Harker v. West (In Re West)Harker v. West (In Re West)
MEMORANDUM OPINION
Section 727(a) of the Bankruptcy Code provides that certain misconduct by the debtor will bar the grant of a discharge, including: (1) the transfer, with intent to hinder, delay, or defraud a creditor or officer of the bankruptcy estate, of (A) property of the debtor in the year preceding the filing of a bankruptcy petition, or (B) property of the estate after the bankruptcy filing; or (2) the making of a false oath or account in connection with a bankruptcy case. 11 U.S.C. § 727(a)(2) and (a)(4)(A). Donald Harker, the Chapter 7 Trustee (“Harker” or “Trustee”), has filed a complaint alleging that the Debtor, Kelly West (“West” or “Debtor”), concealed and attempted to dispose of jewelry that is property of her bankruptcy estate, turned over the jewelry to the Trustee in a piecemeal manner, grossly undervalued the jewelry in the schedule of assets filed with her bankruptcy petition, and transferred several pieces of jewelry to her sister and others in the year preceding her bankruptcy filing. The evidence presented at trial established that while West did not knowingly and fraudulently undervalue her jewelry, she concealed a diamond and sapphire ring from the Trustee, attempted to sell the ring or trade it for another piece of jewelry, and failed to turn the ring over to the Trustee until well after her misconduct had been discovered. The Court therefore holds that the Debtor’s discharge must be denied.
This memorandum opinion constitutes the Court’s findings of fact and conclusions of law. Fed.R.Civ.P. 52 (made applicable here by Fed. R. Bankr.P. 7052 and 9014).
I. Jurisdiction
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference entered in this district. This is a core proceeding. 28 U.S.C. § 157(b)(2).
II. Factual and Procedural Background
A. The Debtor’s Income, Physical Condition, and Educational Background
West, a 37-year old single mother, filed her voluntary Chapter 7 bankruptcy petition on June 21, 2001 (the “Petition Date”). West has been diagnosed with chronic fatigue syndrome and fibromyalgia and is unable to work. Trial Transcript (“Tr.”) at 5-6. She became ill approximately eight years ago while pregnant with her daughter. Tr. at 154. At present, the Debtor has three sources of income: monthly long-term disability insurance benefits of $1778.22; monthly Social Security disability payments of $1440; and monthly child support payments of $600. Schedule I — Current Income of Individual Debtor(s); Tr. at 7. West was determined to be eligible for long-term disability insurance benefits in 1996 and for Social Security disability payments in 1997. Payment of these disability benefits was made retro
B. The Debtor’s Scheduled Assets and Liabilities
The schedules of assets and liabilities that the Debtor filed with her bankruptcy petition suggest that West enjoyed a lavish lifestyle prior to the Petition Date. Her recently-built home in a small town was valued at $300,000, she drove a late-model Mercedes, and she listed a number of debts arising from jewelry purchases. Her schedules list unsecured debts totaling nearly a quarter million dollars. Some $79,000 of this amount is credit card debt owing to Saks Fifth Avenue, Nieman Marcus, and Lazarus department stores. The schedules also include medical bills and a substantial amount of debt arising from the construction of her home.
On her Schedule D (Creditors Holding Secured Claims), West listed two mortgages totaling $299,000. She also listed approximately $69,000 in other secured debt, $31,000 of which is attributable to an auto loan for a 2001 Mercedes C240 purchased shortly before the bankruptcy filing. With the exception of a $635 debt for a stereo, the remainder of West’s secured debt arose from jewelry purchases. 2 The Debt- or listed five creditors holding liens on jewelry: American General, Borsheim’s, Jewelry Express/GE Capital Consumer Card Co. (“Jewelry Express”), Saks Fifth Avenue, and Wells Fargo. The debts secured by liens on jewelry amount to $32,689.46. Schedule D states the value of all of the jewelry securing the liens as zero. On her Schedule B (Personal Property), however, Debtor listed “Jewelry— Various items” with a total value of $2,000. Although Debtor’s schedules do not include an itemization of her jewelry, West testified at trial that on the Petition Date she owned the 10 items of jewelry listed on the chart set forth below on page 5 of this opinion (the “Chart”). On her Schedule C (Property Claimed as Exempt), the Debtor claimed a $400 exemption in jewelry.
