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In re Hannon

United States Court of Appeals, First Circuit

October 7, 2016



          Matthew R. Johnson, with whom Joshua M. Wyatt and Devine, Millimet & Branch, P.A. were on brief, for appellant.

          Joel E. Faller, with whom McLaughlin Brothers, P.C. was on brief, for appellees.

          Before Kayatta and Barron, Circuit Judges, McAuliffe, [*] District Judge.

          McAULIFFE, District Judge.

         Patrick J. Hannon ("Hannon") appeals from the entry of summary judgment denying his petition for a discharge in bankruptcy. See 11 U.S.C. § 727(a)(4)(A). The bankruptcy court denied the discharge after concluding that Hannon made false material statements with respect to disbursements made on his behalf by third parties during the bankruptcy proceeding. The district court affirmed the bankruptcy court's entry of summary judgment, and we affirm as well.

         I. Background

         A. Factual Background

         In May of 2012, Hannon and his wife, Elizabeth, sought protection from their creditors by filing a voluntary bankruptcy petition under Chapter 11 of the Bankruptcy Code.[1] The Hannons reported total assets of about $6 million, and liabilities of approximately $10.4 million, which included a disputed tax debt of more than $7 million.

         Hannon owned and operated a recycling and scrap metal company, ABC&D Recycling, Inc. ("ABC&D Recycling"), as well as a real estate company, Ware Real Estate, LLC ("Ware Real Estate"), which held title to the land on which ABC&D Recycling was located. The Hannons estimated that monthly expenses necessary to support their family during the bankruptcy process would average about $13, 180, and noted that the income required to pay those expenses would come from ABC&D Recycling's ongoing operations while Hannon served as debtor-in-possession.

         ABC&D Recycling and Ware Real Estate

         Hannon bought ABC&D Recycling and Ware Real Estate with the help of an attorney named George McLaughlin, Esq., who had previously represented Hannon. McLaughlin owned a financing company, Bright Horizon Finance, LLC ("Bright Horizon"), which loaned Hannon the necessary funds. Bright Horizon's loan terms included warrant rights, affording it the option to purchase a 50.1 percent interest in each company. On June 21, 2012, after the Hannons filed for bankruptcy protection, Bright Horizon assigned its warrant to ABCD Holdings, LLC ("ABCD Holdings"), another company controlled by McLaughlin, and, on July 17, 2012, ABCD Holdings exercised those warrant rights, thereby obtaining a 50.1 percent ownership interest in both Ware Real Estate and ABC&D Recycling.

         A few weeks earlier, on June 27, 2012, McLaughlin, suspecting that business funds were being diverted by Hannon for unauthorized purposes, obtained an ex parte temporary restraining order from the Suffolk County Superior Court. That order temporarily barred Hannon from ABC&D Recycling's premises. On July 2, 2012, however, that order was modified to allow Hannon to resume operational control over the business. A short time later, on July 18, 2012, ABCD Holdings removed Hannon as an officer of Ware Real Estate and appointed McLaughlin to replace him. Hannon, however, continued to operate ABC&D Recycling until February 6, 2013, when ABCD Holdings removed him as an officer and director of that company as well. On March 13, 2013, the bankruptcy court approved the sale of Hannon's remaining minority interest in both Ware Real Estate and ABC&D Recycling to ABCD Holdings.

         Hannon's Monthly Operating Reports

         Hannon was required to file monthly operating reports ("MORs") on a standardized form with the United States Trustee's office. He did so from May through September of 2012. Hannon says that he provided his counsel with bank statements from the debtor-in-possession accounts and, based on those statements, counsel completed the necessary forms for him. Hannon then reviewed the forms and signed a certification on each MOR which declared "under penalty of perjury" that the report was true and correct "to the best of [his] knowledge and belief."

