Opinion
No. 02-84622, Adv. No. 03-8135
April 6, 2004
OPINION
This matter came before the Court for trial on the complaint brought by the United States Trustee ("UST") alleging that the Chapter 7 discharge should be denied because of a number of false statements made by the Debtors, Jerry S. Wilson ("JERRY") and Crystal K. Wilson ("CRYSTAL") (jointly, the "DEBTORS"), in their bankruptcy papers. The Court took the case under advisement.
FACTUAL AND PROCEDURAL BACKGROUND
The DEBTORS, after retaining Attorney Michael Williams, filed a Chapter 13 petition on October 11, 2002. Their Chapter 13 Plan, proposing to pay 0% to general unsecured creditors, was confirmed on December 5, 2002. On December 16, 2002, the Chapter 13 Trustee sent a letter to the DEBTORS advising that he had been made aware that the DEBTORS sold real estate on August 8, 2002, that they received net proceeds of $32,910.57, that the sale was not disclosed in the bankruptcy schedules, and requesting that they contact him. On December 30, 2002, the Trustee filed a motion to hold the DEBTORS accountable for their failure to disclose the transaction and to compel them to account for the proceeds.
On January 6, 2003, the DEBTORS filed an Amended Statement of Financial Affairs disclosing for the first time, under "Other Transfers," the August 8, 2002 sale, as well as the sale of a separate lot for $3,000.00. On January 15, 2003, the DEBTORS' attorney filed a Motion to Withdraw citing an unspecified conflict of interest. At trial, it was disclosed that the DEBTORS blamed Attorney Williams for the nondisclosure of these sales, claiming that they had advised Attorney Williams of both sales but that he failed to include the transactions on the Statement of Financial Affairs when it was typed. The Motion to Withdraw was granted on January 27, 2003.
The DEBTORS thereafter hired Attorney Bruce Buckrop to represent them and he filed a Motion to Dismiss the Chapter 13 case on February 21, 2003. The UST objected to the dismissal and moved to convert the case to Chapter 7. The Court granted the UST'S motion and ordered the case converted to Chapter 7 on March 25, 2003.
On June 19, 2003, the UST filed an adversary complaint objecting to the discharge under Section 727(a)(4)(A), alleging that the DEBTORS knowingly and fraudulently made a false oath by failing to disclose the real estate sales and the sale of a pontoon boat in their Statement of Financial Affairs. In their Answer, the DEBTORS admitted the nondisclosure, but denied it was done "knowingly and fraudulently." Subsequent to the complaint, the UST expanded the factual basis for its false oath theory to include failure to disclose bank accounts, payments to creditors in excess of $600.00 within ninety days prefiling, and gambling losses within one year before filing. The DEBTORS' defense is two-pronged. First, they argue that the omissions were not made knowingly due to their relative lack of sophistication, education and understanding of what was required. Second, they assert that they had nothing to gain by not disclosing the prepetition sales and other information, and they did not intend to defraud anyone.
JERRY is forty-seven years of age and completed only nine years of schooling. He has owned and operated his own construction and home remodeling business, as a sole proprietor, for twenty-two years. CRYSTAL is forty-six years old and completed thirteen years of formal education. She is employed as a receptionist at Illini Hospital.
The DEBTORS went through a fairly extensive pre-filing educational process with their attorney. They viewed a video tape that explained the difference between Chapter 7 and Chapter 13 and the basic elements of a personal bankruptcy proceeding. While waiting to meet with the attorney, they read together and filled out a client interview sheet, a five page form in "fill in the blank" format, requiring the DEBTORS to list basic personal information, current employment and income information, and general financial information including a list of all bank accounts. The DEBTORS left the bank account disclosure blank. At the bottom of the fifth page of the form, immediately above the signature lines, appears the following question and admonition:
Do you understand that you can go to jail for failing to list all of your debts and assets on your bankruptcy forms you file and sent to Court? The attorney and his staff cannot give you permission to do otherwise. If they do, you should go to another firm. Y N
The DEBTORS circled the letter "Y" and, at trial, both admitted to reading the provision.
After watching the informational video and filling out the client interview sheet, the DEBTORS met with Attorney Williams. Schedules A through J were completed, more or less, by Attorney Williams, to the extent of the information that the DEBTORS were able to provide at the meeting. It is not unusual that debtors have to supplement the information provided at the initial meeting with specific lists of creditors, assets, etc., provided thereafter.
