Hannon v. ABCD Holdings, LLC , 839 F.3d 63 ( 2016 )

United States Court of Appeals
For the First Circuit
No. 15-2269
IN RE: PATRICK J. HANNON; ELIZABETH HANNON,
Debtors.
PATRICK J. HANNON,
Plaintiff, Appellant,
v.
ABCD HOLDINGS, LLC; ABC&D RECYCLING, INC.;
WARE REAL ESTATE, LLC,
Defendants, Appellees.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Denise J. Casper, U.S. District Judge]
Before
Kayatta and Barron, Circuit Judges,
McAuliffe,* District Judge.
Matthew R. Johnson, with whom Joshua M. Wyatt and Devine,
Millimet & Branch, P.A. were on brief, for appellant.
Joel E. Faller, with whom McLaughlin Brothers, P.C. was on
brief, for appellees.
October 7, 2016
_____________________
*Of the District of New Hampshire, sitting by designation.
McAULIFFE, District Judge. Patrick J. Hannon ("Hannon")
appeals from the entry of summary judgment denying his petition
for a discharge in bankruptcy. See 11 U.S.C. § 727(a)(4)(A). The
bankruptcy court denied the discharge after concluding that Hannon
made false material statements with respect to disbursements made
on his behalf by third parties during the bankruptcy proceeding.
The district court affirmed the bankruptcy court's entry of summary
judgment, and we affirm as well.
I. Background
A. Factual Background
In May of 2012, Hannon and his wife, Elizabeth, sought
protection from their creditors by filing a voluntary bankruptcy
petition under Chapter 11 of the Bankruptcy Code.1 The Hannons
reported total assets of about $6 million, and liabilities of
approximately $10.4 million, which included a disputed tax debt of
more than $7 million.
Hannon owned and operated a recycling and scrap metal
company, ABC&D Recycling, Inc. ("ABC&D Recycling"), as well as a
real estate company, Ware Real Estate, LLC ("Ware Real Estate"),
which held title to the land on which ABC&D Recycling was located.
1 On January 2, 2013, the case was converted to a
Chapter 7 proceeding, upon motion of the United States Trustee.
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The Hannons estimated that monthly expenses necessary to support
their family during the bankruptcy process would average about
$13,180, and noted that the income required to pay those expenses
would come from ABC&D Recycling's ongoing operations while Hannon
served as debtor-in-possession.
ABC&D Recycling and Ware Real Estate
Hannon bought ABC&D Recycling and Ware Real Estate with
the help of an attorney named George McLaughlin, Esq., who had
previously represented Hannon. McLaughlin owned a financing
company, Bright Horizon Finance, LLC ("Bright Horizon"), which
loaned Hannon the necessary funds. Bright Horizon's loan terms
included warrant rights, affording it the option to purchase a
50.1 percent interest in each company. On June 21, 2012, after
the Hannons filed for bankruptcy protection, Bright Horizon
assigned its warrant to ABCD Holdings, LLC ("ABCD Holdings"),
another company controlled by McLaughlin, and, on July 17, 2012,
ABCD Holdings exercised those warrant rights, thereby obtaining a
50.1 percent ownership interest in both Ware Real Estate and ABC&D
Recycling.
A few weeks earlier, on June 27, 2012, McLaughlin,
suspecting that business funds were being diverted by Hannon for
unauthorized purposes, obtained an ex parte temporary restraining
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order from the Suffolk County Superior Court. That order
temporarily barred Hannon from ABC&D Recycling's premises. On
July 2, 2012, however, that order was modified to allow Hannon to
resume operational control over the business. A short time later,
on July 18, 2012, ABCD Holdings removed Hannon as an officer of
Ware Real Estate and appointed McLaughlin to replace him. Hannon,
however, continued to operate ABC&D Recycling until
February 6, 2013, when ABCD Holdings removed him as an officer and
director of that company as well. On March 13, 2013, the
bankruptcy court approved the sale of Hannon's remaining minority
interest in both Ware Real Estate and ABC&D Recycling to ABCD
Holdings.
