{Nature of Proceeding: Debtors-Defendants’ Requests for Sanctions (Docs. ##67, 139, 233, 288, and 290)}
OPINION
28 U.S.C. § 1927
John J. Thomas, Bankruptcy JudgeA request by Debtors/Defendants, Christopher and Michele Paige, has been made for sanctions against Lerner Master Fund, LLC, (LMF), attorneys under the provisions of 28 U.S.C. § 1927, which reads:
Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.
28 U.S.C.A. § 1927
This sanction should only be used in instances of serious disregard of the judicial process. In re Prosser, 777 F.3d 154, 161 (3rd Cir. 2015).
A bankruptcy court is authorized to issue sanctions under § 1927. Id.
The Paiges have suggested that virtually every document filed by LMF’s counsel was designed to harass the Debtors. The original Complaint filed by LMF objected to the discharge of the Debtors and also the dischargeability of a debt allegedly owing LMF from the Paiges. To impose § 1927 sanctions, a court must find counsel to have “(1) multiplied proceedings; (2) in an unreasonable and vexatious manner; (3) thereby increasing the cost of the proceedings; and (4) doing so in bad faith or by intentional misconduct.” In re Prudential Ins. Co. Am. Sales Practice Litig. Agent Actions, 278 F.3d 175, 188 (3rd Cir. 2002). A strong indication of bad faith is whether the claims advanced were meritless, whether counsel should have known this, and whether the purpose of the litigation was harassment. Id.
Was the Complaint against the Debtors Frivolous?
I have, heretofore, preliminarily ruled in favor of the Paiges on the merits of the underlying Complaint. Attached hereto and incorporated herein as an Appendix is my Opinion1 with findings and *810conclusions supporting the judgment attached to this sanction Opinion. Plaintiff, LMF, certainly did not prevail on its claim. Nevertheless, can I find that the claims were “meritless?”
LMF filed proofs of claim in this case against each of the Paiges for an unsecured amount in excess of $6,500,000. See Proofs of Claim Nos. 2 and 3. It was those claims which LMF sought a finding of nondischargeability. In the case of Michele Paige, there existed an underlying state court judgment in the amount of $6,568,400. See Proof of Claim No. 2 at Exhibit A (Order of Court filed August 26, 2011, C.A. No. 5502-CS). In the matter of Christopher Paige, an explanatory note from the Delaware State Court preceding the entry of final judgment strongly hints of a finding of liability against Christopher Paige but for pleading shortcomings. See Proof of Claim No. 3 at Exhibit B (Letter dated August 24, 2011).2 Liability alone, however, does not support a finding of nondischargeability under 11 U.S.C. § 523.
If the claim was meritorious, it could not be frivolous. The minimum standard for a meritorious claim can be found in Federal Rules of Bankruptcy Procedure 9011(b)(2)and (3).
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;
(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery;
Fed. R. Bankr. P. 9011.
Since the Complaint and the Amended Complaint survived Motions to Dismiss under Federal Rule of Bankruptcy Procedure 7012, I can assume that the allegations of the Complaints were at least likely to have evidentiary support after a reasonable opportunity for further investigation or discovery, unless counsel had no reason to make those allegations in the first instance.
The Delaware Court found Michele Paige liable for a breach of the fiduciary duty she owed LMF. Paige Capital Mgmt., LLC v. Lerner Master Fund, LLC, 2011 WL 3505355 at 43 (Del. Ch. Aug. 8, 2011). In an earlier Opinion issued in this case on the issue of liability, I wrote:
When the original Complaint was filed in 2012, the courts were split as to the degree of culpability implicit in the term “defalcation.” To. some courts, a simple breach of fiduciary responsibility was sufficient. In re Sherman, 658 F.3d 1009, 1017 (9th Cir. 2011), In re Uwimana, 274 F.3d 806, 811 (4th Cir. 2001). Other courts concluded that there be a degree of scienter or recklessness present before one would lose the ability to discharge the debt. In re Bullock, 670 F.3d 1160, 1162 (11th Cir. 2012), In re Baylis, 313 F.3d 9, 20 (1st Cir. 2002). In May of 2013, that issue was resolved when the United States Supreme Court decided Bullock v. BankChampaign, N.A., [— U.S. —,] 133 S.Ct. 1754, 1757, 185 L.Ed.2d 922 (2013). The Supreme Court concluded that in order for a fiduciary to lose his or her right to discharge an obligation, there must be *811more than mere negligence or innocent default. The Court required either an actual knowledge of wrongdoing or its equivalent or a reckless and conscious disregard that conduct will violate- a fiduciary duty.
In re Paige, No. 5-12-ap-00067-JJT, Slip Copy, 2016 WL 969018 at 6 (Bankr. M.D. Pa. Mar. 11, 2016).
