§ 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
this 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; or
(B) property of the estate, after 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;
(4) the debtor knowingly and fraudulently, in or in
connection with the case—
(A) made a false oath or account;
(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[.]
Section 727(a)(4)(A)
denies a discharge to a debtor who “knowingly and fraudulently” makes a false
oath or account in the course of the bankruptcy case. § 727(a)(4)(A). A
false statement or an omission in the debtor’s bankruptcy schedules or
statement of financial affairs can constitute a false oath.[2]
“The fundamental purpose of § 727(a)(4)(A) is to
insure that the trustee and creditors have accurate information without having
to conduct costly investigations.” Fogal Legware of Switz., Inc. v.
Wills (In re Wills), 243 B.R. 58, 63
(9th Cir. BAP 1999) (citing Aubrey v. Thomas (In re Aubrey), 111 B.R. 268, 274 (9th Cir. BAP
1990)). That said, a false statement or omission that has no impact on
a bankruptcy case is not material and does not provide grounds for denial of a
discharge under § 727(a)(4)(A). Id.
Plaintiffs
must show by a preponderance of the evidence that: (1) Debtor made such a false
statement or omission, (2) regarding a material fact, and (3) did so knowingly
and fraudulently. See Searles, 317 B.R. at 377; Roberts, 331 B.R. at 882 (same
test, broken down into four elements).
B. False Statement or Omission
The
first of these three elements is satisfied. The evidentiary record before this
Court and as detailed and itemized in this brief, is replete with clear and
convincing, irrefutable evidence of the existence of multiple omissions by
Debtors. Indeed Debtors’ Counsel, as
discussed herein, admitted as much in his opening statement at trial. Moreover, Debtors have cited no authority,
either before the bankruptcy court at trial or in any pleadings prior to trial
that the subject bank accounts, that the pre petition transfers of funds, and
the omission of income need not have been disclosed. Indeed, the fact that they ultimately amended
their filings at least so as to disclose the accounts at issue is tantamount to
an admission that at least the bank accounts should have been disclosed in the
first instance even if it took them almost two years to do so. Nor has Debtor cited any authority or
provided any evidence or testimony that the income admittedly received by them
at trial from wholly owned LLCs was nothing less than income within the meaning
of the statement of financial affairs (Official Form 7), regardless of how that
income may have characterized.
C. Materiality.
The next element is that the
false statement or omission must involve a material fact. A fact is material
“if it bears a relationship to the debtor’s business transactions or estate, or
concerns the discovery of assets, business dealings, or the existence and
disposition of the debtor’s property.” Wills, 243 B.R. at 62
(citations omitted). As detailed herein and as demonstrated by the evidentiary
record before the Court and at trial, we have at issue in the present case,
tens of thousands of dollars in undisclosed personal bank accounts and dozens
of surreptitious transactions pre and post petition in these clandestine
accounts together with the omission of significant income. This more than suffices to satisfy the
materiality element here. Moreover,
Debtors’ briefs, their evidence proffered at trial and their testimony make no
credible argument that the undisclosed accounts, the surreptitious transactions
and payments related to those transactions, and the omitted income are not
material under this broad test.[3]
A number of courts have considered the concept of
materiality. Most cited is In re Chalik, 748 F.2d 616, 618 (11th
Cir.1984).[4]
There, the court concluded:
The
subject matter of a false oath is “material,” and thus sufficient to bar
discharge, if it bears a relationship to the bankrupt's business transactions
or estate, or concerns the discovery of assets, business dealings, or the
existence and disposition of his property.... The recalcitrant debtor may not
escape a section 727(a)(4)(A) denial of discharge by asserting that the
admittedly omitted or falsely stated information concerned a worthless business
relationship or holding; such a defense is specious. (Citation omitted.) It
makes no difference that he does not intend to injure his creditors when he
makes a false statement. Creditors are entitled to judge for themselves what
will benefit, and what will prejudice, them. (Citations omitted.) The veracity
of the bankrupt's statements is essential to the successful administration of
the Bankruptcy Act. (Citation omitted.)
