Vexatious Litigant Debtor Denied Discharge under Four Sections of Section 727 for Concealing More Than $1 Million in Assets.
The following is a case summary written by Kathleen A. Cashman-Kramer analyzing Szanto vs. U.S. Trustee (In re Szanto), 2021 WL 1329435 (9th Cir. BAP April 1, 2021).
It was not an April Fool’s joke when on April 1, 2021, the Ninth Circuit Bankruptcy Appellate Panel (“BAP”) affirmed the decision of the Oregon bankruptcy court denying the discharge of debtor Peter Szanto (“Szanto”) under Bankruptcy Code sections 727(a)(2)(B), (4)(A), (4)(D), and (6)(A).
To review the published opinion, click here.
In August 2016 Szanto filed a chapter 11 petition. When he filed his bankruptcy schedules (“Schedules”) and statement of financial affairs (“SOFA”), he swore under penalty of perjury that they were true and correct. And under oath at a § 341(a) meeting of creditors, he again testified to their accuracy. However, he actually failed to disclose assets worth in excess of $1 million, including various financial accounts and interests in trusts, as well as transfers. Then, post-petition, Szanto engaged in significant undisclosed postpetition financial activity which included but was not limited to: (1) failing to report every financial account used by the debtor in his monthly operating reports; (2) continuing undisclosed use of those accounts; and (3) forming an Oregon limited liability company and making an unauthorized transfer of $367,000 of estate funds into its coffers.
In the spring 2017 the bankruptcy court granted the IRS’s Rule 2004 motion and required Szanto to produce statements for any financial account in which he had an interest, but he failed to do so and also continued to make unauthorized transfers, including transfers from concealed accounts. Even after the IRS moved to convert the case in September 2017, and just days before the hearing on that motion Szanto wrote an unauthorized check for nearly $100,000 to his wife from one of the concealed accounts.
The bankruptcy court issued an order restraining Szanto from taking further action regarding his accounts. On the first day of the conversion hearing, Szanto ignored that order and moved almost $278,000 from an E*TRADE account to an undisclosed account. Thereafter, on December 5, 2017, the bankruptcy court entered an order converting the case, with extensive specific findings based upon overwhelming evidence supporting conversion, including Szanto’s repeated and unexcused failures to disclose the material financial information and bad faith. It overruled Szanto’s many excuses for his misrepresentations and omissions, including his contention that they were “innocent,” finding that Szanto was “simply not believable” considering the “number and materiality of the omissions” and Szanto’s “strenuous efforts to prevent discovery of the omissions after the IRS began its investigation ….”
The conversion order, like the prior no-transfer order, prohibited Szanto from using estate assets, required him to provide specific information to the chapter 7 trustee by December 19, 2017, and warned that non-compliance could result in a denial of discharge. However, Szanto was not to be deterred: in the weeks following entry of the conversion order, Szanto: (1) transferred nearly a million dollars to his undisclosed accounts in violation of the orders; (2) failed to provide the chapter 7 trustee with an account of transfers he made during the chapter 11 case or the account statements as required by the conversion order; and (3) also failed to transfer all estate property to the trustee as required by the conversion order. In response, in March 2018 the United States Trustee responded with a complaint to deny him a discharge under §§ 727(a)(2)(B), (4)(A), (4)(D), and (6)(A), and the chapter 7 trustee moved to hold Szanto in contempt and require turnover of estate funds.
The bankruptcy court found Szanto in contempt and ordered him to sign all necessary Release Forms; he refused. In addition, after a two-day trial, it entered an order denying Szanto a discharge under §§ 727(a)(2)(B), (4)(A), (4)(D), and (6)(A). He timely appealed.
The BAP took the matter under submission based upon the record and briefs and, without oral argument, affirmed the bankruptcy court in all respects. Szanto argued that the bankruptcy court had abused its discretion when it denied him a discharge. Although Szanto did not point to any specific error of law or attack any of the specific factual findings, the BAP reviewed all four grounds for relief under Section 727:
(1) Section 727(a)(2)(B): The BAP noted that ample evidence was produced at the conversion hearing and trial as to Szanto’s failure to disclose accounts, the Trust, the postpetition creation of the LLC and transfer of funds to the LLC’s account, numerous post-petition transfers (even when ordered not to), noting that “Szanto’s misconduct . . .[was] . ‘a deliberate and concerted effort to withhold information.’”
(2) Section 727(a)(4)(A): The BAP noted clear uncontroverted evidence of this.
