In re Guadarrama

• Decision Date: 30 September 2002
• Docket Number: No. CV 01-07407 MMM.,CV 01-07407 MMM.
• Citation: 284 B.R. 463
• Parties: In re Juan C. GUADARRAMA and Ilda Valencia aka Hilda Valencia, Debtors. Maureen A. Tighe, United States Trustee, Appellant, v. Ilda Valencia aka Hilda Valencia, Appellee.
• Court: U.S. District Court — Central District of California

284 B.R. 463

In re Juan C. GUADARRAMA and Ilda Valencia aka Hilda Valencia, Debtors Maureen A. Tighe, United States Trustee, Appellant, v. Ilda Valencia aka Hilda Valencia, Appellee.

No. CV 01-07407 MMM.

United States District Court, C.D. California.

September 30, 2002.

COPYRIGHT MATERIAL OMITTED

Michael J. Hauser, Santa Ana, CA, for appellant.

Christopher L. Blank, Newport Beach, CA, for appellee.

ORDER REVERSING BANKRUPTCY COURT'S ORDER DENYING COMPLAINT TO REVOKE DISCHARGE OF DEBTOR ILDA VALENCIA

MORROW, District Judge.

On August 11, 1999, debtors Ilda Valencia and Juan C. Guadarrama commenced a Chapter 7 bankruptcy proceeding, which resulted in a discharge of their debts on November 22, 1999. On July 24, 2000, the United States Trustee sought to reopen the bankruptcy for the purpose of filing a complaint seeking revocation and denial of discharge pursuant to 11 U.S.C. § 727(d)(1). The motion to reopen was granted, and the Trustee filed her § 727(d)(1) complaint on November 8, 2000.¹ The Trustee alleged that Valencia had listed two false social security numbers on her bankruptcy petition, omitted her true social security number, and lied under oath to the Chapter 7 Trustee at the 11 U.S.C. § 341(a) meeting of creditors. Following a trial, the bankruptcy court found that the Trustee had failed to prove that Valencia's false oath was "material" and that she had obtained her discharge through fraud.² Accordingly, it declined to revoke the discharge. The Trustee has appealed the bankruptcy court's decision to this court.

To prevail on its complaint seeking revocation of discharge under 11 U.S.C. § 727(d)(1), the United States Trustee was required to prove (1) that Valencia obtained a discharge through fraud, and (2) that the Trustee was not aware of the alleged fraud prior to discharge. 11 U.S.C. § 727(d)(1). To prove that Valencia procured or attempted to procure a discharge by fraud, the Trustee was required to show that (1) Valencia knowingly and fraudulently made a false oath in or in connection with the bankruptcy proceeding and (2) that the oath concerned a material fact. See 11 U.S.C. § 727(a)(4)(A). Because the Trustee proved each of the necessary elements, the court reverses the order of the bankruptcy court denying relief on the Trustee's complaint seeking revocation of discharge, and remands to that court with directions to enter an order revoking Valencia's discharge.

I. FACTUAL BACKGROUND

On August 11, 1999, Valencia and her husband, Guadarrama, filed a voluntary Chapter 7 bankruptcy petition. Valencia signed the petition under penalty of perjury. The petition listed two Social Security numbers for Valencia — XXX-XX-XXXX and XXX-XX-XXXX. Valencia had fabricated both numbers prior to the filing of the petition, and had used them to obtain employment and credit, and to attend college.³ Valencia constructed the second of the two numbers by changing the last digit of her sister's valid Social Security number from a zero to a two.⁴ Valencia had obtained a valid Social Security number — XXX-XX-XXXX — in October 1998. This number was not listed on the petition.⁵

Before filing the petition, Valencia worked as a receptionist in the office of bankruptcy petition preparer Rafael Berrios. While working for Berrios, Valencia learned how to prepare bankruptcy petitions. In September 1999, shortly after filing her own bankruptcy petition, Valencia began to prepare bankruptcy petitions for others.⁶

On September 13, 1999, Valencia and Guadarrama attended a 11 U.S.C. § 341(a) meeting of creditors conducted by the Chapter 7 Trustee of their bankruptcy estate, James J. Joseph. Joseph asked Valencia for her Social Security number, and Valencia gave him one of the fabricated numbers that she included on the bankruptcy petition — XXX-XX-XXXX. Joseph also asked Valencia if she had read her bankruptcy papers, if the information contained in them was correct to her knowledge, and if the papers contained any mistakes of which she was aware. Valencia answered that she had read the filings, that they were correct as far as she knew, and that they did not contain any mistakes of which she was aware.⁷ Following this meeting, on November 22, 1999, Valencia and Guadarrama received a discharge; their case was closed on December 10, 1999.⁸

On January 21, 2000, the United States Trustee filed a motion for sanctions against Valencia in her capacity as a bankruptcy petition preparer. On February 29, 2000, Valencia testified under oath at a hearing on the motion that neither of the Social Security numbers listed on her Chapter 7 petition had been issued to her by the Social Security Administration, and that she had failed to include her valid Social Security number on the petition.⁹

The United States Trustee then moved to reopen Valencia's Chapter 7 proceeding in order to prosecute a complaint for revocation of her discharge pursuant to 11 U.S.C. § 727(d)(1). The motion to reopen was granted on July 24, 2000 and the Trustee filed a complaint for revocation of Valencia's discharge on November 8, 2000.¹⁰ The complaint was timely filed within one year of the date of the discharge. See 11 U.S.C. § 727(e)(1).