With respect to the Statement of Financial Affairs, Attorney Williams went over each question with the DEBTORS. Question No. 10, covering "Other Transfers," requiring disclosure of all property transferred within the year before bankruptcy other than in the ordinary course of business, was answered "None" on the Statement signed by the DEBTORS on October 6, 2002, and filed October 11, 2002. Attorney Williams testified that the DEBTORS did not advise him of any prepetition sale of real estate or of a pontoon boat. JERRY testified that he disclosed both real estate sales to Attorney Williams who told him he would be accountable for the proceeds. CRYSTAL also testified that Attorney Williams was told of the sale of both parcels of real estate at the initial meeting with them. She testified that Attorney Williams asked for a written accounting of the use of the proceeds, which she subsequently prepared and provided to him. This writing was not produced at trial. The unrefuted testimony at trial indicated that the pontoon boat was sold in June, 2001, more than one year before bankruptcy.
JERRY does business as "Wilson Remodeling," a sole proprietorship. The primary nature of his business is contract construction work on single-family residences, such as room additions and remodeling work. In the twenty-two years he has been in business, he has bought, refurbished, and sold only nine properties, including the two sold within a few months prior to bankruptcy, one of which was an unimproved lot. He is not a licensed realtor.
He acquired title to the vacant lot in January, 2001, in exchange for work he did for the owner. The property sold in August, 2002, was a duplex acquired in 1989. It was in poor condition, with code violations rendering it uninhabitable. JERRY refurbished it mostly within the year before bankruptcy. He and his wife held title to it as joint tenants. CRYSTAL attended the closing and signed the deed. JERRY admitted that the work he did refurbishing the nine properties that he purchased was not his principal business.
The proceeds from the August 8, 2002 sale of the duplex, the sum of $32,217.57, was deposited on August 9, 2002, into JERRY'S checking account at IH Mississippi Valley Credit Union. CRYSTAL is not a co-owner of, or signatory on, that account. That same day, withdrawals were made totaling $31,239.57. JERRY testified that he took the money to one of the local river boat casinos that evening and proceeded to lose $17,000.00 over the course of eleven and one-half hours. At that point, his wife found him and took $11,000.00 from him. She paid bills with the money, including two mortgage payments totaling $1,600.00; house, car and truck insurance totaling $1,100.00; and tax payments of $2,000.00. CRYSTAL testified she prepared and, after the bankruptcy case was converted to Chapter 7, gave to the Chapter 7 Trustee a list of checks showing how the money was spent. The list was not produced at trial.
The DEBTORS testified that they each maintained separate bank accounts, each having a checking and a savings account. Schedule B, however, lists no checking, savings or other bank accounts and lists no cash on hand. The DEBTORS admitted their failure to list their bank accounts was an error.
Question No. 8 on the Statement of Financial Affairs requires disclosure of all losses from gambling within the year prior to bankruptcy. The DEBTORS listed $4,000.00 for gambling losses in 2001 and $24,000.00 in 2000. No losses are shown for 2002. The DEBTORS reported gambling losses of $21,000.00 on their 2002 tax return. With JERRY'S testimony that he lost $17,000.00 on August 9 and 10, 2002, the DEBTORS admitted that their failure to disclose any gambling losses for 2002 was an error.
Question No. 3 of the Statement of Financial Affairs requires disclosure of all debt payments of more than $600.00 to any one creditor made within ninety days before bankruptcy. The DEBTORS answered "None". With CRYSTAL'S testimony that she made several payments of more than $600.00 less than two months before bankruptcy from the $11,000.00 she took from JERRY, the DEBTORS admitted that their failure to disclose these payments was an error.
The Amended Statement of Financial Affairs filed January 6, 2003, while it disclosed the two real estate sales that were previously undisclosed, did not disclose a sale of a pontoon boat, did not disclose any gambling losses for 2002, and did not disclose any payments within ninety days before filing. No other amendments to their bankruptcy papers were made by the DEBTORS.
The bankruptcy schedules and Statement of Financial Affairs were typed by Attorney William's staff based on his notes and the information contained on the client interview sheet. The completed papers were then mailed to the DEBTORS for review and signature. JERRY testified that he tried to read the papers to the best of his ability, but that he may not have fully comprehended them. CRYSTAL testified that she and JERRY only looked at the papers briefly because they trusted their attorney to prepare the documents correctly. The DEBTORS signed the papers and mailed them back to their attorney with no changes.
ANALYSIS
A debtor's discharge will 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). In order to prevail, the UST 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 the intent to deceive; and
5. the statement related materially to the bankruptcy case.
