard. Id. at 1201.

         The third step is the application of law to fact, that is “whether the rule of law as applied to the established facts is or is not violated.” Pullman-Standard v. Swint, 456 U.S. 273, 289 n.19 (1982). The McConney court further discussed the standard of review for mixed questions of law and fact, as follows:

If application of the rule of law to the facts requires an inquiry that is essentially factual, one that is founded on the application of the fact-finding tribunal's experience with the mainsprings of human conduct, the concerns of judicial administration will favor the district court, and the district court's determination should be classified as one of fact reviewable under the clearly erroneous standard. If, on the other hand, the question requires us to consider legal concepts in the mix of fact and law and to exercise judgment about the values that animate legal principles, then the concerns of judicial administration will favor the appellate court, and the question should be classified as one of law and reviewed de novo.

McConney, 728 F.2d at 1202 (further citation and quotation omitted).

         In this case, the Appellee (Gun Bo) is the party objecting to the discharge of a debtor, and it “bears the burden of proving by a preponderance of the evidence that [the debtor's] discharge should be denied.” Khalil v. Developers Sur. & Indem. Co. (In re Khalil), 379 B.R. 163, 172 (9th Cir. BAP 2007) (resolving standard of proof for claims made under 11 U.S.C. § 727, aff'd, 578 F.3d 1167, 1168 (9th Cir. 2009) (expressly adopting the BAP's statement of applicable law). Section 727's denial of discharge is construed liberally in favor of the debtor and strictly against those objecting to discharge. See Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279, 1281 (9th Cir. 1996).

         DISCUSSION

         Denial of Discharge under § 727(a)(2).

         Cork first contends that the Bankruptcy Judge erred in denying him discharge under § 727(a)(2) because Gun Bo did not meet its burden of proving subjective intent for Cork's transfer of assets that allegedly hindered, delayed, or defrauded a creditor. (Doc. 9 at 15-22.) According to Cork, it was error because the Bankruptcy Judge relied on constructive intent rather than actual or subjective intent. (Id.) Cork acknowledges that money transfers were made to Searchlight pre-petition but contends that he never intended to hinder, delay, or defraud Gun Bo; rather, the transfers were focused on saving his business and protecting the creditors and investors in his various ongoing development projects. (Id. at 16.) Citing Retz v. Samson (In re Retz), 606 F.3d 1189, 1196 (9th Cir. 2010), Cork contends that the intent to hinder, delay, or defraud Gun Bo is not satisfied by Gun Bo's pursuit of an uncollected state court judgment which resulted in Gun Bo not getting paid. (Id.) According to Cork, the money transfers he made between 2008 and 2014 were done to maintain his ongoing development projects, save the jobs of his employees, and protect investors and lenders on his projects, not to hinder, delay or defraud, a creditor. (Id. at 17.)

         Based on the cases Cork cites in his opening brief, [4] Cork maintains that where there is no evidence that the transferred assets were not reasonably used or were squandered, indicia of fraud are lacking. (Id. at 18.) Furthermore, Cork contends that allegations of fraudulent intent may be rebutted by evidence that the debtor transferred property to keep a business afloat. (Id.) Continuing, Cork states that all of his efforts to pay back creditors and lenders who had invested far more in the projects than Gun Bo are not the actions of an individual trying to hinder, delay, or defraud anyone. (Id. at 18-20 (alleging that the funds he transferred were used for business expenses, i.e. his retirement money, $4 million dollars located in his off-shore trust, $600, 000 in refinanced home equity, and $2.3 million in personal tax refunds transferred to Searchlight, all to provide continued funding for his development projects, creditors, and investors).)

         Regarding Tiburon, Cork acknowledges that it was formed in a manner to keep it away from litigation; its sole task was to manage the projects, prevent interference, so that it could protect the investments of the creditors and investors on the various projects. (Id. at 21.) Thus, according to Cork, Tiburon was formed to protect investors and creditors that were relying upon Cork's ability to manage the development projects, not to hinder, delay, or defraud Gun Bo. (Id.)

         In summary, Cork argues that the Bankruptcy Judge erred in finding that Gun Bo sustained its burden of proof regarding intent because the money transfers Cork made to Searchlight and Tiburon were made so that Cork could extricate himself from the particular difficulty of losing the ability to manage the hundreds of millions of dollars of real estate and in so doing was enabled to promote the interest of all other creditors by continuing his business. (Id. at 22.)

