Opinion
No. 03-81761, Adv. No. 03-8153.
July 27, 2005
Thomas R. Kolleck, Carthage, IL, for Plaintiff.
Richard L. Whitman, Monmouth, IL, for Attorney for Debtor.
Richard E. Barber, Galesburg, IL, for Chapter 7 Trustee.
U.S. Trustee, Peoria, Illinois.
OPINION
This matter is before the Court for decision, after trial, on the Complaint seeking to deny the Debtor a discharge under various provisions of 11 U.S.C. § 727. In the alternative, the Plaintiff seeks to have his claim excepted from discharge under 11 U.S.C. §§ 523(a)(4) and (a)(6). Also before the Court is the Plaintiff's objection to the Debtor's claim of homestead exemption. FACTUAL BACKGROUND
The Plaintiff, Thomas R. Kolleck (PLAINTIFF), met the Debtor, Michael C. Fields (DEBTOR), in April, 2000, when the DEBTOR approached the PLAINTIFF, at his business property in Niota, Illinois, AHT Rentals and Sales, to inquire whether he had any construction work which the DEBTOR could perform. At that time, the PLAINTIFF was in the process of procuring a small business loan to start up a storage container rental and sales business and was soliciting bids for repairs on a roof for a building known as the "Millhouse" in Niota. The DEBTOR proposed that he could better an estimate for $5,950, which the PLAINTIFF had obtained from an industrial roofing company, if the PLAINTIFF would advance him $5,000 in order that he could purchase a backhoe. The DEBTOR would then be able to do some other work on the business premises.
The PLAINTIFF claims that he hired the DEBTOR to repair the roof, issuing the DEBTOR a check for $5,000 on May 13, 2000, and requiring the DEBTOR to sign a promissory note. According to the terms of the note, the debt was to be repaid by five hundred hours of labor and services performed for the PLAINTIFF, or his business, at the rate of $10 per hour. The note was to mature on May 13, 2002, with the entire balance to become due and payable on that date. The note contained the following provision:
If the Undersigned does not perform the full Five Hundred (500) hours of labor, this Note shall be paid off in installments of principal and interest of Two Hundred Fifty Dollars ($250.00) from the first day of the next month after labor is stopped, and on the first day of each month thereafter until paid in full.
Interest was to accrue at the rate of 10% only if the labor was not completed. According to the PLAINTIFF, the only labor to be credited against the note was the work performed on the Millhouse roof.
About two weeks later, the DEBTOR inquired of the PLAINTIFF whether he had any other work for him to do or if he could drive one of PLAINTIFF'S trucks. The PLAINTIFF was having a security fence installed around the Niota property and needed to have some gravel spread. The DEBTOR completed that work and was paid $220 on May 25, 2000. In late May, the DEBTOR began to drive a truck for the PLAINTIFF. Per the PLAINTIFF, the DEBTOR was paid an agreed fee for each trip, and given an advance for expenses incurred. According to the PLAINTIFF, he gave the DEBTOR a small notebook to keep track of the hours he worked for him. When the PLAINTIFF gave the DEBTOR a cash advance, the DEBTOR was required to obtain receipts for all expenditures and to turn those in, along with any remaining funds, to the PLAINTIFF. The DEBTOR continued to drive trucks for the PLAINTIFF throughout the summer, often accompanied by the PLAINTIFF. The two became personal friends. During this time, the PLAINTIFF was residing with Ruth Mason (RUTH), his former spouse and the mother of his two sons. According to the PLAINTIFF, on two separate occasions he gave $50 to RUTH in order that she could buy groceries when the DEBTOR was out on the road.
The PLAINTIFF testified that on July 30, 2000, the DEBTOR, at his direction, moved a bulldozer for Raker Farms and collected $444 on the PLAINTIFF'S behalf but failed to turn the money over to him, promising instead to work the debt off. Reluctantly, the PLAINTIFF added the amount to the DEBTOR'S advances on his books. The DEBTOR denied receiving full payment from Raker Farms.
