Opinion
Case No. 99-11575-MAM-7
February 16, 2000
ORDER REQUIRING STEPHEN K. ORSO, ATTORNEY FOR DEBTORS, TO TURN OVER FUNDS TO DEBTORS
This case is before the Court on the Court's own show cause order requiring Stephen K. Orso to appear and show cause why Mr. Orso should not be required to disgorge some or all of the fees he collected from debtors for this case. This Court has jurisdiction to hear this case pursuant to 28 U.S.C. § 1334 and 157 and the Order of Reference of the District Court. This matter is a core proceeding pursuant to 28 U.S.C. § 157 (b)(2) and the Court has the authority to enter a final order. For the reasons indicated below, the Court is ordering Mr. Orso to turn over $150 of the fee he received from the debtors to them.
FACTS
The Court stated the facts presented to the Court at the trial of the discharge case in the order to show cause dated February 2, 2000, and the order and judgment granting discharge to debtors dated February 2, 2000, as well. They are incorporated by reference. At the hearing on the order to show cause, Mr. Orso appeared and offered further evidence. He produced the "Instructions for Filling Out the Bankruptcy Questionnaire" which the Toomeys had completed. It stated that the debtors had a 1951 Ford truck. It also stated that the truck was collateral for a loan from First National Bank of Atmore. Mr. Orso listed the truck on the debtors' Schedules B and C. Debtors must list the items of personal property which they own and wish to exempt on these schedules. He did not list the pickup truck on Schedule D as collateral for the loan of First National Bank of Atmore. Consequently, at the first meeting of creditors, the Bankruptcy Administrator did not question the Toomeys about the truck at all. If the truck had been listed on Schedule D, the Bankruptcy Administrator would have asked the Toomeys whether they still owned the truck. Mr. Orso came to the show cause hearing with evidence that he had filed that day an amendment to the schedules of the Toomeys that deleted the truck from Schedule B and Schedule C (the Exempt Asset Schedule).
Mr. Orso had told the Court at the trial of the discharge case, in argument, that the debtors had said that the truck was sold prebankruptcy at the first meeting of creditors. He had also stated that his failure to list the asset on the proper schedules (or not list it) was a common error. Mr. Orso believed at the time of the trial that what had happened was that the asset was listed on Schedule D and not on Schedule B or C.
LAW
A debtor's counsel must provide a debtor with reasonably competent legal services to earn the fees he or she is paid in handling a bankruptcy case. See, e.g., Hale v. United States Trustee (In re Basham), 208 B.R. 926 (9th Cir. BAP 1997); In re Morrison, 231 B.R. 754 (Bankr.W.D.Mo. 1999). In this case, Mr. Orso charged the debtors $575 for his services. He did not provide $575 of value for their money. The Court has authority to review this fee pursuant to §§ 105 and 329(b) of the Bankruptcy Code.
Mr. Orso should be able to provide to the Court correctly filled out bankruptcy schedules for debtors he represents. Mr. Orso's questionnaire may be adequate. However, he must use it appropriately when completing schedules. In this case, the questionnaire completed by the debtors reveals that they listed that they owned a 1951 truck and that it was security for a loan from First National Bank of Atmore. The truck information was transferred to Schedules B and C of the Toomeys' petition, but not to Schedule D. If the truck had been listed on Schedule D, the Bankruptcy Administrator would have found out through his routine questions that the truck had been sold before bankruptcy. The Toomeys would then have amended their schedules very early in this case.
Mr. Orso argues that the incorrect listing of the truck caused no extra work and is a minimal or insubstantial error. The relief from stay motion of First National would have been necessary in any event to obtain possession of the trailer which was also security for the loan. Since the Bank's collateral was sold prepetition, the discharge suit would have been filed anyway. When the Bank found out about the fact that the collateral was missing is irrelevant. He is correct.