Hannon's Monthly Operating Reports
Hannon was required to file monthly operating reports
("MORs") on a standardized form with the United States Trustee's
office. He did so from May through September of 2012. Hannon
says that he provided his counsel with bank statements from the
debtor-in-possession accounts and, based on those statements,
counsel completed the necessary forms for him. Hannon then
reviewed the forms and signed a certification on each MOR which
declared "under penalty of perjury" that the report was true and
correct "to the best of [his] knowledge and belief."
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The MOR forms require, among other things, that a debtor
affirmatively disclose whether funds have been disbursed for the
debtor's benefit from any account other than a debtor-in-
possession account, and, if so, to provide an explanation for such
payments. Here, that would include disclosure of disbursements
made by ABC&D Recycling and Ware Real Estate for Hannon's benefit.
The MOR form also instructs the debtor to report the amount of
estate disbursements made by outside sources. On all of the
relevant MORs, Hannon reported that funds had been disbursed for
his and his wife's benefit from an account other than a debtor-
in-possession account. In May and June of 2012, for example,
Hannon's MORs identified $1,407.24 and $2,830.30, respectively, as
"payments from ABC&D for rent and utilities." Hannon's September
MOR also disclosed that funds had been disbursed from "ABC&D for
rent and utilities," but reported that no amount ("0") had been
disbursed for the estate's benefit from outside sources. Hannon's
July and August MORs contained no reference to disclosable payments
from ABC&D Recycling, and reported "0" estate disbursements made
by outside sources.
Companies Object to Discharge
On July 12, 2013, ABCD Holdings, ABC&D Recycling, and
Ware Real Estate (the "Companies") filed an adversary complaint
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against Hannon in the bankruptcy proceeding, objecting to his
discharge in bankruptcy. Based upon a forensic accounting
analysis of the books and records of ABC&D Recycling and Ware Real
Estate, the Companies alleged that while Hannon was in control of
the businesses, he diverted a substantial amount of business
revenue to his own benefit, without authority. According to the
Companies, business funds were diverted by means of: (1) Hannon's
use of business accounts to pay Hannon's entirely personal
expenses; (2) Hannon's withdrawal of funds from business bank
accounts for entirely personal use; and (3) Hannon's and his family
members' use of business debit cards to cover entirely personal
expenses. The Companies asserted that Hannon did not disclose
receipt of the majority of those diverted funds on his MORs, as
required. They charged that Hannon diverted approximately $99,000
from ABC&D Recycling and Ware Real Estate between May and September
of 2012, during which period he only identified approximately
$4,200 in disbursements made on his behalf on the MOR forms.
On November 21, 2013, the Companies moved for partial
summary judgment on their claim that, because Hannon made a false
oath or filed a false account in connection with his bankruptcy
proceeding, he should be denied a discharge. 11 U.S.C.
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§ 727(a)(4)(A). Hannon, acting pro se,2 opposed the motion but
did not deny that the disbursements identified by the Companies
actually occurred. Instead, he contended that virtually all of
the identified expenditures were made for business purposes, and
not for his personal benefit. And, he argued, some expenditures
that appeared to be for his personal benefit were actually made
by, or on behalf of, other employees.
Hannon's Proffered Defenses
A hearing was held in the bankruptcy court on the
Companies' motion. The bankruptcy court questioned Hannon about
the transactions at issue. Hannon denied that the identified
disbursements were made for his personal benefit, stating that
nearly all of them ("99.9 percent of them") had a business purpose.
The bankruptcy court took the matter under advisement, but offered
Hannon the opportunity to "spell out in detail" his defenses to
the multiple diversion claims.
Hannon then retained new legal counsel, who filed a
further brief in opposition to the Companies' motion for partial
2 Hannon initially had the benefit of retained counsel to
assist him in navigating the bankruptcy process, but was unable to
maintain that representation. The bankruptcy court allowed
counsel to withdraw by order dated July 13, 2013, after which
Hannon acted pro se. He then retained new counsel after a hearing
on the Companies' motion for partial summary judgment.
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summary judgment. Hannon retreated from his earlier claim that
99.9 percent of the disbursements had a business purpose, but
included an affidavit in which he declared that many of the
disbursements and withdrawals from business accounts actually had
a business purpose. He also filed an affidavit by Jeffrey M.
