TERRENCE L. MICHAEL, Chief Bankruptcy Judge.
Every one of us hides something from time to time. It may be a holiday gift that you don't want your kids to secretly unwrap before the appointed day, or a favorite t-shirt from college that your spouse has been trying to throw away for the last twenty years. Some things are harder to hide than others. Like a multi-million dollar lawsuit, for example, or a fully restored stolen 1967 Camaro. In this case, the debtors are accused of hiding both of these items. The question is whether they should get a discharge in bankruptcy. The following findings of fact and conclusions of law are made pursuant to Federal Rule of Bankruptcy Procedure 7052.
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b), and venue is proper pursuant to 28 U.S.C. § 1409.
In October 2007, three fully restored 1967 Chevrolet Camaros (the "Camaros") were stolen from C & S Classic Cars in Springdale, Arkansas ("C & S"). C & S owned an insurance policy that insured against loss of the Camaros by theft. The policy was issued by Philadelphia Indemnity Insurance Company ("Philadelphia"). One of those cars (the "Rotert Camaro") found its way into the hands of Rodney Rotert ("Mr. Rotert"), one of the defendants in this adversary proceeding. We have two completely different stories as to how Mr. Rotert acquired the Rotert Camaro. The first story is told by Mr. Rotert. The second comes from a person who helped steal the Camaros and the detective who investigated their theft. Only one of the stories can be true.
According to Mr. Rotert, a gentleman named Victor Revilla ("Mr. Revilla") approached Mr. Rotert in the fall of 2007 and asked if Mr. Rotert wanted to buy a 1967 Camaro. The Rotert Camaro had been presented to Mr. Rotert for inspection by Jerry Stephenson ("Mr. Stephenson") a few days prior to the meeting between Mr. Rotert and Mr. Revilla. After meeting with Mr. Revilla, Mr. Rotert decided to purchase the Rotert Camaro. The parties agreed on a price of $15,000 plus the transfer of a Mazda RX8 from Mr. Rotert. The $15,000 was paid in cash in three separate installments. Mr. Rotert has no records to support his allegation that he made the cash payments.
Mr. Revilla testified that he never in his life owned a 1967 Camaro. He categorically denied ever selling such a vehicle to Mr. Rotert, or having any discussions with Mr. Rotert regarding the sale of the Rotert Camaro. Mr. Revilla denied receiving any cash from Mr. Rotert, except for remodeling services performed by Mr. Revilla on Mr. Rotert's home. He has seen the Rotert Camaro one time, at a car wash.
The Court also heard the testimony of Maxwell Ryden ("Detective Ryden"), a detective with the Tulsa Police Department.
While Mr. Rotert denies any involvement in the theft of the Rotert Camaro, he admits his role in a string of burglaries. On December 17, 2007, Messrs. Rotert, Moreland, Revilla, and Stephenson stole a safe from a MidFirst Bank location in Tulsa. They used a stolen wrecker to tear out an exterior wall of the bank.
Eventually, criminal charges were filed against Mr. Rotert in the District Court in and for Tulsa County, Oklahoma, arising out of his possession of the Rotert Camaro and involvement in several burglaries (the "Criminal Case"). Mr. Rotert retained Mark Lyons, an attorney practicing in Tulsa ("Mr. Lyons") as his criminal counsel. On April 13, 2011, Mr. Rotert entered a plea of "no contest" to four criminal charges:
As part of this plea, Mr. Rotert admitted that "if all of the State's witnesses appeared and testified to the evidence set forth in their reports and they are believed to the exclusion of all evidence presented by [Mr. Rotert]," the evidence would support his conviction for the crimes charged.
In February 2008, Mr. Rotert had a problem: he had possession of the Rotert Camaro, but no title. In order to obtain a title to the Rotert Camaro, Mr. Rotert executed a power of attorney in favor of Linda B. Bray, Jamie Glass, and Chris Glass (the "POA").
Under the auspices of the POA, James Glass prepared four documents:
Using these documents, D & R Fab, which is either an entity owned by Mr. Rotert or a trade name used by Mr. Rotert, applied for and received an Oklahoma Motor Vehicle Title to the Rotert Camaro on February 26, 2008.
