Opinion
Case No. 95-11544-AM, Adversary Proceeding No. 95-1227
September 3, 1996
Q. Russell Hatchl, Esquire, Alexandria, VA, counsel for the plaintiff
Henry Counts, Jr., Esquire, Alexandria, VA, counsel for the debtor-defendant
MEMORANDUM OPINION
This matter is before the court on the complaint of Nellie Tippenhauer, an unsecured creditor in the chapter 7 bankruptcy case of Erwin H. Miers, objecting to the debtor's discharge pursuant to 11 U.S.C. § 727 (a)(4)(A). A trial was held on April 18, 1996. The debtor was present in person and by counsel. After receiving the evidence and hearing the contentions of the parties, the Court took the matter under advisement. For the reasons set forth in this opinion — which constitutes the Court's findings of fact and conclusions of law as required by F.R.Bankr.P. 7052 and Fed.R.Civ.P. 52(a) — the Court concludes that the debtor should be denied a discharge.
Findings of Fact
The evidence consisted of exhibits offered by the plaintiff, the testimony of the debtor, and the debtor's deemed admissions to requests for admission that were properly propounded by Ms. Tippenhauer. The debtor, Erwin H. Miers, d/b/a/ E E Welding, filed a voluntary chapter 7 petition in this court on April 14, 1995. On his schedules, the debtor listed $21,047 in assets and $91,768.80 in liabilities.
While in his timely-filed answer the debtor generally denied the allegations of the complaint, he never responded to the requests for admissions. Consequently, the following facts are deemed admitted:
1. Plaintiff is one of the debtor's unsecured creditors.
2. The debtor filed his chapter 7 bankruptcy on April 14, 1995.
3. On April 14, 1995, the debtor owned all of the stock or other indicia of ownership of E E Welding, Inc.
4. The debtor omitted his non-wage income from E E Welding Inc. from his statement of income from employment or operation of business in his Statement of Financial Affairs and asserted in his Schedule I that he received no "regular income from operation of business," disclosing on Schedule I only the income that E E Welding Inc. paid him in wages.
5. The debtor's non-wage income from E E Welding Inc. for 1994 totaled $12,102.00.
6. In his Schedule B, the debtor claimed that his interest in E E Welding Inc. had no value.
7. E E Welding Inc. had $15,252.50 in accounts receivable as of April 14, 1995.
8. E E Welding Inc. had no liabilities as [of] April 14, 1995.
9. In his Schedule B, the debtor valued his tools of the trade at only $500.
10. The debtor claimed an $1,803.00 investment in small tools in the 1994 1120S for E E Welding Inc.
11. All of the tools purchased for $1,803.00 in 1994 for E E Welding Inc. were still in use on April 14, 1995.
12. In his Schedule B, the debtor valued his 1986 Ford truck at only $1,200.00. When the debtor sought an appraisal [of] his 1986 Ford truck from Tom Ambrose, Used Car Manager for Academy Ford Sales on May 24, 1995, he did not advice [sic] Mr. Ambrose he (the debtor) had recently put $3,000 in repairs in the vehicle.
Ms. Tippenhauer is the debtor's largest unsecured creditor, with a claim for $79,348.25 based on a state court judgment obtained in Maryland.
It remains a mystery exactly why the debtor's case was filed in the Eastern District of Virginia when the debtor himself is a Maryland resident, and all his assets appear to be located in Maryland. See, 28 U.S.C. § 1408 (bankruptcy case may be commenced in district in which the debtor's "domicile, residence, principal place of business in the United States, or principal assets in the United States" have been located for the longer portion of the previous 180 days). Although the debtor's solely-owned corporation, E E Welding, Inc., is apparently incorporated in Virginia, its business location and all its assets likewise appear to be located in Maryland. Simply because the debtor owns stock in a corporation that is incorporated in a particular state does not make that state the debtor's "principal place of business" or the location of his "principal assets." This is particularly true where, as here, the stock has been listed by the debtor on his schedules as having "no value." The only apparent reason the court can divine for the filing of the petition in this district is because a prior corporation owned by the debtor, Erwin H. Miers Welding, Inc., filed a chapter 7 petition in this court four years ago, In re Erwin H. Miers Welding, Inc., No. 92-14568-AT (Bankr. E.D. Va.), and was represented by the same attorney who now represents the debtor. That corporation apparently had a place of business within this district, and there is no suggestion that venue was not proper in that case. That case, however, has been closed since November 30, 1992. While 28 U.S.C. § 1408(2) permits a bankruptcy petition to be filed in any district "in which there is pending a case under title 11 concerning such person's affiliate, general partner, or partnership," there is no authority for filing a petition in a particular district solely because there was once a case concerning the debtor's affiliate.
