Opinion
NOT FOR PUBLICATION
Argued and Submitted at Pasadena, California: May 21, 2010
Appeal from the United States Bankruptcy Court for the Southern District of California. Bk. No. 05-14843-JM7, Adv. No. 07-90015-JM. Honorable James W. Meyers, Bankruptcy Judge, Presiding.
Before RUSSELL, [ JURY and HOLLOWELL, Bankruptcy Judges.
Hon. David E. Russell, Bankruptcy Judge for the Eastern District of California, sitting by designation.
This disposition is not appropriate for publication. Although it may be cited for whatever persuasive value it may have (see Fed. R. App. P. 32.1), it has no precedential value. See 9th Cir. BAP Rule 8013-1.
The debtors in this case appeal the bankruptcy court's judgment revoking their discharge pursuant to 11 U.S.C. § 727(d)(2) entered after trial at which evidence, including live testimony, was presented.
Unless otherwise indicated, all chapter, section, and rule references are to the Bankruptcy Code, 11 U.S.C. § § 101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
We AFFIRM the bankruptcy court's judgment revoking the debtors' discharge.
FACTS
This is the second appeal arising from an adversary proceeding filed by Chapter 7 trustee Gerald Davis seeking to revoke Debtors' discharge.
Appellants Steven H. Salomon and Victoria Y. Salomon (the Debtors) filed a joint voluntary Chapter 7 petition on October 15, 2005. Although their attorney rushed to file the petition before October 17, 2005, the effective date of BAPCPA, both Debtors admit they were given at least one opportunity to look over their petition prior to signing it. They received their discharge on January 17, 2006.
Evidence that Debtors' conduct might qualify them for a revocation of their discharge was discovered in a related adversary proceeding Greenfield v. Salomon (No. 06-90083) and was reported to the Chapter 7 trustee. On January 16, 2007, one day prior to the expiration of the one-year statute of limitations of 11 U.S.C. § 727(e), trustee filed an adversary proceeding seeking to revoke Debtors' discharge pursuant to § 727(d)(1) and (2) on the premise that property was omitted from the schedules and liquidated postpetition without turnover of proceeds to the estate.
The first appeal to the BAP (BAP No. SC-07-1290) stemmed from a default judgment revoking Debtors' discharge, which was entered over Debtors' objections and requests to vacate their default so they could defend themselves. The prior panel vacated the default judgment because it was based on insufficient findings and conclusions and remanded for further proceedings.
On remand, the bankruptcy court determined that it would vacate the default and conduct a trial. On April 7, 2009, the court approved a stipulated joint pre-trial order pursuant to Federal Rule of Civil Procedure 16 (incorporated by Federal Rule of Bankruptcy Procedure 7016).
The parties stipulated in the pre-trial order that the following facts, among others, were not in dispute: 1) Debtors did not disclose their interest in the membership at the Farms Country Club; 2) Steven Salomon sold the membership after the bankruptcy petition was filed; 3) the country club remitted payment of $17, 738.75 to Mr. Salomon; 4) Debtors did not turn those funds over to the trustee; 5) Debtors did not notify the trustee of the sale or the receipt of the proceeds from the sale; 6) Debtors represented to Canyon National Bank, through a personal financial statement filled out about one year prior to bankruptcy, that the country club membership was their personal property; 7) Debtors did not disclose their submission of the financial statement to Canyon National Bank in their Statement of Financial Affairs.
Trial was conducted on October 1, 2009. At the trial, Debtors were represented by counsel; there was live testimony of witnesses, including testimony by Mr. Salomon. Mrs. Salomon attended telephonically and did not testify.
Mrs. Salomon's brother, Jeffrey Welty, testified that the country club membership was an asset of CBIS, Mr. Welty's company, as it paid 50 per cent of the original membership fee. Mr. Salomon testified that he contributed the remaining 50 per cent of the country club membership fee. Mr. Salomon also testified that he included the country club membership as an asset in his financial statement filed with Canyon National Bank because it was in his name.
At the trial, the trustee was represented by Mr. Alan Nahmias of Plotkin, Rapoport & Nahmias. Mr. Nahmias was first employed by a former business partner and creditor of the Salomons, Steve Greenfield, to prosecute a related adversary proceeding Greenfield v. Salomon. Trustee's application to expand the scope of employment of Mr. Nahmias to prosecute the revocation of discharge action at the expense of Mr. Greenfield was approved by the court over Debtors' objections.
At the conclusion of the trial, the court announced its decision to revoke discharge orally on the record. The notice of appeal was filed after the court announced its decision, but before the judgment revoking discharge pursuant to § 727(d)(2) was entered on the docket on January 7, 2010.
JURISDICTION
The bankruptcy court had jurisdiction pursuant to 28 U.S.C. § 157(b)(2)(K). We have jurisdiction under 28 U.S.C. § 158.
