Opinion
Case No. 15-13536 Adversary No. 15-1117 Adversary No. 15-1125
09-16-2019
In Re: GERALD BENJAMIN BRUCE Debtor DANIEL M. McDERMOTT Plaintiff v. GERALD BENJAMIN BRUCE Defendant ROBERT GREER Plaintiff v. GERALD BENJAMIN BRUCE Defendant
Chapter 7
MEMORANDUM DECISION DENYING DEBTOR'S DISCHARGE
This Court has jurisdiction over this matter pursuant to 28 U.S.C. § 157 and § 1334 and the standing General Order of Reference in this district.
On December 7, 2015, Plaintiff Daniel M. McDermott, United States Trustee for Region 9 ("UST") filed an adversary complaint against Debtor-Defendant Gerald Benjamin Bruce ("Mr. Bruce") to deny Mr. Bruce's discharge pursuant to 11 U.S.C. §§ 727(a)(2) and 727(a)(4). The UST asserts that Mr. Bruce engaged in prepetition transfers of property, and the concealment thereof, and omitted or supplied inaccurate information in his schedules and Statement of Financial Affairs.
Use of the terms "Bankruptcy Code," "Section" or "§" are references to provisions of Title 11 of the United States Code.
Soon after, Creditor Robert Greer ("Mr. Greer") filed an adversary complaint against Mr. Bruce on December 21, 2015. Mr. Greer similarly requests that Mr. Bruce be denied a discharge for certain prepetition transfers of property, the failure to disclose those transfers, and inaccurate values for property provided in Mr. Bruce's schedules. Alternatively, Mr. Greer requests that the specific state court judgment debt owed to him be determined nondischargeable pursuant to §§ 523(a)(4) and (a)(6).
After denying the motions for summary judgment filed by the UST and Mr. Greer (collectively "Plaintiffs") and following a delay caused, in part, by the government shutdown and the filing of amended pleadings in the UST's adversary proceeding, both matters were set for a joint trial on June 27, 2019. At trial, Mr. Greer made the determination not to pursue litigation or present evidence on his claims to except Mr. Bruce's state court judgment debt from discharge. Consequently, Mr. Greer's § 523 claims will be dismissed by separate order.
All parties agreed to proceed solely on the Plaintiffs' collective claims for denial of Mr. Bruce's discharge based on the testimony presented at the trial and the exhibits stipulated to by Mr. Bruce and the UST and admitted into evidence. After careful consideration of the evidence, and for the reasons set forth herein, this Court concludes that the Plaintiffs have established the elements for denial of Mr. Bruce's discharge pursuant to §§ 727(a)(2)(A) and (a)(4)(A).
During the trial, the UST and Mr. Bruce stipulated to the admissibility of all exhibits attached to their exhibit lists [Docket Number 61, UST Exs. 1- 20 and Docket Number 65, Debtor Exs. A and B]. All of the exhibits were admitted into evidence.
The following constitutes this Court's findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052.
I. FINDINGS OF FACT
A. Mr. Greer's Judgment and Mr. Bruce's Activities Prior to the Bankruptcy Filing
On February 19, 2014, a state court Final Judgment Entry was entered awarding Mr. Greer $607,182.40 in compensatory and punitive damages against Mr. Bruce and a co-defendant ("Greer Judgment") [UST Ex. 20]. The Final Judgment Entry adopts a previous magistrate's decision entered against Mr. Bruce and his co-defendant on November 6, 2013 to which they objected [Id.]. As such, Mr. Bruce was aware of the potential entry of a final judgment against him as early as November of 2013.
A day before the final judgment was entered, Mr. Bruce sent documents to the State of Ohio to form Linden Property Management LLC ("LPM") [UST Exs. 6 and 7] with himself as the sole member / owner.
At the time LPM was formed, Mr. Bruce owned the following real estate:
10901 Stephens Road, North Bend, OH 45052 ("Stephens Property")At trial, Mr. Bruce testified that one of the Disbro Properties was his father's residence and the Lee Property was his mother's residence. Those properties remain his parents' residences as of the date of trial. Mr. Bruce lived in the Madison Property for approximately one year before converting it to a rental property and then he moved to the Laurel 1 Property. The other properties were rental properties or were intended to be rental properties at some point in the future.