In September, 2000, the DEBTOR asked the PLAINTIFF if he could purchase his Freightliner on contract. The PLAINTIFF declined, but told the DEBTOR he would consider leasing it to him if he obtained a job working for someone else. The parties envisioned that the PLAINTIFF would lease his truck to the DEBTOR who would in turn lease it to a carrier. The DEBTOR sought employment with Container Port Group, a carrier headquartered in Cleveland, Ohio, with a location in St. Louis, Missouri. Container Port Group would not permit the truck to be leased by a nonowner, but required the PLAINTIFF to be the lessor of the vehicle. The PLAINTIFF'S truck did not pass inspection, and repairs totaling $4,000 were required to be made before it could be driven. The PLAINTIFF paid for those repairs and the DEBTOR later paid him back. The arrangement between the PLAINTIFF and the DEBTOR was never finalized because they were waiting to see how profitable it would turn out to be. Container Port Group issued a fuel card to the DEBTOR, which he used to take a cash advance for living expenses of $150 per week. According to the DEBTOR, the PLAINTIFF consented to his use of the fuel card and had agreed that the workers' compensation insurance deducted by Container Port Group would be his expense. The PLAINTIFF maintains he did not consent to the DEBTOR'S use of the fuel card for living expenses. The venture was short-lived, however, and the PLAINTIFF'S lease with Container Port Group was terminated at the end of November, 2000.
Throughout this period, the DEBTOR, with RUTH'S assistance, kept track of his work for the PLAINTIFF on a note-book size, loose leaf calendar, which was admitted at trial. Some entries detailed the work that was done and were marked "paid" and other entries simply noted the number of hours worked. The DEBTOR submitted several "receipts," signed by the PLAINTIFF, which acknowledge hours worked in application against the $5,000 loan. The last receipt shows a balance due on the loan of $809. The PLAINTIFF contends that some of the receipts are forgeries. According to the PLAINTIFF'S records, he paid the DEBTOR $2,925.02 for work that was never completed. In addition, the PLAINTIFF sought to recover $2,089.93 from the DEBTOR, representing cash advances taken on the Container Port Group fuel card and workers' compensation costs deducted by Container Port Group on monthly payments made to the PLAINTIFF. The PLAINTIFF issued a 1099 to the DEBTOR for the calendar year 2000 showing nonemployee compensation of $14,851.95.
In the fall of 2002, the PLAINTIFF wrote the DEBTOR, requesting copies of his work record book in order to determine the balance he owed under the promissory note. When the DEBTOR failed to turn over any time records, the PLAINTIFF made a demand for the full amount due under the note of $6,406.72. On March 4, 2003, the PLAINTIFF filed a complaint against the DEBTOR in state court, seeking to recover the balance due on the promissory note (Count I), additional monies advanced in the amount of $4,757 (Count II) and cash advances taken from Container Port Group's fuel card and OCR advances in the amount of $2,478.16 (Count III). The DEBTOR failed to appear in that proceeding and a default judgment was entered on April 7, 2003, awarding the PLAINTIFF $6,450.68 on Count I, $6,249.35 on Count II, $2,478.16 on Count III and costs of $115.00.
Just before that date, on April 4, 2003, the DEBTOR was involved in a serious accident while driving his 1985 Peterbilt semi tractor. He suffered numerous injuries and was hospitalized. On April 7, 2003, the same day that the default judgment was taken, the DEBTOR filed a Chapter 7 petition in bankruptcy. The DEBTOR scheduled his real estate, consisting of two parcels, as having a combined value of $27,000. When the DEBTOR filed his schedules on April 23, 2003, the second page to Schedule B was missing. The DEBTOR scheduled the PLAINTIFF as an unsecured creditor holding various claims totaling $12,500, referring to the state court litigation. The First Meeting was held on May 23, 2003, and the TRUSTEE filed a no asset report on June 9, 2003.
The signatures on the petition are dated April 4, 2003. The petition was not filed until 12:23 p.m. on April 7, 2003.
The PLAINTIFF timely filed an objection to the DEBTOR'S claim of exemptions, contending that the DEBTOR undervalued his interest in the real estate and understated the value of his personal property. The DEBTOR moved to strike the PLAINTIFF'S objection, denying that significant improvements had been made to the property and also denying that the PLAINTIFF has a judicial lien on the property. The PLAINTIFF also filed an adversary complaint objecting to the discharge of the judgment debt owed to him by the DEBTOR, as well as to the DEBTOR'S general discharge. The PLAINTIFF alleged that the DEBTOR concealed assets in violation of Section 727(a)(2), that he made a false oath by failing to list material assets in his bankruptcy filing in violation of Section 727(a)(4) and that he failed to satisfactorily explain a loss or deficiency of assets in violation of Section 727(a)(5). The PLAINTIFF also sought a determination that his debt was nondischargeable under Sections 523(a)(2)(A) and (a)(4), alleging that the DEBTOR defrauded him by never intending to do the work for which he was paid, and that the DEBTOR embezzled funds which were entrusted to him for specific purposes. The trial covered four days.