The court in In re Bailey, 147 B.R. 157,
162–63 (Bankr.N.D.Ill.1992), reiterated the foregoing, and added several
observations. Quoting from Matter of Yonikus, 974 F.2d 901 (7th
Cir.1992), the Bailey court stated “ ‘[d]ebtors have an absolute duty to
report whatever interests they hold in property, even if they believe their
assets are worthless or unavailable to the bankruptcy estate.’ ” The Bailey
court continued: “This is because ‘[t]he bankruptcy court, not the debtor,
decides what property is exempt from the bankruptcy estate.’ ” The Bailey
court then wrote at length:
Debtors
in Chapter 7 proceedings have an affirmative duty to disclose on their
schedules of assets whatever ownership interest they hold in any property,
inclusive of all legal and equitable interest in said property, as of the
commencement of a bankruptcy case. (Citations omitted.) The purpose behind 11
U.S.C. § 727(a)(4) is to enforce debtors' duty of disclosure and to ensure that
the debtor provides reliable information to those who have an interest in the
administration of the estate. (Citations omitted.) “Bankruptcy Trustees lack
the time and resources to play detective and uncover all the assets and
transactions of their debtors.” Since § 727(a)(4) relates to the discovery of
assets and enforces debtors' duty of disclosure, an omission can be material,
even if the creditors were not prejudiced by the false statement. (Citations
omitted.)
D. Intent.
The
last element is intent. Debtor must have “knowingly and fraudulently” made a
false oath or account. Section 727(a)(4)(A). A
debtor “acts knowingly if he or she acts deliberately and consciously.” Roberts, 331 B.R. at 883
(citation omitted). In this case Debtors do not appear to admit that they made
a deliberate and conscious choice to omit but claim that either, (1) they simply forgot to
include them or didn’t know they had to be included,…(an innocent oversight).
Of course it is not uncommon for Debtors to refuse to admit intent. As for acting fraudulently, the Ninth Circuit
held in Roberts that
the elements of common law fraud substantially overlap the elements of a claim
under Section 727(a)(4)(A),
except that “materiality replaces the elements of reliance and proximately
caused damage,” so that the creditor must show: “(1) [that] the debtor made the
representations [e.g., a false statement or omission in bankruptcy
schedules]; (2) that at the time he knew they were false; [and] (3) that
he made them with the intention and purpose of deceiving the creditors
....” Id. at 884 (citations omitted, emphasis added).
(1)
Reckless Indifference as Probative of
Fraudulent Intent
Recklessness
can be probative of fraudulent intent.
In Wills the
Ninth Circuit stated in dicta that a court “may find the requisite intent where
there has been a pattern of falsity or from a debtor’s reckless
indifference to or disregard of the truth.” Wills, 243 B.R. at 64
(emphasis added) (citing Coombs, 193 B.R. at 564). The
Appellate Court specifically left unresolved in Roberts
whether “a reckless disregard of both the serious nature of the information
sought and the necessary attention to detail and accuracy in answering may rise
to the level of fraudulent intent necessary to bar a discharge....” Roberts, 331 B.R. at 884 n. 4
(quoting Mondore v. Mondore (In re Mondore), 326 B.R. 214, 217
(Bankr.W.D.N.Y.2005)).