In their brief on appeal, Appellants raise an evidentiary issue that the financial statement from Canyon National Bank was tampered with in the area of the document containing notation pertaining to " Farms C.C." and " Plantation C.C." This issue was not raised below, is deemed waived, and was not considered on appeal.
1. Whether discharge was correctly revoked pursuant to 11 U.S.C. § 727(d)(2).
2. Whether discharge can be revoked pursuant to 11 U.S.C. § 727(d)(1).
3. Whether the issue of trustee counsel's alleged conflict of interest was properly raised below or relevant to the disposition of the case.
STANDARD OF REVIEW
The court's determinations of the historical facts are reviewed for clear error; the selection of the applicable legal rules under Section 727 is reviewed de novo; and the application of the facts to those rules requiring the exercise of judgments about values animating the rules is reviewed de novo. Retz v. Samson (In re Retz), 606 F.3d 1189, 2010 WL 2220063, at *3 (9th Cir. 2010) (citing Searles v. Riley (In re Searles), 317 B.R. 368, 373 (9th Cir. BAP 2004), aff'd, 212 Fed.Appx. 589 (9th Cir. 2006)).
DISCUSSION
I
Appellants argue that discharge was incorrectly revoked because (1) they presented evidence that the country club membership was an asset of CBIS, a company owned by Mr. Welty; (2) the only evidence of intent to deceive was the financial statement to Canyon National Bank; (3) the amount of money involved does not warrant the severe punishment of revocation of discharge; and (4) nothing new was presented at the trial to indicate wrongdoing by Appellants beyond what was stated in the pleadings. We affirm on two adequate, independent reasons.
A
First, the discharge qualified for revocation pursuant to § 727(d)(2), because Debtors intentionally and deliberately failed to list their interest in property of the estate on their schedules and subsequently fraudulently failed to report the receipt of the proceeds from the sale of that property to the Trustee.
1
When announcing its judgment on the record at the conclusion of the trial on October 1, 2009, the court stated:
. . .Debtors failed to disclose that Steven H. Salomon was a member of the Farms Country Club. Also, the Debtors failed to check off that there was a financial statement that had been submitted to a creditor.... And I think, after reviewing the evidence, that there was value there, that the Salomons did have an interest in that country club membership... and I have to reluctantly conclude that that omission was intentional and deliberate. And on that alone, on those items alone... I have to revoke [the discharge]...
After a request for further findings, the court stated:
[T]he admitted findings would make a prima facie case on its own. What we were really here for today was the opportunity to listen to Mr. Salomon indicate that it was not his intention to defraud anyone, in effect. And I listened to him and most of the things, they're either immaterial --they wouldn't cause me to decide this way except on that one item. On that one item, I had to wrestle with, I had to deal with, and I finally made a decision based on that. I think he did explain a lot of the things away. I don't know what to make of that previous financial statement, but obviously that was some evidence that he knew this had value to him personally.... So I reluctantly rule that there was an intention to deceive, an intention to omit. It was certainly a material item.
The court's findings indicate that the bankruptcy court considered both the evidence as stipulated to by the parties and the evidence (including testimony) provided by the Debtors. There is no indication of clear error in the court's findings, because the finding that the Salomons had an interest in the country club membership and the finding that it was omitted from the schedules were based on stipulated facts.
The court considered the evidence, including testimony, presented by Debtors that the country club membership was an asset of a company owned by Mr. Welty because it had paid 50 per cent of the cost and considered Mr. Salomon's testimony about his intent. The court also considered the evidence that Mr. Salomon represented that the membership had value to him personally when he prepared the Canyon National Bank financial statement sometime prior to filing bankruptcy.
Weighing the evidence established both by stipulation and by testimony and making determinations of fact rest squarely within the trial court's province and should not be disturbed on appeal absent clear error. Fed.R.Civ.P. 52(a)(6), incorporated by Fed.R.Bankr.P. 7052. The court did not find Mr. Salomon's testimony, which was designed to negate fraudulent intent, credible. The court's conclusion that the omission from the schedules was intentional and deliberate, which equates with knowing and fraudulent, was supported by the evidence and was not clearly erroneous.
2
Appellants contend that the showing of fraudulent intent was based only on documentary evidence. We do not agree that the evidence probative of that question was so limited.
The question of intent necessarily requires the trier of fact to " delve into the mind of the debtor." Searles 317 B.R. at 380. Such intent ordinarily is established by inference from surrounding circumstances. Emmett Valley Assocs. v. Woodfield (In re Woodfield), 978 F.2d 516, 518 (9th Cir. 1992).
Here, the surrounding circumstances, namely the omission of the country club membership from the schedules, the listing of it as an asset on the Canyon National Bank financial statement, the subsequent sale of the membership, and the retention of the proceeds, all support a finding of fraudulent intent.
Moreover, the court listened to the testimony, including that of Mr. Salomon, considered the evidence, and made findings of fact that were within its discretion based on that evidence. It is apparent that the court did not find Mr. Salomon's testimony credible in that respect.
