Opinion
Case No. 18-13837 Adv. Pro. No. 19-1042 Adv. Pro. No. 19-1065
2022-03-23
IN RE: Matthew C. DANIELS, Debtor. E. Hanlin Bavely, Plaintiff, v. Matthew C. Daniels, Defendant. E. Hanlin Bavely, Plaintiff, v. LAD Holdings LLC, et al., Defendants.
Nicholas A. Zingarelli, The Law Firm of Droder & Miller, Cincinnati, OH, for Defendant. E. Hanlin Bavely, The Kenwood Commons, Cincinnati, OH, Plaintiff, Pro Se. William H. Blessing, Cincinnati, OH, for Plaintiff E. Hanlin Bavely. Brian D. Flick, DannLaw, Lakewood, OH, for Defendants LAD Holdings, LLC, Lori Daniels, Patrick McCluskey. Nicholas A. Zingarelli, The Law Firm of Droder & Miller, Cincinnati, OH, for Defendant Matthew C. Daniels.
Nicholas A. Zingarelli, The Law Firm of Droder & Miller, Cincinnati, OH, for Defendant.
E. Hanlin Bavely, The Kenwood Commons, Cincinnati, OH, Plaintiff, Pro Se.
William H. Blessing, Cincinnati, OH, for Plaintiff E. Hanlin Bavely.
Brian D. Flick, DannLaw, Lakewood, OH, for Defendants LAD Holdings, LLC, Lori Daniels, Patrick McCluskey.
Nicholas A. Zingarelli, The Law Firm of Droder & Miller, Cincinnati, OH, for Defendant Matthew C. Daniels.
OPINION AND ORDER
Jeffrey P. Hopkins, United States Bankruptcy Judge I. Introduction
Prior to filing bankruptcy, Matthew Daniels—the Debtor in the underlying bankruptcy case and a defendant in both of these consolidated proceedings—managed multiple commercial real estate development and holding companies. These companies brought in substantial revenue and supported a lavish lifestyle for the Debtor. Among other things, the Debtor lived in a million-dollar home, drove a high-end Mercedes, and paid for expensive vacations. But when the Debtor filed this bankruptcy case—seeking to discharge some $17 million in debt—he claimed to have virtually nothing to his name. The companies he managed, his house, his car, his household goods—all were owned or leased by the Lori A. Daniels Irrevocable Trust (the "Trust") or defendant LAD Holdings.
Before this bankruptcy case, the Debtor blurred the lines between his personal expenses and those of the companies he managed. And when he filed, he failed to provide comprehensive records that would permit the Trustee and the Debtor's creditors to paint a clear picture of the Debtor's finances and dealings with his companies. Specifically, the Debtor failed to provide (because he also failed to file) multiple years’ worth of tax returns. Indeed, despite reaping substantial benefits from the relative success of the businesses, neither the Debtor nor the companies he managed had filed tax returns since 2012—a failure that the Debtor attempts to justify with the excuse that he could not afford to pay his CPA.
The Bankruptcy Code imposes an obligation on debtors to maintain records sufficient for the trustee and creditors to obtain an accurate view of the debtor's financial condition and business transactions. And the case law makes clear that for a sophisticated business debtor like the Debtor, that obligation includes business records. (Indeed, it defies credulity to think that the Debtor could operate numerous sophisticated businesses without any or very little record keeping). The Plaintiff, the Chapter 7 trustee in the underlying bankruptcy case, seeks to deny the Debtor a discharge for his failure to satisfy that obligation. Because the Court finds the Debtor's records to be inadequate and his justifications unconvincing, it will deny the Debtor's discharge.
Faced with a wealthy debtor in an otherwise no-asset Chapter 7 case, the Plaintiff also seeks to reach the assets of the Trust and LAD Holdings in order to pay the Debtor's creditors. But the theory on which the Plaintiff relies, substantive consolidation, is an extreme remedy that the Plaintiff has fallen well short of proving.
II. Jurisdiction and Constitutional Authority
The Court has jurisdiction to hear and determine these adversary proceedings under 28 U.S.C. § 1334(b) and the general order of reference entered in this district under 28 U.S.C. § 157(a). This is a core proceeding. 28 U.S.C. § 157(b)(2)(A), (H), (J), and (O). Because a debtor's entitlement to a discharge and the issue of substantive consolidation both "stem[ ] from the bankruptcy itself," Stern v. Marshall , 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), this Court has the constitutional authority to enter a final judgment in these adversary proceedings. See SE Prop. Holdings, LLC v. Stewart (In re Stewart) , 571 B.R. 460, 463–64 (Bankr. W.D. Okla. 2017) (holding that the court has constitutional authority to enter a final judgment in an action for substantive consolidation); Yaquinto v. Ward (In re Ward) , 558 B.R. 771, 777–78 (Bankr. N.D. Tex. 2016) (same).
III. Procedural History
The Debtor filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code on October 18, 2018 (the "Petition Date"), and the Plaintiff was appointed trustee for the Debtor's estate. Following multiple extensions of time, the Plaintiff timely commenced the first of these adversary proceedings, seeking to deny the Debtor's discharge under § 727. Adv. No. 19-1042. Although the Plaintiff's complaint alleged that the Debtor's discharge should be denied on multiple grounds, the Plaintiff proceeded to trial solely on § 727(a)(3)—the failure to maintain records.
The Plaintiff commenced the second adversary proceeding against the Debtor, LAD Holdings, and Patrick McCluskey and Lori A. Daniels in their capacity as co-trustees of the Trust. See Adv. No. 19-1065, Doc. 1. In this action, the Plaintiff requests entry of an order consolidating the assets of LAD Holdings and the Trust with the assets of the Debtor, asserting theories of substantive consolidation and alter ego. The complaint also seeks "to avoid preferences and postpetition transfers, ... to compel turnover of property, and to secure [a] money judgment," but the Plaintiff did not (and still today has not) set forth what transfers he seeks to avoid. With the agreement of the parties, the Court determined that the adversary proceedings would be tried concurrently.
"Under Ohio law, the trustee is the legal owner of the trust res. The trustee is the proper party defendant in a suit involving a trust, and a trust generally is not recognized as a separate legal entity with the capacity to be sued in its own name." Trident Tr. Co. (UK) Ltd. v. Anglo-Am. Credit Union, Inc. , No. 1:07CV893, 2008 WL 2599891, at *2 (S.D. Ohio June 26, 2008) (citing Fred Martin Motor Co. v. LML Technologies, Inc., No. 5:07cv2475, 2008 WL 750555, *1 (N.D. Ohio Mar. 19, 2008) ); see also Fed. R. Civ. P. 17(b)(3) (providing that a non-individual and non-corporate entity's capacity to sue and be sued is determined by state law).
The trial was held over the course of two days. In each adversary proceeding, the transcript of the first day of the trial is docketed at Doc. 51 ("Transcript I") and the transcript of the second day is at Doc. 53 ("Transcript II"). In advance of the trial, the parties stipulated to certain facts applicable to the proceedings. See Adv. No. 19-1065, Doc. 38 (the "Stipulations"); Adv. No. 19-1042, Docs. 20–22 & 40. The parties also resolved a pretrial evidentiary dispute regarding the admission of summaries of Quicken data (Pl. Exs. 1065-12A through 12M) (the "Quicken Summaries") under Rule 1006 of the Federal Rules of Evidence (the "Evidence Rules") by stipulation. Adv. No. 19-1065, Doc. 46. During trial, the Court heard the testimony of two live witnesses: the Plaintiff, in his capacity as Chapter 7 Trustee, and the Debtor. The Plaintiff chose not to present any other live witnesses, instead employing the unusual stratagem of reading deposition testimony into the record. Specifically, the Plaintiff read portions of deposition testimony of the Debtor, Mrs. Daniels, and Mr. McCluskey into the record as a substantial portion of his case-in-chief.
These cases were tried during one of the most lethal pandemics in this nation's recorded history. To protect the health and safety of the litigants and court staff, the case was tried remotely with lawyers and witnesses appearing via Zoom for Government. See Bankr. S.D. Ohio Gen. Order 35-8, Order Regarding Matters Scheduled Before the Court Until Further Notice (Sept. 17, 2020); Bankr. S.D. Ohio Gen. Order 44-1, Order Regarding Virtual Hearings (Aug. 21, 2020).
Despite this stipulation, the Debtor's counsel broadly questioned the accuracy of the Quicken Summaries, arguing that he did "not believe it [was his] duty to go through and cross-reference every single line item" in the summaries with "the underlying source data" and suggested the Quicken Summaries should not necessarily be admitted. Id. at 94 (counsel stating that "If the Court deems [the Quicken Summaries] admitted, I mean, that's, of course, Your Honor's decision ultimately. We can stipulate all we want. That doesn't make it come into the record."). Evidence Rule 1006 allows a proponent to "use a summary, chart, or calculation to prove the content of voluminous writings, recordings, or photographs that cannot be conveniently examined in court." Fed. R. Evid. 1006. The underlying documents—over 2,500 pages of bank records—are voluminous, the Debtor had access to them, and they were admissible in evidence. See Tr. I at 100–01. And indeed, the Debtor already stipulated to the admissibility of the Quicken Summaries. The Court overruled Debtor's counsel's objection during the hearing, and it reiterates that ruling here.
In the § 727 action, Plaintiff's Exhibits 1–4 and 8–13 and the Debtor's Exhibits 1 and 3 were admitted into evidence. In the substantive consolidation action, Plaintiff's Exhibits 1–2, 5–6, 10, and 12A–12M were admitted into evidence. Because the two actions were tried together, and to avoid confusion with the Plaintiff's overlapping exhibit designations, the Court will refer to the Plaintiff's exhibits in the § 727 action as "Plaintiff's Exhibit 1042-__" and his exhibits in the substantive consolidation action as "Plaintiff's Exhibit 1065-__."
The Debtor also offered Debtor's Ex. 2, an affidavit of his accountant, Robert Findley, executed on August 18, 2020 (the "Findley Affidavit"). The Plaintiff objected on the grounds of hearsay, Tr. II at 27, and the Court will sustain that objection. "Hearsay is ‘an out-of-court statement offered in evidence to prove the truth of the matter asserted.’ " United States v. Porter , 886 F.3d 562, 567 (6th Cir. 2018) (quoting Moore v. KUKA Welding Sys. & Robot Corp. , 171 F.3d 1073, 1081 (6th Cir. 1999) ) (internal quotation marks omitted). "Unless a statement falls within an exception or exclusion set forth by the Federal Rules of Evidence, federal statute, or Supreme Court precedent, hearsay is inadmissible." In re Davol, Inc./C.R. Bard, Inc., Polypropylene Hernia Mesh Prod. Liab. Litig ., 512 F. Supp. 3d 803, 812–13 (S.D. Ohio 2021) (citing Fed. R. Evid. 802 ). Here, the Findley Affidavit is hearsay because Mr. Findley did not make the statement while testifying at the current trial, and the statements are being offered into evidence to prove the truth of the matter asserted (specifically, that Mr. Findley advised the Debtor not his file his personal tax returns until the Debtor's business entities filed their tax returns; that Mr. Findley is in possession of significant business records that would allow him to prepare the tax returns in question; and that Mr. Findley cannot complete or file the business entities’ tax returns because the Debtor is not paying him). The Debtor offered no exception or exclusion to the rule against hearsay to make the affidavit admissible. Instead, the Debtor argued that the affidavit should be admitted because it was offered previously to the Court as an exhibit attached to the Debtor's response to a motion for summary judgment. Tr. II at 31–32; see also Adv. No. 19-1042, Doc. 25. But a document is not necessarily admissible just because it has been offered as an exhibit to a pleading. After careful review, the Court has determined that the affidavit does not fall within any exclusion or exception and is, therefore, inadmissible.