On June 22, 2001, the bankruptcy court conducted a trial on the Trustee's complaint. Valencia testified that she had fabricated the two Social Security numbers listed on her Chapter 7 petition and that she had used them to obtain credit.¹¹ She testified that she went to a credit reporting agency before filing her Chapter 7 petition to determine what debt she should list on her bankruptcy petition. She requested a report for her valid Social Security number, and learned that there was no debt associated with that number. She then requested a report for one of the false Social Security numbers — XXX-XX-XXXX — and learned that that was the number that reflected her debts.¹²

Valencia admitted that she did not disclose her valid Social Security number or the fact that she had listed two false Social Security numbers on her bankruptcy petition at the § 341(a) meeting of creditors.¹³ She stated that, after the bankruptcy petition was filed, she used the valid Social Security number to open a bank account and obtain both a pre-paid credit card and a Nordstrom credit card.¹⁴ Valencia acknowledged that she disclosed the bankruptcy proceeding when she applied for the first credit card, and was limited to a "pre-paid" card as a result. She did not disclose the bankruptcy on her application for the Nordstrom card.¹⁵

Assistant United States Trustee Arthur Marquis also testified at trial. He stated that the proper administration of bankruptcy cases depends on debtors' disclosure of their valid Social Security numbers. Specifically, he explained that the Social Security numbers listed on a petition are entered into a computer system to cross-check against previous bankruptcy filings and discharges, and to determine if the petitioner is eligible to receive a discharge.¹⁶ Marquis asserted that, had he known of the false information contained in Valencia's petition prior to her discharge on November 22, 1999, the he would have initiated an action under § 727 to deny her a discharge. His office has initiated similar actions in the past against individuals who have listed false Social Security numbers on their petitions.¹⁷

Based on the evidence presented at trial, the bankruptcy court found that Valencia had "knowingly . . . omitted the Social Security number she was assigned by the Social Security Administration from her petition and . . . done so with the intent to deceive the Trustee and her creditors."¹⁸ It concluded, however, that the Trustee had failed to prove (1) that Valencia's failure to disclose her Social Security number was a "material" misrepresentation as that term is used in 11 U.S.C. § 727(a)(4), and (2) that Valencia obtained her discharge through fraud.¹⁹ The court based its finding regarding materiality on its interpretation of United States v. Phillips, 606 F.2d 884 (9th Cir.1979), cert. denied, 444 U.S. 1024, 100 S.Ct. 685, 62 L.Ed.2d 657 (1980).²⁰

The Trustee has appealed the bankruptcy court's decision, arguing that it erred in concluding that Valencia did not obtain her discharge through fraud and that her failure to disclose her valid Social Security number was not material.²¹

II. DISCUSSION

A. Legal Standard Governing Review Of A Bankruptcy Court Ruling

The district court has jurisdiction to hear appeals from final judgments, orders or decrees of the bankruptcy court. 28 U.S.C. § 158(a). When reviewing a decision of a bankruptcy court, a district court functions as an appellate court and applies the standards of review generally applied in federal courts of appeal. In re Webb, 954 F.2d 1102, 1103-04 (5th Cir.1992). The district court must accept the bankruptcy court's findings of fact unless they are clearly erroneous. It reviews the bankruptcy court's conclusions of law de novo. In re Cohen, 300 F.3d 1097, 1101 (9th Cir.2002); In re Anastas, 94 F.3d 1280, 1283 (9th Cir.1996).

Materiality is generally considered "a mixed question of law and fact, involving as it does the application of a legal standard to a particular set of facts." TSC Industries Inc., v. Northway, Inc., 426 U.S. 438, 450, 96 S.Ct. 2126, 48 L.Ed.2d 757 (1976). See also United States v. Gaudin, 515 U.S. 506, 512, 115 S.Ct. 2310, 132 L.Ed.2d 444 (1995). The bankruptcy court's factual findings regarding Valencia's misstatements and non-disclosures must thus be reviewed for clear error, while its legal conclusion that the representations were not material is reviewed de novo. See GAF Corp. v. Heyman, 724 F.2d 727, 738 (2d Cir.1983) (review of a lower court's application of a legal standard to the facts is not limited by clearly erroneous rule); K & M Joint Venture v. Smith International, Inc., 669 F.2d 1106, 1111-12 (6th Cir.1982) (review of mixed questions of fact and law is not governed by the clearly erroneous standard); First...