It is clear that, at the time of the initial Complaint, LMF had quite sufficient reason to argue that Michele Paige should not be discharged from her obligation to LMF, The Bullock Opinion certainly increased the burdens placed on LMF so as to prevail under 11 U.S.C. § 628(a)(4), but that is not to say that Bullock eliminated the reasonableness of LMF’s action under that subsection. The degree with which a fiduciary deviates from their responsibility before the fiduciary commits a nondischargeable act is still a rather vague standard and may be considered even more problematic after the United States Supreme Court decision in Husky Int’l Elecs., Inc. v. Ritz, — U.S. —, 136 S.Ct. 1581, 194 L.Ed.2d 655 (2016), which appears to have expanded the term “actual fraud” as used in § 528(a)(2) on nondischargeability so as not to require a false representation.
Addressing allegations in the Amended Complaint that the Paiges’ dischargeability should be denied as a willful and malicious injury under § 523(a)(6), what appears to have been alleged is that the Paiges drained funds from the invested accounts with actual knowledge of their wrongdoing. While this was never established at trial, the specific question critical here was whether this allegation was “likely to have evidentiary support after a reasonable opportunity for further investigation or discovery.” There was, in fact, testimony from Christopher Paige that raised significant concerns. Among the various roles he played.in the Paiges’ enterprises was as a financial manager, and his testimony indicated that business funds were used to pay personal expenses. I referenced these events as “sloppy bookkeeping” in my earlier Opinion. In re Paige, No. 5-12-ap-00067-JJT, Slip Copy, 2016 WL 959018 at 5 (Bankr. M.D. Pa. Mar. 11, 2016). While I found no improper motivation for the failure to honor corporate formalities, the commingling of business and personal expenses was a serious compromise of accepted business practice.
The Delaware Opinion made clear that Michele and Christopher operated as a team in this hedge fund enterprise. It was certainly conceivable that LMF might have been able to fashion some sort of feasible argument supporting liability by both Paiges either on a conspiracy theory, (Gilbert v. El Paso Co., 490 A.2d 1050, 1058 (Del.Ch. 1984), or a participation theory, (Walsh v. Alarm Sec. Grp., Inc., 95 Fed.Appx. 399 (3rd Cir. 2004) (not prece-dential)).
Just as in the Delaware case, the Paiges argued before me that LMF had a “personal antipathy to injure Michele Paige.” The Delaware Chancellor found no support for that argument despite a chain of tasteless emails among LMF associates. Paige Capital Mgmt., LLC v. Lerner Master Fund, LLC, 2011 WL 3505355 at 6-7 (Del. Ch. Aug. 8, 2011). I, too, cannot find evidence in this trial of a personal antipathy against the Paiges.
Were the Documents filed in the Adversary Unreasonably Multiplied?
I recognize that filings in both the main case and the adversary may be relevant. In re Prosser, 777 F.3d at 162. I wish to focus on the adversary action. Statistically there were numerous filings by both Plaintiff and Defendants. Generally, the Paiges filed, approximately four times as many documents as LMF.
*812In order to find against LMF under § 192-7, I must find bad faith. LaSalle Nat’l Bank v. First Conn. Holding Grp., LLC, 287 F.3d 279, 289 (3rd Cir. 2002). The Paiges would have me focus on pre state court litigation emails between LMF associates as that evidence of bad faith. The Delaware State Court did not find those emails dispositive of any issue, and neither can I. In this bankruptcy litigation, LMF counsel has been no more than zealous and well-intentioned. I find no cause to sanction LMF counsel under 28 U.S.C. § 1927. I can find no liability attaching to LMF counsel under this section.
Rule 9011
Rule 9011 requires parties and them counsel to comply with certain standards when filing documents. Those requirements are set forth in Federal Rule of Bankruptcy Procedure 9011(b), as follows:
(b) Representations to the court
By presenting to the court (whether by signing, filing, submitting, or later advocating) a petition, pleading, written motion, or other paper, an attorney or unrepresented party is certifying that to the best of the person’s knowledge, information, and belief, formed after an inquiry reasonable under the circumstances,
(1) it is not being presented for any improper purpose, such as to harass or to cause unnecessary delay or needless increase in the cost of litigation;
(2) the claims, defenses, and other legal contentions therein are warranted by existing law or by a nonfrivolous argument for the extension, modification, or reversal of existing law or the establishment of new law;
(3) the allegations and other factual contentions have evidentiary support or, if specifically so identified, are likely to have evidentiary support after a reasonable opportunity for further investigation or discovery; and
(4)the denials of factual contentions are warranted on the evidence or, if specifically so identified, are reasonably based on a lack of information or belief. ■
“The imposition of Rule 11 sanctions3 ... requires only a showing of objectively unreasonable conduct.” Fellheimer, Eichen & Braverman, P.C. v. Charter Tech., Inc., 57 F.3d 1215, 1225 (3rd Cir. 1995).
The Paiges argue that the allegations made in the Amended Complaint have no basis in fact or law and that counsel violated Rule 9011 by filing and later pursuing that Complaint against them.
I again turn to the lengthy Delaware State Court Opinion which outlines an intricate strategy by the Paige enterprises to prevent LMF from accessing its funds. The fact that the evidentiary record of the proceeding before me did not support the conclusion that any debts owing LMF were nondischargeable is of no moment since, a failure to prevail does not “trigger” a Rule 11 violation. Gaiardo v. Ethyl Corp., 835 F.2d 479, 483 (3rd Cir. 1987). The allegations in the Amended Complaint appeared likely to have eviden-tiary support when filed and later advocated.