         In response, Gun Bo contends that this Court's review of the Bankruptcy Judge's finding regarding Cork's intent under § 727(a)(2) is to be evaluated based on a clearly erroneous standard of review. (Doc. 20 at 22.) In support, Gun Bo cites First Beverly Bank v. Adeeb (In Re Adeeb), 787 F.2d 1339, 1342 (9th Cir. 1986), for its holding that under § 727(a)(2) whether a bankruptcy debtor transferred assets pre-petition with an intent to hinder, delay or defraud, a creditor is a finding of fact that is reviewed for clear error. (Id.) According to Gun Bo, in Adeeb, the Ninth Circuit held that under § 727(a)(2), discharge may properly be denied to a debtor when the facts show the debtor admitting that he transferred assets intending to put them out of the reach of one of his creditors. (Id. at 24, (citing Adeeb, 787 F.2d at 1343).) Continuing, since the Adeeb debtor had the intent penalized by the statute, “any other motivation he may have had for the transfer” of assets did not matter, and thus, discharge of the debtor's debts was denied. (Id.) Similarly here, Gun Bo argues that pre-petition Cork transferred his tax refunds to Searchlight so that he could continue his business operations without being bothered by Gun Bo or other pre-petition creditors and that this transfer effectively placed the Searchlight Funds beyond the pre-petition creditors' reach, thus hindering, delaying, and defrauding them. (Doc. 20 at 25.)

         As to Cork's argument that a debtor's fraudulent intent may be rebutted by evidence that the debtor transferred assets to keep a business afloat, Gun Bo contends that the Ninth Circuit in Adeeb has already rejected such an argument, and furthermore that the facts of the cases cited by Cork cut against such an argument. (Id. at 26.) As to Cork's cases, Gun Bo argues that in Miller, 39 F.3d at 307, the court held that transfers to bona fide creditors to keep a business alive while satisfying the largest bankruptcy creditor are distinguishable from those involving transfers to non-creditors and/or family members, and that these latter type of transfers merit closer scrutiny. In Brown, the court distinguished between transferring title and merely granting a security interest, stressing that “[t]here is little question that if an individual transfers title of an item but continues to exercise dominion over it, that fraud could be inferred.” 108 F.3d at 1293. Thus, according to Gun Bo, Miller and Brown do not support the proposition that a debtor's intent may be rebutted by evidence that the debtor transferred assets to non-creditor corporations, such as Searchlight and Tiburon, in order to keep his businesses afloat financially.

         In reply, Cork maintains that even though the Bankruptcy Judge did not believe the testimony he presented regarding the transfers, that disbelief did nothing to relieve Gun Bo of its obligation to present admissible evidence of actual intent to hinder, delay, or defraud bankruptcy creditors. (Doc. 17 at 10.) Regarding his testimony that he formed Tiburon as an entity “away from litigation” that could be used to manage the affairs of his business ventures, Cork disagrees that such was an admission of actual intent to hinder, delay, or defraud Gun Bo. (Id. at 11.) According to Cork, Tiburon was formed so that Cork could continue managing assets and making payroll and doing the things that must be done as a land banker. (Id. at 12.) Therefore, Cork maintains that Adeeb is not controlling because in Adeeb the debtor admitted actual intent; the Ninth Circuit neither resolved nor needed to resolve whether circumstantial evidence or inferences demonstrated the existence or absence of actual intent on the debtor's part. (Id.)

         The Court finds that the Bankruptcy Judge's factual determinations are supported by the record-Cork transferred assets pre-petition and post-petition with the intent to hinder, delay, or defraud creditors and thus was properly denied discharge pursuant to 11 U.S.C. § 727(a)(2). Here, as in the Bankruptcy Court, Gun Bo, the party objecting to Cork's discharge of a debt, retains “the burden of proving by a preponderance of the evidence that [the debtor's] discharge should be denied.” In re Khalil, 379 B.R. at 172. This Court reviews de novo whether Gun Bo satisfied the requirements of 11 U.S.C. § 727(a)(2)(A) and (B), which provides:

(a) The court shall grant the debtor a discharge, unless- . . . (2) the debtor, with intent to hinder, delay, or defraud a ...

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