Debtor and Appellant David Bruce Kluge ("Kluge") appeals from the bankruptcy court's order denying him a discharge under 11 U.S.C. § 727(a)(4)(A).
Kluge filed a voluntary chapter 7 bankruptcy petition on May 14, 2010. He filed his original schedules and statement of financial affairs ("SOFA") the next day. On his Schedule B, Kluge listed ownership of 1,000 shares in Affirm Direct, Inc. ("Affirm Direct") with an "unknown" value. On his Schedule I, he disclosed that he was President of Affirm Direct. He, however, did not disclose any income from Affirm Direct in his schedules, and he listed his income for all relevant pre-petition periods as $0.01 per year and his current income as -0-. Kluge did disclose that his wife, who was not a joint debtor, was employed by Meggitt-USA, Inc. and earned a monthly net salary of $6,542.39.
Shortly after the bankruptcy filing, creditor RHI/10223 Sepulveda, LLC ("RHI")
On November 5, 2010, RHI initiated an adversary proceeding against Kluge seeking to bar his discharge under § 727(a)(4).
The bankruptcy court scheduled a trial for May 23, 2012. Prior to trial, it entered a stipulated Joint Pre-Trial Order ("PTO"). The PTO established certain admitted facts, including that Kluge listed his monthly income as $0 on his Schedule I and that he listed his earnings as $0.01 for the years 2008, 2009, and 2010 on his SOFA. The PTO also established that Kluge and his wife owned Affirm Direct and that each held a 50% ownership interest in the corporation; that at his Rule 2004 Examination, Kluge testified that the transfers to his wife were income; that the transfers were for household expenses; and that the amount transferred each month to his wife was approximately $2,000. In addition, the PTO identified the remaining facts and legal issues
The bankruptcy court held a one-day trial on May 23, 2012. It began the proceeding by narrowing the disputed factual and legal issues to be tried.
As to his scheduled valuation of Affirm Direct, Kluge testified that he discussed the value of Affirm Direct with his bankruptcy counsel
Kluge, however, also characterized the distributions as loan repayments. He testified that Affirm Direct booked these investments as a "loan from officer," but acknowledged that he previously (and erroneously) characterized the transactions during the bankruptcy proceedings as a "loan to officer." Kluge further testified that he did not consider these transfers to be income, because it was his own money and because the corporation booked the transfers as a loan. But Kluge subsequently testified that he omitted the loans that Affirm Direct allegedly owed him on his Schedule B, because he "didn't think about it as a loan." Trial Tr. (May 23, 2012) at 87:16.
At the close of argument, the bankruptcy court announced an oral ruling on the record. It discussed three potential false oaths that possibly gave rise to denial of discharge, but concluded that RHI had not met its burden on two of the three potential misstatements. The bankruptcy court then focused on the issue of the omitted monthly distributions from Affirm Direct and found that Kluge's testimony attempting to excuse his failure to disclose these payments was not credible. The bankruptcy court based this conclusion on its determination that there were numerous inconsistencies in Kluge's testimony at his Rule 2004 Examination
The bankruptcy court noted that at his Rule 2004 Examination, Kluge acknowledged that the omitted income was income to his wife, but not income to him. In contrast, the bankruptcy court found that Kluge's testimony at trial was vague and inconsistent. The bankruptcy court, therefore, determined that the omitted monthly transfers were income, that Kluge should have disclosed this income on his Schedule I and SOFA, and that his failure to disclose this income was not justified. The bankruptcy court, thus, concluded that Kluge knowingly and fraudulently made a false oath in his case and that this warranted denial of discharge.
On June 19, 2012, the bankruptcy court entered a judgment denying Kluge's discharge under § 727(a)(4)(A). Kluge timely appealed.
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(J). We have jurisdiction under 28 U.S.C. § 158.
Did the bankruptcy court err when it denied Kluge a discharge under § 727(a)(4)(A)?
In an action for denial of discharge, we review: (1) the bankruptcy court's determinations of the historical facts for clear error; (2) its selection of the applicable legal rules under § 727 de novo; and (3) its application of the facts to those rules requiring the exercise of judgments about values animating the rules de novo.
Factual findings are clearly erroneous if illogical, implausible, or without support in the record.
Section 727 provides that a court must grant the debtor a discharge unless, among other things, the debtor knowingly and fraudulently makes a false oath or account in the bankruptcy case or in connection with the case. 11 U.S.C. § 727(a)(4)(A). It is well established that a fundamental purpose of § 727(a)(4)(A) is to incentivize a debtor to provide the trustee and creditors with accurate information so that they do not need to conduct costly investigations.
To obtain a denial of discharge under § 727(a)(4)(A), the objector must show 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.
A false statement or omission in the debtor's schedules or statement of financial affairs may constitute a false oath for the purposes of § 727(a)(4)(A).
