Opinion
Case No. 20-30397
02-24-2021
In re: JEREMY JOHN ASBRA, Debtor.
Chapter 7
DECISION DENYING AMENDED MOTION TO DISMISS OF LINDA A. GAVOLA, AND THE ROBERT S. AND LINDA A. GAVOLA FAMILY TRUST (DOCS. 20, 89, 92)
This decision concerns whether this individual Chapter 7 case should be dismissed pursuant to § 707(a) of the Bankruptcy Code for bad faith.
I. Procedural Background
On February 17, 2020 the debtor, Jeremy John Asbra ("Asbra") filed a petition for relief under Chapter 7 of the Bankruptcy Code. Doc. 1. Creditor Linda A. Gavola, and the Robert S. & Linda A. Gavola Family Trust (collectively, "Gavola") have moved to dismiss this case pursuant to 11 U.S.C. § 707(a). Doc. 20. Gavola holds a California judgment against Asbra, and have filed a proof of claim in this case in the amount of $873,203.95 as of August 13, 2020, plus interest at 10% per annum, all arising out of an arbitration award. Claim 2-1. Asbra filed a response in opposition to the motion to dismiss (doc. 36). The Chapter 7 Trustee, Paul Spaeth, also filed a response to the Gavola motion to dismiss, indicating that he was not taking a position on the motion, but, if the case was not dismissed, would pursue assets for the bankruptcy estate, including possible fraudulent transfers. Doc. 34.
By agreed order, the motion to dismiss was amended to dismiss Robert Gavola as a party. Docs. 89, 92. Mr. Gavola died on September 28, 2017. Transcript of October 29, 2020 at 32-33 (doc. 96).
Gavola has also filed an adversary proceeding seeking to deny Asbra his discharge, and find the debt owed to Gavola non-dischargeable. Adv. No. 20-3022.
The hearing occurred on October 29th, November 3rd, and November 6th of 2020. The court considered post-hearing briefs of the parties. (Docs. 87-88, 90-91).
Due to the COVID-19 pandemic, the hearing was conducted virtually pursuant General Orders 35-8 and 44-1, and within the requirements of Federal Rule of Civil Procedure 43(a) (applicable by Federal Rule of Bankruptcy Procedure 9017).
II. Jurisdiction
This court has jurisdiction pursuant to 28 U.S.C. § 1334(b) and Amended General Order 05-02 of the United States District Court for the Southern District of Ohio. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) and (O), and this court has constitutional authority to enter final judgment on this contested matter.
III. Findings of Fact
A. Gavola Judgment
On November 29, 2012 Gavola filed a complaint against Asbra, among other defendants, in the Superior Court of California, Riverside County (the "California State Court"). Exhibit A. In March 2014, Asbra and Gavola, as well as the other defendants, agreed to submit their dispute to binding arbitration. Exhibit B at 5.
The exhibits referred to by letter were introduced by Gavola. Exhibits referred to by number were introduced by Asbra.
Prior to the arbitration, in July 2013, Asbra applied for a temporary injunction to enjoin the Gavola litigation. That action was brought in a state court in Dallas, Texas, but the court denied any injunctive relief. Transcript of October 29, 2020 ("Tr.1") at 26 (doc. 96); Exhibit L. Linda Gavola testified that she "assumed" that Asbra filed that action "to reduce his costs, by joining in with another party." Tr.1 at 28. Otherwise the details of that litigation strategy were never presented in the dismissal hearing, by expert testimony or otherwise.
Following these procedural maneuvers, the arbitration proceeded in California in 2014. Tr.1 at 18. A May 2015 decision of the arbiter resulted in Gavola successfully pursuing its claims against Asbra. Exhibit B at 27 (Findings and Award After Arbitration); Exhibit 1 at 4. The arbitration award was confirmed in a minute order of the California State Court on January 8, 2016. Exhibit C. A judgment was entered in March 2016 in the amount of $605,692 (the "judgment"). Exhibits D and 1. In April 2016, Asbra sought to enjoin the enforcement of the judgment in the United States District Court for the Northern District of Texas. Exhibit M. Linda Gavola testified that Asbra had not made any attempt to pay the judgment and fought enforcement of it. Tr.1 at 30. Asbra appealed the judgment to the California state appellate courts, but the judgment was upheld. Exhibits F and G.
Gavola sought collection of the judgment. Tr.1 at 54-55. In August 2016, Gavola attempted a judgment debtor examination of Asbra in California. Exhibit H. Asbra, who had moved to Ohio, did not appear for the examination and a bench warrant was issued by the California State Court. Id. The California State Court also issued a bench warrant for another attempted debtor examination in June 2017. Exhibits I. Asbra claims, as to the June 2017 debtor examination, he called the California State Court to participate, but was not connected to the call to appear by phone. Tr.1 at 87. In addition, a motion to compel responses to documentary discovery was granted in April 2017, although the minute order has no detail. Exhibit J. Asbra testified he produced "thousands upon thousands of documents" and that he was once served with only a "title page", and another document with Gavola's counsel's credit card information. Tr.1 at 90, 95.
At some point later, the bench warrant issued by the California State Court was apparently removed because Gavola had moved to Ohio in December 2015, and the California State Court concluded that it lacked personal jurisdiction over him. Tr.1 at 88; Transcript of November 3, 2020 ("Tr.2") at 46 (doc. 98). Gavola certified the California judgment in Ohio, and on June 24, 2016, a judgment lien was entered by the Montgomery County Ohio Court of Common Pleas. Exhibit E; Tr.1 at 25.