Dennis, CPA, in which Dennis opined that laypersons (like Hannon,
who had a high school education) typically lack the necessary
training to accurately complete MORs. Finally, Hannon provided
the court with an unsworn attachment to his memorandum, in the
form of a spreadsheet, detailing his explanations for each of the
disbursements challenged by the Companies. Hannon's explanations
were divided into three categories: 1) those expenditures that
Hannon "believe[d] were incurred for his benefit," 2) those that
he "believe[d were] incurred for legitimate business purposes,"
and 3) those that he claimed were incurred for both a personal and
a business purpose.
Hannon conceded that $19,323.22 in business
disbursements were "incurred for his benefit." Those transactions
included eleven cash withdrawals, which Hannon labeled as
"Stipends to Joint Debtor" (his wife); two paychecks to Hannon
from ABC&D Recycling; $7,500 in rent payments made to Hannon's
landlord; $1,500 in payments to a boat storage facility in Maine;
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retail purchases for groceries, clothing, and entertainment; and
video game and music purchases made by Hannon's daughters on a
business debit card.3
Hannon identified $77,155.91 of the challenged
disbursements as having a business purpose, including substantial
cash withdrawals used to make cash payments for scrap metal,
expenses related to business travel, and expenses associated with
transporting and feeding ABC&D Recycling employees.4 He included
within that category costs associated with two of his homes, one
in Wells, Maine, and another in Truro, Massachusetts. According
to Hannon, those vacation homes were used for entertaining
potential ABC&D clients, so costs associated with maintaining
those homes, as well as monies spent entertaining clients while in
residence, qualified as business expenses. Disbursements were
made to cover costs for utilities, landscaping, local hardware and
liquor store purchases, and meals at nearby restaurants.
3 Hannon stated that he "believe[d]" the stipends to the
Joint Debtor and his paychecks were reported on the MORs.
4 The bankruptcy court pointed out that Hannon included
within the "business expense" category three disbursements he had
previously listed on his Addendum to the May and June MORs as paid
by ABC&D Recycling: a $97.84 payment to Dish Network, a $355.76
payment to NSTAR Electric, and a $178.89 payment to a Hannaford
grocery store. Hannon cryptically described those payments as
business expenses relating to "client guest house," "company
utility," and "ABC&D grocery," respectively.
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Finally, Hannon identified $2,849.99 of the questioned
disbursements as having both a personal and a business purpose.
He included within that final category utility payments related to
his Wells and Truro homes.
Hannon had previously given testimony concerning his
Wells and Truro homes at a June 6, 2012, meeting of creditors. In
response to questioning by counsel to the United States Trustee,
Hannon said that he and his family used the Wells home only
occasionally and during the day, and that it needed significant
work (as a result of major leaks and a dysfunctional heating
system) to make it rentable. The Truro vacation home, he said,
was used only "once in a while" and otherwise remained unoccupied.
He did not mention any marketing or other business entertainment
uses of either property.
B. Procedural History
On June 10, 2014, after fully considering the matter,
the bankruptcy judge granted summary judgment in favor of the
Companies and declined to grant Hannon a discharge in bankruptcy.
11 U.S.C. § 727(a)(4)(A). The court found, as Hannon admitted,
that over $19,000 in payments by ABC&D Recycling or Ware Real
Estate were made for Hannon's personal benefit, and that the
majority of those payments were not disclosed on the MORs, as
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required. The bankruptcy court found that Hannon's affidavit
explanations for the claimed business expenditures related to his
Wells and Truro homes were directly contradicted by his earlier
testimony at the creditors' meeting, and that Hannon provided no
explanation for the substantive change. Accordingly, the
bankruptcy court determined that Hannon failed to raise a genuine
issue of material fact with respect to whether the business
payments relating to his Wells and Truro houses were "in fact
incurred solely for his personal benefit."
