1 UNITED STATES BANKRUPTCY COURT 2 EASTERN DISTRICT OF CALIFORNIA 3 4 In re: ) Case No. 19-25091-C-7 ) 5 AGHEE WILLIAM SMITH, II and ) SUSAN BLAIR SMITH, ) 6 ) Debtors. ) 7 ) ________________________________) 8 ) KIMBERLY J. HUSTED, Chapter 7 ) Adv. Proc. No. 20-02034-C 9 trustee, ) ) 10 Plaintiff, ) ) 11 v. ) ) 12 AGHEE WILLIAM SMITH, II and ) SUSAN BLAIR SMITH, ) 13 ) Defendants. ) 14 ________________________________) 15 16 MEMORANDUM DECISION REGARDING SCHEDULING AND STAY 17 OF ADVERSARY PROCEEDING 18 This is an adversary proceeding prosecuted by the chapter 7 19 trustee objecting to the discharge of the debtors. 20 The initial pretrial conference was held May 27, 2020, 21 pursuant to Federal Rule of Civil Procedure 16, as incorporated 22 by Federal Rule of Bankruptcy Procedure 7016(a), for purposes of, 23 establishing a scheduling order, expediting disposition of the 24 action, establishing early and continuing control of the action, 25 and discouraging wasteful activities and delays. 26 Gabriel P. Herrera of Kronick, Moskovitz, Tiedeman & Girard 27 appeared as counsel to the plaintiff chapter 7 trustee, Kimberly 28 J. Husted. 1 The defendant chapter 7 debtors Aghee William Smith, II, and 2 Susan Blair Smith each appeared self-represented. They have 3 counsel in the main bankruptcy case, but that attorney is not 4 representing them in this adversary proceeding. 5 6 Procedural History 7 The Complaint Objecting to Debtors’ Discharge was filed 8 March 31, 2020 (Dkt. #1), asserting four counts under 11 U.S.C. 9 § 727(a): 10 Count One: 11 U.S.C. § 727(a)(3) – the debtor has 11 concealed, destroyed, mutilated, falsified, or failed to 12 keep or preserve any recorded information, including books, 13 documents, records, and papers, from which the debtor’s 14 financial condition or business transactions might be 15 ascertained, unless such act or failure to act was justified 16 under all of the circumstances of the case; 17 Count Two: 11 U.S.C. § 727(a)(4)(A) – the debtor 18 knowingly and fraudulent, in or in connection with the case 19 — (A) made a false oath or account; 20 Count Three: 11 U.S.C. § 727(a)(4)(D) — the debtor 21 knowingly and fraudulently, in or in connection with the 22 case — withheld from an officer of the estate entitled to 23 possession under this title, any recorded information, 24 including books, documents, records, and papers, relating to 25 the debtor’s property or financial affairs; 26 Count Four: 11 U.S.C. § 727(a)(5) — the debtor has 27 failed to explain satisfactorily, before determination of 28 denial of discharge under this paragraph, any loss of assets 1 or deficiency of assets to meet the debtor’s liabilities. 2 The defendant debtors jointly filed an Answer on May 1, 3 2020. Dkt. #9. They admit the allegation that this is a “core 4 proceeding” and deny “each and every other allegation.” 5 In the Answer, the debtors requested a stay of this 6 adversary proceeding until after disposition of criminal 7 proceedings against Aghee William Smith, II. 8 The plaintiff filed a Proposed Discovery Plan that proposes: 9 (1) Rule 26 disclosures no later than June 10, 2020, with 10 supplemental disclosures pursuant to Federal Rule of Civil 11 Procedure 26(e); (2) discovery deadline no later than 12 September 21, 2020; (3) dispositive motions no later than 13 October 19, 2020; and (4) disclosure of expert testimony in 14 accordance with Federal Rule of Civil Procedure 26(a)(2). 15 Dkt. #7. 16 The defendants did not participate in a discovery conference 17 and adhere to their request for a stay of this adversary 18 proceeding. 19 20 The Criminal Case 21 The Complaint does refer to the federal indictment of Aghee 22 William Smith, II for Conspiracy to Commit Mail and Wire Fraud 23 and for Wire Fraud. Although the debtors’ Statement of Financial 24 Affairs refers to a “pending” criminal case as “USA v. Smith, 25 2:19-MJ-00055-AC, U.S. Dist. Ct., E.D. Cal., other papers in the 26 main bankruptcy case file indicate that the actual prosecution is 27 proceeding in the Eastern District of Virginia as Case No. 2:19- 28 cr-00047-RAJ-LRL-3, that trial was originally set to commence 1 January 21, 2020, and last three to four weeks. 2 Defendant Aghee William Smith, II in his oral presentation 3 on May 27, 2020, in support of his request for a stay reported 4 that trial in the Eastern District of Virginia is now scheduled 5 to commence November 2, 2020. 6 The general allegations in the Complaint Objecting to 7 Debtors’ Discharge refer to what is described as a fraudulent 8 business involving offering financial services to clients and to 9 a role in investment vehicles that led to charges by the U.S. 10 Securities and Exchange Commission, a Desist and Refrain Order by 11 the California Department of Business Oversight, and, eventually 12 to the federal prosecution. 