Mr. Orso also states that the Bank did not attend the first meeting of creditors at which it could have found out about the missing collateral and the Bank did not file a 2004 Examination request for the information either. He is correct.
Mr. Orso also argues that attorneys are going to make errors on schedules; that it is hard to do all of the work required for the fees normally charged in these cases; and he is not the only attorney who makes these errors. He is correct.
Mr. Orso's arguments do not persuade this Court that no reduction in fees should be ordered in this case. First, the debtors provided information to Mr. Orso in the questionnaire which should have required him to place the information about the truck in Schedule D. This listing would have revealed the sale of the truck early in the case. Schedules are required to be correct. The signature of the debtors under penalty of perjury on the schedules makes that clear. The bankruptcy system only works if the information debtors give the court and creditors is true and complete. Schedules must be amended when they are incorrect, particularly when the error is substantive. Second, whether a trial on the discharge objection would have occurred or not if the truck's sale had been disclosed misses the point. The type of trial (discharge or dischargeability) may have been affected, the issues tried may have been affected, and the length of trial should have been less. The debtors were required to be present in court for a trial at a time when they could have been working. Failure to give creditors true, complete facts at the beginning of a case leads creditors to mistrust information given later. This requires more testimony under oath and more witnesses. Third, whether a creditor could have helped itself and found out the facts in another way also misses the point. There is certain information debtors are required to provide correctly to creditors in their schedules. It was not provided in this case. That is a debtor problem, and creditors should not have to seek this information in a more expensive or time consuming manner.
Mr. Orso should not have listed the asset on any schedules. When the debtors listed it on their questionnaire, their error should have been caught in a meeting with counsel before the petition was filed. If not, the asset would have been listed as security for the Bank's debt, and would have been discovered to be sold by the Bankruptcy Administrator at the first meeting of creditors. At that point an amendment to the schedules would have been done. In this case, even when counsel knew that the truck did not exist, no amendment to the schedules was done until this Court determined that counsel's fee should likely be reduced. All of these scenarios required earlier action by Mr. Orso. No action was taken.
The evidence provided by Mr. Orso mitigated somewhat the situation the Court believed existed after the trial of the discharge objection. Accordingly, instead of requiring Mr. Orso to repay the entire fee, only about 1/4 of the fee, or $150, must be returned. Mr. Orso's handling of the adversary trial, his preparation of the bankruptcy papers as to other assets and debts, his handling of other matters during the bankruptcy were adequate.
The Court is ordering that the money be returned to the debtors and not to the trustee. The sum is too small for administration by the trustee. Also, the debtors have been inconvenienced by the time they had to spend in trial of the discharge case and in dealing with the relief from stay issues as they related to the nonexistent truck.
THEREFORE IT IS ORDERED that Stephen K. Orso shall return to the debtors the sum of One Hundred Fifty and no/100ths Dollars ($150.00) by March 31, 2000.
ORDER AND JUDGMENT GRANTING DISCHARGE TO DEFENDANTS
This case is before the Court on the complaint of the First National Bank of Atmore (the Bank) seeking a determination pursuant to 11 U.S.C. § 727 that the discharge of the debtors, William B. Toomey and Robbie D. Toomey, should be denied. This Court has jurisdiction to hear this case pursuant to 28 U.S.C. § 157 and 1334 and the Order of Reference of the District Court. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). For the reasons indicated below, the Court is denying the complaint of the Bank and is granting a discharge to the debtors.
FACTS
The debtors filed their chapter 7 case on May 3, 1999. In their schedules, they listed a 1951 Ford truck, a John Deere back hoe and a 26' trailer. The schedules listed the value of the truck at $800. The trailer and backhoe were valued at $15,000. The truck and trailer and back hoe were listed as "in debtor possession." The schedules were never amended.
On July 2, 1999, the Bank filed a motion seeking to lift the stay against the truck, back hoe and trailer. On August 10, 1999, debtors' counsel and the Bank counsel appeared and the debtor consented to relief from stay as to the items. The order was signed by the Court on August 12, 1999.