The bankruptcy court took note of the extent and
frequency of Hannon's omissions, as well as the fact that Hannon
had partially disclosed payments made for his benefit by ABC&D
Recycling in his May and June MORs. From the undisputed facts,
the bankruptcy court determined that the "only plausible
conclusion is that [Hannon] acted with reckless indifference to
the truth when filing his MORs." The court decided that it was
unnecessary to consider the additional disbursements at issue,
because Hannon admitted sufficient unreported payments made on his
behalf to resolve the motion for summary judgment.
Hannon appealed to the district court. The district
court affirmed the bankruptcy court's order on September 22, 2015.
This appeal followed.
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II. Standard of Review
As recently noted in Rok Builders, LLC v. 2010-1 SFG
Venture, LLC, (In re Moultonborough Hotel Group, LLC), "[a]lthough
we constitute the second tier of appellate review in this case
arising out of a decision by the bankruptcy court in an adversary
proceeding, 'we cede no special deference to the determinations
made by the . . . district court' and instead 'assess the
bankruptcy court's decision directly.'" 726 F.3d 1, 4 (1st Cir.
2013) (quoting City Sanitation, LLC v. Allied Waste Servs. of
Mass., LLC (In re Am. Cartage, Inc.), 656 F.3d 82, 87 (1st Cir.
2011)). Our review of the bankruptcy court's order granting
summary judgment is de novo. Desmond v. Varrasso (In re Varrasso)
37 F.3d 760, 763 (1st Cir. 1994) (citations omitted); see also
Daniels v. Agin, 736 F.3d 70, 78 (1st Cir. 2013).
The bankruptcy court entered summary judgment under
Federal Rule of Bankruptcy Procedure 7056, which expressly
"incorporates into bankruptcy practice the standards of Rule 56 of
the Federal Rules of Civil Procedure." In re Varrasso, 37 F.3d
at 762. Accordingly, the "legal standards traditionally
applicable to motions for summary judgment . . . apply without
change in bankruptcy proceedings." In re Moultonborough Hotel
Grp., LLC, 726 F.3d at 4 (citations omitted). Summary judgment
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in bankruptcy proceedings, then, should be granted "only when no
genuine issue of material fact exists and the movant has
successfully demonstrated an entitlement to judgment as a matter
of law." In re Varrasso, 37 F.3d at 763. "[A]ll reasonable
inferences from the facts must be drawn in the manner most
favorable to the nonmovant." Id.
III. Discussion
We begin with a basic principle. "Under [11 U.S.C.]
§ 727(a)(4)(A), [a] debtor can be refused his discharge only if he
(i) knowingly and fraudulently made a false oath, (ii) relating to
a material fact." Boroff v. Tully (In re Tully), 818 F.2d 106,
110 (1st Cir. 1987). As the moving parties, the Companies must
establish that there is no genuine dispute about any material fact,
and that they are entitled to judgment as a matter of law, because:
(1) Hannon made a false statement under oath in the course of his
bankruptcy proceeding; (2) he did so knowingly and fraudulently;
and (3) the false statement related to a material fact. Perry v.
Warner (In re Warner), 247 B.R. 24, 26 (B.A.P. 1st Cir. 2000). As
we have previously recognized:
[11 U.S.C. § 727], by its very nature, invokes
competing considerations. On the one hand, bankruptcy
is an essentially equitable remedy. As the [Supreme]
Court has said, it is an "overriding consideration that
equitable principles govern the exercise of bankruptcy
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jurisdiction." Bank of Marin v. England, 385 U.S. 99,
103 (1966). In that vein, the statutory right to a
discharge should ordinarily be construed liberally in
favor of the debtor. Matter of Vickers, 577 F.2d 683,
687 (10th Cir. 1978); In re Leichter, 197 F.2d 955, 959
(3d Cir. 1952), cert. denied, 344 U.S. 914 (1953);
Roberts v. W.P. Ford & Son, Inc., 169 F.2d 151, 152 (4th
Cir. 1948). "The reasons for denying a discharge to a
bankrupt must be real and substantial, not merely
technical and conjectural." Dilworth v. Boothe, 69 F.2d
621, 624 (5th Cir. 1934).
