United States District Court, D. Arizona
In re JACK D. ROSE and VANESSA PALMA ROSE, Debtors.
DAVID M. REAVES, Appellee. JACK D. ROSE and VANESSA PALMA ROSE, Appellants, Bk. No. 2:11-bk-13156-GBN Adv. No. 2:12-ap-00996-GBN BAP No. AZ-16-1327
Russel Holland, United States District Judge
Jack D. Rose and Vanessa Palma Rose appeal the bankruptcy
court's order and judgment denying a discharge under
sections 727(a)(2)(A) and 727(a)(4)(A) of the Bankruptcy
Code. Oral argument was not requested and is not deemed
Rose was a real estate developer whose business was adversely
affected by the real estate market crash in 2007 and 2008.
Mr. Rose is a graduate of Yale University and Harvard Law
School. Vanessa Rose is a registered nurse and her role in
Mr. Rose's business was to sign papers, such as personal
guarantees, upon request.
approximately February of 2010, Mubeen Aliniazee formed the
entity Highpoint Management Solutions LLC
(“Highpoint”). Aliniazee was a former employee as
well as a personal friend of Mr. Rose.
approximately May 2010, the Roses began using a bank account
maintained in Highpoint's name. The Roses deposited their
own funds into the Highpoint account and Highpoint created a
ledger to track these deposits The Highpoint ledger also
tracked any payments made out of the Highpoint account on the
Roses' behalf. The Roses deposited their state income tax
refund into the Highpoint account in December 2010 and their
federal income tax refund in February 2011. These two
deposits into the Highpoint account totaled approximately
$300, 000. Mr. Rose and Highpoint entered into written
agreements regarding the deposit of the tax refunds into the
Highpoint account, one for each of the tax refund deposits.
In addition to the two tax refund deposits, the Roses made
eleven other deposits into the Highpoint account between May
27, 2010 and May 5, 2011, totaling $411, 285.32 in all.
issued checks from the account at the direction of Mr. Rose.
In addition, Mr. Rose had a debit card for this account. The
money deposited in the Highpoint account by the Roses was
primarily used to pay lawyers, including Mr. Rose's
defense attorney and the Roses' bankruptcy counsel. In
addition, at least one creditor (Irene Beard/Touch Stone) was
paid out of the Highpoint account as were the Roses'
accountants. The Highpoint account was also used to pay
personal expenses of the Roses. Mr. Rose testified that he
used the Highpoint account because he had no other bank
account and he needed to pay his attorneys. Mr. Rose
testified that he had no intent to conceal the funds in the
Highpoint account and that he had no intent to defraud his
other creditors by using the Highpoint account to pay his
2010, Meridian Bank NA (“Meridian”) obtained an
$8 million judgment against the Roses. Meridian pursued
collection by garnishing the Roses' bank accounts. In
December 2010, Mr. Rose closed his bank account at Washington
Federal after it was garnished by Meridian. Meridian also
served a writ of garnishment on Highpoint in December 2010.
This garnishment was limited to funds in the account that
constituted earnings of the Roses and was not a general
garnishment of assets. Highpoint denied paying earnings to
Mr. Rose. As part of its collection efforts,
Meridian also served document subpoenas on the Roses and
sought, among other documents, “[s]tatements on all
checking and savings accounts maintained by or on behalf of
the named Defendant/Judgment Debtor in any depository,
wherever located....” The Roses provided no information
about the Highpoint account in response to this request.
6, 2011, the Roses filed for bankruptcy protection under
Chapter 11 of the Bankruptcy Code. As part of their case, the
Roses filed schedules, a statement of financial affairs
(“SOFA”), an amended SOFA, amended Schedules A,
B, and C, amended Schedules B and F, and a final amended
SOFA. The Roses each read these various schedules,
statements, and amendments before signing them. The Roses
signed all of these filings under oath, knowing that their
creditors would rely on them and after being warned of
possible sanctions for making a false statement.
Roses' Schedules listed thirty general unsecured
creditors with claims totaling more than $35
million. The SOFAs listed more than fifty entities
in which the Roses' had an interest, twenty-one lawsuits
involving the Roses' in some capacity, and five
foreclosure actions against real estate owned by the
Roses' initial SOFA did not list the funds deposited into
the Highpoint account or otherwise mention the Highpoint
account. The Highpoint account was also not listed on the
Roses' initial Schedule B. Mr. Rose believed that at the
time the Roses filed their petition, there were no Rose funds
left in the Highpoint account, but there was in fact $1,
325.41 in the account. The Roses' September 2013
amendment of Schedule B was the first time the Highpoint
account was listed.
7, 2011, the United States Trustee conducted a meeting of
creditors. The Highpoint account was not mentioned or
discussed during the June 7 meeting. This meeting was
relatively short because of Mrs. Rose's work schedule and
the Trustee's availability.The meeting was continued to June
30, 2011. At the June 30, 2011 meeting, Mr. Rose was
questioned extensively about the Highpoint account. After the
creditors' meeting, Highpoint produced a copy of the
Highpoint ledger and bank statements from the Highpoint
November 16, 2011, plaintiff David Reaves was appointed as
Chapter 11 trustee. Copies of the Highpoint ledger and
Highpoint account bank statements were forwarded to him.
