In re: John J. Diamond, III CV-03-192-M 10/24/03 UNITED STATES DISTRICT COURT

DISTRICT OF NEW HAMPSHIRE

In r e : John J. Diamond, III, Debtor

Premier Capital, Inc., Appellant

v. Civil No. 03-192-M Opinion No.

John J. Diamond, III, Appellee

O R D E R

John J. Diamond, III ("Diamond"), is a Chapter 7 debtor.

Premier Capital, Inc. ("Premier Capital"), a judgment creditor

appeals the decision of the bankruptcy court (Vaughn, J.) to

grant Diamond a discharge over its claims of unlawful transfer

unlawful concealment, and false oaths, under

2 7 (a)(2) and 7 2 7 (a)(4). For the reasons given below, the

decision of the bankruptcy court is affirmed. Standard of Review

A bankruptcy court's findings of fact are not set aside

unless clearly erroneous. Palmacci v. Umpierrez,

(1st Cir. 1997) (citing F e d . R. B a n k r . P. 8013; Commerce Bank &

Trust Co. v. Burgess (In re Burgess) ,

(1st Cir.

1992); F e d . R. C i v . P. 52(c), advisory committee's note to 1991

Amendment). However, a "bankruptcy court's legal conclusions,

drawn from the facts so found, are reviewed de novo." Palmacci,

(citing Martin v. Baigar (In re Baigar) ,

(1st Cir. 1997)) .

Absent either a mistake of law or an abuse of discretion, the bankruptcy court ruling must stand. See Siedle v. Putnam Invs., Inc.,

(1st Cir. 1998). A bankruptcy court "may abuse its discretion by ignoring a material factor that deserves significant weight, relying on an improper factor, or, even if it [considered] only the proper mix of factors, by making a serious mistake in judgment."

Picciotto v. Salem Suede, Inc. (In re Salem Suede, Inc.),

(1st Cir. 2001). "On an appeal the district court .

. . may affirm, modify, or reverse a bankruptcy judge's judgment,

order, or decree or remand with instructions for further

proceedings." F e d . R. B a n k r . P. 8013.

2 Background

On May 6, 1999, Premier Capital obtained judgment against

Diamond in the New Hampshire Superior Court in the amount of

$131,215.12. Suit was based upon Diamond's default on two notes.

Earlier, on January 20, 1999, as the parties were attempting

to resolve their dispute, before entry of judgment. Diamond gave

Premier Capital an unsigned affidavit purporting to list all of

his assets and liabilities. (Diamond also resubmitted that

affidavit to Premier Capital on June 1, 2000.) The affidavit

failed to disclose: (1) Diamond's ownership interest in two

closely-held corporations, Diafil, Inc., and Real Estate

Settlement Services, Inc. ("Real Estate Settlement"); (2) a

Prudential life insurance policy with a cash value of $11,900;

and (3) an account with Solomon Smith Barney.

On July 11, 2000, Premier Capital sought to attach, through

trustee process, all of Diamond's assets, of which it was aware.

Premier Capital succeeded in attaching Diamond's accounts at

First Savings of New Hampshire, Citizens Bank, and Morgan

Stanley, Dean Witter. It did not, however, seek to attach the

3 account at Solomon Smith Barney or the Prudential life insurance

policy because it was unaware of the existence of those assets.

Between July 18 and July 26, 2000, Diamond liquidated those two

assets, depositing the proceeds in a trust account maintained by

Attorney Terrie Harman. At the same time. Attorney Harmon

provided Premier Capital with information about Diamond's

finances, including the transfer of funds into her trust account.

From that trust account. Attorney Harman collected legal fees and

paid the Internal Revenue Service $15,000 against a $75,000

deficiency owed by Diamond.

On September 27, 2000, Diamond was divorced. In his divorce

proceeding. Diamond disclosed his interests in both Real Estate

Settlement and Diafil, and the permanent stipulation incorporated

into his divorce decree awarded those interests to his wife.

On October 6, 2000, Diamond filed for bankruptcy protection.

In his petition, he indicated that his interests in Real Estate

Settlement and Diafil had been transferred to his wife on

September 27, but the final transfer of stock certificates did

not actually occur until some time after Diamond filed his

4 petition. Diamond's petition also failed to disclose

approximately $35,000 in commissions to be paid to him on real

estate transactions in which he acted as a broker.

Based upon the foregoing. Premier Capital filed suit in six

counts, asking the bankruptcy court to deny Diamond a discharge,

on grounds that he concealed and transferred assets and gave

false oaths. Specifically, Premier Capital asserted that Diamond

unlawfully concealed his interests in Real Estate Settlement and

Diafil (Count I), the Solomon Smith Barney account and the

Prudential insurance policy (Count II), and the commissions he

was to collect on several real estate transactions (Count IV),

and that he unlawfully transferred funds from the Solomon Smith

Barney account and proceeds from the Prudential policy to

Attorney Harman's trust account (Count III). Premier Capital

also asserted that Diamond gave false oaths by failing to list

his pending real estate commissions (Count V) and his interests

in Real Estate Settlement and Diafil (Count VI) in his bankruptcy

petition.

