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Dranichak v. Rosetti

United States District Court, Second Circuit

May 21, 2013

RICHARD G. ROSETTI; and PLAZA 7, LLC, Chapter 7, Plaintiffs/Appellants. No. 10-63042

HODGSON RUSS LLP, RICHARD L. WEISZ, ESQ. Albany, NY, Counsel for Debtor/Appellee.

McNAMEE, LOCHNER TITUS & WILLIAMS, P.C. KENNETH L. GELLHAUS, ESQ. Albany, NY, Counsel for Plaintiffs/Appellants.


GLENN T. SUDDABY, District Judge.

The above-captioned action is a bankruptcy appeal from an Order of United States Bankruptcy Judge Diane Davis dismissing an amended complaint in an adversary proceeding filed by Richard G. Rosetti and Plaza 7, LLC ("Plaintiffs") seeking to deny Michael J. Dranichak ("Debtor") a discharge in bankruptcy under 11 U.S.C. § 724(a)(4)(A) and (B). For the reasons set forth below, Plaintiffs' appeal is denied, and Bankruptcy Judge Diane Davis's decision is affirmed.


A. Debtor's History

Debtor earned an undergraduate degree from St. Lawrence University with a major in economics. (Dkt. No. 2-3, at 7 [Transcript of Trial Before U.S. Bankr. Judge Davis on Jan. 31, 2012, or "TT."].) He also completed "some post-graduate work" at Rensselaer Polytechnic Institute. (TT. at 7.)

After college, Debtor held numerous jobs, many of which were obtained with help from his father. Debtor's first employment was with Crellin International ("Crellin"), which was partially owned by Debtor's father. (TT. at 7-8.) Simultaneously, Debtor was also employed by Colony Athletic Club, a health club. (TT. at 7.) Debtor obtained an ownership interest in Colony Athletic Club in 1992. (TT. at 8.) Colony Athletic Club struggled as a business, leading Debtor to seek a personal loan from his father for an unspecified amount. (TT. at 79.) Colony Athletic Club filed for bankruptcy in 1997. (TT. at 9, 78.)[1]

In 1997, Debtor's father opened 5672 Main Street, Inc. ("5672 Main Street"), a gym. Debtor's father was the sole shareholder of 5672 Main Street. (TT. at 9.) Debtor testified that 5672 Main Street was opened because his father had a UCC filing against gym equipment, including tread mills and weights. (TT. at 79.) Debtor's father agreed to downsize the business and allow Debtor to run the new gym business. (TT. at 79.) In 1997, Debtor was elected President of 5672 Main Street, and served as such until 2005 when 5672 Main Street closed. (TT. at 10-11.)

Soon after 5672 Main Street closed, Arizona Fitness opened in the same location as 5672 Main Street. (TT. at 13.) Again, Debtor's father was the owner of Arizona Fitness. (TT. at 12.) Debtor was employed as the "president, general manager, janitor, salesperson." (TT. at 12.) Debtor continued in this employment until 2007 when Arizona Fitness was closed. (TT. at 11-12.) Throughout his employment with 5672 Main Street and Arizona Fitness, Debtor personally guaranteed some of the loans to these businesses. (TT. at 20.)

While working at Arizona Fitness Debtor began contracting to mow lawns, paint houses, and conduct home repairs. Debtor continued to in the same capacity through the time he filed for bankruptcy. (TT. at 14.) Debtor's customers primarily paid him by the tender of checks, which he gave to his wife, Lynda Dranichak ("Lynda"), to deposit into her bank account. (Dkt. No. 2-7, at § 8 [Joint Stipulation as to Uncontested Facts For Trial In The Above Adversary Proceeding or "Joint Stipulation"]; TT. at 28-32.) Debtor has not held a bank account since the mid-1990s. (TT. at 31.)

Debtor obtained a real estate license on June 20, 2008, but did not earn any pre-petition income from that license. (Joint Stipulation, at § 11.)

B. Debtor's Bankruptcy Petition

On July 7, 2010, Debtor filed a Chapter 7 bankruptcy petition by submitting a completed Voluntary Petition, Schedules, Declaration Concerning Debtor's Schedule, Statement of Financial Affairs ("SOFA"), and Form B22A ("Means Test") (collectively "Debtor's Petition").

