WTHW Investment Builders v. Dias (In Re Dias)WTHW Investment Builders v. Dias (In Re Dias)
MEMORANDUM OPINION AND ORDER
WTHW Investment Builders complains that the debtor Jossee Patterson Dias should not be granted a discharge because,
inter alia,
he failed to keep certain recorded information from which his financial condition and business transactions might be ascertained, 11 U.S.C. § 727(a)(3), he transferred or concealed property within one year of the filing of his bankruptcy petition with intent to defraud his creditors, 11 U.S.C. § 727(a)(2), and because he knowingly and fraudulently made a false oath by his failure to disclose material assets on his schedules, 11 U.S.C. § 727(a)(4). The court tried the complaint on September 30, 1988. This memorandum opinion contains the court’s findings of fact and con-
The Bankruptcy Code provides an honest debtor with a fresh start, free from the burden of past debts.
Brown v. Felsen,
the very purpose of certain sections of the [code], like 11 U.S.C. § 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. As we have stated, “[t]he successful functioning of the bankruptcy act hinges both upon the bankrupt’s veracity and his willingness to make a full disclosure.” 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.
(citation omitted). Should a debtor fail to keep books and records from which the debtor’s financial condition or business transaction might be ascertained, fraudulently transfer or conceal property, or knowingly and fraudulently make a false oath, the debtor may not receive a discharge. WTHW, as complaining party, must prove by clear and convincing evidence
1
that Dias is not entitled to a discharge.
See,
Bankruptcy Rule 4005. Denying discharge to a debtor is a serious matter not lightly taken by a court.
In re Burke,
Failure to Maintain Records
WTHW contends that Dias has failed, without justification, to keep recorded information, including books and records, from which the financial condition or business transactions of J.P. Cleaners (the business owned and operated by Dias) could be ascertained. WTHW asserts that his failure to maintain records should result in a denial of a discharge to Dias under 11 U.S.C. § 727(a)(3). WTHW has met its burden of proof.
Dias kept no ledger of billings, receipts, expenses or accounts payable. A two month summary had to be prepared by the accountant hired by WTHW. The summary ledger of receipts prepared by WTHW’s accountant appear to match the deposits made in the J.P. Cleaners account for the time period reviewed. Dias testified that he and his wife frequently withdrew cash from the cash register to pay household expenses, keeping no record of these withdrawals. Additionally, Dias has not filed a income tax return since 1985.
Section 727(a)(3) is intended to al. low creditors and/or the trustee to examine the debtor’s financial condition and determine what has passed through a debtor’s hands.
In re Esposito,
Dias has failed to meet the requirement of the Bankruptcy Code in this regard.
See, e.g., In re Schultz,
Dias contends that his financial condition can be ascertained from the cleaning ticket receipts, cancelled checks, bank deposit slips and other miscellaneous documents, including the cash register tapes. This court had much difficulty in making any sense of these documents, when produced. 2
The court in determining whether the books and records produced are sufficient to trace the debtor’s financial history has reasonably wide discretion.
In re Parker,
The next inquiry which must be made under Section 727(a)(3) is whether the debt- or’s failure to keep records can be excused. The debtor could not sufficiently explain why he failed to keep records. He testified that he did not have time to maintain sufficient records. As stated previously, the demands of operating a business do not excuse the keeping of basic financial records. Dias was well educated and capable of maintaining business records. He was familiar with accounting procedures and record-keeping techniques and, on occasion, had prepared sufficient books and records. Hence, the court concludes that Dias’ failure to maintain adequate records is not justified under all the circumstances of this case. By violating § 727(a)(3), Dias is not entitled to a discharge.
False Oath
WTHW also contends that Dias violated § 727(a)(4). To deny Dias a discharge under § 727(a)(4), WTHW must show that Dias knowingly and fraudulently made a false oath with respect to a material fact.
Williamson v. Fireman’s Fund Insurance Co.,
In his schedule of assets, Dias did not disclose that he owned and operated the business known as J.P. Cleaners. Dias did however style the bankruptcy petition and schedules with the name of J.P. Cleaners as a “d/b/a” and subsequently amended his schedules to show J.P. Cleaners as an asset with a “nominal value at best.” Because the petition and schedules place creditors on notice that Dias filed d/b/a J.P. Cleaners, his failure to specifically schedule the business and assets, even if valueless, did not constitute fraud against the trustee or the debtor’s creditors.
At the time Dias filed his petition, he expected $30,000 from his sister for the purchase of his real property interests in India. Dias neither disclosed that obligation nor his property interest. If ultimately bequeathed by his mother, Dias would inherit real property in India formerly belonging to his deceased father. Unhappy with her life in Canada, his sister offered Dias $30,000 for that property interest. She intended to return to India and live on that land. Dias accepted that ver
The property interest, until vested, may have been worthless. The promise by the sister may have been an unenforceable obligation. The court must nevertheless look to the requirements of the schedules and statement of affairs. The schedules of assets ask for information on all property. The questions posed on the schedules are meant to be inclusive of all legal and equitable interests held by the debtor as of the commencement of the bankruptcy case consistent with § 541(a)(1).
