BILL PARKER, Bankruptcy Judge.
This matter came before the Court for trial of the Complaint of the Plaintiff, First United Bank and Trust Co. (the "Plaintiff"), through which it seeks to deny the entry of a Chapter 7 discharge in favor of the joint Debtor-Defendant, Sherry R. Buescher ("Debtor"), pursuant to 11 U.S.C. § 727(a)(2), § 727(a)(3) or § 727(a)(5) or, alternatively, seeking a determination that a debt purportedly owed to the Plaintiff by Defendant should be declared non-dischargeable under § 523(a)(2), (a)(4) or (a)(6). The trial pertained solely to the actions of the Defendant since a discharge has already been denied to Ms. Buescher's spouse, Dean E. Buescher, pursuant to that certain "Order Granting in Part and Denying in Part Motion for Summary Judgment Filed by Plaintiff, First United Bank & Trust Co." entered in this cause on April 24, 2012 and for the reasons set forth on the oral record of this Court on that date. However, the Plaintiff failed to demonstrate the propriety of entry of summary judgment against the Debtor as the spouse of Mr. Buescher.
The Debtor, Sherry R. Buescher,
The Plaintiff, First United Bank & Trust Co., had previously loaned BIL approximately
The Bueschers eventually sought professional legal assistance from the Pelley Law Office in Sherman. The law firm provided the Bueschers with worksheets as a preliminary step to the production of the required schedules and statements.
On September 18, 2009, the Debtor and her husband filed a voluntary petition for relief under Chapter 7 in this Court without accompanying schedules and statements.
The required schedules and statements for the Debtor and her husband were filed by electronic means by the law firm on October 2, 2009.
Prior to the `initial § 341(a) meeting of creditors, Mark Weisbart, the Chapter 7 Trustee,
At the initial § 341(a) meeting of creditors conducted by the Trustee on Friday, October 16, 2009, Mr. Buescher, while under oath, affirmatively answered his attorney's inquiry regarding whether he had "had the opportunity to review your petition, schedules and statement of financial affairs," whether "all your assets and liabilities [are] listed," and confirming that all of the information supplied to the attorneys that was used in the preparation of the schedules and statements was true and correct.
After a home inspection was conducted by the Trustee, he tendered correspondence to Mr. Pelley on November 12, 2009, seeking assistance from the Debtors in coordinating the inspection photographs with the property items listed in the schedules, seeking relevant bank and credit card statements, and requesting documentation of a number of property transfers involving the Debtors.
On February 15, 2010, the Trustee sent correspondence to Mr. Pelley, notifying him that the § 341 meeting will be continued to, and likely concluded on, February 22, 2010.
The degree to which the Debtor was responsive to the Trustee's ongoing requests for information after the creditors' meeting was concluded in February is difficult to quantify. It is clear that the Debtor and her husband never amended Schedule B nor their Statement of Financial
However, notwithstanding any disputes between the Debtor and her lawyers, the evidence clearly establishes that the Debtor and her husband were not forthcoming in describing the piecemeal liquidation of their substantial property holdings in the months prior to their bankruptcy filing, nor in detailing the disposition of the substantial sums realized thereby. Now in the light of information that has been subsequently revealed from various sources in the post-petition period, it is clear that the Statement of Financial Affairs filed by the Debtor and her husband contained some significant omissions and deficiencies:
Finally, in the midst of his ongoing difficulties to ascertain the scope and validity of the Debtors' pre-petition liquidation activities, the Trustee learned from a third-party source that the Debtors were concealing assets in a Lewisville, Texas storage facility (the "Lewisville assets"). The Trustee made an unannounced visit to that facility and discovered several pieces of personal property that had not been previously disclosed by the Debtors on their schedules.
As this effort for disclosure of relevant information and the discovery of undisclosed assets unfolded between the Trustee and the Debtors, First United Bank & Trust Co., initiated this adversary proceeding on December 15, 2009, seeking to deny a discharge to both Dean and Sherry Buescher on various grounds under § 727(a) and, alternatively, seeking a determination that a significant deficiency amount was owed to it by both of the Debtors that should be declared non-dischargeable.
