553 B.R. 916
Bankr. M.D. Fla.2016Background
- Debtor (longtime Allstate agent) filed Chapter 7 on Dec. 18, 2014; had converted to independent contractor status in 2000.
- Allstate terminated the agency relationship in mid-2014 and paid the Debtor a two-year termination buyout of $2,190.43/month (payments based on renewal commissions); Debtor received at least one such payment in Nov. 2014.
- Debtor listed limited assets on Schedule B (three computers, three desks/chairs, filing cabinet — $300) and reported net monthly business income of ~$423 on Schedule I, but Schedule J showed monthly expenses far exceeding income.
- Debtor disclosed some matters (e.g., existence of Allen Insurance Corporation on SOFA; discussed termination payments with counsel and the trustee), but did not list the termination buyout payments as an asset or list several bank accounts and certain bank statements in response to discovery requests.
- Plaintiff (a creditor with a judgment) brought an adversary to deny discharge under 11 U.S.C. §§ 727(a)(2), (a)(3), and (a)(4), alleging concealment/omissions (including a transfer of a vehicle to Debtor’s son) and inadequate records; trial held Mar. 10, 2016.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| §727(a)(2): concealment/transfer/undervaluation of assets | Debtor fraudulently failed to schedule assets, failed to disclose termination buyout and pre-petition transfers to hinder creditors | Debtor informed counsel and the trustee; omissions were attorney mistakes or inadvertent | Court declined to deny discharge under §727(a)(2); such claims better raised under §727(a)(4) |
| §727(a)(3): inadequate books and records | Debtor failed to produce bank statements and other records, preventing creditors from tracing income and expenditures | Debtor produced some records and testified about certain items; no specific justification for missing statements | Court denied discharge under §727(a)(3); records inadequate and unjustified, leaving unexplained discrepancies (~$12,000) |
| §727(a)(4)(A): false oaths/omissions on schedules and SOFA | Debtor knowingly and fraudulently omitted the termination buyout as an asset, failed to disclose vehicle transfer and business assets | Omissions were inadvertent or due to counsel's error; Debtor disclosed key facts to counsel/trustee; no fraudulent intent shown | Court found no fraudulent intent; discharge denied only under §727(a)(3), not §727(a)(4) |
| Treatment of termination buyout payments | Plaintiff: buyout/payments are estate property and should have been scheduled/treated as asset | Debtor/counsel: uncertainty whether payments were income or asset; counsel failed to list as asset but informed trustee | Court: payments are estate property (renewal commissions); but no finding of Debtor fraud re: nondisclosure — counsel’s error and disclosure to trustee mitigated finding of intent |
Key Cases Cited
- Schultz v. U.S., 529 F.3d 343 (6th Cir.) (Chapter 7 discharge policy favoring honest debtors)
- Meridian Bank v. Alten (In re Alten), 958 F.2d 1226 (3d Cir.) (purpose of §727(a)(3) and creditor burden to obtain complete records)
- Boroff v. Tully (In re Tully), 818 F.2d 106 (1st Cir.) (importance of truthful, complete disclosures under §727(a)(4))
- In re Burke, 523 B.R. 765 (Bankr. E.D. Pa.) (discussing placement of scheduling omissions under §727(a)(2) vs §727(a)(4))
- In re Tauber, 349 B.R. 540 (Bankr. N.D. Ind.) (creditors not required to speculate; need reliable records)
- In re Perry, 252 B.R. 541 (Bankr. M.D. Fla.) (elements required to deny discharge under §727(a)(4))
- In re Wicheff, 215 B.R. 839 (6th Cir. B.A.P.) (renewal commissions earned pre-petition are property of the estate)