C. The Debtor’s Alleged Undervaluation of Jewelry
The Trustee’s Complaint alleges that the Debtor knowingly and fraudulently made a false oath by grossly undervaluing the jewelry in her schedules. At trial, the Trustee and the Debtor each called expert witnesses who offered opinions concerning the value of Debtor’s jewelry. The Trustee called Michael Karaman (“Karaman”), owner of James Free Jewelers, and the Debtor called Daniel Klawon (“Klawon”), proprietor of Dan Klawon’s Estate Sale Service. Both Karaman and Klawon testified regarding their respective appraisals of the jewelry. The Debtor also offered her opinion of the aggregate value of the jewelry that she owned on the Petition Date. The testimony offered by Karaman, Klawon, and the Debtor is summarized in the Chart below.
Karaman opined that the aggregate retail value of the first eight items of jewelry-listed on the Chart is $8,900. Klawon assessed seven of the eight pieces of jewelry appraised by Karaman and arrived at a retail value for those items of $7,000. Kla-won did not appraise the diamond and platinum anniversary band listed in the Chart as Item 7 (the “Platinum Ring”). Had Klawon appraised the Platinum Ring, his opinion of the aggregate retail value of the jewelry presumably would have been closer to Karaman’s total. Neither Kara-man nor Klawon appraised the bracelet or the watch listed in the Chart as Items 9 and 10.
In her schedules, West listed the total value of all the jewelry at $2,000. She testified at trial that the $2,000 amount represented her opinion of the jewelry’s so-called “pawnshop” value. Karaman did not offer his opinion of the jewelry’s pawn
West testified that she was instructed by Christopher Bennington (“Bennington”)— the attorney who prepared, signed, and filed her Chapter 7 petition — to value the jewelry in her schedules at its pawnshop value. 3 In response to a question from Conway as to how she arrived at a value of $2,000 for her jewelry, West testified:
Conway: Do you know where that number came from?
West: I believe at the time Mr. Ben-nington told me when I valued my household items and my jewelry items, he said that Trustee Redford, 4 who is obviously not the [tjrustee that I got, said to depreciate household goods over two years and for jewelry he wanted pawn shop value, and so that was my opinion.
Conway: The $2,000 was your opinion? West: I believe so.
Conway: And what were you thinking about as far as a definition of value at that time? You obviously weren’t thinking about retail because you paid a lot more for them, right?
West: Of course, and I indicated that, when I put the items on the Schedule!?] I put how much I paid for them, so, but he said pawn shop value, which it’s not very much that you get for things in a pawn shop.
Conway: Do you have any expertise in appraising jewelry or any specific knowledge about the value of jewelry?
West: No.
Conway: Okay. Do you have any opinion other than $2,000 as to the value of all of the jewelry that you’ve turned over to Mr. Harker?
West: [T]oday ... if I went to a jewelry store or I went to a pawn shop, ... I would be lucky to get $2,000.00.
Tr. at 156,164.
On both direct and cross-examination, West testified that Bennington made the decision to list the value of the jewelry as zero on her Schedule D. On direct examination, West testified:
Conway: On your petition there are the secured debts listed but there is zero value for all of them. Why did you report them as zero value?
West: I did not list zero for them because the stuff I could remember I was very conscientious about listing everything, every person that I owed and I listed the amount that I owed. So I intended to disclose everything there, but I did not put down zero for the value.
McQuiston: You say Mr. Bennington supplied you with certain forms that you completed, is that right?
West: Yes.
McQuiston: And if I’m understanding your testimony correctly, it’s your opinion that Mr. Bennington, for whatever reason, did not properly record the information that you provided to him; is that right?
West: Yes.
Tr. at 166.
West filed a statement of intention in which she expressed her intent to surrender certain pieces of jewelry to American General, Borsheim’s, Gateway Credit Card, Jewelry Express, Saks Fifth Avenue, and Wells Fargo. As of November 13, 2001, the claims bar date set in the Chapter 7 case, four of these creditors 5 had filed proofs of claim. Only Borsheim’s sought the return of the jewelry on which it claimed a lien and, after receiving the pieces back from the Debtor, the Trustee returned the jewelry to Borsheim’s at the end of 2002.
