Opinion
No. 96-01971-BKC-3P7
April 30, 1997
FINDINGS OF FACT AND CONCLUSIONS OF LAW
This proceeding came before the Court on a complaint objecting to debtor's discharge pursuant to 11 U.S.C. § 727(a)(2)(A), 727(a)(2)(B), 727(a)(3), 727(a)(4)(A), and 727(a)(5). The complaint also sought to determine dischargeability of a debt pursuant to 11 U.S.C. § 523(a)(2)(A), 523(a)(2)(B), 523(a)(4), and 523(a)(6). After a trial on January 22, 1997, the Court enters the following findings of fact and conclusions of law:
FINDINGS OF FACT
1. For most of his adult life, Defendant has been engaged in the ownership and operation of various pawn shop businesses.
2. In 1985, Plaintiff sustained head injuries in a car accident and continues to suffer from mental deficiencies.
3. Between February and September 1995, Plaintiff and Defendant were engaged in an intimate, personal relationship. Plaintiff alleged that during this relationship, Defendant promised to leave his wife and build a home for himself and Plaintiff. Plaintiff further alleged that Defendant asked her for several loans so that he could provide the home and life he promised.
4. Plaintiff alleged that in response to Defendant's promises of marriage, she made one loan in the amount of $15,000 to ABC Surplus, Inc., Defendant's business interest and employer. Plaintiff further alleges that she made three loans to Defendant personally, totalling $14,685. Defendant admitted receiving $9,000 from Plaintiff, but claims it was a gift. He also stated that he returned over $1,000 to Plaintiff.
5. Defendant filed a petition under Chapter 7 of the Bankruptcy Code on April 5, 1996.
6. Also in 1996, Plaintiff filed a complaint against Defendant, Irving Isicoff, and ABC Surplus, Inc., in the Circuit Court for Marion County, Florida. In the state court, Plaintiff stated that Defendant fraudulently induced Plaintiff to loan them money, and that Plaintiff relied on his misrepresentations to loan them $29,685. (Pl.'s Ex. 4). The state court entered judgment in favor of Plaintiff on November 14, 1996. (Pl.'s Ex. 5). The judgment states that Irving Isicoff must pay $16,655,58 to Plaintiff, a sum representing the $15,000 loaned to ABC Surplus, Inc., plus statutory interest and costs. The state court, however, reserved jurisdiction in regards to the Defendant, stating that it was stayed from proceeding by the automatic stay imposed by the Bankruptcy Code. Consequently, the Final Judgment entered by the state court does not provide Plaintiff recovery against the Defendant.
7. Plaintiff filed this adversary proceeding to object to Defendant's discharge pursuant to 11 U.S.C. § 727. Alternatively, Plaintiff seeks to have any debt owed to her by Defendant excepted from Defendant's discharge pursuant to 11 U.S.C. § 523.
CONCLUSIONS OF LAW Objection to Discharge
The Court will first address Plaintiff's objection to Defendant's discharge pursuant to 11 U.S.C. § 727. In relevant part, section 727 provides:
(a) The court shall grant the debtor a discharge, unless —
. . .
(2) the debtor, 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; or
(B) property of the estate, after the date of the filing of the petition;
(3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case;
(4) the debtor knowingly and fraudulently, in or in connection with the case —
(A) made a false oath or account;
. . . (5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor's liabilities. . . .
11 U.S.C. § 727(a)(2)(A) and (B)
Plaintiff first alleges that Defendant transferred property with intent to defraud creditors and continued to conceal property after his petition was filed. This Court has held that Bankruptcy Code section 727(a)(2)(A) requires the objecting party to show that:
1. a transfer occurred;
2. that the property transferred was property of the debtor;
3. that the transfer was within one year of the petition; and
4. that at the time of the transfer, the debtor possessed the requisite intent to hinder, delay or defraud a creditor.