On the other hand, the very purpose of certain
sections of the law, like 11 U.S.C. § 727(a)(4)(A), is
to make certain that those who seek the shelter of the
bankruptcy code do not play fast and loose with their
assets or with the reality of their affairs. The
statutes are designed to insure that complete, truthful,
and reliable information is put forward at the outset of
the proceedings, so that decisions can be made by the
parties in interest based on fact rather than fiction.
As we have stated, "[t]he successful functioning of the
bankruptcy act hinges both upon the bankrupt's veracity
and his willingness to make a full disclosure." [Matter
of] Mascolo, 505 F.2d [274,] 278 [(1st Cir. 1974)].
In re Tully, 818 F.2d at 110 (parallel citations omitted). With
these principles in mind, we turn to Hannon's arguments on appeal.
A. False Oath
The bankruptcy court, invoking the principle that "an
unsworn declaration made under penalty of perjury is the equivalent
of a verification under oath," determined that, because Hannon
signed the MORs under penalty of perjury, his statements on those
forms were made under oath. 28 U.S.C. § 1746; Smith v. Grondin
(In re Grondin), 232 B.R. 274, 276 (B.A.P. 1st Cir. 1999). Hannon
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challenges that determination on appeal, arguing that the
certification required by MORs is not the type of certification
covered by § 1746, which contemplates a certification as "true and
correct," and not one based on a subjective understanding.
Therefore, he argues, his MOR certifications were not made under
"oath," as necessary to support a false oath claim.
Hannon concedes that he presents the argument for the
first time on appeal. "[T]herefore, we can consider the argument
waived." Hoover v. Harrington (In re Hoover), 828 F.3d 5, 11 (1st
Cir. 2016) (quoting Net-Velazquez v. Wiscovitch-Rentas (In re Net-
Velazquez), 625 F.3d 34, 40 (1st Cir. 2010) ("[A]bsent the most
extraordinary circumstances, legal theories not raised squarely in
the lower court cannot be broached for the first time on
appeal.")). However, even if Hannon had presented the argument
to the bankruptcy court, it would have likely failed. The
verification language used on the MOR is nearly identical to the
verification language used on debtor bankruptcy schedules.5 Other
5 The MOR certification reads: "I declare under penalty
of perjury (28 U.S.C. Section 1746) that this report and all
attachments are true and correct to the best of my knowledge and
belief."
The "Declaration Concerning Debtor's Schedules" reads: "I
declare under penalty of perjury that I have read the foregoing
summary and schedules, consisting of ___ sheets, and that they are
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circuit courts that have addressed the point have consistently
found the language used on the debtor schedules sufficient to
constitute a verification under oath for purposes of
§ 727(a)(4)(A). See, e.g., Retz v. Samson (In re Retz), 606 F.3d
1189, 1196 (9th Cir. 2010) ("A false statement or an omission in
the debtor's bankruptcy schedules or statement of financial
affairs can constitute a false oath.") (quoting Khalil v.
Developers Sur. & Indem. Co. (In re Khalil), 379 B.R. 163, 172
(B.A.P. 9th Cir. 2007)); Beaubouef v. Beaubouef (Matter of
Beaubouef), 966 F.2d 174, 178 (5th Cir. 1992) ("False oaths
sufficient to justify the denial of discharge include . . . a false
statement or omission in the debtor's schedules") (internal
quotations omitted) (quoting 4 Collier on Bankruptcy ¶ 727.01[1],
at 727–59 (15th ed. 1992); Chalik v. Moorefield (In re Chalik),
748 F.2d 616, 618 n.3 (11th Cir. 1984) ("A knowing and fraudulent
omission from a sworn Statement of Affairs or schedule may
true and correct to the best of my knowledge, information and
belief."
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constitute a false oath.") (citing Farmers Coop. Ass'n v. Strunk,
671 F.2d 391, 395 (10th Cir. 1982)).6
We do not discern any principled basis upon which to
draw a meaningful distinction between the certification language
used on the MOR form from that used on a debtor's schedules, and
think the nearly identical language used on the MOR form would
likely constitute a verification under oath for § 727(a)(4)(A)
purposes. "Sworn statements filed in any court must be regarded
as serious business. In bankruptcy administration, the system
will collapse if debtors are not forthcoming." In re Tully, 818
F.2d at 112. So, while it is unlikely that Hannon would prevail,
the issue is forfeited in this case due to Hannon's failure to
raise it below.