D. The Debtor’s Alleged Concealment of Jewelry
Harker testified that upon reviewing the Debtor’s schedules he questioned their accuracy and had concerns about the debts and assets listed. As a result, in addition to questioning the Debtor at the August 3, 2001 meeting of creditors (the “Creditors’ Meeting”), the Trustee conducted a Fed. R. Bankr.P. 2004 examination of the Debt- or on September 25, 2001 (the “First 2004 Examination”), which was continued and completed on February 25, 2002 (the “Continued 2004 Examination”). The Debtor also was deposed by the Trustee on February 14, 2003 (the “Deposition”) in preparation for trial.
At trial, the Trustee explained his questions and concerns about the Debtor’s schedules:
McQuiston: Now, during the course of that examination at the [Creditors’ Meeting], you became aware of the fact that there was jewelry involved in this case, is that right?
Harker: Correct. We reviewed the petition and schedules prior to the [Creditors’ Meeting] and what struck me as rather odd about this was, if I look at Schedule D I’m seeing Saks Fifth Avenue, Wells Fargo, Jewelry Express, I’m seeing a lot of creditors which reflect, according to the schedules, the purchase of significant amounts of jewelry, more than thirty or forty thousand. And then I look at Schedule B and I see jewelry, two thousand bucks. And I’m thinking to myself, well, gosh, either somebody grossly overpaid for these items or something happened to them, where are they, because how could you have paid forty thousand or so for jewelry and now it’s only worth two grand? So I had some suspicions about that.
Then I was also concerned ... [that] the debtor ... was unemployed ... [and was receiving] disability insurance payments and social security, and ... I couldn’t believe that she would be able to purchase a brand new Mercedes automobile and be in bankruptcy.
Tr. at 44-45.
Several weeks after the Creditors’ Meeting, Harker conducted the First 2004 Examination. At the First 2004 Examination, he instructed the Debtor to surrender all of her jewelry to him. He testified as follows:
Harker: I did tell Ms. West to make arrangements to turn over all jewelry to my office. I was quite explicit about that. I even told her that when she was ready to bring it in to call the office to make sure that either I or my secretary was there so that we could properly acknowledge receipt of those items.
Tr. at 46. Rather than turn over all of her jewelry to the Trustee at one time, West turned the jewelry over to Harker piece by piece. West’s incremental compliance with the Trustee’s request for the turnover of all jewelry is one of the bases for his contention that the Debtor concealed assets of the estate. The first few items of jewelry were turned over to the Trustee approximately three weeks after the Creditors’ Meeting. On August 23, 2001, the Debtor brought to the Trustee’s office the first six items of jewelry listed on the Chart. At the First 2004 Examination, the Debtor turned over the Platinum Ring (see Chart, Item 7). And on November 26, 2001, at the conclusion of a hearing on an unrelated matter (the “November 2001 Hearing”), the Debtor turned over the bracelet listed in the Chart as Item 9. Finally, on January 10, 2003, the Debtor turned over the diamond and sapphire ring listed in the Chart as Item 8 (the “Sapphire Ring”). The Trustee testified that each time West turned over jewelry he asked her if she had given him everything and each time she replied in the affirmative. Tr. at 47-49.
The piece of jewelry on which the Trustee’s allegation of concealment primarily focuses is the one with the lowest monetary value — the Sapphire Ring. According to the Trustee, West concealed and attempted to sell the Sapphire Ring or trade it for a different piece of jewelry. This alleged conduct, together with the Debt- or’s piecemeal turnover of the other jewelry, form the basis of the Trustee’s contention that West concealed assets of the estate in an attempt to hinder, delay, or defraud creditors.
In late October 2001, the Trustee visited James Free Jewelers for the purpose of obtaining an appraisal of the jewelry he had received from the Debtor up to that point. While at James Free Jewelers, Harker was informed by Karaman that West had recently visited the store and attempted to sell or trade the Sapphire Ring. Both Karaman and Randall Ihle (“Ihle”), a salesman at James Free Jewelers, testified that West had come to the store with the Sapphire Ring and had inquired about either selling it or trading it for another piece of jewelry. Tr. at 72, 74, 89. Karaman declined to purchase or exchange the Sapphire Ring because James Free Jewelers had a similar ring in inventory. Tr. at 75, 90-91. Ihle testified that West did not have any other jewelry with her at the time (Tr. at 81) and did not ask to have the Sapphire Ring sized (Tr. at 74, 79). Karaman stated that, due to the engraving on the Sapphire Ring and the placement of the stones, sizing it properly at the store would have been difficult. Tr.