12408 Disbro Road, Moores Hill, IN 47032 ("Disbro 1 Property")
12438 Disbro Road, Moores Hill, IN 47032 ("Disbro 2 Property" and, together with Disbro 1, the "Disbro Properties")
6359 Robert E Lee Dr., Fairfield, OH 45014 ("Lee Property")
316 Laurel Avenue, Hamilton, OH 45015 ("Laurel 1 Property")
799 Laurel Avenue, Hamilton, OH 45015 ("Laurel 2 Property")
2021 Madison Ave, Hamilton, OH 45015 ("Madison Property")
Mr. Bruce testified that, prior to forming LPM, the Madison Property was renting for $800 and one of the Laurel Properties was renting for $500.
Within two months of the Greer judgment and formation of LPM, Mr. Bruce began transferring real property he owned to LPM. On April 2, 2014, Mr. Bruce transferred the Stephens Property to LPM [UST Ex. 9]. On March 19, 2015, Mr. Bruce transferred the Disbro Properties to LPM [UST Exs. 12 and 13]. On April 13, 2015, Mr. Bruce transferred the Lee Property to LPM [UST Ex. 10]. Subsequently, on June 22, 2015, he caused LPM to transfer the Lee Property to Sandra Barbe ("Ms. Barbe"), Mr. Bruce's mother [UST Ex. 11]. At trial, Mr. Bruce testified that he did not receive any consideration for these transfers.
Subsequent to the Stephens Property transfer, Mr. Bruce initiated a lawsuit to evict the Stephens Property's tenant and obtain back rent. The named plaintiff was Mr. Bruce and not LPM to which the property had been transferred. When asked why LPM was not named as the plaintiff, Mr. Bruce testified that it was how his attorney filed it. Ultimately, Mr. Bruce obtained a $14,000 judgment for back rent that he admitted was owed to him personally although he has not attempted to collect it.
In June of 2014, Mr. Bruce was hired at Firestone and set up a direct deposit for his wages. Rather than have his wages deposited into a personal account he had at Huntington Bank, Mr. Bruce had his employer deposit his wages into LPM's business account.
On April 2, 2015, Mr. Bruce amended LPM's Operating Agreement and transferred 75% of his interest in LPM to three family members: 25% to his mother, Sandra Barbe, and 25% each to his two minor children ("the LPM Equity Transfer") [UST Exs. 8 and 18]. Mr. Bruce received no consideration for the LPM Equity Transfer. In his answer to the UST's complaint, Mr. Bruce stated that these additional family members were added to LPM "per the rules in Regulations Section 301.7701.3 and the requirements of form 8823 affirmatively electing to be treat[ed] as a corporation" [UST Ex. 18, ¶ 12].
B. Mr. Bruce's Bankruptcy Filings and the Meeting of Creditors
On September 15, 2015, Mr. Bruce filed a pro se voluntary chapter 7 petition. In his Schedule B - Personal Property, he listed a personal bank account he had at Huntington Bank with a balance of $21.42 [UST Ex. 1]. He did not list the LPM business account in which his Firestone wages were deposited. On September 17, 2015, the UST sent a letter to Mr. Bruce requesting, among other things, "copies of bank statements for all personal accounts and business accounts in the name of Gerald Benjamin Bruce for the past six months" [UST Ex. 19, UST Letter, item 3]. Mr. Bruce responded to the document request and provided six months of bank statements for his personal bank account with Huntington Bank [UST Ex. 15]. The account showed almost no activity for those six months in which he maintained a balance of approximately $20 to $35 [Id.]. Mr. Bruce did not provide any bank statements for the LPM business account.
Mr. Bruce filed his Statement of Financial Affairs ("SOFA") on September 24, 2015 [UST Ex. 2]. Question 10 requires a debtor to list all property, other than property transferred in the ordinary course of business or financial affairs of the debtor, transferred within two years immediately preceding the commencement of the bankruptcy case. In response to Question 10, Mr. Bruce checked the box for "none" [Id., p. 5].
Mr. Bruce attended the first meeting of creditors held pursuant to 11 U.S.C. § 341 on November 4, 2015 ("Meeting of Creditors"). At the Meeting of Creditors, Mr. Bruce testified under oath that he listed all transfers, and that his bankruptcy documents remained true, accurate, and complete [UST Ex. 3, Meeting of Creditors Tr., p. 3, lines 12-22].