B. "Knowingly and Fraudulently"
Hannon's main argument on appeal relates to the
bankruptcy court's determination that there was no genuine issue
of material fact with respect to his state of mind when he filed
the MORs. Hannon asserts that the bankruptcy court incorrectly
6 While the point seems not to have been directly
confronted by this court, it has been assumed, for purposes of
§ 727(a)(4)(A), that omissions and false statements on a debtor's
schedules constitute statements made under oath. See, e.g., In
re Tully, 818 F.2d at 110.
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concluded that the undisputed facts established his knowing and
fraudulent state of mind as a matter of law. Relying upon our
decision in In re Varrasso, 37 F.3d at 764, he argues that the
undisputed facts here--as in In re Varrasso--do not point to only
one conclusion about his state of mind, but instead support
"conflicting yet plausible inferences--inferences that are capable
of leading a rational factfinder to different outcomes in a
litigated matter depending on which of them the factfinder draws."
Id. Because the undisputed facts require a choice between two
plausible, and conflicting, inferences (reckless conduct or merely
careless conduct), he argues, summary judgment was improper.
Hannon says the undisputed facts support an inference
that he acted carelessly, but not recklessly. He stresses that
he had no reason to conceal the business disbursements made for
his personal benefit because, even including those disbursements,
his actual monthly expenses were still significantly lower than
the monthly support amount he estimated would be needed at the
outset of the bankruptcy proceeding. So, no harm, and no intent,
given no evident reason for him to conceal those disbursements.
He also notes that his formal education ended with high school,
and he could well have misinterpreted the complicated bankruptcy
forms. Moreover, he points out that he relied on legal counsel
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to prepare the forms. Those facts should render a culpable mental
state doubtful, he contends.
Hannon also points to his "good faith" participation in
the bankruptcy process, and his improved reporting practices over
time, which also should tend to negate any inference of an intent
to deceive. Finally, Hannon argues that accurate MOR reporting
was necessarily hampered by his lack of access to underlying
financial documentation about the businesses. Files and records
were missing, he says, after the brief hiatus between the issuance
of the temporary restraining order and his resumption of control
over ABC&D's operations when the restraining order was modified.
All of which, Hannon argues, would readily support a legal
conclusion that he acted carelessly, but did not act with reckless
indifference to the truth.
A debtor "knowingly and fraudulently" makes a false oath
if he "knows the truth and nonetheless willfully and intentionally
swears to what is false." Lussier v. Sullivan (In re Sullivan),
455 B.R. 829, 837 (B.A.P. 1st Cir. 2011) (internal quotation marks
and citations omitted). "[R]eckless indifference to the truth"
has "consistently been treated as the functional equivalent of
fraud for purposes of § 727(a)(4)(A)." In re Tully, 818 F.2d at
112 (citations omitted); accord In re Grondin, 232 B.R. at 277.
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We of course recognize that it has been repeatedly
emphasized, and remains true today, that "[c]ourts use special
caution in granting summary judgment as to intent. Intent is
often proved by inference, after all, and on a motion for summary
judgment, all reasonable inferences must be drawn in favor of the
nonmoving party." Daniels, 736 F.3d at 83. But, "[s]ummary
judgment may be warranted even as to such elusive elements as a
defendant's motive or intent where the non-moving party rests
merely upon conclusory allegations, improbable inferences, and
unsupported speculation." Santiago v. Canon U.S.A., Inc., 138
F.3d 1, 5 (1st Cir. 1998) (quotations and citations omitted).
Here, there are no genuine disputes regarding material facts, and
construing the undisputed facts and all reasonable inferences
arising from those facts in favor of Hannon, it is still clear
that the entry of summary judgment was proper.
