JIM D. PAPPAS, Bankruptcy Judge.
This is an action under § 727(d)(3)
Debtors filed a chapter 7 petition on May 10, 2013. Bankr. No. 13-40574, Dkt. No. 1. Trustee is the case trustee. On May 13, 2013, the Court issued an Income Tax Turnover Order (the "Tax Order") to Debtors. Bankr. Dkt. No. 10; Exh. 103. The Tax Order required Debtors: (1) to timely file all required Federal and state income and other tax returns for tax years during the case, and for the year preceding the filing of the case; (2) to deliver to Trustee signed and dated copies of the tax returns; and (3) to turn over to Trustee any income tax refunds held or received by Debtors while the bankruptcy case is open. Id. at 1. The Tax Order advised Debtors about the serious possible consequences for their willful failure to obey its requirements:
Id.
On July 22, 2013, Trustee conducted the § 341(a) meeting of creditors in the bankruptcy case at which Debtors and their attorney were present. Trustee testified that he specifically recalled asking Debtors whether they had filed their 2012 tax returns, and that he was careful to explain to them that he should be given a copy of the returns and any tax refunds they received on account of the returns.
In response to Trustee's statements, Mrs. Leiser testified about the personal struggles she experienced during the time leading up to the § 341(a) meeting. Among other problems, she recalled that she was stressed because her father died shortly before the meeting, requiring her to travel to South Carolina to manage his affairs and attend his funeral. Mrs. Leiser suggested that these events diverted her attention away from the bankruptcy filing. In addition, she stated her computer "crashed" shortly before the meeting, which caused her to lose the information necessary to complete the 2012 tax returns.
Debtors were granted a discharge on September 17, 2013. Bankr. Dkt. No. 27. On October 9, 2013, Trustee filed and served on Debtors and their counsel a Motion for Turnover of Property and Records. Exh. 104. The motion was unopposed by Debtors, and on November 5, 2013, the Court entered an order granting the motion (the "Turnover Order") . Exh. 105. The Turnover Order required Debtors to "forthwith turn over to [Trustee] the following property and records:"
Id.
Debtors did not comply with the Turnover Order, and so on December 10, 2013, Trustee sent Debtors a letter, with a copy to their counsel, asking that Debtors comply with the Turnover Order within ten days; it also warned that he would pursue an action to revoke their discharge under § 727(d)(3) if they failed to comply. Exh. 106.
When Debtors did not comply with his demand, Trustee filed the adversary complaint on January 2, 2014, seeking a revocation of Debtors' discharge and a money judgment for the amounts Debtors had failed to turn over. Adv. No. 14-08001, Dkt. No. 1. After serving the complaint on Debtors and their attorney, Trustee received checks totaling $2,235.63 from Debtors on or around February 3, 2014. Trustee testified that these payments represented the amounts in the bank accounts listed in the Turnover Order, plus reimbursement for the $293 adversary proceeding filing fee he had paid to commence this action.
In contrast, and although their math is not precise, Debtors contend that the amount they paid to Trustee represented the $1,200 in rents paid to them by Clay Clasby (see Exh. 105, ¶ 5), plus the amounts they assert were actually available to them in their bank accounts on the petition date.
In February 2014, Debtors testified that they received an Federal tax refund from the 2012 tax returns they filed the month prior. Debtors assumed their receipt of these funds was a mistake, because they owed significant tax debts to the IRS, so they contacted IRS to inquire about the situation. Mrs. Leiser testified it took several months for the IRS to respond to their inquiries. An agency representative eventually advised Debtors their receipt of the refund check was indeed the result of a mistake, and she requested that they return the check. Without consulting Trustee, Debtors, acting on advice of their counsel, honored the request by returning the check to a local IRS office some time in June 2014. Of course, their counsel gave them this advice, and they returned the funds to IRS notwithstanding the terms of the Court's Tax Order and the Turnover Order, and even, by that time, Trustee had commenced this adversary proceeding against them to revoke their discharge for failure to comply with those orders and deliver property of the bankruptcy estate to him.