Mr. Miers, a resident of Maryland, has two years of college education and has been a welder for the past 16 years. On his schedules of assets he listed an interest in a solely-owned corporation, E E Welding, Inc. ("E E Welding"). Mr. Miers listed the business on his schedules as having "no value" — despite the fact (which he did not disclose) that it had some $15,252.50 in accounts receivable on the filing date, that it had a checking account balance on that date of $3,444.94, that it was an on-going business, and that it had earned a profit of some $12,102 during the prior calendar year (in addition to paying him approximately $19,000 in wages, which was disclosed in the statement of financial affairs). Giving the debtor every benefit of the doubt, and using his own records, the most that E E Welding could have owed at the time of filing was $8,485.96. This statement of liabilities even includes $2,267.72 that may have been owed to CNA Business Insurance and certain Virginia taxes that the debtor did not even know about at the time of the filing. While the debtor's interest in E E Welding was listed in the debtor's schedules, it was not disclosed in his Statement of Financial Affairs. In response to the question which asks individual debtors to list "the names and addresses of all businesses in which the debtor was an officer, director, partner, or managing executive of a corporation, partnership . . . within the two years immediately preceding the commencement of this case," the debtor marked, "NONE."
E E Welding is incorporated in Virginia and is an "S" corporation for tax purposes.
At least $7,005.50 of these accounts were good, since the debtor had collected that amount by the time of trial, and the debtor testified that at the time he prepared his bankruptcy schedules he believed that they were all good.
E E Welding operates out of the debtor's wife's house and has one employee in addition to the debtor — the debtor's brother.
The debtor's statement of liabilities also included $1,500 that the debtor asserted E E Welding owed in back rent to the debtor's wife for the space used by E E Welding in the debtor's wife's house. It was established at trial that this entire amount had been paid prior to the bankruptcy filing. As such, the most that E E Welding may have owed was $500 in rent for April, 1995. Consequently, $1,000 has been subtracted from the debtor's statement of liabilities for E E Welding.
From the testimony it was unclear whether, if E E Welding had ceased to operate on April 14, 1995, E E Welding would have owed the entire amount to CNA or only a pro-rated amount through the date of cancellation.
Next, the debtor listed on his schedules "tools of the trade" valued at $500, although he had spent $1,803 on tools in 1994 alone. He listed ownership of a 1986 Ford F350 pickup truck but showed its value as only $1,200, despite the fact that its "Blue Book" trade-in value was $4,075 and he had recently had $3,000 in repairs performed. The debtor claimed both the truck and tools as exempt under Maryland law. Finally, he did not list at all his ownership of a 1981 Yamaha 1100 Special motorcycle. The debtor did, however, testify that he thought he told his attorney about the motorcycle when he was preparing his schedules and that he disclosed the existence of the motorcycle at the meeting of creditors.
The plaintiff's expert appraised the value of the tools at $1,870. This did not include scaffolds and scaffold casters that the debtor did not show the appraiser, and which had been purchased for $930.22.
The appraised value of the truck, as established at the trial, was $3,700.00.
The "Blue Book" trade-in value for this model is approximately $1,025.