IV. Findings of Fact
Based on the parties’ stipulated facts and the evidence adduced at trial, including the documentary evidence and the testimony provided, and having considered the demeanor and credibility of the witnesses, the Court makes the findings of fact set forth below.
A. The Debtor's Background and Businesses
The Debtor testified that he grew up with a learning disability, and he graduated high school with a C-average. Tr. I at 193–94 (Debtor testifying that his learning disability "didn't allow [him] to function in a public school up to par"); see also Debtor Ex. 2. The Debtor attended the University of Pittsburgh on a football scholarship, and after marrying his wife, he transferred to the University of Cincinnati. Tr. I at 194; Debtor Ex. 2. The Debtor "did fairly well in college" despite his learning disability, because he "could kind of learn [his own] way." Id. But when he and his wife had their first child, the Debtor dropped out of college after only two years, because "[i]t was time to go to work." Id. at 194–95. The Debtor "worked [his] way up from the bottom," beginning his career cleaning job sites for home builders. He moved on to managing construction projects for home builders and eventually transitioned into real estate development—first residential, then commercial. Id. at 195.
Before filing bankruptcy, the Debtor was involved with a number of different business entities. See id. at 197–206; Pl. Ex. 1042-2. Although he had once owned several of his affiliated LLCs, the Debtor had assigned his membership interest to other entities prepetition, including the Trust. As of the Petition Date, the Debtor was the manager of at least eight different businesses. Id. at 198, 200–02, 204–06; Pl. Ex. 1042-2. Two other individuals were regularly involved in at least some of those businesses: Lisa Janusik and Donna Lunic. See Tr. I at 223; Debtor Ex. 2. Ms. Janusik was the Debtor's assistant and the secretary or business manager of several of the businesses. See Stips. ¶ 14 (identifying Ms. Janusik as the Debtor's "assistant"); Debtor Ex. 2 (same); Pl. Ex. 1065-1 (LAD Holdings signature card showing Ms. Janusik as "secretary"); Pl. Ex. 1065-2 (American Capital Partners, LLC signature card showing Ms. Janusik as "business manager"). Ms. Lunic acted as the bookkeeper for at least some of the businesses, but she left in 2017 because they "couldn't afford to pay her." Tr. I at 207–08, 213.
The Court notes that the Debtor's amended Statement of Financial Affairs filed in his main bankruptcy case identifies Ms. Janusik as the bookkeeper for numerous of the Debtor's affiliated businesses. Case No. 18-13837, Doc. 39. The Debtor testified during the Hearing, however, that Ms. Janusik would not "have the knowledge to be able to keep [the companies’] books." Tr. I at 208.
During trial, the parties submitted into evidence—and the Debtor provided extensive testimony on—an organizational chart that set forth the relationships between the Debtor and over a dozen entities with which he was affiliated as of and prior to the Petition Date. See Pl. Ex. 1042-2; Tr. I at 197–206. The Plaintiff focuses on just a handful of those entities in this action: (1) the Trust; (2) LAD Holdings, LLC ("LAD" or "LAD Holdings"); (3) American Capital Partners, LLC ("American Capital"); (4) American Capital Partners Management, LLC ("ACPM"); (5) and Meridian Realty Capital, LLC ("Meridian Realty"). See Tr. I at 18. The Court will address each of these in turn. 1. The Lori A. Daniels Irrevocable Trust
Plaintiff's Exhibit 1042-2 is a copy of an organizational chart that the Debtor helped one of his staff members prepare. It was initially filed with an accompanying affidavit in the Debtor's main bankruptcy case. See Case No. 18-13837, Doc. 54. Although included on the Plaintiff's exhibit list, it was the Debtor who requested its admission into evidence. See Tr. II at 27, 35.
Defendants Lori Daniels (the Debtor's wife) and Patrick McCluskey (the Debtor's father-in-law) are the co-trustees of the Trust, which was formed in January 2001. Tr. I at 73. The Debtor is neither a trustee nor named beneficiary of the Trust. Stips. ¶ 4. Among the Trust's assets are at least six of the Debtor's affiliated business entities, including American Capital, ACPM, LAD Holdings, and Meridian Realty. Pl. Ex. 1042-2. As of the Petition Date, the Trust also owned and made the payments on the Debtor's million-dollar residence at 7805 Brill Road, Cincinnati, Ohio. Stips. ¶ 2; Tr. I at 33; Pl. Ex. 1065-12D. The Debtor testified at the § 341 meeting that the Trust gets its income "[f]rom distribution through real estate shares it owns through LLCs," explaining that "[s]ometimes there's cash flow distributions from rents that are collected," after which "bills are paid and then they distribute cash flow to the members," like the Trust. Pl. Ex. 1042-1B at 26 (page 55 of the § 341 transcript). The parties stipulated that the Debtor "has not filed the Department of the Treasury, Internal Revenue Service, IRS Form 1041 on behalf of [the Trust] since the tax year 2012, to the extent he has any obligation to participate in the filing of such return, if at all." Adv. No. 19-1042, Doc. 21.
Huntington Bank, the mortgagee of the residence, filed a motion for relief from stay in the Debtor's bankruptcy case shortly after the Petition Date, alleging it was owed $1,299,883.86 and that the home's value according to the Hamilton County Auditor was $1,300,770. Case No. 18-13837, Doc. 12. At that hearing, counsel for the Debtor argued (but presented no witness at the time) that the property was worth closer to $3 million. In granting the motion for relief from stay, the Court did not make any determination as to the property's value and does not intend to do so here.
In an April 2017 deposition, portions of which the Plaintiff read into the record during trial, Mrs. Daniels testified that it is "fair to say" that she is a co-trustee of the Trust, but that she is "not really familiar with the operation of the business." Tr. I at 83. Instead, she "rel[ied] on [the Debtor] for what, if any, responsibilities" she had. Id. at 79. But Mrs. Daniels "didn't have any idea" what the Debtor did for the Trust, if he was the manager of the Trust, or even if he worked for the Trust. Id. at 79–80. Mrs. Daniels stated that she does not receive disbursements from the Trust, did not know if Mr. McCluskey ever received disbursements, and did not know who made disbursements, if any, from the Trust. Id. at 81. Mrs. Daniels likewise disclaimed knowledge of the Trust's assets, including whether her own residence in Indian Hill was one of them, stating she does not "handle that." Id. at 81–82.
At various points throughout the Plaintiff's reading of Mrs. Daniels’ testimony, the Debtor's counsel objected, arguing that the questions "call[ed] for speculation." See Tr. I at 80–82. These objections are overruled because the questions were not in fact speculative. "A witness may testify to a matter only if evidence is introduced sufficient to support a finding that the witness has personal knowledge of the matter." Fed. R. Evid. 602. Here, Mrs. Daniels was being asked questions in relation to her role as trustee—specifically, her various responsibilities; the existence of other trustees; the establishment of the trust; the operation of the trust itself; and the key participants and their various roles within the trust. Such matters should be well within her personal knowledge. In any event, Mrs. Daniels was asked if she knew certain information, and if she did not, she testified accordingly. This is not speculation. The Debtor's objection is therefore overruled.
If it was true that Mrs. Daniels did not receive disbursements from the Trust as of her April 2017 deposition, it wasn't true as of the Debtor's October 2018 bankruptcy filing. According to the Debtor's Schedule I, Mrs. Daniels was receiving average monthly disbursements of $10,809.99 from the Trust. Case No. 18-13837, Doc. 31 at 36.
Like Mrs. Daniels, Mr. McCluskey claimed little knowledge of the Trust in the portions of his April 2017 deposition read into the record. Mr. McCluskey stated that his responsibilities with the Trust are "not much" and that he was not involved in the day-to-day, month-to-month, and year-to-year operation of the Trust. Id. at 73. He testified that he did not know if the Debtor had any responsibilities in connection with the Trust, did not recall having meetings with the Debtor or Mrs. Daniels about issues pertaining to the Trust, and did not know if the Trust had a credit card. Id. at 75. If he received correspondence for the Trust, he would "file it unopened," assuming it would be "taken care of by someone else." Id. at 76. According to Mr. McCluskey, the reason he was a co-trustee was "because with the grandchildren, if anything ever happened" to the Debtor or Mrs. Daniels, he and his wife "would take care of the kids and make sure that they were raised and things like that." Id. at 73.
Because the Plaintiff offered the testimony of Mrs. Daniels and Mr. McCluskey solely through the reading of deposition transcripts, the Court was unable to assess these witnesses’ demeanor. Nothing in the record, however, suggests that these witnesses’ testimony lacked credibility as to the matters they testified concerning. See McDaniel v. BSN Med., Inc. , No. 4:07CV-36-M, 2010 WL 2464970, at *4 (W.D. Ky. June 15, 2010) ("[A]lthough live testimony is preferable to deposition testimony, there is no need to insist upon live testimony when the credibility of the witness is not in question." (quoting Borchardt v. United States , 133 F.R.D. 547, 548 (E.D. Wis. 1991) )).
2. LAD Holdings, LLC
According to the Debtor, LAD Holdings is an "LLC that owns shares of separate LLCs that are owners of business property" and gets its money from distributions from the sale or lease of properties. Case No. 18-13837, Doc. 39 at 10 (Debtor's amended Statement of Financial Affairs); Pl. Ex. 1042-9; Tr. I at 43–44 (Plaintiff's counsel reading deposition transcript). The Debtor testified that he was the sole member of LAD Holdings for "like a day" when it was formed in January 2001, but he assigned 99% of his interest to his wife, who immediately assigned that interest to the Trust. Tr. I at 201; Pl. Ex. 1042-2 at 4; Case No. 18-13837, Doc. 39 at 10. The Debtor then assigned his remaining 1% interest in the company to the Trust in March 2008. Despite this, the Debtor was listed as "member" on the November 2013 signature card for LAD Holding's KeyBank account. Pl. Ex. 1065-1. As of the Petition Date, the Debtor was LAD's registered agent and manager. Tr. I at 201; Pl. Ex. 1042-2 at 4. According to the Debtor's § 341 testimony, LAD Holdings leases the Mercedes Benz 550 that the Debtor drives. Pl. Ex. 1042-1A at 4–5 (pages 9–10 of the § 341 transcript); see also Pl. Ex. 1042-1A at 27 (the Debtor stating that Mrs. Daniels, or maybe the Trust, pays for the vehicle).
