Paul and Melody DenBeste (the Debtors) appeal two orders of the bankruptcy court: the first is the denial of the Debtors' motion to dismiss an adversary proceeding, brought by their principal creditor, to deny them a discharge (BAP No. NC-11-1087); the second is the bankruptcy court's post-trial judgment denying them a discharge under § 727(a)(4)(A)
In October 2005, several judgments were entered in California state court against the Debtors in favor of John and Bradford DeMeo (the Judgments). The DeMeos assigned the Judgments to Walter Steinmann dba Judgment Enforcement USA, and Steinmann subsequently assigned the Judgments to Mandy Power dba Judgment Enforcement USA (Power) on April 14, 2010.
Power attempted to collect on the Judgments, the balance due on which was approximately $56,000, to no avail. On August 20, 2010, at Power's request, the state court appointed a receiver (Receiver), stating that it was "loath to order the drastic remedy of receivership, but it is obvious that all other methods of collection have been met with stubborn refusal to abide by the mandates of the Court's lawful orders and judgment."
The Debtors filed their bankruptcy schedules and statement of financial affairs on September 29, 2010 (Schedules). On October 21, 2010, the case was converted at the Debtors' request to chapter 7. The § 341 meeting of creditors was initially held on November 5, 2010, and continued to December 7, 2010. Power attended the December 7th § 341 meeting.
At the start of the meeting, the Debtors took an oath to testify truthfully. They testified that they had reviewed the Schedules and that the Schedules accurately reflected all their assets and creditors with the exception of one omission, which required correction. The Debtors stated that they left off a 60-acre parcel of real property in Lake County, California (the Property), for which they asserted they paid $125,000 and still owed $125,000. However, in response to questions from the Trustee, as well as Power, the Debtors revealed that they also had bank accounts, horses, vehicles, interests in their corporate business, DenBeste Yard & Garden (the Corporation), and in a family trust, the DenBeste Family Trust (the Trust), that were omitted from the Schedules.
While the Debtors admitted they had several vehicles — including a Hummer, BMW, Corvette, and Chevy truck — they asserted those vehicles were owned by the Corporation. When Power questioned the Debtors as to why they had failed to list the Judgments, her attachments or the appointment of the Receiver in their statement of financial affairs and Schedules, or that Mr. DenBeste was a beneficiary to the Trust, the Debtors stated that they thought the information was listed on their Schedules.
Due to the Debtors' omissions on the Schedules, the Trustee commented that: "It's pretty clear these Debtors have run a little fast and loose with their statement under penalty of perjury on these schedules, as well as their statements today" and that "they've probably given . . . enough ammunition" to bring an action to deny their discharge. The Trustee continued the § 341 meeting to December 21, 2010, in order for the Debtors to provide further information about their assets and make appropriate amendments to their Schedules. According to the bankruptcy court's docket, no amendments to the Debtors' Schedules were filed until eight months later in August 2011.
Power filed, on July 6, 2011, an adversary proceeding against the Debtors alleging they knowingly and fraudulently filed materially false bankruptcy schedules and should be denied a discharge under § 727(a)(3) and (4) (the Complaint).
On August 10, 2011, the Debtors filed an amended petition and amended schedules (Amended Schedules). Although the Amended Schedules corrected some of the omissions brought up at the § 341 meeting and referenced in the Complaint, they did not list the Debtors' interests in the Trust or the Corporation, nor any additional vehicles.
On August 26, 2011, the Debtors filed a motion to dismiss the Complaint pursuant to Fed. R. Civ. P. 12(b)(1) and (b)(6) or in the alternative, a Motion for Summary Judgment (Motion to Dismiss). The Debtors asserted that they were entitled to judgment as a matter of law on the basis that Power lacked standing to pursue the Complaint because: (1) the Judgments were invalid as they lacked merit ("the judgments on which plaintiff bases her claims were not the result of any conduct by debtors, but by unmitigated, unrestrained and outrageous gamesmanship on the part of the underlying claimants"); (2) the assignment of the Judgments to her were invalid because of her failure to file a fictitious business name statement under requirements of California business law; (3) Power could show no "injury in fact" traceable to the Debtors' conduct. Additionally, the Debtors asserted that the allegations in the Complaint were rendered moot by the Amended Schedules.
