Davis v. Baker (In re Baker)
| Decision Date | 20 May 2021 |
| Docket Number | Adv. No. 20-5006,Case No. 19-12015 |
| Parties | IN RE: MONICA L. BAKER Debtor. L. JOY DAVIS Plaintiff, v. MONICA L. BAKER Defendant. |
| Court | U.S. Bankruptcy Court — District of Kansas |
DESIGNATED FOR ONLINE PUBLICATION
Section 727 objections to a Chapter 7 debtor's discharge are difficult to prove, and for good reason. A denial of debtor's discharge is the "death penalty" in bankruptcy. A creditor's objections to discharge under § 727(a)(2) and § 727(a)(4)(A) and (D)—based upon the debtor's singular failure to disclose a "customer list" from her accounting business on Schedule A/B—require proof that the debtor concealed the customer list with the intent to hinder, delay, or defraud a creditor or the trustee, knowingly and fraudulently made a false oath, or knowingly and fraudulently withheld recorded information from the Chapter 7 trustee. Fraudulent intent is an element of each of those objections. While fraudulent intent can be shown by circumstantial evidence, the plaintiff's evidence of such was lacking or unpersuasive in this case. Having failed to meet her burden of proof on any of the objections, the plaintiff's § 727(a) claims must be denied.1
A proceeding objecting to a Chapter 7 debtor's discharge under § 727 is a core proceeding arising under the Bankruptcy Code, 28 U.S.C. § 157(b)(2)(J), for which the bankruptcy court has subject matter jurisdiction.2
Background and Sale of Accounting Business Debtor-defendant Monica Baker is the sole proprietor of Baker Professional Accounting Services. She is indebted to plaintiff Joy Davis pursuant to a state court consent judgment arising out of her breach of contract for the purchase of an accounting business. In the latter part of 2014 plaintiff Davis sold her accounting business (Kahmeyer Accounting) to defendant Baker, a ten-year employee of the business, for a purchase price of $255,031, of which $245,031 was allocated for tax purposes to the "client base." The parties memorialized the transaction by a Business Sale Agreement dated November 1, 2014.3 Neither party was represented by an attorney in the negotiation or sale of the business.
Neither party is a certified public accountant. At the time of the sale, Davis was a part-time school teacher and worked part-time at the accounting business, but was planning to retire. Baker worked full-time at the business and had been employed there for about ten years. Baker maintained that she was the one who "cultivated" the clients. She held herself out as a public accountant. The business provided state and federal income tax preparation services, sales tax returns, monthly payroll services, preparation of profit and loss statements and depreciation schedules, and performed general bookkeeping functions for some clients.
When Davis had the business, she did not maintain a client list. She acknowledged that an accounting business has no "customers;" the people to whom they provide accounting services are properly referred to as "clients." When Davis acquired the business from her predecessor in 1986, she had client files, generated manually. Over time the business transitioned to databases of client information and their historical data generated and accessed through computer software programs. The "Client Base" referenced in the sale contract was this database and historical client information and records. According to Davis, this was the most valuable asset of the business that was transferred to Baker. Baker counters that the value of the business lies in the value of services performed for the client. Though Davis planned to retire, Baker sought and the parties agreed to a non-compete provision in the contract that prohibited Davis from competing with Baker for a five-year period in a 50-mile radius. This non-compete provision is what made the client base valuable according to Baker. Since the sale, Baker has operated the accounting business as a sole proprietorship, dba Baker Professional Accounting Services (BPAS).
After paying some $60,000 toward the sale contract, Baker defaulted in her payments under the contract and Davis sued her in Pratt County District Court for breach of contract. The parties ultimately settled the dispute in the fall of 2019 and entered into a consent judgment against Baker in the amountof $174,516.4 Neither the sale transaction, nor the consent judgment was secured or collateralized in any fashion.
