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In re Malkani

United States Bankruptcy Court, E.D. Virginia
Feb 22, 2002
Case No. 98-17327-SSM, Adversary Proceeding No. 01-1133 (Bankr. E.D. Va. Feb. 22, 2002)

Opinion

Case No. 98-17327-SSM, Adversary Proceeding No. 01-1133

February 22, 2002

Frank Bove, Esquire, Alexandria, VA, of Counsel for the plaintiff

Steven B. Ramsdell, Esquire, Tyler, Bartl, Burke Gorman, P.L.C., Alexandria, VA, of Counsel for the defendant


MEMORANDUM OPINION AND ORDER


Before the court is the motion filed by the United States Trustee for summary judgment denying the debtor a discharge. A hearing was held on February 5, 2002, at which both the United States Trustee and the debtor were represented by counsel. The court heard the arguments of both parties and took the matter under advisement. Upon review of the record and the applicable law, and for the reasons set forth below, the court grants the motion with respect to Counts Two and Three of the complaint and denies the motion with respect to Counts One and Four.

Background

Vikram Malkani ("the debtor") is an emergency room physician. He filed a voluntary chapter 13 petition in this court on October 5, 1998. His second amended plan dated June 3, 1999, was confirmed on August 11, 1999. That plan provided for the debtor to pay the chapter 13 trustee $4,750.00 per month for 60 months plus federal and state income tax refunds in excess of $250.00. The bulk of the payments into the plan were to go toward approximately $57,400 in priority taxes owed the Internal Revenue Service ("IRS") and the Commonwealth of Virginia and approximately $96,500 in mortgage arrearages. The estimated dividend on unsecured claims was 30%.

On April 11, 2000, the chapter 13 trustee filed a motion to dismiss this case, or alternatively, to convert this case to chapter 7. For cause, the chapter 13 trustee cited (a) the debtor's failure to make his monthly plan payments as required by the confirmation order, and (b) the debtor's failure to turn over certain tax refunds to the trustee as required by the confirmation order. In this connection, it is undisputed that the debtor received three tax refunds while his case remained in chapter 13. He received refunds from the Virginia Department of Taxation on December 27, 1999, and January 25, 2000, in the amounts, respectively, of $473.20 and $8,193.00. More significantly, he received a $42,465.98 refund from the IRS on May 17, 2000. This refund, which was made payable jointly to the debtor and his spouse, was deposited in full on June 1, 2000, into a Branch Banking and Trust Company ("BBT") checking account (account # 5150147079) in the his name. Neither the debtor nor his spouse voluntarily disclosed the refund to the chapter 13 trustee or the creditors in this case. Rather, it was only after several continued hearings on the chapter 13 trustee's motion to dismiss or convert that the debtor's receipt of these funds came to light. At a hearing held on November 14, 2000, the debtor testified that he was unaware at the time that the refund had been received, because he had been working in California, and his cousin (who has since gone back to India) was opening his mail for him. According to the debtor, his cousin deposited the refund check in the bank account without telling him. The court found that testimony to be unbelievable:

The debtor's wife, Anisha Malkani, was at that time herself a chapter 13 debtor in this court. In re Anisha Malkani, No. 99-13113-SSM. She filed her chapter 13 petition on June 15, 1999, and remained a chapter 13 debtor until February 23, 2001, when her case was converted to chapter 7. She ultimately received a discharge on September 7, 2001.

Between early June 2000 to late July 2000 numerous debits and checks were posted to this account, leaving a negative account balance as of July 21, 2000.

I am struck by the size of the unpaid — the tax refund which was not paid over to the Chapter 13 trustee, as required by the terms of the order confirming the plan, and which Dr. Malkani testified that he understood perfectly well that that's what the plan provided for. It just defies, frankly, normal human experience to think that if you had only a single checking account and you were as strapped for cash as Dr. Malkani was during this whole period . . . to think that a person would not know that $42,465.98 had suddenly been deposited into his account just defies normal human experience. . . . I just find it impossible to believe the testimony that Dr. Malkani was not aware that he had this — these funds.