In re Sholdra, 249 F.3d 380 (5th Cir. 2001). A false oath may include a knowing and fraudulent omission. In re Handel, 266 B.R. 585 (Bankr.S.D.N.Y. 2001).
Debtors are required to respond to each of the numbered interrogatories on the Statement of Financial Affairs and to fill out Schedules A through J, completely, with all applicable information. The successful administration of the bankruptcy system depends, in large part, on these voluntary disclosures of information relating to their financial affairs that debtors are required to make. Full disclosure with absolute honesty is the standard against which the information set forth in these documents is measured.
The Statement of Financial Affairs and the schedules, signed under penalty of perjury, qualify as statements under oath for purposes of the "false oath" exception to discharge under Section 727(a)(4)(A). In re Bostrom, 286 B.R. 352 (Bankr.N.D.Ill. 2002), aff'd Stathopoulos v. Bostrom, 2003 WL 403138 (N.D.Ill. 2003). Perhaps the clearest example of an omission as a false oath that merits denial of the discharge is a debtor's failure to disclose a nonexempt asset with the intent to conceal it from the trustee and from creditors. In re Rosenzweig, 237 B.R. 453 (Bankr.N.D.Ill. 1999). Section 727(a)(4)(A)'s net is cast much wider than that, however.
For example, nondisclosure of even a fully exempt asset may warrant denial of the discharge. Matter of Yonikus, 974 F.2d 901 (7th Cir. 1992). Failure to disclose a prepetition transfer of an asset, even for fair consideration, is a false oath supporting denial of the discharge. In re Bacher, 90 B.R. 97 (E.D.Pa. 1988); In re Grondin, 232 B.R. 274 (1st Cir. BAP 1999). A debtor's failure to disclose a secondary source of employment on his schedules has been held to be a false oath that resulted in denial of the discharge. In re Yonkers, 219 B.R. 227 (Bankr.N.D.Ill. 1997).
Even though full disclosure is the standard, courts recognize that mistakes and inadvertent errors occur. To reserve the harsh penalty of denial of discharge for those debtors whose misconduct truly merits it, Section 727(a)(4)(A) imposes, not a requirement of error-free disclosure, but one of substantial compliance so long as motivated by a good faith effort. Thus, the requisite false oath elements of materiality and knowing and fraudulent intent.
Where the alleged false oath arises from omitted information, it is often necessary to distinguish between true inadvertence and feigned inadvertence used as an excuse to cover up fraudulent intent after the omission is brought to light. Since defendants rarely admit to a fraudulent intent, actual intent may be established by circumstantial evidence. In re Lambert, 280 B.R. 463, 468 (Bankr.W.D.Mo. 2002). A single omission, where the omitted asset or transfer is substantial and material, can be enough, by itself, to justify denial of discharge. Grondin, supra; In re Wilson, 290 B.R. 333 (Bankr.C.D.Ill. 2002). Alternatively, a series or pattern of errors or omissions may have a cumulative effect giving rise to an inference of an intent to deceive. In re Gray, 295 B.R. 338 (Bankr.W.D.Mo. 2003).
Apart from actual fraudulent intent, it is a well-established part of the false oath jurisprudence, that a reckless disregard for the truth is treated as the functional equivalent of fraud for purposes of Section 727(a)(4)(A). In re Tully, 818 F.2d 106, 112 (1st Cir. 1987); Grondin, 232 B.R. at 277-78; In re Bratcher, 289 B.R. 205, 218 (Bankr.M.D.Fla. 2003) (series of omissions may create pattern evidencing reckless disregard for the truth, from which fraudulent intent may be presumed). Indeed, the Seventh Circuit has held that a debtor's reckless disregard for the truth of the statements in his bankruptcy papers suffices as a false oath, reasoning that such a cavalier state of mind is "the equivalent of knowing that the representation is false and material." In re Chavin, 150 F.3d 726, 728 (7th Cir. 1998).
After carefully considering all of the evidence, the Court concludes that the DEBTORS acted with reckless disregard for the truth and accuracy of the information contained in their bankruptcy schedules and Statement of Financial Affairs. What little time they spent, if any, reading the papers prepared by their attorney, was clearly not spent with the intent to get the information right. Since no corrections of even the most obvious errors were made, they might as well not have read the papers at all before signing them (which is, in fact, what may have happened here).