It is clear that this was not a case where a creditor lost in state court and then attempted to pursue a claim in bankruptcy court. Landon v. Hunt, 977 F.2d 829 (3rd Cir. 1992). LMF successfully prosecuted its claim against Michele Paige and was strongly encouraged by the Delaware Court to pursue a claim against Christopher Paige should its judgment not be *813paid. There simply is no basis for finding liability under Rule 9011.
Use of Inherent Sanction Power
The Paiges would also have me utilize the inherent power of this Court to sanction LMF and its counsel arguing that the record is replete with evidence of bad faith. The inherent power of the court is typically utilized when other sanctioning authorities do not cover the conduct at issue. Chambers v. NASCO, Inc., 501 U.S. 32, 50, 111 S.Ct. 2123, 2135, 115 L.Ed.2d 27 (1991).
The inherent power of the court must be exercised with great restraint and discretion. Chambers v. NASCO, Inc., 501 U.S. at 44, 111 S.Ct. 2123. It oftentimes is used to address the disruption of court proceedings. Illinois v. Allen, 397 U.S. 337, 90 S.Ct. 1057, 25 L.Ed.2d 353 (1970). That would not apply here where LMF counsel has, at all times, acted professionally in court proceedings.
To the extent that the Paiges maintain that advancing the Amended Complaint requires the imposition of sanctions under the Court’s inherent power, that request must be denied since I have heretofore concluded that the Complaint did not violate the Rule 9011 standard of objective reasonableness and, therefore, by definition was not in bad faith. Gillette Foods, Inc. v. Bayernwald-Fruchteverwertung, GmbH, 977 F.2d 809, 814 (3rd Cir. 1992). If the Paiges are relying on LMF’s trial conduct as a basis for the Court exercising its inherent authority, that too would fall short since, as indicated, LMF counsels’ behavior through the course of the proceedings was quite restrained.
I believe the essence of the Paig-es’ argument supporting this claim is that LMF advanced the Complaint with as weak a case as it manifested at trial. That argument returns me back to 28 U.S.C. § 1927 which addresses vexatious proceedings, but not weak cases. “Sanctions under Section 1927 are appropriate for attorneys who engage in serious and studied disregard for the orderly process of justice and not simply those who bring weak cases.” Tr. of Bankr. Estate of Monique Faulkner v. Dowson Holding Co., 859 F.Supp.2d 722, 725 (D.V.I. 2012), citing Ford v. Temple Hosp., 790 F.2d 342, 347 (3rd Cir. 1986).
It is for these reasons that the sanction requests of the Debtors-Defendants must be denied.
My Order will follow.
ORDER
For those reasons indicated in the Opinions filed this date and on March 11, 2016, (Doc. #303), on the issue of liability IT IS HEREBY
ORDERED that judgment is entered in favor of the above Debtors/Defendants, Christopher Howard Paige and Michele Anna Paige, and against the Plaintiff, Lerner Master Fund, LLC.
On the issue of sanctions, IT IS HEREBY
ORDERED that the request for sanctions filed by the Debtors/Defendants is denied.
APPENDIX
*814In re Paige, Slip Copy (2018)
2016 WL 959018
Only the Westlaw citation is currently available.
United States Bankruptcy Court, M.D, Pennsylvania.
In re: Christopher Howard Paige and Michele Anna Paige, Debtors Lerner Master Fund, LLC, Plaintiff v. Christopher Howard Paige and Michele Anna Paige, Defendants
BANKRUPTCY NO.: 5-11-bk-05957-JJT
ADVERSARYNO.: 5-l2-ap-00067-JJT
Signed March 11, 2016
Attorneys and Law Firms
MelinaR, DlMattio. John C. Cioodchild. ITT, Zachary M. Johns. Morgan. Lewis andBockius LLP, Philadelphia, PA, for Plaintiff. Christopher Howard Paige, Skytop, PA, pro se.
Michele Anna Paige, Skytop, PA, pro se.
(Nature of Proceeding', Debtors-Defendants' Motion for Judgment pursuant to Fed. R. Bankr. P 7052
OPINION
John J. Thomas. Bankruptcy Judge
*1 Lerner Master Fund, LLC, (hereinafter “LMF”), has filed a multi-count Amended Complaint, (Doc. #81), against the joint Debtors, Christopher and Michele Paige, (hereinafter “Debtors”). The seven Count Complaint advances the following causes of notion:
Count T: § 523(a)(4) Dischargeability exception against Michele Paige;
Count II; § 523(a)(6) Dischargeability exception against Michele Paige;
Count III; § 523(a)(4) Dischargeability exception against Christopher Paige;
Count IV; § 523(a)(6) Dischargeability exception against Christopher Paige;
CountV: § 727(a)(2)(A) Objection, to Discharge of All Debts of Christopher and Michele Paigd:
Count VI; § 727(a)(3) Objection to Discharge of All Debts of Christopher and Michele Paige;
Count VII; § 727(a)(5) Objection to Discharge of All Debts of Christopher and Michele Paige.