Pltf. Ex. 2 at 78-79 (emphasis added). As a result, the court concluded that debtor's failure to comply with the turnover requirement imposed by the confirmation order was intentional, id. at 79, lines 15-16, and ruled that the case would be converted to chapter 7. The order converting the case to chapter 7 was entered on November 17, 2000.

On November 27, 2000, the debtor filed a motion asking this court to reconsider its order converting this case to chapter 7. That motion was denied by order of this court on January 2, 2001. The debtor then filed a notice of appeal of the conversion order on January 12, 2001. However, that appeal was eventually dismissed by the United States District Court for the Eastern District of Virginia in September 2001.

At the time of conversion, the debtor had paid approximately $72,000 into his chapter 13 plan. Nevertheless, questions arose with respect to the debtor's lack of disclosure concerning the IRS refund and the debtor's checking account at BBT. Eventually, this led to an investigation by the Office of the United States Trustee, which soon determined that the debtor had failed to disclose on his schedules five bank accounts maintained by him at BBT in addition to the BBT account into which the refund check was deposited:

1. Account # 5150344001, opened on February 25, 1997

2. Account #5150247413, opened on October 4, 1997

3. Account #5150147109, opened on December 26, 1997

4. Account # 5150147095, opened on December 26, 1997

5. Account # 5150147087, opened on December 26, 1997

These accounts held over $24,000.00 on the date the debtor filed his chapter 13 petition; yet his schedule of assets listed only $1,000.00 contained in a single checking account at Crestar Bank. Based on these facts, the instant adversary proceeding was commenced against the debtor on July 16, 2001, in the form of a four-count complaint objecting to the debtor's discharge under § 727, Bankruptcy Code.

Discussion I.

This court has subject-matter jurisdiction under 28 U.S.C. § 1334 and 157(a) and the general order of reference entered by the United States District Court for the Eastern District of Virginia on August 15, 1984. An objection to discharge is a core proceeding in which final orders and judgments may be entered by a bankruptcy judge. 28 U.S.C. § 157(b)(2)(J). Venue is proper in this district under 28 U.S.C. § 1409(a). The defendant has been properly served and has appeared generally.

II.

Under Rule 56(c), Federal Rules of Civil Procedure, as incorporated by Federal Rule of Bankruptcy Procedure 7056, summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." In ruling on a motion for summary judgment, a court should believe the evidence of the non-movant, and all justifiable inferences must be drawn in his favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 2513, 91 L.Ed.2d 202 (1986); Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 530 (1986). At the same time, the Supreme Court has instructed that summary judgment "is properly regarded not as a disfavored procedural shortcut, but rather as an integral part of the Federal Rules as a whole, which are designed `to secure the just, speedy and inexpensive determination of every action.'" Celotex Corp. v. Catrett, 477 U.S. 317, 327, 106 S.Ct. 2548, 2555, 91 L.Ed.2d 265 (1986). Additionally, not every dispute as to the facts will preclude the entry of summary judgment, but only those disputes over facts that might affect the outcome of the suit under the governing law. Anderson v. Liberty Lobby, Inc., 477 U.S. at 248, 106 S.Ct. at 2510.

III.

"Section 727 [of the Bankruptcy Code] provides that [a] court must grant a discharge to a Chapter 7 debtor unless one or more of the specific grounds for denial of a discharge . . . is proven to exist." 6 Collier on Bankruptcy ¶ 727.01 [1], at 727-6 (Lawrence P. King, ed., 15th ed. rev. 1997). Here, the United States Trustee sets forth four grounds under § 727(a), Bankruptcy Code, upon which the debtor's discharge should be denied. First, the United States Trustee argues that the debtor knowingly and fraudulently failed to disclose his BBT accounts on Schedule B in response to question No. 2. Second, the United States Trustee argues that the debtor refused to obey this court's order of August 11, 1999, confirming his amended chapter 13 plan. Third, the United States Trustee argues that the debtor knowingly and fraudulently transferred and concealed the proceeds from the IRS refund with intent to hinder, delay, or defraud creditors in this case. Lastly, the United States Trustee argues that debtor has failed to satisfactorily explain the loss of the proceeds from the IRS refund.

