MEMORANDUM DECISION AFTER TRIAL: NO DENIAL OF DISCHARGE UNDER 11 U.S.C. § 727(a)(4) OR (5)

NEIL W. BASON, Bankruptcy Judge.

For the reasons set forth below, and in oral findings of fact and conclusions of law on the record at a post-trial hearing on July 27, 2016, judgment will be issued in favor of the defendant on all claims under 11 U.S.C. § 727.1 By way of background: the issues were narrowed as reflected in an order partially granting the defendant's motion for summary judgment (adv. dkt. 116) and in the pretrial order (adv. dkt. 204); a bifurcated trial was held on the dates referenced in the caption regarding the § 727 claims; and at the post-trial hearing the parties and this Bankruptcy Court agreed that there is no just reason for delay in entering a final judgment as to the § 727 claims (leaving for another day any litigation regarding the claims under 11 U.S.C. § 523, which could be mooted depending on the ultimate outcome of the § 727 claims after exhaustion of anticipated appeals).

I. LEGAL STANDARDS

False oath or account: "The court shall grant the debtor a discharge, unless . . . the debtor knowingly and fraudulently, in or in connection with the case[,] made a false oath or account." 11 U.S.C. § 727(a)(4)(A). "A false statement or an omission in the debtor's bankruptcy schedules or statement of financial affairs can constitute a false oath." In re Retz, 606 F.3d 1189, 1196 (9th Cir. 2010) (citations and internal quotation marks omitted). "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." Id. at 1196-97.

"To prevail on this claim, a plaintiff must show, by a preponderance of the evidence, 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. Id. A finding of fraudulent intent is a finding of fact reviewed for clear error." Id. These elements are reviewed below.

Material: "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." Id. (internal quotation marks omitted).

Knowing: "A debtor acts knowingly if he or she acts deliberately and consciously." Id. (internal quotation marks omitted).

Fraudulent: "To demonstrate fraudulent intent, [the objecting party bears] the burden of showing that: (1) [the debtor] made the representations [e.g., a false statement or omission in bankruptcy schedules]; (2) . . . at the time he knew they were false; [and] (3) . . . he made them with the intention and purpose of deceiving the creditors." Id. at 1198-99. Intent is usually proven by circumstantial evidence or by inferences drawn from the debtor's conduct. Id. "Reckless indifference or disregard for the truth may be circumstantial evidence of intent, but is not sufficient, alone, to constitute fraudulent intent." Id. at 1199. In Retz, fraudulent intent was established by showing "a pattern of falsity, his reckless indifference to and disregard of the truth." Id. at 1198.

Advice of counsel: "Generally, a debtor who acts in reliance on the advice of his attorney lacks the intent required to deny him a discharge of his debts." Id. "However, the debtor's reliance must be in good faith. The advice of counsel is not a defense when the erroneous information should have been evident to the debtor. A debtor cannot, merely by playing ostrich and burying his head deeply enough in the sand, disclaim all responsibility for statements which he has made under oath." Id.

Failure to explain loss or deficiency of assets: "The court shall grant the debtor a discharge, unless . . . the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor's liabilities." 11 U.S.C. § 727(a)(5). "Under § 727(a)(5) an objecting party bears the initial burden of proof and must demonstrate: (1) debtor at one time, not too remote from the bankruptcy petition date, owned identifiable assets; (2) on the date the bankruptcy petition was filed or order of relief granted, the debtor no longer owned the assets; and (3) the bankruptcy pleadings or statement of affairs do not reflect an adequate explanation for the disposition of the assets." Retz, 606 F.3d at 1205.

II. JURISDICTION AND AUTHORITY

This Bankruptcy Court has jurisdiction under 28 U.S.C. § 1334 because this nondischargeability action arises under section 727 of the Bankruptcy Code (11 U.S.C.), and alternatively because it arises in this bankruptcy case, or alternatively because it is related to this bankruptcy case. In addition, this court has the authority to enter a final judgment in this adversary proceeding. See 28 U.S.C. § 158(b)(2)(J); and see generally Stern v. Marshall, 131 S.Ct. 2594 (2011); In re AWTR Liquidation, Inc., 547 B.R. 831 (Bankr. C.D. Cal. 2016) (discussing Stern); In re Deitz, 469 B.R. 11 (9th Cir. BAP 2012) (ability to enter final judgment in nondischargeability actions, and if anything denial of discharge actions are more "core" because they do not involve nonbankruptcy claims). In addition, although Mr. Simon's counsel purported to reserve this issue after trial, at an early hearing on July 7, 2015 they did not dispute that this court could issue a final judgment, and this court finds and concludes that this was sufficient consent, and that they should not be permitted to change their consent now that it is they (rather than Mr. Marshall) who would like a second bite at the apple. See Wellness Intern. Network, Ltd. v. Sharif, 135 S.Ct. 1932 (2015); In re Pringle, 495 B.R. 447 (9th Cir. BAP 2013).