B. 2016 Ohio Chapter 13 Case
Asbra filed a Chapter 13 petition in this court on September 5, 2016. Exhibits U, 2 (Case No. 16-32823). Schedule A shows that Asbra and his wife, Christine Asbra ("Christine"), jointly owned their residence at 6650 Garber Road, Dayton, Ohio (the "Garber Road Property"), which was valued at $145,000. Exhibit U at 10. In addition, First National Acceptance Corporation held a first mortgage on the Garber Road Property in the amount of $122,100. Exhibit U at 17. Schedule D showed Ditech Financial had a first mortgage against property Asbra still owned located at 19835 Gavilan Road, Parris, California (the "Gavilan Road Property"). Id. The Gavilan Road Property is titled in the name of the J and C 2003 Family Trust (the "Trust"). Id. Asbra owned a 2006 Toyota 4 Runner with 187,000 miles on it, valued at $6,000. Id. at 11. Asbra, as of the petition date, had $5,242 in a Health Savings Account, and $8,000 from a workers' compensation settlement. Id. at 12. Asbra also scheduled approximately $2,600 in total from 3 other bank accounts. Id. Asbra also owns 50 shares of CSJ Services, Inc. ("CSJ"), the company owned by Asbra and his wife, Christine. This decision will discuss various aspects of CSJ in detail, but the value of CSJ was scheduled at zero. Id. at 13. There was no evidence presented at the dismissal hearing that this closely held business has any specific marketable value to anyone other than Asbra and Christine.
The judge presiding over that case, the Honorable Lawrence S. Walter, has since retired from the bench.
Asbra listed the Trust, and described that both the Gavilan Road Property, and another property at 11399 Spanish Hills, Corona, California (the "Spanish Hills Property"), both of which will be discussed in the section of this decision detailing Asbra's transfers of his California property. Id. at 14.
The schedules did not list any priority unsecured debts. Id. at 19-20.
Asbra scheduled an unsecured debt owed to Acme Bail Bonds in the amount of $1,500. Id. at 20. Asbra also scheduled a $20,000 debt with Citicard CBNA. CSJ assumed this debt pursuant to a transaction with CSJ discussed elsewhere, but this assumption has no effect on Asbra's legal liability to Citicard CBNA. Id. at 21. Asbra scheduled a $20,000 debt to owed to Karen Novorr, Asbra's former counsel. Id.; Tr.1 at 59. Nationstar Mortgage is described as holding an unsecured debt as Asbra is liable on a note to that entity, but as noted the Trust owned the Spanish Hills Property that secured that obligation. Exhibit U at 21. Asbra also scheduled a $102,000 debt owed to Paul and Ellen Bruneio. Id. at 22. That debt resulted from another arbitration award in California. See Exhibit 8 (arbitration award) and Exhibit 9 (2016 Bruneio proof of claim in the 2016 Chapter 13 case). Finally, Asbra scheduled $6,381 owed to a Texas law firm, Smith Kendall PLLC. Exhibit U at 22.
On Schedule I, Asbra lists his employment and income with CSJ, as well as that of his non-filing spouse, Christine. Id. at 25. CSJ was founded as a California company by Asbra and Christine in 2010. T.1 at 44; Tr.2 at 51-52; Exhibit QQ. After moving to Ohio, CSJ became a foreign entity operating in Ohio, was subsequently registered as an Ohio corporation, and the California entity was dissolved. Exhibit QQ. These events occurred shortly after the March 2016 judgment of the California State Court.
Asbra listed his gross income at $1,587. Christine's net income was $3,936. Exhibit U at 26. The total monthly income was listed at $5,523. Id. Schedule J shows Asbra and Christine have three minor children, and that household expenses were $5,198. Id. at 27-28. Gavola argued Asbra had understated his income from CSJ by $1,500 based on paystubs and checks. Exhibit CC. Asbra testified that distributions from CSJ for Christine and Asbra were paid to Christine in one check because Christine and Asbra were sharing a bank account, and Asbra's CPA told him it would be accounted for correctly on their taxes. Tr.1. at 176. The checks paid to Asbra and Christine from August 31, 2016, which was days before the 2016 Chapter 13 petition filing, and May 31, 2017, shows Christine receiving significantly more income from CSJ then did Asbra. Exhibit CC.
As further detailed in the analysis, the 2016 Chapter 13 case was dismissed based upon a motion filed by the Chapter 13 Trustee to dismiss the case or convert it, asserting that Asbra's debts exceeded the debt limit eligibility requirement for Chapter 13 cases. Exhibit W. An agreed order was entered allowing Asbra to convert the Chapter 13 case to a Chapter 7 case. Instead, Asbra sought to retain California counsel to represent him to convert the case to Chapter 11. Exhibits M and Y. The attempt to retain California counsel to represent Asbra in a Chapter 11 case did not materialize because Asbra could not pay counsel's required retainer, and the Chapter 13 case was dismissed. Exhibit X; Tr.2 at 95-96.
C. 2020 Ohio Chapter 7 Case
Asbra commenced the present case by filing a voluntary petition for Chapter 7 relief on February 7, 2020. Exhibit 2. Asbra scheduled the same residence, the Garber Road Property. Id. at 10. The Garber Road Property is scheduled at the auditor value of $147,550. Id. First National Bank of America has a loan scheduled at $117,300.54, secured by a first mortgage. Id. at 20. Christine is a co-obligor on the mortgage loan. Id. Asbra and Christine are current on the mortgage loan. Tr.1 at 104. In addition, Gavola has a judgment lien against the Garber Road Property. Exhibit 2 at 21. A motion is pending to avoid that judicial lien (doc. 15).
As in the 2016 Chapter 13 case, Asbra lists no unsecured priority debts on Schedule E/F. Exhibit 2 at 22-23.
Asbra drives the same 2006 Toyota 4 Runner, with a scheduled value of $3,500. Id. at 11. Asbra has an interest in two corporate entities. One of those entities is the previously discussed CSJ. Id. at 13. In addition, Asbra is the sole member of TP Management Group ("TP Management"), LLC. Id. In turn, TP Management is the managing member of TGO Holding LLC. Id.
