THOMAS J. TUCKER, Bankruptcy Judge.
In these two adversary proceedings, which were consolidated for purposes of pretrial proceedings and trial,
On December 3 and December 17, 2013, the Court held a bench trial in these two adversary proceedings.
This Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D.Mich.). This is a core proceeding under 28 U.S.C. § 157(b)(2)(J). This matter also is "core" because it falls within the definition of a proceeding "arising under title 11" and of a proceeding "arising in" a case under title 11, within the meaning of 28 U.S.C. § 1334(b). Matters falling within either of these categories in § 1334(b) are deemed to be core proceedings. See Allard v. Coenen (In re Trans-Industries, Inc.), 419 B.R. 21, 27 (Bankr.E.D.Mich. 2009). This matter is a proceeding "arising under title 11" because it is "created or determined by a statutory provision of title 11," id., namely, the 11 U.S.C. § 727(a) provisions discussed below. And this matter is a proceeding "arising in" a case under title 11, because it is a proceeding that "by [its] very nature, could arise only in bankruptcy cases." Id.
On July 12, 2011, Debtor filed a voluntary petition for relief under Chapter 11, commencing Case No. 11-58953. The Becker Parties filed their adversary proceeding seeking denial of Debtor's discharge on July 30, 2012. The Chapter 11 case was later converted to Chapter 7, on November 2, 2012. The Chapter 7 Trustee filed his adversary proceeding seeking denial of Debtor's discharge, on March 25, 2013.
The parties have stipulated that on more than one occasion, the Debtor made false statements in the schedules and Statement of Financial Affairs that he filed in his bankruptcy case. Debtor, the Trustee, and the Becker Parties stipulated to the following facts, as stated in the final pretrial order, which the Court incorporates into its findings of fact and conclusions of law. Debtor is referred to sometimes in the final pretrial order as "Defendant."
In addition, Debtor and the Becker Parties stipulated to the following facts:
The Becker Parties and the Trustee both seek denial of Debtor's discharge under 11 U.S.C. § 727(a)(4)(A), based on Debtor's failure to disclose in his bankruptcy schedules and Statement of Financial Affairs the property listed above in the parties' stipulated facts, which the Plaintiffs allege was property of the bankruptcy estate. Section 727(a)(4)(A) provides:
11 U.S.C. § 727(a)(4)(A).
Keeney v. Smith (In re Keeney), 227 F.3d 679, 685 (6th Cir.2000) (citation omitted). The parties agree that the elements listed in the Keeney case as element nos. 1, 2, and 5 are satisfied in this case with respect to all of the items the Debtor failed to disclose, listed in the stipulations quoted in Part III of this opinion. That is, Debtor made statements under oath, which were false, and which related materially to Debtor's bankruptcy case.
In re Chavin, 150 F.3d 726, 728 (7th Cir. 1998) (citations omitted).
Keeney, 227 F.3d at 685-86 (citations omitted).
In a recent bench opinion in McDermott v. Schwenck (In re Schwenck), this Court interpreted Keeney as requiring the Court to employ a "totality of circumstances" test to determine whether the "fraudulent intent" element of § 727(a)(4)(A) has been satisfied. (See Docket # 30 in Adv. Pro. No. 13-4701 (Tr. of Opinion on Trustee's Mot. for Summ. J.) at 14-17.) Under that test, a finding that a debtor had a "reckless disregard as to whether a representation is true," does not, standing alone, require the court to find that the "fraudulent intent requirement" of § 727(a)(4)(A) has been established. Rather, whether a debtor had a "reckless disregard as to whether a representation is true," is one factor among others that a court may consider in determining whether to draw an inference of fraudulent intent on the part of a debtor. Id. In other words, the Court may, but
(Id. at 17.)