5 In a memorandum opinion dated March 27, 2003, the bankruptcy

court ruled against Premier Capital on all counts.

Discussion

On appeal. Premier Capital argues that the bankruptcy court

erred by ruling that: (1) Diamond's transfer of funds to his

attorney did not violate

(a) (2); (2) Diamond did

not intentionally conceal his interests in Diafil and Real Estate

Settlement in violation of § 727(a)(2); and (3) Diamond's failure

to list pending real estate commissions did not violate §

727(a)(4). Diamond disagrees, categorically.

I. Relevant Law

The discharge provisions of the bankruptcy code provide, in

pertinent part:

The court shall grant the debtor a discharge, unless-

(2 ) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed-

6 (A) property of the debtor, within one year before the date of the filing of the petition;

(4) the debtor knowingly and fraudulently, in or in connection with the case-

(A) made a false oath or account . . .

11 U.S.C. 727(a). "Exceptions to discharge are narrowly

construed in furtherance of the Bankruptcy Code's 'fresh start'

policy. . . ." Palmacci,

(guoting Century 21

Balfour Real Estate v. Menna (In re Menna),

(1st

Cir. 1994)). "The statutory reguirements for a discharge are

'construed liberally in favor of the debtor' and '[t]he reasons

for denying a discharge to a bankrupt must be real and

substantial, not merely technical and conjectural.'" Palmacci,

(guoting Boroff v. Tullv (In re Tullv),

(1st Cir. 1987)) .

II. Transfer of Funds to Attorney Harman

In Count III, Premier Capital asserted that Diamond should

be denied a discharge because he transferred funds into Attorney

Harman's trust account with the intent to hinder, delay, or

defraud a creditor, i.e.. Premier Capital. The bankruptcy court

7 ruled in Diamond's favor, on grounds that Diamond: (1) disclosed

those transfers to Premier Capital, as they were being made, in a

letter dated July 21, 2000; and (2) maintained control over the

funds in Attorney Harman's trust account. In the view of the

bankruptcy court, "[t]he mere fact that these transfers were

immediately disclosed to [Premier Capital] negates any evidence

of intent to hinder, delay or defraud the Plaintiff."

As set forth above, a debtor may be denied a discharge if he

or she has, "with intent to hinder, delay, or defraud a

creditor," transferred "property of the debtor, within one year

before the date of the filing of the petition."

(a)(2)(A). Here, it is undisputed that Diamond deposited

money into Attorney Harman's trust account less than one year

before the date on which he filed his bankruptcy petition.1 The

1 The bankruptcy court appears to agree with Premier Capital that Diamond's deposit of funds into Attorney Harman's trust account was a "transfer" within the meaning of

(a)(2), and Diamond himself does not challenge that conclusion, other than to note that he maintained control over the funds after the transfers. However, it is not at all clear that Diamond's deposits into Attorney Harman's trust account were transfers, as that term is used in the relevant statute. Typical fraudulent transfer cases involve debtors who sell assets for far less than their value, in order to impoverish themselves, or debtors who transfer assets into trusts while secretly maintaining full control over them. See R.I. Depositors Econ. only question, then, is whether the bankruptcy court correctly

determined that Diamond lacked the requisite intent to hinder,

delay, or defraud Premier Capital.

"Whether the debtor had the requisite wronqful intent is a

question of fact." Farm Credit Bank v. Hodgson (In re Hodgson),

(D. Kan. 1994) (citing Wines v. Wines (In re

Wines),

(11th Cir. 1993)). Thus, the

bankruptcy court's determination that Diamond lacked the

necessary wrongful intent may be reversed only if it was clearly

erroneous. See Palmacci,

(citations omitted).

The bankruptcy court did not commit clear error by finding

that Diamond lacked the intent necessary to support a claim that

he transferred money into Attorney Harman's trust account in

Protection Corp. v. Haves (In re Haves),

(B.A.P. 1st Cir. 1999). Here, by contrast. Diamond did not secretly maintain control over the assets in question but did so out in the open, nor did he place those assets beyond the reach of his creditors. Thus, it is difficult to see how Diamond's deposit of funds into Attorney Harman's trust account even qualifies as a transfer within the meaning of the bankruptcy code. But, because the bankruptcy court's decision can be affirmed on the issue of intent, it is not necessary to decide whether Diamond's act qualified as a transfer of assets in the first instance. order to hinder, delay, or defraud Premier Capital. As the

bankruptcy court points out in its memorandum opinion, there was

nothing in the least bit covert about Diamond's transfer of

funds. Moreover, Diamond's action did not "place assets beyond

the reach of creditors." In re Haves,

(citations

omitted). Accordingly, the bankruptcy court's decision regarding

the transfer of funds into Attorney Harman's trust account is

affirmed.