A.

Under § 727(a)(4) of the Bankruptcy Code, a chapter 7 debtor will be denied a discharge if "the debtor knowingly and fraudulently, in or in connection with the case made a false oath or account." As the Fourth Circuit has explained in Williamson v. Fireman's Fund Insurance Co. (In re Williamson) 828 F.2d 249 (4th Cir. 1987), "[i]n order to be denied a discharge under this section, the debtor must have made a statement under oath which he knew to be false, and he must have made the statement willfully, with the intent to defraud." While this section requires a showing of fraudulent intent, the fraudulent intent may be established by circumstantial evidence, or by inferences that can be drawn from a course of conduct. Bank of Sheridan, Montana v. Devers (In re Devers), 759 F.2d 751, 753-54 (9th Cir. 1985); Spencer v. Hatton (In re Hatton), 204 B.R. 470, 475 (Bankr. E.D. Va. 1996) (Adams, J.), aff'd Hatton v. Spencer (In re Spencer), 204 B.R. 477 (E.D. Va. 1997) (Smith, J.). Furthermore, the false oath made by the debtor must be material. 6 Collier on Bankruptcy ¶ 727.04[1][b]. As the Fourth Circuit has explained, "the subject matter of a false oath is `material,' and thus sufficient to bar discharge, if it bears a relationship to the bankrupt's business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property." Williamson, citing Chalik v. Moorefield (In re Chalik), 748 F.2d 616, 618 (11th Cir. 1984) (per curiam). Whether the debtor made a false oath is an issue of fact, Hatton, 204 B.R. 477, 482 (E.D. Va. 1997), and the standard of proof is preponderance of the evidence. Farouki v. Emirates Bank Int'l Ltd. (In re Farouki), 14 F.3d 244 (4th Cir. 1994).

Here, the United States Trustee argues that the debtor knowingly and fraudulently failed to disclose his BBT accounts on Schedule B in response to question No. 2. In this connection, while it is true that the debtor's Schedule B, question No. 2, only lists a single account at Crestar Bank, Pl.'s Ex. 4, and that the debtor maintained six bank accounts at BBT during the time period in question, Pl.'s Ex. 6, the debtor argues that his failure to disclose such accounts was due to simple inadvertence. Def.'s Aff. at 3. Along these lines, the debtor states that he believes that when he initially filed his schedules in this case, he informed counsel of the various accounts at BBT. He also avers that the retainer paid to his bankruptcy attorney was written on a BBT check and that various checks written to both creditors and the chapter 13 trustee in this case were written on BBT checks. Id; Def.'s Ex. 1. Thus, the debtor contends that his conduct was inconsistent with a wrongful intent to conceal these accounts from his creditors or the chapter 13 trustee in this case. Def.'s Aff. at 3. In response, the United States Trustee has provided an affidavit from debtor's former counsel, Richard G. Hall, which states that the debtor neither advised counsel nor counsel's assistant of any checking accounts other than the Crestar account. Pl.'s Ex. 17. There can be no question that the United States Trustee has made out a strong case. At the same time, a finding as to whether the debtor knowingly omitted the BBT accounts from his schedules would require the trier of fact to weigh the credibility of the debtor's contention that, if he did fail to tell his attorney about the accounts, it was a simple oversight on his part. "A false statement or omission that is made by mistake or inadvertence is not sufficient grounds upon which to base the denial of a discharge, but a knowingly false statement or omission made by the Debtor with reckless indifference to the truth will suffice as grounds for the denial of a Chapter 7 general discharge[.]" Hamo v. Wilson (In re Hamo), 233 B.R. 718, 725 (6th Cir. 1999) (citing Beauboef v. Beauboef (In re Beauboef), 966 F.2d 174, 178 (5th Cir. 1992). Because summary judgment will lie only where there is no genuine dispute as to a material fact, and because there is a genuine dispute as to whether the omission from the schedules was deliberate or simply negligent, summary judgment must be denied on Count One.