After ten days of trial, LMF has rested. The Debtors have countered with a Motion under Rule 52 seeking judgment in rheirfavor on partial findings. In advancing its case, LMF has called both Debtors and the female Debtor's sister as their only witnesses.
*815It has also relied on findings made by the Court of Chancery of Delaware in holding Michele Paige liable for a breach of ■fiduciary responsibility.! LMF also introduced a number of documents in support of its Complaint.
Paige Capital Management. LLC. et al v. Lerner Master Fund, LLC, et al v. Paige Capital Management, LLC, et al. 2011 WL 1 3505355.
Federal Rule of Civil Procedure 52 is made applicable to bankruptcy adversaries by the provisions of Federal Rule of Bankruptcy Procedure 7052. Rule 52(c) provides:
If a party has beenfully heard on an issue during a nonjury trial and tire court finds against the party on that issue, the court may enter judgment against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue...,
This Court will initially focus its attention on Counts Y. VI, and VII. Those Counts allege that discharge should be denied tinder 11 U.S.C. $ 727(a)(2)(A). (3), and (5). The applicable Sections read as follows;
¾ 727. Discharge
(a) The court shall grant the debtor a discharge, unless—
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under th is title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—
(A) property of the debtor, within one year before the date of the filing of the petition;
(3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case;
(5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor's liabilities;
*2 The discharge is central, to Chapter 7 bankruptcy relief. As such it should be construed liberally in favor of the debtor. Rosen v. Bezner, 996 F.2d 1527, 1531 (3rd Cir. 1993). Section 727(a)(2) requires that there be a transfer, concealment, etc,, with intent to hinder, delay, or defraud creditors or the trustee. Section 727(ai(3) requires that there be a failure to maintain adequate records and that failure makes it impossible to ascertain debtor's financial condition or business mansactions. Meridian Bank v. Alten, 958 F.2d 1226. 1233 (3rd Cir. 1992). Section 727(a)(5) reuuires there be a failure by the debtor to satisfactorily explain a loss or insufficiency of assets to meet liabilities.
The operative facts of this complex relationship between the parties are known to the parties and wilT only be summarized In a cursory fashion for the benefit of the readers. Findings of fact pivotal to the outcome will be identified.
Both Debtors are highly educated individuals, Michele Paige has secured an undergraduate degree from Brown University where she graduated magna cum laude, a postgraduate Masters degree from Harvard, and n law degree from Yale, Tr. # 287 at 38-39. She was also an instructor at both Yale Law School and Yale School of Management. Tr. # 274 at 153 and Tr. fr 287 at 41. In addition, she bus clerked for a Federal Circuit Judge. Tr. # 250 at 16. Christopher Paige has earned an undergraduate degree from the University of Virginia, u Masters degree from New York University. and a law degree from Yale. Tr. it 261 at 7 and Tr, # 287 at 44. Michele's unique talents allowed her a certain success as a hedge fund manager which provided the opportunity to establish her own hedge find entities.: The support of a principal investor was essential and she managed to secure a $40 million investment from IMF. This investment was *816received pursuant to various contracts negotiated by LM F and Michelle Paige through her outside counsel. Tr, # 260 at 85, The Debtors invested much, of their own funds in1o the effort and Michele's parents invested all of their savings. Tr. # 250 at 43. Her husband, Christopher, worked for one or mure of Michele's entities in viuious capacities including general counsel, chief opera ting officer, bookkeeper, analyst, compliance officer, etc. Codebtor Michele was the only one who could make investment decisions. Tr. # 261 at 58, She controlled the various entities. Tr. # 287 at 49. The management fee payable to PCM was 1.5% per year or approximately $600,000 annually. Tr. # 261 at 89. This payment was in addition to incentive fees that could be earned by PCM. In 2008, that fee amounted to $120,000. Tr. # 261 at 93. In 2010, the fee was $27,000. Tr. #261 at 95. Michele also hadan entitlement to a $1,15 million annual salary from PCM, Tr. # 272 at 83,98, and 198.
Michele Paige was the principal in a number of related entities mentioned at trial, including Paige Opportunity Master Fund, Ltd. 2 (POMF), Paige Opportunity International (POI), both offshore funds, Paige Opportunity Partners (POP), an onshore fund. Paige Capital Management, LLC, (PCM) and Paige GP, LLC (POP). PCiP was the general partner torthe offshore and onshore funds. LMF Trial Ex, # 93 and Tr. # 287 at 46.
The relationship between Michele and LMF eventually soured, with LM.F expressing a desire to withdraw from the fund. The parties appearto agree that withdrawal was not possible until the conclusion of a three year “lock-up" contract provision expired. After that three year period, a “gate” provision in the governing instruments ostensibly limited LMF's annual withdrawal to 20% per year. A contest over the applicability of that provision spilled over into the Delaware Chancery Court which found that enforcing the gate provision was a breach of fiduciary responsibility on behalf of Michele.! Judgment against Michele and some of her entities was entered in the amount of $6,568,400.! Thereafter, on August 29,2011. the Debtors filed for Chapter 7 relief seeking n discharge of their obligations. During the pendency of this bankruptcy, LMF filed a Complaint objecting to discharge as well as the dischargeability of its specific claim.