CRYSTAL, who claims no lack of ability to comprehend the documents, admitted that she did not spend much time reviewing the papers and that she did not do so carefully. JERRY stated that he read them as best he could, given his lack of education, but that he may not have understood all of the questions. Other than the fact that he only completed the ninth grade and his own self-serving statements, there was no evidence presented to establish a lack of ability to understand the bankruptcy papers. The Court perceived nothing in his testimony at trial that indicated a lack of ability to understand the basic financial questions to which all debtors are required to respond. As someone who has run his own business for more than two decades, it is inconceivable that JERRY would not understand, for example, that he was required to schedule his bank accounts. Based on the evidence, the Court is not persuaded that JERRY was unable to understand the nature of what was required to be disclosed on the schedules and Statement of Financial Affairs. Like his wife, he either did not bother to read the papers or he read them without the intent of making sure the information was accurate and complete.
The DEBTORS argued at trial that the sales of the duplex and the vacant lot just before bankruptcy were ordinary course transfers that did not have to be disclosed. The Statement of Financial Affairs requires a listing of all property transferred within the year before bankruptcy, "other than property transferred in the ordinary course of the business or financial affairs of the debtor." JERRY admitted that he did not make a conscious decision not to disclose the transfers because he believed they were exempt ordinary course transactions. Rather, both he and his wife stated they simply "trusted" their attorney. They stated that they advised the attorney of both transfers and because the transfers did not appear on the Statement of Financial Affairs, they assumed that the attorney had determined that disclosure was not necessary. The attorney disputed having any knowledge of the transfers before learning of them from the Chapter 13 Trustee in December, 2002.
The Court does not agree that the sales of the duplex and vacant lot were ordinary course transfers. JERRY is not in the business of buying and selling real estate. Nine sales over twenty-two years, with no recent sales other than the two in question, does not rise to the level of ordinariness. His ordinary income came from construction and remodeling work performed on a contract basis. Any money he made from buying, refurbishing and selling real estate was infrequent and, therefore, "extra-ordinary." Accordingly, the sales of the duplex and vacant lot within the year before bankruptcy were required to be disclosed in the response to Question No. 10 on the Statement of Financial Affairs.
Moreover, even if the DEBTORS did disclose the transfers to their attorney, they are not absolved from responsibility for the inaccuracy of their papers. Notwithstanding that the schedules and Statement of Financial Affairs are almost always typed by the attorney's office, the ultimate responsibility for their accuracy and completeness falls squarely on the debtor's shoulders. It is the debtors, not their attorney, who sign the papers under oath and vouch for their contents. It is the debtors, not the attorney or his staff, who have personal knowledge of the facts of their financial circumstances and who are in a position to know with certainty whether the information is correct and complete. Debtors must proofread their papers with the critical eye of a grade school teacher looking to red-line the work of a careless student. They must call to the attention of their attorney any mistakes for correction. Debtors are not permitted to shift the blame for errors and omissions in the schedules and Statement of Financial Affairs to their attorney where the debtors have declared, under penalty of perjury, that they have read the documents and, to the best of their knowledge, the documents are true and correct. Bostrom, 286 B.R. at 363.
Here, the DEBTORS were warned more than once, as they worked their way through the client education process at Attorney Williams' office, of the need for full disclosure with absolute honesty and the severe consequences that could result from false representations. The DEBTORS admitted receiving and understanding these warnings. Yet, when it came time to live up to that standard, the DEBTORS couldn't be bothered to expend the effort to proofread and correct their own schedules and Statement of Financial Affairs. By failing to do so, they took the risk of adverse consequences.
The UST must also prove that the omissions were material. The subject matter of a false oath is material 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. In re Olson, 916 F.2d 481, 484 (8th Cir. 1990). Materiality is not contingent upon a showing of any actual detriment or prejudice to a creditor or to the estate. Bostrom, 286 B.R. at 364.
There is no doubt that the sale of substantial assets shortly before bankruptcy is material. The fact that the DEBTORS claim that all of the more than $35,000.00 received from the two sales was immediately spent is irrelevant. One of the fundamental tasks of a case trustee, whether in Chapter 7 or 13, is to identify unusual, and possibly avoidable, prepetition transfers and account for the disposition of proceeds. If such transfers are not disclosed, the trustee's work is significantly impeded.
The DEBTORS' failure to disclose their four bank accounts is also material. In addition to the need to ascertain the account balances as of the petition date, the trustee would also use bank account records to trace the funds derived from the prepetition sales, to verify the claim that all funds were expended, and to identify possible preferential or fraudulent transfers. Here again, with a false statement under oath from the DEBTORS that they had no bank accounts, the Trustee was unable to carry out his responsibilities. The DEBTORS' failure to disclose payments they made within ninety days of filing is material for the same reasons.