Barthlow v. More (In re More), 138 B.R. 102, 104 (Bankr.M.D.Fla. 1992). The Court has further held that to prevail under 11 U.S.C. § 727(a)(2)(A) and (B), the objecting party must prove "actual intent to hinder, delay, or defraud creditors rather than constructive intent." Commercial Nat'l Bank of Peoria v. Kindorf (In re Kindorf), 105 B.R. 685, 689 (Bankr.M.D.Fla. 1989). Actual intent, however, may be inferred from the totality of the circumstances. Id. In determining intent, the Court has previously identified certain "badges of fraud" which are indicative of fraudulent intent:
1. the lack or adequacy of consideration;
2. the family, friendship or close association between the parties;
3. the retention of possession, benefit or use of the property in question;
4. the financial condition of the party sought to be charged both before and after the transaction in question;
5. the existence or cumulative effect of a pattern or series of transactions or course of conduct after incurring of debt, onset of financial difficulties, or pendency of threat of suits by creditor; and
6. the general chronology of the events and transaction under inquiry.
Wade v. Wade (In re Wade), 189 B.R. 522, 525 (Bankr.M.D.Fla. 1995).
Plaintiff alleges that in 1995, within one year of the petition date, Defendant transferred $5,000 to Irving Isicoff and $12,000 to his mother. Plaintiff alleges that these transfers were intended to hinder or defraud a creditor. Defendant claims he made the $5,000 transfer to Isicoff as an investment in Isicoff's ABC Surplus, Inc. business. The transfer was made in a business relationship. Defendant did not retain any portion of the transfer. Defendant testified that he later received $5,000 in compensation from the business, but this was for services performed. The financial condition of the debtor was unstable at the time of the transfer, but the defendant had a history of investing in pawn businesses. Defendant made the investment to attempt to start a new business with Isicoff.
Defendant claims he made the $12,000 transfer to his mother to pay off a previous debt owed to her.
The Court finds that Plaintiff has not presented sufficient evidence to deny the debtor's discharge under 11 U.S.C. § 727(a)(2)(A) or (B). The evidence does not indicate that the defendant made the transfers with an intent to hinder or defraud a creditor. He made a business investment and attempted to repay a previous debt. Thus, the Court concludes that Plaintiff's objection to Defendant's discharge pursuant to 11 U.S.C. § 727(a)(2)(A) and (B) must be overruled.
11 U.S.C. § 727(a)(3)Plaintiff next alleges that Defendant destroyed, mutilated, or falsified books or records. Plaintiff has the burden of showing that Defendant's books or records are inadequate. Phillips v. Nipper (In re Nipper), 186 B.R. 284, 289 (Bankr.M.D.Fla. 1995). This Court has previously held that a full accounting is not required, but some records should exist from which the financial condition of the debtor can be ascertained. Id. at 289. The Court has also held that failure to keep records must be determined on a case by case basis, and that a debtor's failure to keep records is not an absolute bar to a discharge. Barthlow v. More (In re More), 139 B.R. 102, 104 (Bankr.M.D.Fla. 1992). The Court also recognizes that other courts have held that no duty exists on the part of a debtor to preserve records. Id. (citing In re Rios, 27 F. Supp. 744 (D.C.N.Y. 1939)).
Defendant testified that he kept no financial records and maintained no bank accounts in the two years prior to his petition. He further testified that any records he maintained before the two-year time period were turned over to the Internal Revenue Service during an audit in 1994.
Plaintiff argues that it is unreasonable that the Defendant would have no financial records from which his financial condition could be ascertained. The Court, however, finds that the circumstances of this case, although unusual, warrant the conclusion that the Defendant's failure to maintain such records should not bar his discharge. Defendant stated that he has been unemployed for two years, and despite numerous business ventures, the Defendant appears financially unsophisticated. The Court finds that Plaintiff's objection to Defendant's discharge pursuant to 11 U.S.C. § 727 (a) (3) must be overruled.
11 U.S.C. § 727 (a)(4)(A)Plaintiff alleges that Defendant's discharge should be denied because he made a false oath or account in connection with his bankruptcy case. Generally, the veracity of a debtor's statements is essential to the successful administration of his estate. Chalik v. Moorefield (In re Chalik), 748 F.2d 616 (11th Cir. 1984). This Court has held that a debtor's discharge should be denied if he omits information from his schedules that are fraudulent and material. Mahon v. Milam (In re Milam), 172 B.R. 371, 375 (Bankr.M.D.Fla. 1994). An omission is material if it bears relationship to the debtor's business transactions or his estate. Id. This Court has further held that although a single omission is generally insufficient to deny a discharge, a series of omissions can indicate reckless disregard for the truth and is indicative of fraudulent intent on the part of the debtor. Youngblood v. Hembree (In re Hembree), 186 B.R. 530, 532 (Bankr.M.D.Fla. 1995).