Upon learning of the existence of the Sapphire Ring, Harker placed a call to West’s counsel and demanded that it be turned over immediately. The date of that phone call is unknown, but the parties stipulated that the call was placed to counsel shortly after Harker learned of the existence of the Sapphire Ring from Kara-man. Thus, West’s counsel was presumably informed of the existence of the Sapphire Ring in late 2001. After receiving Harker’s call, Conway telephoned West and instructed her to turn over the Sapphire Ring.
On May 30, 2002, the Trustee filed his Complaint to Deny Discharge. Paragraph 11 of the Complaint states that:
Despite Defendant’s assurances that all jewelry had been turned over, in the latter part of October 2001, Defendant sought to trade in or upgrade a sapphire eternity band ring with settings of sapphires and diamonds ... at James Free Jewelers. Defendant’s failure to disclose to Plaintiff the existence of the sapphire ring or the attempt to trade in or upgrade the sapphire ring constitutes an attempt to hinder or defraud creditors of this estate or the Trustee so as to prevent Defendant’s discharge under 11 U.S.C. § 727(a)(2)(B).
Complaint ¶ 11. It was not until January 2003, some 14 months after Harker learned of the existence of the Sapphire Ring, more than a year after her counsel had instructed her to turn it over, and over six months after the filing of the Complaint, that West actually gave the Sapphire Ring to Harker.
West’s testimony regarding her delay in turning over the Sapphire Ring to the Trustee and her dealings with James Free Jewelers was marked by evasiveness and self-contradiction. Initially, on cross-examination, West stated that she did not turn over the Sapphire Ring to the Trustee because she “didn’t know I had it.” Tr. at 31. Later, she said her daughter found it among a bag of costume jewelry. Tr. 31-32. When asked if she took the Sapphire Ring to James Free Jewelers to have it sized after her daughter found it, she could not remember. Tr. at 32. When she was confronted with her earlier testimony, West conceded that the following exchange had taken place at the Deposition:
McQuiston: Question: What did you do when you discovered your daughter playing with the ring? Answer: Well, I was looking at it going where did this come from. She’s like, oh, it’s in this bag, and she brought this bag. As a matter of fact, I saw the bag yesterday with holes in it because I said, ‘Where did you get this?’ And she goes, she’s like pointed out, ‘It was in here.’ And so at some point I remember it doesn’t fit me and I think that’s why I took it into James Free to have it sized to see if they could do something with the size. 6
Tr. at 33.
When asked why she had not disclosed the existence of the Sapphire Ring after it
McQuiston: Okay. Now let’s talk about this ring. Is it fair to say, Ms. West, that had Mr. Harker not run into Mr. Karaman and Mr. Harker not contacted you, that he would still not have that sapphire and diamond ring; isn’t that fair to say?
West: I wouldn’t have thought that it was important; the value was so low on it, I just, I didn’t think it was a significant part of the estate.
McQuiston: I’m trying to understand your testimony because you say you discovered this but you thought it wasn’t — ■ I’m not putting words in your mouth — you tell me, but I understood you to say that you didn’t think you had to disclose this to him because you didn’t think it was worth enough.
West: I didn’t think it was worth anything, I mean, or very little.
McQuiston: Well, it has sapphires and diamonds in it. You knew that, didn’t you?
West: Yes.
McQuiston: Those are, would you agree with me that they’re precious stones?
West: I think sapphires are semi-precious.
McQuiston: Okay, are diamonds precious stones?
West: Yes.
McQuiston: Did you deny being in James Free Jewelers trying to trade a sapphire and diamond ring, to Mr. Harker?
West: I don’t recall being in James Free Jewelers with that ring; I don’t remember.
Tr. at 170-73. On re-direct examination, the Debtor added:
Conway: Do you have any present memory of having taken the ... diamond and sapphire ring to James Free Jewelers?
West: People say I was there, and I might have been there, but if I had taken that ring any place it would have been to have it, get it sized, because it doesn’t fit me.
Tr. at 173.