Based upon this record, Trustee argues that Debtors' discharge should be revoked pursuant to §§ 727(d)(3) and (a)(6)(A),
Debtors argue that they have earnestly attempted to comply with the Court's orders, but concede they have been unable to do so due to their personal struggles. Further, Debtors remind the Court that the amounts listed in the Turnover Order have been largely paid to Trustee, or more precisely, at least the amounts they contend Trustee is rightfully entitled to receive.
A chapter 7 debtor receives a discharge of debts unless any of the circumstances listed in § 727(a)(1)-(12) apply. However, even after the entry of a discharge under § 727(a), a trustee, a creditor of the debtor, or the United States trustee may request that the debtor's discharge be revoked if it is shown that the debtor has engaged in certain acts or misconduct in connection with the bankruptcy case. See § 727(d).
Section 727(a)(6), in turn, provides that a debtor is not entitled to a discharge if "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 testify[.]" An order is lawful if it is issued by a court with jurisdiction over the subject matter and the person to which it was issued. See Maness v. Meyers, 419 U.S. 449, 459 (1975) (stating "an order issued by a court with jurisdiction over the subject matter and the person must be obeyed by the parties until it is reversed by orderly and proper proceedings."). A bankruptcy court has broad discretion to determine that a particular violation of the court's order is so serious as to require the denial of discharge under § 727(a)(6). Devers v. Bank of Sheridan (In re Devers), 759 F.2d 751, 755 (9th Cir. 1985); Cutter v. Seror (In re Cutter), No. CC-10-1022-PaD, 2010 WL 6467694, at *12 (9th Cir. BAP Oct. 21, 2010).
Generally, "[s]ection 727's denial of discharge is construed liberally in favor of the debtor and strictly against those objecting to discharge." First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d 1339, 1342 (9th Cir. 1986) (citing In re Devers, 759 F.2d at 754). Under § 727(d)(3) and (a)(6)(A), the party seeking a revocation of discharge, here Trustee, bears the burden to prove by a preponderance of the evidence "that the debtor (a) was aware of the order; and (b) willfully or intentionally refused to obey the order (i.e. something more than a mere failure to obey the order through inadvertency, mistake[,] or inability to comply)." Gugino v. Cardenas (In re Cardenas), 2011 WL 3510941, at *2-3 (Bankr. D. Idaho Aug. 10, 2011) (quoting Schwarzkopf v. Goodrich (In re Michaels), 2009 WL 7809926, at *5 (9th Cir. BAP Feb. 27, 2009)). Once this showing is made, the burden shifts to the debtor to demonstrate why the discharge should not be denied. In re Cardenas, 2011 WL 3510941, at *2.
Applying these principles in this case, as explained more fully below, the Court concludes that Trustee has proven, by a preponderance of the evidence, that Debtor willfully refused to obey the lawful orders of this Court, and Debtors have not sufficiently rebutted that showing, such that Debtors' discharge should be revoked, and a judgment entered against Debtors for $3,393, the value of property of the estate they have not turned over to Trustee.
First, both the Tax Order and the Turnover Order entered in this case were "lawful" orders for purposes of § 727(a)(6)(A). Without dispute, the Court has jurisdiction over both the subject matter and Debtors in this bankruptcy case. See 28 U.S.C. §§ 1334(b) and 157(b)(2)(A) and (E). These orders were not reversed and were—and are—required to be obeyed. Maness, 419 U.S. at 459.
Next, Debtors were actually aware of the entry and provisions of both orders. The record establishes that both Debtors and their counsel were sent a copy of the Tax Order when it was entered. The evidence shows Debtors and their counsel were served with a copy of Trustee's Motion for Turnover, and without objection from Debtors, the Turnover Order was entered and copies sent to Debtors and their attorney. Moreover, Trustee specifically advised Debtors at the § 341(a) meeting, also attended by their lawyer, that Debtors were obliged to provide him copies of their filed tax returns for the applicable years, and that they must give him any refunds paid to them based on those returns. When Debtors failed to comply, Trustee made a separate written request to them, referencing the Court's orders. Clearly, on this record, the Court finds Debtors were aware of the Court's orders, and importantly, knew of their obligations under those orders.