Numerous courts including five other circuit
courts have held a reckless indifference to the truth can support denial of
discharge under § 727(a)(4)(A). See,
e.g., Boroff v. Tully (In re Tully), 818 F.2d 106, 111 (1st Cir.1987)
(debtor’s omissions evidenced “reckless indifference to truth equivalent to
fraud for purposes of § 727(a)(4)(A)”); Salomon v. Kaiser (In re Kaiser), 722 F.2d 1574, 1584 n. 4 (2d
Cir.1983) (citing authority that reckless indifference to truth is the
equivalent of fraud, and that a pattern of reckless and cavalier disregard for
truth can be serious enough to supply the necessary fraudulent intent required
by § 727(a)(4)(A)); (In re Beaubouef), 966 F.2d 174, 178 (5th Cir.1992) (multiple
falsehoods, combined with “failure to
take advantage of the opportunity to clear up all inconsistencies and omissions
when he filed his amended schedules,” constituted “reckless indifference to the
truth and, therefore, the requisite intent to deceive”) (citation
omitted, emphasis added); Keeney v. Smith (In re Keeney), 227 F.3d 679, 686 (6th Cir.2000) (“A
reckless disregard as to whether a representation is true will also satisfy the
intent requirement”) (citation omitted); In re Chavin, 150 F.3d 726, 728 (7th Cir.1998) (“not
caring whether some representation is true or false—the state of mind known as
‘reckless disregard’—is, at least for purposes of the provisions of the
Bankruptcy Code governing discharge, the equivalent of knowing that the
representation is false and material”) (citations omitted); Martin Marietta Materials Southwest,
Inc. v. Lee (In re Lee), 309 B.R. 468
(Bankr.W.D.Tex.2004) (following Beaubouef). See generally C.C. Marvel,
Annotation, False Oath or Account as Bar to
Discharge in Bankruptcy Proceedings, 59 A.L.R.2d 791,
1958 WL 11371 (1958, updated weekly per Westlaw)
(“Annotation, False Oath or Account”); § 9.5 (reckless disregard).
These
cases could be read as equating recklessness with a knowing and fraudulent
intent, but that goes too far. The statute specifically requires that the
debtor make a false oath or account “knowingly and fraudulently.” § 727(a)(4)(A). As
one court put it:
[A] debtor does not necessarily act
with fraudulent intent even if he knowingly makes a false oath, and § 727(a)(4)(A), by
requiring both knowledge and the intent to defraud, implicitly acknowledges
that fact. It would certainly be anomalous to hold that a finding of reckless
disregard on the part of a debtor for the accuracy of her schedules obviates
the need to establish fraudulent intent, even though the Code permits no such
“short cut” with respect to a debtor who signs schedules containing information
which she knows to be false.
United States v. Sumpter (In re
Sumpter), 136 B.R. 690, 696
(Bankr.E.D.Mich.1991), aff’d on other grounds, 170 B.R. 908 (E.D.Mich.1994),
aff’d in part, rev’d in part, 64 F.3d 663 (6th Cir.1995)
(table).
(2)
Circumstantial Evidence and Inferences
of Intent.
On the
other hand, intent usually must be proven by circumstantial evidence or
inferences drawn from the debtor’s course of conduct. See, e.g., Searles, 317 B.R. at 377
(evidence supported “factual inference” that debtor “intended to list a sum
below the trustee’s radar screen”); Roberts, 331 B.R. at 884
(fraudulent intent “may be established by inferences drawn from [debtor’s]
course of conduct”); Wills, 243 B.R. at 64
(same). Recklessness can be part of
that circumstantial evidence.