Baker filed a Chapter 7 bankruptcy on October 21, 2019. Davis filed an unsecured proof of claim in the bankruptcy case based on her state court judgment. Debtor disclosed in her bankruptcy petition that she was the sole proprietor of BPAS and listed its EIN.5 She also listed her ownership interest in BPAS on the Statement of Financial Affairs (SOFA) and represented that her accounting business was the primary source of her income.6 On Schedule A/B, Baker listed her accounting licenses and the business website or internet domain name (with $0 value).7 In Part 5, she scheduled her business-related property:8 accounts receivable of $9,000 (line 38) and "computers, printers, copiers, software, other office equipment" of $6,830 (line 39). Baker represented she had no "customer lists, mailing lists, or other compilations" (line 43), nor any other business-related property (line 44). On Schedule G, Baker listed a copier lease, an office lease, and an IT service agreement, all of which she intended to assume.9 She disclosed Davis' lawsuitfor breach of contract in Part 4 of her SOFA.10
Baker contends that she checked the "no" box on line 43 because she has no "customer list." And without a non-compete agreement, she believed the client list had no value. In a Chapter 7 liquidation, the client list or client database, if sold, would be free of a non-compete clause.
Davis commenced this adversary proceeding on January 20, 2020, objecting to Baker's discharge under § 727(a)(2) and § 727(a)(4)(A) and (D). This proceeding boils down to the issue of whether Baker's discharge should be denied for failing to disclose the existence of a "customer list" on line 43 of Schedule A/B. During the pendency of this proceeding, plaintiff's complaint evolved from omission of the "customer list" (frequently equating a customer list to a client list by reference to the "customer/client list") as alleged in the complaint,11 and "client list" as alleged in the amended complaint,12 to failure to list her "customer/client list and appurtenant [client] databases" as contended in the final pretrial order,13 to asserting through her expert witness at trial that the client base was a "compilation" within the meaning of line 43. Though the Court does not view a customer list and a client list as interchangeable terms, nor equate a database to a customer list or compilation, the Court need not delve into the distinctions to decide this case. Even if the client list, client base, or database should have been disclosedon Schedule A/B, plaintiff must show that Baker omitted the same with the intent to hinder, delay or defraud creditors or "knowingly and fraudulently" omitted them. As discussed below, this is where plaintiff's § 727(a) claims fail.
Following the debtor's § 341 meeting, the Chapter 7 trustee filed a notice of assets and moved for turnover of BPAS receivables, among other enumerated property.15 That motion was granted without opposition, and was later amended by agreement.16
The trustee filed his final report on October 29, 2020, and an order of distribution was entered November 24, 2020.17 No party objected to the trustee's final report or proposed distribution. Baker's accounting license and website were listed as assets of the estate, but had no value. The trustee administered assets having a total value of $17,677.66 and collected a total of $16,360.91, of which $7,978 was attributed to BPAS's accounts receivable. The office equipment was exempt as tools of the trade and its value was under the $7,500 exemption limit provided by Kansas law. Nearly $10,000 of the trustee's receipts were available for distribution to general unsecured creditors with Davis to be paid the lion's share of that distribution on herallowed claim.
At trial, the Chapter 7 trustee testified that he was aware of the Davis-Baker adversary proceeding and the claims for denial of discharge. He did not agree with the complaint and stated that he had no grounds to bring a § 727 complaint.
The trustee was aware debtor was an accountant and operated her business as a sole proprietorship. In his view, the debtor adequately disclosed she had a client base. He investigated and sought turnover of the accounts receivable, the main source of funds for the estate, and non-exempt, collectible tangible assets. The trustee requested an itemization of the receivables and corresponding invoices and debtor complied with his requests for information. Pursuant to an agreed turnover order, debtor in fact paid the receivables and value of other tangible property. In short, the debtor cooperated with the trustee and did not hide or conceal property of the estate. Nor did she impede the trustee's ability to administer the case.
In his 37 years serving as a trustee, Mr. Morris believed that trying to ascertain the value of intangibles like a client list or client database serves no purpose other than to sell the accounting practice. And where the debtor is operating the business as a "dba" (sole proprietorship), there is a limited purchaser base or readily available market for such property. In the trustee's view, disclosure of the client list or database would not have resulted in agreater recovery or changed anything he did. Pursuing a "sale" of the client database could put the debtor out of business and was impractical and counter-productive to collecting the tangible assets for the estate. Thus, the trustee...
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