At the Meeting of Creditors, the Chapter 7 Trustee Eileen Field ("Chapter 7 Trustee") questioned Mr. Bruce about the lack of activity in his personal bank account at Huntington and asked where his work income was deposited [Id., p. 12, lines 4-10]. In response, he revealed that ". . . because of my judgment I used it in my business account, put it in there and to pay my bills" [Id., p. 12, lines 11-12]. His sworn testimony as to the reason he was using the LPM business account to deposit his wages was that "I was afraid I was going to have garnishments in the personal account" [Id., p. 12, lines 17-18] and that "I just didn't want the little bit I get from Firestone, I just didn't want to be garnished" [Id., p. 13, lines 23-24]. The Chapter 7 Trustee explained to Mr. Bruce that because he used the LPM business account for his personal finances, he would have to amend his schedules to list that account [Id., p. 13 lines 10-16]. She also requested six months of bank account records for the LPM business account [Id., p. 14, lines 14-15].
Upon further questioning by the Chapter 7 Trustee, Mr. Bruce revealed the formation of LPM and the LPM Equity Transfer to his mother and children [Id., pp. 18 -22]. He revealed that his children's ages were four and one [Id., p. 20, lines 16-22]. He further revealed that he received no consideration for the transfer [Id., p. 22, line 7-14]. When asked why he did not list the LPM Equity Transfer on his SOFA, he stated, "well, I guess I missed that" [Id., p. 26, lines 4-5.]. Again, he was told by the Chapter 7 Trustee to include this transfer in the items that needed amendment [Id., p. 26, lines 7-14].
The Chapter 7 Trustee also questioned Mr. Bruce about real property transfers he made to LPM in the two years prior to the bankruptcy filing that were not revealed on his SOFA. In response, he disclosed the Stephens Property transfer, the Disbro Properties transfers, and the Lee Property transfer [Id., pp. 26-32]. With respect to the Disbro Properties, the Chapter 7 Trustee, in attempting to understand the properties' value, asked if they had renters. Mr. Bruce answered "Not right now, no." [Id., p. 29, line 25]. The Chapter 7 Trustee followed up with, "They're vacant?" and Mr. Bruce answered "Yeah." [Id., p. 30, lines 1-2]. In reality, Mr. Bruce's father Earl Bruce resided at one of the Disbro Properties. During the Meeting of Creditors, the Chapter 7 Trustee reminded Mr. Bruce that the SOFA would have to be amended to include transfers made within the two years prior to his bankruptcy filing [Id., p. 28, lines 7-12].
At the end of the Meeting of Creditors, the Chapter 7 Trustee explained that she was going to continue the meeting to a different date, November 18, 2015, to give Mr. Bruce time to make the needed amendments and to get copies of all the mortgages on the properties to the Chapter 7 Trustee [Id., p. 33, line 2-7]. Mr. Bruce failed to attend the rescheduled Meeting of Creditors held on November 18, 2015 [UST Ex. 5, ¶ 4]. Because he did not appear, the Chapter 7 Trustee continued the Meeting of Creditors to December 2, 2015 [Id.]. On November 23, 2015, the Chapter 7 Trustee sent Mr. Bruce a follow-up letter detailing the changes that were needed to his schedules and SOFA prior to attending the rescheduled Meeting of Creditors on December 2, 2015 [UST Ex. 4]. Mr. Bruce failed to attend the rescheduled Meeting of Creditors on December 2, 2015 as well as a third rescheduled meeting on December 16, 2015 [UST Ex. 5, ¶¶ 4-6]. As of the trial date, Mr. Bruce has not made any amendments to his schedules or SOFA.
C. Mr. Bruce and Ms. Barbe's Testimony at Trial
At trial, Mr. Bruce testified that it was a mere coincidence that the formation of LPM and transfer of real properties to that entity occurred near the time the Greer judgment was entered. He stated that the reason he formed LPM and transferred the properties to LPM was not to conceal the assets from Mr. Greer, but instead to treat his rental properties more like a business. He further testified that the reason the property transfers to LPM were not listed on his SOFA in Question 10 was because they were transferred in the ordinary course of business. However, he admitted that, prior to the first transfer of the Stephens Property to LPM, he had never transferred any real property out of his name to another entity. In addition, he admitted that two of the four properties transferred to LPM were his mother and father's residences and that they never paid any rent to either himself or LPM.