First, Hannon's reliance on In re Varrasso, 37 F.3d 760,
is misplaced, because the undisputed facts here do not support
plausible opposing inferences. Hannon concedes that he did not
report at least $8,500 in business payments made for his personal
benefit on the MORs he filed in May through September of 2012.7
7 Hannon takes issue with the bankruptcy court's
categorization of some of the questioned expenditures as personal
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His explanation for those omissions amounted to little more than
assertions that, either he did not understand his obligation to
truthfully report those disbursements, or he failed to accurately
and unreported on the MORs. He argues that the bankruptcy court
calculated the undisputed and unreported personal expenditures as
totaling $23,555.54, but $10,092.98 of that amount was factually
disputed. Actually, the bankruptcy court recognized that Hannon
reported $4,237.54 of ABC&D Recycling's payments on his MORs, so
the amount unreported on the MORs was "over $19,000." Hannon says
he believed that $4,037 in cash stipends to Elizabeth Hannon were
reported on the MORs, because they were included in deposits to
Elizabeth Hannon's bank account, and so were recorded in bank
statements attached to the MORs. The MORs, however, do not
identify any such deposits as "stipends" or income from the
business.
Hannon further argues that the expenditures of $3,205.09 and
$2,849.99 relating to his Wells and Truro homes were "business" or
"business and personal" expenses. That argument is equally
unavailing. Hannon's affidavit is plainly inconsistent with his
prior testimony at the creditors' meeting, and he offers no
adequate explanation for the dramatic change. See Colantuoni v.
Alfred Calcagni & Sons, Inc., 44 F. 3d, 1, 4–5 (1st Cir. 1994)
("When an interested witness has given clear answers to unambiguous
questions, he cannot create a conflict and resist summary judgment
with an affidavit that is clearly contradictory, but does not give
a satisfactory explanation of why the testimony is changed.").
But, even if we accepted Hannon's contentions, he cannot
escape the fact that he admitted to receiving at least $12,830.97
from ABC&D Recycling and Ware Real Estate between May and September
of 2012. He reported only $4,237.54 on his MORs. Hannon cannot,
and does not, dispute that he failed to report over $8,500 in
reportable payments that ABC&D Recycling and Ware Real Estate made
for his personal benefit on the MORs he submitted between May and
September 2012.
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report them because he was merely careless. Neither explanation
is supported by the factual record.
To be sure, "a debtor's honest confusion or lack of
understanding may weigh against an inference of fraudulent
intent." Robin Singh Educ. Servs., Inc. v. McCarthy (In re
McCarthy), 488 B.R. 814, 827 (B.A.P. 1st Cir. 2013). But, Hannon
did properly report some business disbursements made for his
personal benefit in May and June of 2012. As the bankruptcy court
recognized, those May and June disclosures "demonstrate[] that
[Hannon] understood his duty to report such transactions, and was
able to obtain the necessary information to do so." As the
bankruptcy court also recognized, the "magnitude of the omissions
belies the Debtor's assertions that he merely overlooked"
reporting a few small personal transactions. In this case Hannon
reported a few modest personal transactions; it was the multiple
and substantial disbursements made for his benefit that did not
make it to the MORs. Moreover, unlike the debtors in Varrasso,
Hannon did not rectify the omissions as soon as the creditors'
questioning brought them to light. In re Varrasso, 37 F.3d at
764.
At issue here is not a simple failure to report minor
expenditures for miscellaneous expenses. Rather, Hannon
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repeatedly failed to report thousands of dollars diverted from the
businesses for his benefit, while he controlled those businesses.
He cannot plausibly contend that he did not know that the
businesses paid for his personal rent, clothing, and groceries, as
well as his daughters' clothing and entertainment, over a five-
month period. Considered in context, "[t]he amounts here render
reckless errors that arguably may have been only negligent if they
had concerned less significant items." Daniels, 736 F.3d at 85.
Hannon's claim that he relied in good faith on legal
counsel to accurately prepare the forms also founders. As Hannon
himself concedes, "reliance on the advice of counsel is no defense
when the deficiency 'should have been evident to the debtor.'"
Appellant's Br. at 20 (quoting Tully, 818 F.2d at 111). Hannon's
argument is undermined both by his demonstrated knowledge of what
was required to be disclosed, and his undeniable knowledge that
substantial sums spent on his behalf were not disclosed on the
forms filled out by counsel--forms that he reviewed and signed
under oath.