As one court has described it,
Sonders v. Mezvinsky (In re Mezvinsky), 265 B.R. 681, 690 (Bankr.E.D.Penn.2001) (citations and internal quotations omitted). Because the denial of a debtor's discharge is undoubtedly a harsh remedy, the provisions set forth in 11 U.S.C. § 727(a) are precisely drawn so as to encompass only those debtors who have not been honest and forthcoming about their affairs. Buckeye Retirement Properties v. Tauber (In re Tauber), 349 B.R. 540, 545 (Bankr. N.D.Ind.2006) ["The denial of a debtor's discharge is akin to financial capital punishment. It is reserved for the most egregious misconduct by a debtor."]. Thus, in order to accomplish that limited purpose, the provisions of § 727(a) are to be construed liberally in favor of granting debtors the fresh start contemplated by the Bankruptcy Code and construed strictly against parties seeking to deny the granting of a debtor's discharge. In re Ichinose, 946 F.2d 1169, 1172 (5th Cir.1991); Melancon v. Jones (In re Jones), 292 B.R. 555, 559 (Bankr.E.D.Tex.2003). As the Plaintiff seeking such relief, First United Bank bears the burden of proving that the Debtor is not entitled to a discharge under § 727. The standard of proof for its allegations is a preponderance of the evidence. See, e.g., Everspring Enter., Inc. v. Wang (In re Wang), 247 B.R. 211, 213-14 (Bankr.E.D.Tex.2000) (citing Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) and Mozeika v. Townsley (In re Townsley), 195 B.R. 54 (Bankr. E.D.Tex.1996)).
The Court will begin with a § 727(a)(4)(A) analysis since the gist of the Plaintiff's complaint rests upon the alleged inaccuracy of the Debtor's bankruptcy schedules.
Section 727(a)(4)(A) provides that:
As one court has recently stated, "the bankruptcy schedules and statement of financial affairs of a debtor serve a vital role for creditors in a bankruptcy case, in that they ensure that adequate and truthful information is available to trustees and creditors, not just an objecting creditor, without the need for further investigation to determine whether or not the information is true and correct." Mullen v. Jones (In re Jones), 445 B.R. 677, 726-27 (Bankr.N.D.Tex.2011). "The purpose of § 727(a)(4)(A) is to enforce a debtor's duty of disclosure and to ensure that the Debtor provides reliable information to those who have an interest in the administration of the estate. Thus, complete financial disclosure is a condition precedent to the privilege of discharge." Fiala v. Lindemann (In re Lindemann), 375 B.R. 450, 469 (Bankr.N.D.Ill.2007) (citations and quotations omitted).
Thus, the Plaintiff, as the objecting party, carries the burden of proof under § 727(a)(4)(A) and must show by a preponderance of evidence that (1) the debtor made a statement under oath; (2) the statement was false; (3) the debtor knew the statement was false; (4) the debtor made the statement with fraudulent intent; and (5) the statement materially related to the bankruptcy case. Cadle Co. v. Duncan (In re Duncan), 562 F.3d 688, 695 (5th Cir.2009); Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 178 (5th Cir.1992). If a plaintiff establishes a prima facie case that a debtor made a materially false statement, then the burden shifts to the debtor to present evidence that she is innocent of the charged offense. Id.
The evidence establishes that the Debtor's schedules and her Statement of Financial Affairs contained numerous omissions that rendered false the sworn responses of the Debtor. These false statements were undoubtedly material to the bankruptcy case. A false statement or omission is material "if it bears a relationship to the debtor's business transactions, or if it concerns the discovery of assets, business dealings, or the existence or disposition of the debtor's property." Andra Group, L.P. v. Gamble-Ledbetter (In re Gamble-Ledbetter), 419 B.R. 682, 692 (Bankr.E.D.Tex.2009) (citing Cadle Co. v. Duncan, 562 F.3d at 695). The materiality of the omitted assets from the Lewisville storage facility cannot be seriously questioned. The materiality of the information omitted from the Statement of Financial Affairs regarding the Debtors' pre-petition liquidation of their substantial assets was material because those misstatements detrimentally delayed the fulfillment of the Trustee's statutory duty to investigate that extensive liquidation effort to determine whether any avoidance actions for the benefit of creditors would be appropriate.
