After more than a decade of litigation over a personal guarantee, Dr. Tomberlin effectively stripped himself of a bankruptcy discharge through the use of his business bank account over a 4-month period, in a ruling affirmed this week by the 11th Circuit, leaving him on the hook for a $20 million judgment.
One can only assume Dr. Tomberlin’s 2016 bankruptcy filing was intended to be his final dodge of a real estate deal that went belly up in the midst of the real estate market crash. Dr. Tomberlin, who lives in Alabama, became involved with a project to develop 18-acres on South Bass Island, Ohio, into a resort. Although he later contested doing so, in 2006, Dr. Tomberlin signed a personal guarantee of the $8.6 million loan to develop the property. The loan matured in December 2007, but the remaining principal balance of $7.8 million remained unpaid – triggering the application of default interest at a hefty 25%. By 2014, when the lender finally obtained a judgment against Dr. Tomberlin on his personal guarantee, the amount at issue had ballooned to over $20 million. The lender, now a judgment creditor, commenced execution, and by mid-2015 was closing in on real property owned by the doctor, when the IRS also sought money it was owed and levied on Dr. Tomberlin’s seven personal bank accounts.
As Dr. Tomberlin testified later at trial, he needed a place to “protect” his income from garnishment and levy. According to Dr. Tomberlin, it was at the advice of his accountant that in September 2015, he began depositing his salary, rental incomes, and loan proceeds into, and paying his personal expenses from, the bank account for his solely owned medical practice. Dr. Tomberlin continued to use the medical practice’s bank account for all of his personal income and banking through his bankruptcy filing in January 2016, in a voluntary Chapter 7.
The judgment creditor brought an adversary proceeding objecting to Dr. Tomerblin’s discharge under, among other sections, 11 U.S.C. § 727(a)(2), which provides that a debtor is not entitled to a discharge of their debts if they “with intent to hinder, delay, or defraud a creditor … has transferred, removed, destroyed, mutilated, or concealed … property of the debtor[.]” The judgment creditor argued, and the bankruptcy court agreed, that placing income into the business account constituted ‘concealment’ under the statute. Although Dr. Tomberlin argued that he lacked an intent to defraud as he was acting on the advice of his accountant, the trial court found that his own testimony that he was trying to “protect” his money sufficiently evidenced an intent to hinder or delay creditors to warrant denying him a discharge.
Above all else, Dr. Tomberlin’s tale underscores that just because you can do something doesn’t mean you should. Individuals contemplating a bankruptcy filing should act with due care of potential discharge issues during the pre-bankruptcy period. Finally, counsel for debtors would be well advised to review the books of debtor-owned companies before filing to look for these issues – even if the business is not, itself, a debtor.
About Dana Quick:
Dana Quick practices in the area of insolvency and commercial litigation. Her experience includes prosecuting director and officer liability claims, representing trustees, creditors, creditor committees, and debtors in bankruptcy proceedings, state court insolvency litigation, and prosecuting and defending preference actions. Additionally, Dana has significant experience representing and counseling companies of all sizes on employment issues, including ADA, FMLA, and Title VII matters.