Mr. Bruce also testified as to his use of the LPM business account to deposit his Firestone wages. He testified that the real reason he used the LPM business account was because he made his mortgage payments out of it and because he rarely used his personal account. He testified that he was unsure why he gave conflicting testimony at the Meeting of Creditors and should not have said anything because he really did not remember. He further testified that the reason he did not list the LPM business account in his schedule of assets was because there was no question on the schedule asking about business accounts although he admitted using the account for personal reasons, including the deposit of his wages.
With respect to the LPM Equity Transfer, Mr. Bruce testified that he transferred 75% of his interest in LPM to his mother and minor children for tax purposes. However, he deflected questions requesting the tax purposes and whether he filled out and submitted IRS tax forms to achieve those purposes. He said that those questions should be directed to his accountant-mother, Ms. Barbe. At trial he admitted that, prior to the LPM Equity Transfer, he had never transferred an ownership interest in a business.
Following Mr. Bruce's testimony, Ms. Barbe took the stand. She testified that she has been an accountant for thirty years and worked for a corporation and a public accounting firm. In that capacity she advised clients about partnerships, corporations and sole proprietorships and prepared personal and corporate tax returns.
She testified that she was involved in the formation of LPM and the LPM Equity Transfer and amendment to LPM's operating agreement adding herself and Mr. Bruce's minor children as members. She stated that there were tax and inheritance reasons to form a limited liability company ("LLC") like LPM and to add children as members. One reason for adding children, according to her testimony, would be to give the LLC more than one member so that the LLC could file a Subchapter S corporation ("S-corp") tax return. She testified that this device had benefits including escaping some taxes and simpler tax forms. In order to use this device, she testified that an LLC would have to submit IRS Form 8832 [UST Ex. 14], which she stated was the form used to permit an LLC like LPM to file tax returns as an S-corp.
Upon further questioning, however, she answered that she did not know the defining characteristics of an LLC or the difference between an LLC, C-corporation or S-corp. Nor did she know how an LLC reports income or whether children added as members to an LLC were required to report income from the LLC. She did testify that she had never prepared any tax returns on behalf of LPM nor Mr. Bruce's children as members of LPM. Ms. Barbe was unable to specify any actual tax savings or deductions achieved through the formation of LPM and/or the LPM Equity Transfer to Ms. Barbe and Mr. Bruce's minor children.
II. LEGAL ANALYSIS
Generally, a debtor filing under chapter 7 is to be granted a discharge unless one of the specific grounds for denying a discharge in § 727(a) applies. 11 U.S.C. § 727(a); Baker v. Reed (In re Reed), 310 B.R. 363, 367 (Bankr. N.D. Ohio 2004). Consequently, the provisions to deny a discharge are construed liberally in favor of a debtor. Buckeye Retirement Co., LLC v. Swegan (In re Swegan), 383 B.R. 646, 653 (B.A.P. 6th Cir. 2008); Buckeye Retirement Co., LLC v. Hake (In re Hake), 387 B.R. 490, 502 (Bankr. N.D. Ohio 2008).
Nonetheless, the exceptions to discharge serve the purpose of ensuring compliance with basic bankruptcy policy, including full disclosure and honesty. Reed, 310 B.R. at 367. "From a global perspective, honesty envisions a debtor who 'has tried his best to pay his creditors but failed.'" Id. (further citation omitted). Contrary to this policy is the debtor who transfers his or her property for the purpose of evading payment to creditors. Id. at 367-68. See also Hake, 387 B.R. at 502 (noting that while the law favors discharge, "it will not ordinarily tolerate the [debtor's] intentional departure from honest business practices where there is a reasonable likelihood of prejudice").
In this case, the Plaintiffs argue that the evidence supports denying Mr. Bruce's discharge pursuant to the exceptions provided in §§ 727(a)(2)(A) and 727(a)(4).