Besides the Gavola debt, as in 2016, Asbra has a limited number of unsecured debts. Acme Bail Bonds was scheduled in the amount of $1,500. Id. at 23. Citicard CBNA was scheduled in the amount of $20,000. Id. at 24. This debt was assigned to LVNV Funding, LLC. See Exhibit 11 (LVNV Proof of Claim 1-1). Inland Valley Arbitration and Mediation was scheduled in the amount of $32,500. Exhibit 2 at 24. Paul and Ellen Bruneio were scheduled in the amount of $102,000. Id. at 25. The debt owed to Karen Novorr was paid. Tr.1 at 59. Finally, the debtor listed an unknown debt to Premier Health, which filed the only other proof of claim in this case in the amount of $6,893.36. Exhibit 2 at 25; Exhibit 12. D. CSJ Services, Inc., and Other Corporate Entities
Asbra and Christine remain employed by CSJ and scheduled an income of $3,000 a month. Exhibit 2 at 32. CSJ services mortgages, notes, does bookkeeping, rehabilitates properties, and is also the managing partner of AFC Fund V, LLC, which has certain investments that were not specified. Tr.1 at 40; Tr.2 at 49. In California, CSJ managed a certain farm, but does not do any similar work in Ohio. T.1 at 43; Tr.2 at 51-52. CSJ also does IT work in Ohio. Id.
Asbra holds the title of Senior Account Manager, and Christine is the Office Manager. Exhibit 2 at 32. CSJ has Subchapter S tax status, and therefore profits and losses from CSJ flows to Asbra and Christine as its shareholders. Tr.2 at 150. Other than a job Asbra had for a few months in California, the sole source of household income has been from CSJ. Tr.1 at 74-75.
In June 2016, the shares of CSJ were subject to a reverse stock split which reduced the total shares of CSJ from 10,000 to 1,000. Tr.1 at 78; Exhibit LL. In May 2017, following the dismissal of Asbra's Chapter 13 bankruptcy, 450 shares of Asbra's stock were bought back by CSJ, leaving Christine with 500 shares, and Asbra with 50. The consideration for this sale was CSJ agreeing to pay up to $10,000 in Asbra's legal fees related to appeals of the arbitration judgment, and to assume liability for Asbra's debts with Citibank and Home Depot. Tr.1 at 79-80; Exhibits MM, NN.
The tax returns for CSJ were prepared and filed by Paul Preciado of the Alpha Spectrum Group, who Asbra testified was a licensed CPA. Transcript of December 10, 2020 ("Tr.3") at 5 (doc. 100). Asbra testified that he has not received anything from the IRS questioning his personal returns, the CSJ returns, or the CSJ W-2 or W-3 forms. Tr.3 at 23-24. Asbra provided Preciado with W2 forms for all the CSJ employees, and a summary of those W-2 forms, known as a W-3, Tr.3 at 11. Asbra prepared those documents, as well as IRS forms 1096, 1098, and 1099. Id. Preciado did not testify at the hearing. Stacy A. Kinsel, a forensic CPA, testified on behalf of Gavola about discrepancies in the tax returns of Asbra, Christine, and CSJ, and the details of her testimony are in the analysis section of this decision.
Asbra, with a business partner, also formed a company called Advanced Financial Concepts, Inc. in 2006. Exhibit II, Tr.1 at 46. Asbra eventually bought out the partner and became the sole owner. This business closed in late 2015. Tr.1 at 47. It was dissolved as a corporation in March 2016. Exhibit II.
Asbra also owned a Nevada limited liability company, formed in 2008, known as AFC Holdings, LLC ("AFC Holdings"). Tr.1 at 47-48. This entity had two members, Advanced Financial Concepts, LLC, and the Trust. Tr.1 at 48. AFC Holdings issued short-term business loan agreements to buy properties in the St. Louis area, or secured loans on real property in St. Louis. Tr.1 at 48 Asbra testified that he was purchasing the property from an individual that was running a "scam." Tr.1 at 49. However, these events, and Asbra's role in them, generally form the basis for the judgment. Exhibit B at 27-44. AFC Holdings ultimately filed a Chapter 7 bankruptcy petition in the District of Nevada. Exhibit S (Statement of Financial Affairs). A motion to convert that case to a Chapter 11 was denied. Exhibit T.
In October 2015, Asbra, Christine, and a third party formed an Ohio corporation known as Ohio Property Care, Inc. Tr.1 at 116; Tr.2 at 11-12; Exhibit RR. Asbra and Christine indicated that a third party stole from CSJ, and therefore the business relationship ended. Tr.1 at 116; Tr.2 at 12. The corporation was never funded or did any business. Tr.1 at 116-17.
In September 2019, Asbra formed an Ohio limited liability company known as TP Management Group, LLC ("TP"). Exhibit SS; Tr.1 at 114-15. Asbra testified that TP was for future business opportunities. Tr.1 at 116. In addition, in September 2019, Christine formed another Ohio limited liability company known as TGO Holdings, LLC ("TGO"). Asbra indicated this corporation was also formed for "future opportunities," but was never funded either. Tr.1 at 117. Exhibit TT. Christine stated TGO was "to work with investors on real estate," but also testified it was not funded either. Tr.2 at 13.
E. Other Pre-Petition Events in California
On March 14, 2019 Gavola filed a fraudulent transfer action in the California State Court against, among others, Christine and CSJ. Exhibit UU. That case was set for trial on May 15, 2020, or possibly only scheduled for a trial date to be chosen. Exhibit UU; Tr.1 at 118-19. In any event, the California State Court stayed that litigation when this bankruptcy case was filed by Asbra.
The evidence showed that Asbra had his California insurance license revoked in August 2014. Exhibit OO; Tr.1 at 119. Asbra claimed he was not served with the revocation, learned it of it later, but determined not to pursue the matter any further because he was moving to Ohio, and did not need California licenses in the future. Tr.1 at 119-122. In October 2017, the California Department of Business Oversight entered a desist and refrain order against Asbra prohibiting him from selling securities. Tr.1 at 125-26. Asbra was no longer doing business in California and testified that he chose not to contest the order. Tr.1 at 126. The order also involved two former businesses controlled by Asbra. Under the order, Asbra could not engage in the selling of securities. Tr.1 at 127-28; Exhibit PP.
