Opinion
Case No. 02-65702-DOT, Adv. Proc. No. 02-9007-T.
August 13, 2004
Steven C. Mintz, Esq., Phillips Fleckenstein, P.C. Richmond, Virginia, Counsel for Plaintiff.
James E. Kane, Esq., Richmond, Virginia, Counsel for Defendant.
MEMORANDUM OPINION
Trial was held June 9, 2004, on plaintiff trustee's complaint objecting to discharge pursuant to 11 U.S.C. § 727(a). Debtor Mohammed N. Uddin filed a chapter 7 bankruptcy petition on July 3, 2002, and the first meeting of creditors was held on August 1, 2002. On December 30, 2002, trustee filed a complaint objecting to debtor's discharge. In the complaint, trustee asserted that debtor's discharge should be denied pursuant to §§ 727(a)(3), (4), or (5) for debtor's failure to keep records, making of a false oath, or failure to explain deficiency of assets. At the conclusion of the trial, the court ruled from the bench that debtor's discharge was denied. To the extent that the court made findings regarding sections of the Code not averred in the complaint, trustee was given leave to amend. Trustee filed an amended complaint on June 16, 2004, asserting that debtor's discharge should also be denied pursuant to § 727(a)(2)(A) for debtor's fraudulent prepetition transfers of property. This memorandum opinion supplements the court's bench ruling.
The original trial in July 2003 was cancelled because debtor's case was converted to Chapter 13. Subsequently, the case was reconverted to Chapter 7 and trustee requested an alias summons in order to proceed with the matter on the original complaint objecting to debtor's discharge.
Findings of Fact.
After filing his chapter 7 petition and initial schedules, debtor failed to disclose the following upon direct questioning by the trustee:
a.) that he had been an officer in and an owner of a corporation within six years preceding his bankruptcy filing;
b.) that he had an ownership interest in an automobile at the time of his bankruptcy filing that was transferred to a secured creditor shortly before the filing;
c.) that he had income from the sale of merchandise purchased on store charge cards;
d.) that he had gambling losses in the year preceding his bankruptcy filing in excess of $100,000.00;
e.) that he transferred gifts of cash to friends and family members in excess of $100,000.00 in the year preceding his bankruptcy filing; and
f.) that he had a potential claim valued at $75,000.00 resulting from the seizure of business inventory by his landlord.
With one exception, debtor initially denied the above transactions and gradually revealed their details through his amended schedules. Debtor transferred more than $100,000.00 in cash gifts to friends in the year prior to filing bankruptcy, and he failed to maintain records of these gifts. Debtor initially refused to divulge to the trustee the full names and locations of the recipients of these gifts, but he later provided some recipients' first names and amounts received. Debtor listed a $75,000.00 claim against his landlord in his amended schedules, but he did not provide nor had he kept any records in support of this claim. Finally, debtor did not explain nor had he kept adequate records that would explain the disparity between the $447,339.00 in unsecured debt and $200.00 in assets listed on his schedules.
Debtor disclosed for the first time at trial that he received income from the sale of merchandise purchased with store charge cards. He used store charge cards to purchase merchandise, sold that merchandise for cash in New York City, and failed to maintain records of the transactions.
Conclusions of Law.
SECTION 727(a)(2)(A)
Pursuant to § 727(a)(2)(A), a debtor will be granted a discharge unless "the debtor, with intent to hinder, delay, or defraud a creditor . . . has transferred, removed, destroyed, mutilated, or concealed . . . property of the debtor, within one year before the date of the filing of the petition." 11 U.S.C. § 727(a)(2)(A). A plaintiff has the burden of proving this or any other basis for denying discharge under § 727 by a preponderance of the evidence. See Farouki v. Emirates Bank Int'l, Ltd., 14 F.3d 244, 249 (4th Cir. 1994); Harmon v. McGee (In re McGee), 157 B.R. 966, 973 (Bankr. E.D. Va. 1993). Although the burden of proof always remains with the plaintiff, a debtor may be called upon to offer rebuttal evidence once the creditor has established a prima facie case for denial of discharge. See Farouki, 14 F.3d at 249; T.R. Press, Inc. v. Whitcomb (In re Whitcomb), 140 B.R. 396, 398 (Bankr. E.D. Va. 1992).
Because direct evidence of fraudulent intent is rarely available, courts have relied upon the badges of fraud to infer fraudulent intent. See Riggs Nat'l Bank v. Andrews (In re Andrews), 186 B.R. 219, 222 (Bankr. E.D. Va. 1995), citing In re Warner, 87 B.R. 199, 202 (Bankr. M.D. Fla. 1988); Hyman v. Porter (In re Porter), 37 B.R. 56, 63 (Bankr. E.D. Va. 1984). The badges of fraud include: (1) a relationship between the debtor and the transferee; (2) lack of consideration for the conveyance; (3) debtor's insolvency or indebtedness; (4) transfer of debtor's entire estate; (5) reservation of benefits, control, or dominion by the debtor; (6) secrecy or concealment of the transaction; and (7) pendency or threat of litigation at the time of transfer.See In re Andrews, 186 B.R. at 222; In re Porter, 37 B.R. at 63. When there is no direct evidence of fraudulent intent, a court must determine whether the circumstances surrounding debtor's pre-petition transactions contain any of these badges of fraud.