This case turns upon whether the erroneous statements made under oath in the Debtor's schedules were knowingly false and whether they were made by the Debtor with a fraudulent intent. The Debtor contends that the evidence is insufficient to establish those required elements because such acknowledged errors were the direct
When evaluating whether a false statement is made knowingly, one court has quite usefully explained:
Wachovia Bank, N.A. v. Spitko (In re Spitko), 357 B.R. 272, 313-14 (Bankr. E.D.Pa.2006). In this instance, there was certainly information that was tendered by the Debtor to her counsel that did not appear on the schedules and statements. However, she willingly executed a Declaration prior to the filing of those documents which confirmed under penalty of perjury that: (1) she had actually read the original statements and schedules that were to be filed electronically in the case; (2) the information contained in those prepared statements and schedules was true and correct; and (3) she understood that the Declaration would be filed with the Court within five (5) business days after the electronic filing of the documents. Thus, the Debtor was not an innocent victim because, as contemplated in the adoption of the e-filing system, she actually possessed the right to confirm the validity of the information contained in the prospective documents by a complete review of the contents of those documents prior to the time that she signed the Declaration. She controlled whether or not to sign the Declaration. She possessed the leverage necessary to protect herself from the negative consequences that would potentially arise for her from the submission of false information under the penalty of perjury. As an admitted attorney, the significance of that leverage, and the potential implications arising from a failure to exercise it, is heightened. However, out of a sense of deference, or for convenience, or for sheer expediency, she signed the Declaration without reviewing the documents, thereby swearing to the accuracy of documents that she had never seen. At a minimum, that lack of concern rises to the level of a reckless disregard for the truth.
Further, having become aware of the erroneous content of the statements and schedules, the Debtor not only did nothing to correct them, she actually and falsely confirmed under oath the accuracy of the schedules at the original § 341 meeting, though she knew that the documents as presented did not contain other responsive information that she claims to have previously supplied to her attorneys. "Knowledge that a statement is false can be evidenced by a demonstration that the debtor knew the truth, but nonetheless failed to give the information or gave contradictory information." Ayers v. Babb (In re Babb), 358 B.R. 343, 355 (Bankr. E.D.Tenn.2006), quoting Hamo v. Wilson
These occurrences tie into the final consideration — as to whether the false oaths were made with a fraudulent intent by the Debtor. A plaintiff in a § 727(a)(4)(A) action must demonstrate by a preponderance of the evidence an actual intent to hinder, delay, or defraud creditors — a constructive intent is insufficient. FNFS, Ltd. v. Harwood (In re Harwood), 404 B.R. 366, 384 (Bankr.E.D.Tex.2009) (citing Pavy v. Chastant (In re Chastant), 873 F.2d 89, 91 (5th Cir.1989)). However, in most circumstances only the debtor can testify directly concerning his or her intent and "rare will be the debtor who willingly provides direct evidence of a fraudulent intent." Neary v. Darby (In re Darby), 376 B.R. 534, 541 (Bankr.E.D.Tex.2007). Instead, the existence of a fraudulent intent is most often betrayed by an examination of a course of conduct. First Tex. Savings Assoc. v. Reed (In re Reed), 700 F.2d 986, 991 (5th Cir.1983). Thus, "[f]raudulent intent may be proved by showing either actual intent to deceive or a reckless indifference for the truth." Neary v. Hughes (In re Hughes), 353 B.R. 486, 504 (Bankr.N.D.Tex.2006); see also, Sholdra v. Chilmark Fin. LLP (In re Sholdra), 249 F.3d 380, 382-83 (5th Cir. 2001).
The Court has carefully reviewed the evidence surrounding the entire pattern of the Debtor's conduct — including the series of omissions relating to the pre-petition liquidation of substantial amounts of property and the impact of her interactions with her lawyers, or the lack thereof. The Debtor insists that her unfamiliarity with bankruptcy documents and procedures mandated a greater degree of reliance upon her retained counsel and that an improper intent arising from the resulting falsehoods and deficiencies cannot be properly charged to her. However, the Debtor was highly aware of the complexities of the numerous financial activities in which she and her husband had engaged and she was a participant in the concerted pre-petition efforts to liquidate property and to utilize the funds derived thereby. The implication that she did not know that creditor representatives were entitled to scrutinize those activities and that the Bankruptcy Code required full disclosure of all of those financial transactions in order to allow that scrutiny to take place is not credible. Such is the honesty required to gain the benefits of a bankruptcy discharge.
