In re Portnoy 201 B.R. 685 (Bankr. S.D. N.Y. 1996) Oct. 7, 1996. [*688] COUNSEL: Kleban & Samor, P.C. by Elliot I.
Miller, Southport, CT, for Debtor. Phillips, Lytle, Hitchcock, Blaine & Huber
by William J. Brown, David J. McNamara, New York City, for Marine Midland Bank. DECISION AND ORDER ON MOTION FOR SUMMARY
JUDGMENT JUDGE: TINA L. BROZMAN, Chief Judge. At the heart of this
debtors summary judgment motion lies an irrevocable offshore trust into which
he placed virtually all of his assets at a time when he knew that his personal
guarantee of his corporations indebtedness was about to be called. The debtor,
Larry Portnoy, claims not only that his assets have been successfully insulated
under the law of the Jersey Channel Islands (Jersey), but that he is entitled
as a matter of law to a discharge of all debts including the indebtedness which
he guaranteed. Marine Midland Bank (Marine), which holds Portnoys guarantee
and feels bruised by his actions, seeks to deny him a discharge under sections
727(a)(2)(A) and (a)(4) of the Bankruptcy Code on the theories that he engaged
in a deliberate scheme to conceal assets and intentionally or recklessly
omitted from his bankruptcy schedules his substantial control powers in the
offshore trust. Alternatively, Marine seeks to exempt from discharge its debt
alone because, it says, Portnoy willfully and maliciously transferred his
assets in order to injure Marine. In his answer to Marines complaint, Portnoy
denied that (1) I have jurisdiction over the offshore trust, the case, [FN1]
and the adversary proceeding; (2) his estate encompasses the assets in the
offshore trust; (3) he owns his salary which he deposits weekly in his wifes
bank account; (4) Marine was his creditor at the time he created the offshore
trust; (5) after he transferred the assets to the offshore trust and deposited
his salary in his wifes bank account, he was left with insufficient assets to
pay his debts; (6) he has any control powers over the offshore trust or that
such powers are material to the bankruptcy estate; (7) his bankruptcy schedules
were untruthful or that he knowingly or recklessly made a false oath in
connection with this case; and (8) he had any intent to conceal assets from or
willfully and maliciously injure Marine. Portnoy also pleaded several
affirmative defenses bottomed on my asserted lack of jurisdiction over the
trust and his salary or on Marines claimed laches and bad faith. FN1. It would appear that the denial of my
jurisdiction over the voluntary chapter 7 case was a pleading error caused by a
general denial of a particular paragraph of the complaint. In this motion for
summary judgment Portnoy nowhere challenges my jurisdiction over the chapter 7 case which he commenced voluntarily. So far as uncontested the facts are set forth
below. I. A. Creation of the Trust In March 1987, Portnoy, the former president and
sole shareholder of Mary Drawers, [*689] Inc. (Mary Drawers), unconditionally
guaranteed any existing and future indebtedness of that entity to Marine. Just
about one year later, in March 1988, Marine loaned Mary Drawers in excess of $1
million. In August 1989, Portnoy established a trust
(the offshore trust) in St. Helier in Jersey, and executed a declaration of
trust naming Jarden Morgan Trustees (Jersey) Ltd. as sole trustee (Jarden),
as himself Principal Beneficiary, and his two children as additional
beneficiaries. Over the course of the next several months Portnoy transferred
his assets to that trust. Northington Decl. ¶ 12 at 7; Ex. 3, Debtors Dep.
at 163-164 (October 3, 1995). An inference can be drawn that the timing was
purposeful, for in June, two months before the trusts creation, Portnoy knew
that Mary Drawers was in trouble and by December of that same year, Mary
Drawers had defaulted on its obligations to Marine. The declaration of trust provides that it shall
be governed by Jersey law and purports to vest exclusive jurisdiction over the
trusts interpretation in the Jersey courts. Jarden has no office, employees,
or telephone listing in the United States and conducts no business here. As identified by the parties, some of the
important trust provisions include: 5. POWER OF ADVANCEMENT OF CAPITAL. The Trustees
shall have power at any time before the Vesting Day [FN2]
[to] transfer or
apply the whole or any part or parts of the capital of the Trust Fund to or for
the benefit of all or any one or more to the exclusion of the others or other
of the Beneficiaries or Default Beneficiaries
in such manner as the
Trustees shall in their absolute discretion think fit and so that any capital
so paid, transferred or applied shall be freed and discharged from the trusts,
powers and provisions hereof. FN2. According to the Declaration of Trust: the Vesting Day shall mean the first of the
following to occur namely: (i) the day on which the period of 100 years
from the date of this Instrument shall expire; (ii) the day on which the period of 20 years
commencing on the death of the last survivor of the issue living at the date
hereof of his late Majesty King George VI shall expire; or (iii) such day or days as the Trustees may
declare by Instrument in writing on or before such day or days to be the
Vesting Day and such declaration may expressly be related to the whole or any
part or parts of the Trust Fund. There is no contention that the Vesting Day
has occurred. 9. POWER TO CONSIDER WISHES OF PRINCIPAL
BENEFICIARY. In the exercise of their powers and discretions hereunder the
Trustees may if they think fit so to do have regard to but shall in no way be
bound by the wishes in writing of the Principal Beneficiary or the wishes of
any other person who may be nominated in writing by the Principal Beneficiary
to the Trustees from time to time. 13. POWER TO IGNORE INTERESTS. The Trustees in
exercising any of the powers and discretions hereby conferred in favour of any
particular person or persons are hereby expressly authorized to ignore entirely
the interest of any other person interested or who may become interested
hereunder. 26. REMOVAL OF TRUSTEES. (1) The Principal
Beneficiary shall have power (subject to sub-clause (2) of this Clause 26) at
any time or times before the Vesting Day in his absolute discretion and without
giving any reasons therefor by notice in writing given to the Trustees
to
remove any or all of the Trustees from office and to appoint one or more other
persons (wherever resident or domiciled) to be a Trustee or Trustees in place
of the Trustee or Trustees so removed. (2) Unless there is only one Original
Trustee hereof the Principal Beneficiary shall not be capable of exercising the
power conferred by sub-clause (1) hereof unless after the exercise of that
power there will be at lease [sic] two Trustees hereof. 27. DIVESTING OF TRUSTEES. (1) The Principal
Beneficiary shall have the power at any time or times before the Vesting Day by
instrument or instruments in writing to nominate any person (wherever resident
or domiciled) as Successor Trustees and such persons shall while living [*690] or
in existence and unless and until any further nomination is made under the
power conferred by this sub-clause be the Successor Trustees for the purpose
of this clause
. 30. EXCLUSION OF BENEFICIARIES AND DEFAULT
BENEFICIARIES. The Trustees shall have the power at any time or times before
the Vesting Day by instrument in writing revocable before the Vesting Day or
irrevocable to declare that any persons or charitable bodies described in such
instrument who are, would or might but for this Clause be or become
beneficiaries or Default Beneficiaries or otherwise be able to benefit
hereunder shall thenceforth or from such later time falling before the Vesting
Day as may therein be specified and whether permanently or for such period as
may therein be specified:(1) be wholly or partially excluded from benefits
hereunder; or (2) cease to be Beneficiaries or Default Beneficiaries (whether
beneficially or in some fiduciary capacity) in relation to the whole or any
part or part of the Trust Fund or the income therefrom
. Ex. 14, Marines Opp’n to Motion for Summary
Judgment. The total realizable value of the assets
transferred to the trust approximated $700,000; the declared transfer value was
$1,045,943. Northington Decl. ¶ 6 at 4; Marines Statement of Facts ¶ 1(d) at
2. From 1989 to the present, Portnoy has filed required annual forms regarding
the offshore trust with the United States Treasury Department. B. Portnoys Salary and Real Estate Apparently, Portnoy was not satisfied with only
removing assets from Marines reach but decided that he had to protect his
earned income as well. Starting sometime in 1990, Portnoy began, and to this
day continues, to deposit all of his salary, at least $150,000 per annum, into
a bank account in his wifes name. For a short period of time prior to that,
Portnoy had transferred his weekly salary into an account in the name of his
daughter, Melissa. Notwithstanding these transfers, Portnoy exercised sole
check writing authority over the accounts. Real property received similar treatment. In
1990 or 1991, Portnoy transferred to Mrs. Portnoy a joint interest in their
home and all the proceeds from the sale of his condominium located in Florida.
