[00:00:00] Speaker 03:
So, Ms. Corrales, how much time would you like to reserve?

[00:00:04] Speaker 00:
Thank you, Judge Brand. I would like to reserve seven minutes for rebuttal. All right. Thank you. May it please the court, Jody Corrales and Kevin Woldhagen, on behalf of the appellants, and appellant Murphy Cottrell is also present in the courtroom. Thank you.

[00:00:19] Speaker 00:
Your Honors, we are here on two separate appeals, but the crux of the appeal centers around the ruling and the adversary proceeding. Thank you. because that ruling was entered in the administrative case. So both orders are on appeal, but I'm going to focus my time today on the adversary proceeding.

[00:00:37] Speaker 00:
The issue, I'm sure your honors are aware, is whether the plaintiffs sufficiently pled their allegations under 727A4. Excuse me.

[00:00:50] Speaker 00:
And it's appellant's position that there is insufficient evidence to uphold the lower court ruling because the debtors complied with all of their requirements under the bankruptcy code to disclose their assets, sufficiently disclose their assets, and complied with the Chapter 7 trustee in providing additional information requested about those assets. So it's the appellant's position that the bankruptcy court committed reversible error And we're urging this court to remand the proceedings with a directive to issue the debtors a discharge.

[00:01:33] Speaker 03:
All right. So, you know, you had a trial, right? And many people testified, including the appellants.

[00:01:42] Speaker 03:
So what?

[00:01:44] Speaker 03:
And the judge is a trier of fact, right? The bankruptcy judge is a trier of fact and she weighs evidence and makes a determination. So when there is competing information in the record here, you know, it's a harder burden to show me that there was an abuse of discretion because there's facts and they're weighed by the bankruptcy judge. How can we overturn the bankruptcy judge? What precisely did she do wrong. You say, you know, they filed their schedules, they provided extra information, but there's a lot of other information that came out at the trial that, you know, why was it error for the judge to decide that that swayed her more and denied the discharge than the simple, we filed our schedules, you know, and we were cooperative.

[00:02:32] Speaker 00:
Well, I think there are two instances that I can point to. The first instance is the rationale for the judge's ruling. The judge brought up an issue that was never raised in plaintiff's complaint and the issue of whether the debtors sufficiently disclosed their business interests in those entities held by the Children's Trust. That was never pled in the plaintiff's complaint. So the debtors never had an opportunity to either amend their statement of financial affairs or address those issues at trial. So that was kind of something that just came out of nowhere in the ruling.

[00:03:05] Speaker 00:
And the overarching issue... Was there testimony about it?

[00:03:08] Speaker 03:
I mean, how did it come out of nowhere in the ruling? It had to be in the record somewhere. Are you saying she just said it without anything in the record?

[00:03:20] Speaker 00:
There may have been some testimony, but it was not a pivotal or centerpiece of the litigation. It was just maybe something came in passing that just... I mean, due process was not afforded to the debtors because they never had an opportunity to correct either the alleged omission or clarify during the live testimony what that interest was. And just to be clear, so what the plaintiffs are arguing is that the main issue here is I think the trial court conflated the issue of whether or not the the assets held in the children's trust were assets of the estate versus whether or not there were material omissions justifying 727A4 relief.

[00:04:04] Speaker 00:
And I think that's the big picture here is, you know, the Chapter 7 trustee does have a parallel action regarding whether or not those assets held in the trust are assets of the estate. And so there's a proper time and place to argue and litigate those issues. This was not it. This was whether or not the debtors complied with their obligations under Section 521.

[00:04:25] Speaker 00:
and the debtors did. And there's also the other overarching issue of letting plaintiffs' complaints sit idle for 491 days without ever issuing a summons or trying to serve the complaint. I mean, the trial court, in my opinion, abused its discretion by allowing that complaint to sit idle and linger until, you know, to kind of take it out of the back pocket and say, oh, we have this issue that we have to still resolve, because mind you, and I'll go back and refer to the record in the administrative case.

[00:04:56] Speaker 02:
How are your clients harmed by the 491-day delay? Because in the meantime...