Thus, at trial and in pre-trial proceedings, West testified, alternatively, that she: (1) did not know that she had the Sapphire
E. Debtor’s Alleged Transfer of Jewelry With Intent to Defraud
In addition to the Sapphire Ring, the Debtor gave two other pieces to Harker after the initial turnover of jewelry — the Platinum Ring (see Chart, Item 7), turned over at the First 2004 Examination, and the bracelet listed in the Chart as Item 9, which was turned over at the November 2001 Hearing. According to the Trustee, West transferred these two pieces, along with a watch (see Chart, Item 10) that was allegedly given to a “friend of a friend” prior to the Petition Date, for inadequate consideration in an attempt to hinder, delay, or defraud her creditors. West attributed the piecemeal turnover of these items to Harker to her faulty memory. She testified that she had forgotten that she had sold the Platinum Ring and bracelet to her sister and did not recall the jewelry’s whereabouts until she saw her sister wearing these pieces on separate occasions. Tr. at 26, 160-61. She sold these items to her sister, West testified, in order to raise money to pay her propane bill and other debts related to the construction of her house. Tr. at 26. West’s sister, Courtney McNamee (“McNamee”), testified that in late summer or early fall of 2000 or 2001 she agreed to buy the two pieces, but could not remember the amount she had promised to pay, and in any event, never made a payment. Tr. at 121, 133. West also testified that no payments were ever made by her sister, although according to a portion of her testimony from the Creditors’ Meeting that was read into the record, her sister had been paying her monthly, and had paid her “less than, probably $500.” Tr. at 26, 28. At trial, West could not recall this earlier testimony. McNamee testified that she returned the Platinum Ring to West in September of 2001 and the bracelet in November of 2001, after West asked for them. Tr. at 134-35.
West also testified at the Creditors’ Meeting that she had transferred some of her jewelry to a “friend of a friend” in the year preceding her bankruptcy filing:
McQuiston: I’ll ask Ms. West whether you recall Mr. Harker asking you the following questions and you providing the following answers. “Question: Okay, you bought some, bought some jewelry from Saks Fifth Avenue? Answer: Yes. Question: Do you still have that? Answer: No, I don’t. Question: What happened, what kind of jewelry was it? Answer: I believe it was a watch. Question: What kind of watch? Answer: I forget the name of it, the brand. Question: Do you remember when you would have purchased that? Answer: Might have been last spring. Question: Last spring? Answer: Uh huh. Question: What happened to the watch? Answer: I sold that to someone. Question: Do you know who you sold it to? Answer: No. That was a friend of a friend.” Do you recall providing those answers to the questions I’ve indicated?
West: I don’t recall.
Tr. at 37.
West attributes her inability to clearly remember the existence or whereabouts of the jewelry to her medical condition. West testified that she is under the care of several physicians and takes a number of prescribed medications for pain relief and memory problems. Tr. at 184 — 85.
McNamee testified that West’s personality changed when she became ill at the time of her pregnancy:
Conway: [Wjould you describe Kelly today.
McNamee: My sister is very sick; she is moody, she jumps to unreasonable conclusions, she doesn’t think things through all the way; she has no memory. I mean, I’m sure she has some form of memory but her memory is nothing compared to how it used to be. I personally feel that if she’s not writing something down she’s not going to remember anything. She’s hard to have conversations with. She is a different person.
Tr. at 129-30. The testimony regarding West’s physical condition and mental state was not rebutted, nor was it corroborated by testimony from any medical professional.
III. Legal Analysis
A. Objections to Discharge — General Principles
“[T]he dual purposes of a Chapter 7 bankruptcy are to grant the honest debtor a discharge of his or her prepetition debts, and to provide a mechanism for the fair and orderly distribution of the debtor’s assets that are subject to administration by the Trustee.”
See also North River Ins. Co. v. Baskowitz (In re Baskowitz),
Section 727(a) of the Bankruptcy Code, which enumerates grounds for a denial of a debtor’s discharge, provides in pertinent part as follows:
(a) The court shall grant the debtor a discharge, unless — •
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed' — •
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition;
(4) the debtor knowingly and fraudulently, in or in connection with the case—
(A) made a false oath or account;
11 U.S.C. § 727(a)(2) and (4)(A).
Federal Rule of Bankruptcy Procedure 4005 places the burden of proof on the party objecting to the debtor’s discharge. Fed. R. Bankr.P. 4005;
McClendon v. DeVoll (In re DeVoll),
B. The Alleged Grounds for Denial of Discharge
The Trustee objects to the Debtor’s discharge on several grounds. The Trustee asserts that the Debtor’s discharge should be denied under § 727(a)(2) of the Code because West, with intent to hinder, delay, or defraud her creditors: (1) transferred several pieces of jewelry to her sister and a “friend of a friend” in the year preceding the Petition Date; and (2) concealed and attempted to sell or trade the Sapphire Ring after filing her bankruptcy petition. See 11 U.S.C. § 727(a)(2)(A) and (B). The Trustee also maintains that West knowingly made a false oath by grossly undervaluing her jewelry in the schedule of assets she filed with the Court. See 11 U.S.C. § 727(a)(4)(A). These alleged grounds for denial of the Debtor’s discharge are addressed below in the order in which they were presented at trial.