Coombs
strikes the appropriate balance. It is critical of too easy a reliance on
recklessness, but as noted in Wills
it also stands for the general proposition that a court “may find the
requisite intent where there has been a pattern of falsity or from a debtor’s
reckless indifference to or disregard of the truth.” Wills, 243 B.R. at 64
(emphasis added) (citing Coombs, 193 B.R. at 564). The Coombs court
said it well:
The essential point is that there must be something about
the adduced facts and circumstances which suggest that the debtor intended to
defraud creditors or the estate. For instance, multiple omissions of material
assets or information may well support an inference of fraud if the
nature of the assets or transactions suggests that the debtor was aware of them
at the time of preparing the schedules and that there was something about the
assets or transactions which, because of their size or nature, a debtor might
want to conceal. Coombs, 193 B.R. at 565–66
(emphasis added).[5]
(3)
Motive
Motive can support a finding of knowing and fraudulent
intent, but it is not indispensable. A bankruptcy court might find that a
debtor’s reckless indifference to the truth is part of an attempt to fly “below
the trustee’s radar screen” (Searles, 317 B.R. at 377), or to
protect family or friends from intrusive discovery or preference or fraudulent
transfer actions, or simply to make investigation difficult for the bankruptcy
trustee or creditors. Alternatively, the court might never know the debtor’s
motive, but the number of misstatements or omissions, or the size or nature of
a single one, might suffice to support a finding that a debtor knowingly and
fraudulently made a false oath or account. See Hansen v. Moore (In re Hansen), 368 B.R. 868, 878 (9th Cir. BAP
2007) (“The sheer number of material inaccuracies contained in schedules
that debtor, an attorney, admittedly reviewed and revised twice suffices as
circumstantial evidence to support the finding that the ‘knowingly and
fraudulently’ element of § 727(a)(4) was
proven.”). In the present case, Debtors’
adversary counsel hints at the existence and nature of motive in his opening
statement. He states in relevant part,
the following:[6]
COUNSEL
FOR DEBTOR: [Debtor] had not even
contemplated filing bankruptcy. It was only on the eve of learning that a
default judgment had been taken in by the Department of Employment, a
suit that he didn't even know about because it was served at the plaintiffs'
address and not his, that he decided to file bankruptcy, and that was on June
29th when he went to go meet with his lawyer give or take a day or two. I
believe the petition was filed the first week of July --
UNIDENTIFIED
SPEAKER: The 1st. The 1st.
COUNSEL
FOR DEBTOR: -- the 1st of July. Prior
to that, there was never any contemplation of bankruptcy.
COUNSEL
FOR DEBTOR: So, I mean, it's going to be a little bit of a stretch to say, oh,
you know, you were hiding these things, and you had the intent to delay or
hinder especially when none of these accounts had anything in them. And like I
said, your Honor, it's their burden. You know, I don't want to belabor the point.
Let's just see what happens. Thank you.
The Debtors, in an effort to evade creditors, filed for
Bankruptcy without so much as a thought, merely to frustrate their
creditors. Their efforts at hindrance
and delay continued even during the course of the bankruptcy notwithstanding
their duty as debtors to be truthful and forthcoming.
(4)
Hindrance and Delay
Debtors appear to be arguing that their last filing of
schedules amended to finally disclose the clandestine accounts, however late in
the day, is enough to overcome the clear and unequivocal evidence that these
accounts were (1) material; and (2) indeed omitted yet subject to compulsory
disclosure. It is as though they believe that whatever the circumstance
surrounding the omission or concealment f these accounts, all is forgiven once
they are disclosed. But efforts on the
part of Debtors to hinder or delay creditors notwithstanding ultimate
disclosure may suffice to deny discharge.
Under Beauchamp, (In re Beauchamp, 236 B.R. 727, 732-34 (B.A.P. 9th
Cir. 1999) aff'd, 5 F. App'x 743 (9th Cir. 2001)) “[t]wo elements
comprise an objection to discharge under § 727(a)(2)(A): 1) a disposition of
property, such as transfer or concealment, and 2) a subjective intent on the debtor's part to hinder, delay or defraud
a creditor through the act of disposing of the property.” Lawson,
122 F.3d at 1240. Here the evidence presented at trial clearly
establishes both elements.
Debtors appear to argue that, because they
ultimately disclosed the clandestine bank accounts (two years after initially
filing their petition and prior amended schedules) they have absolved
themselves of any wrongdoing. In this view, Debtors direct the Court to
clear repentant debtors, setting the deadline for repentance as far out as
close to two years subsequent to filing a petition for bankruptcy so long as
coming clean occurs prior to trial on the matter.
But as the Beauchamp
Court so eloquently stated: “a debtor who first foils creditors by secreting
assets, and then repents, pits the fundamental “fresh start” purpose of the Code,
requiring liberal construction in favor of the debtor, against the “clean
hands” maxim.”[7],[8] In Beauchamp,
the debtor did not wait till Summary Judgment.
Indeed he “came clean” as early as the first 341 creditors’
meeting. Even still he was denied discharge. The Debtor in Beauchamp stressed that he had disclosed his secret fund by the
time of the meeting of creditors, and urged that Court to extend the grace
period to the § 341 meeting, so long as the schedules are properly amended.
