Home Financial consultant Doctrine of continued concealment adopted by the Second Circuit

Doctrine of continued concealment adopted by the Second Circuit

0

The Second Circuit recently joined the Third, Fifth, Sixth, Seventh, Ninth, and Eleventh Circuits in adopting the “continuing concealment” doctrine for Chapter 7 bankruptcy proceedings where denial of discharge is sought pursuant to 11 USC § 727 (a)(2)(ONE). Section 727(a)(2)(A) bars Chapter 7 debtors from discharging their debts where the debtor is shown to have concealed assets “within one year before the date of the filing of the petition” and “with the intent to obstruct, delay, or defraud a creditor. Under the doctrine of continuing concealment, first approved by the Second Circuit in Gasson c. Premier Capital, LLC43 F.4th 37 (2d. Cir. 2022), a debtor can still be convicted of intentionally concealing assets under section 727(a)(2)(A) when the concealment began earlier “as long as the debtor has authorized the assets to remain hidden during the critical year” and maintained “inappropriate subjective intent during the year preceding the bankruptcy”.[1] This decision clarifies the applicability of the doctrine of continued concealment in § 727(a)(2)(A) for Second Circuit bankruptcy courts, some of which were already following the doctrine as set forth in other circuits,[2] and this has important implications for creditors and debtors as they seek to challenge the enforceability of debts in the Second Circuit in the future.

gasson involved a debtor-appellant named Anthony Gasson, an independent financial consultant who began facing financial difficulties in the mid-1990s after personally guaranteeing the debts of three bankrupt companies. Gasson eventually became liable for the companies’ debts, resulting in the entry of three judgments against him for a combined total of nearly $600,000. Amid his financial turmoil but before the judgments were handed down, Gasson and his wife attempted to “get a fresh start” by establishing a consulting business known as Soroban Inc. (“Soroban”).[3] Gasson used Soroban to continue providing his financial advisory services, although the company was in principle owned by his wife, who also served as chair of Soroban’s board. Gasson’s wife, however, had little or no involvement in the day-to-day operations of the business and continued to work as a full-time nurse during the relevant period. Gasson, on the other hand, retained control of the company’s operations and finances and was its only employee. In 2009, Soroban reported annual revenue in excess of $200,000, the majority of which allegedly came from Gasson’s consulting services.

In 2011, creditor-respondent Premier Capital LLC (“Premier”) had acquired the judgments against Gasson, and it began seeking to recover them. On September 27, 2012, however, Gasson filed for Chapter 7 bankruptcy in the Southern District of New York, seeking discharge from his personal debts. Gasson did not signal his interest in Soroban in his bankruptcy timeline or in his response to the prime minister’s subpoena served on him just four months before his petition was filed. Accordingly, Premier commenced adversarial proceedings against Gasson in the bankruptcy case arguing, among others, that Gasson’s debts should not be discharged pursuant to 11 USC § 727(a)(2)(A) because he concealed his interest in Soroban with the intent to embarrass his creditors. Following a trial, the bankruptcy court ruled that section 727(a)(2)(A) applied to the discharge from the bar in Gasson’s case because although Soroban was trained in 2001, Gasson’s efforts to conceal his interest in Soroban from creditors had persisted into the year before his bankruptcy filing was opened. Gasson appealed the bankruptcy court’s denial of the discharge order to the District Court, which upheld, and then to the Second Circuit arguing, among othersthat the bankruptcy court erred in applying the theory of continued concealment to the facts of the case.

The Second Circuit began its review in gasson upholding the findings of the bankruptcy court that Gasson had a proprietary interest in Soroban and that he concealed that interest with the intent to embarrass his creditors. Turning to the question of whether Gasson’s concealment conduct fell within the relevant one-year period, the Court recognized that other circuits follow the doctrine of continuing concealment in this context, and it then formally adopted the articulation of the Third Circuit doctrine set forth in Rosen v. Bezner, 996 F. 2d 1527, 1531 (3d Cir. 1993) as Second Circuit law. According to this articulation of the doctrine, “a concealment will be found during the year preceding the bankruptcy even if the initial act of concealment took place before this period of one year as long as the debtor allowed the property to remain concealed within the critical year,” and provided that “the party opposing the discharge must still prove abusive subjective intent within the year prior to the bankruptcy.”[4] Turning to Gasson’s case, the Court concluded that the standard had been met in light of the facts on the record which established that “[Gasson]the manner in which its financial affairs have been conducted has persisted in the year preceding [his] bankruptcy filing”. [5] This included Gasson’s failure to declare his interest in Soroban in his response to the Prime Minister’s subpoena or in his schedules filed in the bankruptcy.

Looking forward, gasson establishes that Chapter 7 debtors who have a history of concealing real estate interests with the intention of obstructing, defrauding or delaying their creditors will find it more difficult to rely on the one-year statute of limitations at § 727(a)(2)(A) to defend against a creditor who opposes discharge in the Second Circuit. Although some lower Second Circuit bankruptcy courts have already followed the doctrine of continued concealment, gassonThe formal adoption of the doctrine as Circuit law strengthens the ability of creditors to rely on it when objecting to the discharge pursuant to § 727(a)(2)(A).


FOOTNOTES

[1]Gasson c. Premier Cap., LLC43 F.4e 37, 45 (2nd Cir. 2022) (quoting Rosen v. Bezner996 F.2d 1527, 1531, 1533 (3rd Cir. 1993).

[2]See, for example., Flushing Savings Bank, FSB v. Vidro (In re Vidro), 497 BR 678, 690 (Bankr. EDNY 2013); Pereira v. Gardner (In re Gardner)384 BR 654, 663 (Bankr. SDNY 2008); Nate B. & Francis Spingold Found., Inc. v. Halperin (In re Halperin)215 BR 321, 331 (Bankr. EDNY 1997); Congress Talcott Corp. vs. Sicari (In re Sicari), 187 BR 861, 871-80 (Bankr. SDNY 1994).

[3]Gasson, 43 F.4e at 39-40.

[4]Identifier. at 1533.

[5]Identifier. (quoting Premier cap. LLC v. gasson (In re Gasson)no. 12-23703, 2018 WL 6603737, at *16-17 (Bankr. SDNY Dec. 13, 2018)).

© 2022 Binder & Schwartz LLP. All rights reservedNational Law Review, Volume XII, Number 251