A. Prepetition Transfers and Concealment: Bankruptcy Code Section 727(a)(2)(A)
Section 727(a)(2)(A) provides that a court deny the debtor a discharge when "the debtor, with intent to hinder, delay, or defraud a creditor . . . has transferred, removed, destroyed, mutilated, or concealed . . . property of the debtor, within one year before the date of the filing of the petition[.]" 11 U.S.C. § 727(a)(2)(A). The Plaintiffs, as the parties objecting to discharge, bear the burden of proof by a preponderance of the evidence. Swegan, 383 B.R. at 653.
Denial of a discharge under § 727(a)(2) encompasses two elements: (1) that the debtor engage in conduct disposing of or concealing debtor property; and (2) a subjective intent to hinder, delay or defraud a creditor or the bankruptcy trustee through that conduct. Keeney v. Smith (In re Keeney), 227 F.3d 679, 683 (6th Cir. 2000). Furthermore, under § 727(a)(2)(A), any pre-petition transfer or concealment must occur within one year before the bankruptcy petition is filed. Id. at 684.
In this case, the Plaintiffs point to several acts by Mr. Bruce to support denial of the discharge under § 727(a)(2)(A): Mr. Bruce's real property transfers, the LPM Equity Transfer, and the use of Mr. Bruce's business account to deposit his wages.
1. Transfers of Real Property and the LPM Equity Transfer
The undisputed facts support that Mr. Bruce transferred the Disbro Properties and the Lee Property to LPM in the year prior to the filing of his bankruptcy petition. In addition, the LPM Equity Transfer, in which Mr. Bruce transferred 75% of his interest in LPM to his mother and two minor children, occurred within the year prior to the bankruptcy filing. Accordingly, this evidence establishes the first element of § 727(a)(2)(A).
The UST further asserts that § 727(a)(2)(A) applies to Mr. Bruce's transfer of the Stephens Property, which occurred on April 2, 2014. While the transfer date is outside the one-year look back period provided in § 727(a)(2)(A), the UST asserts that the Stephens Property transfer may be considered to have occurred within a year of Mr. Bruce's bankruptcy petition filing based on the "continuing concealment" doctrine adopted by the Sixth Circuit in Keeney v. Smith (In re Keeney), 227 F.3d 679 (6th Cir. 2000). However, this Court determines it unnecessary to consider the Stephens Property transfer in its § 727(a)(2)(A) analysis, given this Court's conclusion that the Disbro Properties transfers and Lee Property transfer did occur within the year prior to the bankruptcy filing and were made with the intent to evade creditors. --------
Next, the Plaintiffs must demonstrate that these transfers were made with the intent to hinder, delay or defraud. As actual intent is rarely admitted, circumstantial evidence or the "badges of fraud" are often used to establish the requisite intent. United States Trustee v. Zhang (In re Zhang), 463 B.R. 66, 78-79 (Bankr. S.D. Ohio 2012). Badges of fraud include: (1) the concealment of prebankruptcy transfers of assets; (2) transfers that occur immediately prior to the bankruptcy filing; (3) lack or inadequacy of consideration; (4) transfers to family members or close associates; (5) the debtor's retention of possession, benefit or use of the property in question; (6) transfers during the pendency of a lawsuit or following the entry of a judgment against the debtor; (7) a pattern of sharp dealing prior to the bankruptcy; and (8) transfers that render the debtor insolvent. Id. at 79; Agai v. Antoniou (In re Antoniou), 515 B.R. 9, 18-19 (Bankr. E.D.N.Y. 2014).
As this Court has already noted on summary judgment, there are several badges of fraud present in this case. LPM was created after the Magistrate decision was rendered to which Mr. Bruce objected. Thus, at the time of LPM's creation, the lawsuit against Mr. Bruce was pending and he was fully aware of the potential finalization of a large judgment that would be entered against him. Further, the actual transfers of Mr. Bruce's interests in the Disbro Properties and the Lee Property to LPM were made after entry of the Greer Judgment. Mr. Bruce received no consideration for the transfers. Finally, Mr. Bruce's subsequent effectuation of the transfer of the Lee Property from LPM to his mother and the transfer of 75% of his interest in LPM to his mother and minor children are also indicia of fraud.