[00:05:03] Speaker 00:
the debtors did come to an agreement and a settlement with the Chapter 7 trustee to resolve the real issue here of whether or not those assets held by the Children's Trust are assets of the bankruptcy estate.

[00:05:16] Speaker 02:
But the trustee's action didn't include giving the debtors a discharge.

[00:05:25] Speaker 00:
Understood, Your Honor. And the trustee obviously can't give a discharge. Only the bankruptcy court can do that. But the real issue and the pretext of plaintiff's complaint was whether or not those assets should be used to satisfy the claims of the bankruptcy case. And I think that was the real issue. And I think the reason for the delay, the 491 days, and actually getting a summons issued was to hold up those settlement discussions and negotiations.

[00:05:55] Speaker 00:
And mind you, the plaintiffs were the ones who hand-selected the Chapter 7 trustee. This was not a regular panel trustee. This was a hand-selected by the plaintiffs. Plaintiffs were on board with everything until they determined, oh, this is not enough. The settlement that the trustee agreed to is not enough for the creditors. And so that's what kind of threw a hamper.

[00:06:17] Speaker 02:
Isn't this selection of the trustee in the hands of the United States trustee's office? Not the creditors. I mean, creditors might recommend something, but They don't get to select.

[00:06:27] Speaker 00:
There was an election. There was an elected Chapter 7 trustee. It was not like a panel trustee.

[00:06:35] Speaker 00:
Understood. And that raises another interesting point, Judge Corbett, because early on in the Chapter 7 bankruptcy case, the administrative case, the U.S. trustee's office did file a motion to dismiss the case because of the proximity of marijuana under the Controlled Substances Act. But the trustee's the U.S. Trustee's Office ended up withdrawing that and allowing for the settlement to go forward with the Chapter 7 trustee and the debtors and was no longer pursuing that motion to dismiss. So, you know, in this case, Your Honor, I mean, a bankruptcy court is a court of equity.

[00:07:10] Speaker 00:
And when you look at the nature of the debt, it's really primarily held by one creditor, and it's Dyson. And these are judgments that were entered in 2011, and they were not related to marijuana. They were for real estate ventures gone bad.

[00:07:24] Speaker 00:
roughly around $1 million in principal balance. But now they exceed $4 million. And so when you're talking about a denial of discharge in this case, you're not talking about $50,000, $60,000 credit card debt. You're talking about over $4 million of debt that the debtors have been trying to get discharged and should be discharged. And I mean, the record is clear that in this case, if you just look at this case alone, what the debtors did is not it does not rise to the level of a denial of discharge. I mean, this burden is high.

[00:07:55] Speaker 00:
There's case law that says, and I believe it's a 2005 Ninth Circuit VAP opinion in Ray Retz, that the debtor should be given the burden of the benefit of the discharge. And it's a high burden for the plaintiffs to prove. And in this case, because the trusts were listed, it's not a case where they have trusts, but they were not disclosed. They were never listed. This was listed right in Schedule A, B. I mean, The debtors complied with the trustee, provided all the information, and did what they were supposed to do.

[00:08:27] Speaker 00:
They complied with their obligations under the bankruptcy code.

[00:08:31] Speaker 03:
But there were facts that were elicited at trial that, and tell me if I'm getting this incorrect, that the debtors still used and operated these entities, which were assets of the children's trust. while at the same time saying we have no control, you know, we, you know, those assets are the children's trust. There's zero value to the debtor and the debtor's estate, but they're taking money and using money from the trust.

[00:09:05] Speaker 03:
So why was that not...

[00:09:07] Speaker 03:
an appropriate thing for the bankruptcy judge to consider in making her determination that the debtors were not completely forthcoming or as forthcoming as they should have been with respect to disclosing assets.

[00:09:20] Speaker 00:
So with respect to that testimony regarding taking assets, I believe there were two checks, but those checks were written from the Murphy and Barbara Cottrell Living Trust. It was not the Children's Trust, so that's a separate trust.

[00:09:33] Speaker 00:
And so there was a motion in limine that was denied that I filed asking to exclude information about the living trust because that was irrelevant. There were no allegations in the plaintiff's complaint ever talking about the living trust, but that was denied. My motion in limine was denied. And so information regarding the living trust and the conduct with respect to those funds were allowed to be presented at trial. And so it was conflated.

