DALE L. SOMERS, Bankruptcy Judge.
Trial on the Trustee's Second Amended Complaint for Revocation of Discharge was held on May 29, 2012.
This Chapter 7 bankruptcy was filed by Debtor Donald P. Osborne pro se on September 17, 2008. Debtor received a discharge on April 20, 2009. The Trustee's Second Amended Complaint
Debtor is a single person who was born in 1943. For most of his adult life, Debtor
Debtor and Margie C. Osborne were married in 1969. For years, Margie Osborne and Lorraine O. Dawson, Debtor's mother, engaged in the business of property leasing, under the name Hays Partners. No formal business records of Hays Partners were introduced at trial. Although Debtor testified that he was not an owner but only served as a financial consultant or advisor to Hays Partners, the Court finds that the financial affairs of Debtor, Margie Osborne, and Lorraine Dawson were not cleanly separated. For example, Debtor testified that a bank account in his name at Golden Belt Bank received deposits of funds from Hays Partners and made payments to or on behalf of Debtor. In addition, a federal income tax Form 1040C for Hays Partners, listing Debtor as the proprietor of Hays Partners, was filed with Debtor's 2006 federal tax return. Nevertheless, there is not sufficient evidence in this record for the Court to hold that property of Hays Partners should have been included in Debtor's schedules.
In 2004, two events occurred which prompted Debtor to begin to rearrange his financial affairs. First, the IRS questioned Debtor's tax returns for 2001 and 2002. Second, Debtor, who was "self insured" for vehicle liability purposes, was involved in a motor vehicle accident which resulted in personal injury to members of the Albert family, who subsequently sued him for damages. As to the tax liability, Debtor sought and obtained innocent spouse protection for his wife. Also, soon after the accident, Margie Osborne petitioned for a divorce, which was granted in December 2004. The parties agreed to a separation agreement under which Debtor retained his business, Don Osborne Enterprises, valued in the agreement at $785,000, and Margie retained Colorado real property valued at $500,000 and retirement accounts valued at $223,140.81. All debts since the date of separation, which was stated in the divorce documents to be September 1, 1994, were held to be Debtor's separate obligations. Debtor's testimony as to the basis for the valuation of his business was neither consistent nor credible.
Trial on the personal injury lawsuit filed by the Alberts against Debtor was held on September 2, 2008. On September 17, 2008, Debtor filed his voluntary petition under Chapter 7. On October 21, 2008, a journal entry of judgment for $1,176,386.04 was entered in favor of the plaintiffs and against Debtor and Don Osborne Enterprises, which were found to be one and the same. Intervenor Columbia Insurance Company was granted a claim of subrogation in the amount of $137,600, with a right of indemnification from Debtor. Debtor
Debtor's Statement of Financial Affairs, signed under penalty of perjury, contains answers to questions which are neither accurate nor complete. In response to Question 1, Debtor reported he had no income from employment or the operation of a business from the beginning of the calendar year to the date of filing, and no such income during the two years immediately preceding the calendar year in which the petition was filed. Yet Debtor testified that he engaged in his businesses throughout his adult life, except for the period from the date of filing to the date of discharge, and he admitted having had income in 2006 and 2007 from the buying and selling of trucks and from hauling freight. He stated that he did not include the income for the year in which the petition was filed because he had not done his taxes before filing and that he failed to state his gross income for the two prior years because it was not that important.
Debtor reported nothing in response to Question 10, "Other transfers," which requests information about non-ordinary-course transfers made within two years preceding the commencement of the case. Yet Debtor testified that in 2006, Don Osborne Enterprises, which had been valued at $785,000 in December 2004 for the divorce case, liquidated some of its inventory and rolling stock. His 2006 tax return reports gross receipts or sales of $45,431, and an inventory value at the end of the year of $31,300. The only personal property Debtor reported on Schedule A was $600 in cash, $50 worth of clothing, and four vehicles, worth an aggregate of $3,500. The inventory remaining at the end of 2006 was either liquidated before filing and not reported in response to Question 10, or held by Debtor on the date of filing and not included in his Schedules.
