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In re Rose

United States District Court, D. Arizona

May 3, 2017

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


          H. Russel Holland, United States District Judge

         Appellants/defendants Jack D. Rose and Vanessa Palma Rose appeal[1] 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 necessary.


         Jack 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.

         In 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.

         In 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.

         Highpoint 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[3] 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 attorneys.

         In June 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.[4] 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....”[5] The Roses provided no information about the Highpoint account in response to this request.

         On May 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.

         The Roses' Schedules listed thirty general unsecured creditors with claims totaling more than $35 million.[6] 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.[7]

         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.

         On June 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.[8]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 account.

         On 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.

         On January 9, 2012, the Roses' bankruptcy case was converted to a Chapter 7 liquidation case. Reaves was appointed the Chapter 7 trustee.

         On May 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.

         On 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).

         Standard of Review

[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 Cir. 2010).

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)).


         “‘[A] 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.

         The 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).

         The bankruptcy court concluded that “[t]his case involves disposition through deposit into a concealed bank account”[9] 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.”[10] The Roses argue that the bankruptcy court erred as to both of these conclusions.

         First, 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 727(a)(2)(A) [means]

[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.

         The 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.

         Here, 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.

         In sum, 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.

         The 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 ...

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