Opinion
Bankruptcy Case No. 01-72344, Adversary No. 01-7164
March 4, 2002
OPINION
The issue before the Court is whether the Debtors should be denied a discharge pursuant to 11 U.S.C. § 727(a)(2) and 11 U.S.C. § 727(a)(4).
Debtor Steven D. Passmore had a full-time job with Titan Wheel. In addition, he did construction work on the side. He described his construction business as his "hobby". In October, 1998, Mr. Passmore and his uncle, Leon Passmore, entered into a written contract with the Plaintiffs, Alan and Julie Vance, for remodeling work on the Vance home. (Leon Passmore worked two days on the job, then quit.) The contract was originally for $28,000, but add-ons raised it up to $44,000. The Vances paid Mr. Passmore $14,000 in 1998 and $25,000 in 1999. Mr. Vance testified that he paid Mr. Passmore a total of $43,000; Mr. Passmore stated that he received less than $30,000 from the Vances.
By all accounts, the job did not go well. Mr. Passmore left the job in June or July of 2000. Mr. Vance testified that he has had at least five different contractors come out to his house to fix mistakes made by Mr. Passmore.
In addition to his construction work for the Vances, Mr. Passmore also did construction work for Evelyn Hollander and Jack Cassiday. He received a little over $6,000 from each job. However, he testified that he did not make a profit on either job. The Cassiday job may have been completed more than two years before the bankruptcy filing.
On June 8, 2001, the Debtors filed their petition pursuant to Chapter 7 of the Bankruptcy Code. Shortly before filing the petition, Mr. Passmore sold some of his equipment to West Quincy Pawn Shop for approximately $1,000. This equipment included two air nailers, a trailer, a panel lift, and two 32-foot ladders. He did not redeem these items. He stated that he lost $1,000 on the transaction.
The Statement of Financial Affairs signed by both Debtors showed gross income of $28,328 in 2000 and $19,147 in 1999. The Debtors stated that they had no income other than from employment or operation of business. The Debtors also failed to disclose the transfer of the equipment to the West Quincy Pawn Shop in paragraph 10 of their Statement of Financial Affairs.
On September 18, 2001, the Plaintiffs filed a Complaint to Deny Discharge pursuant to 11 U.S.C. § 727(a)(2) and 11 U.S.C. § 727(a)(4). The Plaintiffs allege that the discharge should be denied because the Debtors failed to report the construction income of over $25,000 and failed to disclose the transfer of equipment to the pawn shop.
On November 15, 2001, the Debtors filed an Amended Statement of Financial Affairs. Under paragraph 2, the Debtors show income other than employment or operation of business of $25,276 for work done on the Vance home and $6,080 for work done on the Hollander home. The Debtors noted that expenses and materials exceeded the amount received on both projects. The Amended Statement of Financial Affairs also lists for the first time the transfer of the equipment to the West Quincy Pawn Shop in April and May of 2001. The Debtors note that they lost $1,000 on the transfers.
A discharge provided by the Bankruptcy Code is to effectuate the "fresh start" goal of bankruptcy relief. In exchange for that fresh start, the Bankruptcy Code requires debtors to accurately and truthfully present themselves before the Court. A discharge is only for the honest debtor. In re Garman, 643 F.2d 1252, 1257 (7th Cir. 1980), cert. denied, 450 U.S. 910, 101 S.Ct. 1347, 67 L.Ed.2d 333 (1981). Consequently, objections to discharge under 11 U.S.C. strictly against objectors in order to grant debtors a fresh start. In re Johnson, 98 B.R. 359, 364 (Bankr.N.D.Ill. 1988) (citation omitted). Because denial of discharge is so drastic a remedy, courts may be more reluctant to impose it than to find a particular debt nondischargeable. See Johnson, supra, 98 B.R. at 367 ("The denial of discharge is a harsh remedy to be reserved for a truly pernicious debtor.") (citation omitted). The plaintiff has the burden of proving the objection. See F.R.Bankr.P. 4005; In re Martin, 698 F.2d 883, 887 (7th Cir. 1983) (the ultimate burden of proof in a proceeding objecting to a discharge lies with the plaintiff). The objector must establish all elements by a preponderance of the evidence. In re Scott, 172 F.3d 959, 966-67 (7th Cir. 1999).
Pursuant to 11 U.S.C. § 727(a)(2)(A), a court will grant a debtor a discharge unless the plaintiff can prove by a preponderance of the evidence that the debtor:
(2) with intent to hinder, delay or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed —
(A) property of the debtor, within one year before the date of the filing of the petition . . .
