Disclose, Disclose, Disclose

Posted by NCBRC - September 22, 2014

If you are filing for bankruptcy, do not forget to mention in your schedules the business interest you recently sold or the property you own in Mexico. That was the lesson learned by a couple of debtors who were denied discharge for just such omissions. Gronlund v. Anderson (In re Gronlund), No. 13-1566 (B.A.P. 9th Cir. Aug. 19, 2014) on appeal No. 14- 60053 (9th Cir.); In re Michelotti, No. 12-21679, Adv. Proc. No. 13-40 (Bankr. W.D. Tenn. July 17, 2014) on appeal, No. 14-8048 (B.A.P. 6th Cir.).

In Gronlund the debtor failed to list $2,500 in “interest only” income he and his co-debtor wife received on a note secured by real property in Mexico. The monthly income came to light at the 341 creditor’s meeting when the trustee noticed it on the debtor’s tax return. The debtor amended his schedules to include the Mexico Note and then claimed that the note was subject to a number of encumbrances. The trustee moved to deny discharge alleging false oath under section 727(a)(4)(A), based on the debtor’s initial failure to list the asset on his schedules and at the creditor’s meeting, and concealment under section 727(a)(2)(A) and (B), based on the debtor’s later comments that the monthly payments were sporadic and that the property was encumbered.

The case came down to the debtor’s credibility. The bankruptcy court did not credit the debtor’s claim that because his personal and financial life were chaotic and tattered, he omitted the information inadvertently and, therefore, lacked the requisite intent to satisfy the elements of false oath and concealment.

On appeal the Bankruptcy Panel affirmed. It began with the principle that “a party seeking denial of discharge under § 727(a)(2) must prove two things: ‘(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.’ Hughes v. Lawson (In re Lawson), 122 F.3d 1237, 1240 (9th Cir. 1997).” The panel found that there was sufficient evidence in the record to support the bankruptcy court’s finding of intentional concealment, not least of which was the debtor’s failure to schedule the asset in the first place and his failure to acknowledge it until pressed at the creditor’s meeting.

With respect to whether the debtor had the requisite intent to hinder, delay or defraud, the panel noted that the debtor had twenty years’ experience in mortgages and real estate dealings, the note represented the only asset of value owned by the debtor, and the debtor was ultimately responsible for checking the accuracy of the bankruptcy schedules. The panel found that the bankruptcy court’s conclusion that denial of discharge was appropriate on these facts was “not illogical, implausible or without support in the record.”

As to the issue of false oath under section 727(a)(4)(A), the court began by stating the principle that “[a] false statement or an omission in the debtor’s bankruptcy schedules or statement of financial affairs can constitute a false oath. Khalil v. Developers Sur. & Indem. Co. (In re Khalil), 379 B.R. 163, 172 (9th Cir. BAP 2007).” A finding that “(1) the debtor made a false oath in connection with the case; (2) the oath related to a material fact; (3) the oath was made knowingly; and (4) the oath was made fraudulently. In re Retz, 606 F.3d at 1197,” will support a denial of discharge. The debtor’s failure to list the asset in his schedules and in his income, his failure to disclose it initially in the 341 meeting, and his evasiveness as to the value of the asset supported the bankruptcy court’s finding with respect to this claim. That the false oath was knowingly made was supported by the debtor’s business savvy and the fact that the asset was the only thing of value in the debtor’s estate.

In In re Michelotti, No. 12-21679, Adv. Proc. No. 13-40 (Bankr. W.D. Tenn. July 17, 2014), the trustee objected to discharge for husband and wife co-debtors under section 727(a). The debtors’ amended Schedule B failed to list several businesses of which Mr. Michelotti had partial or 100% interest. The court detailed the Sixth Circuit’s “five element test for determining whether a debtor has violated § 727(a)(4)(A): 1) the debtor made a statement under oath; 2) the statement was false; 3) the debtor knew the statement was false; 4) the debtor made the statement with fraudulent intent; and 5) the statement related materially to the bankruptcy case. See In re Keeney, 227 F.3d at 685 (citing Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 178 (5th Cir. 1992)).”

The bankruptcy documents were prepared by Mrs. Michelotti and contained many false statements with respect to bank accounts and assets. The court found, however, that Mrs. Michelotti was not involved in the family finances and lacked the requisite fraudulent intent or reckless disregard for truth necessary to deny her discharge.

Mr. Michelotti, on the other hand, was aware of a business interest, including an outstanding note receivable worth approximately $64,000.00, that was not listed on the schedules and of which his wife was not aware. When the trustee sought information about this asset, Mr. Michelotti provided a barrage of documents and vague information that did not adequately explain his failure to list the only valuable asset he owned. The court found that his actions revealed at least reckless disregard for the truth and, therefore, constituted a violation of section 727(a)(4)(A).

With respect to the claim under section 727(a)(2)(B), however, of nondisclosure to hinder, delay or defraud, the court found that the trustee had not carried the heightened burden of showing actual intent.

Michelotti opinion

Gronlund BAP 9th opinion




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