MARY P. GORMAN, Chief Bankruptcy Judge.
Before the Court, after trial, is an amended complaint filed by Nancy J. Gargula, the United States Trustee ("UST"), to revoke the discharges of the Debtors, Anthony J. Cooper and Geri L. Cooper. The UST alleges that the Debtors received a 2015 federal income tax refund in the amount of $5447 and knowingly and fraudulently failed to surrender the money to the case trustee. The Debtors contend that, although they knowingly failed to surrender their tax refund, they did not act fraudulently. Because the UST met her burden of proof on all elements required, the Debtors' discharges will be revoked.
In anticipation of trial, the parties filed a joint pretrial statement, wherein they stipulated to the following uncontested facts:
Pretrial Statement at 6-12, Gargula v. Cooper, No. 18-09004 (Bankr. C.D. Ill. Feb. 9, 2018), Doc. 24.
At the trial held August 8, 2018, Geri Cooper was called as a witness by the UST. Mrs. Cooper testified that Trustee Prillaman did not consent to the Debtors' use of the federal tax refund money. She also admitted that she did not consult with her attorney about the impact of using the tax refund money and that she did not conduct independent research regarding the impact of taking property of the estate. Anthony Cooper also testified that Trustee Prillaman did not grant permission to the Debtors to use the tax refund. Mr. Cooper admitted that he did not consult with his attorney about the impact of using the tax refund money and that he did not conduct independent research regarding the impact of taking property of the estate.
Trustee Prillaman was called as a witness by the Debtors. He was questioned about whether, after learning that the money had been spent, he expressed a willingness to accept payments from the Debtors. The Trustee stated that he had not entered into a payment arrangement with the Debtors; he specifically referred to emails he sent to Attorney McClarey as proof that he had unequivocally declined to enter into a payment arrangement with the Debtors. He further testified that the Debtors ultimately did pay to him the amount due in full, but only after the adversary complaint was filed.
Testifying on her own behalf, Mrs. Cooper further stated that she and Mr. Cooper had moved out of their previous home at the end of September or beginning of October 2017 because they were being evicted. According to her, the Debtors had to make a $5000 deposit on a rental house in July 2017 to hold the house for two months before they moved in as well as to cover a pet deposit, first and last months rent, and a security deposit. Mrs. Cooper testified that the source of the $5000 deposit was the tax refund. She also testified that the full amount of the tax refund was eventually paid to Trustee Prillaman.
At the close of trial, both parties presented argument. The matter is ready for decision.
This Court has jurisdiction over the issues before it pursuant to 28 U.S.C. §1334. All bankruptcy cases and proceedings filed in the Central District of Illinois have been referred to the bankruptcy judges. CDIL-Bankr. LR 4.1; see 28 U.S.C. §157(a). Proceedings to revoke a discharge, like objections to discharge, are core proceedings. See 28 U.S.C. §157(b)(2)(J). This matter arises from the Debtor's bankruptcy itself and from the provisions of the Bankruptcy Code and may therefore be constitutionally decided by a bankruptcy judge. See Stern v. Marshall, 564 U.S. 462, 499 (2011).
A debtor's discharge may be revoked, but only under limited circumstances. 11 U.S.C. §727(d). On request of the case trustee, a creditor, or the UST, a court may revoke a discharge previously granted to a debtor, if "the debtor acquired property that is property of the estate, or became entitled to acquire property that would be property of the estate, and knowingly and fraudulently failed to report the acquisition of or entitlement to such property, or to deliver or surrender such property to the trustee[.]" 11 U.S.C. §727(d)(2).
"Revocation of a discharge is a harsh measure and runs contrary to the general policy of the Bankruptcy Code of giving Chapter 7 debtors a `fresh start.'" State Bank of India v. Kaliana (In re Kaliana), 202 B.R. 600, 603 (Bankr. N.D. Ill. 1996). Thus, complaints seeking to revoke a discharge will be strictly construed against a plaintiff and in favor of the debtor. Richardson v. Flaugher (In re Flaugher), 525 B.R. 67, 71 (Bankr. C.D. Ill. 2015). The party seeking to revoke the discharge has the burden of proof. See Matter of Yonikus, 974 F.2d 901, 904 (7th Cir. 1992). All elements of the cause of action must be established by a preponderance of the evidence. Grochocinski v. Eckert (In re Eckert), 375 B.R. 474, 478 (Bankr. N.D. Ill. 2007).
In order to succeed in this action, the UST must prove that (1) the Debtors acquired or became entitled to acquire property of the estate, (2) the Debtors failed to report their acquisition or entitlement, or to deliver or surrender the property to the trustee, and (3) the Debtors' failure was knowing and fraudulent. 11 U.S.C. §727(d)(2); Steege v. Johnsson (In re Johnsson), 551 B.R. 384, 403-04 (Bankr. N.D. Ill. 2016).