There was one small problem with the sale procedure—it never happened. Mr. Rotert did no restoration work on the Rotert Camaro. There were no legitimate charges incurred by Mr. Rotert or D & R Fab. The February 1, 2008, public sale of the Rotert Camaro was never held.
We have two diametrically opposed stories as to how Mr. Rotert acquired the Rotert Camaro. On one hand, Mr. Rotert claims to have purchased the car from Mr. Revilla for cash plus a vehicle. He admits that he has no records to support his claim, and was never provided with a title to the Rotert Camaro. Mr. Rotert also denies any involvement in the theft of the Rotert Camaro, although he does admit to having the car in his possession. On the other hand, Mr. Revilla categorically denies having ever owned
It appears that Mr. Rotert retained possession of the Rotert Camaro until May 11, 2009. On that date, J.J. Gray ("Gray") and Rick Eberle ("Eberle"), officers with the Tulsa Police Department, appeared at Mr. Rotert's place of business, stated that they were investigating the theft of the Rotert Camaro, and seized the vehicle. The Tulsa Police Department determined that the Rotert Camaro was one of the Camaros stolen from C & S, and eventually turned it over to Philadelphia. Philadelphia did not dispose of the Rotert Camaro; instead, it placed the vehicle in storage with CoPart of Oklahoma, Inc. ("CoPart").
Nine months later, Mr. Rotert filed an action in the District Court in and for Tulsa County, Oklahoma (the "State Court"), against Philadelphia, CoPart, the City of Tulsa, Gray, Eberle, and John Does 1 through 5 (the "State Court Action"). Mr. Lyons represents Mr. Rotert in the State Court Action. The State Court Action contains causes of action for conversion, civil conspiracy, abuse of process, replevin of the Rotert Camaro, and violation of civil rights. In addition, Mr. Rotert sought a temporary restraining order and a permanent injunction preventing the sale or other disposition of the Rotert Camaro while the State Court Action was pending. The factual underpinnings of the State Court Action lie in Mr. Rotert's allegations that he was the rightful owner of the Rotert Camaro and held valid title to the same as a result of the sale procedure previously described. Mr. Rotert alleged that the seizure of the Rotert Camaro by the Tulsa Police Department was wrongful, as was the delivery of the Rotert Camaro to Philadelphia. Mr. Rotert sought return of the Rotert Camaro, as well as hundreds of thousands of dollars in actual and punitive damages. In response, Philadelphia filed an answer and counterclaim, seeking damages as well as a declaratory judgment that it, and not Mr. Rotert, was the rightful owner of the Rotert Camaro.
The State Court Action remains unresolved, with the exception that CoPart has been dismissed as a party. Initially, the State Court entered an order prohibiting the sale or disposal of the Rotert Camaro, conditioned upon the posting of a cash bond by Mr. Rotert. The bond amount was originally set at $500, but was later increased to $5,500 (the "Bond"). Mr. Rotert posted the Bond as required. Eventually the restraining order was dissolved by agreement of the parties. In addition, Philadelphia was awarded $800 in discovery sanctions against Mr. Rotert. Philadelphia has also sought a judgment against Mr. Rotert for attorneys' fees in excess of $134,000, which remains pending. Finally, Philadelphia has laid claim to the Bond to compensate it for storage costs and other damages associated with the retention of the Rotert Camaro during the pendency of the State Court Action.
In the years prior to 2013, Mr. and Mrs. Rotert (collectively, the "Roterts") were involved in two businesses: Club XS, LLC (the "Club") and D & R Fab. The Club was in business from July 2009 until October 2011, while the business of D & R Fab was conducted over a nearly twelve year period from August 2000 until June 2012. In the course of operating those businesses, the Roterts accumulated a significant number of records, including purchase records, invoices, and personal information relating to employees, such as income information and social security numbers. For years, this information was stored at the Roterts' place of residence.
In late 2011 or early 2012, the Roterts received notice that their home was being foreclosed upon, and that they would be required to vacate the premises sometime in the summer of 2012. In preparation for surrendering their house, the Roterts made the decision to destroy most, if not all, of the business records of the Club and D & R Fab. The only records of these businesses that were intentionally retained were the tax returns relating to those entities. The balance was destroyed over a period of weeks or months, some by shredding, some by burning. Mrs. Rotert testified that the records were destroyed because they were too voluminous to retain at the next place of residence and too costly to store, and because many of the records contained personal information of former employees. None of the personal financial records of the Roterts were destroyed.