13 The debtors’ initial Schedules E/F filed with the petition 14 commencing this chapter 7 case identify 142 creditors, the 15 majority of which (more than 100) are listed as “possible claim 16 from investment activity” in amounts said to be “unknown.” 17 There are 55 filed proofs of claim in the chapter 7 case, 18 totaling in excess of $5.25 million. 19 20 The Request for Stay 21 This court construes the second and third paragraphs of the 22 self-represented defendants’ Answer as a Motion for Stay on 23 account of the pending criminal prosecution. 24 The question of a stay was addressed during the oral 25 proceedings on May 27, 2020. Defendant Aghee William Smith, II 26 urged a stay of the entire adversary proceeding. He indicated 27 that he would be invoking his Fifth Amendment privilege regarding 28 self-incrimination, which he previously invoked at several points 1 during sessions of the Meeting of Creditors mandated by 11 U.S.C. 2 § 341. 3 Plaintiff’s counsel asserted that little or no discovery 4 would need to be obtained and that proceeding with the adversary 5 proceeding would not impair the defense in the criminal case and 6 that there would be no risk of offending the self-incrimination 7 privilege. 8 The overlap between criminal and civil, including 9 bankruptcy, litigation generally presents delicate issues 10 regarding fairness in criminal procedure. Civil discovery, for 11 example, is not an appropriate circumvention of criminal 12 discovery procedure. 13 Accordingly, this court is inclined to stay bankruptcy 14 adversary proceedings to the extent that the defense in a 15 criminal case could be impeded. 16 Nevertheless, the management of civil litigation when 17 related criminal Mail Fraud or Wire Fraud proceedings are pending 18 is a matter committed to the sound discretion of the civil trial 19 court. 20 Scrutiny of the counts in the Complaint Objecting to 21 Debtors’ Discharge reveals that the essential elements probative 22 of Count One turn on objective factors not involving specific 23 intent and that pose little risk of self-incrimination regarding 24 the pending Mail Fraud and Wire Fraud prosecution. It is even 25 plausible that summary judgment will be sought as to that count.
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1 UNITED STATES BANKRUPTCY COURT 2 EASTERN DISTRICT OF CALIFORNIA 3 4 In re: ) Case No. 19-25091-C-7 ) 5 AGHEE WILLIAM SMITH, II and ) SUSAN BLAIR SMITH, ) 6 ) Debtors. ) 7 ) ________________________________) 8 ) KIMBERLY J. HUSTED, Chapter 7 ) Adv. Proc. No. 20-02034-C 9 trustee, ) ) 10 Plaintiff, ) ) 11 v. ) ) 12 AGHEE WILLIAM SMITH, II and ) SUSAN BLAIR SMITH, ) 13 ) Defendants. ) 14 ________________________________) 15 16 MEMORANDUM DECISION REGARDING SCHEDULING AND STAY 17 OF ADVERSARY PROCEEDING 18 This is an adversary proceeding prosecuted by the chapter 7 19 trustee objecting to the discharge of the debtors. 20 The initial pretrial conference was held May 27, 2020, 21 pursuant to Federal Rule of Civil Procedure 16, as incorporated 22 by Federal Rule of Bankruptcy Procedure 7016(a), for purposes of, 23 establishing a scheduling order, expediting disposition of the 24 action, establishing early and continuing control of the action, 25 and discouraging wasteful activities and delays. 26 Gabriel P. Herrera of Kronick, Moskovitz, Tiedeman & Girard 27 appeared as counsel to the plaintiff chapter 7 trustee, Kimberly 28 J. Husted. 1 The defendant chapter 7 debtors Aghee William Smith, II, and 2 Susan Blair Smith each appeared self-represented. They have 3 counsel in the main bankruptcy case, but that attorney is not 4 representing them in this adversary proceeding. 5 6 Procedural History 7 The Complaint Objecting to Debtors’ Discharge was filed 8 March 31, 2020 (Dkt. #1), asserting four counts under 11 U.S.C. 9 § 727(a): 10 Count One: 11 U.S.C. § 727(a)(3) – the debtor has 11 concealed, destroyed, mutilated, falsified, or failed to 12 keep or preserve any recorded information, including books, 13 documents, records, and papers, from which the debtor’s 14 financial condition or business transactions might be 15 ascertained, unless such act or failure to act was justified 16 under all of the circumstances of the case; 17 Count Two: 11 U.S.C. § 727(a)(4)(A) – the debtor 18 knowingly and fraudulent, in or in connection with the case 19 — (A) made a false oath or account; 20 Count Three: 11 U.S.C. § 727(a)(4)(D) — the debtor 21 knowingly and fraudulently, in or in connection with the 22 case — withheld from an officer of the estate entitled to 23 possession under this title, any recorded information, 24 including books, documents, records, and papers, relating to 25 the debtor’s property or financial affairs; 26 Count Four: 11 U.S.C. § 727(a)(5) — the debtor has 27 failed to explain satisfactorily, before determination of 28 denial of discharge under this paragraph, any loss of assets 1 or deficiency of assets to meet the debtor’s liabilities. 