MIKE K. NAKAGAWA, Bankruptcy Judge.
On February 21, 2019, a trial was conducted in the above-captioned adversary proceeding. The appearances of counsel were noted on the record. After conclusion of the trial, the matter was taken under submission. This Memorandum Decision constitutes the court's findings of fact and conclusions of law pursuant to FRBP 7052 and FRCP 52.
On March 9, 2017, a Chapter 7 petition ("Petition") was filed by Steven Isadore Snider ("Debtor") along with his schedules of assets and liabilities ("Schedules"), his statement of financial affairs ("SOFA"), and other required information. (ECF No. 1). The Petition, Schedules, SOFA, and other information were prepared by the Debtor's bankruptcy counsel, Dorothy G. Bunce ("Attorney Bunce"). Administration of the Debtor's Chapter 7 proceeding was assigned to panel trustee Victoria L. Nelson ("Chapter 7 Trustee").
A notice was sent to all parties in interest that a meeting of creditors ("Creditors Meeting") would be conducted by the Chapter 7 Trustee on April 7, 2017, and that the deadline for objecting to the Debtor's discharge would be June 6, 2017 ("Bankruptcy Notice"). (ECF No. 7). The Bankruptcy Notice also instructed creditors not to file proofs of claim in the Debtor's proceeding because there did not appear to be assets available to pay creditors.
On April 11, 2017, after the Creditors Meeting was completed, the Chapter 7 Trustee reported that there are no assets available for distribution to creditors. (ECF No. 12).
On June 2, 2017, Plaintiff commenced the instant adversary proceeding against the Debtor by filing a "Complaint Objecting to Discharge Under 11 U.S.C. 523 AND 727" ("Complaint"). (AECF No. 1). By his Complaint, Plaintiff seeks to deny the Debtor a discharge of any of his prebankruptcy debts under Section 727.
On October 19, 2017, Debtor filed an answer ("Answer") to the Complaint. (AECF No. 11).
On October 26, 2018, an order was entered scheduling a pre-trial conference for January 24, 2019, and a half-day trial for February 21, 2019. (AECF No. 28).
On January 10, 2019, Plaintiff filed his trial statement ("Plaintiff Trial Statement"). (AECF No. 30). In that statement, Plaintiff withdrew his request to determine the prior default judgment to be nondischargeable under Section 523 and elected to proceed solely on his objection to discharge under Section 727.
On January 11, 2019, Debtor filed his trial statement ("Debtor Trial Statement"). (AECF No. 31).
On January 24, 2019, the pre-trial conference was completed.
Denying a discharge under Section 727 is an extreme result. As such, an objection to discharge must be construed strictly against the objecting party and liberally in favor of the debtor.
Section 727(a) provides that an individual debtor shall be granted a discharge unless at least one of twelve different circumstances are present. In the instant case, the relevant circumstances under Section 727(a) state in pertinent part:
11 U.S.C. § 727(a)(3, 4(A) and 5) (Emphasis added). An objection based on a failure to keep or preserve records under Section 727(a)(3), a false oath under Section 727(a)(4)(A), or a failure to explain under Section 727(a)(5), must be timely raised through commencement of an adversary proceeding. Fed.R.Bankr.P. 7001(4).
Under Section 727(a)(3), the objecting party bears the initial burden of establishing that the debtor has failed to keep or preserve sufficient records to ascertain the debtor's financial condition.
Section 727(a)(5) operates in a similar fashion. The objecting party has the initial burden of demonstrating: (1) that the debtor at one time not too long before the petition date, owned identifiable assets, (2) that the debtor no longer owned the assets on the petition date, and (3) that the bankruptcy schedules and statements do not adequately explain the disposition of the assets.
Unlike Sections 727(a)(3) and 727(a)(5), the burden on the objecting party under Section 727(a)(4)(A) is not merely to establish that the written and oral statements and representations of a debtor are false. Rather, the objecting party must prove that the debtor "knowingly" and "fraudulently" made a false oath, which requires proof of actual intent.