[00:10:00] Speaker 00:
But there was never any evidence presented at trial that the debtors used funds of the Children's Trust.

[00:10:06] Speaker 03:
All right. Thank you. And you're within your seven minutes. So if you want to stop, you can. Thank you.

[00:10:13] Speaker 03:
All right. Let's hear from Appelli on Zoom.

[00:10:17] Speaker 01:
Thank you, Your Honor.

[00:10:19] Speaker 01:
I might be the one person in front of you today who is not a bankruptcy attorney. I'm, I'm here because, uh, this is somewhere between the 15th and the 20th different action I've had to pursue against the contrails who have defrauded, uh, numerous investors, uh, requiring me to, uh, be in front of multiple state courts, multiple bankruptcy courts, and now, um, in front of this court. Um, the issue here though, fundamentally comes down to the fact that, um, I that said, my introduction is that I'm not I'm the least qualified bankruptcy attorney will be in front of you today.

[00:10:52] Speaker 01:
And yet I'm going to wax philosophically for just a second about bankruptcy, which is and perhaps I'm the least qualified to do so. But I think what the structure of bankruptcy is, is that it relies to a large extent upon the debtors coming in with honesty, with forthright and engaging in the bankruptcy process. And that is fundamentally put at odds when a debtor comes before the court. and intentionally misleads and intentionally files makes a filing which is fundamentally inaccurate and that's what we have here the cattrells had assets at the time of their bankruptcy that involve approximately 15 million dollars in business assets engaged in the marijuana business and more that we found out subsequently um they had never disclosed and My opponent says that, well, there's a $4 million judgment, so this is a lot of money.

[00:11:43] Speaker 01:
But yes, it's a lot of money because there's, again, enough money here to fully pay these. What the debtors are doing here is hiding a significant amount of money, $15 million, to avoid paying a $4 million judgment.

[00:12:01] Speaker 01:
They did so. on the eve yet again of a trial. This is not the first, the second, nor the third time where I have been stopped in my collection pursuits on behalf of various parties by a bankruptcy filing made by these parties to prevent a hearing to go forward on collections.

[00:12:19] Speaker 01:
This hearing was, this filing was very much made to prevent a trial going forward in Maricopa County Superior Court to have these very trusts declared a sham trust and that they were collectible on these personal judgments.

[00:12:33] Speaker 01:
But that's not the issue. The issue here is when they filed this, were they false? And of course they were. There is no response ever provided to the mere fact that the statement of values and the sofas do not disclose the debtor's status as trustees of these trusts.

[00:12:50] Speaker 01:
It says they are settlers of an irrevocable trust, which has a very clear meaning, which is I don't control them. I don't I don't have any authority. I'm not holding any assets in trust for someone else, which is, in fact, why I believe item 25. They check. No, all of that is false. And in fact, not only is it false, I kind of went through just the highlights of the issues at trial, starting on page 13 of this.

[00:13:17] Speaker 01:
of my response brief and pointed out that they'd signed contracts saying that they were really the personal owners. This wasn't owned by a trust approximately two years before filing.

[00:13:28] Speaker 01:
That they'd solicited an investment saying, hey, I'll pay off your personal judgment if you invest in these entities, which means a personal benefit for their judgments if there's an investment made into supposedly irrevocable trust assets.

[00:13:43] Speaker 01:
I note on page 14 of my brief that there was evidence that the Cottrells received a personal loan of $225,000 and they pledged the assets of the Cottrell Children's Trust, the supposedly irrevocable trust. So while they're saying, I have no interest in this trust, it has no value to me. They are apparently using it to pledge to get loans, personal loans to and pledge it as security. That is a clear benefit. If you can use trust assets as security and collateral for a loan, that is a significant benefit.

[00:14:16] Speaker 01:
And they did make personal payments from KCT-owned, from Cottrell Children's Trust-owned assets. I even showed you the checks that they fraudulently had made up. that were trust-owned assets, that they had checks made up in their personal name and wrote personal checks. My opponent just said there was no money that ever came out of the KCT, the Cottrell Children's Trust. That is absolutely false. The check that you can see on page 15 of our answering brief shows you that is false. And there were other direct payments that we showed at trial, payments that came directly from Cottrell Children's Trust money.