PRECLUSIVE EFFECT OF THE DEFAULT JUDGMENT
A federal court, including a bankruptcy court, must accord a state court judgment the same preclusive effect it would be accorded by the rendering state. Brokaw v. Weaver, 305 F.3d 660, 669 (7th Cir. 2002). Under the doctrine of collateral estoppel, relitigation of a factual issue is precluded if: (1) the issue to be precluded is the same as that involved in the prior state suit, (2) the issue was actually litigated by the parties in the prior action, and (3) the state court's determination of the issue was necessary to the resulting final and valid judgment. Housing Authority for La Salle County v. Young Men's Christian Ass'n of Ottawa, 101 Ill.2d 246, 461 N.E.2d 959, 78 Ill.Dec. 125 (1984). A default judgment generally carries no collateral estoppel effect because the issues have not been "actually litigated." SS Automotive v. Checker Taxi Co., 166 Ill.App.3d 6, 520 N.E.2d 929, 117 Ill.Dec. 578 (Ill.App. 1 Dist. 1988); In re Nikitas, 326 B.R. 127 (Bankr.N.D.Ill. 2005). Here, it is not clear whether the default judgment was entered prior to the filing of the petition. A copy of the state court complaint is in evidence. The causes of action alleged are for breach of contract, to collect the amounts allegedly advanced to the DEBTOR by the PLAINTIFF. The complaint contains no allegation of fraud, misrepresentation or deceptive conduct by the DEBTOR. Thus, even if the default judgment could be accorded preclusive effect, at most it would bar relitigation only of the fact that monies were advanced and the amount of the advances. Given the result reached by the court, however, it need not determine this issue.
DISCHARGEABILITY
Exceptions to the discharge of a debt in bankruptcy are governed by Section 523 of the Bankruptcy Code. A creditor seeking to establish an exception to the discharge of a debt bears the burden of proof. Matter of Scarlata, 979 F.2d 521 (7th Cir. 1992). A creditor must meet this burden by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). In order to afford the debtor a "fresh start," exceptions are construed liberally in favor of the debtor and strictly against the creditor. Meyer v. Rigdon, 36 F.3d 1375 (7th Cir. 1994).
Section 523(a)(2)(A)
Section 523(a)(2)(A) excepts from discharge a debt obtained by "false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor's or an insider's financial condition." The elements of this cause of action include that: (1) the debtor made a representation; (2) the representation was false; (3) the representation was made with the intention of deceiving the creditor; (4) the creditor justifiably relied on the fraudulent representation; and (5) the creditor sustained damages as a result of the fraudulent representation. In re Austin, 317 B.R. 525 (8th Cir.BAP 2004).
Ordinarily, a fraudulent misrepresentation must relate to a past or existing fact, and may not be based upon a failure to perform a promise or agreement to do something at some future time. Only where the debtor never intended to perform at the time he made the promise will the misstatement of intention constitute a fraudulent misrepresentation. In re Alicea, 230 B.R. 492 (Bankr.S.D.N.Y. 1999). Nonperformance, standing alone, does not establish that the debtor never intended to perform.
It is undisputed that the PLAINTIFF loaned the DEBTOR $5,000 so that the DEBTOR could purchase a backhoe. The dispute centers around the alleged conditions attached to the loan. The PLAINTIFF claims that the DEBTOR promised to repair the Millhouse roof and that the loan would be paid back by crediting the hours worked by the DEBTOR on the roof against the note balance. The DEBTOR denies that he promised to repair the roof and contends that they agreed that the note could be paid off with credits for any work that he performed for the PLAINTIFF.
The note, which the PLAINTIFF prepared, refers only to labor and services to be performed by the DEBTOR for the PLAINTIFF or his business, AHT Rentals and Sales, at $10 per hour and, further, if the labor is not performed, then in installments of $250 per month. The note contains no reference whatsoever to the Millhouse or any specific roof work. In addition, the PLAINTIFF'S check to the DEBTOR for the $5,000 states that it is "For 500 hours of Labor at $10 per hour," again with no reference to roof work. The PLAINTIFF also routinely credited the note balance with hours worked by the DEBTOR for truck driving and other non-roof repair services.
Moreover, even if the DEBTOR did agree to repair the roof, his failure to do so is simply an unfulfilled promise. There was no evidence introduced at trial that the DEBTOR promised to repair the roof while secretly intending not to. Accordingly, the Court determines that the PLAINTIFF has failed to carry his burden of proof on this claim brought under Count IV of the Complaint.
Under that same count, the PLAINTIFF also alleges that the DEBTOR made other promises to perform work in exchange for cash advances, that after receiving the advances he refused to do the work, and that the promises were fraudulently made by the DEBTOR because he never intended to do the work.
