Nicholas and Penny Stamat filed for bankruptcy under Chapter 7 of the Bankruptcy Code on July 26, 2007. The Trustee alleged that the Stamats omitted numerous assets and transactions from their filings and accompanying documentation, including past business interests, two limited partnerships, a $10,000 settlement payment, and $90,000 obtained through a refinancing of a second home, and misreported their 2006 income. The Trustee filed a complaint objecting to the discharge of the Stamats’ debt under 11 U.S.C. §§ 727(a)(2), (4), and (5), arguing that the Stamats concealed estate assets with the intent to defraud their creditors, fraudulently made false statements under oath, and failed to satisfactorily explain the loss of assets. The bankruptcy court denied discharge under all three grounds. The Stamats appealed that ruling to the district court, which affirmed the denial of discharge under section 727(a)(4) for fraudulently making a false oath. We also find that the Stamats made numerous omissions, that these omissions displayed a reckless disregard for the truth, and were material to the Stamats’ bankruptcy case. Therefore, we affirm the denial of discharge under section 727(a)(4).
I. BACKGROUND
Nicholas Stamat is a medical doctor who operates Stamat Pediatrics. Penny Sta-mat has a bachelor’s degree in math and accounting, owns and operates a billing company, On Time Billing, and handles billing for her husband’s medical practice. The Stamats filed a joint voluntary Chapter 7 Bankruptcy Petition on July 26, 2007, requesting the discharge of over $1.5 million in secured and unsecured debt. They also filed the required official bankruptcy Schedules and Statement of Financial Affairs (“SOFA”). See 11 U.S.C. § 521(a)(1)(B); Fed. R. Bankr. P. Official Form 6; Fed. R. Bankr. P. Official Form 7. On December 21, 2007, the United States Trustee filed his complaint objecting to the discharge of the Stamats’ debts on three statutory grounds: concealing property with the intent to defraud creditors, making false oaths with fraudulent intent, and failing to satisfactorily explain the loss of substantial assets or deficiency of assets to meet their liabilities. See 11 U.S.C. §§ 727(a)(2), (4), and (5). The Trustee argued that the bankruptcy petition and accompanying SOFA and Schedules included a number of misstatements and omissions.
In response to Question 1 of their original SOFA, the Stamats listed the gross income they received from their businesses in 2006 as $53,309. That number was incorrect, since the Stamats’ 2006 tax return showed that the gross income of Sta-mat Pediatrics in 2006 was $265,012, that the gross income of On Time Billing in 2006 was $22,188, and that after the deduction of expenses, the Stamats’ personal income was $20,559 for the tax year.
Other inaccuracies also surfaced. On November 14, 2007, the Trustee conducted the First Meeting of Creditors (“ § 341 meeting”).
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At this meeting, the Stamats disclosed past investment or business interests in various entities, including: (a) Meyer Medical Physicians Group, (b) 4425 E. 63rd Medical Center, and (c) Hoffman/Elk Grove Physician Group. Dr. Sta-
At the § 341 meeting, the Stamats also disclosed ownership interests in the following limited partnerships during the six years before their bankruptcy filing: (a) Trailhead Land Investment, L.P. and (b) Eagle Crest Golf Club, Ltd. Partnership. These interests were not disclosed in response to Question 18 of the SOFA.
Dr. Stamat also testified that he worked as a part-time police officer for the Thornton Police Department. Dr. Stamat’s position with the police department was not reported in the Stamats’ original Schedules or SOFA, but Dr. Stamat’s income of approximately $80 a month from his position with the police department was included in the business income listed on Schedule I. On May 8, 2008, the Stamats amended Schedule I and Question 1 of the SOFA to reflect Dr. Stamat’s employment and income as a part-time police officer separately from his business income. Dr. Stamat also testified that he owned two guns, which were not disclosed in the Sta-mats’ original schedules. One month after the § 341 meeting, on December 7, 2007, the Stamats amended their Schedule B to include the two guns.
Finally, Dr. Stamat stated at the § 341 meeting that in September of 2005, he paid $10,000 to Oak Brook Financial to settle pending litigation against the Stamats. Mrs. Stamat later testified that this payment was made to settle an outstanding judgment for nonpayment of a loan. The settlement payment was also not listed in the original schedules or Question 10 of the SOFA. 4 The Stamats amended Question 10 of the SOFA on May 8, 2008 to reflect this settlement payment.
