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Hill v. McDermott

United States District Court, D. Minnesota

October 19, 2017

Chad Menter Hill, Appellant,
Daniel M. McDermott, Appellee.

          Bradley A. Kirscher, Kirscher Law Firm, PA, for Appellant.

          Colin Kreuziger, for Appellee.



         Appellant Chad Menter Hill (“Hill”) appeals from: (1) an October 19, 2016 Judgment of the United States Bankruptcy Court for the District of Minnesota (“Bankruptcy Court”) in the matter of McDermott v. Hill (In re Hill), 14-BKY-35001, 15-ADV-3098, denying Hill's discharge under 11 U.S.C. § 727(a)(2)(A); and (2) a July 30, 2015 Order extending the deadline for the United States Trustee to file the complaint which ultimately lead to the denial of Hill's discharge. (Notice of Appeal [Doc. No. 1].) For the reasons set forth herein, the Bankruptcy Court's Order and Judgment are affirmed.

         I. BACKGROUND

         In December of 2014, Hill filed a petition for relief under Chapter 7 of the Bankruptcy Code (the “bankruptcy petition” or “petition for discharge”). (Trustee's App. (“USTAPP”) at 3-59, [1] Bankr. Pet. [Doc. No. 15].) Several months later, the United States Trustee[2] (“Trustee”) filed a complaint objecting to Hill's discharge after becoming aware of Hill's ties to business entities that were under a Florida receivership order due to allegations of fraud. (See Appellant's App. (“APP”) at 121-29, Compl. [Doc. No. 11-1].) Below, the Court recounts necessary details of the Florida action that are relevant to Hill's appeal, and then addresses the procedural background of this case.

         A. Factual Background

         Appellant Hill is a chiropractor. (USTAPP at 182, Stipulation of Facts ¶ 3.) In April of 2013, he began work as a consultant to Diagnostic Pain Solutions, a chiropractic clinic. (Id. ¶ 4.) The business affairs of Diagnostic Pain Solutions were managed by Tri-Med Management, Inc. (“Tri-Med”), a company owned by Hill's childhood friend, Jeremy Anderson (“Anderson”). (Id.)

         Starting in approximately July of 2013, Hill became associated with another business entity formed by Anderson, Interventional Pain Center, LLC (“IPC”). (Id. ¶ 6.) That month, Anderson had formed IPC with two doctors, Dr. Michael Mai (“Mai”)-one of Hill's chiropractic school classmates-and Dr. Steven Kazi. (Id. ¶ 4-5.) On July 12, 2013, IPC entered into a Business Associate Agreement with Tri-Med. (Id. ¶ 6.) In that agreement, Hill was identified as the vice-president of IPC. (Id.) Hill became part owner of IPC in September of 2013, when Mai resigned from IPC and relinquished his 95% interest in IPC to Hill. (Id. ¶ 7.)

         On March 4, 2014, the Office of Financial Regulation of the State of Florida filed an enforcement action (“Florida enforcement action”) against Anderson and Tri-Med, among others, alleging that they had defrauded hundreds of Florida investors. (See APP at 22-45, Florida Compl.) The Florida enforcement action sought a temporary and permanent injunction freezing the defendants' assets as well as the appointment of a receiver over Tri-Med's assets. (Id. at 44.) Neither Hill nor IPC were named as defendants in the Florida enforcement action. (Id. at 22.)

         The next day, on March 5, 2014, a Florida court entered an order (“receivership order”) freezing the defendants' assets and appointing Burton Wiand (“Wiand”) as receiver. (See APP at 47-62, Order Imposing Temporary Inj.) The Florida court found that there was evidence that strongly suggested that Anderson, Tri-Med, and the other defendants had sold more than $13 million in unregistered securities in violation of Florida law, and had defrauded at least 232 Florida investors in what appeared to be a Ponzi scheme. (Id. at 48.) Concerned with further loss of investor funds, the Florida court prohibited Tri-Med and the other entities from disposing of any funds in their possession, and also prohibited “those persons in active concert or participating with” any of the defendants from accepting or depositing additional funds or in any way disposing of the defendants' assets. (Id. at 51-52.) The Florida court tasked Wiand with the duty and authority to “marshal and safeguard” the defendants' properties and assets. (Id. at 55)

