Opinion
No. 03-81801, Adv. No. 03-8147.
June 10, 2004
OPINION
This matter is before the Court on the Motion for Summary Judgment filed by the Plaintiff, First Capital Bank (FIRST CAPITAL). The Complaint, objecting to the discharge of the Debtor and Defendant, Wayne Alan Thomas (DEBTOR), asserts claims under 11 U.S.C. § 727(a)(2), (3), (4)(A), (5) and (7). This Motion seeks summary judgment only as to two of those claims, under Section 727(a)(4)(A) and (a)(7).
The main thrust of the Motion is the allegation that the DEBTOR made false statements under oath by misrepresenting and omitting information required to be disclosed on the bankruptcy papers that he filed in his own case and in a related case. Under the statutory provisions at issue, a Chapter 7 debtor`s discharge may be denied where "the debtor knowingly and fraudulently, in or in connection with the case — made a false oath or account," 11 U.S.C. § 727(a)(4)(A), or where the debtor has done so in connection with another case concerning an insider, 11 U.S.C. § 727(a)(7).
The DEBTOR filed his Chapter 7 petition on April 8, 2003. Prior thereto, on March 12, 2003, L.W. Thomas Roofing Co. (THOMAS ROOFING) filed its Chapter 7 petition. It is undisputed that the DEBTOR, as President of THOMAS ROOFING, was an insider of that corporation. It is also undisputed that the DEBTOR signed the schedules and statement of financial affairs in his own case and in that of THOMAS ROOFING, and that the information contained and the representations made therein constitute statements made under oath for purposes of Section 727(a)(4)(A) and (a)(7).
In its Motion and accompanying Memorandum, FIRST CAPITAL details a number of alleged false oaths by the DEBTOR, including, in his own case:
1. The failure to disclose over $300,000 of non-wage income received from THOMAS ROOFING within the two years prior to his filing;
2. The failure to disclose numerous payments made on his behalf by THOMAS ROOFING;
3. The failure to list his interest or former interest in three business entities or ventures;
4. The failure to disclose several financial statements given by the DEBTOR, prepetition, to various creditors;
5. The failure to schedule and/or properly value two or three undeveloped parcels of real estate;
6. The failure to disclose and/or properly value household goods; and
7. The failure to schedule THOMAS ROOFING as an unsecured creditor; and, in the THOMAS ROOFING case:
1. The failure to disclose numerous payments made by THOMAS ROOFING to personal creditors of the DEBTOR;
2. The failure to answer Questions 3(a) and (b) on the Statement of Financial Affairs;
3. The failure to disclose THOMAS ROOFING`S accounts receivable factoring arrangement;
4. The failure to disclose the more than $300,000 in non-wage income received by the DEBTOR from THOMAS ROOFING, and
5. The failure to accurately disclose the wages paid to the DEBTOR by THOMAS ROOFING.
The DEBTOR responds to the Motion by arguing that FIRST CAPITAL has failed to establish that he acted knowingly and with fraudulent intent when he signed the bankruptcy papers that contained inaccuracies and omissions. The DEBTOR alleges that prior to THOMAS ROOFING`S filing, FIRST CAPITAL took control of and excluded him from the business premises, denying him access to the business records and some personal records, so that the schedules in both cases were prepared without the opportunity to review those records. In his affidavit, attached to the Response, the DEBTOR states facts in support of this allegation.
Summary judgment is properly granted when the "pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c); Celotex v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Summary judgment will be granted only where it is clear that there is no dispute about the facts or inferences to be drawn therefrom. Central Nat. Life Ins. v. Fidelity and Deposit Co. of Maryland, 626 F.2d 537 (7th Cir. 1980). On a motion for summary judgment, the court must view the evidence in the light most favorable to the nonmoving party. In re Chambers, 348 F.3d 650 (7th Cir. 2003). It is not the role of the trial court to weigh the evidence or to determine its credibility, and the moving party cannot prevail if any essential element of its claim for relief requires trial. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). The movant bears the burden to prove each fact material to its claim and to establish that each fact is not in genuine dispute. If the movant fails to make that showing, summary judgment is not proper and must be denied. In re Rogstad, 126 F.3d 1224, 1227-28 (9th Cir. 1997).