On April 16, 2008, the Stamats appeared for a Rule 2004 Examination (“2004 Examination”) at the Office of the U.S. Trustee, at which they produced numerous documents, including tax returns, pursuant to a subpoena for documents issued by the Trustee. At this examination, Mrs. Sta-
The bankruptcy court held a bench trial, during which the Stamats testified regarding the above omissions. Mrs. Stamat also testified about a 2001 lawsuit involving Standard Bank regarding property liens. Mrs. Stamat was questioned regarding the existence of a counterclaim pending against Standard Bank, and stated, “I don’t know who sued who.” When asked if she was aware of whether or not “you and Dr. Stamat have asked the court to find their mortgage invalid,” she answered, “[w]ell, we were suing them since 2001, so I guess in there we were trying to do that.” The Trustee argued that a counterclaim existed against Standard Bank, which was not disclosed in their original or amended schedules. The record does not include court documents from the Standard Bank litigation.
After the bench trial, the bankruptcy court found that the Stamats’ debt was not dischargeable under 11 U.S.C. §§ 727(a)(2), (4), and (5). The bankruptcy court determined that the Stamats concealed estate assets with the intent to defraud their creditors, made fraudulent false statements under oath, and failed to satisfactorily explain the loss of assets. The Stamats appealed that ruling to the district court, which affirmed the bankruptcy court’s decision to deny discharge pursuant to section 727(a)(4) for fraudulently making a false oath, without reaching the grounds under sections 727(a)(2) and (5). This appeal followed.
II. ANALYSIS
The primary benefit of filing for bankruptcy under Chapter 7 is that the financial discharge gives the debtor a “fresh start.”
In re Chambers,
One of those exceptions, found in section 727(a)(4), provides in relevant part that the court shall grant the debtor a discharge, unless “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). We have stated that the Trustee must establish grounds for denial of discharge under 11 U.S.C. § 727(a) by a preponderance of the evidence.
In re Scott,
We review the bankruptcy court’s conclusions of law de novo and its factual findings for clear error.
In re Resource Tech. Corp.,
With respect to section 727(a)(4), the bankruptcy court specifically discussed the refinancing of the Stamats’ second home and their failure to list their partnership interests, and found that the Trustee proved by a preponderance of the evidence that the Stamats made numerous false oaths that they knew or should have known were inaccurate, and that the cumulative effect of their false statements was material and established a pattern of reckless indifference to the truth. The district court affirmed the denial of discharge under section 727(a)(4), finding that the Sta-mats’ failure to report the refinancing of their second home, their partnership interests, counterclaim, $10,000 settlement payment, and the error in the reporting of their 2006 income were material omissions that showed a reckless disregard for the truth. We affirm the denial of discharge.
The Stamats first argue that certain omissions cited by the bankruptcy court were not in fact omissions because the disclosure of those interests was not required. The Stamats contend that there was no need to disclose their interests in Meyer Medical, Hoffman/Elk Grove Physician Group, and 4425 E. 63rd Medical Center given that these assets were no longer in existence at the time the bankruptcy petition was filed. However, the bankruptcy petition does not exempt assets no longer in existence. Question 18 of the SOFA asks for all business interests “within six years immediately preceding the commencement of this case,” (emphasis in original), and, in fact, asks for “beginning and ending dates.” (emphasis added). The Stamats do not contend that these investments were outside the six-year window, only that disclosure was not required because these entities did not exist at the time of the bankruptcy filing. Given the clarity of the question, we cannot agree.
The Stamats next contend that their “passive investment interests” in Trailhead Land Investment and Eagle Crest Golf Club did not require disclosure under Question 18 of the SOFA because the Sta-mats were merely “limited partners” in these enterprises. As both the bankruptcy and district courts noted, there are, in fact, sections of the SOFA that exclude limited partnerships. Official Form 7 of the SOFA states that “[d]ebtors that are or have been in business, as defined below, also must complete Questions 19-25.” The form goes on to state that:
An individual debtor is ‘in business’ for the purpose of this form if the debtor is or has been, within six years immediately preceding the filing of this bankruptcy case, any of the following: an officer, director, managing executive, or owner of 5 percent or more of the voting or equity securities of a corporation; apartner, other than a limited partner, of a partnership; a sole proprietor or self-employed full-time or part-time.
Fed. R. Bankr. P. Official Form 7 (emphasis added). As the Stamats correctly point out, “limited partners” are exempt from answering Questions 19-25 of the SOFA. However, Question 18 does not exclude “limited partners.” While the Stamats argue that the same caveat must be read into Question 18, the question plainly requires disclosure of “all businesses in which the debtor was ... [a] partner, ... [or] partner in a partnership,” and thus, by its terms, does not exclude limited partnerships. While a limited interest in a partnership may not be as significant as a greater interest, we cannot ignore the distinction the Form itself makes, and find that the failure to include these interests was an omission.