On June 4, 2014, the Roterts filed a joint petition for relief under Chapter 7 of the United States Bankruptcy Code. Scott P. Kirtley ("Mr. Kirtley") was appointed as trustee in the case. In their initial schedules and statement of financial affairs, the Roterts did not disclose any interest in the Rotert Camaro. They did not list Philadelphia or Mr. Lyons as creditors, even though Philadelphia had made counterclaims and sought fees in the State Court Action, and Mr. Lyons was owed money for his services in the State Court Action and perhaps in the Criminal Case as well. In addition, while the Roterts listed several pending lawsuits to which they were parties by case number, neither the Criminal Case nor the State Court Action were listed in such detail. The Criminal Case was entirely omitted from the schedules and statement of financial affairs, while the State Court Action was described as "Civil Rights Lawsuit against City of Tulsa Policy [sic] Department" in the Roterts' Schedule B.
A first meeting of creditors was held in the Roterts' bankruptcy case on July 17, 2014. At the meeting, the Roterts testified that their schedules were true and correct to the best of their knowledge and belief and that no amendments to the documents were required. Despite not receiving notice of the bankruptcy case, Philadelphia appeared at the first meeting. Upon questioning by counsel for Philadelphia, the Roterts refused to provide direct answers regarding their ownership interest in the Rotert Camaro.
Philadelphia filed this adversary proceeding on July 21, 2014, seeking to deny the Roterts a discharge. Philadelphia claims that the Roterts:
Philadelphia also claims that Mr. Rotert refused to answer questions at their first meeting of creditors, stating that he feared a perjury charge were he to answer questions pertaining to the Rotert Camaro. On the basis of these allegations, Philadelphia argues that the Roterts should be denied a discharge under § 727(a) (2),(3),(4), and/or (6) of the Bankruptcy Code.
To the extent the "Conclusions of Law" contain any items that should more appropriately be considered "Findings of Fact," they are incorporated herein by this reference.
In order to prevail on an objection to discharge, the plaintiff must prove each statutory element by a preponderance of the evidence.
Section 727(a)(2)(A) of the Code provides that a discharge may be denied where
This exception to discharge consists of two critical pieces: 1) an act, i.e, a transfer or a concealment, involving property of the debtor; and 2) a subjective intent to hinder, delay, or defraud a creditor.
The Court does not reach any of the § 727(a)(2)(A) issues as they may pertain to Mr. Rotert because the fate of his bankruptcy discharge is decided under § 727(a)(4) infra. As to Mrs. Rotert, there is no evidence that she ever claimed any interest in the Rotert Camaro or the State Court Action. Nor has Philadelphia met its burden of proof to show that Mrs. Rotert had any intent to hinder, delay, or defraud her creditors. To the extent Philadelphia seeks to deny Mrs. Rotert a discharge under § 727(a)(2), the request is denied.
This Court first addressed the issue of denial of discharge under § 727(a)(3) almost twelve years ago.
The court shall grant the debtor a discharge, unless—
The United States Court of Appeals for the Tenth Circuit has held that in order to sustain a claim under § 727(a)(3), the plaintiff must establish that the debtor "failed to maintain and preserve adequate records and that the failure made it impossible to ascertain his financial condition and material business transactions."
Factors that a court may take into account when determining the sufficiency of disclosures include:
The decision as to whether the books and records provided are sufficient is to be made on a case by case basis, and is a matter left to the discretion of the bankruptcy court.
In this case, the evidence before the Court is that the Roterts destroyed records relating to two of their businesses approximately two years prior to the filing of their bankruptcy case. With respect to those businesses, the Roterts retained the relevant tax returns and documents. None of their personal records were destroyed. None of the records pertaining to the State Court Action or the Rotert Camaro are alleged to have been destroyed.
Section 727(a)(4)(A) of the Code provides that a discharge may be denied where "the debtor knowingly and fraudulently, in or in connection with the case . . . made a false oath or account[.]"