Ex. 9, Debtors Dep. at 95-97 (February 2, 1995). C. Marine Sues Portnoy and Discusses Settlement On February 22, 1990, Marine sued Portnoy on his
guarantee in New York State Supreme Court, New York County. Ex. 16, Marine
Midland Bank v. Portnoy, No. 104830/95, slip op. at 2-3 (Sup.Ct.N.Y. County
Sept. 8, 1995) (Davis, J.). In early 1991, Portnoy, Marine and their
respective counsel met to discuss a possible settlement of Marines suit.
Portnoy had previously supplied Marine with a financial statement dated June
30, 1989, which indicated his net worth at $2,104,250, showing assets of cash
($242,500), real estate ($1,000,000 encumbered by a $319,000 mortgage),
government and marketable securities ($141,250), sundry partnerships
($350,000), equity in a corporation ($615,000) and an Individual Retirement
Account ($34,500). Ex. 5, Marines Opp’n to Motion for Summary Judgment.
[FN3] During the settlement conference, Portnoy told Marine that he had been
financially ruined by expensive experimental cancer treatments, that his assets
other than real estate were all gone, and that he had no unencumbered assets
with which to satisfy his indebtedness to Marine. Notwithstanding his actual
$150,000 plus annual salary, Portnoy also said he was earning only $1,700 per
month as an employee in the garment industry, an amount insufficient to service
his debt to Marine. Northington Decl. ¶ 22 at 12. Portnoy does not now dispute
that he made those statements; instead he coyly argues that I am precluded from
considering them because, if made, they were made in the context of a
settlement negotiation. FN3. Marine contends that these are the same
assets that were used to fund the trust, as reflected in the trust forms
annexed as Ex. K The debtor does not now contest this assertion. [*6901] D. Marines Judgment and Enforcement
Proceedings When settlement efforts failed Marine pursued
its litigation, obtaining, in September 1991, judgment against Portnoy for
$183,891.92, which, together with post-judgment interest, remains outstanding
today. Earlier that year Mary Drawers was involuntarily petitioned into
bankruptcy; it is no longer in business. In October 1994, counsel to the Mary Drawers
trustee in bankruptcy informed Marine that Portnoy was employed and earning an
executives salary at a company called Dawn Joy Fashions. With this discovery,
Marine commenced supplementary proceedings to enforce its judgment. In 1995
Marine began garnishing 10% of Portnoys salary. Pursuant to a subpoena
obtained in the supplemental proceedings, Marine deposed Portnoy on January 19,
1995, and again on February 2, 1995. At that time, he disclosed to Marine for
the first time the existence of the offshore trust and his practice of
depositing his salary into an account in Mrs. Portnoys name. Portnoy also
provided Marine with a copy of the declaration of trust. Armed with this new
information, Marine initiated an action against Mr. and Mrs. Portnoy (i) to
recover Portnoys salary and the trust assets as fraudulent conveyances and
(ii) to enjoin Portnoy, Mrs. Portnoy, and Jarden from transferring or
dissipating assets. During the pendency of that action, Marine moved the state
court for an order to compel Portnoy to make weekly installment payments on the
judgment. In May 1995, the state court vacated a previous temporary restraint
against Mrs. Portnoys use of her account but granted a preliminary injunction
enjoining Portnoy from transferring any assets. The order granting the
preliminary injunction was entered in July 1995 and was timely appealed. In September 1995, the state court granted
Marines demand for an installment payment order and directed Portnoy to make
weekly installments in the amount of $1,250 to Marine until the judgment were
fully satisfied. Portnoy appealed that order and moved for a stay pending
appeal, which was denied on October 26, 1995. Within a month, Portnoy filed a
chapter 7 petition. The bankruptcy schedules which were filed contemporaneously
with the petition identify the debtors interest in the offshore trust as one
of the beneficiaries as determined by the trustees in their sole discretion. II. We begin with the threshold issue of whether I
may consider what Portnoy told Marine during their settlement discussions.
Portnoys argument that his statements are shielded by Federal Rule of Evidence
408 misapprehends the significance of the rule, which provides: Evidence of (1) furnishing or offering or
promising to furnish, or (2) accepting or offering or promising to accept, a
valuable consideration in compromising or attempting to compromise a claim
which was disputed as to either validity of or amount, is not admissible to
prove liability for or invalidity of the claim or its amount. Evidence of
conduct or statements made in compromise negotiations is likewise not
admissible. This rule does not require the exclusion of any evidence otherwise
discoverable merely because it is presented in the course of compromise
negotiations. This rule also does not require exclusion when the evidence is
offered for another purpose, such as proving bias or prejudice of a witness,
negativing a contention of undue delay, or proving an effort to obstruct a
criminal investigation or prosecution. Fed.R.Evid. 408 (emphasis added). The purpose
behind Rule 408 is the promotion of nonlitigious solutions to disputes.
Catullo v. Metzner, 834 F.2d 1075, 1079-79 (1st Cir.1987) (quoting Reichenbach
v. Smith, 528 F.2d 1072, 1074 (5th Cir.1976)). To encourage compromise of
disputes, statements made during the course of a settlement negotiation may not
be introduced as evidence of liability or the absence of liability on an
underlying claim. Such admissions may, however, be introduced for other
purposes. See, e.g., id.; United States v. Hauert, 40 F.3d 197 (7th Cir.1994)
(offered to show knowledge), cert. denied, 514 U.S. 1095, 115 S.Ct. 1822, 131
L.Ed.2d 744 (1995). Here, [*692] the statements are not being offered to show
that the debtor is or is not liable on the guarantee; in fact, the debtor does
not contest his liability on the underlying debt. Rather, the statements are
being used to demonstrate the debtors intent to conceal assets from Marine.
See Catullo v. Metzner, 834 F.2d at 1079 (reversing trial judge who excluded
statements made during settlement negotiations which were offered to show
intent of the parties to the ultimate settlement). With that predicate issue resolved, we move on
to the meat of the motion. A motion for summary judgment may only be granted
where there is no genuine issue of material fact that is in dispute and a party
is entitled to judgment as a matter of law. Industri & Skipsbanken A/S v.
Levy, 183 B.R. 58, 61-62 (S.D.N.Y.1995) (citing Fed.R.Civ.P. 56(c)). The moving
party bears the burden of showing that no genuine issue of material fact
exists, id. (citing Brady v. Town of Colchester, 863 F.2d 205, 210 (2d
Cir.1988)), and all reasonable inferences must be drawn and ambiguities
resolved in favor of the nonmoving party. Matsushita Electric Indus. Co. v.
Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538
(1986); Brady, 863 F.2d at 210. The courts function at this stage is not to
assess the credibility of witnesses or affidavits, see Azrielli v. Cohen Law
Offices, 21 F.3d 512, 517 (2d Cir.1994), nor to weigh the evidence to determine
the truth of the matter, but merely to determine whether a genuine issue
remains to be tried. Anderson v. Liberty Lobby, 477 U.S. 242, 249, 106 S.Ct.