Paige Capital Management, LLC. et al v. Lerner Master Fund, LLC. et al v. Paige Capital Management. LLC. et al. 2011 WL 3 3505355.
4 Order of Aug. 25, 2011 filed to C.A. No. 5502-CS.
*3 While the Debtors were initially represented by counsel, their relationship with counsel deteriorated, and, on February 13, 2012, they dismissed their lawyer and elected to proceed pro sc. Doc. # 70. Although without any bankruptcy law experience, they have resolutely been proactive in this case utilizing their innate intelligence as well as their legal acumen in defending the Complaint, Their defense has included multiple and repetilive pleadings and objections presumably advanced to prevent any possible “waiver" of their rights to appellate review should the outcome he less than favorable to them. The trial was marked by a constant stream of interruptions by Michele Paige, some of which were legitimate objections, but most appeared to emanate from a desire to supplement the witness's testimony at Inappropriate times. The Debtors exercised every opportunity to inject sarcasm into their comments, clearly venting their conclusion that the proceeding was a yiadictive assault on their integrity. While the Debtors were manifestly indignant. I cannot find that they acted with an Intent to he vexatious. Nevertheless, the trial stands as a testament to the deficiencies of representing oneself.
LMF's case consisted solely of certain findings made by the Delaware Chancery Court in connection with the judgment issued August 25, 2011, the testimony of the Debtors, Christopher and Michele Paige, and the testimony of Michele's sister, Jessica Paige. Completing its case was the admission of various exhibits, including Debtors' response to oertain interrogatories. See Exhibit 13 to Doc. #275.
I have heretofore concluded that Michele is collaterally estopped from challenging certain findings of the Delaware Chancery Court. Doc, # 16. My conclusions weremade in response to a Bankruptcy Rule 7016 Motion filed by LMF and can he found at trail script found at Doc. # 66. At the time of the hearing, T emphasized that the Delaware Court's reference to “the Paiges” was subject to further dispute between the parties since the Delaware Court was sometimes inconsistent in its use, Doc. # 66 at 57.
The Plaintiff, LMF, has the burilen of proof.
In Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 659, 661, 112 L.Ed.2d 755 (1991), the United States Supreme Court held that a preponderance of the evidence was the applicable standard of proof which must he met to prevail in an action brought under Section 523(a) of the code. Other courts have determined that this same standard should be applicable to a plaintiff in an action filed under Section 727. See In re Serafini, 938 F.2d 1156 *817(10th Cir. 1991); In re Henderson. 134 B.R. 147 (Bankr.E.D.Pa.1991); In re Goldstein, 123 B.R. 514, 522 n. 15 (Bankr.E.D.Pa.1991), We agree. The Henderson Coart, supra, discusses This burden of proof and cites the following from the case of Burch v. Reading Co., 240 F.2d 574, 579 (3rd Cir.), cert. denied, 353 U.S. 965, 77 S.Ct. 1049, 1 L.Ed.2d 914 (1957); the plaintiffs burden is to convince [the fact-finder] upon all the evidence before [it] that the facts asserted by the plaintiff are more probably true than false... [the fact-finder] must at least be convinced that the evidence considered as a whole, its ‘preponderance’ to use the traditional term, indicates that the facts asserted by the plaintiff are probably true.
In re Kisberg, 150 B.R. 354, 356 (Bankr.M.D.Pa.1992).
In Count V, LMF makes the very specific allegation under $ 727(a)('2KA) that, within one year of bankruptcy, the Debtors transferred funds from their personal accounts to the corporate entities with the intent to hinder, delay, and defraud creditors and/or the Trustee in bankruptcy, Doo. # 81, ¶¶ 50-52.
During the operation of the hedge funds, the Debtors had one personal account that they maintained jointly at Bank of America. Tr. P 260 at 96-97. The testimony was that if personal funds went into one of the Debtors' corporations, and was transferred from theirpersona! funds, the souroemayhave come from Michele's parents, a gift, or Michele's 401 (k) account. Tr. 260 at 99-100, Inquiry into the timing of these transfers was rather vague but presumably occurred between the inception of the hedge fund operation and the Debtors' bankruptcy, a period from October 31.2007 to August 29, 2011. Tr. 4 260 at 104. Christopher Paige further testified that both business and personal expenses were paid from a corporate account and then reconciled at the end of the year with (he help of their tax professionals. Tr. P 272 at 155-156. Transfers from one account to another were preceded by memorandums delivered to the prime broker and copied to the administrator/Tr. 4 274 at 18.