The failure to accurately disclose JERRY'S gambling losses suffered within one year of the filing is also material. He claims to have lost $17,000.00 within two months of bankruptcy, yet the disclosure of gambling losses includes no amount for the entire calendar year of 2002. Whether this omission was intentional or merely made with reckless indifference, the effect is the same. The Trustee and creditors were prevented from having a true picture of the financial circumstances of the DEBTORS, including, in all likelihood, the single most important event that precipitated the filing.
The DEBTORS argue that it was JERRY'S sole responsibility to disclose the real estate sales and that CRYSTAL should not be held accountable for that omission. This argument fails to recognize that, in a joint case, each debtor has an independent responsibility for making sure that the schedules and Statement of Financial Affairs are true and correct to the extent of his or her own knowledge, information and belief. It is undisputed that CRYSTAL knew of the real estate sales, the gambling losses, the debt payments within ninety days before bankruptcy, and the four bank accounts. She violated her oath by signing the papers that omitted the true facts of which she was aware.
Finally, the DEBTORS rely on and attempt to distinguish the facts of this case from those in this Court's opinion in In re (Todd A.) Wilson, 290 B.R. 333 (Bankr.C.D.Ill. 2002). Two months before bankruptcy, Todd Wilson quit-claimed his joint tenancy interest in his marital residence to his wife. He failed to disclose the transfer on his Statement of Financial Affairs and denied transferring any property when asked at his first meeting of creditors. His discharge was denied pursuant to Section 727(a)(4)(A). Pointing out that they are not accused of lying in their testimony at the first meeting of creditors, the DEBTORS contend that their conduct, involving falsehoods on their papers only, is not as egregious as Todd Wilson's and does not rise to a level warranting denial of discharge.
The Court disagrees. In Wilson, the Court noted that the debtor could possibly have remedied the false oath omission in his papers by bringing the prepetition transfer to the trustee's attention at the first meeting of creditors. Instead, he reaffirmed his error by lying to the trustee. Here, JERRY and CRYSTAL could also have brought the omissions out at their first meeting of creditors, but did not do so. Instead, they left the impression that their papers, as filed, were true and correct in accordance with their oath.
Moreover, the DEBTORS filed an Amended Statement of Financial Affairs that repeated many of the same omissions. After the Chapter 13 Trustee confronted the DEBTORS with the fact that he had been advised of the sale of the duplex, the DEBTORS, on January 6, 2003, filed an Amended Statement of Financial Affairs. While the Amended Statement disclosed the two prepetition real estate sales in response to Question No. 10, it did not remedy the prior omission of any preferential transfers and of the 2002 gambling losses. Neither was Schedule B amended to disclose the bank accounts.
Although a debtor cannot necessarily redress a false oath by making a subsequent correction, In re Costello, 299 B.R. 882, 899-900 (Bankr.N.D.Ill. 2003), the fact that a debtor comes forward with omitted material of his own accord is evidence that there was no fraudulent intent in the omission. In re Brown, 108 F.3d 1290 (10th Cir. 1997). Here, the Amended Statement of Financial Affairs was filed only after the Trustee was aware of and raised a question about the real estate transfers, and it amended only that section of the Statement that concerned the discovered information. The DEBTORS simply did not voluntarily come forth with any omitted information other than that which had already been discovered. Rather than the Amended Statement being exculpatory, this repeated series of omissions is further evidence of a culpable state of mind. Likewise, the fact that the DEBTORS gave the Chapter 7 Trustee a list of checks evidencing the disposition of the proceeds does not make up for the prior omission of the payment of large prepetition debts.
In the Court's view, there is no qualitative distinction to be drawn between Todd Wilson's behavior and the DEBTORS' behavior. Todd Wilson lied about a single transfer, twice. The DEBTORS made a false oath on one occasion about two real estate transfers and four bank accounts, and on two occasions about an unknown number of preferential payments and undisclosed gambling losses. The DEBTORS' conduct is no less egregious than Todd Wilson's.
CONCLUSION
The evidence compels the conclusion that the DEBTORS knowingly made a false statement under oath by omitting material information that was required to be disclosed on Schedule B and on the Statement of Financial Affairs. Because they signed and filed those documents with reckless indifference as to the truth and accuracy of their contents, the fraudulent intent of the DEBTORS is presumed and established. The Court determines that the UST has carried its burden of proof and that the DEBTORS' discharge must be denied pursuant to Section 727(a)(4)(A).
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 Jerry S. and Crystal K. Wilson's bankruptcy discharge is denied pursuant to Section 727(a)(4)(A).