2505, 2510-11, 91 L.Ed.2d 202 (1986). A. Section 727(a)(2)(A) 1. The First Claim for Relief The first claim alleges that Portnoy ought be
denied a discharge under section 727(a)(2)(A) of the Bankruptcy Code because,
within one year of the petition date, he concealed his transfer of his weekly
paychecks to his wife with the intent to hinder, delay or defraud Marine.
Section 727(a)(2)(A) of the Bankruptcy Code provides in pertinent part: (a) The court shall grant a 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 (A) property of the debtor, within one year before
the date of the filing of the petition. 11 U.S.C. § 727(a)(2)(A) (emphasis added). a. Whether any of Portnoys salary could
constitute his property Portnoy contends that he cannot be said to have
concealed his salary because his salary was not his property under New York
law. He argues that, as a matter of law, a debtors transfer of his paycheck to
his spouse cannot constitute a fraudulent transfer in New York, and that,
therefore, it may not form the basis for concealment of property under section
727(a)(2)(A) either. For the former proposition he cites In re Caplans Estate,
196 Misc. 631, 633, 92 N.Y.S.2d 369, 371 (Surrogates Ct. N.Y. County 1949);
Power v. Loonam, 49 Misc.2d 127, 266 N.Y.S.2d 865 (N.Y.Sup.Ct. Nassau County
1966); and In re Edelman, 172 F.Supp. 200 (E.D.N.Y.1959), and for the latter,
Bennett & Kahnweiler Assoc. v. Ratner (In re Ratner), 132 B.R. 728
(N.D.Ill.1991). Portnoy overstates the law on both counts. The New York cases are based on those courts
interpretation of what is now section 5205 of New Yorks Civil Practice Law and
Rules. [FN4] The section provides in relevant part: FN4. Notwithstanding the minor textual
alterations and changes in section number, no change in substance was intended.
See 3rd Report Leg. Doc. (1959) No. 17, p. 112. The following property is exempt from
application to the satisfaction of a money judgment, except such part as a
court determines to be unnecessary for the reasonable requirements of the
judgment debtor and his dependents:
2. ninety per cent of the earnings of the
judgment debtor for his personal services [*693] rendered within sixty days
before, and at any time after, an income execution is delivered to the sheriff
or a motion is made to secure the application of the judgment debtors earnings
to the satisfaction of the judgment
. 7B N.Y. CIV.PRAC. L. & R. § 5205(d)(2)
(McKinneys 1978) (emphasis supplied). Nowhere in this statute is there any exoneration
of a debtors intentionally fraudulent concealment of salary through a transfer
to a spouse. Nor does the statute say that all of such transferred funds are no
longer a debtors property even if he maintains unfettered access to those
funds for needs beyond that necessary for support. Rather, each of the cases
interpreting the statute holds, in substance, that to the extent the debtors
transferred salary is used for necessary support of the debtor or the debtors
dependents, the transfer of such funds cannot be considered a fraud on
creditors. For example, In re Caplans Estate holds that: Since the fund in question would have been
exempt in the hands of the decedent from seizure by judgment creditors, its
transfer to debtors wife for the very purpose of support mentioned in the
statute granting the exemption cannot constitute a transfer of assets
in
fraud of creditors. In re Caplans Estate, 196 Misc. at 633, 92
N.Y.S.2d at 371. Likewise, Power v. Loonam noted that the funds were identified
by the debtors wife as funds intended to meet current living expenses, and
absent any other evidence, the court vacated a previous restraint against the
wifes use of her account as least to the amount which is exempt under the
statute. 49 Misc.2d at 129-130, 266 N.Y.S.2d at 867-68. In re Edelman held
that where the trustee in bankruptcy failed to rebut the showing that the funds
were necessary for the reasonable requirements of the debtor and his family,
the referee was not in error for adjudicating the salary exempt. 172 F.Supp.
200 (E.D.N.Y.1959). Edelman quoted Sverd v. Mostel, 283 A.D. 128, 126 N.Y.S.2d
426, 429 (1st Dep’t 1953) which said: The debtor, or a third party who seeks to rely
for his protection on the exemption of the debtors property in his hands[,]
must satisfy the court of the necessity for the use of the funds for which he
seeks the statutory exemption. In sum, these cases do not stand for the blanket
proposition which the debtor is advancingthat a 90% percent transfer of a
debtors salary to his spouse may never constitute a fraud on creditors.
Rather, synthesizing the cases we see that the appropriate inquiry is the
quantum necessary for the debtors and his familys reasonable requirements
for support, keeping in mind that no man should be permitted to live at the
same time in luxury and in debt. In re Chusids Estate, 60 Misc.2d 462, 463,
301 N.Y.S.2d 766, 770 (Surrogates Ct. Kings County 1969). What this all means in the context of this
motion is that Portnoy cannot be granted summary judgment, having failed to
establish by uncontroverted facts that all of his salary is necessary for the
support of himself and his wife. See Sverd v. Mostel, supra, 126 N.Y.S.2d at
429; see, e.g., 6 WEINSTEIN- KORN-MILLER,, N.Y. CIV.PRAC. ¶ 5205.24. [FN5]
Significantly, Portnoy has not even contended that 90% of his $150,000 plus
annual salary was necessary to support himself and his wife, his only
dependents. Cf. Ex. 16, Marine Midland Bank v. Portnoy, No. 11286/95, slip
op. at 3. And since Portnoy began transferring his salary to his wife she has
amassed some $200,000 even though she earned only $19,000 a year and had no
other significant income. Ex. 16, Marine Midland Bank v. Portnoy, No.
11286/90, slip op. at 4 (Sept. 8, 1995); Ex. 7, Mrs. Portnoys Dep. at
2027, 3640 (Oct. 5, 1995). FN5. The 90% exemption of income is not
absoluteif the court determines that not all of the 90% is necessary for the
reasonable requirements of the judgment debtor and his family, it can invade
the 90%. See N.Y. CIV.PRAC. L. & R. § 5205 practice commentaries. The expedient
for accomplishing this is an installment payment order under CPLR 5226, and it
is to that device that the judgment creditor should direct attention when such
a situation is at hand. Id. Portnoy makes much of the fact that the state
court in Marines fraudulent conveyance action had earlier vacated a temporary
restraint against Mrs. Portnoys use of her account. Portnoy repeatedly cites a
single line from that decision: Moreover, plaintiffs [*694] right to its 10%
share of Larrys paycheck is adequately protected by the garnishment order
(CPLR) 5205(d). Ex. 6, Marine Midland Bank v. Portnoy, 104830/90, slip op.
