J & R Inv. v. Anthony (In re Anthony)

• Decision Date: 23 September 2015
• Docket Number: No. 2:14–cv–647.,2:14–cv–647.
• Citation: 542 B.R. 580
• Court: U.S. District Court — District of Utah
• Parties: In re Michael Frederick ANTHONY, Debtor, J & R Investment, Appellant, v. Michael Frederick Anthony, Appellee.

542 B.R. 580

In re Michael Frederick ANTHONY, Debtor,

J & R Investment, Appellant,

v.Michael Frederick Anthony, Appellee.

No. 2:14–cv–647.

United States District Court, D. Utah, Central Division.

Signed Sept. 23, 2015.

Steven W. Call, Elaine A. Monson, Ray Quinney & Nebeker, Salt Lake City, UT, for Appellant.

Jay L. Kessler, Kessler Law Office, Magna, UT, for Appellee.

MEMORANDUM DECISION AND ORDER

ROBERT J. SHELBY, District Judge.

Michael Frederick Anthony received a Chapter 7 discharge of his debts from the United States Bankruptcy Court for the District of Utah. J & R Investment sought in the bankruptcy court revocation of the discharge under 11 U.S.C. § 727, arguing that Mr. Anthony made a number of false oaths in his bankruptcy filings and withheld property from the bankruptcy estate. After a trial on the matter, the bankruptcy court issued a Memorandum Decision dismissing J & R Investment's claims. J & R Investment appeals from that Memorandum Decision. Exercising jurisdiction under 28 U.S.C. § 158(a), the court affirms.

BACKGROUND

Michael Anthony ran a business named Freedom Storage and rented commercial storage space from J & R Investment. John and Rita Billinis operated J & R Investment when Mr. Anthony began renting the space. In 2005, the Billinises' children, Alex, Barbara, and Katherine, took over the company. Katherine reached an agreement with her siblings in which she received ownership of some of J & R Investment's real properties in exchange for her interest in the company. She used those properties to start two companies, E.Z. Storage, LLC and One Unit Investments, LLC.

In July 2006, J & R Investment sued Mr. Anthony for unpaid rent. In December 2007, the company obtained a judgment against Mr. Anthony for $169,743.74. The order was not certified until August 2010. While the litigation was pending, Katherine married Mr. Anthony and hired him to work as the property manager of E.Z. Storage and One Unit Investments. The couple eventually divorced. Katherine retained full ownership of E.Z. Storage and One Unit Investments, other real property that she received from J & R Investment, and a house in West Valley City. Mr. Anthony did not receive any real property in the divorce. He continued to work at One Unit Investments until May 2012 and still worked at E.Z. Storage at the time of the bankruptcy proceedings.

After J & R Investment served writs of garnishment on E.Z. Storage and One Unit Investments, Mr. Anthony filed for Chapter 7 bankruptcy. Mr. Anthony pursued the discharge pro se. The bankruptcy court issued Mr. Anthony a general discharge of debts on December 6, 2011. On December 4, 2012, J & R Investment filed this action, seeking revocation of the discharge under 11 U.S.C. 727(d). The bankruptcy court held a trial on the matter. Leading up to the trial, the parties submitted a Pretrial Order containing stipulated facts. In a Memorandum Decision dated August 20, 2014, the bankruptcy court made findings of fact and conclusions of law, and dismissed J & R Investment's claims. J & R Investment now appeals the bankruptcy court's ruling.

J & R Investment focuses its appeal on several inaccuracies and misleading statements contained in Mr. Anthony's bankruptcy filings (i.e., Payment Advices Certification, Statement of Financial Affairs, and Bankruptcy Schedules) and tax returns, including:

• Mr. Anthony failed to list his income from Freedom Storage for 2009, 2010, and 2011;

• the yearly incomes listed in Mr. Anthony's bankruptcy filings conflict with the incomes listed in his tax returns; and

• Mr. Anthony failed to disclose that he received two $2,000 checks (one from E.Z. Storage, one from One Unit Investments) in the sixty days before filing his petition.

J & R Investment asserts that the inaccuracies and omissions, taken together, prove that Mr. Anthony made "false oaths" for purposes of 11 U.S.C. § 727. The company also contends that the bankruptcy court erred by suggesting that Roger Oliphant, Mr. Anthony's tax preparer, was responsible for the inaccuracies and omissions in the tax returns and bankruptcy filings. Lastly, J & R Investment argues that the bankruptcy court erred in finding that Mr. Anthony and Katherine did not have a profit-sharing arrangement.