3. American Capital Partners, LLC
American Capital is a property management development company started in 2008 to handle new commercial development projects. Tr. I at 38–39, 42 (reading testimony of Debtor into record). The Debtor was initially a member, but he transferred his membership interest to the Trust in March 2014. Id. at 199–200. As of the Petition Date, the Debtor was American Capital's manager. Id. The Debtor, however, had no recollection of what new development the company did and "d[id] not believe it ever" acquired an interest in commercial development projects. Id. at 39, 42. Either the Debtor or Mrs. Daniels would make the decision as to how the company's earnings would be used. Id. at 44.
See Ohio Secretary of State Business Search, https://businesssearch.ohiosos.gov?=businessDetails/1813799 (showing articles of organization for American Capital Partners, LLC filed October 21, 2008). The Court may take judicial notice of a public record like the Ohio Secretary of State's website. See Fed. R. Evid. 201(b)(2) ; see also Engle v. UHaul , 208 F. Supp. 3d 844, 849 n.3 (S.D. Ohio 2016) ("Information available through the Ohio Secretary of State is a public record that can be considered for deciding a motion to dismiss."); Tocci v. Antioch Univ. , 967 F. Supp. 2d 1176, 1194 n.6 (S.D. Ohio 2013) (taking judicial notice of secretary of state records for purposes of assessing diversity of citizenship), aff'd , No. 13-4123 (6th Cir. June 10, 2014).
Both the Debtor and Lisa Janusik had access to American Capital's debit card. The Debtor testified that he was not aware of any written controls over the debit card's use and that they would use it "[f]or expenses or purchases or whatever it was needed for." Id. at 45–46, 241. The Debtor used the card for many personal expenses, including restaurants, liquor, haircuts, and gas. Id. at 46–47. The Debtor testified that his wife may have also used company debit cards for personal shopping or other expenses. Id. at 241–42.
4. American Capital Partners Management, LLC
The Debtor was likewise the manager for ACPM as of the Petition Date. Id. at 200. ACPM was started in 2014 so the Debtor could "have a different company to do property management" on existing properties "as opposed to [new] development" like American Capital. Id. at 40–42, 232. At his deposition, which was read into the record during the trial, the Debtor testified that he didn't know where ACPM got its income or what ACPM did with the money that did come in and he would "have to check." Id. at 40–41. ACPM received at least one deposit of approximately $800,000 from another one of the Debtor's related entities not at issue here—BCC Sandusky—for, in the Debtor's words, "property management, leasing, tenant build-outs, probably disposition fees, asset management fees, those types of things." Id.
At the hearing, the Debtor testified that he was previously a member but assigned his membership to the Trust in April 2014. Id. at 200–01. The Plaintiff, however, presented the Debtor with a transcript of a Rule 2004 examination from 2017 in which the Debtor testified under oath that he was the owner of ACPM. Id. at 221. The Debtor characterized that testimony as a mistake, maintaining that his ownership had been transferred years earlier. Id.
5. Meridian Realty Capital, LLC
The Debtor was the manager of Meridian Realty at the time he filed bankruptcy. Id. at 205. Meridian Realty was started in 2016. Id. at 233. Although he was identified as a member on the signature card and depository certificate for Meridian Realty's KeyBank account, the Debtor testified that he was not and did not intend to hold himself out as a member of Meridian Realty. Id. at 205–06; Pl. Ex. 1065-5 (depository certificate); Pl. Ex. 1065-6 (signature card); see also Tr. I at 37–38 (reading of deposition testimony in which the Debtor identified his signatures). According to the Debtor, it was "a mistake" that he was listed as "member" on these documents and he "sign[s] a lot of documents, so [it] just was overlooked." Id. at 205–06. The Debtor testified that either he or Mrs. Daniels would make decisions as to the disposition of Meridian Realty's income. Id. at 45.
B. The Debtor's Role as Manager
As the manager of these and other entities, the Debtor would oversee their day-to-day operations, including deciding what properties should be developed and the tenants that should occupy them, and once developed, handling the property management. Id. at 196, 198. The Debtor would handle the negotiations and "all the due diligence, zoning, entitlements, [and] construction," and he would spend "a lot of time with tenants on their leases." Tr. II at 25. Much of his work involved developing relationships. Tr. I at 196. The Debtor testified that entertaining clients and business associates is sometimes a part of his role in conducting business. Id. at 209, 238–39.
The Debtor said he was never involved with the financial side of the business, instead relying on others—attorneys, accountants, and so on—to handle accounting and bookkeeping for his businesses. Id . at 196, 206. The companies used software to maintain their books, and though the Debtor used to receive reports generated by the software, he claimed to be unfamiliar with it. Id. at 40, 208, 234–35. The Debtor testified that he never personally prepared a tax return for any of the businesses he managed, having neither the knowledge nor expertise to do so. See id. at 206–07 (Debtor stating that they would be "very, very complicated tax returns," involving "hundreds and hundreds of millions of dollars of properties and projects.").
Still, the financial side of the business was not totally foreign, and the Debtor engaged in high-level work. The Debtor understands the importance of recordkeeping. Id. at 228. And he admitted to being familiar with real estate financing terminology, even if he does not "deal with that on a day-to-day [basis]." Id. at 227–28. For example, the Debtor conceded that he understood concepts such as tax incremental financing. Id. at 229. In his role as manager, he met with potential corporate clients to discuss their commercial leases, and he answered affirmatively when asked about being "quite familiar with high-level negotiations on sophisticated real estate projects." Id. at 232. Indeed, the Debtor characterized the sale of a shopping center as "very simple." Id. at 228.
The Plaintiff introduced statements from a Rule 2004 examination taken in connection with the bankruptcy case of one of the Debtor's related entities, In re BCC Sandusky Permanent, LLC , Case No. 17-30805 (Bankr. N.D. Ohio), to controvert the Debtor's claim on direct examination that he did not understand financial concepts. Debtor's counsel objected to the use as improper impeachment and claimed that there was "no contradiction of any testimony." Tr. I at 229. The Court will overrule the Debtor's objection, as the Plaintiff's use of the Rule 2004 examination transcript was proper impeachment by prior inconsistent statement.
Impeachment by contradiction, upon with the Debtor's counsel relied, is a common law principle and "is not explicitly contemplated in" the Evidence Rules. United States v. Craig , 953 F.3d 898, 904 (6th Cir. 2020). The Sixth Circuit thus looks upon impeachment by contradiction with skepticism. Id. at 905. It has declined to recognize this common law doctrine on repeated occasions. See United States v. Scott , 693 F.3d 715, 721–22 (6th Cir. 2012) ; United States v. Todd , 431 F. App'x 412, 416 (6th Cir. 2011).
On the other hand, Evidence Rules explicitly authorize impeachment by prior inconsistent statement. Rush v. Ill. Cent. R. Co ., 399 F.3d 705, 720 (6th Cir. 2005) (citing Fed. R. Evid. 613 ). The Sixth Circuit has held that "inconsistency is defined broadly," United States v. LaVictor , 848 F.3d 428, 451 (6th Cir. 2017), and a "trial judge has considerable discretion in determining whether testimony is ‘inconsistent’ with prior statements," United States v. Causey , 834 F.2d 1277, 1282–83 (6th Cir. 1987) (quoting United States v. Dennis , 625 F.2d 782, 795 (8th Cir. 1980) ). Notably, the Sixth Circuit has recognized that "inconsistencies can be found in changes in positions implied through silence or a claimed inability to recall." Id. at 1283. Here, when the Plaintiff introduced statements from the Rule 2004 examination to controvert the Debtor's claim that he did not understand financial concepts, the Plaintiff properly impeached the Debtor with a prior inconsistent statement.
The 2004 examination statements are also admissible for substantive purposes. Under Evidence Rule 801(d)(1)(A), a prior inconsistent statement is not hearsay if "the declarant testifies and is subject to cross-examination about a prior statement, and the statement is inconsistent with the declarant's testimony and was given under penalty of perjury at a trial, hearing, or other proceeding or in a deposition." Fed. R. Evid. 801(d)(1)(A). Soon after the Evidence Rules were adopted, the Sixth Circuit articulated how the new rules modified the approach towards prior inconsistent statements: "At common law, ... [n]either statement would have been admissible as substantive evidence of defendant's guilt .... The Federal Rules of Evidence changed those old rules, in preference for a very broad standard of admissibility with the goal of placing all relevant evidence before the trier of fact .... [P]rior inconsistent statements were made admissible so long as they were made under oath." United States v. Orrico , 599 F.2d 113, 117 (6th Cir. 1979). Here, the statements from the Debtor's 2004 examination are admissible under Evidence Rule 801(d)(1)(a), because: (1) the examination was taken under oath at a prior proceeding; (2) the Debtor testified and was subject to cross-examination about the prior statement; and (3) the Debtor's current testimony (that he lacks knowledge of financial concepts) is inconsistent with his prior statements (that he understood sophisticated financial concepts). Further, the Sixth Circuit has recognized that "2004 examinations have been repeatedly admitted into evidence." Longo v. McLaren (In re McLaren) , 3 F.3d 958, 965 (6th Cir. 1993) (upholding the admission of a Rule 2004 examination transcript); see also AT&T Universal Card Servs. Corp. v. Aguero (In re Aguero) , No. 96-1326, 1997 WL 633276, at *4 (Bankr. E.D. Va. Sept. 16, 1997) (indicating that "there is no apparent reason why the transcript of the debtor's testimony at a Rule 2004 examination would not in appropriate instances qualify as a prior inconsistent statement under Fed. R. Evid. 801(d)(1)(a) or party admission under Fed. R. Evid. 801(d)(2)" (footnote omitted)). Therefore, under the authority of Evidence Rules 613 and 801(d)(1)(a), the Debtor's Rule 2004 examination statements are admissible for both substantive and impeachment purposes.
C. The Debtor's Criminal Indictment, Acquittal, and Return to Management
The Debtor was forced to step down from his role as manager of the various businesses when, in November 2012, he was indicted on twenty-six counts of bank fraud, money laundering, and wire fraud. Id. at 209, 211. Two counts were dropped, and the Debtor took the remaining 24 counts to trial. Id. at 212. During this time, "the LLC's partner" Timothy Baird was the sole manager, and the Debtor had no access to the businesses. Id. The Debtor testified that in 2014, a CPA named George Fels came on board as a court-appointed co-manager of certain of the businesses, but later in the hearing, counsel for the Debtor and Plaintiff both agreed that Mr. Fels was not involved with any of the businesses at issue in these adversary proceedings. Id. at 237, 240; Tr. II at 9–12, 20.