Asbra and Christine, as Trustees of the Trust, acquired the Gavilan Road Property in November 2006, and moved into that property in late 2007. Tr.1 at 155. In October 2015, the Trust conveyed the Gavilan Road Property to Karen Novorr Pezzuto, Asbra's counsel at that time, and to William Pezzuto, Karen's husband. Exhibit O; Tr.1 at 133-34. The sale included a Long Form All-Inclusive Deed of Trust and Assignment of Rents. Exhibit O. Asbra testified that since he didn't get better offers for the Gavilan Road Property, Asbra and Christine, as trustees of the Trust, sold it to the Pezzutos, who had already made an offer. Tr.1 at 135. However, the Pezzutos lacked the necessary credit to obtain a traditional mortgage loan. Id. Therefore, the legal arrangement appeared conceptionally similar to a land contract, and the Pezzutos lived in the property and made payments on the Asbras' ongoing mortgage loan obligations. Asbra and his family lived in the Gavilan Road Property in October and November 2015 and paid the mortgage for those two months. Tr.1 at 138. Starting in December 2015, the payments for the mortgage were to be made by the Pezzutos, through CSJ. Tr.1 at 138-40. Asbra stated that CSJ received funds from the Pezzutos' bank account by automated clearinghouse, commonly known as ACH. Tr.1 at 140. CSJ acted as the servicer for those payments by sending the payments to Ditech, the mortgagee, also through ACH. Tr.1. at 140, 151. Asbra testified at the 341 meeting from the 2016 Chapter 13 case that this arrangement allowed Asbra and Christine to protect their credit, and that they received the Ditech mortgage loan statements personally. Tr.1 at 148-49. The record did not make clear how the payments were made from December of 2015 and July of 2016. Tr.1 at 152-53.
Prior to living at Gavilan Road, Asbra and Christine resided at the Spanish Hills Property. Tr.1 at 155; The Spanish Hills Property was the first house Christine and Asbra acquired together, in May 2001. Tr.2 at 15; Tr.1 at 155. Asbra and Christine borrowed $89,000 from the Olive Manford Trust on or about May 9, 2001 and acquired this property. Exhibit R. Olive Manford was Christine's grandmother. Tr.2 at 16. Asbra and Christine lived in the Spanish Hills Property until about a year after they acquired the Gavilan Road Property. Tr.1 at 156. Although the promissory note is dated May 9, 2001, Asbra's and Christine's signatures are undated. Id. The promissory note is secured by a Deed of Trust. Exhibit Q. However, the Deed of Trust refers to the trustee of the Olive Manford Trust being Denise Cannavo, Asbra's mother-in-law. Tr.1 at 158. Cannavo succeeded as trustee when Olive Manford died. Id; Tr.2 at 33. Additionally, the Deed of Trust was not signed until August 25, 2015, and recorded August 26, 2015. Tr.1 at 158, 160. The recording of the Deed of Trust was only months after the arbitration award in May 2015. Tr.1 at 161. At the time the Deed of Trust was recorded, Nationstar Mortgage held a first lien on the property, securing a traditional housing loan. Id.
Asbra testified that Olive Manford agreed to the Nationstar lien, but claimed that Manford forgot to record a deed of trust promptly to secure the Olive Manford Trust loan. Tr.1 at 162. Asbra testified that he stopped making the payments on the Deed of Trust because he could not pay it and the Nationstar Mortgage loan. Tr.1 at 163. At this point, Asbra and his family had moved into the Gavilan Road Property and no longer lived at the Spanish Hills Property. However, the Spanish Hills Property had a tenant. Id; Tr.2 at 34. Asbra stopped receiving the rents and believed those funds were going to Gavola pursuant to an order of the California State Court. Id. However, Linda Gavola testified that she never received any rent that was ordered by the California State Court. Tr.3 at 29-30. Following his move to Ohio, a hearing was held on November 3, 2017, and continued to December 4, 2017, to find Asbra in contempt, apparently relating to the failure to forward these rent payments to Gavola. Exhibit K. Asbra did not appear and the court entered a bench warrant. Id. The evidence at the dismissal hearing did not provide any other detail as to the underlying contempt motion as to the rent payments.
In 2017, Cannavo decided to foreclose on the Deed of Trust on the Spanish Hills Property. Asbra told Cannavo that she should foreclose before any default "so that she could control the first mortgage and the property, and I deal with real estate for a living." Id. Asbra did not know whether there was equity in the property prior to the foreclosure. Id. Christine testified that her mother, Denise Cannavo, was "very upset" about the inability of Asbra and Christine to make the required payments on the loan. Tr.2 at 36. Once the Spanish Hills Property was foreclosed upon in 2018, the loan from Nationstar was paid out of the foreclosure sale. Tr.2 at 192-93, 195. Asbra was asked if Cannavo "walked away" with equity in the Spanish Hills Property, but Asbra testified that he did not know. Tr.2 at 193-95. Asbra testified he did not pay the costs of the foreclosure. Tr.3 at 5-6.
IV. Analysis
The court may dismiss a chapter 7 case for cause, after notice and a hearing. 11 U.S.C. § 707(a). Section 707(a) provides examples of cause "including" "unreasonable delay" that prejudices creditors, "nonpayment of any fees or charges", or, upon motion of the United States trustee, the failure to file the documents required by § 521(a) of the Bankruptcy Code. Id. However, these examples are not the exclusive bases for dismissal. Indus. Ins. Svcs., Inc. v. Zick (In re Zick), 931 F.2d 1124, 1126-27 (6th Cir. 1991) (citing 11 U.S.C. § 102(3) and determining "including" is a not a "limiting word."). Gavola, as the moving party, has the burden to establish cause to dismiss. Simon v. Amir (In re Amir), 436 B.R. 1, 16 (B.A.P. 6th Cir. 2010).