While the Debtor may credibly claim to have been ignorant of the particulars required to disseminate that required information in the prescribed formats, her status as a licensed attorney means that she knows the meaning of an oath. She knows the full significance of swearing that the contents of a document are true and correct. Yet her benign acceptance of those shortcomings as the case progressed places her in bad light with regard to her intentions regardless of the effectiveness of her lawyers. She never corrected the errors that she had previously affirmed. She never fully supplemented the information that was provided. She was fully willing to accept the benefits derived from such deficiencies. Even with those glaring defects, one might still conclude that no fraudulent intent accompanied the failures. After all, bankruptcy case administration in the real world is often informally accomplished by directly providing additional information
The Lewisville assets constituted property of this bankruptcy estate. Judge Rhoades has so declared it and the Debtor is precluded from arguing otherwise. The record establishes that the purported non-debtor owners failed to present any corroboration for their putative ownership claims. While the Debtor touts her lack of fraudulent intent in this case by citing all of the purported factors that hindered her full disclosure, the evidence establishes that there was no attempt by the Debtor to disclose those items of personalty surreptitiously stored in the Lewisville storage facility and which would never have been revealed by the Debtor, nor likely discovered by the Trustee, in the absence of a third party informant. The disclosure of the Lewisville assets was clearly required. They were clearly omitted. The omission was clearly intentional and it defiles the Debtor's attempt to infer that she was repeatedly the innocent victim of a series of unfortunate miscues.
Upon an examination of the totality of the evidence, the Court finds that the materially false statements repeatedly occurring in the Debtor's statements and schedules were knowingly made by the Debtor with an actual intent to hinder, delay, or defraud creditors. Her cavalier disregard for the truth in this proceeding warrants the denial of her discharge under § 727(a)(4)(A).
The Plaintiff's complaint also seeks to deny a discharge to the Debtor under § 727(a)(2). This statute provides that:
In order to establish grounds for denial of a discharge under § 727(a)(2)(A), the Plaintiff must demonstrate by a preponderance of the evidence that there was: (1) a transfer or concealment of property; (2) belonging to the debtor; (3) within one year of the filing of the petition; and (4) performed with an intent to hinder, delay or defraud a creditor or an officer of the estate. Chastant, 873 F.2d at 90. "The elements for § 727(a)(2)(B) are substantially the same as those for § 727(a)(2)(A) except that the plaintiff must prove that the debtor transferred or concealed property of the estate after the bankruptcy petition was filed." Harwood, 404 B.R. at 384, (citing Rouse v. Stanke (In re Stanke), 234 B.R. 449, 456-57 (Bankr. W.D.Mo.1999)). In both instances, a plaintiff must demonstrate by a preponderance of the evidence an actual intent to hinder, delay, or defraud creditors — a constructive intent is insufficient. Chastant, 873 F.2d at 91; Martin Marietta Matl's Southwest, Inc. v. Lee, 309 B.R. 468, 481 (Bankr. W.D.Tex.2004). However, "a court may infer such actual intent from the circumstances of the debtor's conduct." NCNB Texas Nat'l Bank v. Bowyer (In re Bowyer), 916 F.2d 1056, 1059 (5th Cir.1990)
In this evaluation, the Court incorporates by reference its earlier findings and conclusions from its § 727(a)(4)(A) analysis. Transposed into this statutory context, and with particular reference to the Lewisville assets, the evidence establishes that the Lewisville assets constituted property of the bankruptcy estate that was concealed from the Trustee and the creditors of this estate. Concealment for the purposes of § 727(a)(2) does not require actual physical secretion of the asset. As one court noted in its review of the applicable jurisprudence regarding concealment in this context:
Freelife Int'l, LLC v. Butler (In re Butler), 377 B.R. 895, 918 (Bankr.D.Utah 2006) (citations and quotations omitted). In this case, both standards were violated. The Debtor concealed the assets and any information about them. Such concealment continued unabated for a number of months into the post-petition period.
As an alternative count, the complaint seeks a denial of a discharge to the Debtor under § 727(a)(3). That section provides —
As this Court has previously noted,
Neary v. Guillet (In re Guillet), 398 B.R. 869, 888 (Bankr.E.D.Tex.2008) (citations and internal quotations omitted). See also, Hughes v. Wells (In re Wells), 426 B.R. 579, 594 (Bankr.N.D.Tex.2006) [finding that though an impeccable system of bookkeeping is not required, "creditors should not be required to speculate about the financial condition of the debtor or hunt for the debtor's financial information"]; Stapelton v. Yanni (In re Yanni), 354 B.R. 708, 712 (Bankr.E.D.Pa.2006) [noting that § 727(a)(3) "ensures that creditors are supplied with dependable information on which they can rely in tracing a debtor's financial history"].