The debtor testified that in valuing the pickup truck, he looked at the Blue Book and then "subtracted" the cost of repairing a "bunch of things wrong with it," and thought he would be only offered $1,200 for the truck if it were to be sold. He further testified that the motorcycle "doesn't run" and would cost more to fix than it was worth. As is, he testified that he would be "lucky" to get $500 for the motorcycle. As to the tools, he testified that most of them — with the exception of the welding machine, the truck and a "few small hand tools" — were owned by E E Welding. Collectively, he believed the tools — which he described as "old" and "of value to me but not anyone else" — were worth only $500. He also testified that when he took the tools to the plaintiff's appraiser, he took both his own tools and those belonging to the corporation.
Additionally, while the debtor listed a personal checking account with Agriculture Federal Credit Union as being among his assets, he showed its balance on the date of filing as $20, when in fact the balance was $100. Also, during the course of the trial, the debtor admitted that at a deposition pursuant to F.R.Bankr.P. 2004 he had testified that he (or rather, E E Welding) owed his wife $1,500 in back rent when that was not in fact true. Ultimately, it was learned that the most that E E Welding owed was $500 for April 1995 rent.
The account was subsequently closed prior to the date of the Rule 2004 deposition.
Interestingly, however, the debtor, who owns no real property and is party to no leases, listed on his schedule of monthly expenses — Schedule J — that he personally spends $500 per month in rent. Subsequently, at the Rule 2004 exam, the debtor admitted that, as to the rent, his schedule of expenses was incorrect. This schedule has never been amended.
Conclusions of Law
This Court has jurisdiction of this adversary proceeding under 28 U.S.C. § 1334 and 157(a) and the general order of reference of the United States District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. § 157(b)(2)(J).
Under § 727(a) of the Bankruptcy Code, the court is required to grant a chapter 7 debtor a discharge unless, among other things —
(4) the debtor knowingly and fraudulently, in or in connection with the case —
(A) made a false oath or account;
In a complaint objecting to the debtor's discharge under § 727, the burden of proof is on the objecting party, and the standard of proof is preponderance of the evidence. Harmon v. McGee (In re: McGee), 157 B.R. 966, 973 (Bankr. E.D. Va. 1993). Once the creditor has established a prima facie case, the burden shifts to the debtor to provide satisfactory explanatory evidence to rebut the allegations. Farouki v. Emirates Bank Intl. Ltd., 14 F.3d 244 (4th Cir. 1994). "While the burden of persuasion rests at all times on the creditor objecting to discharge, it is axiomatic that the debtor cannot prevail if he fails to offer credible evidence after the creditor makes a prima facie case." Id., at 250, quoting In re Reed, 700 F.2d 986, 992-93 (5th Cir. 1983).
With respect to § 727(a)(4), courts have recognized that competing concerns are inherently implicated. National Post Office Mail Handlers, Watchmen, Messengers and Group Leaders Division of the Laborers' Int'l. Union of North America, AFL-CIO v. Johnson (In re Johnson), 139 B.R. 163, 165 (Bankr. E.D. Va. 1992), citing Boroff v. Tully (In re Tulfy), 818 F.2d 106, 110 (1st Cir. 1987). On the one hand, bankruptcy is equitable remedy, wherein "the statutory right to a discharge should ordinarily be construed liberally in favor of the debtor." Id. at 166. One the other hand, however,
the very purpose of § 727(a)(4)(A) is to ensure that "those who seek the shelter of the bankruptcy code do not play fast and loose with their assets or with the reality of their affairs," and that "complete, truthful, and reliable information is put forth at the outset of the proceedings, so that decisions can be made by the parties in interest based on fact rather than fiction."
Id. These conflicting goals, as the Tully court cautioned, require careful and "evenhanded" consideration. Id.
As the Fourth Circuit 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 intent, the fraudulent intent may be established by circumstantial evidence, or by inferences that can be drawn from a course of conduct. In re Devers, 759 F.2d 751, 753-54 (9th Cir. 1985).