Though they knew and appreciated their duty to comply with the orders, the Court finds that Debtors willfully refused to obey them. As to the Tax Order, the Court concludes Debtors willfully refused to provide Trustee with a copies of the 2012 tax returns they actually filed, and instead allowed Trustee to believe that the draft of the tax returns given to him by Debtors at the § 341(a) meeting was accurate. Debtors offered no explanation why they did not give Trustee copies of the signed, dated tax returns when they were later filed, which of course, were different in content than the copies of the unfiled tax returns provided to Trustee at the § 341(a) meeting.
The Court also agrees with Trustee when he points out that Debtors further willfully refused to obey the Tax Order by not filing the 2012 tax returns in a timely fashion. The Court finds Debtors' explanation (or excuse) for their failure to timely file the tax returns (i.e. the death of Mrs. Leiser's father and computer issues) does not adequately explain the significant delay in filing, nor why Debtors did not obtain the necessary deadline extension for late-filed returns. In short, Debtors' cavalier approach to filing their returns, which held up administration of their bankruptcy case, did not satisfy their duty under the Tax Order.
If compliance with the general provisions of the Tax Order were the only order at issue in this case, the Court, in exercise of its discretion, might be reluctantly persuaded to find in Debtors' favor in this action. However, Debtors' lack of compliance with the precisely-tailored terms of the Turnover Order, entered after notice to Debtors and their counsel, and without their objection, requires the Court to grant the relief requested by Trustee. Regrettably, and for reasons the Court can not comprehend, Debtors seemingly ignored their obligations as explained in Trustee's motion, the Turnover Order, and then in Trustee's letter, until after Trustee initiated this adversary proceeding to revoke their discharge. Even now, Debtors have not fully complied with the Turnover Order, entered some eight months ago.
Debtors' arguments that the amounts of the bank accounts set forth in the Turnover Order were incorrect, or that the 2012 Federal tax refund had to be returned to the IRS, are of no moment. At best, those arguments, and any evidence to support them, should have been brought to the attention of Trustee and the Court, in response to Trustee's motion that sought turnover of the particular amounts and the 2012 tax refund. See Maness, 419 U.S. at 458 ("If a person to whom a court directs an order believes that order is incorrect, the remedy is to appeal, but absent a stay, he must comply promptly with the order pending appeal."); Espinosa v. United States Aid Funds, 553 F.3d 1193, 1205 (9th Cir. 2008), aff'd, 559 U.S. 260 (2010) (holding that a party is not free to violate a bankruptcy court order because it has doubts about the validity of the order).
Debtors' argument that, though tardy in doing so, they have complied with the Turnover Order by paying most of the amounts required by the order, or at least, those amounts they agree with, similarly lacks merit. In response to a similar argument this Court has held, "[d]ebtor's willful failure to heed the Court's order should not be excused because he eventually complied under threat of discharge revocation . . . [t]he Court declines to send a message to other debtors that the Code's requirements may be ignored until the consequences of delay become sufficiently serious to warrant their compliance with turn over orders and demands." In re Cardenas, 2011 WL 3510941, at *4. That Debtors, after the commencement of this action, may have partially complied with certain terms of the Turnover Order, does not change the fact that their partial compliance came too late, and that they willfully refused to comply with other terms of the order.
Trustee has proven by a preponderance of the evidence that Debtors willfully refused to obey lawful orders of the Court entered in this bankruptcy case. Therefore, Debtors' discharge will be revoked pursuant to § 727(d)(3) and (a)(6)(A). In addition, Trustee will granted a money judgment against Debtors for unpaid amounts under the Turnover Order: $1,593.00 for the 2012 tax refund, and $1,800 for rents paid to Debtors.
The Court will enter a separate judgment in favor of Trustee.
