2008 D e c i sion s O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit 1-29-2008 

# In Re: D iLoret o P r e c e de nt i al or N on-P r e c e de nt i al : N on-P r e c e de nt i al D ocke t N o . 06-4818

F o llow thi s and a dd it ion al work s at : http://d i git alc ommon s .l a w . vi ll anova . e du/thir dc ir c uit_2008

Thi s de c i sion i s br ou ght t o you for f r e e and ope n a c c e s s b y the O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit at V i ll anova U nive r sity S choo l of L a

w Di git al Reposit ory

. It h as be e n a c c ept e d for inclusion in 2008 D e c i sion s b y an authori z e d a dmini s tr at or of V i ll anova U nive r sity S choo l of L a

w Di git al Reposit ory

. F or mor e inform at ion, p le as e c ont a ct Be n j amin . C arl s on@l a

w . vi ll anova . e du . Re c omme nde d C it at ion " In Re: DiL or e t o " (2008). 2008 D e cisio n s . P ape r 1685. http://d i git alc ommon s .l a

w . vi ll anova . e du/thir dc ir c uit_2008/1685NOT P RE CE DE NT I AL UN I TED STATES CO UR T OF A PP EALS F O R T H E T H IR D C IR C U IT

____________ N o. 06- 4818

____________ I N R E : RI CH AR D A. DI L OR E T O, D ebt or G R E G O R Y V . SE R I O , Super i nt endentof I ns ur ance of the St at e of N ew Y or k, and H i s Succes s or s i n O ffi ce a s Super i nt endent of I ns ur ance of the St at e of N ew Y or k, as L i qui dat orof N as s au I ns ur ance C om pany

v. RI CH AR D A . DI LOR ETO S I L L S , CU M M I S , Z UC KE RMAN, RA DI N, T I S CH M AN, E P S T E IN & G R O S S ; D O N O V A N & A S S O C IA T E S , P .C ., Interv en o rs i n D istri ct C o u rt TRU STEE GLO RI A M . SATRI ALE R i char d A . D i L or et o, A ppel l ant2 ____________ O n A ppeal fr om U ni t ed St at es D i s tr i ctC our tforthe

D istric t o f

E a ste rn P e n n sy lv a n ia ( D i s tr i ctC our tN o. 04- cv- 01326) D i s tr i ctJ udge: H onor abl e B ruce W . K auff m an

____________ Subm i t t ed U nderT hi r d C i r cui tL A R 34. 1( a) Subm i t t ed J anuary10, 2008 B e f o re : F IS H E R , H A R D IM A N a n d S T A P L E T O N , C i r cui tJudges .

( Fi l ed: J anuary29, 2008)

____________ OPI NI ON O F THE COURT

____________ H A R D IM A N , C i r cui tJudge . D ebt orR i char d A . D i L or et o appea l s a fi nal or derof the U ni t ed St at es D i s tr i ct C o u rt f o r t h e E a s te rn D is tr ic t o f P e n n s y lv a n ia d e n y in g h im a d is c h a rg e in b a n k ru p tc y . D i L or et o ar gues thatthe D i s tr i ctC our terr ed i n r ever s e- pi er ci ng the vei l s of var i ous corpor at i ons and off

s hor e ent i t i es t o i ncl ude thei ras s et s i n hi s bankrupt cyes t at e. Fort he r e a s o n s th a tf

o l l o w, we wi l l a f

f i r m. I. A s w e w r i t e forthe part i es , w ho ar e fa m i l i arw i th the pr ocedur al hi s t ory , fac t s and ar gum ent s , w e r ecountonl ythatw hi ch i s es s ent i al t o ourdeci s i on. D i L or et o fi l ed a pet i t i on forr el i ef unde rC hapt er7 of the B ankrupt cyC ode, s ubm i t t i ng a Schedul e of3