Trustee has shown and debtor has confirmed that debtor made numerous cash transfers within one year of filing his petition. These transfers included payments of cash to friends and family in excess of $100,000.00, usually made with cash advances on debtor's credit cards. Debtor maintained no record of these transfers. Debtor ultimately disclosed the transfers on his third set of amended schedules and after two meetings of creditors. Still today debtor has not provided the trustee with the full names and locations of and amounts received by the transferees.
The debtor's amended schedules reflecting this information are dated November 4, 2003.
The first meeting of creditors was in the Chapter 7 case on August 1, 2002, and the second meeting of creditors was in the converted Chapter 13 case on July 30, 2003.
The court finds that the debtor made these transfers with the intent to hinder or delay his creditors. Debtor has made a concerted effort to conceal the details of these pre-petition transfers of cash by both failing to maintain records at the times the transfers were made and by refusing to provide more information when requested by the trustee. Further, the information debtor has provided about the transfers, that they were cash gifts made to friends, demonstrates that they were made for no consideration. Debtor incurred major unsecured debt by obtaining cash advances on his credit cards, and he received no assets in return when he transferred that cash to his friends.
SECTION 727(a)(3)
A debtor's discharge can also be denied pursuant to § 727(a)(3) if "the debtor has . . . failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained . . ." 11 U.S.C. § 727(a)(3). A plaintiff objecting to discharge pursuant to this provision must show that the debtor failed to maintain adequate records and that this failure makes it impossible to evaluate the debtor's financial condition. See Meridian Bank v. Alten, 958 F.2d 1226 (3d Cir. 1992); see also First Union Nat'l Bank v. Golob (In re Golob), 252 B.R. 69 (Bankr. E.D. Va. 2000).
In this case trustee has shown that debtor has not provided adequate records regarding his business, his claim against the landlord related to that business, a gambling debt in excess of $100,000.00, and pre-petition cash gifts in excess of $100,000.00. The burden now shifts to the debtor to provide a justification for not maintaining the records. Lubman v. Hall (In re Hall), 174 B.R. 210, 214 (Bankr. E.D. Va. 1994) (citingMeridian Bank, 958 F.2d at 1233). It is not enough for the debtor "to assert an honest belief that he or she did not need to keep the records." Id. at 214-15. Debtor has "a duty to preserve those records that others in like circumstances would ordinarily keep." Id. at 215.
On these facts, the court finds that debtor should be denied his discharge for failure to keep adequate records. A business person such as this debtor is required to keep some records of his transactions. However, debtor has provided no books or accounts from which the trustee can determine the financial history of debtor's business or the validity of debtor's claim against his business's landlord. Considering the amount of unsecured debt involved, $447,339.00, a reasonable person would also have recorded information relating to the accumulation of this debt and any related assets. It was not, for example, reasonable for debtor to make pre-petition gifts of cash to his friends totaling more than $100,000.00 without producing a trail of receipts or documents through which the money could be later traced.
SECTION 727(a)(4)
For trustee to successfully obtain denial of debtor's discharge under § 727(a)(4), he must show that debtor "made a statement under oath which he knew to be false, and he must have made the statement willfully, with the intent to defraud." 11 U.S.C. § 727(a)(4). In order for an alleged false oath to trigger denial of discharge, it must be material. It must "bear a relationship to the debtor's business transactions or estate, concern the discovery of assets or business dealings, or the existence and disposition of property. Fed. Deposit Ins. Corp. v. McFarland (In re McFarland), 197 B.R. 222, 224 (Bankr. E.D. Va. 1995). A debtor's fraudulent intent in making such an oath may be found in circumstantial evidence or "inferences drawn from a course of conduct." Williamson v. Fireman's Fund Ins. Co., 828 F.2d 249, 252 (4th Cir. 1987), citing Farmers Coop. Ass'n v. Strunk, 671 F.2d 391, 395 (10th Cir., 1982).
The court finds that trustee has not met his burden of proof in seeking denial of discharge under § 727(a)(4). This court is satisfied that the trustee explained to debtor the gravity of testifying under oath and the importance of full disclosure. However, the court observed at trial the difficulty that debtor, who does not speak English as a first language, had in communicating with those who do not speak his native Bengla. The marked language barrier between debtor, his counsel, and the trustee may have affected debtor's appreciation of the importance of his signature on his petition and schedules and his testimony under oath. In light of these communication difficulties the court cannot infer fraudulent intent from the relationship between debtor's oath and his failure to provide adequate information to the trustee.
SECTION 727(a)(5)
Trustee also objects to debtor's discharge under § 727(a)(5), which states that discharge should be denied if "the debtor has failed to explain satisfactorily . . . any loss of assets or deficiency of assets to meet the debtor's liabilities." 11 U.S.C. § 727(a)(5). The plaintiff has the initial burden of proving the basis for the objection, and if the plaintiff meets this burden the debtor has the opportunity to explain the deficiency of liabilities over assets. See In re Farouki, 133 B.R. 769, 777 (Bankr. E.D. Va. 1991). The debtor must provide an explanation that is "reasonable and credible so as to satisfy the court that the creditors have no cause to wonder where the assets went."Id.
In the present matter, the court finds that debtor has not adequately explained his accumulation of $447,339.00 in unsecured debt and only $200.00 worth of assets. Trustee has made repeated requests for the personal and business financial records that may explain how debtor accumulated so much debt and so few assets, but debtor has failed to provide these. At trial, debtor could not, even after addressing his $100,000.00 cash gifts to friends, explain why he had such large amounts of credit card debt and no more assets than the clothing listed on his schedules.
A separate order will be entered.