Plaintiff alleges that Defendant's schedules and Statement of Financial Affairs, combined with his testimony at his 341 meeting her which does not correlate with any debt amount on the schedules. However, Defendant owed several debts to his mother, and the Court finds it reasonable that the $12,000 payment was a partial payment toward the total owed to his mother.
Defendant did list income from businesses on his statement of financial affairs.
Although the Plaintiff has cited multiple omissions or inconsistencies in the Defendant's paperwork and his testimony, the Court finds that the Plaintiff has failed to prove that these errors create a series of omissions that are indicative of fraud. The Court finds that Defendant's omissions resulted more from than abundance of confusion, rather than an attempt to defraud a creditor. Accordingly, the Court will overrule Plaintiff's objection to Defendant's discharge pursuant to 11 U.S.C. § 523 (a)(4)(A).
11 U.S.C. § 727 (a)(5)Finally, Plaintiff alleges that Defendant's discharge should be denied because Defendant has failed to explain a loss of assets. Under section 727 (a)(5), the Plaintiff must prove more than a mere allegation that Defendant failed to explain a loss of assets. Barthlow v. More (In re More), 138 B.R. 102, 106 (Bankr.M.D.Fla. 1992). Likewise, the Defendant's explanation of the loss must convince the Court of the Defendant's good faith and businesslike conduct. Grant v. Simmons (In re Simmons), 113 B.R. 741, 745 (Bankr.M.D.Fla. 1990). Courts generally utilize a reasonableness standard, under which the courts determine whether the debtor has and the trial of this adversary, reflect the following inconsistencies or errors:
1. Defendant's schedules state he had no cash on hand when he filed the petition. At trial, however, Defendant stated that he had a nominal amount of cash on hand.
2. Defendant's schedules state he had no interest in insurance policies. At trial, Defendant stated he had a life insurance policy.
3. Defendant failed to list the $5,000 he gave to ABC Surplus, Inc.
4. Defendant inaccurately listed debts owed to his mother.
5. Defendant falsely listed a rental payment of $700. Defendant testified at his 341 meeting that his wife made the rental payments.
6. Defendant listed a monthly utility payment of $38, but did not list the utility company as a creditor.
7. Defendant listed no expenses for transportation, but admitted having a truck which requires fuel and maintenance.
8. Defendant listed no income for two years, but received money from the sale of two businesses.
9. Defendant listed no payments to insider creditors within one year of his petition, but admitted making lease payments for his wife.
10. Defendant listed Plaintiff as a creditor, but did not list the debt as a contingent debt. Defendant later denied owing Plaintiff the $30,000 listed on his schedules.
11. Defendant failed to list one accountant and one bookkeeper.
When Defendant filed his petition, he stated he had no cash on hand. Debtor testified that he had not maintained a bank account for two years, and the Court finds it reasonable to believe that the Defendant did not have any cash on hand when he filed his petition.
Plaintiff alleges that the debt owed to Defendant's mother is inaccurately stated because the Defendant made a $12,000 payment to provided an explanation that does not arouse suspicion. Id. This Court has held that a debtor's explanation of loss of assets is sufficient if it satisfies the trier of fact. Wade v. Wade (In re Wade), 189 B.R. 522, 526 (Bankr.M.D.Fla. 1995).
Plaintiff alleges that Defendant failed to explain loss of assets, namely the proceeds generated from the sale of his businesses. Defendant testified that he used the proceeds from the sales to provide living expenses for a family of four. He also testified that he purchased a motor vehicle and paid off business expenses. Although the defendant did not produce receipts for these items or provide exact dollar amounts, the Court finds his account for the assets to be satisfactory. The Court will overrule Plaintiff's objection to Defendant's discharge pursuant to 11 U.S.C. § 727 (a)(5).