C. Alleged Undervaluation of the Jewelry
Section 727(a)(4)(A) of the Code provides that a discharge must be denied a debtor who knowingly and fraudulently makes a false oath in, or in connection with, a bankruptcy case. As the First Circuit stated in
Boroff v. Tully (In re Tully),
[T]he very purpose of ... § 727(a)(4)(A) is to make certain that those who seek the shelter of the bankruptcy code do not play fast and loose with their assets or with the reality of their affairs. The statutes are designed to insure that complete, truthful, and reliable information is put forward at the outset of the proceedings, so that decisions can be made by the parties in interest based on fact rather than fiction.... Neither the trustee nor the creditors should be required to engage in a laborious tug-of-war to drag the simple truth into the glare of daylight.
See also Oldendorf v. Buckman,
Statements made in a debtor’s petition, schedules, and statement of financial affairs are made under oath.
Hamo v. Wilson (In re Hamo),
“The subject of a false oath is material if it ‘bears a relationship to the [debtor’s] business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property.’ ”
Keeney,
There is no question that West understated the value of the jewelry in her schedules. While the Court need not make a determination of the jewelry’s value in order to adjudicate the Trustee’s § 727(a)(4)(A) claim, the parties’ respective expert witnesses testified at trial that the aggregate value of the jewelry ranged from a high of $8,900 (Karaman’s opinion of the jewelry’s total retail value) to a low of $3,860 (Klawon’s opinion of the jewelry’s total pawnshop value). 7 In her Schedule B, West listed the total value of all of her jewelry as $2,000. Even if the Court were to accept the expert testimony most favorable to the Debtor (Klawon’s $3,860 estimate of the jewelry’s pawnshop value— which, again, included only 7 of the 10 pieces of jewelry), the fact remains that West undervalued the jewelry in her schedules and thus made a false statement under oath.
The final two elements of a § 727(a)(4)(A) claim are knowledge of falsity and intent to deceive. A debtor’s knowledge that a statement is false
may be shown by demonstrating that the debtor knew the truth, but nonetheless failed to give the information or gave contradictory information. A false statement or omission that is made bymistake or inadvertence is not sufficient grounds upon which to base the denial of a discharge, but a knowingly false statement or omission made by the debtor with reckless indifference to the truth will suffice as grounds for denial of a Chapter 7 general discharge.
Hamo,
The Trustee argues that West knowingly and fraudulently undervalued the jewelry by listing its total value at $2,000 in her schedules. According to the Trustee, West surely must have known that 10 pieces of jewelry originally purchased for more than $30,000 had a value much greater than $2,000. Further, the Trustee maintains that the expert testimony offered by Karaman — who pegged the total retail value of the eight pieces of jewelry he appraised at $8,900 — shows that the Debtor’s $2,000 valuation was so far off the mark that it must necessarily be deemed to be a knowing and fraudulent misrepresentation on her part. West, on the other hand, asserts that she arrived at the $2,000 valuation for the jewelry simply by following her bankruptcy counsel’s instruction to list her jewelry at its pawnshop value. West testified at trial that she believed at the time she filed her bankruptcy petition, and continues to believe, that she would receive no more than $2,000 if she attempted to sell all of the jewelry at a pawnshop. The Debtor also submits that if she had intended to conceal the existence of her jewelry, or create the false impression that it had minimal value, she would not have disclosed in her Schedule D (Creditors Holding Secured Claims) the fact that she owed in excess of $35,000 to five creditors whose claims were secured by jewelry (American General, Borsheim’s, Jewelry Express, Saks Fifth Avenue, and Wells Fargo).
Having weighed the evidence, the Court concludes that West’s undervaluation of the jewelry in her schedules does not constitute a knowing and fraudulent misrepresentation within the meaning of § 727(a)(4)(A). The Debtor’s testimony— that she listed the jewelry’s total value at $2,000 based on Bennington’s instruction to estimate what the jewelry would bring if it were sold at a pawnshop — was credible. Bennington’s advice to West appears to have been based on his misunderstanding of the appropriate standard for valuing property listed in a debtor’s schedules. While the caselaw is sparse on the subject, the majority, and better-reasoned, line of authority holds that personal property should be listed in the debtor’s schedules at fair-market, rather than liquidation, or distressed-sale, value.