The parties do not dispute that the Bank had a valid, perfected lien on the collateral. In August 1999, the loan on the truck had a principal balance of $2,695.64. It had originally had a balance of $5,000. The trailer and back hoe were on a separate loan taken out in 1996. The remaining payoff on the back hoe/trailer loan is $5,510.07. This is after the sale of the back hoe by the Bank for $13,500.
The truck was in excellent condition when the loan was incurred. The debtor testified that "the engine blew" in March or April of 1998. He had used the truck for work after he had started his own business. The tires were bad and the paint job was ruined by the time of the engine problem as well. He sold the truck for $400 to a nonrelated third party on an unspecified date after the engine quit working. He did not tell the Bank about the sale. He did not turn over the $400 to the Bank. Mr. Toomey thinks he "relayed in passing" to the Bank that he was going to have to sell the truck after the engine blew.
The trailer and back hoe were returned to the Bank after the relief from stay order was signed. When the loan was incurred in 1996, the back hoe was worth over $25,000. Mr. Toomey believes the back hoe was still worth more than the amount remaining on the loan at the time he turned it in in 1999. The trailer was a homemade one. Mr. Toomey says that he had the same trailer in 1996 and in 1999. At the time of the loan, the Bank never looked at the trailer but put it on the loan as collateral. The trailer is 26' long according to the manner of measurement used by the debtor. The debtor asserts that the trailer is worth about $500.
The Bank, through the testimony of a loan officer, admits that it never viewed the trailer. However, it obtained a vehicle identification number from the debtor and a vehicle tag receipt bearing that same number. Since the trailer was turned over, the Bank has not been able to find any vehicle identification number on the trailer. The Bank has been offered $ 300-$600 for it.
The debtors went to counsel to file their chapter 7 case. Mrs. Toomey took the information to the attorney's office. The debtors thought that they had to list all of the collateral for their debts on the schedules even if they did not have it. They did not intend to defraud anyone. They did sign their petition under oath.
LAW
To maintain an action under § 727 of the Bankruptcy Code, the plaintiff bears the burden of proving that the debtors should be denied a discharge of all of their debts for one of the reasons stated in the code section. The Bank must prove this by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279 (1991). "Objections to discharge are to be strictly construed against the . . . [plaintiff] and liberally in favor of the Debtor." Goldberg v. Lawrence (In re Lawrence), 227 B.R. 907, 915 (Bankr. S.D. Fla. 1998).
A discharge is a privilege, not a right. Debtors must do what is required to deserve it. In re Lawrence, id. at p. 915. Denial of a discharge is an extreme step which is not to be taken lightly by the court. U.S. v. Haught (In re Haught), 207 B.R. 269 (Bankr.M.D.Fla. 1997). The Bank did not specify in its complaint which sections of 11 U.S.C. § 727 it believes the debtors violated. The Court concludes from the evidence that there are three possibly relevant sections — §§ 727(a)(2)(A), 727(a)(4), and 727(a)(5). Section 727 (a)(2)(A) states that a discharge shall be denied if the debtors, "with intent to hinder, delay, or defraud creditors," transfer or destroy property within one year before the bankruptcy filing. Section 727(a)(4) indicates that a discharge should be denied if a debtor makes a false oath. Section 727(a)(5) states that a debtor's discharge should be denied if a debtor fails to explain satisfactorily any loss of assets. The Court will discuss each section below.
SECTION 727(a)(2)(A)
Section 727(a)(2)(A) states that the court shall not grant the debtor a discharge if "the debtor, with intent to hinder, delay, or defraud a creditor . . . has transferred . . . [or] destroyed property of the debtor, within one year before the date of the filing of the petition." The Bank must prove that (1) the Toomeys sold their truck or disposed of their trailer (2) with an intent to hinder, delay, or defraud the Bank or trustee, and (3) the sale of the truck or disposal of the trailer was on or after May 3, 1998. Wolfdiam, P.V.B.A. v. Wainsztein (In re Wainsztein), 117 B.R. 742 (Bankr.S.D.Fla. 1990).