Exception From Discharge
Having overruled Plaintiff's objections to Defendant's discharge, the Court must now determine whether the debt allegedly owed by Defendant to the Plaintiff can be excepted from the Defendant's discharge pursuant to 11 U.S.C. § 523. In relevant part, section 523 provides:
(a) A discharge under section 727 . . . does not discharge an individual debtor from any debt —
. . .
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by —
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition;
(B) use of a statement in writing —
(i) that is materially false;
(ii) respecting the debtor's or an insider's financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intend to deceive;
. . .
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny;
. . .
(6) for willful and malicious injury by the debtor to another entity or to the property of another entity. . . .
11 U.S.C. § 523 (a)(2)(A) and (B)
Under sections 523 (a)(2)(A) and (B), a debt can be excepted from a debtor's discharge if that debt "follows a transfer of value or extension of credit induced by falsity or fraud (not going to financial condition)," or when the debt "follows a transfer or extension induced by a materially false and intentionally deceptive written statement of financial condition upon which [a] creditor reasonably relied." Field v. Mans, — U.S. —, 116 S.Ct. 437, 441, 133 L.Ed.2d 351, — (1995).
To prevail under section 523 (a)(2)(A), the Plaintiff must prove the following four elements:
1. The debtor made a false representation with intent to deceive the creditor.
2. The creditor relied on debtor's representation.
3. The creditor's reliance was reasonable.
4. The creditor sustained loss as a result of debtor's representation.
American Surety Casualty Co. v. Hutchinson (In re Hutchinson), 193 B.R. 61, 64 (Bankr.M.D.Fla. 1996). Fraudulent intent may be inferred from the totality of the circumstances. Id.
In regards to unfulfilled promises, this Court has held that the plaintiff must prove that when the promises were made, the defendant knew he could not fulfill them, or had no intention of fulfilling the promises. Id. at 65 (citing Selz v. Snyder (In re Snyder), 62 B.R. 182, 184 (Bankr.M.D.Fla. 1986)). The Supreme Court has held that under section 523 (a)(2)(A), the plaintiff must only show "justifiable reliance." Field v. Mans, — U.S. —, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). The justifiable reliance standard requires the Court to consider the particular characteristics or infirmities of the Plaintiff in this case.
Plaintiff alleges that she loaned money to the Defendant based on his representations or promises of marriage. Plaintiff further alleges that she suffers diminished mental capabilities due to a previous injury, and that she justifiably relied on the Defendant's promises when she loaned him the money. However, the Court finds that Plaintiff's evidence is insufficient to meet the requirements of section 523 (a)(2)(A).
The Plaintiff willingly engaged in an intimate, personal relationship with the Defendant. She also willingly loaned him money, despite warnings from friends and family members. Evidence offered by the Plaintiff's sister indicated that she warned Plaintiff to document the loans in writing. Although Plaintiff claims to suffer from diminished mental capabilities, she is not under a guardianship. She exercises authority over her own business affairs and her bank accounts. Plaintiff also testified that she enrolled in some college courses and performed reasonably well.
The Court finds that Plaintiff's evidence is insufficient to show that Defendant made a false misrepresentation with intent to deceive the Plaintiff. Plaintiff has not shown that Defendant did not intend to fulfill the promises when he made them. Even if the Plaintiff were successful in proving the misrepresentation, the Court finds that Plaintiff's reliance on the representation was not justifiable. Plaintiff ignored the advice of friends and family and willingly loaned money to the Defendant.
Accordingly, the debt owed by Defendant to Plaintiff is not excepted from Defendant's discharge pursuant to 11 U.S.C. § 523 (a)(2)(A).
Under section 523 (a)(2)(B), Plaintiff must prove that the defendant provided a written statement that contained material misrepresentations.Id. In this case, Plaintiff has not suggested she relied on a written representation made by the Defendant, but rather his oral promises to marry her. Thus, the Court finds section 523 (a)(2)(B) inapplicable in this proceeding, and the debt owed by Defendant to Plaintiff is not excepted from Defendant's discharge pursuant to section 523 (a)(2)(B).