This Court interprets Keeney and similar cases as permitting, but not requiring, a finding of fraudulent intent if the debtor is guilty of reckless disregard for the truth. "[Fraudulent intent] can be found based on `the cumulative effect of a series of innocent mistakes which evidence a pattern of reckless and cavalier disregard for the truth.'" Sheehan & Associates PLC v. Lowe, No. 12-11768, 2012 WL 3079251, at *7 (E.D.Mich. July 30, 2012) (citation omitted), aff'd, 518 Fed.Appx. 348 (6th Cir.2013); see also Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 178 (5th Cir.1992) (footnote omitted) (citation omitted) (holding that the bankruptcy court's findings "that the existence of more than one falsehood, together with [the debtor's] 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 [under § 727(a)(4)(A) ]" were "supported by the record and are not clearly erroneous"); Boroff v. Tully (In re Tully), 818 F.2d 106, 112 (1st Cir.1987) (footnote omitted) (citation omitted) (holding that "there was ample evidence in the record to support a reasoned conclusion by the bankruptcy judge that [the debtor] exhibited the `reckless indifference to the truth,' which has consistently been treated as the functional equivalent of fraud for purposes of § 727(a)(4)(A)"); Stevenson v. Taylor (In re Taylor), 461 B.R. 420, 423 (E.D.Mich. 2011) (quoting Keeney, 227 F.3d at 685-86) ("The Sixth Circuit has provided that `"intent to defraud" involves a material representation that you know to be false, or, what amounts to the same thing, an omission that you know will create an erroneous impression' [and] ... `[a] reckless disregard as to whether a representation is true will also satisfy the intent requirement.'"); Stevenson v. Cutler (In re Cutler), 291 B.R. 718, 726 (Bankr.E.D.Mich. 2003) (citation omitted) (explaining that "[a] series or pattern of errors or omissions may have a cumulative effect giving rise to an inference of an intent to deceive... [but that] the discharge is not to be denied when the untruth was the result of a mistake or inadvertence"); March v. Sanders (In re Sanders), 128 B.R. 963, 972 (Bankr.W.D.La.1991) (citations omitted) (explaining, in relevant part, that under § 727(a)(4)(A), "[t]he statement under oath must be known by its maker to be false and be made willfully (rather than inadvertently) with an intent to defraud"; that "[t]his intent [to defraud] may be established by circumstantial evidence"; and that "[s]tatements made with reckless indifference to the truth are regarded as intentionally false").
In an analogous context, in Bullock v. BankChampaign, N.A., ___ U.S. ___, 133 S.Ct. 1754, 1759, 185 L.Ed.2d 922 (2013), the United States Supreme Court recently held that "defalcation" under 11 U.S.C. § 523(a)(4) must be treated similarly to the way "fraud" is treated in that section; that fraud requires a showing of "positive fraud, or fraud in fact, involving moral turpitude or intentional wrong;" but that an intentional wrong includes "not only conduct that the fiduciary knows is improper, but also reckless conduct of the kind that the criminal law often treats as the equivalent [of an intentional wrong];" and that reckless conduct for purposes of § 523(a)(4) is when a "fiduciary `consciously disregards' (or is willfully blind to) `a substantial and unjustifiable risk' that his conduct will turn out to violate a fiduciary duty"). See also Shapiro v. Plante &
Debtor argues that his numerous false statements — his failure to disclose the various assets and liabilities in his schedules and Statement of Financial Affairs — were due to a combination of innocent mistake, inadvertence, faulty memory, and in some cases, his sincere belief that disclosure was not required. Debtor notes that the Trustee has not sought turnover of any of the assets he failed to disclose, and has made no attempt to administer the assets for the benefit of the estate. According to Debtor, this is because the undisclosed assets had little or no value above what Debtor could exempt, and thus were "undisputedly worthless to the estate." Debtor alleges that he made no attempt to hide any of the undisclosed assets, and had nothing to gain by not disclosing them, because he could have claimed them as exempt. Debtor argues that given these facts, and considering the totality of the circumstances, the Trustee and the Becker Parties have failed to satisfy their burden of establishing the "knowledge" and "fraudulent intent" elements of § 727(a)(4)(A).
The Chapter 7 Trustee and the Becker Parties argue that the totality of circumstances establish that Debtor knowingly, and with fraudulent intent, failed to disclose assets and liabilities in his bankruptcy schedules and Statement of Financial Affairs in an effort to benefit himself and creditors who were his friends, and to make it difficult for other creditors like the Becker Parties, who were hostile to him, to recover on their claims.
The Trustee argues that Debtor's pleas of innocent mistake, inadvertence, or belief that he was not required to disclose certain assets, are not credible. This is so, the Trustee says, because the Debtor is a licensed attorney, who practiced both business and real estate law, was involved in multi-million dollar merger and acquisition cases, had previously filed a bankruptcy petition and completed schedules on behalf of a corporate debtor, and was represented by competent bankruptcy counsel for the first several months in his own case. The Trustee alleges further that Debtor's testimony is not credible, because (1) Debtor lied about his post-petition marketing of technology for Fitzpatrick Technologies LLC; (2) Debtor admitted in writing to having committed fraud against the Bush, Seyferth & Paige law firm, one of the largest creditors in Debtor's bankruptcy case and his former counsel in litigation against the Becker Parties; and (3) Debtor gave no legally valid reason for failing to disclose any of the undisclosed assets. The Trustee alleges further that Debtor's pattern of conduct, which included disobeying court orders, surreptitiously and wrongfully using property of the estate for his own benefit, and refusing to schedule undisclosed assets and liabilities despite filing multiple amendments to his schedules, shows a reckless disregard for the truth and for his duties under the Bankruptcy Code and Rules.