Kluge focuses the majority of his argument on appeal on the alleged immateriality of his omission of the Affirm Direct income. He argues that the bankruptcy court erred when it determined that the income was material without first making other findings. Kluge contends that, pursuant to
At oral argument, Kluge asserted that the record was unclear on what standard the bankruptcy court applied in determining materiality. To the extent the bankruptcy court applied the materiality test set forth in
In response, RHI argues that Kluge's failure to disclose the income affected administration of the estate, and counters that the bankruptcy court was not required to first determine whether it was property of the estate. It maintains that income is never property of the estate, and, thus, that Kluge's reliance on
Kluge, and to some extent RHI, misinterpret the standard for materiality. Whether a fact is material is broadly defined: "[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."
Here, although the bankruptcy court did not explicitly state the standard for materiality, the record supports the bankruptcy court's determination that Kluge's omission was material. First, the record shows that the monthly transfers constituted income from Kluge's corporation and that Kluge previously acknowledged that it was income. Second, the income clearly bore a connection to Kluge's business dealings and the existence of property, including the alleged loans and investments made to Affirm Direct. Had Kluge properly disclosed the alleged loans or income, it would have allowed for a prompt investigation as to potential assets. The fact that Affirm Direct may have owed Kluge thousands of dollars or had the ability to transfer thousands of dollars is significant. And the monthly payments to his wife were significant in amount. Kluge, in fact, acknowledged at oral argument that the amount of the monthly transfers were not a de minimis amount in proportion to his wife's monthly income from her employment.
Moreover, the bankruptcy court's determination of materiality was linked to its conclusion that Kluge was not candid about the nature of the monthly transfers. It considered the evidence presented and found that Kluge's testimony was not credible, based on his demeanor at trial and several inconsistencies in his testimony within the trial itself and at his Rule 2004 Examination. The bankruptcy court determined that Kluge knew that the transfers were income from his corporation, which he should have scheduled but instead omitted. The bankruptcy court's determinations are supported by the record, and we emphasize that we give great deference to the bankruptcy court's determination as to Kluge's credibility as a witness.
In doing so, we reject Kluge's assertion that the bankruptcy court was required to explicitly make certain findings in its path to decision. In
On this record, and based on the broad definition of materiality, the bankruptcy court correctly concluded that Kluge's omission of the income related to a material fact.
A debtor "acts knowingly if he or she acts deliberately and consciously."
Here, the bankruptcy court found that Kluge knowingly omitted the income. It found that Kluge's testimony at trial was inconsistent with his testimony at the Rule 2004 Examination with respect to whether Kluge knew that the monthly transfers were income. Based on its assessment of Kluge's credibility during his testimony at trial, the bankruptcy court stated that it did not believe Kluge's protestations of innocence or mistaken belief. It determined that Kluge was aware that the transfers were income and, consequently, that he consciously omitted the income from his Schedule I and SOFA. On this record, the bankruptcy court did not err in finding that Kluge knowingly made a false oath in his case.
A debtor acts with fraudulent intent when: (1) the debtor makes a misrepresentation; (2) that at the time he or she knew was false; and (3) with the intention and purpose of deceiving creditors.
Here, the bankruptcy court found that Kluge acted with fraudulent intent when he omitted the income on his Schedule I and SOFA. Citing to
To the extent Kluge contends that he followed the advice of his bankruptcy counsel when he initially filed his schedules, he presented no credible evidence that his reliance was reasonable or that he relied in good faith. Lack of intent may be proven by a debtor's reliance on his attorney's advice.
At the trial, Kluge testified that he discussed the alleged loans and money transfers with his bankruptcy counsel at the time of filing. He testified that he discussed with counsel the type of investment loans he had made to Affirm Direct and that counsel expressly acknowledged a "loan to officer" type of loan. Kluge also testified that he disclosed the income to counsel. Yet, he subsequently testified that while he explained to counsel that the money transfers were repayments on his investments, he did not use accounting loan terms or disclose that it would go to household expenses.
The record is devoid of any testimony from Kluge's bankruptcy counsel. Moreover, Kluge's testimony as to what he disclosed to his bankruptcy counsel is inconsistent, even within the trial itself. Kluge has not shown either that he relied on his counsel's advice when he failed to disclose the income or that his reliance on counsel's advice, if any, was reasonable or made in good faith.
On this record, there are sufficient patterns of falsities or reckless indifference on Kluge's part to support the bankruptcy court's determination that advice of counsel was not a defense. And, again, we give abundant deference to the bankruptcy court's findings based on its assessment of Kluge's credibility at trial.
In sum, the bankruptcy court did not err in finding that Kluge made a false omission on his Schedule I and SOFA, that his false omission related to material facts, and that he omitted the information knowingly and fraudulently. Therefore, the bankruptcy court did not err in denying Kluge's discharge under § 727(a)(4)(A).
Based on the foregoing, we AFFIRM.