at 10 (Sup.Ct. N.Y. County, May 8, 1995) (Davis, J). However, Portnoy neglected
to quote the basis of the courts decision, which preceded the quoted
statement: At this juncture there is no showing of exigent circumstances which
would require a court to enjoin Arlenes personal accounts. Plaintiff does not
state that Arlene is about to transfer assets. Id. at 10. Moreover, the state court appeared to credit
Mrs. Portnoys testimony during which she swore that these accounts and the
assets and sources therefor do not represent fraudulent conveyances from Larry,
but represent the savings of a housewife and worker over many years preceding
my marriage to Larry. Marine Midland Bank v. Portnoy, 104830/90, slip op. at
3. To refute this, Marine has now come forth with evidence which sufficiently
raises the inference that Mrs. Portnoy may not have been entirely truthful in
her testimony before the state court. See Ex. 7, Arlene Portnoy Dep. at 20,
23, 24, 36-40 (Oct. 5, 1995). Portnoy has chosen to simply ignore the issue and
rely instead on the isolated quotation from the state courts decision. Portnoy
also apparently forgets the state courts later determination pursuant to CPLR
section 5226, in which the court concluded that approximately $1,250 per week
(in addition to the 10% garnishment) was unnecessary for support. Ex. 16,
Marine Midland Bank v. Portnoy, No. 11286/95, slip op. at 6 (basing that
decision on consideration of all Portnoys income sources, including the
trust). In short, Portnoy has not demonstrated that, as
a matter of law, his paychecks are exempt from execution and are therefore not
property of his estate. Marines submissions could support a finding that not
all of Portnoys $150,000 plus salary was necessary for the reasonable
requirements of the debtor and his wife. Thus, the secret transfer of the whole
salary may be found to have been a fraud on creditors without violating the
spirit of CPLR § 5205. Portnoy can derive no greater comfort from the
bankruptcy cases which he cites than he does from the New York cases. He points
to In re Ratner, 132 B.R. 728 (N.D.Ill.1991), for the proposition that a
chapter 7 debtors practice of depositing funds into his wifes account does
not warrant a denial of discharge under section 727(a)(2)(A). However, the
court expressly noted that the question of a debtors intent under § 727 of
the Code is a question of fact and, after trial, the court found that the
plaintiff did not meet his burden of demonstrating intent. Id. at 731. The
allegations were not disposed of by summary judgment. Rosen v. Bezner, 996 F.2d
1527 (3d Cir.1993), reversed an order awarding summary judgment on precisely the
issue of the debtors intent to continuously conceal property under section
727. (Only in Rosen, the trial court had granted summary judgment against the
debtor). b. Whether Portnoy engaged in concealment Having rejected the debtors contention that as
a matter of law I must find that his entire salary was not his property, we
turn to the law of concealment. Concealment may be accomplished by a transfer of
title coupled with the retention of the benefits of ownership. See, e.g., 4 L.
KING, COLLIER ON BANKRUPTCY ¶ 727-.02[6][b] at 727-31 through 727-32 & n.
87 (15th ed. 1994); EFA Acceptance Corp. v. Cadarette (In re Cadarette), 601
F.2d 648 (2d Cir.1979); In re Ulrich, 18 F.Supp. 919, 920 (S.D.N.Y.1937), affd
without opinion, 95 F.2d 1018 (2d Cir.1938). Here, Marine has alleged that
notwithstanding Portnoys transfer of his salary to his wife during the one
year period before bankruptcy, he maintained all of the benefits of ownership
of the funds. As Marine emphasizes, Portnoy exercised exclusive check writing
privileges over the account notwithstanding the fact that the account was in
Mrs. Portnoys name. Concealment of property is also evidenced by the
debtors placing assets beyond the reach of creditors or withholding knowledge
thereof by fail [ing] or refus[ing] to divulge owed information. 4 L. KING,
[*695] COLLIER ON BANKRUPTCY ¶ 727.02[6][b] at 727-30 (15th ed. 1994) (citing
Continental Bank & Trust Co. v. Winter, 153 F.2d 397 (2d Cir.), cert.
denied, 329 U.S. 717, 67 S.Ct. 49, 91 L.Ed. 622 (1946)). Mere failure to
volunteer information to a creditor is insufficient, however, to constitute
concealment. Continental Bank & Trust Co. v. Winter, 153 F.2d 397 (2d
Cir.), cert. denied, 329 U.S. 717, 67 S.Ct. 49, 91 L.Ed. 622 (1946). Here,
Marine submits that during the course of settlement negotiations, it was misled
by Portnoy into believing that all of Portnoys assets were used up for cancer
treatments, notwithstanding his actual transfer of those assets to the offshore
trust. It is also undisputed that Portnoy lied about his income. In addition,
Marine has elicited testimony from Portnoy that he knew full well in June 1989
that Mary Drawers was shortly to be liquidated, Ex. 3, Debtors Dep. at
21-22, 80-84. Presumably, he therefore recognized that his guarantee would be
called. Even if, as Portnoy contends, he had no duty to
speak in this particular case, once he opened his mouth to set forth the facts,
he thereby gave life to a duty to tell the truth. See Ackerman v. Schwartz, 947
F.2d 841, 847-48 (7th Cir.1991) (the lack of an independent duty does not
excuse a material lie); Schlansky v. United Merchants & Manufacturers,
Inc., 443 F.Supp. 1054 (S.D.N.Y.1977) (If a voluntary representation is
uttered, a duty arises as to its accuracy and truth, along with a concomitant
obligation to avoid negligent omissions following thereafter.) (citing Gediman
v. Anheuser Busch, Inc., 299 F.2d 537, 546 (2d Cir.1962)). Accordingly, the
facts suggest that Marine may be able to establish concealment. c. Whether Portnoy intended to hinder, delay or
defraud Marine The issue whether Portnoy concealed this
property with the requisite intent to hinder, delay, or defraud Marine is
disputed. Portnoy explains that the transfer of his weekly paycheck to his wife
since 1990 and his transfer of a joint interest in his home were not intended
to hinder Marine but were made in response to demands from his wife and in
order to preserve their marriage. Although Portnoys intent is plainly an issue
of fact which precludes summary judgment, Marine annexes a copy of Mrs.
Portnoys deposition during which she testified that she did not demand that
Portnoy transfer his salary to her, but only that she be permitted check
writing privileges. Marine also points out that Portnoys explanation does not
answer the question why previously he had transferred his checks to his
daughter, if not to hinder Marine. The facts are strongly suggestive of the
incredibility of the debtors view. Nevertheless, Marine has not itself moved
for summary judgment and I am not going to reach out to grant it. See Rosen v.
Bezner, 996 F.2d 1527. 2. The Second Claim for Relief The second claim is based on the continuous
concealment doctrine. The complaint alleges that the debtor transferred substantially
all of his assets to an offshore trust before one year prior to the petition
date but remained de facto owner by continuing to maintain unlimited control
over the assets and conceal the trust within one year of the petition date.
[FN6] FN6. This claim also encompasses the concealment
of Portnoys paychecks to his wife outside the one year period before
bankruptcy. Because the transfers continued into that year, it is unnecessary
to invoke the continuous concealment doctrine as to this portion of the claim. [A] concealment will be found to exist during
the year before bankruptcy even if the initial act of concealment took place
before the one year period as long as the debtor allowed the property to remain
concealed into the critical year. Rosen v. Bezner, 996 F.2d 1527, 1531 (3d
Cir.1993) (citing Thibodeaux. v. Olivier (In re Olivier), 819 F.2d 550, 555
(5th Cir.1987)); March v. Sanders (In re Sanders), 128 B.R. 963, 969-70
(Bankr.W.D.La.1991) (citing, e.g., In re Kaiser, 722 F.2d 1574 (2d Cir.1983);
In re Walter, 67 F.Supp. 925 (S.D.N.Y.1946)); 4 L. KING, COLLIER ON BANKRUPTCY
¶ 727.02[2] at 727-12 (15th ed. 1994). This continuing concealment of
property will be found to bar the debtors discharge when he continued to
conceal the existence of the property with [*696] the intent to hinder, delay, or
defraud a creditor. Id.; Congress Talcott Corp. v. Sicari (In re Sicari), 187
B.R. 861, 875 (Bankr.S.D.N.Y.1994). As the debtor points out, the relevant
inquiry for establishing a concealment under section 727(a)(2) is whether the
debtor concealed his property and not whether the debtor concealed a previous
transfer made outside the one year period before bankruptcy. See Rosen, 996
F.2d at 1531-32; Thompson v. Eck, 149 F.2d 631 (2d Cir.1945) (noting that the
bankrupt must have some legal interest in the property before he can be charged
with its concealment.). While the issue of control over the trust assets
appears to be an issue of law, the debtor vehemently contends that I lack
jurisdiction to make that determination. Moreover, he contends that the
declaration of trust ought be interpreted under Jersey law, as the trust so
provides. Frankly, I do not see how I could lack jurisdiction to determine
whether Portnoy retained significant control over the trust assets for purposes
of concealment under section 727(a)(2) of the Bankruptcy Code. Although one
might question whether I have jurisdiction over the trust itself, that is not
terribly relevant, for what is sought is not the enforcement of some right
under the trust, but, rather, a determination of whether by concealing his
interest in that trust the debtor thereby forfeited his right to a discharge in
bankruptcy. Quite plainly, I have jurisdiction to determine whether a voluntary
debtor is entitled to the bankruptcy discharge for which he has petitioned
regardless of whether or not the property which he is said to have concealed is
within my jurisdiction. See 28 U.S.C. § 157(b)(2)(J). So we turn to the issue of whether the debtor
concealed a property interest in the trust. Congress has generally left the
determination of property rights in the assets of a debtors estate to state
law. Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 917-18, 59 L.Ed.2d
136 (1979) (Act case). Whereas property interests are created and defined by
state law, id. at 55, 99 S.Ct. at 918, it is federal bankruptcy law which
determines the outer boundary of what may constitute property of the estate
pursuant to section 541 of the Bankruptcy Code. Crysen/Montenay Energy Co. v.