From October 5, 1998, to January 2, 2001, Richard G. Hall represented the debtor in this case. Subsequently, on January 12, 2001, Stephen B. Ramsdell entered an appearance on behalf of the debtor. To date, Mr. Ramsdell remains counsel of record for the debtor in this case.

B.

Section 727(a)(6)(A) of the Bankruptcy Code bars a debtor from receiving a discharge when the debtor has "refused . . . to obey any lawful order of the court, other than an order to respond to a material question or to testify." Further, it has been said that "it is totally within the discretion of the bankruptcy court to find a particular violation of the court's order so serious as to require denial of discharge." In re Devers, 759 F.2d at 55; Yoppolo v. Walter, et al. (In re Walter), 265 B.R. 753 (Bankr. N.D. Ohio 2001). In this respect, some courts have held that the word "refused" requires a wilful or intentional act, Wilmington Trust Co. v. Jarrell (In re Jarrell), 129 B.R. 29, 33 (Bankr. D. Del. 1991), while others have found that the use of the word "refused" requires no more than a showing of civil contempt. Hunter v. Magack (In re Magack), 247 B.R. 406, 410 (Bankr. N.D. Ohio 1999). Having considered the matter, this court believes that Jarrell articulates the better-reasoned approach. Denial of discharge is universally recognized as a harsh sanction. Congress has placed no burden on a debtor to prove he or she is entitled to a discharge; rather the statute requires that a discharge be granted unless certain specified grounds for denying discharge are proven to exist. Given that statutory framework, and the resulting presumption in favor of discharge, the court believes that the higher standard set forth in Jarrell is more appropriate than the lesser standard set forth in Magack. Accordingly, the court concludes that the United States Trustee must demonstrate, for the purposes of § 727(a)(6)(A), that the debtor's disobedience to this court's order was either willful or intentional. In re Jarrell, 129 B.R. at 33.

In this connection, the United States Trustee argues that the debtor refused to obey this court's order of August 11, 1999, confirming his second amended chapter 13 plan. Specifically, the United States Trustee argues that the confirmation order expressly required the debtor to turn over tax refunds in excess of $250.00 to the chapter 13 trustee, and that the debtor, by not turning over the IRS refund, refused to comply with the order. In response, the debtor argues that he never actually "refused" to comply with the confirmation order. Rather, he contends that he was "unable" to comply with the confirmation order because the IRS refund had already been spent on his mortgage and chapter 13 plan payment obligations during the summer of 2000. Def.'s Aff. at 3. Despite the debtor's argument, the undisputed facts, together with the findings previously made by the court at the hearing on conversion or dismissal, weigh heavily in favor of granting summary judgment.

First, there is no doubt that, as early as November 14, 2000, the debtor was aware of his obligation to turn over the tax refund to the chapter 13 trustee and that he failed to do so. Id.; Pl.'s Ex. 1 at 26-29. Indeed, this court expressly found this to be the case at the November 14, 2000, conversion hearing, stating:

I am struck by the size of the unpaid — the tax refund which was not paid over to the Chapter 13 trustee, as required by the terms of the order confirming the plan, and which Dr. Malkani testified that he understood perfectly well that that's what the plan provided for.

Pl.'s Ex. 2 at 78, lines 16-21 (emphasis added). Second, it is undisputed that this court, at that same hearing, found that the debtor's failure to comply with the confirmation order was intentional:

I believe his obligation was to comply with the Court order, and I believe that his failure to do so in this case was intentional.

Id. at 79, lines 14-16 (emphasis added). Tellingly, despite the debtor's explicit promise that he would pay over the tax refund within 120 days of the November 14, 2000, conversion hearing, he has never made any effort to turn over any of the proceeds from the IRS refund to the trustee in this case. Pl.'s Ex. 2 at 67, lines 1-5; PL's Ex. 8, 15. Accordingly, for these reasons, the court concludes that a grant of summary judgment is appropriate with respect to Count Two of the complaint.

C.

Under § 727(a)(2), Bankruptcy Code, a chapter 7 debtor will be denied a discharge if, among other things:

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 —

* * *

(B) property of the estate, after the date of the filing of the petition[.]