But as the Beauchamp Court found, In re Waddle[9]
did not so hold. A creditor there sought to bar discharge under
several theories, the debtor denied having had an interest in the property at
issue, and the court held that the creditor had failed to carry its burden.
Reiterating elements of a cause of action under § 727(a), the court mentioned
in passing that a debtor might avoid the penalty of the section by reporting
concealed assets at the meeting of creditors: at most, dicta of insignificant
moment. See Waddle, 29 B.R. at 103.
In Baker
v. Mereshian,[10]
the Ninth Circuit Court noted that in a comparable situation, it has stated
that a “debtor who fully discloses his property transactions at the first
meeting of creditors is not fraudulently concealing property from his
creditors.” Nevertheless, Mereshian does not stand for the proposition
that §341 meeting confessions absolve fraud. Instead, the Panel there merely
affirmed the Bankruptcy Court's finding of absence of intent to hinder, delay
or defraud, noting in passing the debtor's candid acknowledgment of the
transactions at the meeting of creditors. Mereshian, 200 B.R. at 346. In
Beauchamp the lower Court found that,
but for the threatened Rule 2004 examination, no disclosures would have been
forthcoming from the Beauchamp
debtor. None of cases cited by
the debtor in Beauchamp hold that
disclosure of secreted assets at or before the § 341 meeting precludes finding
intent to hinder, delay or defraud much less so for half hearted disclosure two
years our on the eve of summary judgment or trial as in the case of these
Debtors.
Indeed, in the present case, it is clear from the
evidentiary record that, but for Plaintiffs’ prosecution of its claims and the
filing of the Motion for Summary Judgment, the Debtors would never have come
clean and disclosed the clandestine bank accounts.
I.
CONCLUSION
While
it is true that a discharge cannot be denied when items are omitted from the
schedules by honest mistake, the existence of more than one falsehood, together
with a debtor’s failure to take advantage of the opportunity to clear up all
inconsistencies and omissions, such as when filing amended schedules, can be
found to constitute reckless indifference to the truth satisfying the requisite
finding of intent to deceive.[11] In the case at bar, Debtors filed their
petition on July 1, 2010. They filed
their schedules soon thereafter on ___________. They amended
their schedules to include 91 new phantom creditors on _ but did not amend at this time so as to
include the undisclosed bank accounts, prepetition transfers, and income. Despite numerous opportunities to be
forthright and honest in their disclosures, The Debtors stubbornly
refused. To wit:
(1) Debtors failed to come clean at three separate 341 Creditors
Meetings.
(2) Plaintiffs filed their Complaint detailing missing bank accounts
and income more than a year and a half ago; still, Debtors refused to come
clean and amend.
(3) On January 6, 2012 the Trustee filed a motion to extend time to
object to discharge based in part on Debtors': (1) failure to disclose numerous
assets (including but not limited bank accounts) and income sources; and (2)
the Debtors' falsified statements as to average monthly income on the Chapter 7
Statement of Current Monthly Income and Means-Test Calculation submitted in
support of their bankruptcy petition.[12]
Still, Debtors refused to come clean and disclose.
(4) Despite numerous depositions and discovery requests, Debtors
refused to acknowledge the existence of the missing accounts and income.
(5) Finally, ONLY AFTER Defendants filed a Motion for Summary Judgment
on or about _________, when it was clear and unequivocal, that the jig was up,
did Debtors begrudgingly decide to disclose the existence of the previously
undisclosed accounts.
Remarkably, they refused to disclose the apparent and obvious
income they received as evidenced by their own testimony at trial.
§ 727(a)(4)(A) is
satisfied if “the debtor knew the
statement (or omission) was false” and “the debtor made the statement (or
omission) with fraudulent intent.” Lee, 309 B.R. at 477
(emphasis added). Tr., Dec. 18, 2006, p. 8:2–4. Lee
requires an “intent to deceive,” but not just Debtor’s conscious omissions; Lee also
permits that intent to be inferred from appropriate circumstantial evidence.