The DEBTOR'S employment by the PLAINTIFF was lengthy and varied. The terms of that employment were never put in writing, and are best characterized as a long string of oral agreements and oral modifications to prior oral agreements. The parties disagree widely over who said what to whom and what their respective intentions were. The PLAINTIFF, as the employer, is responsible for the absence of a written agreement and the looseness of the employer-employee relationship.
Ultimately, the disagreements between the parties led to a severing of the employment relationship. The PLAINTIFF'S attempt to now portray the DEBTOR, his former friend and employee, as the perpetrator of a wide-ranging scheme to defraud the PLAINTIFF over a lengthy period by making repeated false promises in exchange for cash advances, is not only contrary to common sense (why, after all, would the PLAINTIFF continue to employ someone who doesn't keep his word), but is unsupported by the evidence. The PLAINTIFF has failed to carry his burden to prove that the DEBTOR made a false or fraudulent representation that gives rise to nondischargeability under 11 U.S.C. § 523(a)(2)(A) and the DEBTOR is entitled to judgment on those claims.
Section 523(a)(4)
Also under Count IV, the PLAINTIFF alleges a cause of action under 11 U.S.C. § 523(a)(4) for embezzlement. Section 523(a)(4) provides that:
(a) a discharge . . . does not discharge an individual debtor from any debt —
(4) for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny. . . .
11 U.S.C. § 523(a)(4). Embezzlement has been defined to mean the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come. Matter of Weber, 892 F.2d 534 (7th Cir. 1989). In order to prove embezzlement, the creditor must show that the property was rightfully in the possession of a nonowner and that the nonowner appropriated the property to a use other than which it was entrusted. In re Hayden, 248 B.R. 519 (Bankr.N.D.Tex. 2000). In addition, embezzlement requires fraud in fact. U.S. Life Title Ins. Co. of New York v. Dohm, 19 B.R. 134 (N.D.Ill. 1982). Fraudulent intent is negated where the debtor used the funds openly, without any attempt to conceal that use, and had reasonable grounds to believe that he had the right to do so. Matter of Storms, 28 B.R. 761 (Bankr.E.D.N.C. 1983). Moreover, a creditor's knowledgeable acquiescence is relevant to the issue of whether the debtor possessed the requisite fraudulent intent. Weber, supra.
The PLAINTIFF complains that he advanced cash to the DEBTOR to use to purchase fuel, oil and parts for the semi tractors and trailers that the DEBTOR operated for the PLAINTIFF, but that the DEBTOR diverted some of the funds for his own use. The DEBTOR denies diverting funds to his own use and, generally, denies receiving a large number of cash advances from the PLAINTIFF.
The evidence at trial indicates that the PLAINTIFF did give the DEBTOR cash on a number of occasions to pay for authorized expenses. Sometimes the cash advances were documented with receipts and sometimes not. The DEBTOR testified that he spent all such funds for the authorized purpose. There is no competent evidence to the contrary. Further, it appears that the PLAINTIFF knowingly acquiesced in the DEBTOR'S use of the cash advances by adding any disputed sums to the balance due from the DEBTOR and treating them as additional loans. Thus, the Court concludes that the PLAINTIFF has failed to carry his burden of proof on this issue.
In addition, the PLAINTIFF alleges that the DEBTOR embezzled cash payments received from customers. The only specific transaction identified at trial in this regard is the "RAKER FARMS" transaction. Neither party had a clear recollection of the transaction and they disagreed over the meaning of a receipt dated July 30, 2000, in the amount of $444. The PLAINTIFF wrote a note on the receipt that the DEBTOR kept the money to pay bills, that he agreed to pay it back as soon as possible and that the amount was to be added to the loan balance. Thus, even if the Court credits the PLAINTIFF'S version of events, it appears that he acquiesced in the DEBTOR'S use of the funds by treating it as a loan advance. The PLAINTIFF has not met his burden of proof on this issue.
The PLAINTIFF also alleges that the DEBTOR embezzled funds by taking unauthorized advances on a fuel card issued by Container Port Group (CPG). The PLAINTIFF leased his semi tractor and trailer to CPG in September or October, 2000, and hired the DEBTOR as the operator. The fuel card issued by CPG to the DEBTOR permitted cash advances to be obtained. It is undisputed that the DEBTOR used the card to obtain cash advances of $150.00 per week and that these advances reduced the amount paid by CPG to the PLAINTIFF. The PLAINTIFF testified that he never authorized the DEBTOR to take the advances. Both the DEBTOR and RUTH testified that the PLAINTIFF did orally authorize the advances of $150 per week as living expenses for the DEBTOR, RUTH and their two sons. The Court credits the testimony of the DEBTOR and RUTH and discredits the PLAINTIFF'S testimony. Since RUTH wasn't working, and driving for CPG was a full-time job for the DEBTOR, the family had no source of income other than the $150 per week advances. It is simply not reasonable to believe that the DEBTOR would have agreed to drive for CPG on terms that provided him no current income. The PLAINTIFF has failed to sustain his burden of proof on this issue.
