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The Second Circuit Affirms Bankruptcy Fraud Judgment Obtained by Thomas H. Curran Associates, Recognizing the Continuous Concealment Doctrine

Law: Continuous concealment doctrine, 11 USC § 727(a)(2)(A), In re Olivier, 819 F.2d 550 (5th Cir. 1987); In re Boyer, 328 F. App’x 711, 714 (2d Cir. 2009); In re Carl, 517 B.R. 53 (Bankr. N.D.N.Y. 2014); Rosen v. Bezner, 996 F.2d 1527 (3d Cir. 1993)

Case: Anthony J. Gasson v. Premier Capital, LLC, 43 F.4th 37 (2d Cir 2022)

Link to Decision

Introduction

On July 29, 2022, the Second Circuit Court of Appeals issued its decision affirming the judgment of the United States District Court for the Southern District of New York, which affirmed the judgment of the Bankruptcy Court for the Southern District in favor of Thomas H. Curran Associates’s client, Premier Capital, LLC. [1] In the case, the Court affirmed the Bankruptcy Court’s finding that the debtor-defendant Anthony Gasson held an interest in a corporation nominally owned by his wife that he fraudulently concealed from his creditors within the one-year pre-petition lookback period, which barred his discharge under 11 USC 727(a)(2). In so holding, as a matter of first impression, the Second Circuit expressly adopted the continuous concealment doctrine as law in the Second Circuit, relying upon Rosen v. Bezner, 996 F.2d 1527 (3d Cir. 1993) and other Circuit Courts’  precedent. [2]

Relevant Factual Background

The debtor, Anthony Gasson (“Debtor” or “Gasson”), was a certified public accountant in New York for nearly forty (40) years. During that time, the Debtor was a partial owner of three (3) companies that manufactured and sold clothing and accessories. All three companies eventually sought bankruptcy reorganization in the 1990’s but ultimately went defunct. Judgments eventually entered against the Debtor under several personal guaranties, and Thomas H. Curran Associates’s client, Premier Capital, later acquired those judgments and sought to enforce them against the Debtor in the period leading up to Gasson’s Chapter 7 bankruptcy filing in 2012.

In 2001, after the earlier business bankruptcies, the Debtor and his wife formed a “consulting” company, Soroban, to obtain a “fresh start” to avoid Gasson’s personal and business-related debts. While Gasson’s wife was registered as the sole owner of Soroban, the Debtor maintained day-to-day control over the company, was the solely source of its revenue, made all decisions without his wife’s approval, and was Soroban’s sole employee.

In 2011, Premier pursued Gasson to collect on the judgments which resulted from his earlier personal debts. In response, Gasson filed for bankruptcy. On his bankruptcy schedules he listed very few assets and listed $0 as the value for his “individual consulting business.” Premier subsequently filed an adversary proceeding against Gasson objecting to his bankruptcy discharge under 11 USC § 727(a)(2), alleging that Gasson concealed his ownership of Soroban in order to hinder his creditors.

After a multiple day trial, the Bankruptcy Court (Lane, J.) denied discharge of Gasson’s debts, finding that the Debtor fraudulently concealed his equitable interest in Soroban to hinder Premier, since Gasson had an equitable property interest in Soroban as a matter of New York law.[3] The Bankruptcy Court also concluded that the one-year limitations period, under § 727(a)(2)(A), was satisfied under the continuous concealment doctrine since Gasson continued to conceal his interest in Soroban throughout the one-year period (even though Gasson initially concealed his interest almost two decades prior). The Court further held that Gasson’s explanation for failing to properly fill out his bankruptcy schedules lacked credibility given his level of business sophistication and past experience with bankruptcy proceedings. The District Court for the Southern District of New York (Nelson S. Román, J.) affirmed these findings. Gasson appealed to the Second Circuit.

In his appeal, Gasson argued that he held no property interest in Soroban and that he did not conceal that interest with an intent to hinder creditors within the one-year lookback period. Gasson further argued that any act of apparent concealment was innocently motivated by his desire to make a fresh start. The Court thus considered two dispositive issues on appeal: whether the In re Carl[4] equitable interest test was consistent with New York state law, and whether, applying that law, Gasson held an interest in Soroban that he concealed within the one-year period applying the “continuing concealment” doctrine that has been adopted by other Circuits.