The existence of more than one falsehood, together with a debtor’s failure to
take advantage of the opportunity to clear up all inconsistencies and omissions,
such as when filing amended schedules, can be found to constitute a
basis for a finding of intent to deceive. In other words, the court need
not find that there is any actual admission by a debtor of any intent to
deceive, but rather in looking at all of the circumstances, whether or not such
intent may be inferred. The
record before this Court overwhelmingly supports that inference. The requisite intent is supported by the
number of omissions, by the magnitude of the omissions, by the conscious exclusion
of information, even at the time of trial, and no attempt to correct the
inaccuracies. These are exactly the sort
of circumstances referred to in Coombs (and Lee) as supporting an inference of knowing and fraudulent intent.
Debtors who without compunction conceal assets and
file fraudulent schedules, but who realize exposure is imminent and have the
grace (or wit) to surrender before trial, should not be rewarded with a
discharge. Ultimately, such a policy would grant debtors time to gauge the
aggressiveness of their creditors before committing to comfortable levels of
divulgence. Good faith and fair play did
not motivate Debtors’ disclosure; rather, the motivating factor behind these
debtors’ decision to ultimately disclose the existence of the clandestine
accounts was the looming threat of summary judgment. Even then, they could not summon the
integrity and candor to adequately disclose prepetition transfers, payments to
creditors and income and have yet to do so. For all of these reasons Debtor’s
discharge should be denied.
[1] Plaintiffs
bear the burden of proving by a preponderance of the evidence that Debtor’s
discharge should be denied. Searles, 317 B.R. at
376.
That does not, however, change the preponderance of evidence standard. Rather,
it has been held to mean that actual, rather than constructive, intent is
required. See Garcia v. Coombs (In re Coombs), 193 B.R. 557, 560 (Bankr.S.D.Cal.1996) (strict construction
of statute in favor of discharge is rule of “statutory interpretation” not
“rule to apply to consideration of evidence”).
[3] See, In re Coombs (Bankr. S.D. Cal. 1996) 193 B.R. 557 (distinguishing between broad test of materiality and narrower test of intent).
[4] Id at 566.
[5] In re Coombs (Bankr. S.D. Cal. 1996)
193 B.R. 557, 565 referring to: In re Woodfield, 978 F.2d 516, 518 (9th
Cir.1992); In re Gipe, 157 B.R. 171, 176–77 (Bankr.M.D.Fla.1993).
Another court has called them “factors to consider”. In re Schroff, 156
B.R. 250, 254–55 (Bankr.W.D.Mo.1993).
[6] Transcript Trial Day 1, No. 1 Volume 1 A.M. at pg. 30.
[7] Beauchamp, 236 B.R. 727.
[8] See, e.g., Bajgar, 104 F.3d at 498 n. 1
(although reasons for barring discharge must be substantial, “ ‘[o]n the other
hand, the very purpose of certain sections of the law, like 11 U.S.C. § 727(a)[
], is to make certain that those who seek the shelter of the bankruptcy code do
not play fast and loose with their assets or with the reality of their affairs.’
”) (quoting Boroff v. Tully (In re Tully), 818 F.2d 106 (1st Cir.1987)).
[9] In re Waddle, 29 B.R. 100, 103
(Bankr.W.D.Ky.1983); 4 Collier on Bankruptcy ¶ 727.02[6][b] (15th
ed.1985
[10] In re Mereshian, 200 B.R. 342, 346 (9th
Cir. BAP 1996) referring to In re Waddle, 29 B.R. 100, 103
(Bankr.W.D.Ky.1983)).
[11] Lee, 309 B.R. at 477 (emphasis added,
citations omitted); see Tr., Dec. 18, 2006, pp. 7:23–8:25.
[12] See ______, Doc. ____, p. 2, paras. 8-10.
Perhaps you should post that Debtor prevailed in this case, despite Creditor being represented by three attorneys and Debtor only one.
ReplyDelete