At the end of 2013, the Debtor was acquitted on all charges. Tr. I at 212, 240. He returned to his management duties sometime in 2014. See id. at 213 (the Debtor describing getting "back in charge of being a manager of the LLCs" in "very late ’14" or "early ’15"); id. at 240 (the Debtor stating that he "took a couple months off" following the conclusion of his criminal trial in December 2013). The Debtor described the businesses as being in a state of "disaster" upon his return, testifying that "no books were being kept, the physical management of the properties had really gone down," and "[a] lot of tenants were not being renewed, even though they wanted to." Id. at 212. According to the Debtor, once he returned to his position as manager, it was necessary to spend most of 2015 and "half of" 2016 using an accountant to "rebuild[ ] the books." Id. at 213.
The businesses employed Jim Sigman and Blue and Company as their accountants to help get their books up to date and prepare their tax returns, which had not been filed since 2012. Id. at 213–14, 243; Tr. II at 19; Adv. No. 19-1042, Docs. 20–22. But as of the Debtor's bankruptcy petition, those taxes had still not been filed with the IRS. Adv. No. 19-1042, Doc. 21. The Debtor testified that the businesses had paid the accountant, "but when [they] started running out of cash, [the accountant] stopped working and it's approximately [$]200,000, to get caught up on the bills and then to finish the books and file the tax returns." Tr. I at 214. The Debtor testified that in 2014, the businesses were paying accountants to do the 2013 taxes, but they "stopped getting paid so they quit doing the work." Id. at 243. When asked whether, "[i]n 2015, when [the Debtor] had all these hundreds of thousands of dollars coming in," he "ever [thought] about paying somebody to do the tax returns for any of these companies," the Debtor responded:
We did pay for them. We got—the accounting was getting caught up. It was getting rebuilt. I thought there was a few tax returns filed that Tim [Baird] didn't get filed, so I think we did file some. As a matter of fact, I know we did. Jim—I remember now, Jim Sigman filed several tax returns that were—that Tim never filed. And we got them all done up till ’11. Now, he—so, we—to answer your question, the accountants were being paid. Now I'm starting to remember. I remember George [Fels] sitting in here and having me approve accounting bills to have Jim Sigman and Blue and Company paid. It stopped in ’17.
Id. at 244; see also id. at 243 ("The tax returns were being paid for up until end of ’17, right when we were finishing them up, and then that's when we lost [BCC] Sandusky [Permanent, LLC] to the bankruptcy, and the cash flow dried up."); id. at 245 (Debtor testifying that "I'm fairly confident that in ’15 accountants were being paid because George [Fels] was in charge of it[.]"). During cross-examination, counsel for the Plaintiff showed the Debtor four payments made to Mr. Sigman from Meridian Realty in 2016 and 2017, which the Debtor stated "could be some of" the payments to his bookkeepers, but that there should also be payments before then "[b]ecause when George Fels came on board in ’14, that's when he started working on the books with [Ms. Lunic], and then eventually with the accountants." Tr. II at 19–20. But the Debtor did not have a satisfactory answer for why no other payments to the accountants showed up in the bank statements for the Trust, LAD, American Capital, ACPM, or Meridian Realty, instead suggesting that the payments made for these companies’ accounting services may have come from other entities. See Tr. II at 22. The Debtor likewise provided no clear explanation for why, if the accountants were being paid between 2014 through 2017 as he claimed, the Debtor and the businesses still had not filed their tax returns and still did not have comprehensive records to provide to the Trustee.
D. The Bankruptcy Filing
The Debtor filed his bankruptcy case as a no-asset Chapter 7 case, asserting that he had only $2,200 worth of personal property—all of his household goods and furnishings having been transferred to or purchased by the Trust—and over $17 million in liabilities. Case No. 18-13837, Doc. 31 at 1, 3. During the Trustee's investigation into the Debtor's financial affairs, he requested numerous financial records of the Debtor. On or about March 27, 2019, the Trustee requested from the Debtor, among other things, bank account records for the four years prior to the Petition Date for American Capital, ACPM, and Meridian Realty. Stips. ¶ 6. The parties stipulated that between April 11, 2019 and May 14, 2019, the Debtor provided the following bank statements:
• Bank statements for ACPM's KeyBank account ending in 3723 from January 1, 2015 through May 31, 2017. Stips. ¶ 7(a)–(c).
• Bank statements for American Capital's KeyBank account ending in 3582 from January 1, 2015 through December 31, 2017, with the exception of the statement for the month of December 2015. Stips. ¶ 7(d)–(f).
• Bank statements for Meridian's KeyBank account ending in 4218 from February 29, 2016 through August 31, 2017 and statements for its PNC Bank Account ending in 1196 from January 31, 2018 through June 29, 2018. Stips. ¶ 7(g)–(i).
The Debtor also provided the following tax documents:
• Form 1099-MISC documents for tax years 2015, 2017, and 2018 issued to American Capital to Sandusky Retail Partners LLC. Stips. ¶ 7(j)–(l).
• Form 1099 transcript documents issued by the IRS relating to: (a) American Capital for tax years 2014, 2015, 2017, and 2018; (b) ACPM for the tax years 2014, 2015, and 2016; and (c) Meridian for tax year 2016. Stips. ¶ 7(m), (o), (q).
• Various 1099-MISC documents issued to recipient ACPM for tax years 2014, 2015, and 2016 and issued to recipient Meridian for tax year 2016. Stips. ¶ 7(n), (p).
The parties further stipulated that the Debtor "provided the majority of the paper documents requested" in the Trustee's September 2020 request for production. Stips. ¶ 16; see also Adv. No. 19-1042, Doc. 41.
Despite the companies’ use of software to maintain their books, the Debtor never provided electronically stored information to the Plaintiff, instead providing only physical files. Tr. I at 208–09; see also Stips. ¶ 16 (stipulation that although the Debtor provided paper in response to the Trustee's request, he "did not provide any electronic documents"). According to the Debtor, he didn't provide any electronic files because "we don't have any idea how to get into [the software] and open it up and read it ... that's why we just kept all the physical records[.]" Tr. I at 208.
The Plaintiff was forced to obtain at least some documents through subpoena, but it is unclear which records were subpoenaed and which were turned over by the Debtor. See Adv. No. 19-1065, Doc. 46 (stipulation regarding the Plaintiff's Quicken Summaries that "the bank records and cancelled checks produced by Defendant or obtained via subpoena are authentic"); Tr. I at 151–52, 158 (Plaintiff indicating uncertainty during cross-examination over whether certain records were subpoenaed or not). The Plaintiff input the transactions from the bank accounts he obtained into the software Quicken and used it to generate categorized reports of the spending of the Trust, LAD Holdings, American Capital, ACPM, and Meridian Realty. See Pl. Exs. 1065-12A through 12M. The Quicken Summaries show that between April 2013 and the Petition Date, the Debtor had access to some $4.7 million in income, with American Capital, ACPM, and Meridian Realty accounting for about $2.1 million in income. Pl. Ex. 1065-12B; see also Tr. I at 102–03. Their expenses—as categorized by the Plaintiff—reflect substantial payments were made for items such as dining and bars (approximately $110,000), salons and spas (approximately $3,000), and the Debtor's residence ($47,300) in one of this area's most affluent communities, Indian Hill. About $270,000 of the outflows were labeled as cash withdrawals. Pl. Ex. 1065-12B.
V. Legal Analysis
A. Section 727(a)(3)
The Plaintiff asks this Court to deny the Debtor's discharge under § 727(a)(3) of the Bankruptcy Code for the Debtor's failure to maintain adequate records. Under § 727(a)(3), a debtor's discharge shall be denied if:
the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case.
11 U.S.C. § 727(a)(3) (emphasis added). Denial of a debtor's discharge is a harsh remedy, and exceptions should be "liberally construed in favor of the debtor." United States Tr. v. Zhang (In re Zhang) , 463 B.R. 66, 78 (Bankr. S.D. Ohio 2012). But "a discharge is a privilege, and not a right, and should only benefit an honest debtor." CM Temp. Servs., Inc. v. Bailey (In re Bailey) , 375 B.R. 410, 415 (Bankr. S.D. Ohio 2007). Section 727(a)(3) therefore aims "to make the privilege of discharge dependent upon a true presentation of the debtor's financial affairs" by requiring the debtor to supply the trustee and creditors with "dependable information on which they can rely in tracing a debtor's financial history." Lubman v. Hall (In re Hall) , 174 B.R. 210, 214 (Bankr. E.D. Va. 1994) (first quoting Dominick & Dominick, Inc. v. Baxter (In re Baxter), 96 B.R. 58, 60 (Bankr. E.D. Va. 1989) ; then quoting Meridian Bank v. Alten, 958 F.2d 1226, 1230 (3d Cir. 1992) ). In other words, "adequate record-keeping [is] a predicate for a debtor's discharge." Agai v. Antoniou (In re Antoniou) , 527 B.R. 71, 78 (Bankr. E.D.N.Y. 2015).
Actions brought under § 727(a)(3) are analyzed using a two-step, burden-shifting approach. Bailey , 375 B.R. at 415. The plaintiff, who carries the ultimate burden of proof, first "must establish a prima facie case showing the [d]ebtor failed to keep adequate records." Id . at 416. If the plaintiff does so, the burden shifts to the debtor to explain why the failure to maintain records was justified. Id. ; see also McDermott v. Roller (In re Roller) , No. 13-6050, 2014 WL 644590, at *11 (Bankr. N.D. Ohio Feb. 19, 2014). In establishing the prima facie case and in satisfying his ultimate burden of proof, the plaintiff must prove his case by a preponderance of the evidence. Barclays/Am. Bus. Credit, Inc. v. Adams (In re Adams) , 31 F.3d 389, 394 (6th Cir. 1994) ; Bailey , 375 B.R. at 416. Within this framework, the Court has broad discretion in deciding whether to deny a debtor's discharge under § 727(a)(3). Dolin v. N. Petrochemical Co. (In re Dolin) , 799 F.2d 251, 253 (6th Cir. 1986).
As one court pointed out, this articulation of this test—requiring that the plaintiff first prove that the debtor has failed to keep "adequate" records—arguably places a higher burden on the objecting party than the statute calls for:
In analyzing existing precedent applying § 727(a)(3), the court experienced great frustration in determining exactly what Plaintiff must prove to meet her initial burden....
[One] problem arises in ... articulating what a debtor's implied duty is under § 727(a)(3). In doing so, some courts seem to mix up the creditor's proof of whether the debtor failed to keep records with the debtor's proof of justification. The root of this difficulty stems from pronouncements of the implied duty that a debtor must maintain "adequate" records as a prerequisite to discharge. So, for example, whether "adequate" records have been kept ... [is] measured by the nature of the debtor's business or income, the debtor's education and work experience and the debtor's overall financial sophistication. But these are the same factors that are generally stated to be part of whether "justification" has been shown for the absence of records under all of the circumstances of the case. So the two standards tend to become conflated and confused ....