Esselen Assocs., Inc. (In re Crysen/Montenay Energy Co.), 902 F.2d 1098, 1101
(2d Cir.1990). Having recognized that local law determines whether Portnoy
retained an interest in the offshore trust, I must still determine which local
law will supply the substantive rule. See Koreag, Controle et Revision S.A. v.
Refco F/X Assocs., Inc. (In re Koreag, Controle et Revision S.A.), 961 F.2d
341, 350 (2d Cir.1992). There are two possibilities here for the rule of
substantive law, that of New York and that of Jersey. [FN7] Portnoy contends
that it is this latter jurisdictions law which must be applied given the
language in the offshore trust that it is to be interpreted under Jersey law.
Both jurisdictions have an interest in this litigation. On the one hand,
Portnoy is a United States domiciliary who transferred all of his personal
property [FN8] to an offshore trust at a time when he knew that his guarantee
to a New York bank of the debts of his New York company would soon be called.
In addition, Portnoy seeks to distribute his nonexempt property, which is
determined by domestic law, to his creditors and in return receive a bankruptcy
discharge. On the other hand, Jersey has an interest in determining [*697] what
rights remain in the settlor of a trust under its law. [FN9] FN7. The parties have assumed that either New
York or the Jersey Channel Islands law applies to this adversary proceeding,
despite the fact that Portnoy lives in the State of New Jersey. However,
Portnoy has argued New York law and has not contended that New Jersey law
applies to this adversary proceeding; he has therefore waived the argument. I
need not raise the issue sua sponte. See Totalplan Corp. of Am. v. Colborne, 14
F.3d 824, 832 (2d Cir.1994); Vitol Trading S.A., Inc. v. SGS Control Servs.,
Inc., 680 F.Supp. 559, 566 n. 2 (S.D.N.Y.1987), revd on other grounds, 874
F.2d 76 (2d Cir.1989); Martin v. City of Cohoes, 37 N.Y.2d 162, 165-66, 332
N.E.2d 867, 869, 371 N.Y.S.2d 687, 690 (1975); see also Marine Midland Bank v.
Portnoy, No. 11286/95, slip op. 6 (Sup.Ct. N.Y. County Sept. 8, 1995) (applying
New York law as to the dispute between the instant parties). FN8. Marine also submits that Portnoy
transferred real property to The offshore trust, though none of the trust
forms reflect such holdings. In any event, this issue may await the trial on
the merits. FN9. However, as Portnoy admits, Jersey does not
claim to have exclusive jurisdiction over its trusts. See Article 5 of the
Trust Law 1984. Portnoy bases his argument that jurisdiction is vested
exclusively in the Jersey courts on the terms of his trust declaration itself.
To whatever extent that may be binding on Portnoy and the trustee, it certainly
cannot bind Portnoys creditors. Many bankruptcy courts have borrowed from the
law applicable in diversity cases to hold that the forum states choice of law
rules are imposed on bankruptcy adjudications where the underlying rights and
obligations are defined by state law. See Koreag, 961 F.2d at 350 (citing
cases). On the other hand, federal principles should guide consideration of
which jurisdictions substantive law applies in cases arising out of federal
law. Id. (citing Corporacion Venezolana de Fomento v. Vintero Sales Corp., 629
F.2d 786, 795 (2d Cir.1980), cert. denied, 449 U.S. 1080, 101 S.Ct. 863, 66
L.Ed.2d 804 (1981)). Ordinarily, I would have to characterize this action to
deny a discharge as either predominantly founded upon state-created rights or
involving important concerns implicating national bankruptcy policy. Id. Untangling the intermeshed features of state and
federal law is unnecessary in this case, however, because the choice of law
rules of the forum, New York, and under federal common law yield the same result.
The federal common law choice of law rule is to apply the law of the
jurisdiction having the greatest interest in the litigation. [FN10] Koreag, 961
F.2d at 350; In re Best Products Co., 168 B.R. 35, 51 (Bankr.S.D.N.Y.1994),
appeal dismissed as moot, 177 B.R. 791 (S.D.N.Y.), dismissal vacated and ruling
of bankruptcy court affirmed, 68 F.3d 26 (2d Cir.1995). New York law similarly
provides that the law of the jurisdiction having the greatest interest in the
litigation will be applied, and
the [only] facts or contacts which obtain
significance in defining State interests are those which relate to the purpose
of the particular law in conflict. Istim, Inc. v. Chemical Bank, 78 N.Y.2d
342, 347, 581 N.E.2d 1042, 1044, 575 N.Y.S.2d 796, 798 (1991) (internal
quotations omitted); see Wells Fargo Asia Ltd. v. Citibank, N.A., 936 F.2d 723,
726-27 (2d Cir.1991), cert. denied, 505 U.S. 1204, 112 S.Ct. 2990, 120 L.Ed.2d
868 (1992). FN10. This analysis is basically the same one
contained in section 403 of the Restatement (Third) of Foreign Relations Law of
the United States (1987). There, the analysis is grounded in reasonableness
and the court is to focus on locating the jurisdiction whose laws and policies are the most involved with the controversy. See Maxwell
Communication Corporation plc v. Societe Generale plc (In re Maxwell
Communication Corporation), 186 B.R. 807, 822 n. 11 (S.D.N.Y.1995), affd, 93
F.3d 1036 (2d Cir.1996). Both federal and New York choice of law
principles generally respect a designation in a trust which provides that a
certain law be applied to interpret it. See In re New York Trust Co., 195 Misc.
598, 87 N.Y.S.2d 787 (1949); see also 5A AUSTIN W. SCOTT & WILLIAM F.
FRATCHER, THE LAW OF TRUSTS § 575 at 201 (Little, Brown & Company 4th ed.
1987) (referred to as SCOTT ON TRUSTS). For the most part, it is immaterial
whether the forum designated for purposes of construing the trust provisions
has any connection with the creation or the administration of the trust. 5A
SCOTT ON TRUSTS, supra, § 575 at 201-202. Nonetheless, for purposes of
determining the validity of a trust, the settlor has not as free a hand. Id.