In the absence of an admission by a debtor that schedule omissions and inaccuracies were made knowingly and with an intent to defraud, it is difficult for a party seeking summary judgment under Section 727(a)(4)(A) to prove the debtor`s state of mind and establish that there is no genuine issue of fact in that regard. As one court recently observed:
Rare indeed will be the instance where the Court can adjudge with confidence, on a "paper" record alone, that a debtor engaged in discharge-disqualifying conduct with the statutorily-required level of scienter and intention. Pivotal factual issues involved in discharge proceedings often turn on the credibility of witnesses; and an essential tool in the Court's assessment of credibility is its observation of the demeanor of such witnesses. Such observation is, of course, impossible in the context of a summary judgment matter.
In re Salinardi, 304 B.R. 54, 58 (Bankr.D.Conn. 2004).
The difficulty for the movant is readily apparent when one considers that, without a declaration by the debtor as to what he was thinking when he filled out and signed the schedules, a culpable state of mind can only then be established inferentially from circumstantial evidence. But the Court is required, on a motion for summary judgment, to draw all reasonable inferences from the evidence in favor of the opposing party, and against the movant. Summary judgment is inappropriate if inferences are necessary for the judgment and those inferences are not mandated by the record. In re Varrasso, 37 F.3d 760, 763 (1st Cir. 1994). It would be an exceptional case where the circumstantial evidence was such that the only reasonable inference that could be drawn as to the debtor`s state of mind was that he made the omissions and misrepresentations knowingly and with a fraudulent intent.
The record before the Court contains no declaration or admission by the DEBTOR that he made any of the omissions or misstatements in the schedules and statements of financial affairs with an intent to hide assets, provide false information or otherwise defraud the Trustee or creditors. Accordingly, FIRST CAPITAL must rely on circumstantial evidence to prove that the DEBTOR possessed the requisite scienter.
In its Reply, FIRST CAPITAL contends that the DEBTOR`S affidavit and Response do not adequately controvert the factual assertions made by FIRST CAPITAL, do not conform to the Local Rules or the Federal Rules of Civil Procedure, and do not present a valid defense to the Motion for Summary Judgment. FIRST CAPITAL misapprehends the summary judgment process. The movant must establish its entitlement to summary judgment in the first instance. If the movant fails to do so, summary judgment is not proper, even if the opposing party fails to respond or the response fails to adequately controvert the facts established by the movant. Hoover v. Switlik Parachute Co., 663 F.2d 964, 967 (9th Cir. 1981) (where no opposition to motion filed, summary judgment should not be granted if the evidence in support of the motion is insufficient); Hibernia Nat. Bank v. Administracion Cent. Sociedad Anonima, 776 F.2d 1277, 1279 (5th Cir. 1985) (summary judgment cannot be granted simply because there is no opposition, even if the failure to oppose violates a local rule); Henry v. Gill Industries, Inc., 983 F.2d 943, 950 (9th Cir. 1993) (local rule that requires entry of summary judgment simply because no papers opposing the motion are filed, without regard to whether genuine issues of material fact exist, would be inconsistent with Rule 56). The responding party may rest its opposition on the movant`s failure to prove its claim, and is under no obligation to offer affidavits or any other materials in support of its opposition. Rogstad, 126 F.3d at 1227-28. In other words, the opposing party has no burden to controvert an unproven factual assertion. Only where a material fact is duly proved by the movant is it necessary for the respondent to produce competent, contradicting evidence in order to create a genuine issue as to its truth.
As a threshold matter, the fact that the various omissions and inaccuracies alleged by FIRST CAPITAL were made in the papers signed by the DEBTOR is not controverted, with one exception. The exception is the DEBTOR`S contention that the property valuations he used were, in fact, reasonably accurate, based on an assumed disposition at a bankruptcy liquidation sale. The mere fact of inaccuracies, however, is insufficient. The critical question here is whether FIRST CAPITAL has proved that the omissions and misstatements were made by the DEBTOR with a knowing and fraudulent state of mind.
As used in Section 727(a)(4)(A), the term "knowing" means that the debtor had a present awareness that the statement was untrue, and "fraudulent" means that the debtor harbored an intent to deceive, such as an intent to hide assets or the true value of assets or to prevent discovery of transfers of property. See, Williamson v. Fireman`s Fund Ins. Co., 828 F.2d 249 (4th Cir. 1987). Inaccurate statements that are due to inadvertence, an honest mistake or carelessness do not, generally, warrant denial of discharge.