The last problem ... is that some courts place an improperly high initial burden on creditors [by requiring them to show it is "impossible" to ascertain the debtor's financial condition with the records provided]. ... The language of the statute focuses on records a debtor does not have. [But] many courts instead focus on what records a debtor does have and then require the creditor to show that the debtor's financial condition cannot be determined from those records.
Requiring a creditor to prove that it is "impossible" to determine a debtor's financial condition from existing records is not supported by the language of the statute, which requires a showing of missing recorded information from which a debtor's financial condition or business transactions "might" be ascertained.
Strzesynski v. Devaul (In re Devaul) , 318 B.R. 824, 830–32 (Bankr. N.D. Ohio 2004) (citations and footnotes omitted). This Court shares that frustration. But because the overwhelming majority of courts address the "adequacy" of the records provided in assessing the plaintiff's prima facie case, so too will this Court. In any event, as explained below, the Court finds that the Plaintiff has met his burden and that the Debtor's proffered justifications fall short.
Whether a debtor has provided adequate records depends on the circumstances of the case, and courts often consider the debtor's "education, business experience, sophistication, or any other relevant factor." Bailey , 375 B.R. at 415 (citing Turoczy Bonding Co. v. Strbac (In re Strbac) , 235 B.R. 880, 882 (B.A.P. 6th Cir. 1999) ); see also Roller , 2014 WL 644590, at *11 ("Each decision [to deny or grant a discharge under § 727(a)(3) ] is fact specific and should be made on a case-by-case basis."). Although "not entitled to perfect, or even necessarily complete, records," Bailey , 375 B.R. at 415, parties in interest must be given "enough information to ascertain the debtor's financial condition and track his financial dealings with substantial completeness and accuracy for a reasonable period past to present," Strbac , 235 B.R. at 882. The records need not take any special form. In re Juzwiak , 89 F.3d 424, 428 (7th Cir. 1996) ; Meridian Bank , 958 F.2d at 1230 ; Wachovia Bank v. Spitko (In re Spitko) , 357 B.R. 272, 305 (Bankr. E.D. Pa. 2006). But the trustee and creditors are not required to reconstruct the debtor's financial history or to speculate as to the debtor's affairs. See Union Planters Bank, N.A. v. Connors , 283 F.3d 896, 899 (7th Cir. 2002) ("[N]either the court nor a creditor is required to reconstruct a debtor's financial situation by sifting through a morass of checks and bank statements."); Spitko , 357 B.R. 272, 309 (Bankr. E.D. Pa. 2006) (citing cases); Pher. Partners v. Womble (In re Womble) , 289 B.R. 836, 857–58 (Bankr. N.D. Tex. 2003), aff'd , 299 B.R. 810 (N.D. Tex. 2003), 108 F. App'x 993 (5th Cir. 2004).
Courts typically place a higher burden of recordkeeping on debtors who operate businesses. See, e.g. , Roller , 2014 WL 644590, at *11 ("Courts require more in-depth record keeping by financially sophisticated debtors engaged in running a business[.]"). Indeed, numerous courts have held that to satisfy his disclosure obligations under § 727(a)(3), a debtor may be required to provide not only his own records but also records from closely-held businesses. See MoSex Exhibit 1, LLC v. Campbell ( In re Campbell) , No. 19-00042-ELG, 2021 WL 4517424, at *5 (Bankr. D.D.C. Sept. 30, 2021) (citing cases); Jou v. Adalian (In re Adalian) , 500 B.R. 402, 408 (Bankr. M.D. Pa. 2013) ; Spitko , 357 B.R. at 307–08 ; Womble , 289 B.R. at 857 ("[C]ourts that have considered section 727(a)(3) in the context of a debtor who owns or controls closely held entities, have concluded that the debtor's failure to keep adequate records for such entities, as well as of the debtor's business dealings with such entities, may constitute a violation of section 727(a)(3)."). This is true not only when the debtor has a direct ownership interest in the business, but also when the debtor's "business and personal finances are intertwined." Campbell , 2021 WL 4517424, at *5 ; Spitko , 357 B.R. at 307–08 (concluding that the records of two non-debtor entities were relevant to the § 727(a)(3) analysis when debtor derived his income and assets from the corporations); Womble , 289 B.R. at 857–58 (stating that a debtor who "pays personal expenses out of business accounts, ... pays business expenses out of a personal account, or ... pays one entity's expenses out of an account belonging to a different entity" must also provide corporate records). Similarly, "a sophisticated debtor is held to a greater degree of accountability than an unsophisticated debtor." Adalian , 500 B.R. at 409 ; see also Devaul , 318 B.R. at 829.
1. The Debtor failed to maintain records from which his financial condition or business transactions might be ascertained.
The Plaintiff contends that the Debtor has failed to provide records sufficient to permit him to obtain a clear picture of the Debtor's financial condition and business transactions. The Plaintiff focuses in particular on the Debtor's failure to file tax returns for himself and for his businesses. The Debtor concedes that tax returns have not been filed for himself, the Trust, or his other affiliated entities since tax year 2012. Docs. 20–22 in Adv. No. 19-1042. As set forth below, the Court finds that the Plaintiff has met his prima facie case because (1) the Debtor has failed to provide several years’ worth of tax returns not only for himself but also for his affiliated businesses—businesses that directly or indirectly support the Debtor's lifestyle, and (2) the records that were provided did not adequately illuminate the Debtor's financial condition and transactions without forcing the Plaintiff to reconstruct the Debtor's affairs.
Tax returns provide a trustee and creditors significant insight into a debtor's financial condition. Devaul , 318 B.R. at 836 ("[I]ncome tax returns are generally an important ... indicator of a debtor's financial condition." (citation omitted)); Lubman v. Hall (In re Hall) , 174 B.R. 210, 214 (Bankr. E.D. Va. 1994) ("Tax returns are essential to the orderly administration of the debtors’ estate, and necessary for the debtors to make a full presentation of their financial affairs to the trustee."); Nisselson v. Wolfson (In re Wolfson) , 152 B.R. 830, 833 (S.D.N.Y. 1993) ("Income tax returns are quintessential documents ‘from which the debtor's financial condition or business transactions might be ascertained,’ in the words of [ § 727(a)(3) ]."). For example, trustees use tax returns "to verify the schedules filed by debtors, to find property that may be improperly scheduled or not scheduled at all, to determine tax liability, and to determine whether refunds are forthcoming." Hall , 174 B.R. at 215 ; Adalian , 500 B.R. at 408. "Without tax returns, the trustee would be forced to accept the uncorroborated statements of the debtors, as contained in their schedules." Hall , 174 B.R. at 215 ; see also Pl. Ex. 1042-1A at 26 (statement of Trustee during the Debtor's § 341 meeting that "[w]hat [he]’d like to know is [the Debtor's] income for the past four years and these tax returns should reveal that"). Courts have accordingly held that a debtor's failure to file tax returns can amount to a violation of § 727(a)(3). Adalian , 500 B.R. at 407–08 (Bankr. M.D. Pa. 2013) (characterizing the failure to file tax returns as a "a blatant example of a failure to maintain adequate records"); Womble , 289 B.R. at 858 ; Hall , 174 B.R. at 214 ("By refusing to file tax returns, the debtors have run afoul of the purposes of § 727(a)(3).").
This is especially true when, as here, the debtor has failed to file tax returns for himself or his businesses for several years in a row. See Adalian , 500 B.R. at 409–10 (denying discharge of a debtor who, for nearly a decade prepetition, had neither filed his personal tax returns nor seen to it that his employer—a closely-held corporation of which he was the president—had filed its corporate returns); Womble , 289 B.R. at 859–60 (denying discharge of debtor who had not filed tax returns for his businesses for five years). But even when there are only a small number of missing business tax returns, courts have held that debtors run afoul of § 727(a)(3) when those missing returns accounted for a significant portion of the business entities’ history. Vara v. Cowan (In re Cowan) , No. 17-01247 (SLM), 2019 WL 5615968, at *11 (Bankr. D.N.J. Oct. 23, 2019) ("Even one year without tax returns reflects one-third of Home Group's financial history and is, therefore, a significant omission."), aff'd , 2020 WL 2840069 (D.N.J. June 1, 2020).
Like the debtors in Adalian , Womble , and Cowan , the Debtor here failed to file tax returns for himself or for the businesses he manages for at least five years prepetition. As the Plaintiff described in his papers, and as was made clear at trial, the Debtor's failure to provide tax returns has impeded the Plaintiff's ability to ascertain the Debtor's financial condition—a task properly undertaken by the trustee, his creditors, and indeed, the Court. Without the Debtor's personal or corporate tax returns, the Plaintiff and the Debtor's creditors have been "denied potential access to a considerable amount of relevant financial and other information" about the Debtor. Adalian , 500 B.R. at 408. Further, those years of missing tax returns constitute a "significant omission" from the financial history of several of the Debtor's businesses. Cowan , 2019 WL 5615968, at *11. In fact, it would appear that returns have never been filed for at least two of the companies—ACPM and Meridian—which were started in 2014 and 2016, respectively. See Tr. I at 40–42, 232.
In addition to his other proffered justifications, which are addressed in detail below, the Debtor argues that he has been "consistently cooperative and responsive to the [Plaintiff's] requests for information" and has provided the Plaintiff with all the information the Debtor has. Adv. No. 19-1065, Doc. 45 (Debtor's trial brief) at 4; Tr. I at 153–54. It is true that the Debtor has turned over (or the Plaintiff has obtained by subpoena) voluminous records, including bank statements for American Capital, ACPM, and Meridian Realty. See Stips. ¶¶ 6–7. But there are two gaping holes in the Debtor's argument. First, the Code addresses a debtor's failure to "keep or preserve " records, not to merely "provide " records that the debtor did keep. So even if the Debtor promptly and voluntarily turned over every record he had, if those records were insufficient to permit the Plaintiff to ascertain his "financial condition or business transactions," the Debtor may still be subject to a denial of discharge under § 727(a)(3).
Second, "[i]t is not a defense that the debtor submitted for inspection such items as cancelled checks, receipts, and banking account statements, when a creditor would not be able to ascertain the debtor's true financial condition from such documents without time consuming and detailed analysis." Womble , 289 B.R. at 858. In other words, the Code requires more from a debtor than the proverbial document dump. The debtor should provide organized records of his financial affairs and business dealings. See Juzwiak , 89 F.3d at 429 ; Spitko , 357 B.R. at 309. These records must allow the parties in interest to determine the condition of Debtor's finances "with substantial completeness and accuracy," Strbac , 235 B.R. at 882 —and to do so without being forced to reconstruct that accounting themselves, See Union Planters , 283 F.3d at 899. So the mere production of bank records and information about one-off transactions does not on its own provide the context necessary to shed light on a debtor's financial condition.