As to the truck, Mr. Toomey testified that he sold it early in 1998. The evidence suggested that it occurred in March or April 1998 because that is when the engine became inoperative. The bank officer's testimony was also that he saw the truck around town "until 1998" which is consistent with a sale by the debtors in early 1998. If the truck was sold in March or April 1998, then this section of the Bankruptcy Code does not even apply to the truck.
Even assuming that the truck was sold after May 3, 1998, the complaint of the Bank as to the truck should be denied as to this code section. The Bank had to prove that the Toomeys intended to hinder, delay, or defraud the Bank by the sale. The intent must be actual, not implied intent. Equitable Bank v. Miller (In re Miller), 39 F.3d 301, 306-07 (11th Cir. 1994). In this case, Mr. Toomey needed a new truck when the 1951 Ford truck quit working. The truck was no longer of any use to him and was in bad condition. The evidence did not reveal what he used the sales proceeds for, but it is at least possible he used them to help purchase a new truck. The sale had none of the "badges of fraud" surrounding it which courts use to find intent, i.e., the transfer was not to a family member; the consideration was adequate for the condition of the truck; the debtor did not retain the use of the truck; and there was no evidence offered of a scheme or of bankruptcy estate planning. Finally the $400 sales price or value is not substantial. To deny a discharge over $400 is excessive without any other showing of intent or malice or bad faith. Crews v. Topping (In re Topping), 84 B.R. 840, 842 (Bankr.M.D.Fla. 1988).
As to the trailer, the evidence is even slimmer. The debtors and the bank officer disagree about whether the trailer turned over to the Bank is the same trailer as the debtors had at the time the loan was incurred. The debtors testified it was; the bank officer said it was not. The bank officer believed that the trailer had to be a substitute of lesser value because the Bank had obtained a vehicle identification number (VIN) for the trailer at the time of the loan. When the trailer was turned over to the Bank in August or September 1999, the Bank could not locate a VIN. However, the Bank never viewed the collateral at the time the loan was made. Without more, the Bank cannot sustain its burden of proof that the trailer which was collateral for its loan was sold or otherwise disposed of. The evidence is at best in equipoise.
For all of the reasons given above, the Court concludes that neither the truck nor the trailer were sold or transferred in a manner requiring denial of discharge under § 727(a)(2)(A).
SECTION 727(a)(4)
Section 727(a)(4) requires denial of discharge if the debtor " knowingly and fraudulently . . . made a false oath." The debtors signed their schedules under penalty of perjury. The schedules list the truck and trailer. The schedules placed a value on the truck of $800. The schedules stated that the truck was "in debtor possession." The schedules were never amended. The Bank filed a relief from stay motion. The Bank was never told that the truck had been sold until after it got the order granting it relief from the stay.
The debtors filled out the bankruptcy forms at their counsel's office. They asserted that they were mistaken about what the forms meant. They thought they were supposed to list all loans and the items which were collateral for the loans.
To be actionable under § 727(a)(4), the falsity must be intentional. Firstar Bank Iowa, N.A. v. Magnani (In re Magnani), 223 B.R. 177 (Bankr. N. D. Iowa 1997). The falsity must also be material. Sears v. Burrell (In re Sears), 225 B.R. 270 (Bankr.D.R.I. 1998). In this case, neither proposition is true.
The debtors, in essence, rely on an advice of counsel defense. Advice of counsel, if it is reasonable to have relied on the advice, is a valid excuse for incorrect forms. Case v. Cheek (In re Cheek), 157 B.R. 1003, 1024-25 (Bankr.E.D.Mo. 1993). The debtors' counsel himself argued that the debtors misunderstood what they were to do. He also argued that such errors are "common" when filling out forms with the help of a secretary or paralegal. Counsel also stated (although not under oath) that debtors testified that the truck had been sold at their first meeting of creditors. Counsel also stated that he should have done an amendment to the schedules, but he did not.
