Where the U.S. Trustee showed there had been an unexplained loss of millions of dollars of assets to meet the debtor’s liabilities, and the debtor failed to provide a satisfactory explanation for the loss of the funds, the trustee prevailed on this claim.
Bin Hao is an individual residing in Fairfax County. Through Qidian LLC, he solicited funds from individual investors which were then invested into special purpose vehicles, or SPV. The largest of the SPV’s invested in a real estate project in Miami, which suffered a foreclosure on its property by the senior mortgage lender, resulting in a loss of the SPV investors’ money.
Hao filed a Chapter 11 petition and represented in his initial filings that “there is no Balance Sheet, Statement of Operations, or Cash-Flow Statement.” On July 26, 2022, the court converted the case to Chapter. 7. The court found that “the Debtor has not accurately and timely disclosed all of his assets.”
The U.S. Trustee filed a complaint objecting to the debtor’s discharge on Nov. 30, 2022. The U.S. Trustee filed a motion for summary judgment on Feb. 14, 2023.
The defendant argues that it would be unfair to use the court’s previous findings because he was not apprised at the time that such findings might be used in connection with an objection to his discharge. There is no authority, however, for the proposition that a party (who was represented by counsel throughout the process) is entitled to notice of the potential estoppel consequences of the court’s findings.
All of the elements of collateral estoppel are present here. The issues are the same and were actually determined in a prior proceeding. The court’s determinations were a critical and necessary part of its decision to convert the case to Chapter 7. The order converting the case was a final order and was not appealed. The debtor had a full and fair opportunity to litigate the issues (and did so) in the prior proceeding. The court finds that its findings are entitled to preclusive, collateral estoppel effect.
The debtor argues that 11 U.S.C. § 727(a)(3) speaks in terms of the “debtor’s financial condition,” and that Qidian and the related SPV’s are not in bankruptcy. The debtor asserts, therefore, that his failure to produce books and records for these entities cannot constitute grounds for the denial of his discharge. The majority of courts, however, have rejected this restricted reading of § 727(a)(3).
The debtor’s financial condition in this case was inextricably bound up with that of Qidian and the SPV’s. The debtor’s financial condition could only be discerned from the books and records of Qidian and the SPV’s. The debtor does not deny that he has access to, and controls the business records of his entities. Indeed, the debtor relies on these records in his own defense. The court concludes that the books and records of the debtor’s related business entities not only are relevant, they are essential to determining the debtors’ financial condition in this case.
Still, there is a material dispute of fact on what documents the two trustees, or the U.S. Trustee specifically requested, and for what period of time. Neither of the trustees’ affidavits contains a list of documents that were requested and not produced.
The court previously found that the debtor made false oaths in failing to disclose certain assets. The court finds that the failure to disclose these assets all were material to the administration of the bankruptcy estate. The debtor maintains in his affidavit that his failure to list these assets was “inadvertent.” The court finds that the debtor’s intent is a disputed issue for trial.
Under § 727(a)(5), a debtor may be denied a discharge where “the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities ….” The U.S. Trustee has met his burden to demonstrate that there has been an unexplained loss of assets or a deficiency of assets to meet the debtor’s liabilities. The debtor, on the other hand, has not provided a satisfactory explanation for the loss of the funds. The court will grant the plaintiff’s motion for summary judgment on Count Three.
Plaintiff’s motion for summary judgment granted part, denied in part.
Fitzgerald v. Hao, Case No. 22-01095, May 16, 2023. EDVA Bankr. at Alexandria (Kenney). VLW No. 023-4-011. 20 pp.