[00:14:52] Speaker 01:
One of them was...

[00:14:55] Speaker 01:
At other times, they paid $175,000 personal judgment using trust assets.

[00:15:02] Speaker 01:
So what we really have here is a situation where it is difficult to imagine a more significant issue of a party misleading in their filings about what they own.

[00:15:20] Speaker 01:
Had they simply said, you know, hey, we think we've done everything right. We think we've done all of this estate planning. We think we've gamed the system such that we could transfer all of these assets out of our name to an irrevocable trust. Our trust documents are great. They're perfect. They can get us, they can avoid us having to be responsible for these debts. Then that's what they should have done. Disclosed that they were trustees, identified all of the assets that those trusts owned and simply said, come at us, because we've done everything right and you all of these assets are elsewhere and in fact they didn't do that and what we showed was they did use these assets they use it as collateral they've made them payments from themselves personally they've never made a payment to a beneficiary the only parties who have ever benefited from these supposedly irrevocable trusts are the debtors themselves they've received significant payments they've used the assets as collateral for personal loans they've used monies in these trusts literally as their personal funds even had a personal checks made up to write checks out of those it is hard to imagine a case.

[00:16:30] Speaker 01:
In fact, one of the problems I sort of have with this case is if this decision were to somehow become a reported decision, reportable, I think we have too high of a bar here. This is just a overload of evidence of misuse of trust funds. And that's what the trial court found. One thing that my opponent said is that nothing in the complaint stated that the entities, the Cottrell Children's Trust entities were not identified. But I don't really know what that has to do.

[00:17:01] Speaker 01:
It is notice pleading. There was certainly notice given in disclosure in pretrial. But in any event, paragraph 10 of the complaint says exactly that, that what they did not do is identify the business entities that were owned by these trusts. My opponent also brought up the issue of, well, there's this other trust, the Murphy and Barbara Cottrell Living Trust, and that's irrelevant. And she claims to have lost a motion in limine, which is true. And the reason that that was relevant, though, is that that was a different trust that for a period of seven years was irrevocable.

[00:17:31] Speaker 01:
We have the documents, we show it. What the debtors here, what the Cottrells did is try to convert that to an irrevocable trust. And for seven years...

[00:17:42] Speaker 01:
absolutely abused that trust, used it as their own amounts, paid personal bills from it. They tried to use it as both a sword and a shield and say, this is an irrevocable trust. You can't have any of the assets. Meanwhile, paying all of their personal expenses from it. We had a significant amount of bank records and evidence showing the personal use of supposedly irrevocable trust funds.

[00:18:07] Speaker 01:
And what our opponent says is, well, you didn't have that same kind of evidence with regard to the Cachal Children's Trust. And there's a reason for that. And that's because the debtors admitted that they learned from the lesson that that and they just ceased to have bank records at all. They ceased to hold Cottrell Children's Trust at some point in time in a bank. They kept everything in cash. So there could not be a record of their misappropriations. And so what we told the court is simply like, look, this is what happened with their other trust. And. It appears this is what's happening with the Cottrell Children's Trust.

[00:18:39] Speaker 01:
They simply refuse to have any records to show you. They're just going to say there are no records exist. Therefore, you can't prove that I'm misusing the funds here. But we have shown these significant examples again.

[00:18:54] Speaker 01:
Using it as collateral significant payments into the tens and hundreds of thousands of dollars from that trust to their personal amounts. It is a it is kind of an overload, frankly, of impropriety here to the extent that that.

[00:19:13] Speaker 01:
What we really have here is I hope this isn't a reported decision because I don't know that anyone else can ever meet this burden. I don't know that this is the right standard. This is just an overwhelming and substantial amount of fraud and mispropriety, the misuse of trusts.