Therefore, for all of the foregoing reasons, the Court determines that the DEBTOR is entitled to judgment in his favor on Count IV of the Complaint, which includes the allegations of nondischargeability under Sections 523(a)(2)(A) and (a)(4). DISCHARGE
In order to effectuate the fresh start policy of the bankruptcy laws, objections to discharge under Section 727 of the Bankruptcy Code are liberally construed in favor of debtors and strictly against creditors. Matter of Juzwiak, 89 F.3d 424 (7th Cir. 1996). Notwithstanding that rehabilitative policy, it is only the honest but unfortunate debtor that is entitled to a discharge. Matter of Birkenstock, 87 F.3d 947 (7th Cir. 1996). Grounds for denial of discharge must be established by a preponderance of the evidence. In re Scott, 172 F.3d 959 (7th Cir. 1999).
Section 727(a)(2)(A) and (B)
In Count I of his Complaint, the PLAINTIFF alleges that the DEBTOR should be denied a discharge under 11 U.S.C. § 727(a)(2)(A) and (B). To prevail, the PLAINTIFF must prove that (1) the DEBTOR (2) transferred or concealed (3) the DEBTOR'S property (4) with the intent to hinder, delay or defraud a creditor or the Chapter 7 Trustee (5) within one year of bankruptcy for (A) or during the administration of the case for (B). In re Kontrick, 295 F.3d 724, 736 (7th Cir. 2002).
The first item of property at issue is a Case backhoe. At trial, the DEBTOR testified that he sold the backhoe to a Mr. Black in January, 2003, for $3,500. The DEBTOR'S bank account records corroborate his testimony. The proceeds were used to pay medical bills and repair bills on his semi tractor. There was no evidence that the backhoe was sold for less than fair value or that the debtor had a wrongful intent in making the sale. The PLAINTIFF'S claim fails for lack of proof.
The second item of property at issue is a 1979 dump truck. The DEBTOR testified that he sold it to Leonard Polhans about one year before bankruptcy. The PLAINTIFF testified that he thinks he saw someone, who might have been the DEBTOR, driving a similar truck around the time of the bankruptcy. The DEBTOR denies ever driving the truck again after selling it to Polhans. There was no evidence that the truck was sold for less than fair value or with a wrongful intent. The PLAINTIFF'S claim fails for lack of proof.
The third item at issue is a flatbed equipment trailer that the PLAINTIFF alleges the DEBTOR owned. The DEBTOR denies owning such a trailer. The PLAINTIFF stated that he saw one at the DEBTOR'S home. The DEBTOR speculated that it may have been his father's trailer or one owned by Rodney Roth. There is insufficient evidence to prove that the DEBTOR owned such a trailer. The PLAINTIFF'S claim fails for lack of proof.
The fourth item of disputed property is a number of horses that the DEBTOR and RUTH kept on their property. RUTH testified that she bought two horses: "Jack" in 2001 for $850 and "Taz" in 2000 for $250. A third horse kept on the property was owned by a girlfriend of RUTH. There was no evidence that the DEBTOR had an ownership interest in the horses. The claim fails for lack of proof.
A fifth item in dispute is the Peterbilt semi tractor owned by the DEBTOR. The evidence indicated that the truck was destroyed in an accident on April 4, 2003. Insurance proceeds of $9,000 were subsequently paid to the lienholder, State Bank of Nauvoo. The PLAINTIFF'S claim fails as to the Peterbilt.
The PLAINTIFF also makes an allegation that the DEBTOR'S income in the three months preceding the bankruptcy filing exceeded his expenses and there is no explanation as to what happened to the excess funds. Based on the evidence at trial, the PLAINTIFF failed to prove that the DEBTOR improperly transferred or concealed funds and his claim must be denied. For the foregoing reasons, the DEBTOR is entitled to judgment in his favor on Count I of the Complaint.
