3/13/08
Hildebrand v. Browning, Adv. No. 07-3171
UNPUBLISHED LETTER RULING ON TRIAL, by Judge Elizabeth L. Perris
Judge Perris presented her ruling after trial on a creditor’s § 727(a)(4) and § 727(a)(5) grounds for denial of discharge. § 727(a)(4) refers to false oaths by debtors and § 727(a)(5) to failure to explain satisfactorily any loss or deficiency of assets.
The creditor had sold debtors a flower store about two years earlier, for which debtors continued to owe a balance of the purchase price. Barely a month before debtors filed the underlying Chapter 7 case, they had auctioned off all the inventory of that business, grossing almost $7,000 in proceeds, but they failed to list this auction on their Statement of Financial Affairs or inform the trustee about it at the §341 hearing, notwithstanding direct questions put to them there about sales or transfers within the previous 4 years. Then 31 days after the hearing, debtors filed an amended SOFA disclosing the auction.
Judge Perris ruled that even though both these omissions, in the SOFA and at the hearing, were false and material, they were NOT intentional or fraudulent. As for the omission in the SOFA, Judge Perris held that their omissions were not intentional or fraudulent because debtors listed their business and its demise in their initial bankruptcy documents, and thus they were not trying to hide the auction of the business assets. She was also convinced by the testimony of the debtors that their inaccurate answers to the questions at the § 341 hearing were not intentional. And Judge Perris clearly found important that debtors filed an accurate amended SOFA before the trustee or creditors had discovered the error and before this adversary proceeding was filed.
As to allegedly false testimony in a deposition and at trial by each of the debtors, Judge Perris ruled that the evidence showed either that the debtors misunderstood the questions and thus testified inaccurately but did not do so knowingly and fraudulently, or else that the specific testimony complained of was not either not false or not intentionally so.
As to § 727(a)(5), a failure to explain satisfactorily a loss or deficiency of assets did NOT arise from: 1) the failure to sell the business, even though there appeared to be some interested buyers; 2) the failure to get the highest possible sale price for that business: or 3) a failure to get a better price for the sale of the inventory. The last of these issues could be referred to the trustee as a potential fraudulent transfer, but the judge indicated that the evidence before her did not seem to support anything other than an arms length transaction with a disinterested auctioneer.
Judge Perris referred a number of times of the lack of documentary or other potentially available evidence which hurt plaintiff’s case. The most direct example: one of the debtors testified that they did not accept one of the offers to buy the business because it did not include an assumption of the remaining debt to the creditor, whereas the person who made the offer testified at trial that the offer had in fact included such an assumption. But plaintiff failed to produce that written offer at trial so Judge Perris concluded that debtor must have misunderstood the offer and that this misunderstanding was not necessarily unreasonable.
BOTTOM LINE: This adversary proceeding would likely have been altogether avoided had debtors clearly understood the SOFA questions at the outset and had they been completed by the attorney accurately. But debtors’ counsel’s relatively quick action in filing an amended SOFA seemed to be instrumental in convincing Judge Perris of the debtors’ lack of knowing, fraudulent intent. On the other hand, had creditor’s counsel presented into evidence the business purchase offer and some other missing evidence directly supporting the allegations, depending on what that evidence would have been, creditor would have had a better chance at prevailing.
The creditor had sold debtors a flower store about two years earlier, for which debtors continued to owe a balance of the purchase price. Barely a month before debtors filed the underlying Chapter 7 case, they had auctioned off all the inventory of that business, grossing almost $7,000 in proceeds, but they failed to list this auction on their Statement of Financial Affairs or inform the trustee about it at the §341 hearing, notwithstanding direct questions put to them there about sales or transfers within the previous 4 years. Then 31 days after the hearing, debtors filed an amended SOFA disclosing the auction.
Judge Perris ruled that even though both these omissions, in the SOFA and at the hearing, were false and material, they were NOT intentional or fraudulent. As for the omission in the SOFA, Judge Perris held that their omissions were not intentional or fraudulent because debtors listed their business and its demise in their initial bankruptcy documents, and thus they were not trying to hide the auction of the business assets. She was also convinced by the testimony of the debtors that their inaccurate answers to the questions at the § 341 hearing were not intentional. And Judge Perris clearly found important that debtors filed an accurate amended SOFA before the trustee or creditors had discovered the error and before this adversary proceeding was filed.
As to allegedly false testimony in a deposition and at trial by each of the debtors, Judge Perris ruled that the evidence showed either that the debtors misunderstood the questions and thus testified inaccurately but did not do so knowingly and fraudulently, or else that the specific testimony complained of was not either not false or not intentionally so.
As to § 727(a)(5), a failure to explain satisfactorily a loss or deficiency of assets did NOT arise from: 1) the failure to sell the business, even though there appeared to be some interested buyers; 2) the failure to get the highest possible sale price for that business: or 3) a failure to get a better price for the sale of the inventory. The last of these issues could be referred to the trustee as a potential fraudulent transfer, but the judge indicated that the evidence before her did not seem to support anything other than an arms length transaction with a disinterested auctioneer.
Judge Perris referred a number of times of the lack of documentary or other potentially available evidence which hurt plaintiff’s case. The most direct example: one of the debtors testified that they did not accept one of the offers to buy the business because it did not include an assumption of the remaining debt to the creditor, whereas the person who made the offer testified at trial that the offer had in fact included such an assumption. But plaintiff failed to produce that written offer at trial so Judge Perris concluded that debtor must have misunderstood the offer and that this misunderstanding was not necessarily unreasonable.
BOTTOM LINE: This adversary proceeding would likely have been altogether avoided had debtors clearly understood the SOFA questions at the outset and had they been completed by the attorney accurately. But debtors’ counsel’s relatively quick action in filing an amended SOFA seemed to be instrumental in convincing Judge Perris of the debtors’ lack of knowing, fraudulent intent. On the other hand, had creditor’s counsel presented into evidence the business purchase offer and some other missing evidence directly supporting the allegations, depending on what that evidence would have been, creditor would have had a better chance at prevailing.
By Andrew Toth-Fejel, Bankruptcy Litigation Support for Attorneys, Andy@BLSforAttorneys.com
© 2008 Bankruptcy Litigation Support for Attorneys
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