SHON HASTINGS, JUDGE.
Gene W. Doeling, Chapter 7 Trustee, filed a Complaint seeking a denial of Debtor/Defendant Michael J. Peluso's discharge
Debtor filed an Answer to the Complaint, asserting that: (1) he did not transfer assets to his mother but simply gave her authority to disperse Debtor's funds as he directed; and (2) any omissions were inadvertent, unintentional and based on "nominal oversights." Doc. 4 at 3.
For the following reasons, the Court finds in favor of the Trustee and orders that Debtor is denied a discharge.
In 2011, Debtor purchased and became the sole owner of RJKL Corporation. RJKL operated Zachmeier Manufacturing, which constructed boat docks and ice fishing houses. Debtor purchased RJKL from Russell and Jennifer Smith, who previously purchased it from Leo Zachmeier and Tony Wald. Debtor was not represented by counsel in connection with his purchase of RJKL.
After purchasing RJKL, Debtor discovered many challenging issues with the business. Debtor claimed the previous owners left a "lot of loose ends" as well as "ratty books so it was hard to get a good grip on what was actually there and what wasn't." According to Debtor, he "assumed liabilities of hundreds of thousands of dollars" under the purchase agreement with the Smiths. He also assumed responsibility for building $100,000 in docks to fulfill prior commitments made by the Smiths.
Adding to these difficulties, the Missouri River flooded Bismarck in 2011 which affected both the business and Debtor personally.
Debtor addressed these challenges by seeking professional advice from accountants and bankers. He discontinued the dock business and focused on manufacturing ice fishing houses. He reduced the number of employees to streamline the business and minimize overhead, and he performed "lots of work on his own dime." Despite his efforts, Debtor "never could gain traction." The business was never profitable while Debtor owned it. Ultimately, Debtor could not save the business. Debtor did not operate the business in the year and a half prior to July 5, 2017, the date he petitioned for bankruptcy relief.
Attorney LaRoy Baird, who represented Debtor in his bankruptcy case, testified at the trial in this case. Attorney Baird characterized Debtor's purchase of the business as a "terrible decision." The business owed large debts when Debtor purchased it, and Debtor assumed this debt. Debtor then personally guaranteed additional debt trying to keep the business operating.
At some point, Debtor could no longer make the payments for his purchase of the business. Zachmeier and Wald sued the Smiths, who commenced a third-party action against Debtor. Ex. 6. On June 13, 2017, Zachmeier and Wald obtained an amended judgment in state court against the Smiths. Ex. 6. The court found that Debtor "contractually agreed to indemnify and hold Smiths harmless with respect to any financial obligations of RJKL, including the Promissory Note" signed by the Smiths when they purchased the business from Zachmeier and Wald. Ex. 6. Accordingly, the state court found Debtor liable to the Smiths for $232,147.65, the total sum of the judgment awarded to Zachmeier and Wald, plus interest.
After he stopped operating his dock and fish house manufacturing business, Debtor held various jobs. In the summer of 2017, Debtor competed in professional fishing tournaments and worked as a fishing guide on Devils Lake for Perch Eyes Outfitters in addition to his regular employment as a substitute teacher and instructional aid for handicapped students. He did not have a set schedule as a fishing guide. Instead, Jason Feldner, the owner of Perch Eyes, contacted Debtor as needed. The fishing clients paid Perch Eyes, and Feldner paid Debtor. Feldner left checks for Debtor and the other guides in the Perch Eyes shop, and the guides "fetched them" at their convenience.
In the summer of 2017, Debtor owned two Edward Jones accounts opened in 2004 through his previous employment. Only one of the accounts was a qualified retirement account. Prior to June 2017, he did not withdraw any funds from the accounts.
On June 2, 2017, Debtor withdrew the full balance of funds in the account that did not qualify as a retirement account.
Debtor claims he asked his mother to pay his bills because he was out of town during most of this period either competing in fishing tournaments or providing guide services. According to his mother, Debtor was trying to make enough money to pay his mortgage and child support obligations. Debtor, who was newly divorced at the time, depended on his mother to ensure his bills were paid. Debtor wanted to pay his bills and knew his mother — whom Debtor characterized as "like a secretary" for him — would do it for him.