This provision is intended to prevent the discharge of a debtor who attempts to elude the collection of his debts by concealing or otherwise disposing of his assets. T. R. Press, Inc. v. Whitcomb (In re Whitcomb), 140 B.R. 396, 398 (Bankr. E.D. Va. 1992) (Bostetter, C.J.).

Here, the United States Trustee argues that the debtor knowingly and fraudulently transferred and concealed the proceeds from the IRS refund with intent to hinder, delay, or defraud creditors in this case. In this respect, it is undisputed that (a) the debtor received a $42,465.98 refund from the IRS on June 1, 2000; (b) the proceeds from that refund were placed into a BBT checking account held in the debtor's name; and (c) neither the refund nor the BBT checking account were disclosed to the chapter 13 trustee until after the refund had been spent. Nevertheless, the debtor argues that because he did not realize until after he had depleted BBT account # 5150147079 (the account which held the proceeds from the IRS refund) that the source of that money came from the IRS refund, his actions were inconsistent with any wrongful intent to transfer or conceal the refund. Def.'s Aff. at 2-3.

Based on the court's findings at the hearing on dismissal or conversion of the chapter 13 case, however, the court is compelled to conclude that the United States Trustee has carried his burden of showing that there is no genuine dispute as to the material facts. As noted, the court found as a fact that the debtor knew he was obligated to turn over the income tax refund and that his explanation that he was unaware that the refund was in the BBT account was simply not believable. If he was aware of his obligation and aware of the refund, it necessarily follows that his failure to disclose its existence to the trustee was done with the intent, at the very least, "to hinder, delay, or defraud . . . an officer of the estate," namely the chapter 13 trustee, whose duty it was to disburse the funds in accordance with the terms of the confirmed plan. Accordingly, summary judgment will be entered for the trustee on Count Three.

D.

Section 727(a)(5) provides that a debtor will be denied a discharge if he or she "has failed to explain satisfactorily . . . any loss of assets or deficiency of assets to meet the debtor's liabilities." Along these lines, it has been stated that:

In a proceeding involving Section 727(a)(5), the initial burden is on the party objecting to a discharge to produce evidence establishing the basis for his objection whereupon the burden shifts to the debtor to explain satisfactorily the loss or deficiency of assets. The explanation must be reasonable and credible[,] . . . [and t]he failure to offer documentary evidence to corroborate [the] debtor's testimony as to the loss or disposition of assets may justify the denial of a discharge pursuant to Section 727(a)(5).

Union Bank of the Middle East, Ltd. v. Farouki (In re Farouki), 133 B.R. 769, 777 (Bankr. E.D. Va. 1991), aff'd Farouki v. Emirates Bank Int'l, Ltd. (In re Farouki), 14 F.3d 244 (4th Cir. 1994).

Here, the United States Trustee argues that the debtor has failed to satisfactorily explain the loss of the proceeds from the IRS refund. However, the debtor clearly sets forth in his affidavit exactly where he believes the proceeds from the IRS refund went. Def.'s Aff. at 2; Def.'s Ex. Al. Accordingly, because the debtor has placed his ability to satisfactorily explain the loss of the proceeds from the IRS refund at issue, summary judgment is not appropriate at this time with respect to Count Four.

Conclusion

For the reasons stated above, a separate order will be entered consistent with this opinion denying the debtor a discharge on Counts Two and Three of the United States Trustee's complaint. Summary judgment will be denied with respect to the remaining counts.


Summaries of

In re Malkani

United States Bankruptcy Court, E.D. Virginia
Feb 22, 2002
Case No. 98-17327-SSM, Adversary Proceeding No. 01-1133 (Bankr. E.D. Va. Feb. 22, 2002)
Case details for

In re Malkani

Case Details

Full title:In re: VIKRAM MALKANI, Chapter 7, Debtor W. CLARKSON McDOW, JR., UNITED…

Court:United States Bankruptcy Court, E.D. Virginia

Date published: Feb 22, 2002

Citations

Case No. 98-17327-SSM, Adversary Proceeding No. 01-1133 (Bankr. E.D. Va. Feb. 22, 2002)