Hannon also asserts that a reasonable factfinder could
well conclude that he lacked the financial acumen to understand
and appreciate the MORs deficiencies. But, as discussed above,
in May and June of 2012 Hannon did properly report disbursements
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made for his benefit. He plainly demonstrated personal awareness
of what disclosures were required, and clearly was not unaware
that business disbursements made for his benefit had to be
reported. It, therefore, "should have been evident" to Hannon
that the July, August, and September MORs did not disclose
substantial business expenditures made for his benefit.
Appellant's Br. at 20 (quoting In re Tully, 818 F.2d at 111). As
we have warned, "[a] debtor cannot, merely by playing ostrich and
burying his head deeply enough in the sand, disclaim all
responsibility for statements which he has made under oath." In
re Tully, 818 F.2d at 111.8
While Hannon has no formal training in financial
reporting, still, he is hardly unsophisticated. Until recently,
he owned and successfully operated two businesses. He entered
bankruptcy having accumulated assets of nearly $6 million.
Moreover, this is not Hannon's first experience with bankruptcy
filings and reports. Hannon acknowledges that he was "previously
8 As the bankruptcy court pointed out, Hannon testified
that he "provid[ed] counsel with statements from [his] debtor-in-
possession accounts, and then reviewed the report prepared by
counsel." But no evidence suggests that he provided counsel with
full access to relevant financial information, including
information regarding payments made by the businesses on his
behalf.
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the principal of Embassy Realty, LLC, which had operated as a
debtor-in-possession." Hannon's business experience and his past
experience with the bankruptcy process undermine his claimed
inability to accurately and truthfully complete the MORs due to a
lack of financial sophistication.
Finally, Hannon's passing contention that his ability to
accurately and truthfully disclose all business expenditures made
for his benefit was hampered by missing financial documentation is
also implausible. Hannon did not provide any explanation as to
how access to the allegedly missing business records was a
necessary predicate to his truthfully reporting substantial
disbursements made on his behalf. Hannon, of course, did have
access to all the financial records of ABC&D Recycling and Ware
Real Estate through at least the end of June, 2012, yet still did
not accurately and truthfully report disbursements made for his
benefit on the May and June MORs. "The record in this case shows,
at the very least, cavalier indifference and a pattern of disdain
for the truth. Meaningful disclosure was accorded much too low a
priority." In re Tully, 818 F.2d at 112.
Reviewing the matter de novo, we recognize this case as
one of those uncommon situations in which summary judgment is
appropriate notwithstanding that intent, or state of mind, is at
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issue. We concur in the bankruptcy court's determination that
Hannon's proffered explanations for his significant omissions are
so implausible that they do not give rise to a genuine dispute of
material fact with respect to his intent.9
C. Materiality
The final critical element, that the debtor's statement
be materially related to the bankruptcy case, is "satisfied if the
statement bears a relationship to the debtor's business
transactions or estate, or concerns the discovery of assets,
business dealings, or the existence and disposition of property."
In re Sullivan, 455 B.R. at 829 (quotations omitted).
Neither party disputes on appeal that Hannon's omissions
were material. We agree. As the bankruptcy court noted, because
Hannon's omissions "prevented parties in interest from accurately
assessing the viability of a reorganization or understanding the
Debtor's true financial condition," they were material.
IV. Conclusion
9 On these same grounds, we reject Hannon's argument that
the bankruptcy court should not have granted summary judgment
because the MORs were verified "to the best of his knowledge and
belief," and the record would support a finding that he
subjectively believed that the information was accurate. As
discussed above, the record does not support that inference.
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Summary judgment is not commonly available in cases
featuring intent as a necessary element, but, as this case
illustrates, there are exceptions. Material statements made in
the course of judicial proceedings implicate serious interests,
and must be as complete and reliable as studied caution will allow.
Reckless indifference cannot be countenanced and will provide no
protection from sanctions imposed for making false statements
under oath.
For the reasons stated above, we affirm the bankruptcy
court's denial of Hannon's discharge pursuant to § 723(a)(4)(A).
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