Debtor's mother opened a checking account in her name only at Kirkwood Bank & Trust on June 21, 2017. Ex. 9. She explained that she opened the account because she did not want Debtor's money in her personal account. She felt she could be "accountable" for the money if she used a separate account. She deposited the two checks in the sums of $800.00 and $15,258.24 on June 21, 2017, and another check for $800.00 from guide services on July 6, 2017. Ex. 9 at T-46. According to a handwritten ledger she kept, Debtor's mother wrote 14 checks on June 26, 2017, leaving $4,696.84 in the account. Ex. 118.
Debtor's mother confirmed that Debtor was rarely in Bismarck at that time and explained that she opened the account in her name only because she signed all the checks. Although Debtor was not named on the account and was not granted signature authority for it, Debtor's mother gave him the debit card for the account when Kirkwood Bank sent it to her two weeks after she opened the account. Debtor began using the debit card for purchases on July 2, 2017. Ex. 9. He was the only person who used the debit card for purchases.
Debtor filed a voluntary petition for bankruptcy relief under Chapter 7 of the Bankruptcy Code on July 5, 2017. Debtor understood that he was required to disclose all his assets and "spent quite a bit of time" reviewing the information in his bankruptcy petition before signing it. Despite acknowledging his duty to disclose, Debtor omitted assets from his schedules, including a trolling motor, a depth finder, a portable ice house, an auger, a golf cart, archery equipment and income from fishing guide services and fishing tournaments.
Debtor also failed to disclose the liquidated Edward Jones investment account or its proceeds on his schedules. Although he properly listed the Edward Jones IRA account valued at $10,032 on his Statement of Financial Affairs (SOFA) under the question related to retirement or pension accounts, he neglected to disclose the other Edward Jones account or the proceeds which were deposited in the Kirkwood Bank account.
Likewise, Debtor gave incorrect or, at the very least, misleading answers to the following questions on the SOFA:
Ex. 12 at 52.
Ex. 12 at 53.
Debtor answered, "No" to both questions.
Schedule A/B asks debtors to list money or property owed to a debtor. Debtor did not list any prepetition income or payments received for his fishing guide services on this schedule. He left this answer blank even though his mother deposited a check for $800 for such services on the day after he filed his bankruptcy petition and even though he knew he was owed additional compensation for these services. Ex. 9 at T-46. Even though he testified about the dates and sums of fishing guide services checks at the continued meeting of creditors, during the trial Debtor was unable to specify the dates he provided fishing guide services and he did not know the sum Feldner owed him at the time he filed his bankruptcy petition.
At the time Debtor filed his bankruptcy petition, he worked as a substitute teacher and instructional aid for handicapped children in addition to his fishing-related side jobs. He coached hockey earlier in the year, but the season ended in February. Ex. 8 at T-18. On Schedule I of his petition, Debtor listed his occupation as "instructional aid/coach" and his gross monthly income as $2,850. Although Schedule I also requires debtors to disclose "other income regularly received," Debtor did not list his income from fishing guide services or tournaments. At trial, he testified that he had no other income although he conceded that he provided guide services beginning the end of June.
In addition to omitting assets and information on his schedules, Debtor also undervalued fishing rods and reels. In his schedules, Debtor listed a value of $100 for this equipment but later provided the Trustee an itemized inventory of rods and reels in his possession with a total value of $1,325. Debtor explained that he only included items he owned on his schedules. He claims that most of the rods and reels in his possession were Scheels' property,
The Trustee conducted the meeting of creditors on August 24, 2017, approximately seven weeks after Debtor filed his bankruptcy petition. Before the meeting began, Attorney Baird raised the issue of the Edward Jones account with the Trustee. Specifically, Attorney Baird told the Trustee that Debtor's 2015 tax return indicated Debtor earned interest income. Attorney Baird told the Trustee that he suspected the interest income was from the Edward Jones account and that he was looking into it.
According to Attorney Baird, Debtor had "no clue" where the interest came from. At trial, Debtor also asserted that he did not know what type of account it was at the time and that Attorney Baird was researching it, and he insisted he was not trying to hide the money or the existence of the account. During the meeting of creditors, Debtor did not inform Attorney Baird or the Trustee that he gave the Edward Jones account money to his mother, who deposited it into an account in her name.