DISCUSSION

I. STANDARD OF REVIEW

When reviewing a bankruptcy court's decision, the district court is "bound to accept the bankruptcy court's findings of fact unless they are clearly erroneous, but may examine its conclusions of law de novo."¹ "A finding of fact is clearly erroneous if it is without factual support in the record or if, after reviewing all of the evidence, [the reviewing court is] left with the definite and firm conviction that a mistake has been made."² The court is not to "weigh the evidence or reverse a finding because it would have decided the case differently."³ Deference to the bankruptcy court's findings of fact is based on the notion that the fact-finder hears live testimony and has the opportunity to judge the credibility of witnesses.⁴ In sum, "[a] bankruptcy court's factual determinations will not be disturbed on appeal absent ‘the most cogent reasons appearing in the record.’ "⁵

II. REVOCATION

Chapter 7 of the Bankruptcy Code allows a debtor, upon meeting certain conditions, to receive a discharge of his debts. The general policy of Chapter 7 is to give debtors a "fresh start."⁶ Revocation of a Chapter 7 discharge is "an extraordinary remedy,"⁷ and the statutory provisions governing revocation "must be construed strictly against the [plaintiff seeking revocation] and liberally in favor the Debtor."⁸

J & R Investment contends that the bankruptcy court erred when it dismissed the claims for revocation of discharge under 11 U.S.C. § 727(d)(1) and (d)(2).

A. Section 727(d)(1)

J & R Investment contends that Mr. Anthony made false oaths within the meaning of 11 U.S.C. § 727(d)(1). The provision states:

(d) On request of the trustee, a creditor, or the United States trustee, and after notice and a hearing, the court shall revoke a discharge granted under ... [Section 727(a) ] ... if—

(1) such discharge was obtained through the fraud of the debtor, and the requesting party did not know of such fraud until after the granting of such discharge....⁹

Section 727(a)(4)(A) establishes that a court must grant a debtor a discharge unless the "debtor knowingly and fraudulently, in or in connection with the case ... made a false oath or account."¹⁰ To succeed on a revocation claim, the statute requires a plaintiff to show that the debtor knowingly and fraudulently made a material false oath.¹¹ "A debtor will not be denied discharge if a false statement is due to mere mistake or inadvertence. Moreover, an honest error or mere inaccuracy is not a proper basis for denial of discharge."¹² Courts have also found that ignorance of the law or carelessness is not grounds for revocation.¹³ On the other hand, reckless indifference to the truth often has "been treated as the functional equivalent of fraud for purposes of § 727(a)(4)(A)."¹⁴

A plaintiff seeking revocation of a discharge has the burden of proof.¹⁵ If the plaintiff makes a prima facie showing that raises "a reasonable inference of the debtor's intentional fraud, the burden shifts to the debtor to provide a cogent explanation for the omissions or misstatements."¹⁶ The burden shifting does not vitiate the plaintiff's ultimate burden of persuasion.¹⁷ This goes toward the well-established proposition that revocation of a Chapter 7 discharge is an extraordinary and harsh remedy, and that Section 727 should be construed against the plaintiff seeking revocation and in favor of the debtor.¹⁸ The burden therefore remains with the plaintiff.

J & R Investment contends that the bankruptcy court erred in concluding that it—as the plaintiff seeking revocation—had the ultimate burden of persuasion. But retaining the ultimate burden neither enhances a plaintiff's prima facie burden nor lessens a debtor's burden. If the plaintiff meets its prima facie burden, the burden shifts and the debtor must explain the inaccuracies and omissions. The plaintiff has the opportunity and the burden to controvert the debtor's explanation. If the plaintiff successfully does so, revocation is more likely to occur. If the plaintiff fails to do so, the debtor is more likely to fend off revocation. In any event, the plaintiff has the ultimate burden to prove its revocation claim.

1. Prima Facie Case

i. Review of Factual Findings

To make a prima facie showing, a plaintiff must put forth evidence that raises "a reasonable inference of the debtor's intentional fraud."¹⁹ J & R Investment contends that the parties' Pretrial Order was sufficient to establish a prima facie showing that Mr. Anthony made several false statements in his bankruptcy filings that give rise to an inference of fraud. "Factual assertions in ... pretrial orders, unless amended, are considered judicial admissions conclusively binding on the party who made them."²⁰

J & R Investment contends that the bankruptcy court made factual findings contrary to the stipulated facts in the Pretrial Order. In its brief, J & R Investment included a section entitled "All of The Bankruptcy Court's Findings Which Are Contrary To The Pretrial Order, Uncontroverted Facts Are Clearly Erroneous As A Matter Of Law." Under the heading, J & R Investment points to no specific factual findings and contends that the bankruptcy court erred by failing to incorporate into its Memorandum Decision the undisputed facts from the Pretrial Order. J & R Investment also contends in a separate section of its brief that the bankruptcy court's findings related to Mr. Anthony's failure to disclose payments were contrary to the Pretrial Order.

The bankruptcy court acknowledged in its Memorandum Decision that Mr. Anthony admitted he received but did not disclose two payments in the required reporting period of sixty days before the bankruptcy filing. In addition, the bankruptcy court made factual...