A false oath may be a false statement or an omission in the schedules and statements filed by the debtor.
A person acts knowingly if he or she acts deliberately and consciously.
That a debtor knows his or her schedules are false does not mean that the debtor intends to defraud, however, since Section 727(a)(4) requires proof of both knowledge and fraudulent conduct.
A debtor's fraudulent intent may be inferred from his or her
Generally, a debtor who relies in good faith on the advice of counsel lacks the intent necessary to deny a discharge.
Plaintiff alleges that the Schedules signed by the Debtor on March 9, 2017, were inaccurate. In particular, Plaintiff alleges that Schedule "G" failed to list a retention agreement that the Debtor entered with a criminal defense attorney.
Plaintiff also alleges that the SOFA signed by the Debtor on March 9, 2017, was inaccurate. In particular, Plaintiff alleges that in response to Question 9 of the SOFA, Debtor failed to disclose the criminal matter that was pending within one year of the bankruptcy case.
Plaintiff further alleges that the Bankruptcy Questionnaire signed by the Debtor on March 10, 2017, was inaccurate. In particular, Plaintiff alleges that in response to Question 15 of the Bankruptcy Questionnaire, Debtor referred only to his response to Question 6 of the SOFA, which allegedly did not accurately list the creditors payment of $600 or more within 90 days of the bankruptcy case.
Plaintiff further alleges that the Debtor inaccurately testified under oath at the Creditors Meeting that the Schedules, SOFA, and Bankruptcy Questionnaire were true, complete and accurate.
Plaintiff further alleges, on information and belief, the following: (1) that the Debtor entered into an executory contract for legal services of a criminal defense attorney on or before March 9, 2017, for representation in the criminal matter, (2) that on or about February 22, 2017, Debtor received a refund on his 2016 federal income taxes in the approximate amount of $6,005.00 ("Tax Refund"),
Debtor was the only witness who testified at trial. In addition to the Debtor's live testimony, six exhibits offered by the Plaintiff were admitted into evidence by stipulation of counsel. Exhibit "1" is a set of documents consisting of copies of the Petition, Schedules, and SOFA, signed by the Debtor on March 9, 2017. Exhibit "2" is a copy of a Bankruptcy Questionnaire & Document Request ("Bankruptcy Questionnaire") signed by the Debtor on March 10, 2017. Exhibit "3" is a copy of a Default Judgment entered on or about March 25, 2016, in
There is no dispute that the Debtor commenced this voluntary Chapter 7 proceeding on March 9, 2017, on the advice and representation of Attorney Bunce. There is no dispute that all of the Debtor's bankruptcy papers were prepared by Attorney Bunce.
According to his Petition, Debtor has not filed a prior bankruptcy case within the past eight years. Additionally, Debtor is not a sole proprietor of any business and has primarily consumer debts. According to his property Schedule "A/B," Debtor has no interest in any real property and has $3,060 in personal property. The same Schedule discloses that the Debtor has no business assets, nor interests in any businesses. In his Schedule "C," Debtor claimed all of his personal property as exempt under applicable Nevada law. According to his Schedule "H," Debtor's former spouse lived with him during the same eight-year period but is not a co-debtor with respect to the debts listed in his Schedules. According to his Schedule "I," Debtor is a security guard at the Orleans Hotel & Casino in Las Vegas and has been employed in that capacity since October 1998. Debtor receives $1,850.00 in additional income each month. According to his Schedule "J," Debtor's household includes two dependent minors.
According to Part II of his Bankruptcy Questionnaire, Debtor is a widower, whose current household includes four people, including himself and his two minor children. According to Question 5 of his SOFA, Debtor has been receiving Supplemental Security Income ("SSI") benefits since at least January 1, 2015.
None of the foregoing information in the Petition, Schedules, SOFA, and Bankruptcy Questionnaire, all admitted into evidence, is disputed. All of that information, however, is material to the discharge objections raised by the Plaintiff.