III. DISCUSSION

A. The Ferrari

The plaintiff, Mr. Randy Simon, claims that the defendant/debtor, Mr. John Marshall, "knowingly and fraudulently" made a "false oath or account" (11 U.S.C. § 727(a)(4)(A)) by not listing a valuable Ferrari on his bankruptcy schedules. Mr. Marshall counters that he had neither legal title nor equitable ownership at all relevant times, and instead he believed that the Ferrari belonged either (1) to his daughter Ms. Stephanie Marshall or (2) to the plaintiff, Mr. Randy Simon. Mr. Simon points to the sale documents that he and his daughter signed, allegedly in 2009 (Trial Ex. B), and the State Court's conclusions in March of 2014 "that the Ferrari was [] transferred to Stephanie Marshall" (Trial Ex. 35 [dkt. 136, Ex. 2, at PDF p. 23]), and that Mr. Simon "is entitled to possession of the Ferrari" (id.).

Mr. Marshall also asserts as a defense that he relied on the advice of counsel. According to his own testimony and that of his attorney, Richard H. Gibson, Esq., Mr. Marshall was advised not to list the Ferrari as his asset because his position was that it was not in fact his asset, and he did not want to make any contrary legal admission. (Mr. Gibson has since acknowledged that the better approach would have been to provide more complete disclosure, such as by listing the Ferrari as a disputed potential asset on bankruptcy schedule B, but he reiterates that his advice was not to list it so as not to admit ownership, and that there was no intent to make any false oath or account.)

Mr. Simon alleges, as additional evidence of an intent to hide the Ferrari, that Mr. Marshall did not disclose it to the chapter 7 trustee until after negotiations with Mr. Simon had broken down. According to Mr. Simon, Mr. Marshall admitted (in at least one meeting and on the telephone) that if the two of them reached a settlement then Mr. Marshall would orchestrate the dismissal of the bankruptcy case before he had to disclose the Ferrari (or other assets) to the trustee or creditors. Mr. Simon asserts that, in furtherance of this scheme, Mr. Marshall intentionally failed to attend his initial meeting of creditors — i.e., both to set up a likely dismissal of his bankruptcy case if he elected to miss his continued meeting of creditors, and meanwhile to evade having to testify about issues such as the Ferrari. Mr. Simon asserts that negotiations broke down on May 22, 2014, and only then did Mr. Marshall write to the chapter 7 trustee regarding the Ferrari (see Trial Ex. 14 & Trial Ex. F, dated May 22, 2014).

There was conflicting evidence on most of the above issues at trial. Although Mr. Marshall no doubt wished to minimize the chances that the chapter 7 trustee would consider the claim to the Ferrari to be a very valuable asset, for two reasons this Bankruptcy Court is unable to find that he "knowingly and fraudulently" was making a "false oath or account."

First, although the Ferrari itself is not listed on bankruptcy schedule "B," the fraudulent transfer action involving the Ferrari is disclosed on Mr. Marshall's original statement of financial affairs ("SOFA") as a pending "Fraudulent Trans[fer]" action. Trial Ex. 6 [case dkt. 27], item 4.a. See also Trial Ex. 15 (explanation of which actions involved the Ferrari, in letter from Mr. Gibson to chapter 7 trustee). The SOFA was filed on April 18, 2014, long before the negotiations broke down. True, this was not as prominent a disclosure as he should have made, but it would be an exceptionally poor way of attempting to hide this asset, and that strongly suggests that he had no such intent.2

Second, although Mr. Marshall's testimony at trial was not entirely credible, and other testimony shows that he regularly attempts to obfuscate his finances, it is also unrealistic to surmise that he was "knowingly and fraudulently" attempting to hide the Ferrari because that would suppose that he was, as Mr. Gibson put it, both cunning and stupid at the same time (i.e., being cunning enough to come up with elaborate schemes to hide any interest in the Ferrari, but being stupid enough not realizing that those schemes would be transparent and unsuccessful in the face of the disclosure on the SOFA). The most relevant testimony can be summarized as follows.

Mr. Simon's investigator, Mr. Scott Ross (who posed as a prospective purchaser of the Ferrari) testified that Mr. Marshall held himself out as its real owner and described the documents transferring legal title to Ms. Stephanie Marshall as a "poor man's trust." Transcript, adv. dkt. 221, p.12:7-11; see also p.15:18-19, p.18:16-19. This is supported by the testimony of Ms. Angela Berry, who had a personal relationship with Mr. Marshall and loaned him some funds. Ms. Berry testified to Mr. Marshall boasting about using complex schemes to reduce his taxes and obscure ownership of assets, and being "very proud of the fact that his finances were so convoluted that nobody, except for himself and Stephanie, would exactly know what was going on." Transcript, adv. dkt. 220, p.20:10-13.