The Court finds the case In re Womble to be particularly relevant. In Womble , the debtor owned or controlled several farming businesses. 289 B.R. 836. Prepetition, the debtor and his businesses engaged in numerous intercompany transfers and transactions. The debtor had also failed to file tax returns for those businesses for five years prepetition. When the debtor filed bankruptcy, he provided voluminous bank statements and other documents, but the Womble court nonetheless found such records insufficient:
The debtor's records must demonstrate how the debtor paid his living expenses. If the debtor takes funds from his entities to pay such expenses, the debtor must maintain some record of such withdrawals. If the debtor fails to keep proper ledgers of billings, receipts, expenses, and accounts payable, and instead withdraws "cash from the register to pay household expenses," keeping no records of such withdrawals, the debtor has not maintained an adequate record of his finances....
....
... [The debtor] failed to introduce any lease agreements or invoices from one entity to another to substantiate numerous transfers between the entities. For five years [he] failed to file tax returns for his entities. [The debtor] took money from his entities without records explaining why such money was taken. [He] presented his creditors and the court with voluminous bank statements and documents, and then expected the creditors and the court to sift through such documents to discern [his] financial condition and business transactions.
In short, [the debtor] presented the court with spaghetti—numerous transactions going in all directions, all intertwined between [the debtor and his entities], with no meaningful paper trail, and with nothing more than [his] after-the-fact explanation of what any particular transaction or transfer represented. The Code demands more of a debtor in Womble's circumstance.
Womble , 289 B.R. 836, 857–58 (citations omitted).
And, under the circumstances, the Code demands more of this Debtor. The Debtor's lifestyle is directly and indirectly supported by the interrelated companies he manages. The Debtor's home and all of his household goods are owned by the Trust. The Trust also has a 100% ownership interest in each LAD, American Capital, ACPM, and Meridian Realty—not to mention the Trust's interest in numerous other businesses that the Debtor manages that are not at issue in this lawsuit. The Trust derives its income from these entities. And either the Debtor or Mrs. Daniels were the ones making the decision as to the disposition of the income of at least two of the entities—American Capital and Meridian Realty. Further, as of the Petition Date, the Debtor's only income was through the monthly disbursements Mrs. Daniels received from the Trust. The Debtor also used the debit card of at least one of his businesses—American Capital—for a wide variety of personal expenses. Tr. I at 46–47; 241–43. And according to the Quicken Summaries compiled by the Plaintiff, it appears that entities other than American Capital were also paying some of the Debtor's personal expenses. See, e.g. , Pl. Ex. 1065-12D (payments for the Debtor's residence made by American Capital, LAD, and the Trust); Pl. Ex. 1065-12I (dining and bar expenses from accounts associated with American Capital, ACPM, and the Trust).
Someone like the Debtor who "pays personal expenses out of business accounts, ... pays business expenses out of a personal account, or ... pays one entity's expenses out of an account belonging to a different entity" must keep records that adequately identify the reason for and source of the payment. Womble , 289 B.R. at 857–58. But the Debtor has failed to provide documents, including tax returns, that would allow interested parties to reach a reasonable understanding of how these entities’ finances relate to one another, the extent to which the Debtor's financial condition is reliant on them, or how they have contributed to the Debtor's lifestyle. This is made evident by the very fact that the Plaintiff was forced to undertake the time-consuming and laborious process of inputting data from thousands of pages of bank records—records that were provided only in paper format—into a database like Quicken in an effort to reconstruct these payments and transfers. A trustee "should not be required to sort through a large mound of documents to reconstruct the debtors’ financial situation." Spitko , 357 B.R. at 309. And even still, the Quicken Summaries leave questions unanswered—questions that should have been answered by the Debtor in the first place. "When ... a debtor's records lead to a ‘confusion of assets’ between the debtor and his entities, or when the corporate records of the debtor's entities are missing, the debtor has failed to maintain adequate records as mandated by section 727(a)(3)." Womble , 289 B.R. at 858.
For the reasons stated above, the Court finds that the Plaintiff has met his prima facie case of showing that the Debtor has "failed to keep or preserve any recorded information, including books, documents, records, and papers, from which [his] financial condition or business transactions might be ascertained." 11 U.S.C. § 727(a)(3).
2. The Debtor has not justified his failure to maintain records.
Because the Plaintiff has established his prima facie case, the burden shifts to the Debtor to explain why his failure to maintain records was justified under the circumstances. 11 U.S.C. § 727(a)(3) ; Bailey , 375 B.R. at 416 ; Roller , 2014 WL 644590, at *11. Courts consider several factors in assessing whether the debtor's justification is satisfactory: "the education, experience, and sophistication of the debtor; the volume of the debtor's business; the complexity of the debtor's business; the amount of credit extended to debtor in his business; and any other circumstances that should be considered in the interest of justice." Gray v. Jackson (In re Jackson) , 453 B.R. 789, 797 (Bankr. E.D. Pa. 2011) (quoting Meridian Bank , 958 F.2d at 1231 ). A debtor's justification should be "sufficiently based in evidence and testimony." U.S. Tr. v. Kandel (In re Kandel) , No. 12-6003, 2015 WL 1207014, at *11 (Bankr. N.D. Ohio Mar. 13, 2015). The court has broad discretion and "should consider both the Debtor's credibility and the reasonableness of the explanation." Bailey , 375 B.R. at 416 ; see also Kandel , 2015 WL 1207014, at *10 ("[T]he adequacy of a debtor's records are based on what a reasonable person with the same level of financial sophistication would maintain while also managing a business of similar size and complexity.").
As to his tax returns, the Debtor argues that he "lacks the resources" as well as the "education and experience" to prepare his tax returns. The argument goes as follows: The Debtor is unable to file his personal tax returns until his businesses file their tax returns and can issue Schedule K-1s for Mrs. Daniels and 1099s for the Debtor. But the corporate tax returns have not been filed because the Debtor and the businesses cannot afford to pay the accountant to finish preparing them. And the Debtor—a college dropout who has depended on others to keep his business's books—cannot prepare the tax corporate tax returns himself, because the business affairs of the Trust and the entities it owns are "incredibly complicated." Adv. No. 19-1042, Doc. 45 at 4–5; see also Debtor Ex. 2 (affidavit of the Debtor noting the "complexity of business interests that are associated with the [Trust]"). As addressed previously, the Debtor also points to his cooperation with the Plaintiff throughout the bankruptcy case.
The Debtor likens his situation to In re Devaul , a case in which the court found the debtor's failure to file and provide tax returns and other documents to be justified. 318 B.R. 824. The debtor in Devaul —a "sole proprietor in the residential real estate business"—had failed to keep various records, including two years’ worth of tax returns, complete bank statements, a permanent ledger of rent, and cancelled checks supporting his expenses. Id. at 835–37. The debtor explained that his books used to be kept by his ex-wife (a former IRS employee), but after their divorce, the debtor began keeping the records himself. Credible evidence was presented that the debtor was an "unsophisticated and amateur businessman" with "essentially an eighth grade education." Id. at 838. The court found that the debtor "lacked the ability to prepare tax returns on his own, to organize receipts and invoices and cancelled checks and to develop and maintain on an ongoing basis a comprehensive ledger of his rental transactions and property expenses." Id. The Devaul court went on to hold that the debtor's failure to keep records, including the failure to file and produce tax returns, was justified under the circumstances of the case.
The Debtor tries to paint a similar picture here—an uneducated businessman whose records were well-kept until his criminal indictment, when the management installed in his absence failed to stay on top of the books, resulting in a record deficit and financial hole the Debtor was unable to climb out of. But the Court finds Devaul distinguishable. The Debtor here is not a residential landlord. He managed multiple sophisticated commercial real estate businesses that, by his own testimony, had "hundreds and hundreds of millions of dollars of properties and projects." Tr. I at 207. He handled "due diligence, zoning, entitlements, construction," and commercial leases. Tr. II at 25. He understood real estate and financial concepts that the average consumer—or even small business debtor—may not be familiar with. Tr. I at 227–29, 232. In the nearly two decades before his bankruptcy filing, the Debtor started numerous businesses, including holding companies that he has used, along with the Trust, to protect assets and limit liabilities among the entities. See Pl. Ex. 1042-2; Case No. 18-13837, Doc. 54 (Debtor's Statement of Financial Affairs listing no fewer than 20 entities with which the Debtor is associated either as a former owner or manager). As the Debtor said, the business affairs are "incredibly complicated." Debtor Trial Br. Even if the Debtor only completed two years of college and had a learning disability in grade school, the Court disbelieves that he is in any way an amateur or uneducated small businessman like the debtor in Devaul . see also Eggert v. Sendecky (In re Sendecky) , 283 B.R. 760, 764 (B.A.P. 8th Cir. 2002) (holding that debtor's failure to provide personal and business records was justified because he was a "poorly educated" operator of a small concrete business who "had no sophistication"); D.A.N. Joint Venture v. Cacioli (In re Cacioli) , 285 B.R. 778, 783 (Bankr. D. Conn. 2002) (holding that debtor's failure to produce records was justified when his business was "not [ ] unusually complex" such that it would be expected to keep "meticulous records"). To the contrary, the Court finds that the Debtor is a sophisticated businessman who operated a highly complex network of businesses and who, even if he was incapable of accurately preparing the corporate tax returns himself, had the duty to see to it that they were done.
At least two of the companies at issue—ACPM and Meridian Realty—appear to have been started after the resolution of the Debtor's criminal indictment and his return to management. The Debtor's excuse that others are to blame for the businesses’ disorganization therefore falls especially flat with respect to these two.
The Court is likewise unpersuaded by the Debtor's argument that his failure to file tax returns or to provide adequate, well-kept books is justified because he could not afford to pay the accountants. For one, the Debtor testified that the accountants were being paid between 2013 and 2017 to bring the bookkeeping up to date and file the business's tax returns. Tr. I at 213, 243–44. The Court has not been provided a credible answer for why, despite years of payments, not one missing return was filed with the IRS—or turned over to the Plaintiff in response to his requests.
Further, the evidence presented in this case shows that the Debtor and/or his businesses—not to mention the Trust through its ownership of those businesses—had substantial income. See Pl. 1065-12A (reflecting inflows of some $4.7 million between April 2013 and the Petition Date in October 2018); Pl. Ex. 1042-9 at 36 (Debtor's Schedule I showing average monthly disbursements of $10,809.99 to Mrs. Daniels from the Trust); Tr. I at 207 (Debtor's testimony that there were "hundreds and hundreds of millions of dollars of properties and projects"); Pl. Ex. 1042-1A at 55 (Debtor's 341 testimony that the Trust received its income "[f]rom distribution through real estate shares it owns through LLCs"). The record also shows that the businesses and the Trust supported a lavish lifestyle for the Debtor—he used business bank accounts for personal expenses like shopping, restaurants, and salons; the Trust (and at times, other entities) paid and continue to pay for his million-dollar home; and at least one of these entities (whether LAD Holdings, or the Trust, or Mrs. Daniels using the income she receives from the Trust) pays for his leased Mercedes Benz. If the businesses—or the Trust that owns those businesses—did not have the money to pay their accountant to organize their books and file their tax returns, it is because the Debtor (as the manager of the businesses) or his wife (as the trustee of the owner of the businesses) prioritized other expenses. Based on the record before it, the Court does not find the Debtor's alleged lack of resources to be a credible, satisfactory justification for the failure to file tax returns or to provide comprehensive and organized corporate books.