According to the docket in the bankruptcy case, the Debtor filed his "debtor education" certificate on March 27, 2017. (ECF No. 11). Additionally, the Chapter 7 Trustee completed the Creditors Meeting on April 7, 2017, and submitted a "no asset" report on April 11, 2017. Plaintiff timely filed this adversary proceeding on June 2, 2017. Thus, although the Debtor has fulfilled the statutory requirements for bankruptcy relief, he has not received a Chapter 7 discharge due to the commencement of this adversary proceeding. Trial of this adversary proceeding has been completed and the evidentiary record is closed.
The court has considered the Debtor's testimony along with the documents admitted into evidence. The court finds the Debtor's testimony to be credible in the context of the materials presented, and the evidence insufficient to warrant denial of a Chapter 7 discharge.
As summarized above, the evidence in the record is limited. There appear to be inaccuracies in the Schedules, SOFA, and Bankruptcy Questionnaire, but the court finds credible the Debtor's testimony that he did not intentionally misstate or omit information in his Schedule G, his responses to Questions 6 and 9 of the SOFA, nor his responses to Questions 2 and 15, and Part IV, of the Bankruptcy Questionnaire. Debtor testified that he relied on his bankruptcy counsel in preparing the subject documents, and that he did not believe any of them to be false. Debtor's bankruptcy counsel, Attorney Bunce, was present throughout the trial, but was not called to testify,
In this connection, the court also finds that the Debtor's reliance on his bankruptcy counsel was in good faith. On direct examination of the Debtor, Plaintiff established that in his occupation as a casino security guard, Debtor understood the importance of contemporaneously preparing accurate incident reports. On those occasions, Debtor testified that he personally prepared the reports rather than relying on a separate professional to do so. In this bankruptcy proceeding, however, Debtor attested that he relied on Attorney Bunce, an experienced bankruptcy attorney, to advise him and to prepare the subject bankruptcy documents. Debtor's reliance on legal counsel in his bankruptcy case is consistent with his other testimony that he relied on legal counsel to represent him in another DUI criminal matter in 2010, to respond to a wage garnishment commenced by the Plaintiff prior to the bankruptcy filing, and to respond to the pending DUI Action.
Under these circumstances, the court concludes that the Plaintiff has failed to meet his burden of proving that the misstatements and omissions in the Schedules, SOFA, and Bankruptcy Questionnaire, were knowingly and fraudulently perpetrated by the Debtor. Accordingly, denial of discharge under Section 727(a)(4)(A) is unwarranted.
The limited evidentiary record also shapes the court's conclusions with respect to the Tax Refund. In his Answer to the Complaint, Debtor admits that he received the Tax Refund in the amount of $6,005.00 on or about February 22, 2017. Debtor filed his voluntary Chapter 7 petition fifteen days later on March 9, 2017. At trial, he testified that he may have received all or part of his Tax Refund through a "rapid refund" process used by H&R Block, his tax preparation service.
In Part IV, Item 13 of the Bankruptcy Questionnaire, Debtor attested that he used the Tax Refund check "to pay legal fees on bankruptcy and other pending legal matters to other attorneys." That response to Item 13 also listed several documents attached to the Bankruptcy Questionnaire, including an income analysis, current income records, and "2 most recent 1040 Tax returns — Debtor received 2016 Refund Prior to Filing, Used Refund check to pay legal fees on bankruptcy and other pending legal matters to other attorneys."
As previously mentioned, only the Debtor was called to testify at trial. Prior to the trial, Plaintiff listed only himself and the Debtor as potential witnesses,
Similarly, the attorney hired by the Debtor to respond to the Plaintiff's wage garnishment, Attorney Rebolledo, never testified at trial, nor was she listed by either party as a potential witness. This too is unfortunate because testimony from Attorney Rebolledo could have corroborated or disputed the Debtor's testimony as to his pre-bankruptcy payments to address the wage garnishment.