Mr. Marshall's testimony on these issues was somewhat evasive, and to the extent he denied making statements of the type ascribed to him by Mr. Ross or Ms. Berry he was not credible. But nor was Mr. Ross entirely credible to the extent that he suggested that Mr. Marshall flatly admitted to full ownership of the Ferrari (and Mr. Ross's credibility was undermined by his refusal to acknowledge that, obviously, he had a motive to find evidence favoring the person who hired him, Mr. Simon). Transcript, adv. dkt. 221, p.18. Rather, this Bankruptcy Court is persuaded by Mr. Marshall's explanation that he might have said that he could drive the Ferrari until he dies because he knew that his daughter would let him use the Ferrari. Transcript, adv. dkt. 221, p.78:8-15. Similarly, although Mr. Marshall did not admit it, he no doubt also expected that his daughter would let him sell the Ferrari and distribute the proceeds to himself or to her based on whatever suited his purposes at the time.

In other words, Mr. Marshall had a colorable basis to assert that he did not actually own the Ferrari, having transferred title to his daughter as a "poor man's trust." True, that might be an avoidable fraudulent transfer, but Mr. Marshall did disclose the pending fraudulent transfer action by Mr. Simon. Mr. Marshall was not obligated to concede on his bankruptcy schedules that he actually owned the Ferrari.

Likewise, this Bankruptcy Court is persuaded that, as long as negotiations with Mr. Simon continued, Mr. Marshall sought to minimize any disclosures that would suggest to the chapter 7 trustee that there were valuable assets. But this Bankruptcy Court also finds credible the testimony of Mr. Gibson that he and Mr. Marshall did not contemplate actually being able to orchestrate the dismissal of the bankruptcy case without disclosing the Ferrari. Rather, Mr. Gibson fully expected the chapter 7 trustee to investigate the fraudulent transfer action (and other potential assets), and not simply move for dismissal due to any non-appearance by Mr. Marshall at the meeting at creditors. This court takes judicial notice that chapter 7 trustees before this court are loath to dismiss cases that involve potential assets such as what the SOFA discloses without further investigation. At best Mr. Gibson (and, through him, Mr. Marshall) hoped to persuade the chapter 7 trustee to settle at a substantial discount because any claim to the Ferrari was "problematic." That is a far cry for hiding the existence of the Ferrari altogether.

In sum, Mr. Marshall disclosed the fraudulent transfer claim involving the Ferrari in his original SOFA, and that by itself is enough that this Bankruptcy Court cannot find that he "knowingly and fraudulently" made a "false oath or account" by not also disclosing the potential interest in the Ferrari in his other bankruptcy papers. The other evidence reinforces that Mr. Marshall certainly attempted to minimize whatever potential claim his bankruptcy estate might have to ownership of the Ferrari, but that is very different from "knowingly and fraudulently" making a "false oath or account." Alternatively, even if the issue were more doubtful (which it is not), Mr. Marshall presented credible evidence that he relied on advice of counsel, and Mr. Simon has not shown that such reliance lacked good faith. For all of these reasons, Mr. Simon has not established a claim under section 727(a)(4)(A) with respect to the Ferrari.

Likewise, to the extent that Mr. Simon asserts a claim under section 727(a)(5) (failure to explain satisfactorily a loss or deficiency of assets), he has not shown that Mr. Marshall failed to make such an explanation. To the contrary, Mr. Marshall provided considerable explanation to the chapter 7 trustee (including in detailed letters, Trial Ex. 14 & 15), as well as to Mr. Simon.

B. The Exorcist Royalties

Mr. Simon claims that Mr. Marshall "knowingly and fraudulently" made a "false oath or account" by not listing as part of his income any royalties from the film "The Exorcist." Those royalties were owned by Location Creations, Inc. ("Location Creations"), but that entity was wholly owned and solely controlled by Mr. Marshall (Pretrial Order, adv. dkt. 204, p. 4:6-8).

The original SOFA did not list any businesses (Trial Ex. 6 [case dkt. 27], item 18) but also did not have the box for "none" checked; and item 19 (location of books, records and financial statements) lists "Location Creation, Location Cameras, & John Marshall Ent." Although the amended SOFA does disclose Location Creations (Trial Ex. 13 [case dkt. 44], item 18), it is listed with the dates "1986-2004," implying that it was defunct after 2004, and no royalties were disclosed as income in SOFA item 2 (Trial Ex. 6 & 13 [case dkt. 27 & 44], item 2).