A s s et s and Li abi l i t i es and a St at ementof Fi nanci al A ffa i r s . T he Super i nt endentof I ns ur ance of the St at e of N ew Y or k ( Super i nt endent ) obj ect ed t o the di s char ge, al l egi ng th a t D iL o re to h a d o m itt e d a ss e ts f ro m h is S c h e d u le a n d S tate m e n t th a t w e re n o m in a lly th e p ro p e rtyo f

v a rio u s c o rp o ra tio n s a n d o f f sh o re e n tit ies b u t w e re a c tu a llyu n d e r h is contr ol . T he Super i nt endentther efor e al l eged thatD i L or et o vi ol at ed the B ankrupt cy C o d e b y : co n c e a lin g a ss e ts w ith in ten t to d e f ra u d (1 1 U .S .C . § 7 2 7 (a )(2 )); f a ili n g to pr oduce a dequat e r ecor ds fr om w hi ch hi s fi nanci al condi t i on coul d be as cert ai ned ( 11 U. S . C. § 7 2 7 ( a ) ( 3 ) ) ; a n d b r e a c h i n g h i s d u tyo f c a n d o rt o h i s c r e d i t o r s ( 1 1 U. S . C. § 7 2 7 (a)(4)). T he B ankrupt cyC our tgr ant ed the Super i nt endent ’ s obj ect i ons t o the di s char ge, w r i t i ng a compr ehens i ve and pe r s uas i ve opi ni on i n s uppor tof i t s deci s i on. C entr al t o t he B ankrupt cyC our t ’ s anal y s i s w as i t s appl i cat i on of fe der al comm on l aw t o r ever s e- pi er ce th e v e ils o f

th e c o rp o ra tio n s a n d o f f sh o re e n tit ies a t issu e , the re b yd e ter m in in g th a t th e ir a ss e ts s h o u ld h a v e b e e n in c lu d e d in D iL o re to ’s b a n k ru p tcy es tate . O n c e th is det erm i nat i on w as m ade, i tes s ent i al l yfol l ow ed thatD i L or et o w as notent i t l ed t o a d isch arg e u n d er § § 7 2 7 (a)(2)-(4). D i L or et o ar gued t o t he D i s tr i ctC our tthatthe B ankrupt cyC our terr ed i n appl y i ng fede r al comm on l aw , cl ai m i ng thatther e w oul d have be en no bas i s t o r ever s e- pi er ce the corpor at e vei l s had the B ankrupt cyC our tpr oper l yappl i ed Penns y l vani a l aw . T he D i s tr i ct C our tr ej ect ed thi s ar gum entand af fi r m ed the B ankrupt cyC our t , det erm i ni ng thatthe4

r es ul tof the r ever s e- pi er ci ng anal y s i s w oul d have be en the s ame underPenns y l vani a or f e d e r a l c o mm o n l a w. II. I n thi s appea l , D i L or et o r el i es heavi l yon ourdeci s i on i n In re B la tste in , 192 F. 3d 88 ( 3d C i r . 1999) , i n w hi ch w e dec l i ned t o r ever s e- pi er ce c orpor at e vei l s under P e n n s yl v a n i a l a w . D i L o r e t o c l a i m s th a tth e “ f a c t s a n d i s s u e s [ h e r e ] w e r e i n m a n y w a ys id e n tica l to th o se in B lats tein ” a n d su g g e sts th a t “h a d e ith e r c o u rt e m p lo y e d th e B lats tein a n a lysis , [ h e ] w o u ld n o t h a v e b e e n d e n ie d h is d is c h a rg e .” L i ke the Super i nt endenti n t he i ns t antcas e, the pl ai nt i ff i n B la tste in s ought r ever s e- pi er ci ng, cl ai m i ng thatthe “c om m i ngl i ng of funds and paym entof per s onal e x p e n se s b yth e c o rp o ra tio n s w a s p a rt o f a n e lab o ra te p lan b y[ th e d e b to r] to f ru stra te h is cr edi t or s ’ col l ect i on eff or t s . ” 192 F. 3d at101. A l though w e not ed that“s uch an a s s e r t i o n , i f