Lack of good faith is a recognized basis for dismissal under § 707(a). Zick, 931 F.2d at 1126-27. The Zick decision noted that in evaluating whether a case should be dismissed pursuant to § 707(a), the intent of the bankruptcy laws is important:
The Bankruptcy Code is intended to serve those persons who, despite their best efforts, find themselves hopelessly adrift in a sea of debt. Bankruptcy protection was not intended to assist those who, despite their own misconduct, are attempting to preserve a comfortable standard of living at the expense of their creditors. Good faith and candor are necessary prerequisites to obtaining a fresh start. The
bankruptcy laws are grounded on the fresh start concept. There is no right, however, to a head start.Merritt v. Franklin Bank (In re Merritt), 211 F.3d 1269, 2000 WL 420681, at *4 (6th Cir. 2000) (table decision) (quoting Zick, 931 F.2d at 1129-30). Dismissal for bad faith "should be confined carefully and is generally utilized only in those egregious cases that entail concealed or misrepresented assets and/or sources of income, and excessive and continued expenditures, lavish lifestyle, and intention to avoid a large single debt based on conduct akin to fraud, misconduct, or gross negligence." Zick, 931 F.2d at 1129. "The inquiry is fact-specific and must be made on a case-by-case basis under a totality of circumstances." Riddle v. Greenberger (In re Riddle), No. 19-8022, 2020 WL 3498438, at *7 (B.A.P. 6th Cir. June 29, 2020) (citing In re Spagnolia, 199 B.R. 362, 365 (Bankr. W.D. Ky. 1995)). Cases have applied a "smell test" in evaluating these cases. This smell test has included an analysis of the following factors discussed below [Spagnolia, 199 B.R. at 365].
A. The Debtor Reduced His Creditors to a Single Creditor in the Months Prior to Filing the Petition.
The evidence was insufficient to establish that Asbra reduced his creditors to a single creditor pre-petition based on fraud, gross negligence, or similar conduct. The Gavola debt is without question, and by a large measure, Asbra's most significant debt. Without the Gavola debt, it appears that the need for Chapter 7 relief is somewhat questionable. But Gavola did not prove a fraudulent scheme to pay Asbra's other creditors, and not pay Gavola in the months prior to the Chapter 7 petition being filed. The evidence did show that most, if not all of the other creditors on Asbra's schedules were not pursuing collection immediately prior to this case being filed, and perhaps for some time. It also appears that the other significant arbitration award, the Bruneio award, has not been pursued by that creditor, and by not being reduced to judgment, may be uncollectible under California law. However, the debtor is required to list and schedule all his pre-petition debts, disputed or not. 11 U.S.C. § 521(a)(1). While the Gavola debt is the overriding motivator for this bankruptcy filing, as Asbra conceded by testifying that he has no realistic ability to pay it, there was insufficient evidence of some grand strategy to pay all the creditors except Gavola. Deglin v. Keobapha (In re Keobapha), 279 B.R. 49, 53 (Bankr. D. Conn. 2002) ("[W]hile the debtor essentially does only have one creditor . . . he did not manipulate his financial situation to reduce his creditors to a single creditor in the months prior to the filing his petition."); In re McVicker, 546 B.R. 46, 51 (Bankr. N.D. Ohio 2016) ("a single large debt, standing alone, is insufficient to find cause for dismissal of a Chapter 7 case.") (citations and internal quotation marks omitted). In addition to the Gavola and Bruneio debt, Asbra scheduled the Acme Bail Bonds, Citicard CBNA, Inland Valley Arbitration and Mediation, and Premier Health debts, all of which appear to be owed money, regardless of whether they are making any concerted effort to collect their debts and regardless of any statute of limitations. Thus, while the judgment certainly is the debt which predominates over Asbra's financial condition, this is not a case in which the debtor has manipulated his debts down to one obligation.
See Cal. Civ. Pro. Code § 1288 ("A petition to confirm an award shall be served and filed not later than four years after the date of service of a signed copy of the award on the petitioner."). The court makes no determination as to whether the Bruneio arbitration award may still be pursued under California law.
Nevertheless, Gavola did raise and shed light on the unusual circumstances surrounding the foreclosure of the Spanish Hills Property, which was pursued by Asbra's mother-in-law, an insider, based on the belatedly signed and recorded Deed of Trust. However, the evidence was insufficient to prove Asbra acted fraudulently or with gross negligence, or that a deed of trust was not filed earlier by oversight. Although all the specifics are unclear, the evidence showed Asbra spoke to Denise Cannavo, his mother-in-law and assignee of the promissory note after Ms. Manford's passing, to discuss a "friendly" foreclosure. The foreclosure, combined with the belated filing of the Deed of Trust allowed any equity in the Spanish Hills Property to go to Denise Cannavo, and deprived Gavola of recovering anything after abstracting its judgment on the Gavilan Road Property. But the evidence failed to show the foreclosure was conducted in an illegal fashion, or the Deed of Trust was fraudulently granted by Asbra, or improperly recorded. It also didn't show any equity left post-foreclosure went to Asbra or Christine. Asbra also testified he did not pay the costs of the foreclosure. All these facts may be appropriate for investigation by the Chapter 7 trustee to determine whether to pursue an avoidable transfer, but they don't rise to the level by themselves to warrant dismissal of Asbra's case. The court does not have a sufficient record to determine the specifics of any court order providing rental payments to be made to Gavola, or if Asbra acted inappropriately. Without a more detailed record, the court would be speculating.
As to the Gavilan Road Property, the evidence did not show the arrangement with the Pezzutos was improper, nor was it established that any wrongdoing occurred with those mortgage payments being made through CSJ.