In her response to the Motion to Dismiss, Power provided the state court's order appointing the Receiver, which reaffirmed the validity of the Judgments and that Power had standing despite the Debtors' allegation that she (or her assignor) did not properly file a fictitious business name statement. Power also provided the bankruptcy court with copies of the recording of her fictitious business name statement.
After the Debtors filed a reply, a hearing on the Motion to Dismiss was held on October 14, 2011. At the close of the hearing, the bankruptcy court denied the Motion to Dismiss, finding that: (1) Power sufficiently alleged in the Complaint that she was a creditor of the Debtors having been assigned the Judgments, and (2) that even if the issue of compliance with state law was relevant to the Complaint, Power submitted sufficient documentation establishing her compliance with California's fictitious business name filing requirements. The bankruptcy court set a trial on the Complaint for March 8, 2012.
In December 2011, Power served discovery requests on the Debtors. The Debtors responded on January 27, 2012. The Debtors answered each question by reiterating the arguments they made in their Motion to Dismiss and challenging the merits of, and Power's right to collect, the Judgments. Also on January 27, 2012, the Debtors appealed the denial of the Motion to Dismiss.
The bankruptcy court held a trial on the Complaint on March 8, 2012. At trial, Power entered into evidence documents from the Department of Motor Vehicles (DMV) that demonstrated there were nine vehicles registered in the name of the Debtors, including the Hummer, Corvette, two Harley Davidson motorcycles, three trailers, and two trucks. Mr. DenBeste testified that the Corporation owned the Hummer, Corvette, two trailers and two trucks, but he provided no evidence to support that testimony. The Debtors testified that they provided all their information to the Trustee and, although they again testified that they reviewed the Amended Schedules before signing them, they "did not notice" that certain assets, including the motorcycles, the Corporation, and the Trust were not listed.
Additionally, Mr. DenBeste made clear that he vigorously disputed the validity of the Judgments and Power's ability to collect them:
Trial Tr. (March 8, 2012) at 45:4-18.
After the trial, on March 19, 2012, the bankruptcy court issued a written decision (Memorandum Decision), finding that the Debtors' Schedules were "grossly false, and the [A]mended [S]chedules only slightly less so." It further found that the Debtors concealed their assets with the intent to "thwart Power in her efforts to enforce the [J]udgments lawfully assigned to her." Accordingly, the bankruptcy court determined that the Debtors were not entitled to a discharge pursuant to § 727(a)(4)(A) and (a)(2)(B). The bankruptcy court entered a judgment denying the Debtors' discharge the same day. The Debtors 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 in denying the Motion to Dismiss?
Did the bankruptcy court err in denying the Debtors a discharge?
"[W]hile denial of a motion to dismiss an adversary proceeding for failure to state a claim is generally interlocutory and thus rarely reviewed by us, any review of such a denial is de novo."
We apply the following standard of review to a judgment on an objection to discharge: (1) the bankruptcy court's determinations of the historical facts are reviewed for clear error; (2) the selection of the applicable legal rules under § 727 is reviewed de novo; and (3) the application of the facts to those rules requiring the exercise of judgments about values animating the rules is reviewed de novo.
Intent is a factual matter reviewed for clear error.
Neither the denial of a motion to dismiss nor the denial of a motion for summary judgment is a final order capable of appellate review.
Nevertheless, the merger of an interlocutory dismissal order into a final order does not necessarily mean that the dismissal order will be reviewed on appeal. Review of a motion to dismiss may be denied if, at trial, there is adequate evidence presented to support the judgment.
The bankruptcy court's denial of the Motion to Dismiss decided nothing other than that: (1) the allegations in the Complaint were sufficient to state a claim for relief; and, (2) there were genuine issues of fact, which required a trial on the merits of the Complaint. Since the trial has occurred, there is no need to review whether that decision was erroneous, particularly because, as we discuss below, the bankruptcy court did not err in entering judgment in favor of Power.