tru e , mi g h tp r o v i d e [ a n ] e q u i t a b l e j u s t i f i c a t i o n ” f

o rr e v e r s e - p i e r c i n g , we i ns t ead “ found the oppos i t e t o be true . . . thatB l at s t ei n di d nothi de anyof hi s per s onal a ss e ts in th e c o rp o ra tio n s, n o r d id h e c o m m in g le h is a ss e ts w ith th e c o rp o ra tio n s’ a ss e ts s o thats epar at i on w oul d be i m pos s i bl e. ” Id . A c c o rd in g ly , w e f o u n d n o f

a c tu a l p re d ica te t o r ever s e- pi er ce the corpor at e vei l s i n B la tste in . U nl i ke i n B lat

s t ei n, th e e v id e n c e in th is c a se in d ica tes th a t D iL o re to a ttem p ted to c o n c e a l as se ts a n d b e n e f icia l in ter e sts f

ro m h is c re d ito rs. F o r e x a m p le, w h ile D iL o re to w as pr es i dentof A r dr a and the s ol e ow nerof A r dr a’ s par entcompany– and s oon aft erhe,A r dr a’ s exac tfi nanci al condi t i on atthe t i m e of the J une 1998 s al e i s notcl ear 1 from the record. H ow ever, i t s 199 5 b al ance sh eetst at ed asset s of $1 , 52 4, 27 6 ag ai nst l i abi l i t i es of $786, 207. W hen as ked w hetherA r dr a’ s as s et s w er e i n exce s s of hal f a m illio n d o lla rs a t th e tim e o f th e s a le , D iL o re to re s p o n d e d th a t h e d id n o t r e c a ll.

5 hi s w i fe, and A r dr a r ece i ved a $16. 3 m i l l i on j udgm entagai ns tthem – he m ade a s er i es of c a s h tr a n s f

e rs to ta lin g $ 7 8 0 ,1 1 7 .1 0 to A rd ra ’s B e rm u d a a c c o u n ts in 1 9 9 4 a n d 1 9 9 5 . F u r th e r m o r e , i n J u n e 1 9 9 8 – a m e r e f i v e m o n th s b e f

o r e h e f i l e d f o rb a n k ru p t c y – D i L or et o caus ed A r dr a t o be s ol d on non- comm er ci al t erm s t o PT C Fi nance L i m i t ed ( PT C ) . A l though PT C w as os t ens i bl yunaff i l i at ed w i th D i L or et o, i tw as ow ned byPet er E vans , a B ahami an bus i nes s m an w ho had pr evi ous l yas s i s t ed D i L or et o w i th num er ous offs hor e tr ans act i ons . Fur therm or e, E vans acqui r ed A r dr a fora mer e $50, 000, and D i L or et o hi m s el f admi t t ed thatthe s al e di d nott ake a ccountof A r dr a’ s as s et s and li ab il it ies. T h u s, the B an k rup tcyC o u rtco n clud ed that this tran sac ti o n “a ll o w ed A rdra

1 an d it s ass ets t o b e tran sfe rred to an o ff sh o re c o m p an y , w ith n o ap p are n t t ie t o M r. D i L or et o and hi s fami l y ” butthatD i L or et o neverthel es s “w as aw ar e of a nd contr ol l ed the d ay -t o -da yo p era ti o n o f A rdra b yv irtue o f h is on g o ing b u sine ss relati o n s w ith M r. E v a n s.” (B k rtc yO p . at 7 4 ). T h e re c o rd su p p o rts th e B a n k ru p tcy C o u rt’s c o n c lu sio n in thi s r egar d. D i L or et o does m ake a val i d poi ntr egar di ng the appl i cabi l i tyof B la tste in ’s di s t i nct i on betw een c l as s i c pi er ci ng and r ever s e- pi er ci ng t o s om e of the tr ans act i ons at iss u e . F o r e x a m p le, w e n o te th a t A rd ra ’s v a rio u s p a ym e n ts to D iL o re to a n d h is f a m ily6