At trial, the Trustee highlighted several statements Debtor made at the meeting of creditors. These statements, followed by Debtor's explanations for the statements, are summarized below:
On August 29, 2017, the Trustee sent Attorney Baird on behalf of Debtor a letter regarding the meeting of creditors. Ex. 101. In the letter, the Trustee requested documentation related to the Edward Jones accounts and Debtor's sale of his boat, an inventory of Debtor's hockey memorabilia, fishing rods and reels, and information regarding the garnishment against Debtor. Ex. 101. The Trustee also demanded that Debtor amend his schedules to include the golf cart. Ex. 101.
On behalf of Debtor, Attorney Baird responded to the Trustee by letter on September 21, 2017. Ex. 102. He enclosed an account statement for the nonretirement Edward Jones account and stated that "[Debtor] was unaware of this account until I obtained a copy [of the account statement]." Ex. 102. Attorney Baird acknowledged, however, that the statement showed a complete withdrawal of $15,258 from the account. Ex. 102. He also enclosed a statement for the Kirkwood Bank account opened in Debtor's mother's name. Ex. 102. He explained, "It was opened in her name to protect the funds from judgment creditors while we finished the bankruptcy filing," and "She wrote all of the checks and managed this account due to the Debtor's work activities out of town guiding in the Devils Lake area." Ex. 102. He informed the Trustee of the source of the funds and enclosed Debtor's mother's handwritten ledger documenting the checks she wrote. Ex. 102. Attorney Baird also provided additional information on each of the other topics/assets the Trustee requested. Ex. 102.
At trial, Debtor insisted he did not know anything he said at the meeting of creditors was false, and he did not intend to defraud his creditors. He eventually disclosed the Edward Jones account to the Trustee, and he provided the Trustee with all the documentation the Trustee requested.
Debtor filed amended schedules and SOFA on March 23, 2018. Stip. Facts, Doc. 15. In the amended schedules, Debtor disclosed the Kirkwood Bank account, and
This adversary action is a core proceeding under 28 U.S.C. § 157(b)(2)(J). The Court has jurisdiction under 28 U.S.C. §§ 1334 and 157 and authority to enter a final order in this matter. This opinion constitutes findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
In the Complaint, the Trustee seeks a denial of Debtor's discharge under 11 U.S.C. § 727(a)(2) and (a)(4). Section 727 of the Bankruptcy Code provides:
11 U.S.C. § 727(a).
Denying a debtor a discharge is a harsh remedy.
Section 727(a)(4)(A) bars the entry of discharge if a debtor knowingly and fraudulently made a false oath or account in or in connection with a case. 11 U.S.C. § 727(a)(4)(A). To meet his burden under this subsection, the Trustee must prove that "`(1) Debtor made a statement under oath; (2) the statement was false; (3) Debtor knew the statement was false; (4) Debtor made the statement with fraudulent intent; and (5) the statement related materially to Debtor's bankruptcy case.'"
Section 727(a)(4)(A) "`requires nothing less than a full and complete disclosure of any and all apparent interests of any kind. The debtor's petition, including schedules and statements, must be accurate and reliable, without the necessity of digging out and conducting independent examinations to get the facts."
"Full disclosure is required, not only to ensure that creditors receive everything they are entitled to receive under the Bankruptcy Code, but also to give the bankruptcy system credibility and make it function properly and smoothly[.]"
The Trustee argues that Debtor made multiple false oaths in his bankruptcy filings and at the meeting of creditors. Specifically, the Trustee alleges that Debtor failed to schedule or disclose income, several assets, the closed Edward Jones account and the transfer of the money to his mother. The Trustee offered evidence in support of these allegations. The question is whether this evidence is sufficient to meet his burden of proving each of the elements of his section 727(a)(4) cause of action.
A debtor's signature on the petition, made under penalty of perjury, is a declaration which has the force and effect of an oath of the kind contemplated by section 727(a)(4)(A).
Debtor testified that he "spent quite a bit of time" reviewing the information in his bankruptcy petition before he signed it. He understood that he was required to disclose all assets. Yet he filed inaccurate schedules and statements on July 5, 2017. Debtor omitted several assets from his schedules including a depth finder, trolling motor, portable ice house, auger, golf cart and archery equipment. He did not disclose his employment as a fishing guide or the money Feldner owed to him at the time of petition. He did not list his income from fishing tournaments. In addition, he failed to disclose that he liquidated the nonretirement Edward Jones account and transferred the money to his mother.