B. The Debtor Failed to Make Lifestyle Adjustments or Continued Living an Expansive or Lavish Lifestyle.
The record was devoid of evidence that Asbra lives a lavish lifestyle. His scheduled expenses are unremarkable for a family of five in comparison to similarly-situated debtors. His residence, even at the creditor's proposed higher valuation of $200,000, cannot be considered a luxury home, particularly for his family size. Even assuming Asbra occasionally used the truck titled to CSJ for personal use, his main transportation, an older high mileage truck, is not luxurious even compared to other Chapter 7 debtors this court sees every day. The evidence did not show any large unneeded purchases, or unusual entertainment expenses. While the household income of Asbra and Christine is higher than in 2016, Asbra is not required to show abject poverty to avoid a dismissal pursuant to § 707(a), nor is the fact he can pay month-to-month living expenses disqualify him for consideration from Chapter 7 relief. His lifestyle is not of the kind discussed in Zick. C. The Debtor Filed the Case in Response to a Judgment, Pending Litigation, or Collection Action; There is an Intent to Avoid a Large Single Debt.
This case was filed after fraudulent transfer litigation was filed in California. Asbra is not a party to that litigation, but Christine is, and also CSJ, among other parties. Exhibit UU. As noted, it appears that the litigation was either scheduled for trial, or to be scheduled, in May of 2020, but stayed due to this bankruptcy case. But the larger point is that, unlike other reported decisions, Asbra is not trying to avoid paying a debt he has been shown to have the ability to pay. Instead, the record shows that Asbra cannot even pay the continuing interest on the judgment. It may be that the timing of the California litigation affected the timing of this bankruptcy case, approximately 4 years after the prior Chapter 13. But this action is not grounded in fraud, gross negligence, or other similar conduct. Instead, it is just as likely that Asbra determined the California litigation was just one more factor that drove him back into bankruptcy to deal with a debt, in addition to other debts, that the evidence showed he cannot hope to pay. Asbra testified that he filed the 2020 bankruptcy case at the particular time he did ". . . because I owe almost a million dollars . . . . I have no way to pay off the debts . . . that I currently owe." Tr.2 at 171.
D. The Debtor Made No Effort to Repay His Debts.
Asbra has paid certain of his other creditors such as his former counsel in California, Karen Novorr, and certain medical debt. The evidence did not show any attempt to pay Gavola. But again, the income of Asbra and Christine is insufficient to reduce the sum certain of the judgment, or even keep pace with the yearly interest. The record did not show the failure to pay the judgment was part of a pattern of fraud, or gross negligence.
To the extent Gavola argued otherwise, Asbra's appeal of the judgment does not weigh in his disfavor. Litigants can and do appeal judgments for many reasons, and these appeals were not shown to be frivolous. Similarly, the record was insufficient for the court to make any determination that the action in the Northern District of Texas was vexatious, or should otherwise be a factor in dismissing this Chapter 7 case for bad faith. Linda Gavola's personal opinion of the reason for the filing of the Northern District of Texas carries little weight. The evidence did not prove Asbra pursued frivolous (or meritorious) arguments, but instead it just showed his legal strategy failed.
The evidence did show Asbra was not cooperative with Gavola's effort to have him submit to a debtor examination. In the end, the facts show Asbra was found in contempt regarding the failure to appear for a debtor examination, but that order was ultimately vacated because the California State Court determined it lacked personal jurisdiction over him. Otherwise, the court was left with an incomplete story of various written discovery requests that Asbra may or may not have cooperated with, but nothing to justify dismissal under the heightened standard of § 707(a).
E. The Unfairness of the Use of Chapter 7.
The evidence is insufficient to show that Asbra's choice to file Chapter 7 is in bad faith. His income appears insufficient to make a meaningful distribution to his nonpriority unsecured creditors in a Chapter 11, particularly the judgment. Like his income, Asbra's assets are insufficient to pay the judgment, while continuing to pay his other pre-petition obligations, and his household's ongoing expenses.
It appears likely that Asbra may be ineligible for Chapter 13 due to his total "noncontingent, liquidated, unsecured debts" being too high. 11 U.S.C. § 109(e). Chapter 7 allows creditors to challenge a debtor's right to a discharge, and whether a specific debt may be discharged. 11 U.S.C. §§ 523(a) and 727(a); Fed. R. Bankr. P. 4004(a) and 4007. Gavola is pursuing these legal remedies, and those issues have not otherwise been adjudicated by this court. This case is not so egregious as to be dismissed under § 707(a), all without litigating the discharge and dischargeability issues that remain pending.
F. The Debtor has Sufficient Resources to Pay His Debts.
The summary of Christine and Asbra's income received from CSJ from August 2016 to May 2017 and the evidence that the CSJ distributions for both Christine and Asbra were paid in a check to Christine does suggest Asbra made efforts to minimize his income for garnishment and other collection purposes. See Doc. 88 (Attachment 1). However, Asbra owes Gavola in excess of $873,000. Claim 2-1. The claim is earning interest at 10% per annum. The household income of the Asbras appears insufficient to even pay the bulk of the yearly interest, much less the principal on this debt. The testimony showed Asbra and Christine currently receive $3,000 each month from CSJ.
Stacy A. Kinsel, an experienced forensic CPA licensed in the state of California, offered testimony that suggested Asbra may have understated his income on his individual tax returns. Tr.2 at 144. Kinsel looked at various tax records from 2014 through 2019. Tr.2 at 147; See Exhibit 3 (Asbra 2019 tax returns). Specifically, Kinsel testified that Asbra reported $13,000 income in 2018, and $11,000 in 2019. Tr.2 at 148-49. Asbra testified that some of those funds were placed in a Health Savings Account, and would not be taxable income. Tr.1 at 190-91; Tr.3 at 148. Kinsel testified that the individual tax returns for Asbra and Christine showed losses, and that the majority of those losses were net operating loss carry-forward entries. Tr.3 at 148-49.
Kinsel raised the following concerns with the tax returns. Christine's 2017 tax return [Exhibit EE] listed taxable interest of $18,602 from CSJ. Tr.2 at 151. Kinsel testified to the extent these funds were wages that payroll taxes should have been paid. Kinsel raised the same issue as to $11,975 in interest listed on Christine's 2018 return. Exhibit FF; Tr.2 at 153. See also Exhibit GG (2019 Christine individual tax return). Kinsel also testified that CSJ did not list this interest on its corporate returns. Tr.2 at 151. The only explanation Kinsel could find was possibly a loan on the corporate return from 2017. Id. Kinsel also testified she could not tell whether the CSJ returns properly characterized the funds Christine received as interest, rather than as earnings. Id. To the extent such funds were wages, Kinsel testified that payroll taxes should have paid. Tr.2 at 152.