3
Appellant's argument that the amount of money involved does not warrant revocation of discharge is not supported by the law. The Ninth Circuit has consistently held that lack of injury to creditors is irrelevant for purposes of denying a discharge in bankruptcy. First Beverly Bank v. Adeeb (In re Adeeb), 787 F.2d. 1339, 1343 (9th Cir. 1986) (citing Duggins v. Heffron, 128 F.2d 546, 549 (9th Cir. 1942), and Harris v. Baker, 86 F.2d 936, 937-38 (9th Cir. 1936)). Thus, the amount of money is not a relevant consideration when pondering the question of denying or revoking a bankruptcy discharge. In any event, $17, 738.75 cannot be described as an immaterial sum in the context of this case.
4
Appellant contends that the BAP's earlier remand of the case for further proceedings requires that new evidence must be presented to establish wrongdoing by Appellants. The BAP vacated and remanded in the prior appeal because there were " essentially no actual findings or supported conclusions on the record" making it impossible to make " any rational determination on whether [the court's] findings and conclusions are clearly erroneous." The findings and conclusions referenced by the BAP are those required by Federal Rule of Civil Procedure 52(a)(1), as incorporated by Federal Rule of Bankruptcy Procedure 7052. The BAP instructed the trial court to make requisite findings of fact and conclusions of law, and left to the trial court the question of what proceeding would be appropriate. On remand, the bankruptcy court elected to reopen the evidentiary record by holding a trial and stated its findings on the record after the parties presented their respective cases. The fact that in rendering its decision the bankruptcy court relied on facts established in original pleadings did not offend the instructions contained in the BAP's order remanding the case for further proceedings.
B
The revocation of Debtors' discharge is also affirmed on adequate independent grounds pursuant to § 727(d)(1) as having been obtained by fraud. This theory was asserted in the complaint and was tried, but was not mentioned in the form of the judgment. The stipulated facts establish that Mr. Salomon did not disclose the country club membership on the schedules, sold the country club membership, received payment of $17, 738.75, and did not turn over those funds to the trustee. The conclusion that Debtors' actions were fraudulent follows from the court's conclusion about Debtors' intent that was based on the court's finding that Mr. Salomon's testimony lacked credibility. The stipulated facts together with the court's conclusions about Debtors' intent are sufficient to support a finding of fraud and thus to support revocation of the discharge under § 727(d)(1).
II
Appellants raise the issue of prejudice, bias, and conflict of interest by Mr. Nahmias, special counsel to trustee, because Mr. Nahmias also represented Mr. Greenfield, Debtors' former business partner and plaintiff in a related adversary proceeding, No. 06-90083.
Appellee contends that whether Mr. Nahmias had a conflict of interest in prosecuting the case against Debtors was not raised at trial and should not be considered in this appeal, citing Enewally v. Wash. Mut. Bank (In re Enewally), 368 F.3d. 1165 (9th Cir. 2004).
However, Debtors did oppose trustee's application to expand the scope of employment of Mr. Nahmias to litigate the revocation of discharge. Thus, the issue was raised below and can be considered on appeal.
Section 327(c) states that in a case under Chapter 7, " a person is not disqualified for employment under this section solely because of such person's employment by or representation of a creditor, unless there is objection by another creditor or the United States trustee, in which case the court shall disapprove such employment if there is an actual conflict of interest" [emphasis added].
The trustee's application to expand the scope of employment of Mr. Nahmias conforms with the requirements of § 327 and of Federal Rule of Bankruptcy Procedure 2014. The application details the background of the relationship between Mr. Nahmias and Mr. Greenfield, explains that Mr. Greenfield will pay the fees and costs incurred by Mr. Nahmias' firm, and is accompanied by an appropriate declaration from Mr. Nahmias.
While Debtors opposed trustee's application to expand the scope of employment of Mr. Nahmias to prosecute the revocation of discharge action, the record does not show that either another creditor or the United States trustee objected to such employment. Given the adequate disclosure provided in the application and declaration, and apparent lack of opposition by parties entitled to oppose, the fact that Mr. Nahmias represented a creditor of the estate does not disqualify him from employment by the trustee.
Moreover, there is no actual conflict of interest. The interest of creditors and of the trustee are aligned in the matters involving denial of discharge.
Debtors' contention that trustee's retention of Mr. Nahmias shows bias and prejudice is misplaced. If Mr. Nahmias had an interest adverse to the estate by virtue of his representation of a creditor, § 327(c) provides for a procedure by which affected parties may object and § 328(c) provides a remedy. However, the fact that Mr. Nahmias first represented a creditor and then the trustee does not establish a disqualifying conflict of interest and does not show bias and prejudice against the Debtors, except those inherent in the adversarial process.
CONCLUSION
For the foregoing reasons, we AFFIRM the bankruptcy court's judgment revoking the Debtors' discharge.