8
But while West
Moreover, the Trustee’s contention that West acted with fraudulent intent in undervaluing the jewelry is based largely upon a comparison of her $2,000 estimate with the jewelry’s original purchase price and its current retail value. But the $2,000 valuation contained in Schedule B should not be viewed in isolation. West disclosed in Schedule D (Creditors Holding Secured Claims) six claims totaling in excess of $30,000 and specifically noted that these claims were secured by jewelry. By making this disclosure, West put the Trustee and creditors on notice that she had purchased over $30,000 in jewelry before the Petition Date and this jewelry secured substantial claims against her estate. Had it been West’s intent to conceal the fact that she owned a number of pieces of jewelry, these disclosures presumably would not have been made.
In sum, the evidence does not establish that the Debtor knowingly and fraudulently understated the value of the jewelry in her schedules. The Trustee therefore is not entitled to judgment under § 727(a)(4)(A) on his false oath claim.
D. The Debtor’s Alleged Concealment of the Sapphire Ring— § 727(a)(2)(B)
Alleging that West concealed and attempted to dispose of the Sapphire Ring after the Petition Date, the Trustee also seeks denial of the Debtor’s discharge under § 727(a)(2)(B) of the Code. To establish a claim for denial of discharge under § 727(a)(2)(B), the Trustee must prove that the Debtor (1) transferred, removed, destroyed, mutilated, or concealed property of her bankruptcy estate, (2) with actual intent to hinder, delay, or defraud a creditor or an officer of the estate, (3) after the Petition Date.
Sowers,
The evidence presented at trial established that after she had informed the Trustee that all of her jewelry had been turned over, West attempted to sell or trade the Sapphire Ring at James Free Jewelers. The Debtor’s retention and attempted disposition of the Sapphire Ring came to the Trustee’s attention by happenstance. During a visit to James Free Jewelers to obtain an appraisal of several of the pieces of jewelry previously turned over by West, Harker learned from Kara-man that the Debtor had recently visited the store and attempted to sell the Sapphire Ring or trade it for a different piece of jewelry. West’s attempt to sell or trade the Sapphire Ring — after advising the Trustee that she had turned over all of her jewelry — was corroborated by the testimony of Karaman and Ihle. Based on this evidence, the Court finds that after filing her Chapter 7 petition West concealed and attempted to dispose of an asset of the bankruptcy estate. The Trustee thus has established the first and third elements of his § 727(a)(2)(B) claim.
The Court next turns to the issue of whether the Debtor acted with intent to hinder, delay, or defraud the Trustee and/or her creditors. “Intent is the most difficult element of a § 727 violation to prove-”
Poolquip-McNeme, Inc. v.
When ascertaining whether a violation of [§] 727(a)(2)(B) ... has occurred, the trier of fact is necessarily required to make a subjective inquiry into the debt- or’s state of mind. Such an inquiry normally requires explanatory testimony by the debtor and an assessment by the trier of fact of the debtor’s demeanor and credibility.
Sowers,
Having considered the Debtor’s explanation for failing to turn over the Sapphire Ring, observed her demeanor, and assessed her credibility, the Court concludes that West acted with intent to hinder, delay, or defraud the Trustee and/or her creditors. 9 Although she was given ample opportunity to do so, West simply failed to offer a coherent or credible explanation for her failure to turn over the Sapphire Ring to the Trustee until January 2003 — 6 months after the filing of the Complaint in this adversary proceeding, more than 12 months after Harker learned of the Sapphire Ring’s existence and instructed Conway to advise West to turn over the Sapphire Ring to the Trustee immediately, and nearly 19 months after the Petition Date. While West attempted to persuade the Court that her failure to turn over the Sapphire Ring was due to mistake or inadvertence, her explanation was unconvincing. Indeed, it was West’s evasive and hopelessly irreconcilable testimony concerning her belated turnover of the Sapphire Ring and her dealings with James Free Jewelers that ultimately convinced the Court that she acted with the requisite intent to hinder, delay, or defraud the Trustee and/or her creditors. At various times at trial and in pre-trial discovery proceedings West testified alternatively that she: (1) did not know that she had the Sapphire Ring at all; (2) did not become aware that she had the Sapphire Ring until Conway called her following his conversation with the Trustee; (3) did know that she had the Sapphire Ring, but did not turn it over because it lacked significant value; (4) had the Sapphire Ring and took it to James Free Jewelers to have it sized; and (5) had the Sapphire Ring, but never took it to James Free Jewelers. In short, this muddled and self-contradictory testimony led the Court to the conclusion that West was not telling the truth.
