Opinion
No. 03-85615, Adv. No. 04-8075.
December 9, 2004
OPINION
This matter is before the Court for decision following a trial on the Complaint filed by the Chapter 7 Trustee, Richard E. Barber (TRUSTEE), to deny the Debtor, Mike R. Zug (DEBTOR), his discharge for failing to schedule certain assets on his bankruptcy schedules. In his Complaint, filed on February 27, 2004, the TRUSTEE alleges that the DEBTOR owned real estate and vehicles that he failed to disclose on his schedules. In his Answer, the DEBTOR admitted the property was not disclosed on his schedules, but denied having any intent to conceal the assets or defraud the TRUSTEE. Instead, the DEBTOR claims he was confused about what needed to be disclosed, believing that only his business assets were at issue.
In the schedules of real estate and personal property filed with his petition, the DEBTOR declared owning no real estate and no motor vehicles. Admitted into evidence at trial was a partial transcript of the testimony given by the DEBTOR at the First Meeting of Creditors conducted on January 6, 2004. Initially, in response to the TRUSTEE'S general questions, the DEBTOR stated that he read his bankruptcy papers before signing them, that the information contained therein was true and correct and that all of his assets were disclosed. Later, in response to a specific question by the TRUSTEE as to whether he owned any real estate, he responded "yes" and gave the address of his residential property. In response to follow-up questioning, he disclosed that the house was owned by him and his wife, a non-debtor, and that they had owned it for seventeen years. When asked why the real estate was not listed on the schedules, he replied "I'm sorry. I wasn't thinking about it."
In response to a specific question by the TRUSTEE as to whether he owned a car, the DEBTOR stated that he owned a 1982 Ford F-350 1-ton truck worth "a couple hundred bucks." He then testified that his wife owned a 1985 Buick LeSabre worth $2,500 and that he also owned a 1953 Dodge dump truck worth "maybe 900 bucks." When asked to explain why these vehicles were not scheduled, the DEBTOR stated "I wasn't thinking about it."
At trial, the DEBTOR testified that the reason he filed for bankruptcy relief was due to a business failure that left him personally liable for unpaid business debts. He stated that the more than $300,000 in scheduled debts were all business debts. His wife did not file jointly with him since she was not liable for those debts. The DEBTOR recalled that his attorney told him that he had to list all of his assets, but he thought that since he was only seeking to discharge his business debts, that he only needed to schedule the remaining corporate assets. His corporation, J and M Windows and Siding Corporation, filed a Chapter 7 petition on January 24, 2003. That case was processed as a no asset case and was closed on March 12, 2003.
Shortly after the First Meeting of Creditors, on January 12, 2004, the DEBTOR filed Amended Schedules A, B, C and D. The real estate was disclosed on Amended A and D as having a value of $63,000, securing a mortgage lien in that same amount. A homestead exemption was now claimed on Amended C, but with a value of the claimed exemption of "0.00."
Amended Schedule B includes the following newly listed property:
1953 Dodge Dump Truck — not running $ 900 1982 F 350 1-ton 200 1994 Ford E 350 Truck — blown motor — junk price 50 1975 Honda motorcycle — does not run — junk value 50 18 Ft. Larson Boat, Motor and Trailer 1,000
An exemption was claimed in each of these items on Amended Schedule C.
ANALYSIS
The TRUSTEE objects to the discharge under both Section 727(a)(2)(A) and 727(a)(4). Under Section 727(a)(2)(A), the debtor's discharge is denied if he concealed property with the "intent to hinder, delay, or defraud a creditor or an officer of the estate." Under Section 727(a)(4), the discharge is denied if the debtor "knowingly and fraudulently" made a false oath. The TRUSTEE must prove by a preponderance of the evidence that a debtor's discharge should be denied under Section 727. In re Scott, 172 F.3d 959 (7th Cir. 1999). In order to determine if the debtor acted with the requisite fraudulent intent, the court should consider the debtor's whole pattern of conduct. In re Hosler, 309 B.R. 540, 547 (Bankr.C.D.Ill. 2004). Essentially, a distinction must be drawn between an innocent mistake or oversight and a purposeful nondisclosure. Ordinarily, it is only when the debtor was attempting to get away with hiding an asset or otherwise concealing the truth that denial of discharge is appropriate.
The Seventh Circuit has held that denial of discharge may also be warranted where a debtor displays a reckless and cavalier disregard for the truth. Matter of Yonikus, 974 F.2d 901 (7th Cir. 1992). Here, the DEBTOR filled out his schedules with a misconception about what needed to be disclosed but then "came clean" at the First Meeting of Creditors. In this Court's view, the Yonikus corollary is inapplicable under these circumstances.
The DEBTOR, having denied any fraudulent intent, explained the omissions as a failure on his part to understand the necessity of disclosing all of his non-business property, as well as business assets. The Court, after carefully listening to the DEBTOR'S testimony and observing his demeanor at trial, finds him to be a credible witness, although possessing a low level of financial sophistication. Most importantly, his innocent explanation is corroborated by his testimony at the First Meeting of Creditors. Although he responded initially to the TRUSTEE'S general questions that his schedules were correct as filed, when asked specific questions, it appears that the "light bulb went on" and he candidly disclosed the real estate and vehicles. Although it is possible that he had a fraudulent intent when he filled out his schedules and then had a change of heart at the First Meeting of Creditors, it is more likely than not that his failure to initially schedule the assets was attributable to excusable neglect.
This is not a case where the debtor "fessed up" only after having been confronted with evidence of the falsehood. The disclosures at the First Meeting were purely voluntary.
There is a critical distinction between the facts here and those in this Court's decision in In re Wilson, 290 B.R. 333 (Bankr.C.D.Ill. 2002), where the debtor, after failing to disclose the prepetition transfer of his house on his schedules, repeated and persisted in that falsehood in his testimony at the First Meeting of Creditors. Here, the DEBTOR substantially corrected the prior omissions in his First Meeting testimony, which is circumstantial evidence of a non-culpable state of mind at the time the schedules were completed. Although subsequent voluntary disclosure through testimony or an amendment to the schedules does not necessarily expunge a prior false oath, subsequent disclosures are evidence of innocent intent. In re Bailey, 147 B.R. 157, 165 (Bankr.N.D.Ill. 1992). The Court is not persuaded that the DEBTOR fraudulently intended to hide the assets in question when he failed to list them on his schedules.
It appears to the Court that the message that he should have gotten loud and clear from his attorney, that all of his assets must be listed, for some reason did not sink in with this DEBTOR. It also appears, inexcusably, that the schedules were not reviewed for accuracy by the attorney with the DEBTOR. In particular, whenever an individual debtor lists no real estate and no vehicles owned, this "red flag" should cause the attorney to make further inquiry with the debtor to verify the lack of ownership of these common assets. No such verification appears to have been done here. This simple verification could have avoided the DEBTOR becoming embroiled in litigation over his entitlement to a discharge.
This Opinion constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.