Furthermore, the false oath made by the debtor must have related to a material matter. According to the Fourth Circuit, "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 In re Chalik, 748 F.2d 616, 618 (11th Cir. 1984) (per curiam). Further, "[w]here . . . assets of substantial value are omitted from the schedules, the conclusion that they were omitted purposefully with the fraudulent intent to conceal the assets in question may be warranted." In re Topping, 84 B.R. 840, 842 (Bankr. M.D. Fla. 1988). Even where there is no fraud, "the requisite intent to hinder creditors may be found from the debtor's failure to disclose pertinent information." Siegel v. Weldon (In re Weldon), 184 B.R. 710, 712 (Bankr. D. S.C. 1995), citing In re Stowe, No. 93-41274-T (Bankr. E.D. Va.) (Tice, J.). Additionally, "although the fraudulent omission of insubstantial items from bankruptcy schedules may nevertheless support a denial of discharge, the size and nature of the omissions can bear heavily on the issue of intent." Stowe, supra.
In the present case, we are faced with four categories of misrepresentations which the plaintiff asserts require the court to deny the debtor's discharge: (1) the value of the truck; (2) the omission of the motorcycle from the schedules and its subsequent valuation; (3) the value of the tools; and (4) the value of E E Welding, Inc.
At the outset, we are faced with an argument by debtor's counsel that the debtor had no motivation to undervalue the tools and the truck, since he had sufficient available exemptions under Maryland law to protect those items even if the court were to find the higher values urged by the plaintiff. The difficulty here is that the debtor's schedule of property claimed as exempt was sloppily prepared and has never been amended to correct obvious deficiencies, so that it is essentially impossible to tell precisely what exemptions the debtor thought he was entitled to. On his schedules, the debtor has claimed four assets — the truck ($1,200), "personal clothing" ($500), "tools of the trade" ($500) and life insurance ($5,500) — all as being exempt under "Maryland Code Section 11-504(g)." The cited subsection, however, is simply Maryland's "opt out" statute. Other portions of Md. Cts. Jud. Proc. Code Ann. § 11-504 — specifically, subsections (b)(1) through (b)(5) and (f) — do set forth several specific categories of assets that may be claimed as exempt, but from the debtor's schedules it is far from clear exactly how he thought the assets he was exempting fit into the statutory scheme, or how much "cushion" he may have thought he had. Furthermore, the debtor was never examined, either at the Rule 2004 deposition or at trial, as to his understanding, at the time he was preparing his schedules, of the exemptions to which he was entitled. Accordingly, the court is unable to draw any inference favorable to the debtor based on the exemptions available under Maryland law.
Maryland has "opted out" of the Federal exemptions in § 522(d), Bankruptcy Code, and therefore the only exemptions available to the debtor are those provided by state law. Md. Cts. Jud. Proc. Code Ann. § 11-504(g). In re Royal, 165 B.R. 802 (Bankr. D. Md. 1994).
Of course, if a debtor deliberately undervalues his scheduled property or deliberately omits assets from his schedules, it is no answer to a § 727(a)(4)(A) action that the property could ultimately have been claimed as exempt. Put simply, the defense of "No harm, no foul" does not apply. Nevertheless, the fact that particular assets claimed to have been omitted or undervalued were clearly exempt could, in an appropriate case, give rise to an inference that the debtor had no motive to deceive.
As an objective matter, it is far from clear that the available exemptions would have fully protected the value the debtor's assets. The tools — depending on which were "his" and which were the corporation's — arguably fit within the $2,500.00 available under Md. Cts. Jud. Proc. Code Ann. § 11-504(b)(1) and the personal clothing within the $500 available under § 11-504-(b)(4). However, that leaves only a total of $7,500.00 — $3,000 under § 11-504(b)(5) and $2,500.00 under § 11-504(f) — to cover the truck, motorcycle, and stock in E E Welding. (This assumes that the $5,500 life insurance cash value is protected under Md. Estates Trusts Code Ann. § 8-115, although in literal terms that statute exempts only the "proceeds" of life insurance contracts.) Given the N.A.D.A. value of the truck ($4,075) and the motorcycle ($1,025), and the net worth (retained earnings) of more than $12,000 for E E Welding as reflected on its tax return, it would seem difficult to argue that the debtor had no incentive to understate the value of those assets.