At trial, Debtor testified that he does not have a bank account and that the paychecks he receives from his casino employer are cashed at the Orleans casino or at some other casino.
According to his Schedule "J," Debtor's average monthly living expenses, including rent, are $4,031.59, leaving him a deficit of $108.94 each month.
Against this limited record of written and oral testimony solely from the Debtor, the court concludes that denial of discharge under both Section 727(a)(3) and Section 727(a)(5) is unwarranted.
As previously discussed at 4,
But even if the court finds that the Debtor's recorded information is limited, the court must determine whether "others in like circumstances would ordinarily keep" different recorded information.
There is no dispute that the Debtor is an individual wage earner with no business interests or business operations as a source of income.
No evidence was adduced as to the Debtor's education or personal background. Other than what is represented in the Petition, Schedules, SOFA, and Bankruptcy Questionnaire, Debtor appears to be a typical wage earner with minor children and primarily consumer debts. There is no evidence to suggest, nor has any argument been made, that the Debtor has any business experience or a level of financial sophistication that would lead him to treat the Tax Refund other than as an immediate source to meet his pressing financial needs.
Because the materials that apparently were provided to the Chapter 7 Trustee have not been offered or admitted as evidence, the court also cannot find that the Debtor failed to keep information that a "normal, reasonable person would do in similar circumstances." Moreover, Debtor's testimony that he may have recorded information or that such information may have been provided to his bankruptcy counsel, remains uncontradicted because Attorney Bunce was never called to testify. Thus, even if the Plaintiff had met his initial burden under Section 727(a)(3), the court finds that the alleged failure to keep or preserve additional recorded information by this typical, consumer debtor was justified under the circumstances of this case. Accordingly, denial of discharge under Section 727(a)(3) also is inappropriate.
Also, as previously discussed, Section 727(a)(5) places the burden on the objecting party to establish that the debtor had assets prior to bankruptcy, the disposition of which are not adequately explained by the information provided in the debtor's bankruptcy documents or testimony. Also, as previously discussed, the focus in the instant case is on the disposition of a Tax Refund that did not exceed $6,005.00.
Debtor admitted that he received the Tax Refund on or about February 22, 2017, and testified at trial that he may have received portions of the Tax Refund under the "rapid advance" process used by H&R Block. The latter testimony might have been confirmed, one way or the other, if the copy of the Debtor's 2016 tax return, apparently attached to the Bankruptcy Questionnaire, had been admitted into evidence. But that return was not admitted.
Debtor also testified that he paid $1,289.00 plus $335.00 in attorney's fees and costs to Attorney Bunce for her bankruptcy services, that he paid up to $1,200.00 to Attorney Rebolledo for her wage garnishment services, and that he paid up to $1,800.00 to Attorney Yampolsky for his criminal representation. On their own, those amounts total $4,624.00, which would leave $1,381.00 remaining from the Tax Refund. Given the Debtor's testimony that he had $1,000.00 in cash on hand when he filed his Petition on the March 9, 2017, he appears to have explained the disposition of substantially all of the Tax Refund in question.
But the Debtor also is employed as a security guard and also receives SSI benefits each month. He was never asked at trial how often he gets paid by his employer,
The court having observed and listened to the Debtor at trial finds his testimony to be credible. His testimony occasionally was inconsistent with some of the documents prepared by his bankruptcy counsel, but the court construes Section 727(a)(5), like all other exceptions to discharge, strictly in favor of providing the Debtor a fresh start. The court therefore finds that the Debtor has satisfactorily explained, by a preponderance of the evidence, the disposition of the Tax Refund. Accordingly, denial of discharge under Section 727(a)(5) also is inappropriate.
Based on the foregoing, the court concludes that the Plaintiff's objections to discharge under Sections 727(a)(3), 727(a)(4)(A), and 727(a)(5) should be overruled. A judgment in accordance with this Memorandum Decision shall be entered contemporaneously herewith. Each party to this adversary proceeding shall bear their own attorney's fees and costs.
