IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
February 6, 2013
: IN RE: D. ERIK VON KIEL,
D. ERIK VON KIEL,
UNITED STATES TRUSTEE, APPELLEE.
BANKRUPTCY NO. 10-21364
The opinion of the court was delivered by: Rufe,j.
Debtor-Appellant, D. Erik von Kiel, appeals pro se from the Bankruptcy Court's order dated January 5, 2012. For the following reasons, and having considered fully the briefs and the record on appeal, and having determined that oral argument is not necessary in this case,*fn1 the Court will affirm the order of the Bankruptcy Court.
On May 6, 2010, Debtor filed a voluntary bankruptcy petition under Chapter 7 of the United States Bankruptcy Code*fn2 in the Bankruptcy Court for the Eastern District of Pennsylvania.*fn3 On October 13, 2010, the United States Trustee timely filed a complaint, objecting to discharge on three independent statutory grounds: "[Debtor], with intent to hinder, delay or defraud, concealed property and made pre- and/or post-petition transfers thereof"*fn4
(Count 1); "[Debtor] failed to keep or preserve recorded information
from which his financial condition or business transactions might be ascertained"*fn5
(Count 2); and "[Debtor] knowingly and fraudulently, in or in
connection with this case, made a false oath or account"*fn6
(Count 3). The Bankruptcy Court tried the matter on July 29
and August 8, 2011.*fn7 A finding in the Trustee's
favor on any individual count would have provided a basis for denying
the Debtor's discharge. On January 5, 2012, the Bankruptcy Court
entered judgment denying Debtor's discharge on each of the three
grounds.*fn8 This appeal followed.
II. JURISDICTIONAL STATEMENT
Bankruptcy courts have jurisdiction to hear and determine all core
proceedings under Title 11 of the United States Code.*fn9
An adversary proceeding seeking denial of a debtor's
discharge pursuant to 11 U.S.C. § 727 is a core proceeding under 28
U.S.C. § 157(b)(2)(J); therefore, the Bankruptcy Court had
jurisdiction under this section to consider the United States
Trustee's objection to Debtor's discharge.
By Opinion and Order dated January 5, 2012, the Bankruptcy Court
entered final judgment denying Debtor's discharge.*fn10
On January 23, 2012, after the time for filing a notice of
appeal ran, Debtor filed a notice of appeal together with a motion for
an extension of time to file the appeal.*fn11 The
Bankruptcy Court denied the motion for an extension on February 13,
Debtor thereafter filed a motion for reconsideration and on March 20, 2012, after a hearing, the Bankruptcy Court granted the motion to reconsider and extended the time to file an appeal.*fn13
Debtor's appeal to this Court is therefore timely, and this Court has jurisdiction to review the Bankruptcy Court's decision pursuant to 28 U.S.C. § 158(a).*fn14
III. STANDARD OF REVIEW
A district court reviewing the decision of a bankruptcy court on appeal reviews the bankruptcy court's "legal determinations de novo, its factual findings for clear error, and its exercise of discretion for abuse thereof."*fn15 A "bankruptcy court's ultimate determination [to deny discharge under § 727] should be affirmed absent an abuse of discretion."*fn16 "A bankruptcy court abuses its discretion when its ruling is founded on an error of law or a misapplication of law to the facts."*fn17
A district court's review of a bankruptcy appeal is limited to the record before the bankruptcy court.*fn18 Debtor, who did not introduce any exhibits at trial, attempts to introduce in this appeal pleadings and other documents that were not before the Bankruptcy Court. The Court does not consider these documents in reaching its decision as it is not this Court's role to engage in independent fact finding.*fn19
IV. STATEMENT OF FACTS
Generally, Debtor does not take issue with the Bankruptcy Court's factual findings; instead, he disputes the Bankruptcy Court's conclusion with respect to his credibility and his intent in conducting his financial affairs. Deferring to the Bankruptcy Court's credibility determinations, this Court has reviewed the Bankruptcy Court's factual findings for clear error and finds none. The following facts are taken from the Bankruptcy Court's January 5, 2012 Opinion denying Debtor's discharge. Since the Court writes primarily for the parties who are familiar with the facts at issue, the Court recounts herein only those facts necessary to give context to its decision.*fn20