Chrisfoplier Paige described the third party ndmimstiator as SS & C Technologies, the entity that would independently review all 5 trades. Tr. ⅜ 274 at pp 95-99,
*4 I am uncertain as to what funds were transferred to the Debtors during the year before their bankruptcy. The records have not been that specific. The Debtors, in (heir testimony, certainly did not acknowledge making any attempt to defraud creditors by moving assets. LMF's suggestion in its pretrial submission is (hat I seek “badges of fraud,” but I simply came up empty.
Tn considering the disposition of the current Rule 52 Motion, witness credibility is a significant factor. EBC, Inc. v. Clark Bldg. Systems, Inc., 618 F.3d 253, 272-73 (3rd Cir. 2010). The Debtors' lengthy testimony was certainly colored by an anticipated defensiveness, a tendency to ramble, and an obvious antipathy to ward LMF. Notwithstanding those shortcomings, theirtestimony was consistent, plausible, and generally corroborated by extrinsic evidence. The $6,568,400 judgment entered against Michele Paige was also entered against PCM, PGP, the “Onshore Fund” and the “Offshore Fund.” Doc, ⅞ 50. Transfers from the Debtors' personal accounts to anyone of these entities would hardly be motivated by a fraudulent intent since they were all liable to LMF, Such transfers would certainly not be motivated by an intent to spirit funds away from access by LMF. It should be noted also that no specific asset or fund has been identified as being hidden from their creditors. It would be a mistake to «assume llint Michele Paige shorted LMF of over $6.5 million from LMF's initial $40 million investment. The judgment indicated that, on the day of LMF's right of redemption, the sum of $39,505.175 existed in the Debtors' capital accounts, Of that sum, $7,901,035 was returned to LMF on November 30,2010 and $6,326,328 was returned to LMF on June 1,2011. On the day before the Delaware judgment, the market vulue of the capital account stood at $21,461,166, Presumably, this was returned to LMF pursuant to the Delaware judgment. Thus, available for return to LMF was $35,688,529. This is $3,816,646 less titan existed on the day of redemption. The largerjudgment was computed by adding interest accumulation and legal fees and expenses paid prior to October 31, 2010.
In order to survive the Rule 52 Motion. 1 must find that the Debtors transferred assets from their personal estate within one year of bankruptcy and did so with intent to hinder, delay, or defraud their creditors. 11 U.S.C. § 727a)(2)(A). Transfers discussed on the record detailed expenses incurred for medical and/or personal reasons, Such spending can technically qualify as “transfers” under ¾ 727. In re Pearson, 2015 WL 801505(Bktcy. D.Utah February 19, 2015), affirmed Rupp v. Pearson, - F.Supp.3d -, 2015 WL9305674 (Dist. D.Utah December 21, 2015). I would still have to find that LMF established that these transfers were done with subjective intentrto binder, delay, or defraud their creditors. To find this intent, courts have examined badges of fraud including:
1) a close relationship between the transferor and the transferee: 2) that the transfer was in anticipation of a *818pending suit; 3) flint the transferor Debtor was insolvent or in poor financial condition at the time; 4) that all or substantially all of the Debtor's property was transferred; S) that the transfer so completely depicted the Debtor's assets that the creditor has been hindered or delayedin recovering any part of the judgment; and 6) that the Debtor received inadequate consideration for the transfer,
*5 In re van Kiel, 550 Fed.Appx. 105 (3rd Cir. 2013 If unpublished opinion) quoting from In re Woodfield, 978 F.2d 516, 518 (9th Cir. 1992)
There were withdrawals culled from the Dehtors' personal, nocount admitted at trial. Those withdrawals in the form of check, disbursements amounted to between $250,000 and $300,000 for the one year prior to bankruptcy. Exhibit ¡1 62, Nevertheless, at the salary level of Michele, together with the unidentified income level of Christopher, expenses of that nature are hardly notable, LMF, hi filings afterthe Rule 52 Motion, has suggested Ireverse-pierce the corporations and/or oonsiderthe Paige corporations as alter egos of the Debtors. This would allow me to consider corporate transfers ns transfers from the Debtors, There was testimony that personal bills were paidftom corporate accounts for the reason proffered that the accountant would straighten it out at tax time as to whether those withdrawals represented salary, capital withdrawals, or loans, Whilethis.no doubtis sloppy bookkeeping. I decline to do areverse-pierce on this limited evidence, ns sueh n destruction of business idenlities should be preceded hy due process protections afforded hy allegations in n complaint and identification of and service on the various entities that might he affected. As it stands, the record is devoid of any evidence that the Dehtors acted in such a manner for me to conclude that their discharge should he lost under ⅞ 727fal(21 und. therefore, I find that LMF cannot succeed on Count V.