Section 727(a)(4)(A) and (B)
In Count II of the Complaint, the PLAINTIFF alleges that the DEBTOR violated 11 U.S.C. § 727(a)(4)(A) and (B) by knowingly and fraudulently making a false oath or presenting or using a false claim. In order to deny a debtor a discharge on the basis of false oaths, the plaintiff must prove by a preponderance of the 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 related materially to the bankruptcy case. In re Keeney, 227 F.3d 679 (6th Cir. 2000). A debtor's petition and schedules, statement of financial affairs and statements made at the meeting of creditors all constitute statements that are made under oath. In re Broholm, 310 B.R. 864 (Bankr.N.D.Ill. 2004). False statements made as the result of mistake or inadvertence will not result in denial of discharge unless the cumulative effect of all falsehoods together evinces a pattern of reckless and cavalier disregard for the truth. RiccaStroud v. Lopez, 201 B.R. 943 (N.D.Ill. 1996).
The PLAINTIFF alleges that the DEBTOR testified falsely at the Meeting of Creditors regarding the ownership or disposition of a Ford 2½ ton dump truck, a tandem axle equipment trailer and three horses. At the First Meeting, the DEBTOR testified that the dump truck was sold "for scrap." At trial, he clarified that it was sold for scrap value to Leonard Polhans more than one year prior to the bankruptcy. The Court does not consider this slight discrepancy to be a falsehood.
At the First Meeting, the DEBTOR testified that he did not own a trailer. His testimony at trial was consistent. No falsehood occurred in this regard. At the First Meeting, the DEBTOR'S testimony regarding the horses was consistent with his testimony at trial. No falsehood occurred in this regard.
The PLAINTIFF also alleges that the DEBTOR made false oaths on his Statement of Financial Affairs (SFA) and on Schedule B. First, in Paragraph 8 of the SFA, the DEBTOR disclosed no losses from casualty within one year prior to filing. At trial, the DEBTOR testified that his Peterbilt semi tractor was totaled in an accident that occurred on April 4, 2003, three days prior to the bankruptcy filing on April 7, 2003. The SFA was not filed until April 22, 2003. The DEBTOR was hospitalized for a period of time after the accident and was not in a position to provide much assistance to his attorney. He candidly testified at the First Meeting about the loss of the Peterbilt and that the lienholder received all of the insurance proceeds. The Court finds that the omission was not made with fraudulent intent.
In Paragraph 10 of the SFA, the DEBTOR disclosed no transfers of property within one year before filing. The PLAINTIFF claims he should have listed the transfers of the backhoe, the dump truck and one horse. The dump truck was sold more than one year before filing and the horse was owned solely by RUTH, so these transfers did not have to be listed. The backhoe was sold to Mr. Black for $3,500 a few months before bankruptcy. At trial, the DEBTOR testified that he simply forgot about the backhoe sale and that he was not trying to hide it. The Court finds his testimony credible and concludes that the omission was not made with fraudulent intent. The Court also determines that payments made to a repair shop for repairs to the Peterbilt are payments made in the ordinary course of the DEBTOR'S business and did not have to be disclosed in Paragraph 10 of the SFA. Likewise, the omission of any such payments in Paragraph 3 of the SFA was not made with a fraudulent intent.
The PLAINTIFF next alleges that the DEBTOR held or controlled the horses owned by RUTH and his son and they should have been disclosed in Paragraph 14 of the SFA. Based on the evidence, RUTH, not the DEBTOR, was in control of the horses, so there was no omission problem.
The PLAINTIFF next alleges that the DEBTOR should have disclosed on Schedule B a fishing boat, fishing equipment and two all-terrain vehicles (ATVs). Based on the evidence at trial, the Court determines that the DEBTOR did not own a fishing boat and that the value of any fishing equipment was de minimis. The two ATVs were bought used for the children, one at a garage sale for $50. The value is de minimis and these items are not material to the bankruptcy case.
The PLAINTIFF also complains that the DEBTOR failed to disclose two mortgage payments paid before filing and the $9,000 insurance check paid to the lienholder on the Peterbilt. The Court finds no fraudulent intent with regard to the nondisclosure of these payments.
The PLAINTIFF also alleges that the value of the house and the adjoining lot is misstated and that attempting to exempt the horses as "contents of garage," constitutes a false claim. These are not "false claims" actionable under Section 727(a)(4)(B). Further, there is no evidence that the DEBTOR claimed such an exemption in the horses. For the reasons stated later in this Opinion, the Court finds that the DEBTOR did not intentionally misstate the value of the real estate.