The Debtors admit that the tax refund was property of the estate, that they received the tax refund, and that they spent the tax refund instead of turning it over to the Trustee. Thus, the first and second elements of the UST's required proof have been satisfied. The Debtors also stipulated that not only did Trustee Prillaman instruct them at the meeting of creditors that the tax refund was property of the estate but their own attorney informed them that any refund they received would have to be turned over to the Trustee. Further, the Debtors stipulated that they received notice of both the motion for turnover and the motion to compel, along with copies of the orders entered after the hearings, requiring turnover of the tax refund. Thus, there is no question that the Debtors acted "knowingly" when they spent the tax refund instead of turning it over to Trustee Prillaman. The Debtors argue, however, that their discharges should not be revoked because they did not act "fraudulently" in failing to turn over the tax refund.
"Fraud" is broadly defined to mean "any deceit, artifice, trick, or design involving direct and active operation of the mind, used to circumvent and cheat another." McClellan v. Cantrell, 217 F.3d 890, 893 (7th Cir. 2000) (citing 4 Collier on Bankruptcy ¶ 523.08[1][e], p. 523-45 (15th ed. 2000)). To act "fraudulently" or with "fraudulent intent" is to intend to defraud or to engage in behavior that displays a reckless disregard for the truth. Yonikus, 974 F.2d at 905. Because direct evidence of fraudulent intent is rare, it may be inferred from the course of conduct of a debtor. Id. at 905-06.
The Debtors claim that their intent in not turning over their tax refund was not to deceive the Trustee. Rather, the Debtors said that they needed the tax refund in order to pay a $5000 rent deposit on their new home. But the Debtors' use of the funds to acquire housing is not a defense. The issue is whether the taking of the funds was done with an intent to deceive, defraud, or cheat or was done with reckless disregard for the truth. The Debtors' conduct establishes that their acts were fraudulent and deceitful and were intended to cheat the Trustee and their creditors.
The parties stipulated that, by March 8, 2017, the Debtors had prepared their 2015 amended tax return at Trustee Prillaman's request and were entitled to a $5447 refund; the Debtors' attorney emailed the Trustee on that day with information about the refund. In June, after not receiving the money, the Trustee filed his motion for turnover, and an order requiring turnover of the refund was entered after a hearing held on July 12, 2017. The Debtors admit receiving notice of the hearing and a copy of the order requiring turnover. Nevertheless, on July 20, 2017, the Debtors used the refund and paid their new landlord $5000. And despite repeated contacts by their attorney, they never disclosed to their attorney or to Trustee Prillaman that the refund had been spent until December 13, 2017, when they appeared late for the hearing on the Trustee's motion to compel. The inferences that must be drawn from this conduct are that the Debtors knew they were taking money that did not belong to them when they spent the refund money and that they intended to deceive the Trustee by failing to communicate with and provide disclosure of the truth about the refund to their own attorney. They took money they knew belonged to their bankruptcy estate and used it for their own purposes and then failed to cooperate with their own attorney and the Trustee. This conduct establishes that they acted fraudulently. See Johnsson, 551 B.R. at 405-07 (fraud inferred from debtor's delay in actually turning over property of the estate to the trustee when the debtor was informed that it was property of the estate and ignored requests for turnover until litigation was threatened).
The Debtors point to the fact that they ultimately complied with the Court's orders by turning over the full amount of the tax refund to the Trustee on March 29, 2018. But the Debtors had a duty to fully and promptly cooperate with the Trustee in turning over property of the estate. 11 U.S.C. §521(a)(4); Fed. R. Bankr. P. 4002(a)(4). Turning over the refund more than a year after they became entitled to receive it and only after several motions and a complaint to revoke their discharges was filed is not adequate cooperation. The Debtors' delayed turnover of the tax refund does not rectify their prior conduct. See Richardson v. Schoemperlen (In re Schoemperlen), 332 B.R. 179, 182 (Bankr. C.D. Ill. 2005). Equally important, a debtor should not be allowed to buy a discharge; discharges are not "bargaining chips" to be used in negotiations to obtain funds to pay creditors. Philadelphia Indemnity Ins. Co. v. Rotert (In re Rotert), 530 B.R. 791, 799 (Bankr. N.D. Okla. 2015). Thus, once fraudulent conduct has occurred and a complaint has been filed to deny or revoke a discharge, a debtor cannot buy dismissal of the complaint by paying what should have been paid in the first place even if the money is going to the bankruptcy estate for distribution to creditors. Id. at 800.
The UST has met her burden of proof. The Debtors acquired possession of their 2015 federal tax refund and knowingly and fraudulently failed to turnover the funds to the Trustee despite two court orders requiring turnover and instructions to do so from both the Trustee and their own attorney. Due to their conduct, the Debtors' discharges must be revoked.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