Because the Toomeys' belief is reasonable, and because debtors' counsel, in argument, basically admitted that he knew of the misstatement, the defense is credible. The Toomeys did not intentionally lie on their schedules and make a knowingly false oath. Therefore, denial of a discharge under § 727(a)(4) is denied.
SECTION 727(a)(5)
Section 727(a)(5) denies a discharge to a debtor who has failed "to explain satisfactorily . . . any loss of assets." As stated above, the Court finds credible the Toomeys' explanation of their truck sale and the trailer. There is no unexplained asset loss. Sulphur Partnership v. Piscioneri (In re Piscioneri), 108 B.R. 595, 604 (Bankr.N.D.Ohio 1989); Chicago Title Ins. Co., Inc. v. Mart (In re Mart), 87 B.R. 206 (Bankr.S.D.Fla. 1988). Therefore, § 727(a)(5) does not apply.
CONCLUSION
The Court is troubled by the facts of this case. The debtors, in large part, had this adversary case filed and tried because counsel did not help prepare the forms correctly. His argument and the Toomeys' testimony lead the Court to believe that a secretary or paralegal helped with the forms without his guidance. Additionally, counsel admitted that, at the first meeting of creditors, the debtors testified that they did not have the truck. Yet no amendment was filed, even after the Bank had filed this case. It also appears that debtors' counsel did not tell the Bank that the truck had been sold even when the relief from stay motion had been filed.
Debtors should not have been put in the position of barely escaping denial of their discharge when their attorney knew early in the case that the truck, which was a basis for the complaint, was not available. Counsel could have corrected the schedules and/or talked to the Bank's counsel. Furthermore, debtors' counsel, in all cases, should go over debtors' schedules with them and provide careful guidance to any staff who are preparing forms. Debtors, debtors' counsel, the Bank and its counsel, and the Court all paid a high cost for counsel's failure to communicate. The Court, by separate order, will show cause debtors' counsel as to why the attorneys fee paid to counsel should not be disgorged and paid to the debtors or to their estate.
THEREFORE, IT IS ORDERED AND ADJUDGED that the complaint of First National Bank of Atmore seeking denial of the discharge of William B. Toomey and Robbie D. Toomey is DENIED.
ORDER TO DEBTOR'S COUNSEL TO SHOW CAUSE WHY HE SHOULD NOT BE ORDERED TO DISGORGE HIS ATTORNEYS' FEE
The Court has issued an order denying a complaint objecting to the debtors' discharge in this case. The testimony revealed that either the debtors were not being truthful, or they had not been counseled at all or enough about the proper manner to complete their bankruptcy forms. The testimony also revealed that the objecting creditor had not been told about the absence of an item of its collateral until after a relief from stay order was entered and a complaint to deny discharge was filed. Debtors' counsel argued at the trial of the Section 727 discharge complaint that the debtors had not understood how to fill out their bankruptcy forms and that was a "common" error. He also indicated that a secretary or paralegal had assisted the debtors in completing the forms. Finally counsel indicated that he knew as early as the first meeting of creditors that the collateral did not exist, but did not amend the schedules. He also apparently did not advise counsel for the lien creditor of that fact. For these reasons, the Court has concluded that a hearing on the appropriate fee which should be awarded to debtors' counsel is warranted in this case.
IT IS ORDERED that Stephen K. Orso shall appear and show cause why the attorneys' fees paid to him by the debtors in this case should not be disgorged to the debtors or to the trustee. The hearing shall be held on February 15, 2000 at 8:30 a.m. in Courtroom 2, United States Bankruptcy Court, 201 St. Louis Street, Mobile, AL 36602.