In re Garcia, Bankruptcy No. 86-02645F

CourtUnited States Bankruptcy Courts. Third Circuit. U.S. Bankruptcy Court — Eastern District of Pennsylvania
Citation88 BR 695
Decision Date20 July 1988
PartiesIn re Oswald GARCIA, Debtor. The NEW WORLD MARKETING CORPORATION, Plaintiff, v. Oswald GARCIA, Defendant.
Docket NumberAdv. No. 86-1273F.,Bankruptcy No. 86-02645F

88 B.R. 695 (1988)

In re Oswald GARCIA, Debtor.
Oswald GARCIA, Defendant.

Bankruptcy No. 86-02645F, Adv. No. 86-1273F.

United States Bankruptcy Court, E.D. Pennsylvania.

July 20, 1988.

88 BR 696

Penelope A. Davidoff, Phillips & Phelan, Philadelphia, for plaintiff, The New World Marketing Corp.

Richard B. Perlman, Norristown, Pa., for debtor/defendant, Oswald Garcia.

Christopher G. Kuhn, Philadelphia, Pa., Trustee.


BRUCE I. FOX, Bankruptcy Judge:

This adversary proceeding involves a creditor's request to have the debtor's chapter 7 discharge denied pursuant to 11 U.S.C. § 727(a)(2) and 727(a)(4). In a prior opinion reported at In re Garcia, 69 B.R. 522 (Bankr.E.D.Pa.) aff'd. 76 B.R. 68 (E.D. Pa.) aff'd. mem., 838 F.2d 460 (3rd Cir. 1987), I addressed a discovery dispute between these parties. The merits of the proceeding are now before me.

88 BR 697

The underlying facts involved here are not seriously disputed.1 The debtor in this chapter 7 case, Oswald Garcia ("Garcia"), is an individual who was formerly employed by the plaintiff, The New World Marketing Corporation, ("New World"). At some point, the employment relationship between the parties apparently soured and Garcia was terminated from his position. New World then instituted suit against Garcia in state court in Pennsylvania to recover certain sums of money in excess of $200,000.00. Garcia responded with counterclaims in a total amount in excess of $700,000.00.2 Upon the debtor's bankruptcy filing on May 29, 1986, New World filed a proof of claim in the amount of $225,922.50.3

New World also filed the instant complaint under 11 U.S.C. § 727.4 Count I was brought pursuant to section 727(a)(2)(A) alleging that the debtor transferred certain property to his wife before the bankruptcy petition was filed with "intent to hinder, delay or defraud New World and . . . other creditors." (Complaint at ¶ 15.) Count II was brought under section 727(a)(4)(A) alleging that the debtor knowingly or fraudulently signed an oath verifying his statement of financial affairs filed with this court. The statement allegedly failed to disclose the existence of certain property including an equitable interest in property owned by the debtor's wife, "bank accounts and safe deposit boxes" and the state court counterclaim.5 (Complaint at ¶ 18-20).

At the hearing, in support of its claims, New World presented only the pleadings to the extent of admissions contained therein and certain deposition testimony of Garcia.

As to Count I, New World presented evidence that Tatiana Garcia, the debtor's wife, purchased property in Canada on June 26, 1980 to serve as a joint residence for herself, the debtor and their children. The property was titled solely in the name of Mrs. Garcia subject to a purchase money mortgage held by Canada Trustco Mortgage Company in the amount of $68,175.00. Mrs. Garcia then secured a second mortgage from Household Realty Corporation in the amount of $26,783.17 on May 13, 1981 and a third mortgage in the amount of $7,900.00 from Guaranty Trust Co. of Canada on December 17, 1982.6 Mrs. Garcia obtained funds for the down payment on the house by selling a prior residence titled only in her name. At least a portion of the funds used to obtain the prior residence came from sale in 1974 of a residence owned by the Garcias jointly. For most of the period from 1980 to the present, the Canada property has served as the debtor's residence.

Subsequently, each of the mortgages was fully repaid by Mrs. Garcia or by the Garcias jointly. The parties agree that on February 14, 1985, the debtor wrote a check in the amount of $27,279.00 to satisfy the Household Realty Corporation mortgage which was drawn on a joint bank account into which Mrs. Garcia deposited all of her husband's pay checks. Similarly,

88 BR 698
the Guaranty Trust Company mortgage was discharged by payment of $10,236.80 on April 19, 1985 by certified check from the same joint bank account. The parties also agree that on June 25, 1985 the Canada Trust purchase money mortgage was discharged by payment. It is undisputed that the source of the funds was the liquidation of a bank account held in Mrs. Garcia's name only. The parties do dispute, however, the source of the funds in Mrs. Garcia's account. The debtor testified that any money in the account came from a source other than himself.7 New World would have me infer that the source of the funds in the account must have been the debtor insofar as Mrs. Garcia was not employed during the relevant period