[00:19:29] Speaker 01:
So much so that we get down to the very reason these trusts were formed. The debtors admitted it was to defraud these creditors and that they fully plan on and believe they can. transfer all of their assets to an irrevocable trust, file for personal bankruptcy, and if they get this discharge, as Ms. Corrales just requested, they believe they have the full right to just revoke this irrevocable trust, take back their $15 million of business assets, and pay nothing to these creditors. These are the kinds of admissions that go towards the issues of materiality, the issues of intent and the issues of fraud that are the center point of what the court found in her determination of credibility of these witnesses and the determination of the evidence that was presented as to the significant misuses of these trust assets.

[00:20:21] Speaker 01:
And that the court, um, ultimately determining weighing credibility and weighing the facts, um, made the determination that these debtors were not entitled to a discharge. I'm happy to answer any questions you have.

[00:20:34] Speaker 03:
Well, can you address the motion to quash? I would like to hear about that.

[00:20:39] Speaker 03:
Was it error? I'm sorry, Your Honor. Can you please clarify? The motion to quash. They're alleging it was error for the court to quash the summons, you know, to allow the case to proceed.

[00:20:49] Speaker 01:
Oh, I apologize. All right. I was... I thought there was a different issue that I don't think is front of this court involving the subpoena and some other issues. And I was misled for, I'm sorry. I misunderstood.

[00:20:58] Speaker 03:
Right. Because there was a 491 day pause in the litigation.

[00:21:06] Speaker 01:
There was certainly a pause. Um, and what I will tell you is, um, The trial court was well aware of certain circumstances involving the attorney who was involved here, who had significant personal issues and had to step away from the practice of law.

[00:21:26] Speaker 03:
Representing your client, right? Yeah.

[00:21:28] Speaker 01:
That's correct. Yes. And I think that the...

[00:21:32] Speaker 01:
The court made certain determinations, but ultimately the determination was, as Judge Corbett, I believe, asked the question, what was the prejudice here?

[00:21:42] Speaker 01:
The court made those determinations. And so the issue is one of ultimately, yes, there was a pause, undoubtedly. There were extenuating circumstances of which the court was aware. The court weighed those, but ultimately looked at the issue of was there any prejudice here? um and the court determined uh there wasn't and so even upon questioning here this morning from judge corbett um the debtors are unable to specify what the what the prejudice is other than they simply want to say well we We don't like it. We would prefer to have been able to do something else.

[00:22:14] Speaker 01:
But the issue comes down ultimately to the weighing of the prejudice. Would it be prejudicial to my client if the court had denied the ability for us to have an extension? And there certainly would be a severe prejudice. In fact, I think as I address in my opening brief, Ultimately, the prejudice is sort of weighed out by this court's ruling here, which was we were entitled to have the court determine there was a denial of discharge. And the significant prejudice that my clients would have is is not being able to pursue justice.

[00:22:50] Speaker 01:
the full amount of these judgments, which appears that it's going to be fully recoverable. And these debtors will have significant multi-million dollars of assets left over even after, if we're able to fully collect, but, uh, there's been a pause still on that while the, uh, while this court reviews these issues, my, the trial, the, uh, state courts at this time have have said that they're going to wait for this court's ruling before they allow us to proceed so you know um we've been delayed more than four years now from a hearing that we expected to happen in early march of 2022 uh to be able to have these trusts be declared uh collectible um with regard to the judgments that are personally against the debtors uh and so um What the trial court did is exercise its discretion in weighing potential prejudice and came to the right determination in that regard.

[00:23:42] Speaker 03:
All right. Thank you. Thank you very much. Any questions? No. All right. Thank you very much.

[00:23:49] Speaker 00:
Appellant, you've got five minutes. Thank you, Your Honors. I first wanted to apologize about my misstatements earlier regarding the checks.

[00:23:58] Speaker 00:
Mr. Larson is correct that there was a $300 check written out of the MKHS account, which is held by the Children's Trust. So I apologize. And there's also what appears to be a check written by Murphy Cottrell from that same bank account for $4,000. So I apologize for that. But I did want to raise an issue that Mr. Larson brought up. He said that there was notice in the complaint that they were asserting a claim that the business interests were not properly Listed, and that's not true.