In response to Question 11, Debtor identified no closed financial accounts. Yet Debtor testified that an account in the name of Donald P. Osborne at Golden Belt Bank was closed immediately before he filed his petition.
In response to Question 18, Debtor stated that he had engaged in the business of trucking under the name Don Osborne from January 1, 1969, to November 1, 2006. But he testified that throughout his adult life, he has also engaged in buying and selling both real property, and trucks and trailers.
Debtor's Schedules are not accurate. Schedule A lists only Debtor's one-half interest in real property in Woodston, Kansas. But the record includes copies of three sheriffs' deeds by which Debtor acquired interests in three parcels of Texas property on August 19, 2008, shortly before this case was filed. Schedule A directs the reporting of "all real property in which the debtor has any legal, equitable, or future interest." Debtor testified that he did not include his interest in these Texas properties because he purchased them at a tax sale and his right to ownership was subject to the right of redemption of the record owners. But the Court questions the credibility of this reason. The directions on Schedule A as to interests to be included are clear. Debtor is an intelligent man, is licensed as a real estate broker in Colorado, and has bought and sold real estate all his adult life.
When Debtor filed for bankruptcy relief, he listed his mailing address as 1100 Fairway Drive, Hays, Kansas. The Hays property was purchased in 2001 to be a residence for Lorraine Dawson and Margie Osborne. Debtor's name was on the deed, but he quit-claimed his interest in 2004. The Trustee contends Debtor's conveyance
The Trustee contends that Debtor also had interests in two tracts of real property in Plainville, Kansas, located at 605 NW 3rd Street and 2300 17 Road.
Debtor's Schedule B, "Personal Property," does not include tools and four salvage vehicles which Debtor admits he owned on the date of filing. He testified the tools were not listed because they were exempt, but they were not claimed as exempt on Schedule C as originally filed or as later amended. As to the salvage vehicles, Debtor testified they were excluded because they had no book value, but acknowledged that he knew they had monetary value. On October 28, 2008, Debtor filed an amended Schedule C claiming three vehicles as exempt.
Debtor's Schedule E, "Creditors Holding Unsecured Priority Claims," lists five creditors: the U.S. Department of Transportation ($10,000); the Internal Revenue Service (approximately $79,000); the Alberts ($1.176 million judgment), Columbia Insurance ($137,600 subrogation claim); and Liberty Mutual ($29,938, arising from an altercation with a woman in Texas).
The Trustee's contention that Debtor refused to obey a lawful order of the Court concerns the Debtor's resistance to appearing for a Rule 2004 examination noticed by the Trustee. On October 28, 2009, at the request of the Trustee, the Court entered an order requiring Debtor to appear for a Rule 2004 examination on November 17, 2009. Debtor requested rescheduling because of a medical appointment,
The Trustee responded by filing an Accusation in Contempt, which was noticed for hearing on December 10, 2009. At that time, the Court entered an order directing Debtor to appear and show cause why he should not be held in contempt of Court. The hearing on the show cause order was scheduled for January 19, 2010. Debtor did not appear. Because of a question about the sufficiency of notice to the Debtor, the hearing was continued to February 1, 2010 at 1:30 p.m. By letter dated February 1, 2010, sent by fax at 9:39 a.m., Debtor informed the Court as follows:
The Court found Debtor in contempt for failure to appear and ordered him to pay $500 to the Trustee as a sanction. As of the date of trial, the $500 had not been paid. Debtor appeared at proceedings in this case involving his ex-wife and his mother numerous times without having been provided funds for transportation and expenses. Debtor's Rule 2004 examination was ultimately conducted on July 27, 2010, in Wichita, Kansas.
Debtor completed two years of college, where his studies included accounting. He is intelligent and articulate, understands what he reads, and makes long-term plans. When testifying, he displayed a remarkable memory for details of past events, such as when, from whom, and for what amount property was bought and sold. But Debtor also displayed contempt for courts, attorneys, obligations which he believed were unjust as to him (or his ex-wife or
A purpose of the Bankruptcy Code is to provide the honest, but unfortunate, debtor a fresh start.