m e m b e rs w o u ld b e n e f

it rath e r th a n h in d e r D iL o re to ’s c re d ito rs. S u c h p a ym e n ts c o u ld serv e a s the b asis fo r classic p iercing (i n w h ich D iL o reto is he ld li ab le t o A rdra ’s c re d ito rs f

o r A rd ra ’s d e b ts) a s o p p o se d to re v e rse -p ier c in g (in w h ich A rd ra is h e ld liab le to D iL o re to ’s c re d ito rs f o r D iL o re to ’s d e b ts). If th e se p a ym e n ts w e re th e o n ly tr a n s a c tio n s a t is s u e , B la tste in su g g ests that theyw o u ld b e ins u ff ici en t t o su p p o rt r ever s e- pi er ci ng. H ow ever , i n l i ghtof the othertr ans act i ons her e – s uch as the A r dr a- PT C s al e, D i L or et o’ s var i ous cas h t r ans fer s t o A r dr a, the r api d funnel i ng of funds thr ough var i ous off shore enti t i es, and the u nex plai ned dis app earance of m ore than $3 m i l l i on from these e n tit ies – it i s c lea r th a t B lat s t ei n d o es n o t con tr o l. F u rth erm o re, th o u g h D iL o reto o ff ers beni gn expl anat i ons forthes e tr ans act i ons , he does notper s uas i vel ycontr adi ctthe B a n k ru p tcy C o u rt’s f

in d in g th a t h e “ e m b a rk e d u p o n a c o m p lex p lan o v e r m a n yy e a rs to contr ol hi s per s onal as s et s and the as s et s of var i ous ent i t i es , w hi ch as s et s and ent i t i es w e re tit led in th e n a m e o f f a m ilym e m b e rs o r n u m e ro u s c o rp o ra tio n s b u t su b jec t to h is co m p let e c o n tr o l. ” (B k rt cyO p . at 97 ). B eca us e w e ar e convi nced thatthe r es ul tw oul d be the s ame underei therfede r al comm on l aw orPenns y l vani a l aw as des cr i bed i n B la tste in , w e conc l ude thatthe B ankrupt cyC our tand D i s tr i ctC our tdi d noterri n r ever s e- pi er ci ng the vei l s of the corpor at i ons and off

s hor e ent i t i es ati s s ue.7 III . W e now turn t o t he s peci fi c bas es forthe deni al of D i L or et o’ s di s char ge. Sect i on 727( a) ( 2) pr ovi des thata debt ors hal l be deni ed a di s char ge w her e he: w ith in ten t to h in d e r, d e lay or d e f ra u d a c re d ito r o r a n o f

f ice r o f th e e sta te char ged w i th t he cus t odyof pr opertyunderthi s t i t l e, has tr ans ferr ed, r emoved, des tr oy ed, m ut i l at ed orconce al ed, orhas perm i t t ed t o be tr ans ferr ed, r emoved, des tr oy ed, m ut i l at ed orconce al ed – ( A ) pr opertyof the debt or , w i thi n one y earbefor e the dat e of the fi l i ng of the pet i t i on. T o w a rr a n ta d e n i a l o f

d i s c h a r g e u n d e r§ 7 2 7 ( a ) ( 2 ) , th e S u p e r i n t e n d e n tm u s tp r o v e b y a pr eponder ance of the evi dence thatD i L or et o: ( 1) tr ans ferr ed orconce al ed pr operty ; ( 2) bel ongi ng t o hi m ; ( 3) w i thi n one y earof the bankrupt cyfi l i ng oraft erthe pet i t i on w as f ile d ; a n d (4 ) w ith in te n t to h in d e r, d e la y , o r d e f ra u d a c re d ito r. See I