The arguments of the Becker Parties echo those of the Trustee. And the Becker Parties argue that although a debtor's failure to disclose a few minor assets or liabilities on his schedules and Statement of Financial Affairs, under certain circumstances,
The Court finds and concludes that the Debtor did make several false statements material to his bankruptcy case under oath, both knowingly and with fraudulent intent. These include the following.
Debtor failed to list either his Bertolucci watch or his wedding ring in his initial Schedule B, filed July 26, 2011, either in response to Item 7, "Furs and jewelry" (where Debtor checked "None") or in response to Item 35, "Other personal property of any kind not already listed. Itemize."
The Court finds that these false statements were made knowingly and with fraudulent intent. Debtor knew he owned these items when he signed and filed his initial Schedule B, and they were important to him. Furthermore, the Debtor is a long-time licensed attorney, and a person who the Court perceives, from observing the Debtor in many hearings and in his testimony at trial, to be a very intelligent person. It was known and obvious to the Debtor when he filed his initial Schedule B that his watch and wedding ring were "jewelry" within the meaning of Item 7 on Schedule B, but he checked "None" at Item 7, indicating that he owned no jewelry. Even if the Debtor had truly believed that these items were not "jewelry" — which Debtor did not — Debtor still knew that he had to list these items, if nowhere else, at line 35 on Schedule
This conclusion is reinforced by the fact that, as the Court now finds, when the Debtor was questioned about his watch and his wedding ring during his first meeting of creditors, on August 19, 2011, he testified falsely under oath about why he had not listed them in his Schedule B. He was asked about the watch he was wearing, and then after he admitted to owning a wedding ring, he was confronted with a question suggesting that his Schedule B, Item 7 was false because no jewelry was listed. In response, Debtor testified "I don't consider a watch to be jewelry. I consider it to be a functional piece of business equipment."
Then, when asked about his wedding ring, specifically the question "[d]o you consider your wedding ring to be a piece of functional equipment?" Debtor testified "I don't consider it to be jewelry.... I consider it to be a token of my wife's affection."
It is true that when the Debtor filed his amended Schedule B, listing his watch and wedding ring as jewelry, Debtor also claimed an exemption for the full stated value of the watch and the ring, in Debtor's amended Schedule C. From this, one might wonder what motive the Debtor could have had to try to conceal the watch and the wedding ring by not listing them in his initial Schedule B, since he could exempt them fully. The answer to this lies in the fact that, as the Debtor testified at trial, he did not understand or know about the law of exemptions in bankruptcy cases.
The Court finds that Debtor knowingly and with fraudulent intent made false statements under oath material to his bankruptcy case, when he failed to list his watch and his wedding ring in his initial Schedule B, and when he testified at his first meeting of creditors, under oath, about the watch and the ring, as described above. This alone is sufficient to deny Debtor's discharge under § 727(a)(4)(A). But there is more.
When he filed his bankruptcy case, and thereafter, Debtor was leasing a 2009 BMW 5 series vehicle that he regularly drove as his primary vehicle. The first line of instruction on Schedule G required the Debtor to "Describe all executory contracts of any nature and
As with his wedding ring and the $900.00 watch that he wore, the Debtor could not have forgotten about his BMW vehicle lease when he completed, signed, and filed his Schedule G. Nor could the Debtor have forgotten, at all times after filing his initial Schedule G, that he had this unexpired vehicle lease when he filed his bankruptcy case. Debtor testified that this vehicle was the primary vehicle he drove on a regular basis. And he could not have forgotten that he had an unexpired lease for this vehicle. Indeed, in a deposition taken on March 5, 2012, when asked why he did not listed the 2009 BMW in his Schedule B, Debtor testified that this was because he did not own it, but rather leased it.
Debtor testified at trial that he did not understand what "executory contract" means in bankruptcy law.
Debtor testified at trial that he did not believe that the BMW vehicle had any value to him or to the bankruptcy estate, because it was subject to a lease. But this is not a credible explanation for Debtor's failure to list the BMW lease in Schedule G. The description of what must listed in Schedule G, quoted above, is absolutely clear and gives no indication whatsoever that an unexpired lease of personal property need not be listed if it has no value, or if the Debtor thinks that it has no value. As a licensed attorney, and as noted above, a very intelligent person, the Debtor could not have, and did not, think that he did not have to list his BMW vehicle lease in Schedule G.
After admitting the obvious fact that he knew what a lease was, Debtor testified that when he was filling out Schedule G, he did not understand that this was "where you would list unexpired leases or leases that were in effect at the time."