Debtor earns compensation well in excess of $150,000 annually. Debtor earns such compensation, but he has declined and continues to decline to take it and has assigned and continues to assign it to an apparent religious organization that gave and gives back to him, as a gift, a substantial portion of that compensation. For ten years before filing his bankruptcy case, Debtor has been evading taxes and shielding his assets and income from creditors. Under the label of a ministry, Debtor has avoided and evaded his obligation to report his income and file tax returns. He has also kept his assets and income beyond the reach of his creditors, including the United States, to which is owed significant unpaid student loans and probable unpaid taxes. Electing a shield of poverty and maintaining some separation from his family, Debtor exercised complete control over substantial amounts of money by using tax identification numbers that were not his, opening bank accounts (that he controlled) in the names of different entities, and funneling income through a nominally religious entity - all to defraud tax authorities and frustrate his creditors.*fn21
Debtor graduated from Philadelphia College of Osteopathic Medicine with a medical degree in 1985. He used Health Education Assistance Loans ("HEAL") to pay for his education and since completing his residency in 1988, has continually practiced medicine. Despite his continued employment, Debtor claims that he has no actual or beneficial interest in any real property, bank accounts, or other assets and receives no income.
The Bankruptcy Court summarized Debtor's "unusual lifestyle" as follows:
Debtor's unusual lifestyle and financial dealings began after his alleged spiritual awakening upon being charged with Medicare fraud in 1997. Although he was cleared of the charges, he claims this experience caused him to reevaluate his circumstances and make dramatic changes in his life. Among other changes, Debtor ended his practice of family medicine and any practice involving insurance billing. He now concentrates on non-traditional medical treatments, such as lymphology, and he works full time providing medical services to prison inmates.*fn22
Debtor has been employed for ten years as a "Minister/M.D./D.O." with
the International Academy of Life ("IAL") based in Orem, Utah; he
claims that he receives no salary or wages from his employer. In 2001,
Debtor joined the IAL and took a vow of poverty, which required that
he renounce any interest in real or personal property, and current and
future income, granting all such interests to IAL.*fn23
To this end, he established at least one trust in an attempt
to transfer ownership of the home he owned jointly with his wife, and
granted powers of attorney to John Kusek and Robert macWray, to whom
he gave full authority to handle all of his financial affairs.
Thereafter, Debtor claims that he had no involvement in his financial
affairs (with the exception of writing checks for his needs and those
of his family) and keeps no records of his financial dealings.
Beginning in 1989, and continuing at least through Debtor's bankruptcy
trial, Debtor has provided medical services to inmates at the Lehigh
County Prison ("LCP"), where he currently holds the title of Medical
Director. In this capacity, he is a full-time employee of PrimeCare
Medical, Inc., which contracted with Lehigh County to provide medical
services at county correctional facilities, including LCP.*fn24
The Bankruptcy Court found that PrimeCare does not have a
contractual relationship with IAL and that IAL does not supervise or
exercise any control over Debtor's employment at
In 2004, Debtor completed and signed Internal Revenue Service Form W-9 for tax purposes. Rather than complying with the instructions and placing his social security number on the form, Debtor completed the form using another social security number, one that did not belong to him and instead was supplied by IAL. PrimeCare issued a W-2 to Debtor each year listing the social security number supplied by IAL and stating the amount of compensation he earned that year. Debtor did not pay taxes on his yearly PrimeCare income of more than $150,000.
According to Debtor, he receives "gifts" of $12,787 per month, from which no taxes are other deductions are taken. Debtor maintains that he retains little of this "gift" money, stating that he pays $12,000 per month to support his estranged wife and nine children, some of whom are adults and at least two of whom were born after the couple's separation. These support payments are made voluntarily, not pursuant to any court order or other written agreement between Debtor and his wife. The Bankruptcy Court characterized some of the expenses Debtor claims to pay for his wife and children as "extraordinary." After paying $12,000 to his family, Debtor claims that he has less than $1,000 each month to pay his own living expenses.