West’s wrongful intent also was demonstrated by her course of dealing with the Trustee. On several occasions, West advised Harker that she had turned over all her jewelry. Yet, in each instance, after further prodding by the Trustee, additional jewelry surfaced. The Debtor’s piecemeal turnover of her jewelry also suggests that she acted with intent to hinder, delay, or defraud the Trustee and/or her creditors.
The Court is not persuaded — as the Debtor’s counsel argued — that West’s failure to turn over the Sapphire Ring to the Trustee for nearly 19 months after the Petition Date (and only then after being prompted to do so by her counsel at Hark-er’s urging) was attributable to memory lapses caused by chronic fatigue syndrome and depression rather than wrongful intent. The Debtor testified that she suffers from short-term memory loss and cognition problems resulting from her medical condition. McNamee testified that she has noticed a marked deterioration in her sis
E. Alleged Transfer of Jewelry Prior to the Petition Date— § 727(a)(2)(A)
Having found that the Debtor’s discharge must be denied under § 727(a)(2)(B) of the Code, the Court need not address the Trustee’s contention that West’s prepetition transfer of jewelry to McNamee and a “friend of a friend” constitutes a ground for denial of discharge under § 727(a)(2)(A).
See In re Krehl,
IV. Conclusion
Having concluded that West concealed and attempted to sell or trade the Sapphire Ring with the intent to hinder, delay, or defraud the Trustee and/or her creditors, the Court holds that the Debtor’s discharge must be denied pursuant to 11 U.S.C. § 727(a)(2)(B). A judgment deny
IT IS SO ORDERED.
Notes
. No evidence was offered to establish the date that West ceased working.
. No testimony was offered at trial to explain why a single parent living on disability benefits of $3800 per month was building a $300,000 house, driving a luxury automobile, and regularly purchasing jewelry.
. Bennington did not represent West in this adversary proceeding. Her trial counsel in the adversary proceeding was Michael Conway (“Conway”).
. The Debtor’s reference is to George Led-ford, former standing Chapter 13 Trustee in the Dayton Division of the Southern District of Ohio.
. GE Capital Consumer Card filed a claim on behalf of Jewelry Express for $4,765.77, designating the claim as unsecured (Claim No. 5). Borsheim's filed a proof of claim (Claim No. 10) for $11,736.26, but did not specify whether it was filing as a secured or unsecured claimant. American General filed a claim (Claim No. 12) for $4,170.75 and specified that its claim was secured by jewelry. Saks Fifth Avenue filed an unsecured, nonpri-ority claim for $23,283.64 (Claim No. 15).
. In fact, both Karaman and Ihle, upon examining the Sapphire Ring at trial, testified that it had been sized sometime after West brought it to James Free Jewelers in the fall of 2001. Tr. at 75-76, 80, 82, 91-92, 94. Both testified that the Sapphire Ring had not been sized in a professional manner. Kara-man asserted that the poor sizing job had decreased the Sapphire Ring’s value from be
. Presumably, the expert witnesses' respective opinions of the jewelry’s total value — whether at retail or liquidation value — would have exceeded the figures offered at trial since neither Karaman nor Klawon appraised all 10 pieces of jewelry that the Debtor owned on the' Petition Date. As the Chart reflects, Kla-won appraised 7 of the 10 pieces and Kara-man 8 of the 10 pieces.
. Federal Rule of Bankruptcy Procedure 1007(b)(1) requires the filing of "schedules of assets and liabilities ... prepared as prescribed by the appropriate Official Forms." Official Form No. 6 directs the debtor to set forth in Schedule A (Real Estate), Schedule B (Personal Property), and Schedule C (Property Claimed as Exempt) the "current market value of debtor's interest in property.” The phrase "market value" is not defined in either
. Because § 727(a)(2) is worded in the disjunctive, proof of intent to defraud is unnecessary. Proof of intent to hinder or delay creditors or the Chapter 7 trustee suffices.
Beauchamp v. Hoose (In re Beauchamp),