Finally, the PLAINTIFF alleges that all of these errors and omissions together constitute a pattern of disregard for the accuracy and truth of the bankruptcy papers. Based upon all of the evidence, the Court finds that the DEBTOR'S conduct does not rise to the level of a cavalier or reckless disregard for the accuracy or truth of his petition, SFA and schedules. Rather, this case is, as characterized by one court, a case where "a particularly aggressive creditor flyspecked (the debtor's) papers looking for problems, finding minor immaterial issues to complain about." In re Sharp, 244 B.R. 889, 894 (Bankr.E.D.Mich. 2000). For these reasons, judgment will be entered for the DEBTOR on Count II of the Complaint.
Section 727(a)(5)
In Count III of the Complaint, the PLAINTIFF alleges that the DEBTOR'S discharge should be denied pursuant to 11 U.S.C. § 727(a)(5) for failure to satisfactorily explain a loss of assets. The plaintiff bears the initial burden of identifying the assets the absence of which is unexplained. In re Carter, 236 B.R. 173, 180 (Bankr.E.D.Pa. 1999). Once this burden has been met, the burden shifts to the debtor to advance a satisfactory explanation. Id. The debtor must persuade the trier of fact that he has not hidden or improperly shielded assets. Id.
The assets identified by the PLAINTIFF include the DEBTOR'S real estate, the Peterbilt semi tractor and the insurance proceeds paid because of the destruction of the Peterbilt. As indicated earlier in this Opinion, the destruction of the Peterbilt and the payment of the insurance proceeds to the lienholder have been adequately explained by the DEBTOR.
With regard to the real estate, the PLAINTIFF complains not that the DEBTOR owned real estate that is not scheduled, but that the real estate that is scheduled is not valued properly. This issue of the real estate's value will be addressed in the following section of this Opinion and, for the reasons stated therein, is not a basis for a claim under Section 727(a)(5). The DEBTOR is entitled to judgment on Count III of the Complaint.
Objection to DEBTOR'S Claim of Exemption
On June 9, 2003, the Chapter 7 Trustee filed a Report of No Distribution, abandoning all scheduled assets. Although the PLAINTIFF did not object to the Trustee's action, his objection to the DEBTOR'S claim of exemption attempts to preserve nonexempt property for the benefit of creditors. In In re Slack, 290 B.R. 282, 284 (Bankr.D.N.J. 2003), the court discussed the showing required when such an objection is made:
Section 554(a) of the Bankruptcy Code allows a trustee, after notice and a hearing, to abandon property that is of inconsequential value and benefit to the estate. The trustee's power to abandon property is discretionary. See, First Nat'l Bank v. Lasater, 196 U.S. 115, 118-19, 25 S.Ct. 206, 207-08, 49 L.Ed. 408 (1905); In re K.C. Mach. Tool Co., 816 F.2d 238, 246 (6th Cir. 1987); In re Interpictures, Inc., 168 B.R. 526 (Bankr.E.D.N.Y. 1994). Courts defer to the trustee's judgment and place the burden on the party opposing the abandonment to prove a benefit to the estate and an abuse of the trustee's discretion. Interpictures, Inc., at 535. The party opposing the abandonment must show some likely benefit to the estate, not mere speculation about possible scenarios in which there might be a benefit to the estate. In re Cult Awareness Network, Inc., 205 B.R. 575 at 579 (Bankr.N.D.Ill. 1997). The court only needs to find the trustee made: 1) a business judgment; 2) in good faith; 3) upon some reasonable basis; and 4) within the trustee's scope of authority. In re Fulton, 162 B.R. 539, 540 (Bankr.W.D.Mo. 1993). See also, Collier on Bankruptcy, 15th ed., rev. ¶ 554.02[4].
The DEBTOR scheduled the value of the real property at $27,000, subject to two mortgages held by the State Bank of Nauvoo totaling $45,000. A 1986 Ford Pickup valued at $800 also served as collateral for the debt(s). The real estate consists of two adjoining tracts: Tract I is improved with the house; Tract II contains the septic system that serves the house. The DEBTOR owns both parcels in joint tenancy with RUTH. On Schedule A, the DEBTOR valued Tract I at $25,000 and Tract II at $2,000.
Schedule D also lists a 1993 Ford Mustang as collateral, but that vehicle was not included on the schedule of assets, and was not, apparently, owned by the DEBTOR on the date of bankruptcy.
The DEBTOR claimed a homestead exemption of $7,500 in Tract I pursuant to 735 ILCS 5/12-901. In his objection to the exemption claim, the PLAINTIFF does not contend that the DEBTOR is not entitled to the claimed exemption under applicable law. Rather, he challenges the valuation of the real estate, claiming it to be worth $62,000, based on his own review of "comparable sales" information.