[00:24:31] Speaker 00:
And I believe he pointed at paragraph 10 of the complaint, so I wanted to turn your attention to that. Paragraph 10 of the complaint says, and if I can read it, however, as trustees of the Cattrall Children's Trust, the debtors by definition hold the Cattrall Children's Trust res in trust for the beneficiaries. Indeed, under the Cattrall Children's Trust trust agreement, the debtors expressly agreed to hold the Cattrall Children's Trust estate and any additions thereto in trust subject to the terms, conditions, and provisions set forth below. That's paragraph 10. Nothing in paragraph 10 talks about failure to disclose business interests in the statement of financial affairs.

[00:25:03] Speaker 00:
So I just wanted to make that clear that there was no allegation pled in the complaint regarding the misinformation or the alleged omission of the business interest.

[00:25:13] Speaker 00:
I also wanted to point out that plaintiffs had every opportunity to raise the claims that they were pretty much litigating whether or not those trust assets are property of the estate. They could have raised their own claims under their own complaint and not have had to rely on the trustee to prosecute those claims on their behalf. But they chose not to. They chose to only allege a claim under 727A4. They could have filed a complaint for a substantive consolidation.

[00:25:44] Speaker 00:
They could have filed a complaint to—

[00:25:49] Speaker 03:
Yes, and the trustee is the only one who has the right to collect the assets, right?

[00:25:54] Speaker 00:
Correct, but they could have on their own said, you know, those assets held by the Children's Trust are assets of the bankruptcy estate. They could have alleged a substantive consolidation claim.

[00:26:04] Speaker 03:
That's kind of a chicken and the egg question, though, too, because unless you know what the assets are— You got to know. So that's their argument is it's not disclosed out there.

[00:26:18] Speaker 00:
Well, but that's not true, though. I mean, you've heard Mr. Larson say that he's litigated no more than 16 different cases in state court.

[00:26:26] Speaker 03:
But you're lucky to have a sophisticated or not lucky, maybe, I don't know, to have a sophisticated person on the other side who may know things, but that doesn't impact your disclosure requirements, right?

[00:26:40] Speaker 00:
Right. But the fact that he didn't know, he did know. Plaintiffs did know. And plaintiff's counsel specifically, Mr. Larson, did know about these assets in the trust. And so to say that, oh, well, I didn't know and you didn't disclose it, so how was I supposed to know, is not true. I mean, it's an attempt of gamesmanship.

[00:27:00] Speaker 02:
Well, is the duty to disclose to a particular party or is the duty to disclose in the bankruptcy forum?

[00:27:08] Speaker 00:
Well, when you look at the creditor body here, I mean, who are the creditors?

[00:27:13] Speaker 00:
I don't think that's the standard. Well, it's not the standard, but yeah. But what the appellants are arguing today is that they did sufficiently disclose. They disclosed the trust. And as part of the Chapter 7 debtor's requirements is they have to produce those trusts to a Chapter 7 trustee as part of the financial disclosures along with tax returns, bank statements. I mean, that's just part of the rules, and that's what they did here. So to say that, oh, well, you didn't specifically list every little thing about the trust in the schedules and statements, I mean, that's just a technicality.

[00:27:47] Speaker 00:
I mean, that's not the reality that we all live in.

[00:27:53] Speaker 03:
I'm going to let you finish because I interrupted you too much.

[00:27:56] Speaker 00:
No, that's okay, Judge Brand. And I think I'm done. I mean, I just, I kind of can see where the court's headed here. And, you know, it's unfortunate because I believe, I truly do believe that the debtors did comply with their requirements. And I think there were a lot of issues that were conflated with respect to whether or not the trust assets are really property of the bankruptcy estate. And I think that's the real issue here. And I don't think it's proper to determine that under plaintiff's complaint. And I don't think that it should have been, the outcome should have been what it was. All right.

[00:28:25] Speaker 03:
Thank you.

[00:28:26] Speaker 00:
Thank you.

[00:28:26] Speaker 03:
And I do, we, thank you for clarifying your point and argument today, which I think brought it into focus that your argument is, is that the issues are conflated, perhaps improperly conflated in reaching the decision here today. So.

[00:28:41] Speaker 00:
Thank you. All right. Thank you. Thank you. All right.

[00:28:44] Speaker 03:
Thank you so much. Both sides for your argument. The matter is submitted. Thank you.