         The MOR forms require, among other things, that a debtor affirmatively disclose whether funds have been disbursed for the debtor's benefit from any account other than a debtor-in-possession account, and, if so, to provide an explanation for such payments. Here, that would include disclosure of disbursements made by ABC&D Recycling and Ware Real Estate for Hannon's benefit. The MOR form also instructs the debtor to report the amount of estate disbursements made by outside sources. On all of the relevant MORs, Hannon reported that funds had been disbursed for his and his wife's benefit from an account other than a debtor-in-possession account. In May and June of 2012, for example, Hannon's MORs identified $1, 407.24 and $2, 830.30, respectively, as "payments from ABC&D for rent and utilities." Hannon's September MOR also disclosed that funds had been disbursed from "ABC&D for rent and utilities, " but reported that no amount ("0") had been disbursed for the estate's benefit from outside sources. Hannon's July and August MORs contained no reference to disclosable payments from ABC&D Recycling, and reported "0" estate disbursements made by outside sources.

         Companies Object to Discharge

         On July 12, 2013, ABCD Holdings, ABC&D Recycling, and Ware Real Estate (the "Companies") filed an adversary complaint against Hannon in the bankruptcy proceeding, objecting to his discharge in bankruptcy. Based upon a forensic accounting analysis of the books and records of ABC&D Recycling and Ware Real Estate, the Companies alleged that while Hannon was in control of the businesses, he diverted a substantial amount of business revenue to his own benefit, without authority. According to the Companies, business funds were diverted by means of: (1) Hannon's use of business accounts to pay Hannon's entirely personal expenses; (2) Hannon's withdrawal of funds from business bank accounts for entirely personal use; and (3) Hannon's and his family members' use of business debit cards to cover entirely personal expenses. The Companies asserted that Hannon did not disclose receipt of the majority of those diverted funds on his MORs, as required. They charged that Hannon diverted approximately $99, 000 from ABC&D Recycling and Ware Real Estate between May and September of 2012, during which period he only identified approximately $4, 200 in disbursements made on his behalf on the MOR forms.

         On November 21, 2013, the Companies moved for partial summary judgment on their claim that, because Hannon made a false oath or filed a false account in connection with his bankruptcy proceeding, he should be denied a discharge. 11 U.S.C. § 727(a)(4)(A). Hannon, acting pro se, [2] opposed the motion but did not deny that the disbursements identified by the Companies actually occurred. Instead, he contended that virtually all of the identified expenditures were made for business purposes, and not for his personal benefit. And, he argued, some expenditures that appeared to be for his personal benefit were actually made by, or on behalf of, other employees.

         Hannon's Proffered Defenses

         A hearing was held in the bankruptcy court on the Companies' motion. The bankruptcy court questioned Hannon about the transactions at issue. Hannon denied that the identified disbursements were made for his personal benefit, stating that nearly all of them ("99.9 percent of them") had a business purpose. The bankruptcy court took the matter under advisement, but offered Hannon the opportunity to "spell out in detail" his defenses to the multiple diversion claims.

         Hannon then retained new legal counsel, who filed a further brief in opposition to the Companies' motion for partial summary judgment. Hannon retreated from his earlier claim that 99.9 percent of the disbursements had a business purpose, but included an affidavit in which he declared that many of the disbursements and withdrawals from business accounts actually had a business purpose. He also filed an affidavit by Jeffrey M. Dennis, CPA, in which Dennis opined that laypersons (like Hannon, who had a high school education) typically lack the necessary training to accurately complete MORs. Finally, Hannon provided the court with an unsworn attachment to his memorandum, in the form of a spreadsheet, detailing his explanations for each of the disbursements challenged by the Companies. Hannon's explanations were divided into three categories: 1) those expenditures that Hannon "believe[d] were incurred for his benefit, " 2) those that he "believe[d were] incurred for legitimate business purposes, " and 3) those that he claimed were incurred for both a personal and a business purpose.

         Hannon conceded that $19, 323.22 in business disbursements were "incurred for his benefit." Those transactions included eleven cash withdrawals, which Hannon labeled as "Stipends to Joint Debtor" (his wife); two paychecks to Hannon from ABC&D Recycling; $7, 500 in rent payments made to Hannon's landlord; $1, 500 in payments to a boat storage facility in Maine; retail purchases for groceries, clothing, and entertainment; ...

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