Nonetheless, Mr. Bruce maintained at trial that the real property transfers and LPM Equity Transfer were for legitimate business reasons other than evading creditors. Mr. Bruce testified that he created LPM and transferred real property to the business entity in order to treat his rental properties more like a business. However, two of the properties transferred to LPM were not rental properties but, instead, his mother and father's residences. He admitted at trial that his parents never paid him nor LPM any rent. Furthermore, he provided no other legitimate business reason for transferring his parents' residential properties to LPM. This Court concludes that Mr. Bruce's testimony at trial was not credible on this issue and that the real reason for the transfers of his parents' residential properties to LPM was to evade their use in payment of the Greer judgment.
With respect to the LPM Equity Transfer, both Mr. Bruce and his mother, Ms. Barbe, testified that they had legitimate tax reasons for adding Ms. Barbe and Mr. Bruce's two minor children as members of LPM and transferring 75% of his interest in LPM to them. Specifically, Ms. Barbe testified that having the additional members would allow LPM to use an IRS form to file as an S-corp which had tax advantages. However, neither Ms. Barbe nor Mr. Bruce testified that the IRS form was ever filed on LPM's behalf. Furthermore, when pressed on what tax advantages were effectuated by adding these members to LPM or the LPM Equity Transfer, neither Mr. Bruce, who deflected the question to his mother, nor Ms. Barbe were able to specify any tax deductions or other advantages gained. Again, this Court finds both Mr. Bruce and Ms. Barbe's testimony to lack credibility on this issue and concludes that the LPM Equity Transfer was done intentionally by Mr. Bruce to protect the properties held by LPM from liquidation to satisfy the Greer judgment.
The Plaintiffs have established, by a preponderance of the evidence, the elements of § 727(a)(2)(A). Accordingly, Mr. Bruce's discharge is denied under this provision.
2. Use of Business Account for Deposit of Wages
Plaintiffs argue that Mr. Bruce's deposit of his Firestone wages in an LPM business account further supports denial of the discharge pursuant to § 727(a)(2)(A). Specifically, they point to Mr. Bruce's request in June of 2014 that his employer deposit his wages in the LPM business bank account rather than his personal bank account. Upon the bankruptcy filing, this business account was not disclosed in Mr. Bruce's schedules. Furthermore, he admitted at the Meeting of Creditors that having his income deposited into the business account was done to avoid his wages being garnished by creditors.
At trial, Mr. Bruce concedes his statements at the Meeting of Creditors but asserts those statements were a mistake, that he really had not remembered, and that the real reason for depositing wages into the LPM business account was because that was the account he was using at the time. Mr. Bruce's attempt at rehabilitation lacks credibility particularly in light of the fact that he emphasized that the purpose was evading garnishment three times at the Meeting of Creditors. This Court concludes that Mr. Bruce's admission at the Meeting of Creditors is direct proof of his intent to hinder creditors. See Antoniou, 515 B.R. at 19 (concluding that the debtor's express admission that he diverted paychecks to his wife's account to prevent creditors from restraining his bank account was direct proof of the debtor's intent to conceal or transfer these assets to hinder, delay or defraud creditors under § 727(a)(2)).
Nonetheless, Mr. Bruce argues that, regardless of his intent, his request that Firestone start depositing his wages into the business account occurred in June of 2014, more than one year prior to the bankruptcy filing. As such, he argues that it falls outside of the § 727(a)(2)(A) requirement that any concealment or intentional transfer of assets to avoid creditors occur no more than one year before the bankruptcy petition is filed.
To address Mr. Bruce's argument, this Court notes that the Sixth Circuit has adopted and applied the "continuous concealment doctrine." See Keeney, 227 F.3d at 684-85. Thus, although § 727(a)(2)(A) requires the disposition or concealment of property to have occurred within one year of the bankruptcy petition filing date, the continuous concealment doctrine permits denial of the debtor's discharge if the concealment, with the requisite intent, commences prior to the one-year period but the debtor retains a secret benefit of ownership in the property within the year prior to filing. Id.; Pinnacle Tech. Resources, Inc. v. Spencer (In re Spencer), 2006 Bankr. LEXIS 3297, at *18-21, 2006 WL 3539295, at *5-6 (B.A.P. 6th Cir. Dec. 8, 2006) (noting that, although the evasive behavior began more than a year prior to the bankruptcy filing, the continuing concealing and shielding of the debtor's law practice income from collection by his judgment creditor in the year prior to the bankruptcy filing met the requirements of § 727(a)(2)(A)); Antoniou, 515 B.R. at 18 (even if the initial transfers to a non-debtor account to conceal the funds from creditors occurred outside the one-year window, each deposit of a paycheck is a separate transfer so that any continued use of the non-debtor account to deposit funds within the year prior to the bankruptcy filing may be considered under § 727(a)(2)(A)).