         Just a few hours after entry of the receivership order, Tri-Med wired $300, 000 to IPC's bank account. (See Bankr. Tr. of Oct. 18, 2016 Proceedings (“Oct. 18 Hr'g Tr.”) at 6 [Doc. No. 8]) Then, over the next few days, IPC wrote checks to Hill totaling $175, 000. (USTAPP at 183, Stipulation of Facts ¶¶ 8-9.) Hill deposited these funds into his personal bank account. (Id.) In addition to receiving these funds, Hill also opened and utilized new bank accounts in the name of IPC and Tri-Med. In June 2014, he opened an account in the name of IPC identifying himself as the owner and the only signatory on the account. (USTAPP at 184, Stipulation of Facts ¶13.) In September of 2014, he opened an account in the name of Tri-Med, again naming himself as the sole owner and signatory. (Id. ¶ 14.) Hill deposited $100, 000 into this new Tri-Med account, and used it to write checks totaling $99, 900 to himself or IPC. (Id.)

         On December 21, 2014, Hill filed his bankruptcy petition in the Bankruptcy Court. (USTAPP at 3-59, Bankr. Pet.)

         B. Procedural Background

         After Hill filed his bankruptcy petition, the Bankruptcy Court set March 16, 2015 as the deadline for interested parties to file a complaint objecting to discharge under § 727 of the Bankruptcy Code. (APP at 2, Bankr. Ct. Docket, Entry 6.) On March 10, 2015, Wiand- as receiver for Tri-Med et al.-filed a motion (“March 10 motion”) asking the Bankruptcy Court to extend the deadline to June 8, 2015, and to permit Wiand to conduct a “Rule 2004”[3] examination of Hill. (APP at 14-69, Wiand's Mot.)

         In his motion, Wiand alleged that as receiver in the Florida enforcement action, he might be a creditor in Hill's bankruptcy petition. (Id. at 65.) Wiand claimed that evidence indicated that Hill, through his involvement with IPC, “had played a significant role in the concealment and theft of hundreds of thousands of dollars in investor funds traceable to a fraudulent investment scheme that defrauded hundreds of Florida investors.” (Id. at 14-15.) He also indicated that his investigation as receiver “showed that nearly $1 million of funds raised from investors was transferred from Tri-Med to [IPC]” and used for purposes that were undisclosed to investors. (Id. at 18-19).

         Wiand also expressed concern that Hill might be committing fraud on the Bankruptcy Court by failing to disclose truthfully his financial affairs. Wiand contended that Hill had “grossly misrepresented” to the Bankruptcy Court the amount of funds he received from entities associated with the fraudulent scheme in Florida. (Id. at 15.) Wiand noted that his investigation had revealed that Hill had “received over $300, 000 in payments from IPC during 2013 and 2014, ” an amount that significantly exceeded the roughly $20, 000 that Hill had reported in his bankruptcy petition as having been received from Tri-Med and IPC. (Id. at 19.) Wiand also pointed to the $300, 000 that IPC received from Tri-Med the day of the Florida court order, the $175, 000 that Hill then received from IPC, and Hill's subsequent “numerous transfers to individuals and entities believed to be associated with J. Anderson”-all transactions that Wiand alleged Hill had not reported in his bankruptcy petition. (Id. at 20.)

         On April 2, 2015, the Bankruptcy Court granted Wiand's March 10 motion. (APP at 70-71, Bankr. Ct. Order Granting Mot.) The Bankruptcy Court extended the deadline for Wiand to object to discharge to June 8, 2015. (Id. at 71.) The Court also authorized Wiand to examine Hill pursuant to Rule 2004. (Id. at 70.)