January 9, 2012, the Roses' bankruptcy case was converted
to a Chapter 7 liquidation case. Reaves was appointed the
Chapter 7 trustee.
23, 2012, Reaves commenced an adversary proceeding seeking to
deny the Roses a Chapter 7 discharge pursuant to 11 U.S.C.
§§ 727(a)(2)(A), 727(a)(4)(A), and 727(a)(7). After
four days of trial testimony and post-trial briefing and
argument, on September 27, 2016, the bankruptcy court entered
its Findings of Fact, Conclusions of Law and Order. The
bankruptcy court concluded that Mr. Rose had violated
sections 727(a)(2)(A) and 727(a)(4)(A), but that Mrs. Rose
had not. The bankruptcy court also concluded that there had
been no violation of section 727(a)(7) by either of the
Roses. The bankruptcy court thus ordered that Mr. Rose and
the marital community of Jack D. Rose and Vanessa Palma Rose
would not be granted a discharge in their bankruptcy case.
Judgment to that effect was entered on September 29, 2016.
November 7, 2016, the Roses filed an appeal of the bankruptcy
court's order and judgment denying a discharge under
sections 727(a)(2)(A) and 727(a)(4)(A).
[T]he standard of review for an objection to discharge is:
“(1) the court's determination of the historical
facts are reviewed for clear error; (2) the selection of the
applicable legal rules under § 727 is reviewed de novo;
and (3) the application of the facts to those rules requiring
the exercise of judgments about values animating the rules is
reviewed de novo.”
Weddell v. Landis, 551 B.R. 74, 79-80 (D. Nev. 2016)
(quoting In re Searles, 317 B.R. 368, 373 (9th Cir.
BAP 2004)). “‘Because discharge is a matter
generally left to the sound discretion of the bankruptcy
judge, [courts] disturb this determination only if [they]
find a gross abuse of discretion.'” Id. at
80 (quoting In re Cox, 41 F.3d 1294, 1296 (9th Cir.
1994)). “Accordingly, district courts ‘defer to
the bankruptcy court's conclusions ... unless its factual
findings are clearly erroneous or it applies the incorrect
legal standard.'” Id. “A court's
factual determination is clearly erroneous if it is
illogical, implausible, or without support in the
record.” In re Retz, 606 F.3d 1189, 1196 (9th
When factual findings are based on determinations regarding
the credibility of witnesses, [the court] give[s] great
deference to the bankruptcy court's findings, because the
bankruptcy court, as the trier of fact, had the opportunity
to note “variations in demeanor and tone of voice that
bear so heavily on the listener's understanding of and
belief in what is said.”
Id. (quoting Anderson v. City of Bessemer City,
North Carolina, 470 U.S. 564, 575 (1985)).
central purpose of the [Bankruptcy] Code is to provide a
procedure by which certain insolvent debtors can reorder
their affairs, make peace with their creditors, and enjoy
‘a new opportunity in life and a clear field for future
effort, unhampered by the pressure and discouragement of
preexisting debt.'” In re Sicroff, 401
F.3d 1101, 1104 (9th Cir. 2005) (quoting Grogan v.
Garner, 498 U.S. 279, 286 (1991)). “It is only the
‘honest but unfortunate' debtor, however, who is
entitled to an entirely unencumbered fresh start.”
Id. (quoting Grogan, 498 U.S. at 286). A
debtor may forfeit his discharge if, in the year before
filing, he, with an intent to hinder, delay or defraud,
transfers or conceals property or if he knowingly and
fraudulently makes a false oath in his schedules or SOFA.
first issue presented in this appeal is whether the
bankruptcy court erred in denying Mr. Rose's discharge
under section 727(a)(2)(A). Section 727(a)(2)(A) provides
that a bankruptcy discharge can be denied if
the debtor, with intent to hinder, delay, or defraud a
creditor or an officer of the estate charged with custody of
property under this title, has transferred, removed,
destroyed, mutilated, or concealed, or has permitted to be
transferred, removed, destroyed, mutilated, or concealed ...
property of the debtor, within one year before the date of
the filing of the petition[.]
11 U.S.C. § 727(a)(2)(A). “A party seeking denial
of discharge under § 727(a)(2) must prove two things:
‘(1) a disposition of property, such as transfer or
concealment, and (2) a subjective intent on the debtor's
part to hinder, delay or defraud a creditor through the act
[of] disposing of the property.'” In re
Retz, 606 F.3d at 1200 (quoting Hughes v.
Lawson, 122 F.3d 1237, 1240 (9th Cir. 1997)).