The Restatement (Second) of Conflicts of Laws notes: The chief purpose in making decisions as to the
applicable law is to carry out the intention of the creator of the trust in the
disposal of his property. It is important that his intention, to the extent to
which it can be ascertained, should not be defeated, unless this is required by
the policy of a state which has such an interest in defeating his intention, as
to the particular issue involved, that its local law should be applied. Restatement (Second) of Conflicts of Laws § 267
at 131 (1971); see also 5A Scott on Trusts, supra, § 553 at 110-111 (In the
making of a contract, the conflicting interests of two or more parties are
involved, whereas in the creation of a trust the intention of the settlor or
testator is the only important consideration, except insofar as some public
policy may defeat his intention.). As to a trusts validity, the Restatement
provides: [*698] An inter vivos trust of interests in
movables is valid if valid (a) under the local law of the state designated
by the settlor to govern the validity of the trust, provided that this state
has a substantial relation to the trust and the application of its law does not
violate a strong public policy of the state with which, as to the matter at
issue, the trust has its most significant relationship
Restatement (Second) of Conflicts of Laws § 270
at 163, 164. That Portnoy settled the trust in Jersey,
designated the trust to be administered in Jersey, and appointed a Jersey
resident as trustee, gives Jersey an undeniable relationship to the trust. On
the other hand, Portnoy, who is both the settlor and primary beneficiary,
Portnoys creditors, and the other beneficiaries are all United States
domiciliaries. [FN11] Portnoys creditors have no contacts with Jersey, and
Portnoy had the greatest contact with the United States at the time he settled
the trust and reasonably could have believed that United States law would be
applicable, see First Natl Bank of Mount Dora v. Shawmut Bank, 378 Mass. 137,
147, 389 N.E.2d 1002, 1008 (1979) (citing Restatement (Second) of Conflict of
Laws § 268(2) (1971); 5A Scott on Trusts § 576 (Supp.1979)); Ferrari v.
Barclays Business Credit, Inc. (In re Morse Tool, Inc.), 108 B.R. 384, 385-86
(Bankr.D.Mass.1989). On balance, I conclude that New York has the weightier
concern in determining whether or not whatever rights Portnoy retained after he
formed the trust could be considered to constitute a property interest such
that that interest should have been disclosed in his bankruptcy schedules. The
trust, the beneficiaries, and the ramifications of Portnoys assets being
transferred into trust have their most significant impact in the United States.
In addition, I believe that application of Jerseys substantive law would
offend strong New York and federal bankruptcy policies if it were applied, as I
will explain. [FN12] FN11. It is not clear at this juncture where the
assets are being heldin the United States or Jersey. See Elizabeth R. Turner,
et al., Asset Protection Techniques, C992 ALI/ABA 1, 43 (Feb. 23, 1995)
(asserting that bankruptcy judge can issue a continuing turnover order so that
if the assignee of the debtors rights can ever catch the debtor or any
distributee with trust assets in the United States, the creditor can reach such assets). FN12. This is not to suggest that Jersey would
unquestionably apply its own substantive law. For Jersey too has its own
conflict of law rules which in some instances point to the application of
United States law. For example, the general Jersey conflicts of law rule is
that the capacity of a settlor to dispose of the personal property needed to
create the trust is governed not by the trusts designated law but where the
settlor is domiciled. See Paul Matthews & Terry Sowden QC, The Jersey Law
of Trusts 44-45 (Key Haven Publication plc 3d ed. 1993). The law of the
settlors domicile also governs whether a particular transaction involving
movable property is forbidden by law. Id. at 53. In order to put the discussion into context, I
will begin with New York law on the subject. Under New York law: when a person creates for his own benefit a
discretionary trust, his creditors can reach the maximum amount which the
trustee under the terms of the trust could pay to him or apply for his benefit,
even though the trustee in the exercise of his discretion wished to pay nothing
to the beneficiary or to his creditors, and even though the beneficiary could
not compel the trustee to pay him anything, (Vanderbilt [Credit Corp. v. Chase
Manhattan Bank, N.A.], 100 A.D.2d [544] at 545, 546, [473 N.Y.S.2d 242, 245 (2d
Dept 1984); Restatement (Second) of TrustsS § 156 (1959) ] ). In addition, it
is irrelevant that the settlor was solvent [at] the time of the creation of the
trust and did not intend to defraud creditors for [i]t is against public
policy to permit the settlor-beneficiary to tie up her own property in such a
way that she can still enjoy it but can prevent her creditors form [sic]
reaching it (id.; cf. Herzog v. CIR, 116 F.2d 591 (2d Cir. [1941] )). The creditors right to invade the trust corpus
to satisfy a judgment is determined by the wording of the declaration. For
example, a judgment creditor may reach the corpus of the trust if the trust
agreement grants the trustee the power to invade the corpus and pay the entire
principal to the settlor (Vanderbilt, supra; State [*699] of New York v. Coyle,
171 A.D.2d 288 [575 N.Y.S.2d 975 (A.D.3d Dep’t 1991] )). [FN13] FN13. The predecessor statute to N.Y. Estate
Powers and Trust Law § 7-3.1, Personal Property Law § 34, avoided only
transfers which were wholly for the use of the grantor; it did not apply to
transfers made for other objects, but which contained a residuary incidental or
partial reservation of interest for the transferor. See Liberty Storage &
Warehouse Co. v. Van Wyck, 256 A.D. 641, 11 N.Y.S.2d 92, 93 (1939); In re
Bournes Will, 4 Misc.2d 610, 158 N.Y.S.2d 1009 (1957). Here, however, it is
clear that the trustee may appoint the whole of the trust and its income to the
Principal BeneficiaryPortnoywho himself retains the exclusive power to dismiss
the trustee and appoint another, thus rendering the result the same under the
current and old law. Ex. 6, Marine Midland Bank v. Portnoy, No.