11 U.S.C. § 727(a)(2)(A) (italics added).
Denial of discharge under this section requires proof of actual intent to hinder, delay or defraud a creditor. In re Snyder, 152 F.3d 596, 601 (7th Cir. 1998); In re Krehl, 86 F.3d 737, 743 (7th Cir. 1996); In re Smiley, 864 F.2d 562, 566 (7th Cir. 1989). "[P]roof of harm is not a required element of a cause of action under Section 727." Id. at 569. In determining whether a debtor has acted with intent to defraud under § 727, the court should consider the debtor's "whole pattern of conduct." In re Ratner, 132 B.R. 728, 731 (N.D.Ill. 1991) (quoting In re Reed, 700 F.2d 986 (5th Cir. 1983)). The issue of a debtor's intent is a question of fact to be determined by the bankruptcy judge. See Smiley, supra, 864 F.2d at 566. Actual fraudulent intent can be inferred from extrinsic evidence. Id.; Krehl, supra, 86 F.3d at 743; In re White, 63 B.R. 742, 744 (Bankr.N.D.Ill. 1986) ("a debtor is unlikely to directly testify that his intent was fraudulent, the court may deduce fraudulent intent from all the facts and circumstances of a case"). "Thus, where the evidence on the intent question is such that two permissible conclusions may rationally be drawn, the bankruptcy court's choice between them will not be viewed as clearly erroneous." Krehl, supra, 86 F.3d at 744 (citation omitted). "Intent to defraud involves a material misrepresentation that you know to be false, or, what amounts to the same thing, an omission that you know will create an erroneous impression." In re Chavin, 150 F.3d 726, 728 (7th Cir. 1998) (citations omitted).
In order to prevail against the Debtors on their § 727(a)(2)(A) claim, the Plaintiffs must prove two things: (a) equipment was transferred, removed, destroyed, mutilated, or concealed, and, if proven, (b) that the Debtors had an intent to hinder, delay, or defraud their creditors.
It is undisputed that Mr. Passmore transferred certain equipment to the West Quincy Pawn Shop within a year of the filing of the bankruptcy petition. However, there was no evidence that Mrs. Passmore had any part in the transfer or even knew of it. Therefore, the § 727(a)(2)(A) count is dismissed as to Mrs. Passmore.
The next question is whether Mr. Passmore transferred the equipment with the intent to hinder, delay, or defraud his creditors. Mr. Passmore denied any intent to deceive his creditors. He thought that pawning the equipment was in the ordinary course of business. He stated that he intended to redeem the equipment from the pawn shop, but the money never became available to do so. The items pawned at West Quincy Pawn Shop were not secured to any creditors.
While the Court does not accept Mr. Passmore's explanation that the transfer was in the ordinary course of business, the Court is not convinced that Mr. Passmore pawned the equipment with the intent to hinder, delay, or defraud creditors. It appears that Mr. Passmore was short of cash, and the equipment, which was not being used on any constructions projects, was a ready source of cash. There was no evidence that Mr. Passmore had the Vances or any other creditor in mind when he pawned the equipment. Further, the Court finds that the equipment was not of significant value. The Court notes that the Chapter 7 Trustee elected not to try to recover the equipment, something he could have done if the property was transferred with fraudulent intent or for less than reasonably equivalent value. Under these circumstances, the Court finds that Mr. Passmore's discharge should not be denied pursuant to § 727(a)(2)(A).
Section 727(a)(2)(A) of the Bankruptcy Code provides as follows:
(a) The court shall grant the debtor a discharge unless —
(4) the debtor knowingly and fraudulently, in or in connection with the case —
(A) made a false oath or account.
The purpose of § 727(a)(4) 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. In re Carlson, 231 B.R. 640, 655 (Bankr.N.D.Ill. 1999), aff'd 250 B.R. 366 (N.D.Ill. 2000), aff'd 263 F.3d 748 (7th Cir. 2001). In order to prevail under § 727(a)(4), the Plaintiff must establish five elements: (1) the Defendants made a statement under oath; (2) the statement was false; (3) the Defendants knew that the statement was false; (4) the Defendants made the statement with intent to deceive, and (5) the statement related materially to the bankruptcy case. In re Bailey, 147 B.R. 157, 163 (Bankr. N.D. Ill. 1992). If made with the requisite fraudulent intent, a false statement, whether made in the schedules or orally at a § 341 creditors' meeting, is sufficient grounds for denying a discharge provided it was knowingly made and is material. In re Lunday, 100 B.R. 502, 508 (Bankr.D.N.D. 1989). It is a debtor's role to consider the questions posed on the schedules and at the creditors' meeting carefully and answer them accurately and completely. Id.