n r e D aw l ey , 312 B . R . 7 6 5 , 7 8 2 (B k rt cy . E . D . P a. 20 0 4 ). G iv e n th e v a rio u s tra n sf e rs o f D iL o re to ’s p e rso n a l as se ts a n d c o rp o ra te a ss e ts underhi s contr ol , and i n l i ghtof the for egoi ng r ever s e- pi er ci ng anal y s i s , the D i s tr i ct C o u rt d id n o t er r in c o n c lu d in g th a t th e f irst a n d se c o n d e lem e n ts w e re sa tisf ied . W ith r e g a r d t o th e th i r d e l e me n t , we n o t e th a tth e n o n - c o mme r c i a l s a l e o f Ar d r a t o PTC occurr ed fi ve mont hs befor e D i L or et o fi l ed forbankrupt cy . I n addi t i on, though s ever al othertr ans act i ons ( i ncl udi ng the s er i es of ca s h tr ans fer s t o A r dr a) occurr ed more than a y earbefor e the fi l i ng, the D i s tr i ctC our tpr oper l yi nvoked the cont i nuous conce al m ent d o ctri n e – w h ich p rov ides that “c o n ce alm en t w il l be f o u n d to ex istd u ri n g the y ea r be fo reW e ar e unper s uaded byD i L or et o’ s ar gum entthatthe cont i nuous conce al m ent 2 doctr i ne does notappl yt o t he 1994 and 1995 c as h tr ans fer s beca us e “ther e i s no fi ndi ng thatthe moneycont i nued t o exi s ti nt o the one- y earper i od pr i ort o the bankrupt cy ” and thathe ther efor e “ha d no cont i nued bene fi ci al i nt er es ti n thatpr operty . ” D i L or et o cannot cr edi bl yar gue thatthe moneyhe tr ans ferr ed t o A r dr a’ s B erm uda ac count s i n 1994 and 1995 no l ongerexi s t ed as of 1998. 8 bankrupt cyeven i f the i ni t i al actof conc eal m entt ook pl ace befor e thi s one- y earper i od as lo n g a s th e d e b to r a llo w e d th e p ro p e rt yto re m a in c o n c e a le d in to th e c ri tic a l yea r.” 2 R os en v. B ez ner , 9 9 6 F . 2 d 1 5 2 7 , 1 5 3 1 (3d C ir . 1 9 9 3 ). F in a lly , the f

o u rth e lem e n t re q u ire s p ro o f th a t D iL o re to a c ted w ith th e in ten t to h in d e r, d e la y , o r d e f

ra u d h is c re d ito rs d u ri n g th e y e a r b e f o re th e b a n k ru p tc yf

ilin g . R os en , 996 F. 2d at1533. G i ven the di ffi cul tyof demonstr at i ng i nt ent , thi s pr oof “maybe bas ed on i nfer ence s dr aw n fr om a cour s e of c onduct . ” I n r e Zi m m er m an , 320 B . C . 800, 806 ( B kr t cy . M . D . Pa. 2005) . H er e, D i L or et o’ s tr ans act i ons w er e mar ked w i th num er ous badges of fr aud, i ncl udi ng: i ns i derr el at i ons hi ps betw een the part i es ; D i L or et o’ s r et ent i on of bene fi t s fr om tr ans ferr ed as s et s ; i nadequa t e cons i der at i on fortr ans fer s ; and the p ro x im ity o f