In 1999 and 2000, two civil judgments totaling about $187,000, had been entered against Debtor in the Lehigh County Court of Common Pleas. The judgments arose from defaulted payments to the Department of Health and Human Services ("HHS"), on Debtor's HEAL loans, and were registered under Debtor's alias (D.O. Dennis W. Fluck) in the United States District Court for the Eastern District of Pennsylvania on September 19, 2002.*fn26
The United States began collection efforts in 2006, applying for and
obtaining writs of garnishment from PrimeCare. Around the beginning of
these garnishment proceedings, Debtor engaged in a series of actions
which the Bankruptcy Court found were designed to keep Debtor's assets
and income beyond the reach of his creditors, including the United
States. On June 1, 2006, or example, Debtor signed a deed transferring
sole ownership of his home to his estranged wife. He also signed two
different "Employee Direct Deposit Authorization Forms."*fn27
forms directed that PrimeCare deposit Debtor's paycheck into an account maintained by IAL Management, LLC ("IAL account"); however, one was completed using Debtor's social security number, while the other was completed using the second social security number that IAL had provided to Debtor.
In December 2006, Debtor opened a business checking and investment accounts in the name of "True Life Ministries, Inc." or "TLM", naming himself as trustee. Debtor used a third tax identification number to open these accounts.*fn28 Though Debtor claimed to be ignorant of the fact that he was named as trustee on the TLM accounts, the Bankruptcy Court found that Debtor's claimed ignorance was a frequent and pervasive characteristic of Debtor's testimony and conduct throughout this entire case. Debtor blindly followed the direction and advice of IAL, its representatives, and Mr. Kusek regarding all things legal and financial. He made no effort to ascertain the legitimacy of anything that he did at their direction. He simply followed their orders and direction on how he should conduct his affairs with no evinced concern for its legality or propriety.*fn29
Further, despite Debtor's insistence that he had no affiliation with TLM other than being permitted to use the accounts, the address given for the TLM accounts is Debtor's personal address, the TLM accounts were in his sole and exclusive control,*fn30 and the TLM account funds were used to pay the expenses of Debtor and his family.
In July 2007, PrimeCare began depositing Debtor's pay directly into the IAL account; IAL would then transfer money in amounts similar to Debtor's paychecks into the TLM account.*fn31 Notwithstanding Debtor's receipt of W-2s from PrimeCare and his salary of more than $150,000 per year, Debtor insisted in his testimony before the Bankruptcy Court that he receives no income for his work for PrimeCare. Rather, he claims that his salary belonged to IAL, and that since 2001 he worked "voluntarily in his capacity as a minister and medical missionary of IAL, pursuant to specific directive of the church."*fn32
"On April 23, 2010, only two weeks before Debtor filed [his bankruptcy petition], Judge Tucker rejected Debtor's attempt to challenge the judgments and the garnishment efforts of the United States and ordered Debtor's employer to pay 25% of Debtor's net earnings to the United States for his HEAL loans."*fn33 The Bankruptcy Court found that Debtor's bankruptcy petition "constitutes Debtor's ill-concealed and back-door attempt to avoid Judge Tucker's decision," and the reach of his creditors in general.*fn34
V. DEBTOR'S APPEAL
As stated, the Bankruptcy Court denied Debtor's discharge on three separate and independent statutory grounds---11 U.S.C. §§ 727(a)(2), 727(a)(3), and 727(a)(4). Debtor appeals, arguing that the Bankruptcy Court's decision "cannot be sustained on violations of sections 727(a)(2)(A) or 727(a)(4) or 727(a)(3) of the bankruptcy code."*fn35 This Court, however, will affirm the denial of discharge under § 727(a)(2) based on its conclusion that the record supports the Bankruptcy Court's finding that Debtor engaged in a fraudulent scheme to evade taxes and frustrate his creditors. Since the Court finds that the Bankruptcy Court's denial of Debtor's discharge pursuant to § 727(a)(2) is supported by the record, is legally sufficient, and provides a sufficient independent statutory basis for denial of discharge, the Court will not address the two other statutory grounds that the Bankruptcy Court found justified discharge in this case.