Under § 727(a)(3), a plaintiff must prove that a debtor: (1) failed to keep and preserve financial records; and (2) that this failure prevented the plaintiff from ascertaining the debtor's financial condition. Robertson v. Dennis (In re Dennis), 330 F.3d 696, 703 (5th Cir.2003). Intent is not an element. "The premise of the subsection is that such financial documents would have been available under normal circumstances except for the failure of the debtor to maintain or preserve them. If this evidentiary burden is sustained,
Guillet, 398 B.R. at 889, citing Cadlerock Joint Venture, L.P. v. Sauntry (In re Sauntry), 390 B.R. 848, 855 (Bankr. E.D.Tex.2008) (citations and quotations omitted). "The financial records a debtor maintains should be appropriate and reasonable for a debtor of similar sophistication." Wells, 426 B.R. at 594. In sum, the Court must deny a discharge under § 727(a)(3) if the Plaintiff can demonstrate that each Defendant failed to keep records or "to take such steps as ordinary fair dealing and common caution dictate to enable the creditors to learn what he did with his estate." Randall v. Atkins (In re Atkins), 458 B.R. 858, 873 (Bankr. W.D.Tex.2011).
The evidence is replete with examples of how the Debtor failed to present insightful records to explain the methodical dissolution of her marital estate: the failure to account for the disposition of the $219,645 derived from the sale of the Mabank lakehouse; the failure to account for the disposition of the $41,665 derived from the sale of the Florida insurance company; the failure to account for the disposition of almost $700,000 derived from the liquidation of various IRA accounts; and the failure to account for the disposition of the liquidation of the various vehicles. These unexplained transactions illustrate the degree to which this Debtor, as a sophisticated attorney and businesswoman, and her husband meticulously avoided creating paper trails that might otherwise explain the disposition of hundreds of thousands of dollars in the months preceding their bankruptcy filing. It is certainly a fair inference from the evidence that a proper examination, or the discovery of information, was exactly what the Debtor and her husband intended to preclude. They provided some documents to the Trustee, but those documents were far from constituting the breadth necessary to explain the propriety of their financial actions as a multimillion-dollar business empire collapsed. In lieu thereof, the Debtor offers only perfunctory explanations, generally without corroboration.
However, "[c]reditors are not required to accept a debtor's oral recitations or recollections of [her] transactions; rather, to qualify for a discharge in bankruptcy, a debtor is required to keep and produce written documentation of all such transactions. Records are not adequate if they do not provide enough information for the creditors or the trustee to ascertain the debtor's financial condition or to track [her] financial dealings with substantial completeness and accuracy for a reasonable period into the past." Neary v. Hughes (In re Hughes), 353 B.R. 486, 500 (Bankr.N.D.Tex.2006). Far from being substantially justified in the failure to maintain sufficient records by which the Trustee could reconstruct and evaluate their financial transactions,
Given the education, experience and sophistication of this Debtor, her failure to preserve significant and relevant documentation to explain her financial affairs is inexcusable. As the Hughes court observed,
Hughes, 353 B.R. at 502.
Because the Plaintiff has demonstrated that the Debtor's failure to preserve adequate financial records impaired its efforts, and that of the Trustee, to ascertain her financial condition and the transactions relating thereto, and in light of the Debtor's failure to justify that deficiency, such failure warrants the denial of the Debtor's discharge pursuant to § 727(a)(3).
The Plaintiff seeks an award of attorney's fees. However, in adherence to the so-called "American Rule," attorneys' fees are not taxable as costs or recoverable as damages in an adversary proceeding unless such fees are authorized by statute or through an enforceable contract between the parties. Bell v. Claybrook (In re Claybrook), 385 B.R. 842, 854 (Bankr. E.D.Tex.2008). Certainly § 727 itself does not provide a statutory basis for such a recovery and there is sound authority that precludes an award of attorneys' fees in this context. Tuloil, Inc. v. Shahid (In re Shahid), 254 B.R. 40, 44 (10th Cir. BAP 2000); Cole Taylor Bank v. Yonkers (In re Yonkers), 219 B.R. 227, 234 (Bankr.N.D.Ill. 1997). As the Shahid court observed:
254 B.R. at 44. Because the judgment being issued by this Court does not reach any particularized claim against Mrs. Buescher solely for the benefit of the Plaintiff, there is no valid basis upon which to grant the Plaintiff's request for an award of attorneys' fees. Taxable court costs in the form of the $250.00 filing fee, however, are awarded pursuant to 28 U.S.C. § 1920.
Complete, thorough and honest disclosure of all relevant financial information by a bankruptcy debtor is the quid
This memorandum of decision constitutes the Court's findings of fact and conclusions of law