tr a n s a c tio n s to ju d g m e n ts a g a in s t D iL o re to a n d h is a f f ilia te s . See In re W atm an , 3 0 1 F . 3 d 3 , 8 (1st C ir . 2 0 0 2 ) ( ci t i ng Sal om on v. Kais er , 722 F. 2d 1574, 1582- 83 ( 2d C i r . 1983) ) . W e al s o not e that“[t ] he s hi ft i ng of as s et s bythe debt ort o a corpor at i on w hol l ycontr ol l ed byhi m i s anotherbadge of fr aud. ” Id . ( ci t i ng Sal om on , 722 F. 2d at 1583) . A ccor di ngl y , the D i s tr i ctC our tdi d noterri n fi ndi ng thatD i L or et o pos s es s ed theI ndeed, the B ankrupt cyC our tfound thatD i L or et o’ s fr audul enti nt entper s i s t ed 3 th ro u g h trial w h e n it cite d h is “ se lec tiv e m e m o rylap se s” w h ile te stif y in g a s w e ll as h is fai l ur e t o pr ovi de ade quat e expl anat i ons form anyof the tr ans act i ons di s cus s ed. ( B kr t cy O p . a t 8 9 -9 0 ). 9 re q u isite in ten t to d e f

ra u d , an d th a t th is in ten t p e rsis ted u p to a n d th ro u g h o u t h is bankrupt cyfi l i ng. 3 I V. S ec ti o n s 7 2 7 (a)(3) a n d (4) p rov ide in d ep en d en t bas es f o r th e d en ial o f D iL o reto’s dis charge. In order t o st at e a cl ai m un der § 72 7(a) (3) , the S up eri ntenden tm ust d e m o n stra te b ya p re p o n d e ra n c e o f th e e v id e n c e th a t: (1 ) D iL o re to c o n c e a led o r f a iled to m a in tain a n d p re se rv e a d e q u a te r e c o rd s, a n d (2 ) th is f a ilu re m a d e it i m p o ss ib le to a s c e rt a in h is f

in a n c ia l c o n d itio n a n d m a te ri a l b u s in e s s tr a n s a c tio n s . Mer i di an B ank v. A l t en , 958 F. 2d 1226, 1233 ( 3d C i r . 1992) . O nce the Super i nt endentm eet s hi s bur den of pr oof, D i L or et o i s then r equi r ed t o “j us t i fyhi s fai l ur e t o m ai nt ai n the r ecor ds . ” I d. H er e, the Super i nt endentnot es thatD i L or et o fai l ed t o pr oduce r ecor ds s how i ng the di s pos i t i on of m or e than $3 mi l l i on thatw as tr ans ferr ed t o offs hor e ent i t i es s uch as A r dr a, N ar a, and Sondam . D i L or et o offe r s no expl anat i on forthe abs ence of the r ecor ds , orthe abs ence of the $3 mi l l i on forthatm att er ; i ns t ead, he ar gues thatthe r ecor ds ar e i rr el evantbeca us e the afor ement i oned ent i t i es w er e err oneous l ydeemed hi s al t erego. I n l i ghtof ourdeci s i on a f f irm in g th e re v e rse -p ier c in g o f th e se e n tit ies , D iL o re to ’s a rg u m e n t f a ils a n d w e h o ld that there w as n o erro r i n d en y ing h im a d isch arg e u n d er § 7 2 7 (a)(3).10

Fi nal l y , under§ 727( a) ( 4) ( A ) , a debt ori s notent i t l ed t o a di s char ge w hen he “know i ngl yand fr audul ent l y , i n ori n connec t i on w i th the ca s e – ( A ) m ade a fal s e oath or acc ount . ” D i L or et o’ s fai l ur e t o di s cl os e hi s as s et s and bene fi ci al i nt er es t s i n var i ous corpor at i ons and off

s hor e ent i t i es , as w el l as hi s fal s e t es t i m onythatthe r ecor ds he s ubm i t t ed w er e compl et e, i s s uffi ci entevi dence t o s uppor tthe deni al of hi s di s char ge u n d er § 7 2 7 (a)(4). V. F o r t h e f o re g o in g re a s o n s , w e w ill a f f ir m th e ju d g m e n t o f

th e D is tr ic t C o u rt .