Subsection (1) of § 727(d) provides for revocation of discharge as follows:
The phrase "discharge was obtained through the fraud of the debtor" has been construed to refer to the behavior that would be sufficient for the denial of discharge under § 727(a)(2)-(5).
Subsection (a)(2)(A) of § 727 provides that grounds for denial of discharge include "the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate ..., has transferred, removed, destroyed, mutilated, or concealed ... — (A) property of the debtor, within one year before the date of the filing of the petition." The purpose of the subsection is stated by a commentator as follows:
The Trustee has failed to prove that Debtor's discharge would have been denied under § 727(a)(2)(A) if all of the facts had been known in April 2009. At trial, rather than presenting evidence of fraudulent transfers, the Trustee litigated this case on the erroneous premise that the failure to reveal property and transactions in bankruptcy Statements of Affairs and Schedules constitutes concealment for purposes of § 727(a)(2)(A). The section of the Pretrial Order setting forth the Trustee's theory of recovery includes the statement that "[u]nder 11 U.S.C. 727(a)(2), the debtor did, with intent to hinder, delay or defraud creditors and an officer of the estate, conceal and refuse to disclose his interest in property."
Denial of discharge based upon concealment through omissions from the statements of financial affairs and schedules is covered by § 727(a)(4), not § 727(a)(2)(A). The Trustee's claim for revocation of discharge under § 727(d)(1) based upon fraud under § 727(a)(2)(A) is denied.
Subsection (a)(4)(A) of § 727 provides that "[t]he court shall grant the debtor a discharge, unless — ... (4) the debtor knowingly and fraudulently, in or in connection with the case — (A) made a false oath or account." "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."
In order to prevent a discharge under this provision, the Trustee "must demonstrate by a preponderance of the evidence that the debtor knowingly and fraudulently made an oath and that the oath relates to a material fact."
Debtor acted knowingly. "A debtor acts knowingly if he or she acts deliberately and consciously."
The Court finds that Debtor acted with fraudulent intent. "`The problem in ascertaining whether a debtor acted with fraudulent intent is difficult because, ordinarily, the debtor will be the only person able to testify directly concerning his intent and he is unlikely to state that his intent was fraudulent. Therefore, fraudulent intent may be deduced from the facts and circumstances of a case.'"
The Court concludes that Debtor acted with indifference to his obligation as a debtor to truthfully provide the information required in his Statement of Financial Affairs and Schedules. Throughout his testimony, Debtor expressed disdain for lawyers, the bankruptcy process, and the individuals charged with its administration. Although intelligent, experienced in business, and steadfastly opposed to consulting with an attorney, Debtor displayed a reckless lack of interest in acquainting himself with what was required of a debtor to gain the benefit of the Chapter 7 discharge which he sought. When Debtor's "off the books" method of conducting his businesses collided with substantial debts, Debtor sought bankruptcy protection but recklessly continued to operate as if he were exempt from the bankruptcy rules and regulations applicable to others, or at least, if not completely exempt, as if he were entitled to pick and choose those which he found acceptable and those which he did not.
The next question is whether Debtor's omissions and false statements were material. In determining materiality, the question is not "merely the value of the omitted assets or whether the omission was detrimental to creditors.... [A] discharge may be denied if the omission adversely affects the trustee's or creditors' ability to discover other assets or to fully investigate the debtor's pre-bankruptcy dealing and financial condition."