Moreover, several months before filing his Schedule G in his bankruptcy case, the Debtor had reviewed and signed, on behalf of MEM Investments, LLC, in that company's
Given the evidence, the Court concludes that the Debtor knowingly made a false statement when he failed to list his BMW vehicle lease in Schedule G. And because he knew that it must be listed, and knowingly failed to list it, the Court infers that the Debtor must have had, and did have, a fraudulent intent in making this false statement. The Debtor has given no other credible explanation for his failure to disclose this vehicle lease.
For some time before Debtor filed his own bankruptcy case, a company of which the Debtor was indirectly the 95% owner, MEM Investments, LLC, had been in its own Chapter 11 bankruptcy case in this Court. When he filed his bankruptcy case, Debtor had a claim against MEM Investments, LLC, that he later valued at $290,000. We know this, in part, because in his amended Schedule B, filed November 11, 2011, Debtor listed this claim, and stated that its "current value" was $290,000, in response to question 35 of Schedule B, which required Debtor to list "[o]ther personal property of any kind not already listed."
Debtor testified that when he filled out his initial schedules in his bankruptcy case he thought that an "asset" meant real or personal property that has some actual value, as opposed to property that has no value. And he testified that he later disclosed his claim against MEM Investments in his amended Schedule B because "I was advised that as an asset, even though it was — it had no value at that point in time, that it needed to be scheduled."
But the Court finds that this explanation is false. First, the instructions on Schedule B, at the very beginning, state that the Debtor is to "list all personal property of the debtor of whatever kind," without making any reference to whether or not the property has value.
Thus, the Court concludes that the Debtor knowingly and fraudulently made a false statement under oath when he failed to list his $290,000 claim against MEM Investments, LLC in his initial Schedule B. And Debtor made another false oath under § 727(a)(4)(A), in his testimony at trial, when he knowingly gave a false explanation of his failure to list this property in his initial Schedule B.
The Court finds, from the evidence at trial, that at the time of his bankruptcy petition in this case, and at all times thereafter, Debtor had an oral agreement with Fitzpatrick Technologies LLC ("Fitzpatrick"). Under that oral agreement, which the Debtor made with the members of Fitzpatrick no later than 2008, the Debtor was to help Fitzpatrick try to market Fitzpatrick's technology in certain plastic pallets and pallet components, and the Debtor is to receive from Fitzpatrick between 8-10% of all revenue Fitzpatrick realizes from any sales of such technology.
Debtor's initial Schedule B, and his first and second amended Schedules B, each contain false statements made under oath, material to the bankruptcy case, which the Court finds were made knowingly and with fraudulent intent by the Debtor. In his trial testimony, Debtor claimed that he did not disclose his oral agreement with Fitzpatrick because, in essence, it was something less firm and formal than an actual agreement; because efforts to market the technology of Fitzpatrick had been dormant for quite some time at the time he filed his bankruptcy petition; because Fitzpatrick has never realized any revenue from the marketing of its pallet technology; and because any potential that the Debtor had under his oral understanding with Fitzpatrick had a value of zero as of the petition date, and thereafter.
Contrary to Debtor's testimony, the Court finds that when he filed his bankruptcy petition and at all times thereafter through the present, Debtor knew and believed that he had an enforceable oral agreement with Fitzpatrick, described above, and that the efforts to market Fitzpatrick's pallet technology still might come to fruition, such that Fitzpatrick will realize revenue, and Debtor will be entitled to receive 8-10% of that revenue. At the petition date, and at all times thereafter, the Debtor knew that he had property in
These findings are supported by the facts and evidence already stated, as well as by the fact that in a pre-trial deposition the Debtor himself characterized his oral agreement with Fitzpatrick as a "verbal agreement."
The foregoing discussion is amply sufficient to require the Court to deny Debtor's discharge under § 727(a)(4)(A). For that reason, the Court will not discuss in detail other false statements that were made in Debtor's schedules and Statement of Financial Affairs, including: (1) Debtor's failure to list in his initial Schedule D, or ever to amend his Schedule D to list, the second mortgage that Debtor and his wife gave to Becker Ventures L.L.C. on Debtors' home in Bloomfield Hills, Michigan, which was recorded in 2006;
The Court notes that although it would make the same findings and conclusions that it has made in this opinion, above, without the following, the following evidence
Before Debtor filed this bankruptcy case, he was sued in the Oakland County Circuit Court by the law firm Bush Seyferth & Paige, for fraud. Debtor consented to a judgment for $300,000 in favor of the Bush Seyferth firm, and a consent judgment was entered on or about May 23, 2011.
For the reasons stated in this opinion, the Court will enter a judgment in these consolidated adversary proceedings, on Plaintiff Kohut's Complaint and on Count V of the Becker Parties' Complaint, denying Debtor a discharge under 11 U.S.C. § 727(a)(4)(A). All other remaining counts in the Becker Parties' Complaint will be dismissed, without prejudice.