A debtor's petition and schedules constitute a statement under oath for purposes of a discharge objection under § 727(a)(4). In re Gannon, 173 B.R. 313, 320 (Bankr.S.D.N.Y. 1994). In addition, a debtor's testimony at the meeting of creditors is under oath. Thus, the Plaintiff has established that the Defendants made a statement under oath.
The Court notes that the Debtors filed an Amended Statement of Financial Affairs following the filing of the Objection to Discharge. However, a debtor cannot cure an intentional omission from his or her schedules by filing amendments. In re Pond, 221 B.R. 29, 34 (Bankr.M.D.Fla. 1998). See also In re Mellor, 226 B.R. 451, 459 (D.Colo. 1998) (Debtor amended schedules after debtor "knew that cat was out of the bag").
The Debtors do not dispute that they failed to disclose their construction income or the transfer of the equipment to the pawn shop. (While there was no evidence that Mrs. Passmore was aware of the pawning of the equipment, her signature on several canceled checks shows that she was aware of her husband's construction business.) The focus at trial was on the Debtors' intent to deceive and the materiality of the omissions.
To find the requisite degree of fraudulent intent, the Court must find that the Defendants knowingly intended to defraud or engaged in behavior which displayed a reckless disregard for the truth. In re Yonikus, 974 F.2d 901, 905 (7th Cir. 1992). If a debtor's bankruptcy schedules or § 341 testimony reflect a "reckless indifference to the truth", then the plaintiff seeking denial of discharge need not offer any further evidence of fraud. In re Calisoff, 92 B.R. 346, 355 (Bankr.N.D.Ill. 1988). The requisite intent under § 727(a)(4)(A) may be inferred from circumstantial evidence. In re Yonikus, supra, 974 F.2d at 955. When a debtor is in doubt concerning disclosure, it is unquestioned that he is obligated to disclose. In re Johnson, 189 B.R. 985, 994-95 (Bankr.N.D.Ala. 1995) (failure to disclose transferred assets warranted denial of discharge).
Mr. Passmore testified that he did not report his construction income in his original Statement of Financial Affairs because he did not have any net income. He stated that he did not earn any money on the Vance or Hollander projects. He further testified that he did not list any of his construction income on his tax return on the advice of his accountant. He did not disclose the pawning of his equipment because he thought it was in the ordinary course of business.
Paragraph 1 of the Statement of Financial Affairs asks for "the gross amount of income" from employment or operation of business. (Emphasis added). Paragraph 2 asks for "the amount of income" received by the debtor other than from employment or operation of business. The Debtors listed their gross income from their regular employment with Titan Wheel and Servicemaster in paragraph 1. The construction income did not appear in the Debtors' Statement of Affairs until they were amended, and then it was shown in paragraph 2. The Court finds it understandable that the Debtors would list the construction income in paragraph 2 rather than paragraph 1; Mr. Passmore described his construction work as a "hobby". Because paragraph 2 asks for "income" (rather than the "gross amount of income" requested in paragraph 1) and the Debtors did not have any net income from the construction business, the Court finds that the omission of this information was neither intentional nor material. See In re Townsley, 195 B.R. 54, 65 (Bankr.E.D.Tex. 1996). The omission of the construction income did not materially affect the administration of the estate or the rights of creditors.
The Court reaches a similar conclusion with regard to the omission of the pawned equipment from the Statement of Financial Affairs. The equipment had limited value, clearly not enough to warrant the attention of the Chapter 7 Trustee. Although the de minimus value of property does not, in and of itself, excuse omission, it can reasonably be considered by the Court on the issue of intent and motivation to deceive. In re Graham, 122 B.R. 447, 452 (Bankr.M.D.Fla. 1990). The Plaintiffs failed to prove any actual intent to deceive creditors; no reasonable motive was suggested for the omission. The most reasonable explanation for the omission is inadvertence.
For the foregoing reasons, the Plaintiffs' Complaint to Deny Discharge is denied.
This Opinion is to serve as Findings of Fact and Conclusions of Law pursuant to Rule 7052 of the Rules of Bankruptcy Procedure.
See written Order.
ORDER
For the reasons set forth in an Opinion entered this day,
IT IS HEREBY ORDERED that the Complaint to Deny Discharge be and is hereby denied.