(3) Section 727(a)(4)(D): Again, the record showed abundant support.
(4) Section 727(a)(6)(A): Again, the BAP noted the bankruptcy court’s record, including that Szanto was aware of the no-transfer and conversion orders, yet he willfully and intentionally refused to obey them and in fact acted in direct violation of them, and that Szanto’s excuses were completely unsupported.
The BAP noted that once the U.S. Trustee had made a prima facie showing on the Section 727 complaint, Szanto bore the burden to “offer credible evidence” in response, and he failed “utterly” to do so, citing Devers v. Bank of Sheridan (In re Devers), 759 F.2d 751, 754 (9th Cir. 1985).
The BAP also made short work of Szanto’s other arguments on appeal, finding that each was frivolous and ignored the overwhelming evidence in the record:
(1) Szanto claimed that the Court’s denial of ECF privileges to him was a due process violation, finding that “ECF access is not a ‘due process right[,’ it] is granted at the discretion of the Court.” The BAP also noted that the record was devoid of any evidence to suggest that his lack of ECF privileges denied him any opportunity to be heard at any time in the case.
(2) Szanto claimed judicial bias; although he did not appeal his motion to recuse the judge, which was denied, there was nothing in the record to support such a finding, and Szanto argued bias by the judge based on “unspecified comments regarding his demeanor.”
(3) Szanto claimed that the comments in the 31-page memorandum decision following the Section 727 trial regarding his vexatious litigant status required reversal as they were “contrary to [the Panel’s] own long and thorough analysis in 2012” in which it stated, in a two-paragraph order denying appellee’s vexatious litigant motion, that “the Panel is presently unable to conclude that appellant is a vexatious litigant.” [citation omitted] Indeed, in footnotes 9 and 10 the BAP noted that Szanto was indeed found to be a vexatious litigant after entry of the Panel’s 2012 order he cited, and in 2017 the Ninth Circuit declared Szanto to be subject to a pre-filing review order in the Ninth Circuit because of his “practice of burdening [that] court with meritless litigation.” In re Szanto, No. 17-80195, Dkt. 2 at 1 (9th Cir. Oct. 2, 2017). The bankruptcy court had also previously entered its own pre-filing vexatious litigant order against Szanto in another adversary proceeding.
(4) Szanto argued that his denial of discharge should also be reversed because he was denied a jury trial. The BAP easily disposed of this, finding “there is no right to a jury trial in a § 727 action.” [citation omitted]
(5) Szanto asserted the bankruptcy court erred by denying joinder of “the Hendersons” as indispensable parties. The BAP rejected this, noting that Szanto did not explain who the Hendersons were or how the failure to join them led to any reversible error, and the fact that Szanto sought evidence from them did not make them necessary parties.
(6) Szanto asserted alleged discovery abuse and the denial of his motion for terminating sanctions as a basis for reversal. The BAP again noted that Szanto did not show any abuse of discretion in the bankruptcy court’s discovery rulings, nor did he show how any of those rulings prejudiced him.
It should not come as a surprise that Szanto appealed the BAP’s affirmance of the bankruptcy court’s denial of his discharge to the Ninth Circuit. Specifically, on July 2, 2021 he filed his appeal, presently pending as Ninth Circuit case no. 21-60035. At the time this article was written, the docket in that appeal reflects that the Court of Appeals granted the debtor’s request for an extension, and his opening brief is currently due July 5, 2022.
According to footnote 9 of the BAP’s decision, another BAP panel noted in 2016 that Szanto was a “serial litigant.” The bankruptcy court noted that there were seventy-six cases nationwide involving a party named Peter Szanto, and Mr. Szanto acknowledged that he was a party to at least fifteen or twenty of those cases. At oral argument, Mr. Szanto acknowledged that the California state court found him to be a vexatious litigant as well.
I have handled matters for trustees and creditors involving debtors who concealed assets, and I have handled matters for trustees where the debtor was also a vexatious litigant. But I have not had one where both were present in one scenario. Based upon the facts presented in this case, I believe that the matter was correctly decided based upon applicable law. Based on my experiences in similar cases, it would appear that the various courts in the federal District of Oregon have not seen the last of Mr. Szanto.
These materials were authored by Kathleen A. Cashman-Kramer, Of Counsel at Sullivan Hill Rez & Engel (Cashman-Kramer@Sullivanhill.com), with editorial contributions from ILC member Meredith King of Higgs Fletcher & Mack (email@example.com).