Second Circuit Decision and Reasoning

In affirming the decision of the District Court, the Second Circuit first considered whether the Debtor held an equitable interest in Soroban under New York law.[5] The Court assessed the lower courts’ application of the test set forth in In re Carl and determined that bankruptcy courts must look at state substantive law, here New York’s, to make that determination.  Under the In re Carl test, courts may consider a variety of factors to determine if a debtor holds an equitable interest in property that is nominally titled in someone else, such as an insider, including:

  1. Whether a debtor previously owned a similar business;
  2. whether the debtor left his previous venture under financial duress;
  3. whether the debtor transferred his or her salary, or the right to receive salary to a family member or to a business entity owned by an insider;
  4. whether the debtor is actively and actually involved in the success of the insider business; and
  5. whether the debtor retains some of the benefits of the salary, such as having expenses paid for by the insider of the business.[6]

The Court stated that the third factor is the most important. Comparing the In re Carl test to New York state substantive law, the Court concluded that “all of the Carl factors considered by the bankruptcy court are consistent with the list of factors that formed part of the charge described by the New York Court of Appeals in Carothers, and with New York law in general.”[7]  Thus, the Court held that the Bankruptcy Court did not err in finding and concluding that Gasson had an equitable interest in Soroban.

Secondly, explaining the continuous concealment doctrine, which had been adopted as law in both the Third and Fifth Circuits under Rosen and Oliver, the Court stated that:

A concealment will be found to exist during the year before bankruptcy even if the initial act of concealment took place before this one-year period as long as the debtor allowed the property to remain concealed into the critical year. Under § 727(a)(2)(A), the party objecting to the discharge must establish that the wrongful act complained of occurred “within one year before the date of the filing of the petition.[8]

The Court further explained that the continuing concealment doctrine provides that:

Concealment of an interest in an asset that continues, with the requisite intent, into the year before bankruptcy constitutes a form of concealment which occurs within the year before bankruptcy and, therefore, that such concealment is within the reach of § 727(a)(2)(A).[9]

The Second Circuit expressly adopted this doctrine, stating that there was “logic and rationale behind” the doctrine, and that it was “compelling.”[10] The Court further found that Gasson had deliberately hindered Premier’s collection efforts. The Court found that the following facts, as found by the Bankruptcy Court, were particularly compelling: (1) Gasson’s denying any business affiliation with Soroban, or salary derived from Soroban in response to Premier’s informational subpoenas; (2) Gasson placing incorrect information on his bankruptcy schedules and otherwise obfuscating the fact that he received substantial value from his consulting business; (3) Gasson routinely siphoning money out of Soroban bank accounts for personal use while avoiding a substantive paper trail; and (4) Gasson creating Soroban following “rough times” when the IRS was seizing assets from [Gasson], and [he] was under threat from other creditors.[11]

What is the impact?

The Second Circuit’s decision in Gasson is important for at least two reasons. First, the Court laid down a bright line test and method for determining whether a bankruptcy debtor can be found to hold equitable property interests that may often be nominally owned by their family members or other insiders. This test was not previously articulated by the Second Circuit, which led Circuit bankruptcy courts to treat In re Carl as de facto precedent. Thus, the Court has clarified and laid down actual precedent on the issue of equitable property interests for the lower courts to follow but without disturbing In re Carl and its progeny. This obviously has implications for distressed pre-bankruptcy debtors who wish to organize their business, financial and personal affairs by placing income, assets and properties in the name of their insiders while still maintaining control over and reaping the benefits from those assets.

Secondly, by expressly adopting Rosen’s continuous concealment doctrine, the Second Circuit has established binding precedent for future bankruptcy courts to follow: any attempt by a debtor to conceal assets within one year prior to filing for bankruptcy, even if the concealment began many years’ prior, will expose the debtor to a potential denial of bankruptcy discharge under 11 USC § 727(a)(2). Thus, organizing one’s affairs in a complex manner for years in order to avoid one’s present and/or future creditors and then filing for bankruptcy many years later will not necessarily protect a debtor from losing his discharge.

Link to Decision

[1]            Gasson v. Premier Capital, LLC, 43 F.4th 37, 46 (2d Cir. 2022)

[2]            Id at 45.

[3]            See In re Gasson, Adv. Pro. No. 14-08217, 2018 WL 6603737, 10-16 (Bankr. S.D.N.Y. Dec. 13, 2018).

[4]            In re Carl, 517 B.R. 53, 65-66 (Bankr. N.D.N.Y. 2014)

[5]            Gasson, 43 F.4th at 37.

[6]            Id.

[7]            Id. at 43.

[8]            Rosen, 996 F.2d at 1531-1533; see also In re Lawson, 122 F.3d 1237, 1240 (9th Cir. 1997)

[9]            In re Oliver, 819 F.2d 550, 555 (5th Cir. 1987)

[10]           Gasson, 43 F.4th at 45.

[11]           In re Gasson, 2018 WL 6603737, at 10-16.

Thomas H. Curran Associates represents a broad range of businesses and corporate entities, private equity funds, as well as governmental agencies and other interested parties in all phases of the bankruptcy process and in bankruptcy related transactions and litigation. As advocates and trusted business advisors, our well-established foundation of knowledge and understanding of our clients’ business and professional interests, enables our attorneys to deliver unparalleled individualized attention to our clients of all sizes with their bankruptcy, litigation and corporate transactional needs.

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