Another issue Kinsel raised was whether Asbra and Christine were understating income concerning the compensation of officers. In 2015, total wages were $24,000, but compensation of officers on the CSJ return was $45,000. In 2016, $18,000 was income, but compensation of officers was $57,000. In 2017, wages were $46,000, and compensation of officers was $85,000. Kinsel testified these figures were not matched on the personal returns in 2015, 2016, and 2017. Tr.2 at 156. For 2018, Kinsel stated that the corporate return and the personal returns matched. Tr.2 at 157.
The Asbra's health savings account (the "HSA") provides an opportunity to pay health expenses pre-tax. The evidence did not present any specific numbers as to the amount of the HSA, or anything to suggest Asbra's use of the HSA was inappropriate. An HSA is a recognized source of paying health expenses pretax, and indeed Gavola's counsel concurred at closing argument that an HSA was legitimate. Tr.3 at 61. Of course, such funds are income, but by placing the funds in an HSA, the funds must be used for health expenses Asbra is incurring. The evidence showed Asbra had health issues he was managing. Tr.2 at 171.
Kinsel testified about how CSJ operates as a Subchapter S corporation. As a corporate entity it can take various deductions to reduce corporate income, including for depreciation and net loss carryforwards. But the testimony did not show these deductions were improper. As income generally flows through to the shareholders, these deductions may ultimately reduce the taxable income of Asbra and Christine. But this would not be different than the operation of any other Subchapter S corporation.
In summary, Gavola, through Kinsel's testimony, raised issues as how Asbra's and Christine's income and distributions from CSJ were accounted for through CSJ's and their personal tax returns and records. However, the evidence established that their tax returns were prepared by a CPA, and the record did not show the W-2 and W-3 documents prepared by Asbra were inaccurate. This court need not resolve whether all of these transactions were properly recorded and accounted for in their records and tax returns. What is clear is that, for purposes of Gavola's motion, whatever Asbra's actual income was or is, it is insufficient to pay his debts in any substantial way and, as noted, he appears ineligible to pursue a Chapter 13 case to make payments due to the Chapter 13 debt limits. In addition, his efforts to pursue a Chapter 11 case in 2016 were not successful because Asbra could not pay the needed retainer, and such a case likely would remain expensive to pursue now. Thus, proper or not, the court finds that the accounting and tax issues which Kinsel raised are not of the egregious nature requiring dismissal for abuse under § 707(a).
G. The Debtor is Paying Debts to Insiders.
The circumstances surrounding the Spanish Hills Property foreclosure was discussed under factor A. As to the Gavilan Road Property sale, the court discussed in factor A that the evidence did not show Asbra acted improperly. Karen Novorr is not enumerated as an insider under the Bankruptcy Code. See 11 U.S.C. § 101(31)(A). The evidence was also insufficient to find Kovorr should be considered a non-statutory insider. See U.S. Bank Nat'l Assoc. ex rel. CWCapital Asset Mgmt. LLC v. Village at Lakeridge, LLC, 138 S. Ct. 960, 963 (2018) (reviewing the standard of non-statutory insiders is generally based on whether the transaction was arm's length).
H. The Schedules Inflate Expenses to Disguise Financial Well-Being.
The evidence did not show Asbra inflated his expenses on Schedule J. The issue was not addressed at the hearing at all, except Asbra reviewed certain one-time repairs to the Garber Road Property when it was purchased, none of which were disputed.
I. The Debtor Transferred Assets.
The court addressed the transfer of the Gavilan Road Property to the Pezzutos, and the foreclosure of the Spanish Hills Property in factor A.
J. The Debtor is Over-Utilizing the Protection of the Code to the Unconscionable Detriment of Creditors.
The record does not show Asbra overused the Bankruptcy Code in an unconscionable manner. Although it was suggested that the AFC Holdings Chapter 7 in the Bankruptcy Court for the District of Nevada was improper, it was never proven this case was fraudulent or an abuse of the bankruptcy system. At most, the record showed AFC Holdings attempted to convert the case to Chapter 11, but that motion was denied. The company was subsequently dissolved.
Asbra has filed two individual bankruptcy cases, the Chapter 13 in 2016, and the present Chapter 7 case. As far as the present case, the parties will litigate the dischargeability of the Gavola debt, and whether Asbra should receive a Chapter 7 discharge. But the filing of the Chapter 7 case has not shown to be an abuse justifying dismissal. As for the Chapter 13, the court discusses that case in factor N below.
K. The Debtor Employed a Deliberate and Persistent Pattern of Evading a Single Major Creditor.
Gavola raises questions concerning two unfunded Ohio corporations created following the filing of the California fraudulent transfer action, TP Management Group LLC (created in September 2019) and TGO Holdings LLC (created in August 2019). This court is quite familiar with fact patterns of debtors using the creation of corporate entities as a step toward hiding assets, or fraudulently transferring assets. But it is equally true that corporate entities are set up for separate business ventures for a variety of legitimate reasons. The court cannot impute bad faith under the heightened standard of § 707(a) merely because a debtor creates an unfunded corporate entity when there is no evidence anything of value was transferred to that entity.
Gavola raises issues about the reverse stock split of the CSJ stock. First, it is far from clear that the CSJ stock has any marketable value. Second, Asbra documented the consideration for the subsequent stock buyback to CSJ, and the use of the CSJ funds to cover legal expenses for the appeal of the judgment.
L. The Debtor Failed to Make Candid and Full Disclosure.
The evidence from the hearing is insufficient to conclude the debtor has failed to make candid and full disclosures to the court in completing the schedules, or the Statement of Financial Affairs. The record was insufficient to demonstrate that Asbra failed to list a material asset. The court discussed the argument that Asbra underreported income in factor F.