III. Concealment of Corporate Interests

In Count I, Premier Capital asserted that Diamond should be

denied a discharge because, with the intent to hinder, delay, or

defraud, he concealed his interests in Diafil and Real Estate

Settlement from a creditor.2 The bankruptcy court ruled in favor

of Diamond on Count I on grounds that while Diamond failed to

inform Premier Capital of his interests in Diafil and Real Estate

Settlement, he lacked "the reguisite intent to hinder, delay or

2 Premier Capital also asserted, in Count VI, that Diamond should be denied a discharge because he falsely stated, in his petition, that he had transferred his interest in Real Estate Settlement on September 27, 2000. Premier Capital does not appeal the bankruptcy court's decision in Diamond's favor on Count VI, which was based upon the court's determination that Diamond did not knowingly and fraudulently make a false oath.

10 defraud." In reaching that decision, the bankruptcy court

credited, among other things. Diamond's testimony that he did not

list those interests because he believed them to have no value to

a third party. The court also noted that Diamond did, in fact,

disclose those interests to Premier Capital in the July 21, 2000,

letter.

As set forth above, a debtor may be denied a discharge if he

or she has, "with intent to hinder, delay, or defraud a

creditor," concealed "property of the debtor, within one year

before the date of the filing of the petition."

(a)(2)(A). Here, the determinative guestion is whether

Diamond had the reguisite intent to hinder, delay, or defraud

Premier Capital on June 1, 2000, when he resubmitted the January

20, 1999, affidavit.

The bankruptcy court did not commit clear error by finding

that Diamond lacked the intent necessary to support a claim that

he failed to disclose his interests in Diafil and Real Estate

Settlement in order to hinder, delay, or defraud Premier Capital.

Not only did the bankruptcy court find Diamond to be a credible

11 witness, it also found Diamond's explanation of his omission to

be logical. Indeed, it was not at all unreasonable for Diamond

to consider his ownership interests in two closely held

corporations to have negligible value to a third party, because

those corporations had little in the way of liguid assets.

Accordingly, the bankruptcy court's decision regarding the

alleged concealment of Diamond's corporate interests is affirmed.

IV. Failure to List Real Estate Commissions

In Count V, Premier Capital asserted that Diamond should be

denied a discharge because he gave a false oath by failing to

list, in his petition, the real estate commissions he was due to

collect.3 The bankruptcy court ruled in favor of Diamond on

Count V, on grounds that Diamond did not make a knowingly

fraudulent statement but, rather, omitted his commissions from

the list of assets in his petition based upon a credible claim

that he did not know what an "executory contract" was and a

3 Premier Capital also asserted, in Count IV, that Diamond should be denied a discharge because, with intent to hinder, delay, or defraud the trustee, he concealed from the trustee the real estate commissions that he was due to collect. Premier Capital does not appeal the bankruptcy court's decision in Diamond's favor on Count IV, which was based upon the bankruptcy court's determination that Diamond lacked the reguisite intent to hinder, delay, or defraud the trustee.

12 reasonable belief that, at the time of the petition, he had not

yet earned those commissions.

As set forth above, a debtor may be denied a discharge if he

or she has "knowingly and fraudulently . . . made a false oath or

account."

(a)(4)(A). "[T]he existence of false

or inaccurate statements is not, in and of itself, sufficient

cause to deny a debtor's discharge unless it is shown that these

were knowingly and fraudulently made." Santana Olmo v. Quinones

Rivera (In re Quinones Rivera),

(D.P.R. 1995)

(citing In re Burgess,

; In re Tullv,

)). "Because a determination concerning fraudulent intent

depends largely upon an assessment of the credibility and

demeanor of the debtor, deference to the bankruptcy court's

factual findings is particularly appropriate." In re Burgess,

(guoting Williamson v. Fireman's Fund Ins. Co. ,

828 F .2d 249, 252 (4th Cir. 1987)).

Here, in light of the deferential standard of review, there

is no basis for reversing the bankruptcy court's determination

that Diamond lacked the reguisite fraudulent intent when he

13 failed to list the real estate commissions he was due to be paid.

As the bankruptcy court points out, there is debate within the

legal community over when a real estate commission is actually

earned. Thus, it was entirely reasonable for Diamond to believe

that he had not yet earned the commissions he did not list.

Consequently, it was not clear error for the bankruptcy court to

conclude that Diamond's omission was not motivated by an intent

to defraud. Accordingly, the bankruptcy court's decision

regarding Diamond's failure to list his real estate commissions

is affirmed.

Conclusion

For the reasons given, the decision of the bankruptcy court

is affirmed in all respects. The Clerk of Court shall enter

judgment in accordance with this order and close the case.

SO ORDERED.

Steven J. McAuliffe United States District Judge

October 24, 2003

14 cc: Randall L. Pratt, Esq. Terrie L. Harman, Esq. James F. Molleur, Esq. Georqe Vannah Timothy P. Smith Geraldine B. Karonis, Esq.

15