The only direct evidence of Garcia's income was Garcia's testimony that he earned approximately $17,000.00 in 1983, $25,000.00 in 1984 and $25,000.00 in 1985. During the entire period, the debtor claims that he had expenses of approximately $2,000.00 monthly. New World would have me infer that the debtor's income was greater during that period, based on records indicating that certain inventory was in Garcia's control and the amount of money remitted to New World does not fully jibe with the value of the inventory. New World argues as well that Garcia's credibility is undermined insofar as his income and expense figures would not have allowed Mrs. Garcia to save the money in the joint bank account necessary to allow repayment of the mortgages.8

In support of its allegations under Count II, New World asserts that Garcia has an ownership interest in the Canada residence which was not disclosed. It also presented unrebutted evidence that Garcia owns a safe deposit box and two bank accounts which were not listed in the debtor's sworn Statement of Financial Affairs. See Official Bankr. Form 7, question 4 ("Financial accounts, certificates of deposit and safe deposit boxes."); 11 U.S.C. § 521(1); Bankr Rule 1007. The debtor, of course, disputes his alleged ownership interest in the real estate, but admitted existence of the other assets at a deposition taken by New World and in the answer filed to the complaint. In addition, unrebutted evidence establishes that the existence of the state court counterclaim against New World was omitted from the debtor' scheduled assets. Little, if any, evidence was offered, however, by either party about the value of the respective assets.9 In response, the debtor presented amended schedules which disclose the existence of the assets at the time of his initial filing. The amended schedules were not filed until on or about the date of the trial in this matter.

Having made a record on which both parties essentially agree upon many of the facts, the parties, of course, disagree on the appropriate inferences to be drawn from the record and on the requisite legal conclusions. I thus must review the evidentiary burdens applicable to 11 U.S.C. § 727 as well as the elements to which those burdens apply.


The relevant language of 11 U.S.C. § 727 reads as follows:

(a) The court shall grant the debtor a discharge, unless —
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed —
(A) property of the debtor, within one year before the date of the filing of the petition;
* * * * * *
88 BR 699
(4) the debtor knowingly and fraudulently, in or in connection with the case —
(A) made a false oath or account.

Both 11 U.S.C. § 727(a)(2) and § 727(a)(4) are derived from the Bankruptcy Act, § 14c. Under § 14c, a significant and often litigated issue was allocation of the burden of proof. That issue was ultimately resolved by rule, specifically former Bankr. Rule 407, which made clear that the burden of proof applicable to a complaint objecting to a discharge was on the plaintiff. See Matter of Decker, 595 F.2d 185 (3rd Cir.1979) (upholding validity of Rule 407).

Current Bankr. Rule 4005 is virtually identical to former Rule 407 in stating that the burden is on the plaintiff in a proceeding brought under Section 727. See 8 Collier on Bankruptcy ¶ 4005 at 4005-1 to 4005-2 (15th ed. 1988) ("Collier"). Much less clear, however, is the question of the measure of evidence necessary to carry plaintiff's burden under 727(a)(2) and (a)(4). The following courts have concluded that the plaintiff need carry its burden only by a preponderance of the evidence. Farmers Co-operative Association v. Strunk, 671 F.2d 391, 395 (10th Cir.1982); In re Shults, 28 B.R. 395, 396 (Bankr. 9th Cir.1983); In re Parker, 85 B.R. 384 (Bankr.E.D.Va. 1988); In re Riso, 74 B.R. 750, 757 (Bankr. D.N.H.1987); In re Clausen, 44 B.R. 41, 45 (Bankr.D.Minn.1984); In re Gonday, 27 B.R. 428, 432 (Bankr.M.D.La.1983). Other courts have concluded that clear and convincing evidence is required. In re Johnson, 82 B.R. 801, 804 (Bankr.E.D.N.C.1988); In re Somerville, 73 B.R. 826, 835 (Bankr. E.D.Pa.1987); In re Booth, 70 B.R. 391, 394 (Bankr.D.Colo.1987); In re Woerner, 66 B.R. 964, 971 (Bankr.E.D.Pa.1986) aff'd. C.A. 86-7324 (E.D.Pa. April 28, 1987); In re Lineberry, 55 B.R. 510, 511 (Bankr.W.D. Ky.1985); In re Cohen, 47 B.R. 871, 874 (Bankr.S.D.Fla.1985).

Those cases which have concluded that the applicable burden of proof under section 727 is by a preponderance of the evidence rely primarily on decisions under the Act, § 14c which concluded that the burden of persuasion necessary to deny a debtor's discharge under that section could be established by a mere preponderance of the evidence. See In re Mascolo, 505 F.2d 274, 276 (1st Cir.1974); In re Robinson, 506 F.2d 1184, 1187 (2d Cir.1974); Union Bank v. Blum, 460 F.2d 197, 200-201 (9th Cir. 1972). See also 12 Collier on Bankruptcy, ¶ 407.3 at 4-69 to 4-70 (14th ed. 1978).

Those cases which conclude that clear and convincing evidence is required rely primarily on a long line of decisions under both state and federal law which require...

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