2 The defendant debtors jointly filed an Answer on May 1, 3 2020. Dkt. #9. They admit the allegation that this is a “core 4 proceeding” and deny “each and every other allegation.” 5 In the Answer, the debtors requested a stay of this 6 adversary proceeding until after disposition of criminal 7 proceedings against Aghee William Smith, II. 8 The plaintiff filed a Proposed Discovery Plan that proposes: 9 (1) Rule 26 disclosures no later than June 10, 2020, with 10 supplemental disclosures pursuant to Federal Rule of Civil 11 Procedure 26(e); (2) discovery deadline no later than 12 September 21, 2020; (3) dispositive motions no later than 13 October 19, 2020; and (4) disclosure of expert testimony in 14 accordance with Federal Rule of Civil Procedure 26(a)(2). 15 Dkt. #7. 16 The defendants did not participate in a discovery conference 17 and adhere to their request for a stay of this adversary 18 proceeding. 19 20 The Criminal Case 21 The Complaint does refer to the federal indictment of Aghee 22 William Smith, II for Conspiracy to Commit Mail and Wire Fraud 23 and for Wire Fraud. Although the debtors’ Statement of Financial 24 Affairs refers to a “pending” criminal case as “USA v. Smith, 25 2:19-MJ-00055-AC, U.S. Dist. Ct., E.D. Cal., other papers in the 26 main bankruptcy case file indicate that the actual prosecution is 27 proceeding in the Eastern District of Virginia as Case No. 2:19- 28 cr-00047-RAJ-LRL-3, that trial was originally set to commence 1 January 21, 2020, and last three to four weeks. 2 Defendant Aghee William Smith, II in his oral presentation 3 on May 27, 2020, in support of his request for a stay reported 4 that trial in the Eastern District of Virginia is now scheduled 5 to commence November 2, 2020. 6 The general allegations in the Complaint Objecting to 7 Debtors’ Discharge refer to what is described as a fraudulent 8 business involving offering financial services to clients and to 9 a role in investment vehicles that led to charges by the U.S. 10 Securities and Exchange Commission, a Desist and Refrain Order by 11 the California Department of Business Oversight, and, eventually 12 to the federal prosecution. 13 The debtors’ initial Schedules E/F filed with the petition 14 commencing this chapter 7 case identify 142 creditors, the 15 majority of which (more than 100) are listed as “possible claim 16 from investment activity” in amounts said to be “unknown.” 17 There are 55 filed proofs of claim in the chapter 7 case, 18 totaling in excess of $5.25 million. 19 20 The Request for Stay 21 This court construes the second and third paragraphs of the 22 self-represented defendants’ Answer as a Motion for Stay on 23 account of the pending criminal prosecution. 24 The question of a stay was addressed during the oral 25 proceedings on May 27, 2020. Defendant Aghee William Smith, II 26 urged a stay of the entire adversary proceeding. He indicated 27 that he would be invoking his Fifth Amendment privilege regarding 28 self-incrimination, which he previously invoked at several points 1 during sessions of the Meeting of Creditors mandated by 11 U.S.C. 2 § 341. 3 Plaintiff’s counsel asserted that little or no discovery 4 would need to be obtained and that proceeding with the adversary 5 proceeding would not impair the defense in the criminal case and 6 that there would be no risk of offending the self-incrimination 7 privilege. 8 The overlap between criminal and civil, including 9 bankruptcy, litigation generally presents delicate issues 10 regarding fairness in criminal procedure. Civil discovery, for 11 example, is not an appropriate circumvention of criminal 12 discovery procedure. 13 Accordingly, this court is inclined to stay bankruptcy 14 adversary proceedings to the extent that the defense in a 15 criminal case could be impeded. 16 Nevertheless, the management of civil litigation when 17 related criminal Mail Fraud or Wire Fraud proceedings are pending 18 is a matter committed to the sound discretion of the civil trial 19 court. 20 Scrutiny of the counts in the Complaint Objecting to 21 Debtors’ Discharge reveals that the essential elements probative 22 of Count One turn on objective factors not involving specific 23 intent and that pose little risk of self-incrimination regarding 24 the pending Mail Fraud and Wire Fraud prosecution. It is even 25 plausible that summary judgment will be sought as to that count. 