“Section 727's denial of discharge is construed
liberally in favor of the debtor and strictly against those
objecting to discharge.” In re Adeeb, 787 F.2d
1339, 1342 (9th Cir. 1986).
bankruptcy court concluded that “[t]his case involves
disposition through deposit into a concealed bank
account” and “that Mr. Rose intentionally
concealed his use and interest in the Highpoint account both
before and after filing bankruptcy to hinder and delay his
creditors, principally Meridian.” The Roses
argue that the bankruptcy court erred as to both of these
the Roses argue that the bankruptcy court erred in concluding
that there had been a disposition of property for purposes of
section 727(a)(2)(A) because there was neither a transfer nor
a concealment here. The Roses argue that there could not have
been a transfer of property because Mr. Rose maintained
ownership of the funds deposited into the Highpoint account.
The Roses rely on Adeeb, 787 F.2d 1339, in support
of this argument. There, the Ninth Circuit held that
‘transferred and remained transferred[.]'”
Id. at 1344. The court explained that
“‘transferred' as used in section
[t]he language of section 727(a)(2)(A) demonstrates that
Congress intended to deny discharge to debtors who take
actions designed to keep their assets from their creditors
either by hiding the assets until after they obtain their
discharge in bankruptcy or by destroying them. The only type
of transfer that has the effect of keeping assets from
creditors is a transfer in which the property remains
transferred at the time the bankruptcy petition is filed.
Id. at 1344-45 (internal citation omitted). The
Roses argue that the bankruptcy court departed from the
reasoning of Adeeb and effectively concluded that
disposition of property can occur with any transfer of funds
by the debtor, regardless of whether the funds remained the
property of the debtor. Here, the Roses insist there could
not have been a transfer when Mr. Rose deposited funds into
the Highpoint account because Mr. Rose maintained control of
the deposited funds at all times and the funds were not
beyond the reach of their creditors, as evidenced by the fact
that at least one of their creditors was paid with funds from
the Highpoint account.
Roses' reliance on Adeeb is misplaced. There,
Adeeb, who was facing financial difficulties,
“transferred title to several parcels of real property
to friends and associates for no consideration” on the
advice of his attorney, who was not a bankruptcy attorney.
Adeeb, 787 F.2d at 1341. “As his financial
condition continued to worsen, Adeeb sought advice from
Mayer, a bankruptcy attorney. Mayer advised Adeeb to reverse
the transfers and to disclose them to his creditors. Adeeb
immediately began to reverse the transfers.”
Id. Adeeb then called a meeting of his creditors at
which he disclosed the transfers and advised that he was in
the process of reversing the transfers. Id. at
1341-42. After the meeting, some of Adeeb's creditors
filed an involuntary bankruptcy petition against him.
Id. at 1342. “Adeeb decided not to contest
that petition and filed a voluntary bankruptcy
petition” five days later. Id. Three of his
creditors sought to block his discharge pursuant to section
727(a)(2)(A). Id. The bankruptcy court held that
section 727(a)(2)(A) barred Adeeb's discharge, but the
Ninth Circuit reversed. Id. at 1342, 1346. The Ninth
Circuit held “that a debtor who transfers property
within one year of bankruptcy with the intent penalized by
section 727(a)(2)(A) may not be denied discharge of his debts
if he reveals the transfers to his creditors, recovers
substantially all of the property before he files his
bankruptcy petition, and is otherwise qualified for a
discharge.” Id. at 1345. The Ninth Circuit
“emphasize[d] that the debtor must be making a good
faith effort to recover the property prior to the filing of
the involuntary petition, and he must actually recover the
property within a reasonable time after the filing of the
involuntary petition.” Id. at 1346.
in contrast, Mr. Rose made no effort to recover any of the
funds that he had transferred to the Highpoint account,
primarily because those funds had been transferred, as that
term is defined for purposes of section 727(a)(2)(A), to Mr.
Rose's lawyers, accountants, and other creditors. The
funds that were deposited into the Highpoint account remained
transferred at the time of the petition because they were no
longer in Mr. Rose's control (except for approximately
$1300). The fact that the Roses had not deposited the funds
in the Highpoint account so that they could access them after
their bankruptcy case was concluded does not save the Roses.
By depositing the funds in the Highpoint account, the Roses
kept assets from one of their major creditors, Meridian. The
Roses' argument that there was no property to recover
from the Highpoint account because the property had never
been “transferred” as that term is used in
section 727(a)(2)(A) misses the mark. There was no property
to recover not because the property that the Roses had put in
the Highpoint account had never been transferred, but because
the Roses had transferred the property in the Highpoint
account to their lawyers, accountants, and others.
the bankruptcy court did not err in finding that the use of
the Highpoint account by Mr. Rose involved a disposition by
transfer. Mr. Rose first deposited (transferred) funds held
in the Roses' name to the Highpoint account. Those funds
were then paid out (a second transfer) to others such that
when the Roses filed their petition, virtually all of the
funds had been paid out of the Highpoint account. These
actions by Mr. Rose constituted a disposition of property.
Roses argue that if depositing funds into a checking account
and using those funds is considered a “transfer”
for purposes of section 727(a)(2)(A), a debtor, in the year
prior to filing his petition, would not be able to pay
ordinary expenses without running afoul of section
727(a)(2)(A). Not so. The intent element of a section
727(a)(2)(A) violation would still have to be met. If the use
of a checking account by a debtor was not for the purpose of
hindering, delaying, or defrauding a creditor, the