The Fourth Circuit has held that
A statement contained in a debtor's schedules or statement of affairs, or the omission of assets from the same may constitute a false oath for purposes of § 727(a)(4)(A).
The United States Court of Appeals for the Tenth Circuit has given us further guidance in the application of § 727(a)(4)(A). It has held that "[a] debtor will not be denied discharge if a false statement is due to mere mistake or inadvertence."
At the time this case was filed, Mr. Rotert claimed an interest in the Rotert Camaro. He was aware that Philadelphia asserted claims against him. Neither the asset nor the liability were disclosed in his schedules, nor was Philadelphia listed as a creditor on the original list of creditors filed with the Court. Although the State Court Action was nominally described in the initial bankruptcy schedules, it was not described with any particularity, a fact that is especially striking in light of the fact that Mr. Rotert described other pending litigation in great detail, i.e., by case name and docket number. Nor did Mr. Rotert list Mr. Lyons as a creditor, even though he knew he owed Mr. Lyons money for his services. The Court finds these omissions by Mr. Rotert were intentionally made in the hopes that his interests in the Rotert Camaro and the State Court Action would escape the claims of Mr. Kirtley, and remain in Mr. Rotert's control. The failure to disclose assets, liabilities, and pending litigation all constitute false oaths, and justify denial of Mr. Rotert's discharge under § 727(a)(4)(A).
Mr. Rotert argues that the fact that he amended the bankruptcy schedules after the first meeting of creditors negates any inference of fraudulent intent. The Court disagrees. Other courts have noted that amendments made after the discovery of omitted information do not necessarily cleanse a debtor's intent.
In prior unpublished decisions and numerous rulings from the bench, this Court has repeatedly and consistently said that the filing of bankruptcy schedules and statements of financial affairs is not a game of "catch me if you can." When a debtor fails to disclose material information and the information is later discovered by a trustee or revealed to the trustee by a creditor, amendments to the schedules and/or statement of financial affairs to reflect the independently discovered information carry little weight on the issue of good faith. If every debtor could cleanse the slate of full disclosure by revealing that which was once hidden but now revealed, the test for good faith becomes meaningless, and the world of bankruptcy disclosure truly devolves into an unacceptable game of "catch me if you can." The Court does not find that subsequent disclosure absolves Mr. Rotert of knowingly and fraudulently omitting the State Court Action and his claimed interest in the Rotert Camaro from his schedules.
In the eyes of the Court, the record does not support denial of Mrs. Rotert's discharge under § 727(a)(4)(A). She is not a party to the State Court Action, and (at least on the evidence before the Court) has never claimed an ownership interest in the Rotert Camaro. She did not engage in Mr. Rotert's course of fraudulent conduct with respect to the Rotert Camaro, i.e., she did not help steal the car, conceal the car, or obtain a certificate of title to it under false pretenses. As a result, the Court does not ascribe the same intent to mislead the Court and Mr. Kirtley to Mrs. Rotert that it ascribes to Mr. Rotert, and declines to deny her a discharge under § 727(a)(4).
Each subsection of § 727(a)(6) requires some form of court involvement, whether it be a direct order to give testimony, the granting of immunity, or approval of a question submitted to the court for review. If none of these prerequisites are present, § 727(a)(6) does not come into play.
In this case, Philadelphia claims that the answers given by the Roterts at their first meeting of creditors constitute "failure to respond to a material question . . . or to testify" for purposes of § 727(a)(6)(C).
To the extent Philadelphia seeks to deny the Roterts a discharge under the provisions of § 727(a)(6), the request is denied.
Mr. Rotert shall be denied a discharge in this case under § 727(a)(4)(A). Mrs. Rotert shall be granted her discharge. A separate judgment in accordance with this Memorandum Opinion shall be entered concurrently herewith.
In re Yonikus, 974 F.2d 901, 905 (7th Cir. 1992) (citations omitted). See also Kaler v. Olmstead (In re Olmstead), 220 B.R. 986, 994 (Bankr. D.N.D. 1998) (quoting Yonikus); Rezin v. Barr (In re Barr), 207 B.R. 168, 176 (Bankr. N.D. Ill. 1997) (fraud "may be proven by evidence that Debtors were aware the omitted assets existed and that they knew failure to list the assets would mislead creditors or the Trustee").