104830/95, slip op. at 13 (Sup.Ct. N.Y. County May 8, 1995); see In re de
Kleinman, 172 B.R. 764, 772-73 (Bankr.S.D.N.Y.1994); N.Y. ESTATE POWERS &
TRUST LAW § 7-3.1(a) (McKinneys 1992). Portnoy has admitted that Jarden has the
broadest discretion possible with respect to the accumulation of income,
distribution of income, and invasion of principal [sic], a discretion which
unequivocally permits payment of some or all of the trust assets to Portnoy
himself. See Debtors Aff. in Supp. ¶ 11 at 4. It cannot be legitimately
disputed then that Portnoy has a property interest in the trust assets under
New York law. Under prior Jersey law the rule was that a gift
into trust of the donors assets was disregarded as fraudulent vis-a-vis his
creditors where the settlor retained the power freely to dispose of the assets
given by him into trust. See Abdel Rahman v. Chase Bank (C.I.) Trust Company
Limited, 1991 J.L.R. 103, 125 (1991). The Abdel court engaged in a lengthy
discussion of the maxim donner et retenir ne vaut rien and held that its
purpose is to protect the rights of succession of heirs, to protect creditors
and to prevent frauds. The maxim, donner et retenir ne vaut rien, roughly
translated to English means giving and retaining is not worth anything, and
encapsulates the idea that that person cannot give away property and at the
same time retain it, see Paul Matthews & Terry Sowden QC, The Jersey Law of
Trusts 59 (Key Haven Publication plc 3d ed. 1993). In other words, Jersey
recognized that effective retention of the use of the trust corpus means that
the property has not been parted with. Id. Were that the law today, then
application of Jersey law to determine whether Portnoy retained a secret
property interest in the offshore trust would probably not offend any policy of
New York or of federal bankruptcy law. The rub is that the law applied in Abdel
Rahman was legislatively overruled in Jersey with the enactment of Trust
(Amendment) (Jersey) Law, 1989. See Abdel Rahman, 1991 J.L.R. at 146 (noting
that the trust which it was there holding invalid was created long before the
Trusts (Amendment No. 1) (Jersey) Law, 1989 was enacted). The amendment made in early 1989 abolished the
maxim that was used to nullify the trust in Abdel Rahman; the law now declares
that Nothing in the terms of a trust shall cause a transfer or disposition of
property to a trust to be invalidated by application of the rule, donner et
retenir ne vaut. Trust (Amendment) (Jersey) Law, 1989. As one commentator
has said, for dispositions taking effect on or after July 21, 1989, the
question of whether the donor retained the power to freely dispose of property
already given by him inter vivos or where he remains in possession of it is
purely academic. Matthews & Sowden QC, The Jersey Law of Trusts, supra, at
59 (citations omitted). Nor will [the trust] be affected if the trust is expressed
to be revocable at the will of the settlor. Id. at 65. Here, Portnoy settled
the offshore trust in August 1989, after the Jersey amendment became effective. Whereas under normal circumstances parties are
free to designate what states or nations law will govern their rights and
duties, where another state or nation has a dominant interest in the
transaction at issue, and the designated law offends a fundamental policy of
that dominant state, the court may refuse to apply the foreign law. Hong Kong
and Shanghai Banking Corp., Ltd. v. HFH USA Corp., 805 F.Supp. 133, 141
(W.D.N.Y.1992) (citing Carlson v. Tandy Computer Leasing, 803 F.2d 391, 394
(8th Cir.1986)). [*700] In making a determination, on the basis of
public policy, whether to enforce a foreign statute, the issue is not whether
the foreign statute reflects a different public policy from that of the forum,
but rather whether enforcement of the particular agreement would represent an
affront to the public policy of the forum. Thus, to render foreign law
unenforceable as contrary to public policy, it must violate some fundamental
principle of justice, some prevalent conception of good morals, or some
deep-rooted tradition of the common weal. 19 N.Y. JUR.2D Conflict of Laws § 14 at 586-87
(1982). Generally speaking, the public policy is to be found in the states
constitution, its statutes and the decisions and settled rules of the courts.
Id. I think it probably goes without saying that it would offend our policies
to permit a debtor to shield from creditors all of his assets because ownership
is technically held in a self-settled trust, where the settlor/beneficiary
nonetheless retains control over the assets and may effectively direct
disposition of those assets. Nonetheless, I shall briefly outline the policies
underpinning American law. In the United States, it has long been held that
[i]t is against public policy to permit the owner of property to create for
his own benefit an interest in that property that cannot be reached by his
creditors. 2A SCOTT ON TRUSTS, supra, § 156 at 168. This policy finds it
roots in an English statute of 1487, prescribing that [a]ll deeds of gift of
goods and chattels, made or to be made in trust to the use of that person or
persons that made the same deed or gift, be void and of none (sic) effect.
Elena Marty-Nelson, Offshore Asset Protection Trusts: Having Your Cake and
Eating it Too, 47 RUTGERS L. REV. 11, 12 (Fall 1994) (quoting 3 Hen., 7, ch. 4
(1487) (Eng.)). On the other hand, it is not at all clear what
the policy behind the Jersey amendment is except, perhaps, to augment business.
See Marty-Nelson, Offshore Asset Protection Trusts, supra, at 58 & n. 229;
see also Finnish Fur Sales Co., Ltd. v. Juliette Shulof Furs, Inc., 770 F.Supp.
139, 143-44 (S.D.N.Y.1991) (noting that in the case of a conflict, New Yorks
policy will not invariably prevail in the face of a strong assertion of
interest by the foreign jurisdiction); Vladikavkazsky Ry. Co. v. New York Trust
Co., 263 N.Y. 369, 378-79, 189 N.E. 456, 460 (1934) (confiscation decree was so
contrary to New Yorks public policy that absent more compelling foreign
countervailing policy, New York law applied), rhrg denied, 264 N.Y. 595, 191
N.E. 581 (1934). Portnoys trust is not a unique phenomenon, but a variant of
what in the domestic context is called a spendthrift trust. This offshore
variant is commonly referred to as an offshore asset protection trust
(OAPT). See Marty-Nelson, Offshore Asset Protection Trusts, supra. The OAPTs
offer far more protection to the settlor than their U.S. counterparts because
they enable a settlor/beneficiary to control and benefit from the property and
at the same time shield it from creditors. Id. at 15. In the United States,
state laws uniformly outlaw self-settled spendthrift trusts, id. at 15, 29-30
& n. 95, 31 & n. 104, and [a] conveyance whether absolute or in trust
is ineffective if the transferor does not surrender control over the property,
2A SCOTT ON TRUSTS, supra, § 37 at 401. Based on New Yorks deep-rooted policies and
absent a more compelling countervailing Jersey policy, New York law applies to
the determination of whether Portnoy retained a property interest in the assets
of the offshore trust for the purposes of determining whether he is entitled to
the bankruptcy discharge for which he has petitioned. Whereas it is not
necessary in this instance to examine the particular powers reserved to Portnoy
in the declaration of trust because New York law would hold the assets of a
self- settled discretionary trust to be the settlors, I do feel compelled to
comment on some of the provisions. Portnoy makes much of the fact that
distribution of corpus and principal is within the absolute discretion of the
trustee, notwithstanding his exclusive power to advise the trustee. Portnoy
downplays this power by pointing to the trustees fiduciary duties to the other
beneficiaries (which, by the way, Jarden can ignore for no reason at all under
the terms of the trust). Jardens fidelity to Portnoy is plainly apparent, for
during the course of this very motion, Portnoy successfully [*701] directed the
trustee to pay from the assets of the trust for a legal analysis of Jersey law
for the sole purpose of determining whether Portnoy would be entitled to a
bankruptcy discharge under United States law. See Letter of Elliot I. Miller to
Jarden Morgan Trustees (Jersey) Ltd. (Aug. 20, 1996); Letter of Jarden Morgan
Trustees (Jersey) Ltd to Elliot I. Miller (Aug. 21, 1996). If Portnoy is only a
mere beneficiary as he so emphatically contends, why are the trust and other
beneficiaries blindly footing the costs of issues arising in his personal
United States bankruptcy case? In addition there is a second basis upon which
to apply New York lawa choice of law provision will not be regarded where it
would operate to the detriment of strangers to the agreement, such as creditors
or lienholders. Hong Kong and Shanghai Banking Corp., Ltd. v. HFH USA Corp.,
805 F.Supp. 133, 140 (W.D.N.Y.1992) (citing Broadcasting Rights Intl Corp. v.
Societe du Tour de France, 675 F.Supp. 1439, 1448 (S.D.N.Y.1987)); Carlson v.