T will move to consideration of LMF's claim under 8 727ia)(3). heretofore identified as Count VT, As set forth in Meridian Bank v. Alten, 958 F.2d 1226, 1232 (3rd Cir. 1992). “in order to state a prima facie case under section 727(a)(31, a creditor objecting to the discharge must show (1) that the debtor failed to maintain and preserve adequate records, und (2) that suoh failure makes it impossible to ascertain the debtor's financial condition und material business transactions.” In litis oase, both Debtors testified that much of their personal and business records were In possession of lawyers in conjunction with the Delaware case heretofore reterenoed. Testimony was offered that after the Delaware litigation, LMF, through its counsel, asked that confidential reoords delivered to the Debtors' counsel he destroyed pursuant to a Delaware Court Order, Tr. #261 at 177 mid LMF Trial Ex. #6(1. They testified that because the amount of the materials wus massive, the Debtors' Delaware lawyers; wanted $75,000 to separate those materials covered by the Court Order from those that were not, Tr. 11261 at 181 and Tr. # 274 at 46. The Debtors elected not to pny for that effort because they had no assets to iuad the effort, Christopher Pnige emphatically denied destroying any reoords. Tr, # 274 at 89. This testimony was not challenged. Curiously, tills conversation occurred after the filing of the Chapter 7 bankruptcy, suggesting that the decision to retain or destroy records wus not for the Debtors to decide, hut for the Chapter 7 trustee. The Debtors' Delaware lawyerknew of the bankruptcy because the bankruptcy lawyer filing the case was paid by the Delaware lawyer discussing these options with the Debtors, Tr.# 261 nr LSI- The Dehtors testified that they did retain some reoords and mode those records available to the Chapter 7 trustee. Presumably, LMF argues that the Debtors have failed to preserve records, but there is no evidence that the Debtors took any affirmative action to cause the records not to be available to LMF or the Chapter 7 trustee.
Tn the Delaware Chancery Court, the Dehtors were represented by lawyers from Delaware and from New York, For convenience, * they will simply be refen'ed to us "Delaware" counsel.
*6 Turning to the second requirement that the lack of records makes it “impossible” to ascertain Debtors' financial condition und material business transactions, I observe there was no testimony to that effect. The Chapter 7 trustee did not testify and neither did any individual who had access to the records. No testimony was offered hy tlte outside auditor charged with reviewing records of the hedge funds. No testimony was offered by the document storage company to whom all corporate records were delivered during the Delaware litigation. No testimony was offered by LMF to whom access was granted during the Delaware litigation. LMF simply has not met its burden in this regard und must fail on this Count,
Directing the parties' attention to Count VII which alleges flint the Dehtors have failed to explain satisfactorily a loss of assets or a deficiency of nssets tn meet their liabilities, I assume that the “asset” in question was the difference in the $4(1 million deposited by LMF in the hedge funds und the funds that were returned to LMF pursuant to the Delaware judgment. See Delaware Opinion. Despite the fact that the Debtors were on the stand for a combined ten days, I do not believe the question was ever specifically asked of them. Testimony was advanced that the monies in Michele's hedge fund corporations were directed either to the “tenant as a security deposit”; or delivered to the Plaintiff, LMF. Tr. H 261 at 166, Copies of bank records fur the Debtors' *819personal account were delivered to the Trustee in bankruptcy. Tr. # 261 at 169. Corporate records, at the suggestion of Delaware counsel, were delivered to a document storage company, referred to in testimony us “Rhino,” for use during tlie Delaware litigation. Full access wus provided to LMF. Tr. # 261 at 170. Tire Debtors retained no copies because access to the database was also available to the Debtors, hi at 172.
Presumably referring to a payment on a sublease for their corporate office in Manhattan.
7
LMF fails to offer sufficient evidence to prevail on this Count. The Debtors are, therefore, entitled to their general discharge subject, however, to the disposition of the remaining Counts of this Complaint,
I turn my attention to tiróse Counts objecting to the dischargeability of the debt against the Debtors. Counts I through IV allege that under § 523(a)(4) and (6), both Debtors should not be discharged for their alleged obligations to LMF, While the general liability of Michele Paige to LMF has been adjudicated by the Delaware Court, Christopher's liability has not been adjudicated. Thefhemy advanced by LMF to hold Christopher liable is unique inasmuch as it rests on an allegation of‘‘aiding and abetting” to commit a breach of fiduciary duty apparently recognized by the Delaware Court of Chancery in Weinberger v. Rio Grande Indus., Inc., Del.Ch., 519 A.2d 116, 131 (1986). The allegation as to grounds under § 53300(4) against both Debtors (Counts I and III) has taken an interesting turn, That Section rends: “(a) A discharge under section 727.1141,1228(a), 1228(b). or 1328(b) of this title does not dischorge an individual debtor from nay debt... (4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”
When tlie original Complaint was filed in 2012, the courts were split as to the degree of culpability implicit in the term “defalcation.” To some courts, a simple breach of fiduciary responsibility was sufficient. In re Sherman, 658 F.3d 1009, 1017 (9th Cir. 2011). In re Uwimana, 274 F.3d 806, 811 (4th Cir. 2001). Other courts concluded that there be a degree of scienter or recklessness present before one would lose the ability to discharge the debt. In re Bullock 670 F.3d 1160, 1162 (11th Cir. 2012), In re Baylis, 313 F.3d 9, 20 (1st Cir. 2002). In May of 2013, that issue was resolved when the United States Supreme Court decided Bullock v. BankChampaign. N.A., -U.S. -, 133 S.Ct 1754, 1757, 185 L.Ed.2d 922 (2013), The Supreme Court concluded that in order for a fiduciary to lose his or her right to discharge an obligation, there must he more than mere negligence or “innocent default.” The Court required either an actual knowledge of wrongdoing or its equivalent or a reckless and conscious disregard that conduct will violate a fiduciary duty,
*7 Initially, it was not all that clear atibe onset of the Delaware litigation between these entities that either Debtor was a fiduciary, Funds were held by various corporate and partnership entities piesumably insulating the owner/raanager from personal liability. It was only at the conclusion of the Delaware litigation when Michele Paige was found to have breached a fiduciary duty and the relationship between Michele and LMF was defined, I further find that there is no evidence either Debtor had ft conscious understanding that their activities under the various contracts that bound the parties was wrongful. At best, the Delaware ruling could be interpreted such that Michele Paige conducted the hedge fund in a way to maximize her own self interest. Bullock, however, stands for the proposition that simple self dealing is not sufficient to support a loss of dischargeahiiity under § 523(a)(4).