Debtor's Petition states that he owes $988.529.65 in unsecured business debt. (Schedule F to Debtor's Petition.) This includes $115, 218.00 to Plaza 7, LLC. ( Id. ) Debtor's Petition also states that he owes $300, 000.00 to his father, Michael Dranichak, Jr. ( Id. )

Schedule I of Debtor's Petition lists his occupation as a "self-employed" "general handyman" for the last three years. It lists Debtor's monthly gross income as $2, 300.00. Schedule I lists Debtors' spouse, Lynda, as a "homemaker" with monthly gross income of $533.00.

Question 1 of the SOFA directed Debtor to "[s]tate the gross amount of income the debtor received... from the beginning of this calendar year to the date this case was commenced." Debtor did not include any calculation for 2010. However, at trial, Debtor stated that he continued to conduct lawn mowing, snow plowing, and home repairs in the first six months of 2010. (TT. at 58.) Furthermore, his wife Lynda's bank account records show approximately $39, 000 in deposits during the first six months of 2010. (Joint Stipulation, at § 26.)[2]

Question 1 of the SOFA further directed Debtor to "[s]tate also the gross amounts received two years immediately preceding this calendar year." Debtor stated that he earned $24, 000 in 2008 from lawn mowing, snow plowing and home repairs. However, Debtor listed $24, 389 as his gross income on his 2008 tax return. (Dkt. No. 10, Attach. 1 [Trial Exhibit 2-2008 Federal Tax Return].)[3]

Further responding to Question 1 of the SOFA, Debtors stated that he earned $27, 595 in 2009 from lawn mowing, snow plowing and home repairs. However, Debtor listed $38, 607 as his gross income on his 2009 tax return. (Dkt. No. 10, Attach. 2 [Trial Exhibit 3-2009 Federal Tax Return].)[4]

It is undisputed that Debtor's Petition failed to disclose Debtor's status as a licensed real estate agent. At trial, Debtor testified that he did not disclose the license because he did not gain any income prior to the Petition. (TT. at 71.) However, later at trial, Debtor testified that he may have been listed as a "sub-agent" or "secondary agent" on certain pre-Petition real estate listings. (TT. at 121.) Moreover, Debtor admitted that he received income from four post -Petition real estate closings. (TT. at 114.)

C. Plaintiffs' Adversary Proceeding

On October 12, 2010, Plaintiffs commenced the underlying adversary proceeding by filing a complaint, claiming Debtor knowingly made false statements on his Petition. On December 15, 2010, Plaintiffs filed an amended complaint asserting the same claim. On January 31, 2012, the bankruptcy court held a one-day trial. At the trial, the only witness was Debtor. On March 30, 2012, the parties submitted post-trial briefs. On June 20, 2012, the bankruptcy court issued a 20-page Memorandum-Decision and Order dismissing Plaintiffs' amended complaint. Generally, in its Memorandum-Decision and Order, the bankruptcy court found that Debtor made "at least one false oath in the form of erroneous gross income figures within his Petition." The bankruptcy court did not individually examine each of Plaintiffs contentions to determine which constituted false oaths. However, the bankruptcy court did expressly examine whether Debtor's statements were made intentionally or with reckless disregard for the truth, concluding that they were not so made, based on the following three findings: (1) that Debtor made attempts to disclose information and genuinely believed his disclosure was consistent with his tax return; (2) that Debtor's Petition did not contain more or almost more false information and omissions than it does accurate and true information; and (3) that Debtor did not attempt to shield himself from his statements by disclaiming responsibility for those statements, but instead demonstrated that he was intimately familiar with his Petition through "responsive, " "direct" and "transparent" testimony.

D. Parties' Arguments on Appeal

1. Plaintiffs' Brief in Chief

On appeal, Plaintiffs argues that the bankruptcy court erred in failing to find that Debtor fraudulently made one or more false oaths. Plaintiffs acknowledge that the bankruptcy court held that Debtor's misstated his 2008 and 2009 income on the his Petition. Therefore, Plaintiffs' sole argument is that the bankruptcy court erred in failing to find that Debtor either fraudulently or recklessly made these statements. Plaintiffs' argue that fraudulent intent is demonstrated by the long pattern of false statements and omissions, including the following: (1) Debtor's failure to disclose his status as a licensed real estate agent; (2) Debtor's understatement of income for 2008, 2009, and 2010; (3) Debtor's failure to disclose his status as an officer and general manager of 5672 Main Street and Arizona Fitness; (4) Debtor's overstatement of expenses totaling more than $2, 000, and subsequent admission that those expenses were actually paid by his non-filing spouse; (5) Debtor's pattern of signing his checks to his spouse, thereby creating a "self-settled trust, " and (6) Debtor's evasive testimony regarding a land transfer from his father in which his name was temporarily placed ...

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