Tandy Computer Leasing, 803 F.2d 391 (8th Cir.1986); Ferrari v. Barclays
Business Credit (In re Morse Tool, Inc.), 108 B.R. 384, 386 (Bankr.D.Mass.1989)
(refusing to follow choice of law provision in trust, holding that it was
ineffective to bind creditors). Here, the only person that is party to this
choice of law provision is Portnoy himself. Portnoy may not unilaterally remove
the characterization of property as his simply by incorporating a favorable
choice of law provision into a self-settled trust of which he is the primary
beneficiary. Equity would not countenance such a practice. Cf. Peoples Bank of
Charles Town v. Colburn, III (In re Colburn, III), 145 B.R. 851 (Bankr.E.D.Va.1992)
(denying debtor a discharge for his failure to list reversionary interest in an
offshore trust on his bankruptcy schedules). Under the Bankruptcy Code, all property
wherever located and by whomever held in which the debtor has a legal or
equitable interest becomes property of the bankruptcy estate, 11 U.S.C. §
541(a). As the legislative history demonstrates, the sweep of this section was
intended to be quite broad. United States v. Whiting Pools, Inc., 462 U.S. 198,
103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). I have already determined that Portnoys
assets remain his, notwithstanding their transfer to the trust. If Portnoy
contends that section 541(c)(2) of the Bankruptcy Code [FN14] would provide him
any relief, he is wrong, for under settled New York law, when a person creates
a discretionary trust for his own benefit, his creditors can receive the
maximum amount which the trustee under the terms of the trust could pay out to
him even though the trustee in the exercise of his discretion wishes to pay the
settlor/beneficiary nothing. Vanderbilt, 100 A.D.2d at 546, 473 N.Y.S.2d at
245-46. FN14. The section provides: Except as provided in paragraph (2) of this
subsection, an interest of the debtor in property becomes property of the
estate under subsection (a)(1), (a)(2), or (a)(5) of this section
notwithstanding any provision in an agreement, transfer instrument, or
applicable nonbankruptcy law (A) that restricts or conditions transfer of
such interest by the debtor; or (B) that is conditioned on the insolvency or
financial condition of the debtor, on the commencement of a case under this
title, or on the appointment of or taking possession by a trustee in a case
under this title or a custodian before such commencement, and that effects or
gives and option to effect a forfeiture, modification, or termination of the
debtors interest in property. (2) A restriction on the transfer of a
beneficial interest of the debtor in a trust that is enforceable under
applicable nonbankruptcy law is enforceable in a case under this title. 11 U.S.C. § 541(c) (emphasis supplied). To the
extent that the beneficial interest may be reached under New York law, it will
constitute property of the estate. That being decided, the only remaining issue is
the debtors intent. Clear issues of fact exist as to the intent of the debtor
in transferring the assets to the offshore trust and whether that intent
continued into the one-year prepetition period; thus summary judgment is not
warranted. It may well be that if the disputed factual issues are resolved in
Marines favor, it will be entitled to judgment. See Rosen v. Bezner, 996 F.2d
1527, 1532-33 (3d Cir.1993). B. Section 727(a)(4) The third and fourth claims relate to Portnoys
alleged knowledge of his control [*702] powers or his reckless failure to
identify them on his bankruptcy schedules. Section 727 provides: (a) The court shall grant the debtor a
discharge, unless
(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)(4). In his summary judgment motion, the debtor
contends that there is no issue of material fact because he does not have any
control powers. I have already determined that Portnoy retained sufficient
control over the assets to have them constitute his property under section 541
of the Bankruptcy Code and an issue of fact remains as to whether his failure
to list such assets was knowing or reckless, precluding summary judgment. See
In re Sicari, 187 B.R. 861. C. Section 523(a)(6) Marine challenges not only Portnoys right to a
discharge but also his right to discharge Marines judgment even if he would
otherwise be entitled to a discharge. Portnoy seeks summary judgment on this
claim under section 523(a)(6). This section provides in pertinent part, A
discharge
does not discharge an individual debtor from any debt
for
willful and malicious injury by the debtor to another entity or to the property
of another entity. 11 U.S.C. § 523(a)(6). Section 523(a)(6) includes willful
and malicious economic injury to an entity. Navistar Financial Corp. v.
Stelluti (In re Stelluti), 167 B.R. 29, 33 (Bankr.S.D.N.Y.1994), affd without
opinion, (S.D.N.Y.), affd, 94 F.3d 84 (2d Cir.1996). There are two distinct
components under subsection (a)(6)intent and malice. The debtor must have
engaged in (1) voluntary or deliberate conduct which was (2) targeted to cause
the creditor injury. Barclays American/Business Credit, Inc. v. Long (In re
Long), 774 F.2d 875, 880 (8th Cir.1985). Conduct that is merely negligent or
reckless is not malicious, Senate Report No. 97-139, 97th Cong., 1st Sess. 523
(1981), and knowledge that legal rights are being violated is insufficient to
establish malice, absent aggravated circumstances. In re Zinke, 174 B.R. at
1022; Davis v. Aetna Acceptance Co., 293 U.S. 328, 55 S.Ct. 151, 79 L.Ed. 393
(1934). Said another way, there must be intent to cause injury rather than
merely an intentional act which causes injury. In re Long, 774 F.2d at 880 (quoting
In re Cecchini, 37 B.R. 671, 675 (9th Cir. BAP 1984)). Courts routinely look to the facts to see if the
circumstances are sufficiently egregious to constitute malice. See In re Stelluti,
167 B.R. 29; In re Zinke, 174 B.R. 1017, 1022 (Bankr.D.N.D.1994). Here, the
issue of the debtors true intent is disputed, and Marine has come forward with
reasonable evidence sufficient to raise an inference that the debtor
maliciously intended to injure Marine. Therefore, an issue of material fact
exists and summary judgment in the debtors favor is not warranted. CONCLUSION In his motion for summary judgment, Portnoy
contends that he disclosed to Marine his practice of transferring his paycheck to
his wife and the existence of the offshore trust approximately ten months
before the petition date. Further, he argues that his transfer of his salary
was permissible under New York law and intended to save his marriage rather
than to hinder or delay. He also contends that, although he did not disclose
the existence of the offshore trust, there is no issue of fact because he filed
Annual Foreign Trust Returns which, with due diligence, would have been
discovered by Marine. In opposition, Marine submits a declaration from
its vice president in which Mr. Northington details an alleged history of
intentional conduct by Portnoy designed to stave off Marines ability to
collect from him on his guarantee. The evidence and allegations contained in
the declaration and supporting exhibits raise an inference that Portnoy
intended to hinder Marines collections efforts at the time he made the
statements regarding his ability to pay. Marines submissions also raise an
inference that Portnoy secretly retained the benefits of ownership of seemingly
transferred property with the intent to hinder creditors. This intent may have
continued into the prepetition period. [*703] The powers awarded him
in the declaration of trust, coupled with the other allegations of intent, also
raise an inference that Portnoy may have knowingly or recklessly made a false
oath in connection with the case. On this motion, all reasonable inferences
must be drawn in favor of Marine. If all that Marine asserts be true, Portnoy
could be found to have intentionally hindered Marines ability to collect on
its guarantee within one year of the filing. He could also be found to have
maliciously intended to injure Marine and to have fraudulently omitted property
from his schedules. Although the debtor urges that there is no
genuine issue of material fact, it is clear that his knowledge and intent
regarding his transfer of assets is central. See Marines Memo. of Law in Oppn
at 14-28 (outlining the Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574, 1582-1583
(2d Cir.1983) badges of fraud and reasonably asserting that Portnoys actions
have earned him every one). His alleged benevolent intent to save his marriage
in the face of Marines evidence that Portnoy made these transfers with the
intent to defraud is an issue of fact not properly resolved on a motion for
summary judgment; Portnoys interpretation of New York law is also misguided.
Portnoys contention that he fully disclosed his practices ten months before
the petition date ignores the other two months of the year before the filing.
Cf. Najjar v. Kablaoui (In re Kablaoui), 196 B.R. 705, 708-09
(Bankr.S.D.N.Y.1996). Portnoys contention that with due diligence, Marine
would have discovered the trust is not relevant now. Marine claims that Portnoy
did not earlier turn over the governmental forms to either Marine or the Mary
Drawers trustee, although the documents demanded would have included the trust
forms. Beside the fact that Marine disputes the debtors contentions and claims
that the Trust Returns were not available to the public, Marine is not now
expected to meet its burden of proof; it need only show that the debtors
version of the material facts is legitimately disputed. Marine has overcome
that burden. Based on the foregoing, the debtors motion for
summary judgment is denied. It is SO ORDERED. |