Michele as manager of the fund and Christopher as, at best, a key person, were strongly influenced to enforce the literal terms of the contracts between the parties, albeit for Michele's owu benefit and not the fund, This is not a onsc where a fiduciary of superior knowledge, skill, and background bamboozled an investor with Limited knowledge or resources. SEC v. Bocchino (In re Bocchino), 794 F.3d 376 (3rd Cir. 2015). Michelle Paige and LMF both appeared to be well represented in their negotiation creating the funds.
This is where LMF has come up short. Michele’s refusal to turn over the total fund to LMF at the end of a three year lock up was primarily motivated by herrather selfish desire that the hedge funds not be dissipated. While the fund remainedunder her control, she would continue to utilize it to fund expenses including her own income. This was the essential reason why the Delaware Court held her liable for breach of fiduciary responsibility. It was apparent, however, that Michele watt not motivated by some malicious motive such us theft of funds, fraud on the principal, or sume false pretense. She. rightly or wrongly, relied on a cofitractual provision allowing her company to “gate” the withdrawal so that only 20% of the investment could be withdrawn each year. This procedure has been recognized as a device to protect fund managers, not the investors. Tr.#26l at 154. It so happens that LMF was by for the only siguificant investor and by acting in her own self interest and not that of the client, the Delaware Court found that Michele Puige breached her fiduciary responsibility. Nevertheless, on advice of counsel, both Christopher and an outside *820attorney, she did rely upon the terms of a contractbetweenthe parties in refusing to turnoverthe investment at the end of the three year‘‘loch up.” On examination, Christopher Paige opined, without challenge, that a hedge fund was u compensation vehicle for its manager. It was “a way of hiring ait investor [sic] that you couldn't afford to pay a salary.” Tr. #261 at 154,
It has been said that adherence to a contract does not violate a duty of good faith, See, for example, Creeger Brick & Bldg. Supply Inc. v. Mid-State Bank & Trust Co., 385 Pa.Super. 30, 560 A.2d 151, 154 (1989). Furthermore, a review of the rather detailed Delaware Court decision reinforces the conclusion that the issues litigated between the parties were certainly intense and acrimonious, but they turned on contractual provisions and not reckless or fraudulent conduct,
It should go without suying that unless Count I could be established against Michele Paige, then Count III alleging that Christopher “aided and abetted” her would also come up short. I find that LMF has failed to meet its burden of proof.
Turning to Counts TT and TV alleging willful and malicious injury to LMF, T find that LMF failed to present evidence to support that argument. There is no iack of case law interpreting the meaning of § 523(a)(6). Debts arising from professional malpractice will not be considered “willful and malicious.” Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 977, 140 L.Ed.2d 90 (1998); In re Conte, 33 F.3d 303 (3rd Cir. 1994). Even intentional breaches of contract do not amount to willful and malicious injury, Lockerby v. Sierra, 535 F.3d 1038 (9th Cir. 2008) (“Expanding the scope of § 523(a)(6) to include contracts that are Intentionally breached whenever it is substantially certain that injury will occur would severely oircumscribethe ability of debtors to start afresh.”) Id. at 1042.
*8 Succinctly, LMF has simply not met its burden of proof in this Complaint, and a ruling is required in favor of the Debtors,
Inasmuch os there remains related sanction issues, I will defer entering a final judgment in favor of the Debtors until such time as those sanctions issues are disposed so that the appeal times may run concurrently.
All Citations
Slip Copy, 2016 WL 959018
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. In re Paige, No. 5-12-ap-00067-JJT, Slip Copy, 2016 WL 959018 (Bankr. M.D.Pa., March 11, 2016).
. The Delaware judgment was supported by a detailed Opinion issued after what appeared to be a lengthy trial. Paige Capital Mgmt., LLC v. Lerner Master Fund, LLC, 2011 WL 3505355 (Del. Ch. Aug. 8, 2011).
: Cases decided pursuant to Federal Rule of Civil Procedure 11 apply to Federal Rule of Bankruptcy Procedure 9011. In re Gioioso, 979 F.2d 956, 960 (3rd Cir. 1992).