However, we note that it may be appropriate to address the Debtors' argument regarding Power's standing, as questions of standing must be supported at each stage of litigation.
The Complaint alleged that: (1) Power had been assigned the Judgments, (2) the Receiver had been appointed to aid Power's collection efforts on the Judgments; and, (3) the state court had issued an order directing the Debtors to show cause why funds seized by the Receiver should not be used to satisfy the Judgments. These allegations were sufficient to establish that Power was a creditor of the Debtors with standing to pursue the § 727 action.
As noted by numerous courts, the integrity and viability of the bankruptcy process depend on the full, candid and complete disclosure by debtors of their financial affairs.
A denial of a discharge is an act that must not be taken lightly. Consequently, § 727 must be construed liberally in favor of the debtor and against the objector.
The Bankruptcy Code provides that a chapter 7 debtor shall be granted a discharge, unless "the debtor knowingly and fraudulently, in or in connection with the case — (A) made a false oath or account." 11 U.S.C. § 727(a)(4)(A). 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."
A false oath or statement is made when it occurs in the debtor's schedules or at an examination during the course of the proceedings.
A debtor's bankruptcy schedules must be verified or contain an unsworn declaration under penalty of perjury. 28 U.S.C. § 1746; Rule 1008. Accordingly, a false statement or omission in a debtor's schedules is a false oath under § 727(a)(4)(A). As a result, the bankruptcy court did not err when it found that the first element of § 727(a)(4)(A) was satisfied.
A false oath is "`material,' and thus sufficient to bar discharge if it bears a relationship to the bankrupt's business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property."
The last element is intent. The Debtors must have "knowingly and fraudulently" made the omissions on their Schedules. A debtor "acts knowingly if he or she acts deliberately and consciously."
The element of fraudulent intent is satisfied if the debtor made a false statement or omission in his bankruptcy schedules that he knew at the time to be false and that he made with the intention and purpose of deceiving creditors.
Intent may be proven through "circumstantial evidence or by inferences drawn from a debtor's course of conduct."
The record indicates that the Debtors' omissions were not the result of honest mistake promptly corrected by an amendment. The Amended Schedules failed to clear up all inconsistencies or omissions; they did not reflect the Debtors' ownership of several vehicles, which were, according to D.V. records, registered in their names. Furthermore, although the issue of the vehicles and motorcycles, as well as their interests in the Corporation and the Trust, were brought up at the § 341 meeting, the Debtors did not endeavor to ensure those items were included on the Amended Schedules. Instead, they insisted that the D.V. records were incorrect and that the Hummer, Corvette, two trailers and two trucks were owned by the Corporation and that they had discussed this with the Trustee. Still, they provided no evidence to demonstrate that the Corporation paid for or owned the vehicles. More importantly, simply providing information to the Trustee does not satisfy the Debtors' burden to disclose their assets on their bankruptcy schedules.
Debtors have a duty, throughout the bankruptcy case, to ensure that their bankruptcy schedules are accurate.
Finally, Mr. Densest admitted that he intended to resist any effort by Power to collect on the Judgments. Indeed, the bankruptcy court found that the Debtors' were motivated to conceal their assets because they "believe that the [Judgments assigned to [Power] were wrongly made by the state court and that the state court ruled improperly in holding that the [Judgments are enforceable. The [Debtors] therefore feel justified in obstructing their enforcement. This attitude is fully apparent in their responses to discovery." Memorandum Decision at 2. "Motive can support a finding of knowing and fraudulent intent."
After carefully reviewing the record, we have no difficulty concluding that the bankruptcy court did not err in finding that the Debtors knowingly and fraudulently made a false oath on their Schedules (and Amended Schedules), which materially affected the Trustee's and creditors' ability to fully determine the Debtors' financial affairs. Therefore, we AFFIRM the bankruptcy court's judgment denying the Debtors' discharge.
For the foregoing reasons, we AFFIRM the judgment denying the Debtors' discharge.
The Debtors also made an argument that joinder of the Trustee to the Complaint was necessary.