As with the Ferrari, the royalties were eventually disclosed to the chapter 7 trustee more explicitly, in correspondence, but as with the amended SOFA this only occurred after negotiations with Mr. Simon had broken down. See Trial Ex. 13 (dated May 23, 2014) and Trial Ex. 15 (dated May 30, 2014). Mr. Simon argues that this is support for his theory that Mr. Marshall was knowingly and fraudulently hiding the royalties from the chapter 7 trustee until he knew whether he could cut a deal with Mr. Simon.

Mr. Marshall's excuse for his lack of disclosure is that his father, Noel Marshall, had been adamant that the royalties not go to him, and instead should go to Ms. Stephanie Marshall. He — i.e., Mr. John Marshall, the son/debtor/defendant — claims that he had always treated the royalties as belonging to his daughter, and he habitually forwarded them to her. See, e.g., adv. dkt. 223, p. 232:6-14. He also repeats his advice of counsel defense. In addition, as with the Ferrari, the original SOFA (Trial Ex. 6 [case dkt. 44], item 4.a.) discloses the State Court litigation in which Mr. Simon asserted that the royalties actually belonged to Mr. Marshall. See id. and Trial Ex. 15 (explanation of which actions involved the Exorcist royalties, in letter from Mr. Gibson to chapter 7 trustee).

In sum, once again, Mr. John Marshall's lack of disclosure of this potential asset on his bankruptcy schedule "B" or in his SOFA items 2 and 18 is problematic, but again he disclosed the litigation in which this property was at issue in his SOFA (Trial Ex. 6 [case dkt. 27], item 4.a., filed on April 18, 2014). So if he was trying to hide the existence of those royalties he chose an exceptionally poor way to do so, and that strongly suggests that he had no such intent. In addition, although Mr. Marshall no doubt was attempting not to draw any attention to this potentially substantial income stream, that is a far cry from "knowingly and fraudulently" attempting to hide the royalties. In addition, Mr. Marshall again established a credible defense of advice of counsel, and Mr. Simon did not establish a lack of good faith reliance on that advice. Mr. Simon's claims under section 727 therefore fail as to the Exorcist royalties.

C. Claims of Stephanie Marshall and Barbara Price

On May 22, 2014, Mr. Marshall filed amended bankruptcy schedules (Trial Ex. 10-13 [case dkt. 41-43]). On his amended schedule F, Mr. Marshall listed Barbara Price as a creditor with a claim in the amount of $7,500,000.00, and Stephanie Marshall as a creditor with a claim in the amount of $450,000.00 (Trial Ex. 10 [case dkt. 41], p.8). Barbara Price had been listed as a creditor in the original schedule F, but with a claim in the amount of $2,500,000.00, while Stephanie Marshall was not listed at all (Trial Ex. 7 [case dkt. 29], p.6). Mr. Simon alleges that these claims were intentionally overstated (especially after his negotiations with Mr. Marshall broke down) — so overstated, in fact, that they are grounds to deny Mr. Marshall a discharge under section 727.

In support of these claims Mr. Simon's counsel has provided a thorough analysis or accounting involving the claim of Ms. Stephanie Marshall, in Trial Exhibit 144. No expert testimony was offered to support this analysis, but to the extent it points out mathematical facts this court is prepared to consider it as evidence whether Mr. Marshall knowingly and fraudulently made a false oath or account in (allegedly) grossly overstating her claim. Nevertheless, the analysis falls short.

Certainly it is possible to calculate that Ms. Stephanie Marshall's (possible) claim appears to have been greatly overstated; but there is no evidence that Mr. Marshall engaged in anything like such extensive analysis when he was completing his schedules. In transactions between family members and friends it is not uncommon for accounting to be sloppy and make very rough estimates. Moreover, Mr. Simon has not shown that Mr. Marshall expected any substantial distributions out of his chapter 7 bankruptcy estate, which made it less important (in Mr. Marshall's mind) to be entirely accurate. In other words, the potential claim might have been vastly overstated, but that does not establish that Mr. Marshall "knowingly and fraudulently" made a "false oath or account." Nor has Mr. Simon established a failure to explain satisfactorily any loss or deficiency of assets. The section 727 claims must be denied with respect to the claims of Ms. Stephanie Marshall or Mr. Barbara Price.

IV. CONCLUSION

A separate judgment will enter in favor of the defendant (debtor) Mr. John Marshall on all claims under 11 U.S.C. § 727. As agreed by the parties, and as found and concluded by this court on the record at the post-trial hearing, there is no just reason for delay in entering a final judgment as to the § 727 claims, so that will be a final judgment pursuant to Rule 54 (Fed. R. Civ. P.) (incorporated by Rule 7054, Fed. R. Bankr. P.).