M. The Debts are Modest in Relation to Assets and Income.
No allegation has been made that Asbra's debts are modest in relation to his assets or income. Again, Asbra's household income, even considering all of the CSJ paystubs and corporate draws of Asbra and Christine, is insufficient to pay the yearly interest on the Gavola judgment and the other expenses of his family. See Exhibit 4 (December 2018 - August 2019 pay stubs of Asbra); Exhibit 5 (report of distribution checks to Asbra).
N. There are Multiple Bankruptcy Filings or Other Procedural "Gymnastics."
Asbra has not serially filed bankruptcy cases in this district, or any other. He had one prior Chapter 13 in this district filed on September 5, 2016. Exhibit U (Voluntary Petition, Schedules, and Statement of Financial Affairs in Case No. 16-32823). See also Exhibit V (341 Hearing Transcript). Asbra was represented by his current counsel, Wayne Novick. The evidence is insufficient to support a finding that this case was a manipulation of the bankruptcy system, although the case was certainly unusual. Asbra filed a Chapter 13, but the Trustee moved to dismiss or convert the case due to eligibility issues in 11 U.S.C. § 109(e), which addresses the maximum debt to be in a Chapter 13. Exhibit W. While the motion to dismiss was pending, Gavola filed, among other things, an adversary proceeding objecting to the dischargeability of the Gavola debt and also supported the Chapter 13 Trustee's motion to dismiss. Docs. 46 and 47. However, the motion to dismiss never proceeded because the debtor agreed with the Chapter 13 Trustee to either convert the case to Chapter 7 by February 23, 2017 or the case would be dismissed. Doc. 62. However, at this time, a new lawyer for Asbra, Michael Totaro moved to convert the case to Chapter 11 instead. Exhibit AA. Shortly after, Mr. Novick withdrew from the case with the consent of Asbra. Exhibit Y. Totaro also moved to transfer that case to the Bankruptcy Court for the Central District of California. Exhibit Z. However, shortly after that, Totaro moved to withdraw. Exhibit BB. Asbra testified this was because he could not pay a $50,000 retainer to Totaro. At that point, Asbra apparently did not pursue the pending motions pro se and testified that he did not know how to communicate with the court. Tr.1 at 71. The case was dismissed on April 17, 2017 based on the prior order requiring a conversion of the case to Chapter 7. Exhibit X. The case lasted for 7 months total, and, like any Chapter 13 dismissed prior to confirmation, left Asbra with the same debts he had when the Chapter 13 petition was filed. While this case was unusual, the record does not support it constituted a manipulation of the bankruptcy system.
As noted in factor J, the evidence presented is also insufficient to ascribe improper motives to AFC Holdings' Chapter 7 filing in the District of Nevada in 2011. See Exhibit S (Statement of Financial Affairs); Exhibit T (Order Denying Motion to Convert Case from Chapter 7 to Chapter 11). Although it was so alleged, the evidence did not support that the AFC Holdings' filing was part of a scheme of fraudulent transfers, or was filed for any other improper purpose. Nor is there anything in the record from the hearing that the Bankruptcy Court for the District of Nevada made any such finding.
O. Other Miscellaneous Issues
The court also considered the relevance of the termination of Asbra's California insurance license, and the cease and desist order entered by the California Department of Business Oversight. But a dismissal under § 707(a) is not concerned with whether a debtor has been a dishonest or ethical person generally. It is not a character test. Instead, § 707(b) is concerned, through a series of factors, to determine, under the totality of the circumstances, if this case represents an egregious abuse of the bankruptcy system that requires dismissal. If a debtor has not been honest and forthright in this bankruptcy filing, § 727 of the Bankruptcy Code provides a series of specific reasons why a debtor's discharge can be denied, some of which are alleged by Gavola in the related adversary proceeding. If the judgment can be proved to meet certain elements as Gavola has alleged, it will be found non-dischargeable under § 523. The specific findings of the judgment do not serve as a basis to dismiss this case pursuant to § 707(a). To do so would substitute this court's evaluation of what debts are "egregious" for the congressionally mandated reasons provided in the dischargeability sections of the Bankruptcy Code.
Finally, Gavola criticizes Asbra for not filing a dischargeability adversary proceeding in his prior bankruptcy case in 2016. But the burden is on the creditor to prove a debt is non-dischargeable pursuant to 11 U.S.C. § 523(a)(2), (4), or (6) by timely filing an adversary proceeding. 11 U.S.C. § 523(c)(1); Fed. R Bankr. P. 4007. Gavola timely filed just such a complaint.
Other dischargeability sections are self-executing, most notably student loans as defined in 11 U.S.C. § 523(a)(8). If a debtor does not pursue a proceeding seeking the discharge of a student loan, it is not discharged when an individual debtor receives a statutory discharge under any chapter of the Bankruptcy Code. Wetzel v. N.Y. State Higher Educ. Svcs. Corp. (In re Wetzel), 213 B.R. 220, 224 (Bankr. N.D.N.Y. 1996). --------
V. Conclusion
Gavola suggests that the denial of this motion to dismiss somehow would let Asbra off "scot-free." Doc. 90 at 4. But all this court decides today, based on the totality of the circumstances, was the evidence was insufficient to dismiss this case under the demanding standard of § 707(a), which is limited to the most egregious cases. The issues about whether the Gavola debt will be discharged, or whether Asbra should be given a Chapter 7 discharge at all are yet to be determined. In addition, the Chapter 7 trustee may review and pursue on behalf of creditors such as Gavola any potentially avoidable transfers made by Asbra.
Gavola's motion to dismiss pursuant to 11 U.S.C. § 707(a) is denied. The court will enter a separate order contemporaneously with this decision.
This document has been electronically entered in the records of the United States Bankruptcy Court for the South ern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Guy R. Humphrey
United States Bankruptcy Judge Dated: February 24, 2021 Copies to: Default List