         On June 5, 2015, Wiand conducted the Rule 2004 examination of Hill. (See USTAPP at 100-140, Rule 2004 Examination.) On that morning, Hill also produced some tax returns and bank records to Wiand. (See USTAPP at 141-175.) At the examination, Wiand questioned Hill about the details surrounding the $175, 000 in checks that IPC had written to Hill in the days following entry of the Florida receivership order. (See USTAPP at 106-07; 115-19, Rule 2004 Examination.) Hill explained that the $100, 000 personal transfer from IPC was driven by the collective fear of Anderson, Hill, and the other IPC doctors that, like Tri-Med's accounts, “IPC's accounts would get shut down, too, and we would have to close the doors tomorrow.” (Id. at 107.) Hill gave similar testimony about a $75, 000 check from IPC that Hill had also deposited into his personal bank account. (Id. at 115-19).

         On June 8, 2015, three days after the Rule 2004 Examination and on the last day Wiand could file objections to Hill's discharge, two separate parties moved the Bankruptcy Court to again extend the deadline for submitting objections. First, Wiand sought another extension to review the documents that Hill had produced at the Rule 2004 examination. (USTAPP at 60-71, Wiand's Second Mot.) At a July 29 hearing, the Bankruptcy Court granted Wiand's motion. (See Bankr. Tr. of July 29, 2015 Mot. Hr'g (“July 29 Mot. Hr'g”) [Doc. No. 7].) Importantly here, the Court noted that the Rule 2004 examination and document production had been necessary, because if Wiand had brought a complaint objecting to discharge based only on the allegations contained in the March 10 motion, the complaint “would have been perhaps subject to a successful Rule 8 motion or other motion under the rules for insufficient pleading.” (Id. at 31.) The Bankruptcy Court granted Wiand's extension so that he could bring a more “fulsome complaint” and give Hill enough information to respond appropriately. (Id. at 32.)

         The second party to move for an extension to file a complaint was the Trustee. (APP at 73-81, Trustee's Mot.) Because Federal Rule of Bankruptcy Procedure 4004(b)(1) generally provides that a party must move to extend the time to object to discharge before the initial deadline expires[4]-in this case, March 16, 2015-the Trustee brought his motion under Rule 4004(b)(2), which provides an exception to that general rule. (Id. at 74.) Under Rule 4004(b)(2), a motion to extend the deadline may be filed after the expiration of the original deadline if three requirements are met: (1) “the objection is based on facts that, if learned after the discharge, would provide a basis for revocation under § 727(d) of the Code”; (2) “the movant did not have knowledge of those facts in time to permit an objection”; and (3) the motion is “filed promptly after the movant discovers the facts on which the objection is based.” Fed.R.Bankr.P. 4004(b)(2).

         The Trustee argued that all three requirements were met. First, he claimed that there was evidence that Hill had made “numerous false oaths” in his petition for discharge, which would in turn provide a basis for revocation under § 727(d) of the Bankruptcy Code. (Id. at 78.) As to whether he knew about these false oaths “in time to permit an objection” before March 16, the Trustee asserted that it wasn't until “[s]hortly before the [June 5] Rule 2004 examination was scheduled to occur” that he “became aware of the debtor's case and the Rule 2004 examination.” (Id. at 74.) And as to the third requirement, the Trustee highlighted that he was filing the motion just three days after the debtor's Rule 2004 examination. (Id. at 78.)

         Hill opposed the Trustee's motion. (See APP at 82-87, Debtor's Resp. in Opp'n to Trustee's Mot.) He argued that the Trustee did, in fact, have knowledge of Hill's alleged nondisclosures before March 16. (Id. at 82.) First, Hill argued that the word “knowledge” in Rule 4004(b)(2) should be interpreted as constructive knowledge. (See July 29 Mot. Hr'g at 54-56.) Second, Hill claimed that by virtue of Wiand's March 10 motion, the Trustee had such constructive knowledge. (Id. at 55-56.) According to Hill, the “Trustee would have received a copy of [Wiand's March 10] motion via the ECF system, ” and that motion contained the allegations on which the Trustee was basing his motion for an extension. (APP at 82-83, Debtor's Resp. in ...

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