In this case, Debtor disclosed in his Schedules what he thought the parties in interest should know, not what the statutes required. At the outset, the Trustee was not informed that Debtor had recently received income from his businesses, that business assets had been liquidated within the two years before filing, that a bank account had been closed on the eve of filing, and that Debtor owned recently purchased interests in Texas real property. Although, because of the small values involved, no single omission standing alone was of great significance, the cumulative effect of the omissions was material. While the Trustee presented no direct evidence of materiality, such as the costs incurred in ferreting out what was omitted from Debtor's bankruptcy filings, the Court's examination of the admitted exhibits in this case, review of the dockets in the main case and the adversary cases, and familiarity with these proceedings convinces the Court that if Debtor's filings had been complete and accurate, or even if Debtor had cooperated once the deficiencies were identified, the course of these proceedings would have been smoother and the work of the Trustee significantly reduced. When coupled with Debtor's cavalier indifference and his on-going pattern of disdain for full disclosure, the deficiencies in Debtor's filings required the Trustee to "engage in a laborious tug-of-war to drag the simple truth into the glare of daylight."
The Court therefore concludes that Debtor's discharge should be revoked under § 727(d)(1). The omissions and inaccuracies constitute grounds for denial of discharge under § 727(a)(2)(A) but were not known to the Trustee when the discharge was granted. Therefore the discharge was obtained through Debtor's fraud for purposes of § 727(d)(1) and must be revoked.
The Trustee in Count I of the Second Amended Complaint prays for revocation of discharge under § 727(d)(3), which allows for the revocation of a discharge if the debtor committed an act specified in § 727(a)(6). That subsection states that the court shall grant the debtor a discharge unless "the debtor has refused, in the case — (A) to obey any lawful order of the court, other than an order to respond to a material question or to testify." In the Tenth Circuit, a party objecting to discharge under § 727(a)(6)(A) "must demonstrate that `the debtor received the order in question and failed to comply with its terms.' The debtor then bears the burden of explaining the non-compliance. Ultimately, the court may not deny discharge under § 727(a)(6)(A) unless it finds
The Trustee contends Debtor's discharge should be revoked because he failed to comply with orders to appear for his Rule 2004 examination and for the hearing on the show cause order. But as to each of these orders, Debtor responded before the scheduled appearance by letter to either counsel or the Court explaining his position. As to the first notice of the Rule 2004 examination scheduled for November 17, 2009, Debtor stated he had a previously scheduled medical appointment, and the examination was rescheduled for November 23, 2009. On November 18, 2009, well before the rescheduled examination, by letter to counsel for the Trustee, Debtor stated his reasons for nonattendance. Likewise, Debtor explained to the Court his reasons for not appearing at the show cause hearing, which included a lack of funds to make the trip to Wichita from Texas.
Thus the Trustee has shown that Debtor received the orders in question. Debtor has explained his reasons for noncompliance. Each of these reasons was presented well before or on the date of the scheduled appearance. This is not a case where a debtor willfully did not respond to an order to appear.
Although the Court questions whether Debtor's reasons for noncompliance were presented in good faith, since the arbitrary failure to appear would be consistent with the pattern of disdain for the bankruptcy process he displayed in his testimony and his initial insistence that the Trustee provide funds for his appearance at his Rule 2004 examination, the Trustee has not presented evidence from which the Court can conclude they were pretexts. The Trustee argues that since Debtor traveled to attend unspecified hearings in the adversary actions in which his ex-wife and mother were also defendants, the Court should reject lack of funds as a sufficient reason for his failure to attend the show cause hearing. But the Trustee offered no evidence in support of this position, so the Court does not know the source of the funds Debtor used to pay for such attendance, or if Debtor's circumstances changed between his failure to attend in late 2009 and early 2010, and the unspecified dates on which he did appear.
Revocation of discharge is an extraordinary remedy.
For the foregoing reasons, the Court grants the Trustee's complaint to revoke Debtor's discharge under § 727(d)(1)
The foregoing constitute Findings of Fact and Conclusions of Law under Rule 7052 of the Federal Rules of Bankruptcy Procedure, which makes Rule 52(a) of the Federal Rules of Civil Procedure applicable to this proceeding. A judgment based upon this ruling will be entered on a separate document as required by Federal Rule of Bankruptcy Procedure 7058, which makes Federal Rule of Civil Procedure 58 applicable to this proceeding.