Title 11, United States Code, § 727(a)(2) "provides that a debtor shall be denied a discharge where he: 'with intent to hinder, delay or defraud a creditor or an officer of the estate charged with the custody of property under this title, has transferred, removed, destroyed, mutilated or concealed, or has permitted to be transferred, removed, destroyed, mutilated or concealed- (A) property of the debtor, within one year before the date of the filing of the petition.'"*fn36 A court's primary inquiry under this section "is whether [debtor] intended to hinder or delay a creditor. If he did, he had the intent penalized by the statute notwithstanding any other motivation he may have had for the transfer."*fn37 A denial of discharge under § 727(a)(2) is warranted upon a finding:
1. that the act complained of was done at a time subsequent to one year before the filing of the petition or after the date of the filing of the petition;
2. with intent to hinder, delay, or defraud a creditor of the property under the Bankruptcy Code;
3. that the act was that of the debtor or his duly authorized agent; and
4. that the act consisted of transferring, removing, destroying or concealing any of the debtor's property.*fn38
Given that a debtor is unlikely to admit that his acts were in fact intended to hinder creditors or fraudulent, courts have identified "badges of fraud" the existence of which indicates fraudulent intent. These "badges" include:
(1) a close relationship between a transferor and transferee; (2) a
transfer in anticipation of a pending lawsuit; (3) a transferor/debtor
who was insolvent or in poor financial condition at the time of the
transfer; (4) the transfer of all or substantially all of the debtor's
property; (5) a transfer that so completely depletes the debtor's
assets that the creditor was hindered or delayed in
recovering any part of the judgment; and (6) the shifting of assets by
the debtor to a corporation wholly controlled by him."*fn39
Here, the record clearly supports the Bankruptcy Court's finding that Debtor concealed property belonging to, or at the very least controlled by him with the intent to hinder his creditors. Despite his income of more than $150,000, his receipt of W-2s, his control over the TLM account to which most of the $150,000 income was transferred, and the fact that this income, or an equivalent sum of money, was used to pay Debtor's personal and family expenses, Debtor maintained that he has little to no income or assets. Debtor's claimed that the income he earned from PrimeCare was not his property is belied by his actions, which show attempts to conceal income and assets, and to move his property beyond the reach of his creditors.
The Court notes factual evidence of a close relationship between Debtor and IAL and the Debtor and TLM, the use of a second social security number, Debtor's arranging for his income to be passed through more than one account though ultimately the funds were used by Debtor, Debtor's attempt to transfer the home he owned jointly with his estranged wife to her sole ownership, Debtor's attempt to disclaim knowledge of his financial affairs by using a power of attorney and failing to keep records of his transactions, and Debtor's receipt and use of $13,000 in "gift" money from IAL every month to pay personal and family expenses. The Bankruptcy Court did not find Debtor and his "ignorance" credible and this Court defers to this credibility determination, which is supported by other facts of record.
Although his arguments are not clearly defined, it appears that Debtor believes that the Bankruptcy Court's ruling pursuant to § 727(a)(2) should be overturned (1) because the Government was aware that PrimeCare was Debtor's employer and has not determined that he is liable for any taxes on the $150,000 he earned at LCP, and (2) because he relinquished all of his income and assets to IAL, he could not have concealed any income or assets, but even if the "gifts" should have been disclosed, he used the money for a proper purpose. With respect to Debtor's first argument, whether Defendant is required to pay taxes on his earnings and the Government's knowledge of Debtor's employer is irrelevant to the issue of Debtor's concealing assets with intent to defraud. With respect to Debtor's second argument, the Bankruptcy Court found that despite Debtor's insistence that he retained no interest in the income he earned, Debtor had an undisclosed interest in the accounts where the money was deposited and the earnings were used to pay Debtor's personal and family expenses. Debtor's use of these earnings to pay for legitimate living expenses is irrelevant.
For the foregoing reasons, the Court finds that the Bankruptcy Court did not abuse its discretion when it denied Debtor's discharge pursuant to 11 U.S.C. § 727(a)(2). Accordingly, the Court will affirm the January 5, 2012 Order of the Bankruptcy Court.
An order will be entered.