11 U.S.C. § 523 (a)(4)Plaintiff next alleges that the debt owed by Defendant to Plaintiff should be excepted from discharge because it was a debt resulting from larceny. In Florida, larceny is defined as "the wrongful taking and carrying away of property of another with intent to convert said property to one's use without consent of the owner." Werner v. Hofmann (In re Hofmann), 144 B.R. 459, 464 (Bankr.M.D.Fla. 1992). A Bankruptcy Court is not bound by the state law definition, however, and may utilize the federal common law definition of larceny: "larceny is the felonious taking of another's personal property with intent to convert it or deprive the owner of same." Weinreich v. Langworthy (In re Langworthy), 121 B.R. 903, 907-08 (Bankr.M.D.Fla. 1990).
In this case, Plaintiff willingly gave money to the Defendant. Plaintiff offered no evidence to prove that Defendant intended to convert or deprive her of the money. The Defendant considered the money a gift. The Court finds that Plaintiff has not produced sufficient evidence to prove that Defendant committed larceny. Thus, the Court finds that the debt owed by Defendant to Plaintiff is not excepted from Defendant's discharge pursuant to 11 U.S.C. § 523 (a)(4).
11 U.S.C. § 523 (a)(6)Finally, Plaintiff alleges that Defendant acted willfully and maliciously toward her, and that the debt owed to her by the Defendant should be excepted from his discharge. To prevail under this section, Plaintiff must prove the following:
1. an intentional action by the defendant;
2. done with intent to harm or with reckless disregard of others' rights or without just cause or excuse;
3. which causes damage (economic or physical) to the plaintiff; and
4. the injury is the approximate result of the action by the defendant.
American Surety Casualty Co. v. Hutchinson (In re Hutchinson), 193 B.R. 61, 66 (Bankr.M.D.Fla. 1996).
"For purposes of section 523 (a)(6), malice can be established by a finding of implied or constructive malice." Cladakis v. Triggiano (In re Triggiano), 132 B.R. 486, 490 (Bankr.M.D.Fla. 1991). To show implied or constructive malice, "it is sufficient to show that [a debtor] deliberately and intentionally committed an act which he knew would necessarily injure a cognizable right of the creditor." Id.
In this case, Plaintiff has failed to prove that Defendant committed an intentional act he knew would harm the Plaintiff. The Defendant admits accepting money from the Plaintiff, but did not procure the "gift" through any artifice of fraud. The Court finds that the debt owed by Defendant to Plaintiff cannot be excepted from Defendant's discharge pursuant to 11 U.S.C. § 523 (a)(6).
CONCLUSION
The Court finds that Plaintiff has failed to produce sufficient evidence to deny the Defendant his discharge, or to except any debt owed by the Defendant to the Plaintiff from the discharge. The Plaintiff's objection to Defendant's discharge is overruled. The debt owed to Plaintiff by Defendant is not excepted from Defendant's discharge pursuant to 11 U.S.C. § 523 and is dischargeable under 11 U.S.C. § 727. The Court will enter a judgment consistent with these findings of fact and conclusions of law.
Judgment
This proceeding came before the Court on a complaint objecting to debtor's discharge pursuant to 11 U.S.C. § 727 (a)(2)(A), 727 (a)(2)(B), 727(a)(3), 727 (a)(4)(A), and 727 (a)(5). The complaint also sought to determine dischargeability of a debt pursuant to 11 U.S.C. § 523 (a)(2)(A), 523 (a)(2)(B), 523 (a)(4), and 523 (a)(6). Upon findings of fact and conclusions of law separately entered, it is
ORDERED:
1. Judgment is entered in favor of the Defendant, Chester C. Bryant, and against the Plaintiff, Kathleen Turner.
2. Plaintiff's objection to Defendant's discharge pursuant to 11 U.S.C. § 727 is overruled.
3. The debt owed to Plaintiff by Defendant is not excepted from Defendant's discharge under 11 U.S.C. § 523, and is dischargeable pursuant to 11 U.S.C. § 727.
ORDER DENYING MOTION TO TAX COSTS
This proceeding came before the Court on Plaintiff's Motion to Tax Costs. After consideration, it is
ORDERED:
The motion is denied.