Mr. Bruce began depositing his wages in the LPM account more than a year prior to the bankruptcy. However, Mr. Bruce continued to use the LPM business account for the deposit of his wages within the year prior to the bankruptcy and failed to disclose it on his bankruptcy schedules. This continued shielding of his wages from creditors during the year prior to the bankruptcy filing meets the elements of § 727(a)(2)(A) and is another basis for the denial of Mr. Bruce's discharge under this provision.
B. False Oaths: Bankruptcy Code Section 727(a)(4)(A)
Next, this Court turns to the Plaintiffs' argument that Mr. Bruce should be denied a discharge under § 727(a)(4)(A). This provision provides that a debtor be denied a discharge if "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). To prevail, the Plaintiffs must prove the following by a preponderance of the evidence:
(1) the debtor made a statement under oath;Keeney, 227 F.3d at 685; Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 178 (5th Cir. 1992).
(2) the statement was false;
(3) the debtor knew the statement was false;
(4) the debtor made the statement with fraudulent intent; and
(5) the statement related materially to the bankruptcy case.
In this case, the Plaintiffs point to what they consider to be Mr. Bruce's pattern of nondisclosure on bankruptcy documents a debtor is required to file: the debtor's schedules and SOFA. Statements made by a debtor in his bankruptcy schedules and SOFA as well as statements made during the meeting of creditors are all statements made under oath. Jahn v. Hughes (In re Hughes), 490 B.R. 784, 791 (Bankr. E.D. Tenn. 2013).
With respect to the other elements of § 727(a)(4)(A), a statement in a schedule or SOFA is considered "material" if it "'concerns the discovery of assets, business dealings or [the] existence or disposition of property.'" Hamo v. Wilson (In re Hamo), 233 B.R. 718, 725 (B.A.P. 6th Cir. 1999) (further citation omitted). Consequently, an intentional failure to disclose an asset or property transfer, even if the asset is ultimately deemed worthless, can support a denial of discharge. Id. See also Beaubouef, 966 F.2d at 178 (noting that "[t]he recalcitrant debtor may not escape a section 727(a)(4)(A) denial of discharge by asserting that the admittedly omitted or falsely stated information concerned a worthless business relationship or holding; such a defense is specious"). This is because the trustee and creditors should be entitled to judge for themselves what assets hold value and benefit to the estate. Beaubouef, 966 F.2d at 178. Indeed, the completeness and veracity of the debtor's statements are essential to the successful administration of the Bankruptcy Code. Id.
The remaining two elements require the Plaintiffs to show knowledge and intent. "'Knowledge may be shown by demonstrating that the debtor knew the truth but nonetheless failed to give the information or gave contradictory information.'" Hamo, 233 B.R. at 725 (further citation omitted). Either fraudulent intent or a reckless disregard for the truth is sufficient to establish the intent requirement. Keeney, 227 F.3d at 685-86. Knowledge and intent may be deduced from all of the facts and circumstances of a case, including the course of conduct of a debtor. Id. See also Khalil v. Developers Surety and Indemnity Co. (In re Khalil), 379 B.R. 163, 176 (B.A.P. 9th Cir. 2007) aff'd 578 F.3d 1167 (9th Cir. 2009) (noting that an inference of knowing and fraudulent intent is supported by the number and magnitude of omissions in the schedules with no attempt to correct the inaccuracies even up to the time of trial). While a false statement or omission made by mistake or inadvertence will not support a denial of discharge, a knowingly false statement or omission made by a debtor with reckless indifference to the truth will suffice as grounds for the denial of a chapter 7 debtor's discharge. Keeney, 227 F.3d at 686.
Turning to Mr. Bruce's bankruptcy filings, the SOFA, Question 10 requires a debtor to disclose all transfers of property of the debtor (other than those already listed) that occurred within the two years immediately prior to the bankruptcy filing. The only exception is for property transferred in the "ordinary course of the business or financial affairs of the debtor."