One inference that may be drawn from the evidence is that the DEBTOR was aware that the schedules and statements contained false information and that he intended to deceive the Trustee and/or the creditors by filing false statements. But that is not the only inference that may reasonably be drawn from the evidence. Although it is not necessary for the DEBTOR, at this stage, to articulate and prove a "defense" to the Motion, the DEBTOR has made an assertion of fact that he was locked out of the business office of THOMAS ROOFING and had no access to business records and some personal records at the time the bankruptcy schedules were prepared. According to his deposition testimony, the DEBTOR was forced to make guesstimates and estimations when preparing the schedules.
Thus, based on the evidence, one plausible scenario is that the omissions and misstatements were unintentional mistakes caused by the lack of records. Although there are factors that weigh against it, this is, in this Court`s view, one reasonable inference that may be drawn from the evidence presently in the record. Furthermore, because it is most favorable to the DEBTOR, it is the inference that the Court must draw at this stage of the proceeding. Any attempt to compare the relative plausibility of each inference would encroach into the prohibited territory of weighing the evidence, which is premature at the summary judgment stage. As so cogently pointed out by the First Circuit Court of Appeals, the very existence of conflicting inferences precludes summary judgment:
In order to deny a debtor's discharge under section 727(a)(4)(A), the trustee must show that the debtor "knowingly and fraudulently" misstated a material matter. (Citation omitted). Here, the undisputed facts conclusively demonstrate the omission of certain assets from the schedules, but, beyond that, the facts are consistent either with an inference of deliberateness or an inference of carelessness. In other words, the undisputed facts require a choice between competing inferences, and, since both inferences are plausible, the choice cannot be made under the banner of summary judgment.
Varrasso, 37 F.3d at 764.
FIRST CAPITAL argues that the large number of inaccuracies compels a finding of fraudulent intent. Here, however, the DEBTOR has asserted an innocent explanation for the inaccuracies and the Court is required to accept the non-culpable inference that flows from that explanation. Even if the Court was to accept that explanation for only a portion of the inaccuracies, that problematic volume of errors is thereby decreased, and the culpable inference becomes less compelling. Without weighing the evidence and determining which, if any, of the inaccuracies will be exculpated, the volume of wrongful inaccuracies is indeterminate. It is, therefore, impossible to make an inferential finding of fraudulent intent, at this stage, on the basis that a fairly large number of inaccuracies are present.
FIRST CAPITAL makes one further argument. The Seventh Circuit has held that a determination that a debtor signed schedules with a reckless disregard for the truth of the information is sufficient to justify denial of discharge under Section 727(a)(4)(A). In re Chavin, 150 F.3d 726, 728 (7th Cir. 1998). FIRST CAPITAL contends that it has at least proved that the DEBTOR acted with such reckless disregard. This Court disagrees. Whether mere carelessness or inattention to detail rises to the level of reckless disregard is an extraordinarily fine line that is supremely fact-intensive and, as such, is almost never amenable to determination on summary judgment.
One could surmise that a debtor who admitted not assisting in the preparation of or reading the schedules at all before signing them exhibited, ipso facto, a reckless disregard. The DEBTOR makes no such admission here.
FIRST CAPITAL relies on a number of cases where a debtor`s discharge was denied on the basis of false schedules. Most of those cases, however, were disposed of not at the summary judgment stage, but only after trial was conducted. See, In re Wilson, 290 B.R. 333 (Bankr.C.D.Ill. 2002); In re Leija, 270 B.R. 497 (Bankr.E.D.Cal. 2001); In re Petersen, 296 B.R. 766 (Bankr.C.D.Ill. 2003); In re Bailey, 147 B.R. 157 (Bankr.N.D.Ill. 1992). Compare, In re Sholdra, 249 F.3d 380 (5th Cir. 2001) (summary judgment affirmed where the debtor admitted making intentionally false statements in his schedules).
For the reasons stated herein, the Court determines that a genuine issue of material fact exists as to whether the omissions and inaccurate statements contained in the bankruptcy schedules and statements of financial affairs, signed and filed by the DEBTOR in his own case and that of THOMAS ROOFING, were made "knowingly and fraudulently" for purposes of Section 727(a)(4)(A) and (a)(7). Accordingly, FIRST CAPITAL`S Motion for Summary Judgment will be denied.
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.
ORDER
For the reasons stated in an Opinion filed this day, IT IS HEREBY ORDERED that the Motion for Summary Judgment filed by the Plaintiff, First Capital Bank, is DENIED.