At trial, an expert appraiser, Randy Sharp, testified on behalf of the DEBTOR. The PLAINTIFF did not call an expert and submitted no direct evidence of the value of the real estate. The PLAINTIFF, himself, is not a real estate expert. Sharp is a professional realtor experienced in selling real estate in Hancock County, the county in which the subject real estate is located. He visited the property on October 14, 2004, inspecting the house inside and out, and taking photographs of the house and the two lots. The house was originally built as a summer cottage, is not fully finished and is in fair to poor condition. Sharp used three comparable sales in his report. In Sharp's opinion, Tract I has a fair market value of $29,500. Tract II, which contains the septic system, also contains an older frame shed open on one side. Sharp valued Tract II at $4,000.
On cross examination, the PLAINTIFF asked Sharp whether his opinion would change if he knew that Tract I was purchased for $28,000 in 1999 and Tract II was purchased for $12,500. Sharp responded that his opinion would not change. The Court gives credence to Sharp's opinion of value, and in the absence of any other evidence of value, finds that Tract I has a fair market value of $29,500 and Tract II of $4,000.
The PLAINTIFF correctly points out that the DEBTOR has made no claim of exemption on Tract II. In his closing argument, the DEBTOR suggested that the homestead exemption should encompass Tract II as well as Tract I. Because a formal claim of exemption on Tract II has not been asserted, however, the Court will not consider the DEBTOR'S argument in this regard.
It also appears that the PLAINTIFF believes he has a lien on the real estate simply because a state court judgment was entered against the DEBTOR. Unless a Memorandum of Judgment was recorded in the Hancock County Recorder's office prepetition, the PLAINTIFF is mistaken. There is no evidence that such a Memorandum was recorded. If it was, the DEBTOR would have to file a Motion to Avoid the Judgment Lien pursuant to 11 U.S.C. § 522(f). Such a motion has not been filed and the issue is not before the Court. The Court also notes that a post-bankruptcy recording of a Memorandum by the PLAINTIFF would violate the automatic stay or the discharge injunction.
The Court also determines that the holder of the mortgages on the real estate, State Bank of Nauvoo, for the purpose of this proceeding, is undersecured. This conclusion follows directly from the undisputed evidence that the balance due on the mortgage debts substantially exceeds the value of the real estate. A lack of equity in the property is not a basis for denial of an exemption claim. See, In re Meincke, 2004 WL 1175129 (Bankr.C.D.Ill. 2004).
In support of his objection to the homestead exemption claim, the PLAINTIFF relies on the allegation that the DEBTOR wilfully undervalued the real estate on his schedules. The Court rejects this argument. The scheduled value of $25,000 for Tract I is within $4,500 of the appraised value of $29,500. The scheduled value of $2,000 for Tract II is very close to the appraised value of $4,000. Moreover, there was no evidence at trial that the DEBTOR believed the property to be worth more than what he scheduled it for at the time he signed his schedules. The PLAINTIFF has failed to prove any basis for denial of the claim of exemption. The DEBTOR'S claim of homestead exemption in the amount of $7,500 in Tract I will be allowed. Based on this finding of a good faith valuation by the DEBTOR, the PLAINTIFF'S claim under Section 727(a)(4) and/or (a)(5), premised upon an allegation of intentional undervaluation, will also be denied.
Although the DEBTOR has not claimed an exemption in Tract II, the Chapter 7 Trustee abandoned the estate's interest in that Tract in his Report of No Distribution filed on June 9, 2003. That abandonment constitutes a determination by the Trustee that the property is of inconsequential value and benefit to the estate. 11 U.S.C. § 554(a). The abandonment appears entirely sensible in light of the fact that the DEBTOR'S half interest in Tract II is worth only $2,000 and that the primary use of Tract II is as a repository of human waste.
As a final point, the Court notes that the Trustee's abandonment of Tract II and the absence of an allowed homestead exemption on that parcel, accords no rights whatsoever to the PLAINTIFF with respect to that parcel. Since the PLAINTIFF is a prepetition, unsecured creditor, the DEBTOR'S debt to the PLAINTIFF is discharged. Any attempt to enforce the state court judgment or otherwise collect the debt would violate the discharge injunction of 11 U.S.C. § 524(a). The judgment itself is rendered void by operation of that Section. 11 U.S.C. § 524(a)(1).
As indicated earlier, because the DEBTOR'S debt to the PLAINTIFF is determined to be dischargeable and his discharge will be granted, it is not necessary for the Court to determine the amount of the debt. Therefore, it is unnecessary to consider the mass of evidence introduced at trial pertaining to the hotly disputed issue of the proper debits and credits to be allocated between the parties.
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.