Next, the Stamats challenge both the settlement payment to Oak Brook Financial and the two refinances of their Michigan home as omissions. The Stamats do not argue that the $10,000 payment and the $90,000 refinancing do not constitute transfers of property, rather, they claim that these transactions occurred “in the ordinary course of business or financial affairs,” and therefore did not require disclosure under Question 10 of the SOFA. 5
Neither the SOFA nor the Bankruptcy Code define the phrase “in the ordinary course of business or financial affairs” with respect to Question 10. The Stamats argue that in order for a transfer to be outside the “ordinary course,” there must be evidence of intent to conceal or fraudulently convey property or assets. While we do not doubt that such a transfer would be outside the ordinary course, we do not find such conduct to be required. In examining the “ordinary course of business” defense under section 547(b) of the Bankruptcy Code, we have found that the “ordinary course of business” refers to “normal commercial and financial relationships,” such as, for example, “customary credit transactions,” and that factors to consider include the length of time the parties were engaged in the type of transaction at issue, whether the amount or form of tender differed from past practices, and whether the debtor engaged in any unusual collection or payment activity.
Kleven v. Household Bank F.S.B.,
In this case, the Stamats borrowed $10,000 and made a payment to Oak Brook Financial to settle an unpaid loan. Mrs. Stamat testified that Dr. Stamat and others had taken out a loan, the exact amount of which she did not recall. She stated:
[W]e got sued for like his part of it, 80 some thousand maybe. And then they came to a settlement agreement. And we had put down 25,000. And then we had to pay 15,000 back. And I paid all but 2,000 I had left to pay. And I didn’t have the money. So they came back to us for 15,000 which was the judgment. And then we settled with them for 10.
There is no evidence in the record that such a payment was a customary or regularly occurring one, and based on the non-customary nature of the transaction testified to by Mrs. Stamat, we cannot find
With respect to the $90,000 received from the refinancing of the Stamats’ Michigan home, the Stamats argue that the bankruptcy court actually determined that the use of the proceeds was in ordinary course. In its order, under the section “Defendants’ Testimony at Trial,” the bankruptcy court wrote that “[t]he refinancing and the use of the proceeds therefrom in the medical practice, was done in the ordinary course of business.” The district court found “[t]he Stamats take the finding out of context; the Bankruptcy Court stated that the Stamats so testified at trial; it does not follow that the Bankruptcy Court necessarily agreed with this testimony.”
Neary v. Stamat,
Some bankruptcy courts examining “ordinary course,” both in the section 727 context and in others, have found that the payment of living expenses occurs in the “ordinary course of affairs.”
See In re Oliver,
Next, although the bankruptcy court analyzed the Stamats’ reporting of their business income under its section 727(a)(2) analysis, in finding that the Stamats acted with reckless disregard under section 727(a)(4), it referenced their “numerous false statements.” With respect to wheth
The Stamats argue that an over-reporting of income cannot constitute an intent to defraud. As both the bankruptcy and district courts noted, a showing of reckless disregard for the truth is sufficient to prove fraudulent intent.
See In re Chavin,
Given the Stamats’ level of education and business experience, their failure to disclose the required past business interests, property transfers, and income as discussed above shows a reckless disregard sufficient for the bankruptcy court’s finding of intent under section 727(a)(4), and we do not disturb that finding.
See, e.g., In re Chavin,
Finally, a fact 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 the debtor’s property.”
Retz v. Samson, et al. (In re Retz),
III. CONCLUSION
For the reasons set .forth above, the order of the district court affirming the bankruptcy court’s denial of discharge is Affirmed.
Notes
. Section 341(a) of the Bankruptcy Code states that, "[w]ithin a reasonable time after the order for relief in a case under this title, the United States trustee shall convene and preside at a meeting of creditors.”
.Question 18 reads in pertinent part:
If the debtor is an individual, list the names, addresses, taxpayer-identification numbers, nature of the businesses, and beginning and ending dates of all businesses in which the debtor was an officer, director, partner, or managing executive of a corporation, partner in a partnership, sole proprietor, or was self-employed in a trade, profession, or other activity either full- or part-time with six years immediately preceding the commencement of this case, or in which the debtor owned 5 percent or more of the voting or equity securities within six years immediately preceding the commencement of this case.
. The Stamats also did not initially list an interest in Dr. Stamat's medical practice, Sta-mat Pediatrics, LLC, or an interest in On Time Billing, LLC, Mrs. Stamat’s billing practice, in response to Question 18; however, both Stamat Pediatrics and On Time Billing were disclosed in Schedule B.
. Question 10 of the SOFA, entitled "Other transfers,” states: "List all other property, other than property transferred in the ordinary course of the business or financial affairs of the debtor, transferred either absolutely or as security within two years immediately preceding the commencement of this case.”
. As to the settlement payment, we note that during the bankruptcy proceedings, the Sta-mats contended that they did not understand the $10,000 payment to be a transfer of property, or believed that it had taken place prior to the two-year period relevant to Question 10. The Stamats do not now make these arguments.
. Because we rely on the above omissions to affirm the bankruptcy court's denial of discharge, we need not address the existence (or not) of an undisclosed counterclaim, or the bankruptcy court’s findings under sections 727(a)(2) and 727(a)(5).