The debtor testified that he "did his best" to assign values to his property based on its trade-in value, less the cost to repair the item. With respect to the tools, the debtor considered his tools — both his personal tools and those actually purchased by E E Welding — to be "old," even though some of them had been purchased less than two years previously, and to be of use to him and his business, but not to anyone else. Despite the fact that these valuations ultimately proved to be significantly less than the N.A.D.A. and appraised value for the truck and the appraised value for the tools, the debtor's values are not inherently unreasonable. Consequently, with respect to the tools and truck, the court finds — after having the opportunity to gauge the debtor's demeanor and listen to his testimony — that his valuations, although decidedly on the low side, were not misrepresentations made with the intent to defraud.
The court is more troubled by the debtor's failure to list the motorcycle. Although the motorcycle was not disclosed on the schedules (which have never been amended), the debtor stated that he had told his attorney about the motorcycle when they were preparing his schedules and it was subsequently disclosed in the 341 meeting. The debtor's testimony that he discussed this asset with his attorney is not unbelievable. This, however, does not absolve the debtor. He signed his schedules — certifying under penalty of perjury that they were true and correct to the best of his information and belief — when, in fact, they were not. As a consequence, the debtor's failure to list the motorcycle — regardless of whether motorcycle truly was inoperable, worth only $500 and potentially exemptable — prevented the chapter 7 trustee from evaluating that asset. Nevertheless, based on the evidence and testimony, the court cannot find that the debtor intentionally omitted the motorcycle. Furthermore, the court concludes that this omission and the other low valuations do not form a "general pattern" of misrepresentation such as to persuade the court of the debtor's intent to dissemble.
Although the court cannot find that the debtor's low valuations of the truck and tools, and his failure to list the motorcycle, were motivated by an attempt to deceive, the court is compelled to reach a different conclusion with respect to the debtor's valuation of his business, E E Welding. Overall, with respect to this asset, the debtor was uniformly less than candid and forthcoming. After listening to his testimony and observing his demeanor, the court finds that there was no way that the debtor could have, in good faith, reasonably determined that E E Welding had no value. To the contrary, based on the evidence admitted, this court finds that E E Welding's value at the time of the debtor's chapter 7 filing was substantially greater than the "no value" attested to by the debtor on his schedules. First, according to the debtor's 1994 tax returns, the corporation's retained earnings — in effect, its net worth — totaled $12,102 at the end of the 1994 tax year, just a few months prior to the debtor's bankruptcy filing. Secondly, on the date that the bankruptcy petition was filed, the corporation had a checking account with a balance of $3,444.94. Finally, the corporation also had $15,252.50 in accounts receivable, at least $7,005.50 of which were good, as the debtor had collected this amount by the time of trial. Notwithstanding the fact that a majority of the accounts receivable were owed by entities that were having financial difficulties, the debtor testified that he had expected to be able to collect — even if late — on most of the accounts. While the total amount of payables owing at the time of the debtor's filing was unclear from the testimony and exhibits, they did not exceed $8,485.96, far less than the $18,500 total in the checking account and in accounts receivable. While no precise value need be determined for purposes of the conclusion reached, it is sufficient that this court finds that the value of E E Welding — which was and remains an ongoing, apparently profitable, business — is a great deal more than "no value." Mr. Miers certified, under penalty of perjury, that the information he provided regarding E E Welding's value was true and correct to the best of his information and belief. It was not. Based on the foregoing, it is clear to the court that the debtor's intention with regard to E E Welding was not to provide "complete, truthful, and reliable" disclosure to the trustee and interested parties, such as the plaintiff, at the outset of this proceeding. In the context of this bankruptcy case, listing E E Welding as having "no value" was clearly a material misrepresentation made with the intent to defraud. See, Morton v. Dreyer (In re Dreyer), 127 B.R. 587 (Bankr. N.D. Tex. 1991) (discharge denied where, among other conduct, debtor represented that his on-going business had no value).
In conclusion, for the reasons set forth in this opinion, a separate order will be entered denying the debtor a discharge.