Debtor knew about the omitted personal property. Although he offered explanations for why he overlooked or omitted the assets, he did not deny owning them or knowing that he owned them on the petition date.
He also knew about the income he earned from fishing tournaments and guide services. His side jobs and income were contemporaneous with the filing of his bankruptcy petition. His suggestion that the details regarding prepetition earnings were jumbled together or that the information was not immediately available to him is unconvincing. Debtor knew he was entitled to payments from fishing tournaments or guide services and should have investigated the details and fully disclosed them.
Lastly, Debtor liquidated the Edward Jones account and gave the money to his mother approximately one month before he filed his petition. Debtor knew his mother deposited the proceeds in the Kirkwood Bank account because he used the debit card associated with the account to pay his living expenses days before and after the petition date. He also knew that his mother used these funds to pay his bills. Debtor explained his failure to disclose the Edward Jones account in his schedules and statements and at the meetings of creditors by saying he did not consider "cashing out" the account and giving the money to his mother to deposit into an account in her name "a transfer" and therefore did not disclose it as "a transfer." This explanation does not excuse his failure to disclose the account as an asset on his schedules. He knew that he owned the proceeds from the Edward Jones account and that the schedules and statements were incomplete without this account. Accordingly, the Court finds that the Trustee met his burden of proving that Debtor made false statements he knew were false on the date he signed the petition and at his meeting of creditors.
Debtor claims that his failure to provide accurate information was inadvertent, unintentional and based on "nominal oversights." He expressly denies that he made these misstatements or omissions with fraudulent intent. The Trustee may establish fraudulent intent with direct or circumstantial evidence.
The Court finds that Debtor's reckless indifference to the truth and the circumstances of this case demonstrate that he acted with fraudulent intent related to his omissions and false statements regarding the money from the Edward Jones account. Debtor closed the Edward Jones account on June 2, 2017, eleven days before a state court entered judgment against Debtor in the total sum of approximately $280,000, the timing of which raises
Debtor asserts that he provided documentation showing how he spent the funds he withdrew from the Edward Jones account. He claims he used the money to pay legitimately due bills, negating a finding of fraudulent intent. The court in
In addition, Debtor failed to disclose income generated from fishing tournaments and guide services and denied he was owed any money on the petition date. Debtor later conceded that he was holding two guide checks on the date of petition and he did not disclose them. These facts bolster the Court's finding of fraudulent intent under the circumstances of this case.
Similarly, Debtor's failure to disclose some of his assets shows reckless indifference for the truth. Debtor explained at trial that he did not list a depth finder, a small portable ice house, an auger, a golf cart and archery equipment because he felt they had no value. This explanation is not a persuasive defense. A debtor must disclose all assets and transactions, even if the assets are worthless or unavailable to creditors.
Debtor next claims that his misrepresentations and omissions were the result of oversight or misunderstanding of the disclosure requirements. He argued that he is
The Court is not persuaded. "While courts are often understanding of a single omission or error resulting from an innocent mistake, multiple inaccuracies or falsehoods may rise to the level of reckless indifference to the truth which is the functional equivalent of intent to deceive."
Debtor's failure to disclose numerous assets and his false statements in this case show a reckless indifference to the truth and demonstrate Debtor's lack of "utmost honesty and candor" in completing or reviewing the filings.
Accordingly, the Court finds that the Trustee met his burden of showing, by a preponderance of the evidence, that Debtor acted with fraudulent intent.
A statement is material under 11 U.S.C. § 727(a)(4)(A) if it relates to or concerns the debtor's business transactions, the debtor's business or personal estate, the discovery of assets, or the existence or disposition of the debtor's property.
The Court considered all of Debtor's other arguments related to the Trustee's section 727(a)(4)(A) cause of action and deems them to be without merit.
For the reasons stated above, Debtor's discharge is denied under 11 U.S.C. § 727(a)(4)(A). Because the Court denies Debtor's discharge under this section, the Court finds it unnecessary to decide whether he should also be denied a discharge under 11 U.S.C. § 727(a)(2).
At a second (continued) meeting of creditors in September 2017, Debtor admitted that Feldner wrote him checks for fish guiding services for $500.00 dated July 1, 2017, and for $850.00 dated July 4, 2017, and that he was holding the checks on the date he filed his bankruptcy petition. Ex. 8 at T-34.