In this case, Mr. Bruce failed to disclose the transfers of the Stephens Property, Disbro Properties and Lee Properties to LPM as well as the transfer of 75% of his interest in LPM to family members within the year prior to the bankruptcy filing. These were material dispositions of debtor property. Nonetheless, Mr. Bruce asserts that he did not think these transfers needed to be disclosed because he felt they were in the ordinary course of business.
Neither the SOFA nor the Bankruptcy Code define the phrase "in the ordinary course of the business or financial affairs of the debtor." Generally, the phrase is used in the bankruptcy context to mean the normal, routine or customary transactions or practices in which a debtor engages. See Stamat v. Neary, 635 F.3d 974, 980 (7th Cir. 2011). In this case, Mr. Bruce admitted that he had never transferred real property out of his name prior to the real property transfers to LPM so those transfers were not "ordinary" in that they were neither customary nor routine practices for Mr. Bruce. The same is true of the LPM Equity Transfer to family members given his admission that he had never transferred an ownership interest in a business before that transaction. Furthermore, the reason Mr. Bruce set forth for those transfers, to treat his rental properties more like a business, does not explain the transfers of his parents' residences to LPM. Mr. Bruce never provided a satisfactory explanation for how he considered these transfers to be in the ordinary course of business.
This conclusion is further supported by his course of conduct since the bankruptcy filing. At the November 4, 2015 Meeting of Creditors, the Chapter 7 Trustee requested that Mr. Bruce make corrections to his SOFA and schedules to disclose the missing real estate transfers. When the meeting was adjourned to a new date to allow him time to fix the errors and pull together relevant documents for the Chapter 7 Trustee's review, Mr. Bruce failed to appear at the rescheduled meeting. Although the Chapter 7 Trustee rescheduled the meeting of creditors three times, November 18, 2015, December 2, 2015, and December 16, 2015, Mr. Bruce never appeared. To date, Mr. Bruce has yet to complete the meeting of creditors or to amend his schedules and SOFA to properly disclose the prepetition real property transfers and the LPM Equity Transfer.
As the Sixth Circuit Bankruptcy Appellate Panel has noted:
"The very purpose of . . . 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 . . . . 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."Hamo, 233 B.R. at 725 (further citations omitted)
Instead of being honest and forthright from the beginning of his case, Mr. Bruce has forced the Chapter 7 Trustee and his creditors to expend time and money to obtain the basic disclosures that a debtor is required to make and which have yet to be made in this case.
The Plaintiffs have met their burden of proof and Mr. Bruce is denied a discharge pursuant to § 727(a)(4)(A).
III. CONCLUSION
In order to obtain the privilege of a discharge, the Bankruptcy Code requires from a debtor honesty, complete disclosure of financial affairs, and fair dealing with creditors. Instead, within the year prior to his bankruptcy filing, Mr. Bruce engaged in a pattern of prepetition transfers of his property interests to a business he owned and/or family members and the continued concealment of wages in a business account with the intent to protect those assets and thwart payment of the Greer judgment. He further failed to disclose these prepetition dealings in his schedules and Statement of Financial Affairs continuing the pattern to hinder and delay the payment of the Greer judgment. To date, he has not amended his filings to disclose these dealings as requested by the Chapter 7 Trustee nor did he attend any of the three rescheduled meetings of creditors.
For these reasons, Mr. Bruce is denied a discharge of his debts pursuant to 11 U.S.C. §§ 727(a)(2)(A) and (a)(4)(A).
SO ORDERED.
This document has been electronically entered in the records of the United States Bankruptcy Court for the Southern District of Ohio.
IT IS SO ORDERED.
/s/ _________
Beth A. Buchanan
United States Bankruptcy Judge Dated: September 16, 2019 Copies to:
Benjamin Sales, Esq.
Monica Kindt, Esq.
Douglas N. Hawkins, Esq.
Eileen Field, Esq.
Kenneth Grant Hawley, Esq
Stephanie Nicole Lape, Esq.
Gerald Benjamin Bruce
316 Laurel Avenue
Hamilton, Ohio 45015
Gerald Benjamin Bruce
6359 Robert E Lee Drive
Fairfield, Ohio 45014