In the end, the Debtor has failed to meet his burden of justifying his failure to file (and therefore provide) several years’ worth of tax returns for himself or the entities he managed or to provide records that clarify his financial condition and business transactions. He is a sophisticated real estate developer who is charged with maintaining adequate records for himself and his businesses. The Debtor has failed to file or provide personal tax returns—"fundamental, and legally required, records" that he unambiguously has a duty to file. Adalian , 500 B.R. at 410. And because the Debtor derives his income from these entities—whether indirectly through the Trust disbursements or directly through the unfettered use of business accounts for his personal expenses—he has an obligation to also provide corporate records that illuminate his financial condition and business transactions. Womble , 289 B.R. at 858 ; Spitko , 357 B.R. at 308 (holding that the financial records of two entities were relevant to § 727(a)(3) when the "debtor's income and assets were largely derived from the[ ] two corporations").
Because he has "failed to keep any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained," and because he has not shown that this "failure to act was justified under all the circumstances of the case," the Debtor's discharge will be denied under § 727(a)(3).
B. Substantive Consolidation
The Plaintiff also seeks an order substantively consolidating the Debtor's estate with two non-debtor entities—the Trust and LAD Holdings. Substantive consolidation is a judicially created doctrine, stemming from the Court's equitable powers under § 105 of the Bankruptcy Code, that treats separate entities as one, pooling their assets into a common fund that can be used to satisfy the liabilities of both entities. Huntington Nat'l Bank v. Richardson (In re Cyberco Holdings, Inc.) , 734 F.3d 432, 438–39 (6th Cir. 2013) (noting that substantive consolidation "is not a procedure or right recognized by the Bankruptcy Code or Rules" but "has been considered part of the bankruptcy court's general equitable powers since the passage of the Bankruptcy Act of 1898"); Alexander v. Compton (In re Bonham) , 229 F.3d 750, 763 (9th Cir. 2000) ; Simon v. ASIMCO Techs., Inc. (In re Am. Camshaft Specialties, Inc.) , 410 B.R. 765, 778 (Bankr. E.D. Mich. 2009). The central purpose of the doctrine is "to ensure the equitable treatment of all creditors." Union Savs. Bank v. Augie/Restivo Baking Co. (In re Augie/Restivo Baking Co.) , 860 F.2d 515, 518 (2d Cir. 1988) ; Bonham , 229 F.3d at 764. Substantive consolidation functions as "an alternative to avoidance actions and other more specific measures to corral and distribute assets." Hardesty v. City Medical Nursing Ctr., LLC (In re Felix) , 572 B.R. 892, 893 (Bankr. S.D. Ohio 2017) (citing Paris v. Walker (In re Walker) , 566 B.R. 503, 532 (Bankr. E.D. Tenn. 2017) ).
Substantive consolidation is no mere procedural formality; rather, it has been described as an "extreme measure" and an "extraordinary remedy" that should be used "sparingly" and "only when there are no other adequate remedies." Spradlin v. Beads & Steeds Inns, LLC (In re Howland) , 674 F. App'x 482, 488 (6th Cir. 2017) ; Am. Camshaft , 410 B.R. at 787 ; Spradlin v. Beads & Steeds Inns, LLC (In re Howland) , 518 B.R. 408, 412 (Bankr. E.D. Ky. 2014), aff'd, 579 B.R. 411 (E.D. Ky. 2016), aff'd, 674 F. App'x 482 (6th Cir. 2017) ; see also White v. Creditors Serv. Corp. (In re Creditors Serv. Corp.) , 195 B.R. 680, 689 (Bankr. S.D. Ohio 1996) ("Because of its extreme nature, substantive consolidation is, ‘no mere instrument of procedural convenience ... but a measure vitally affecting substantive rights." (quoting Flora Mir Candy Corp v. R.S. Dickson & Co. (In re Flora Mir Candy Corp.) , 432 F.2d 1060, 1062 (2d Cir. 1970) )). This is especially true when, as here, the target of consolidation is a non-debtor entity. Howland , 674 F. App'x at 488. Substantive consolidation's "profound effect" on creditors’ rights "raises serious due process considerations" with respect to the creditors of the entity to be consolidated. Cyberco , 734 F.3d at 438 ; Howland , 518 B.R. at 413 (quoting Am. Camshaft , 410 B.R. at 786 ). Indeed, the Ninth Circuit has held that substantive consolidation with a non-debtor entity cannot be ordered without proper notice and opportunity to be heard by the non-debtor's creditors. Leslie v. Mihranian (In re Mihranian) , 937 F.3d 1214 (9th Cir. 2019).
Courts have articulated several tests to determine if substantive consolidation is appropriate. See Walker , 566 B.R. at 526–32 (reviewing the various tests across circuits); David S. Kupetz, Norton Journal of Bankruptcy Law and Practice, Vol. 23 No. 1 J. Bankr. L. & Prac. NL Art. 5 (Feb. 2014). Three tests in particular have emerged from the case law—those adopted by (1) the D.C. Circuit in Drabkin v. Midland-Ross Corp. (In re Auto-Train Corp., Inc.) , 810 F.2d 270 (D.C. Cir. 1987), (2) the Second Circuit in Union Savs. Bank v. Augie/Restivo Baking Co. (In re Augie/Restivo Baking Co.) , 860 F.2d 515 (2d Cir. 1988), and (3) the Third Circuit in In re Owens Corning , 419 F.3d 195 (3d Cir. 2005), as amended (Nov. 1, 2007).
For a detailed history of substantive consolidation and the development of the various tests recounted below, see, for example, Judge Shefferly's opinion in Simon v. ASIMCO Techs., Inc. (In re Am. Camshaft Specialties, Inc.) , 410 B.R. 765 (Bankr. E.D. Mich. 2009), and Judge Rucker's decision in Paris v. Walker (In re Walker) , 566 B.R. 503 (Bankr. E.D. Tenn. 2017).
The Auto-Train Approach
The Auto-Train approach permits substantive consolidation where there is "substantial identity between the debtor and the target" and where, after "conduct[ing] a searching inquiry," the court finds that the benefits of consolidation outweigh the harm to objecting parties. Auto-Train Corp. , 810 F.2d at 276 ; see also Eastgroup Props. v. S. Motel Ass'n, Ltd. , 935 F.2d 245, 249 (11th Cir. 1991) (adopting the Auto-Train approach). The proponent has the initial burden of showing substantial identity and consolidation's benefit (or avoidance of harm), at which point the burden shifts to any creditors of the target entities to show "that it relied on the separate credit of one of the entities and that it will be prejudiced by the consolidation." Id.
Substantial identity can be shown with evidence of "disregard of corporate boundaries, failure to respect joint ownership interests, or dominion over assets to the exclusion of all stakeholders" and "proof of disarray so substantial that a debtor's creditors benefit more through substantive consolidation, compared to any potential harm to the subject and its separate creditors." Felix , 572 B.R. at 894 (citing Walker , 566 B.R. at 531 ). The Eleventh Circuit in Eastgroup Properties , which adopted Auto-Train , suggested that a proponent could make a prima facie case for consolidation using the following factors:
(1) The presence or absence of consolidated financial statements.
(2) The unity of interests and ownership between various corporate entities.
(3) The existence of parent and intercorporate guarantees on loans.
(4) The degree of difficulty in segregating and ascertaining individual assets and liabilities.
(5) The existence of transfers of assets without formal observance of corporate formalities.
(6) The commingling of assets and business functions.
(7) The profitability of consolidation at a single physical location.
Eastgroup Props. , 935 F.2d at 249 ; see also Holywell Corp. v. Bank of N.Y. , 59 B.R. 340, 347 (S.D. Fla. 1986) ; In re Donut Queen, Ltd. , 41 B.R. 706, 709 (Bankr. E.D.N.Y. 1984) ; In re Vecco Const. Indus., Inc. , 4 B.R. 407, 410 (Bankr. E.D. Va. 1980).
Without specifically advocating for one test or another, LAD Holdings and the Trust defendants suggest in their trial memorandum that such an approach might be used here (while arguing, of course, that they "do not believe the evidence presented by the Plaintiff will establish any of these seven factors"). Adv. No. 19-1065, Doc. 45 at 2.
The Augie/Restivo Approach
The Augie/Restivo approach assesses (1) "whether creditors dealt with the entities as a single economic unit and did not rely on their separate identity in extending credit" or (2) "whether the affairs of the debtors are so entangled that consolidation will benefit all creditors." Augie/Restivo Baking Co. , 860 F.2d at 518 (citations and internal quotation marks omitted). "The presence of either factor is a sufficient basis to order substantive consolidation." Bonham , 229 F.3d at 766 (adopting the Augie/Restivo approach).
The first factor "is based on the consideration that lenders ‘structure their loans according to their expectations regarding th[e] borrower and do not anticipate either having the assets of a more sound company available in the case of insolvency or having the creditors of a less sound debtor compete for the borrower's assets.’ " Id. (quoting Augie/Restivo Baking Co. , 860 F.2d at 518–19 ). Under the entanglement factor, commingling "can justify substantive consolidation only where ‘the time and expense necessary even to attempt to unscramble them [is] so substantial as to threaten the realization of any net assets for all the creditors,’ or where no accurate identification and allocation of assets is possible." Augie/Restivo , 860 F.2d at 519 (quoting Chem. Bank New York Tr. Co. v. Kheel , 369 F.2d 845, 847 (2d Cir. 1966) ).
The Owens Corning Approach
In Owens Corning , the Third Circuit criticized the Auto-Train approach (which, as it described, "adopts ... one of the Augie/Restivo touchstones for substantive consolidation while adding the low bar of avoiding some harm or discerning some benefit by consolidation") for "fail[ing] to capture completely the few times substantive consolidation may be considered" and "allow[ing] a threshold not sufficiently egregious and too imprecise for easy measure." Owens Corning , 419 F.3d at 210. It also argued that using a checklist of factors "often results in rote following of a form containing factors where courts tally up and spit out a score without an eye on the principles that give the rationale for substantive consolidation (and why, as a result, it should so seldom be in play)." Id. Instead, under the Owens Corning approach, the proponent of substantive consolidation must prove that either "(i) prepetition [the entities sought to be consolidated] disregarded separateness so significantly their creditors relied on the breakdown of entity borders and treated them as one legal entity, or (ii) postpetition their assets and liabilities are so scrambled that separating them is prohibitive and hurts all creditors." Id. at 211 (footnotes omitted). If a proponent is going to make a case for substantive consolidation based on the test's first option—prepetition conduct—it must prove "corporate disregard creating contractual expectations of creditors that they were dealing with debtors as one indistinguishable entity" and, if the proponent is a creditor, that it "actually and reasonably relied on debtors’ supposed unity." Id. at 212 (footnotes omitted).