See, In re Burke,
Standing alone, Dias knowing failure to disclose his property interests in India, however contingent, and his expectation of a sale to his sister, however unenforceable but which he anticipated would be consummated at the time he filed his petition, would not support a finding of fraudulent intent. However, Dias also failed to disclose a sale of ivory for less than full value to his brother-in-law three months prior to the filing of his bankruptcy petition.
Dias bought the ivory in Africa for $5,000 prior to the United States ivory embargo. He speculated that the market forces of supply and demand after the embargo would appreciate the value of the ivory. In pre-petition financial statements he estimated the value of the ivory to be $100,000. Yet he sold the ivory to his brother-in-law for $24,000 three months before bankruptcy. He did not disclose the transfer in his schedules and statements.
Dias’ failure to list the sale of the ivory to his brother-in-law on his schedules constitutes a material omission. 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.”
Chalik,
To determine whether Dias fraudulently made the false oath of the material fact, the court considers whether Dias’ actions “ ‘appear so inconsistent with [his] self-serving statement of intent that the proof leads the court to disbelieve [him].’ ”
Caspers v. Van Horne (In re Horne),
A month after the bankruptcy filing, in a Rule 2004 examination taken by WTHW, Dias acknowledged the disposition of the ivory. Dias testified at the trial that he used the proceeds from the sale of the ivory to pay some creditors. In the 2004 examination Dias stated that he felt the ivory was worth more than what his brother-in-law paid him. But at trial he testified that he got no other offers except $5,000 from his bank. However, he did not market the ivory or publicly offer the ivory for sale.
The non-disclosure of the sale of ivory to his brother-in-law within three months of bankruptcy, when considered in light of the totality of facts, requires a finding that Dias intended to defraud his creditors. He valued the ivory as part of a financial statement at $100,000 yet sold the ivory to a relative for $24,000. As late as his 2004 examination he still believed the ivory to be worth more than $24,000. Although he offered to sell the ivory to his bank, he never marketed the ivory and thus never determined what a non-insider willing buyer would pay. Even though he paid the $24,000 to creditors, since he sold to his brother-in-law believing the property to be worth more, and then failed to disclose the transaction, he kept assets from his creditors. He failed to disclose that sale to a relative at the same time he failed to disclose his then pending sale of an asset to another relative for $30,000. This false oath amounts to an intent to defraud creditors.
The knowing and fraudulent false oath in the statement of financial affairs and schedule of assets cannot be subsequently remedied by amended schedules or testimony at a Bankruptcy Rule 2004 examination or an adversary proceeding.
In re Tabibian,
Transfer or Concealment of Property
WTHW also contends that Dias is not entitled to a discharge pursuant to § 727(a)(2) because he transferred or concealed his assets, within one year of filing his bankruptcy petition, to defraud creditors. Section 727(a)(2) denies a discharge to a debtor who, within one year before his petition is filed, transfers with actual intent to hinder, delay, or defraud creditors, property owned by him that would be property of the estate.
First Beverly Bank v. Adeeb (In re Adeeb),
“Because a debtor is unlikely to testify directly that his intent was fraudulent, [a] court may deduce fraudulent intent from all the facts and circumstances of a case.”
Devers v. Bank of Sheridan, Montand (In re Devers),
Conclusion
Exceptions to discharge are construed narrowly against the creditor and in favor of the debtor,
Boyle v. Abilene Lumber, Inc. (In re Boyle),
This court does not lightly deny a discharge. But here Dias cannot receive that discharge. He has unjustifiably failed to keep basic business records that would provide his creditors with the written evidence of his financial affairs to which they are entitled. He did not prepare his schedules and statements with scrupulous accuracy and honesty. He did not provide complete, truthful and reliable information at the outset of the proceedings. He sold property to a relative for considerably less than what he believed it to be worth and hid that from his creditors by filing a false oath. When he filed his false oath, he expected $30,000 as a purchase price for another non-disclosed asset but did not include that in his schedules and statements. His creditors had to drag this information out at a Rule 2004 examination and in this adversary proceeding. The creditors still do not have basic business records that can be reviewed in a coherent fashion. Standing alone, the court might excuse one of these failures. But, in totality, the court must deny the discharge.
Based on the findings of facts and conclusions of law contained herein,
IT IS ORDERED that Jossee Patterson Dias shall not be granted a discharge.
Notes
. Under the Bankruptcy Act of 1898, the general rule was that the creditor had to prove its case by a preponderance of the evidence.
Farmers Co-Operative Association of Talmage, Kansas v. Strunk, 671
F.2d 391, 395 (10th Cir.1982);
In re Mascolo,
. Dias produced boxes of cleaning ticket receipts, cancelled checks and other documents which were spread out on the floor of the courtroom but which were not marked as exhibits or entered into evidence.
. An omission from the sworn schedules may constitute a false oath.
Chalik v. Moorefield (In re Chalik),
. Omission of property from schedules may be both a false oath and a concealment.
Strunk,