26 In contrast, the other counts could affect the prosecution. 27 Counts Two and Three, both of which have as essential elements 28 that the debtors acted “knowingly and fraudulently,” would risk 1 straying into the realm of information that might be pertinent to 2 the pending Wire Fraud prosecution in a manner that could raise 3 self-incrimination concerns. And, the premise of Count Four is 4 the failure to explain loss or deficiency of the assets that are 5 alleged to have been acquired in connection with the conduct at 6 issue in the pending prosecution. 7 8 Self-Incrimination Privilege 9 Part of the defendants’ request for stay included in their 10 Answer is the statement: “We assert our 5th amendment right on 11 advi[c]e of counsel.” 12 As to Count One cause of action to deny discharge on account 13 of alleged destruction of “recorded information, including books, 14 documents, records, and papers, from which the debtor’s financial 15 condition or business transactions might be ascertained” that is 16 the core of the cause of action under § 727(a)(3), the Fifth 17 Amendment privilege appears to have been lost by the debtors’ 18 testimony at the November 6, 2019, meeting of creditors. 19 The allegations in paragraph 20 of the Complaint include 20 quotations from the November 6, 2019, testimony at that session 21 of the meeting of creditors, at which the debtors were 22 represented by counsel: 23 20. At the Debtors' continued 341 meeting of creditors, on 24 November 6, 2019, the Trustee requested information related 25 to a part-time assistant that the Debtors were paying on a 26 regular basis. Upon further questioning by the Trustee, 27 Smith explained that the part-time assistant would, among 28 other things, assist with organizing "files" at the Debtors' 1 home office. Given that the Debtors testified that they did 2 not maintain business records and left the record-keeping to 3 others, the Trustee pressed for further information related 4 to the "files" that were organized by the part-time 5 assistant. In response, Smith stated that there were no 6 longer any "files." He stated that "when the creditors came 7 after me, I joyfully shredded them … and I would do the same 8 thing again." Smith also could not provide information as 9 to the location of source documentation that would 10 demonstrate why he was paid for certain services, including 11 documentation from Sill and Associates. He also advised 12 that he originated the invoices but did not maintain 13 possession of the invoices – the documents were "shredded." 14 Complaint Objecting to Debtors’ Discharge, ¶ 20. 15 16 Assuming that the quotations from testimony at the meeting 17 of creditors are accurate (which will need to be confirmed by an 18 official transcript of that testimony), Mr. Smith’s statement, 19 "when the creditors came after me, I joyfully shredded them … and 20 I would do the same thing again," appears to operate as a loss of 21 his self-incrimination privilege regarding destruction of 22 recorded information. 23 By testifying under oath at the statutorily-mandated meeting 24 of creditors without invoking the self-incrimination privilege, 25 one may “lose” the privilege. Minnesota v. Murphy, 465 U.S. 419, 26 426-429 (1984); Garner v. United States, 424 U.S. 648, 654 n.9 27 (1976); cf. McCarthy v. Arndstein, 266 U.S. 34, 41-42 (1924); 28 KENNETH N. KLEE, BANKRUPTCY & THE SUPREME COURT, 133-35 (2008). 1 It is also pertinent that the instant adversary proceeding a civil action, not a criminal proceeding, in which the 3 || question is whether to deny a discharge in bankruptcy. 4 5 Separate Trial 6 Considerations of judicial economy and of prudential 7 || deference to related criminal proceedings warrant invocation of the court’s discretionary power to bifurcate and order separate trial of Count One. Fed. R. Civ. P. 42(b), incorporated by Fed. Bankr. P. 7042. 1] Hence, orders will be issued bifurcating the adversary 12 || proceeding so as to permit the action to progress to and through 13 || separate trial of Count One, staying further proceedings 14 || addressed to Counts Two, Three, and Four, scheduling further 15 |] proceedings. 16 17 || Dated: June 06, 2020
19 \ Ye Wg 20 United S ates Eaxknister Judge 21 22 23 24 25 26 27 28
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1 INSTRUCTIONS TO CLERK OF COURT SERVICE LIST 2 The Clerk of Court is instructed to send the attached 3 document, via the BNC, to the following parties: 4 Gabriel P. Herrera 400 Capitol Mall 27th Fl 5 Sacramento, CA 95814 6 Aghee William Smith, II 3088 Big Bear Dr. 7 Roseville, CA 95747 8 Susan Blair Smith 3088 Big Bear Dr. 9 Roseville, CA 95747 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28