The Sixth Circuit has not adopted a test for substantive consolidation, and the lower courts within this circuit have applied all three. See Howland , 674 F. App'x at 488 n.3 (applying Owens Corning due to the parties’ agreement but explicitly declining to adopt a test); Walker , 566 B.R. at 532 (adopting Auto-Train ); Felix , 572 B.R. at 894 (applying Auto-Train ); Am. Camshaft , 410 B.R. at 787 (adopting Owens Corning ); see also Simon v. Brentwood Tavern, LLC (In re Brentwood Golf Club, LLC) , 329 B.R. 802, 814–15 (Bankr. E.D. Mich. 2005) (finding substantive consolidation appropriate under both Auto-Train and Augie/Restivo ). This Court need not decide which test to adopt, because, as explained further below, the Plaintiff's claim for substantive consolidation fails under each of the tests.
As recounted above, substantive consolidation is "an ‘extreme’ measure, only to be used ‘sparingly,’ especially when consolidating a non-debtor entity." Howland , 674 F. App'x at 488. The various fact-intensive tests require that the parties "disregarded separateness so significantly ," that their assets and liabilities are "so scrambled that separating them is prohibitive," id. , or that there is "disarray so substantial " and "disregard of corporate boundaries, failure to respect joint ownership interests, or dominion over assets to the exclusion of all stakeholders," Felix , 572 B.R. at 894. The Plaintiff has fallen far short of proving that here.
The Court lacks any evidence as to how creditors viewed and treated the Debtor and his businesses—that is, whether creditors viewed or relied upon the putative consolidated entities as a single unit. See Bonham , 229 F.3d at 766 ; Howland , 674 F. App'x at 489 ("Missing are any allegations that the debtors or Meadow Lake distributed misleading financial information to creditors, failed to accurately record their transactions with creditors, or otherwise misled creditors into believing they were dealing with them as one indistinguishable entity."); Butler v. Candlewood Rd. Partners, LLC (In re Raymond) , 529 B.R. 455, 492 (Bankr. D. Mass. 2015) (holding that the trustee did not state a plausible claim for substantive consolidation where, among other things, the trustee "did not specifically identify any secured or unsecured creditors who were deceived by, or who relied upon, the limited liability companies as a single entity[.]"). In fact, the Court has virtually no information about the creditors or the liabilities of LAD Holdings or of the Trust. Without this information, the Court is not only unable to weigh any potential harm to LAD Holdings, the Trust, and their creditors (who, the Court notes, are not parties to this case), but it is also unable to assess what benefit substantive consolidation brings to the Debtor's creditors. For substantive consolidation pools not only the assets but also the liabilities of the target entities. See Felix , 572 B.R. at 894 (looking at whether "a debtor's creditors benefit more through substantive consolidation, compared to any potential harm to the subject and its separate creditors"); cf. Lassman v. Cameron Constr. LLC (In re Cameron Constr. & Roofing Co.) , 565 B.R. 1, 10 (Bankr. D. Mass. 2016) ("The Trustee also demonstrated that a benefit would be realized where the Defendant has de minimis debt relative to the value of the Property. Thus, consolidation is necessary to realize a benefit to the Debtor's bankruptcy estate, particularly where it is unlikely that any creditor of the Defendant would be prejudiced and the benefits of consolidation heavily outweigh the harm.").
Although the Plaintiff argued that the Debtor exercised complete control over LAD Holdings and the Trust and that the nominal owners of them—Mrs. Daniels and Mr. McCluskey—had nothing to do with the businesses, he offered scant proof. Indeed, rather than call Mrs. Daniels or Mr. McCluskey to the stand so he could question them and permit the Court to assess their demeanor and credibility, the Plaintiff merely relied on reading portions of deposition testimony into the record.
The deposition testimony that the Plaintiff sought to use in these proceedings—proceedings in which he seeks the extraordinary remedy of substantive consolidation—did not even come from depositions that he or his attorney had taken. Rather, the depositions were taken in a case before the Hamilton County Court of Common Pleas, Kraft Electrical Contracting, Inc. v. Lori A. Daniels Irrevocable Trust , Case No. A1605462, years before the Debtor's bankruptcy case was even filed.
Instead, the only thing the Court can conclude from the Plaintiff's presentation is that, as the Court discussed above in connection with the § 727(a)(3) case, the Debtor used the bank accounts of American Capital, ACPM, Meridian, and LAD Holdings to fund many of his own personal expenditures. There is no doubt that this misuse of corporate assets is inappropriate and disregards corporate separateness. But commingling "can justify substantive consolidation only where ‘the time and expense necessary even to attempt to unscramble them [is] so substantial as to threaten the realization of any net assets for all the creditors,’ or where no accurate identification and allocation of assets is possible." Augie/Restivo , 860 F.2d at 519 (quoting Kheel, 369 F.2d at 847 ); Owens Corning , 419 F.3d at 214 (3d Cir. 2005) ("[C]ommingling justifies consolidation only when separately accounting for the assets and liabilities of the distinct entities will reduce the recovery of every creditor—that is, when every creditor will benefit from the consolidation."). The Plaintiff has failed to show that this is the case here.
Thus, in light of the evidence presented, the Court is unable to find that substantive consolidation would be appropriate here.
C. Alter Ego
As an alternative to substantive consolidation, the Plaintiff asserts in the Complaint that the Trust and LAD Holdings are alter egos of the Debtor. But the Plaintiff's alter ego claim must likewise fail.
Although the alter ego claim was a part of the Complaint, the Plaintiff did little to nothing to advance this theory throughout the briefing in this case or at trial. During the trial, the Plaintiff did not mention or make any specific argument with respect to the alter ego claim, instead focusing solely on substantive consolidation.
Under Ohio law, the alter ego doctrine "requires that [the] plaintiff show that the individual and the corporation are fundamentally indistinguishable." Taylor Steel, Inc. v. Keeton , 417 F.3d 598, 605 (6th Cir. 2005). The corporation must be "so dominated by the shareholder that it has no separate mind, will, or existence of its own." Belvedere Condo. Unit Owners’ Assn. v. R.E. Roark Cos., Inc. , 67 Ohio St.3d 274, 617 N.E.2d 1075, 1086 (Ohio 1993) ; Music Express Broad. Corp. v. Aloha Sports, Inc. , 161 Ohio App.3d 737, 831 N.E.2d 1087, 1090 (Ohio Ct. App. 2005). In making this determination, courts consider factors such as:
Belvedere adopted a three-part test for piercing the corporate veil, the first part of which is basically "a concise statement of the alter ego doctrine." Belvedere , 617 N.E.2d at 1086. Some federal courts, including the Sixth Circuit, have viewed alter ego as a distinct remedy under Ohio law. See Brennan v. Fisher (In re Fisher) , 296 F. App'x 494 (6th Cir. 2008). One Ohio appeals court recently pointed out that Ohio courts have criticized this approach: "if a corporate form could be disregarded for purposes of imposing ... liability vis-a-vis the alter-ego doctrine alone, then this would seem to circumvent and, indeed, eviscerate the other two requirements for piercing a corporate veil." U.S. Bank Nat'l Ass'n v. MMCO, L.L.C. , No. 110246, 183 N.E.3d 499 (Ohio Ct. App. 2021) (quoting Fifth Third Bank v. Diversified Transp. Servs. , C.P. Lucas No. CI 09-2373, 2010 Ohio Misc. LEXIS 547, at *30 n.18 (Ohio C.P. Lucas Cnty. Jan. 14, 2010)); see also Rossisa Participacoes S.A. v. Reynolds & Reynolds Co. , No. 3:18-CV-00297, 2019 WL 4242937, at *15 n.14 (S.D. Ohio Sept. 6, 2019) (citing Diversified Transportation and noting that "under Ohio law, the veil piercing doctrine subsumes the alter ego doctrine"); Hitachi Med. Sys. Am., Inc. v. Branch , No. 5:09-cv-1575, 2010 WL 3941824, at *3 (N.D. Ohio Sept. 14, 2010), report and recommendation adopted , No. 5:09-cv-01575, 2010 WL 3941912 (N.D. Ohio Oct. 7, 2010) ("[I]t is unclear whether alter ego theory is a theory of recovery distinct from veil piercing or whether, under Belvedere, it is part of the first prong of the veil-piercing test."). Because the Court finds that the Plaintiff has not met his burden of proving that LAD Holdings and the Trust are alter egos of the Debtor, it need not address whether the Plaintiff's alter ego claim is truly a standalone claim—or whether reverse veil piercing, which it seems the Plaintiff is really attempting to accomplish here, is a recognized cause of action in Ohio. Zhang , 463 B.R. at 80 (noting that neither the Sixth Circuit nor Ohio law have recognized reverse veil piercing).
(1) grossly inadequate capitalization, (2) failure to observe corporate formalities, (3) insolvency of the debtor corporation at the time the debt is incurred, (4) shareholders holding themselves out as personally liable for certain corporate obligations, (5) diversion of funds or other property of the company property for personal use, (6) absence of corporate records, and (7) the fact that the corporation was a mere facade for the operations of the dominant shareholder(s).
Id. The burden of proof is on the Plaintiff. Id. at 610.
Certainly, there is evidence that the Debtor diverted company funds for his personal use. But the Plaintiff fell short of proving the other elements. The Court has no information as to the capitalization of the Trust or LAD Holdings. Apart from commingling, the Plaintiff presented no evidence that the Debtor failed to observe other corporate formalities. And though the business records the Debtor provided to the Plaintiff were inadequate for purposes of § 727(a)(3), records were not completely absent. The Plaintiff presented evidence that Mrs. Daniels and Mr. McClusky, the co-trustees of the Trust, were not substantially involved in the management of the Trust. But this does not translate to evidence that the Debtor controlled the Trust—and it would certainly not satisfy the requirement that the Debtor have "complete" control such that he is "fundamentally indistinguishable." Belvedere , 617 N.E.2d at 1086 ; see also Spitko , 357 B.R. at 308 (denying the debtor a discharge for failure to provide business records under § 727(a)(3) while also concluding those businesses were not the debtor's alter egos).
Indeed, if the Trust and LAD Holdings were grossly undercapitalized, it seems unlikely that the Plaintiff would be pushing to substantively consolidate their assets and liabilities with the Debtor's.
In the end, as the Court has found with respect to substantive consolidation, the Plaintiff has failed to present evidence to meet his burden of showing that the Trust and LAD Holdings are alter egos of the Debtor.
VI. Conclusion
For all the reasons set forth above, the Court finds that the Debtor's discharge should be DENIED under § 727(a)(3) of the Bankruptcy Code and that judgment should be granted in favor of the Plaintiff and against the Debtor in Adv. No. 19-1042. The Court further holds that the Plaintiff has failed to meet his burden of proof on his claims for substantive consolidation and alter ego, that those claims should be DISMISSED , and that judgment should be granted in favor of the Defendants and against the Plaintiff in Adv. No. 19-1065. The Court will enter a separate judgment entry in each case in accordance with this opinion.