In re Jarrett
| Decision Date | 21 October 2009 |
| Docket Number | Adversary No. 08-064.,Bankruptcy No. 07-26383-DSK. |
| Parties | In re Aaron Larry JARRETT and Darleen F. Jarrett, Debtors. Richard F. Clippard, United States Trustee, Region 8, Plaintiff, v. Aaron Larry Jarrett and Darleen F. Jarrett, Defendants. |
| Court | United States Bankruptcy Courts. Sixth Circuit. U.S. Bankruptcy Court — Western District of Tennessee |
J. Steven Wilkes, Madalyn Scott Greenwood, U.S. Department of Justice, Office of the U.S. Trustee for Region 8, Memphis, TN, for Plaintiff.
Russell W. Savory, Memphis, TN, for Defendants.
MEMORANDUM AND ORDER RE PLAINTIFF'S COMPLAINT OBJECTING TO DEBTORS' GENERAL DISCHARGES COMBINED WITH NOTICE OF THE ENTRY THEREOF
This adversary proceeding arises out of a complaint filed by the plaintiff, Richard F. Clippard, United States Trustee, Region 8 ("Plaintiff"), against the defendants, Aaron Larry Jarrett ("Mr. Jarrett"), and Darleen F. Jarrett ("Mrs. Jarrett"), the above named-debtors ("Debtors"), objecting to their general discharges under 11 U.S.C. § 727(a)(3), (4)(A), and (5).1
The court has subject matter jurisdiction under 28 U.S.C. §§ 1334(a)-(b) and 157(a). By virtue of 28 U.S.C. § 157(b)(2)(A) and (J), this is a core proceeding. The court conducted a trial of this adversary proceeding on September 23, 2009. At the conclusion of the trial, the court took the matter under advisement. The court has now carefully considered the testimony of the witnesses adduced at the trial, the trial exhibits, the written submissions of the parties, the case record as a whole, and the oral arguments of the parties' attorneys. The following shall constitute the court's findings of fact and conclusions of law in accordance with Fed. R. Bankr.P. 7052.
The relevant background facts may be briefly summarized as follows. On July 11, 2007, the debtors filed a joint voluntary § 302 petition under chapter 7 of the Bankruptcy Code. Debtors sought to discharge scheduled non-priority unsecured debts of $215,705.78. The representations set forth in the debtors' joint chapter 7 petition, the statement of financial affairs, and schedules were all made under penalty of perjury. Along with these required "papers," the debtors also filed with the clerk the required Chapter 7 Statement of Current Monthly Income and Means Test Calculation ("Form 22A") reporting current monthly income ("CMI") of $1,819.45 with annualized CMI of $21,833 and a household size of two. The reported CMI attributed to Mrs. Jarrett was $1,444.45 in gross wages and $375 in pension and retirement income. Mr. Jarrett reported no income on Form 22A. Because the debtors' annualized CMI fell below the median income of $43,487 in Tennessee, they were not required to complete the remaining parts of Form 22A.
Debtors' statement of financial affairs reflected CY 2005 employment income of $41,652.00; CY 2006 employment income of $11,167.00; and CY 2007 employment income of $8,000.00. Their statement of financial affairs also reflected a pension income of $9,000 received in the two years preceding the commencement of this joint chapter 7 case. Debtors' amended Schedule I reflected that Mr. Jarrett earned $500 per month from the operation of a business; and Mrs. Jarrett earned $1,494.06 for a combined monthly income of $1,994.06. Although initially not listed, the debtors also filed an amended Schedule B, reflecting that Mrs. Jarrett had an interest in stock options in Sysco Corporation ("Sysco"), her prior employer, with an estimated net value of $2,000. Several years prior to the commencement of their bankruptcy case, Mrs. Jarrett had worked for Sysco as a receptionist. As part of her employment at Sysco, Mrs. Jarrett received 4,000 stock option grants. In March 2004, Mrs. Jarrett exercised 1,200 options by market set order and received net proceeds of $14,950.11.
In June 2003, Mr. Jarrett and his brother, Terry Jarrett, formed Cornerstone Mortgage Group, LLC ("Cornerstone"), a mortgage brokerage company. Mr. Jarrett was a 50% member-manager of Cornerstone and also worked as a mortgage broker for the company. In January 2006, Cornerstone maintained a line-of-credit in the amount of $49,763 with a local bank. This line-of-credit increased to approximately $167,865 as of June 30, 2007. In 2006, Cornerstone began to experience a "slow down" in the mortgage brokerage business. As a direct result, Cornerstone increasingly utilized its line-of-credit and other cash advances to fund operations. As Mr. Jarrett explained at the trial, "[w]e were having to borrow money to keep the company open." During the first six calendar months of 2007, the debtors obtained $8,600 in cash advances from creditors and deposited those advances in their personal bank account. During the same time, Mr. Jarrett received approximately $13,396 from Cornerstone; $21,350 from his brother, Terry; and additional monies from family, friends, and other sources.
In May 2007, Mr. Jarrett's brother, Terry, unexpectedly passed away. With the untimely death of his brother coupled with the severe financial difficulties Cornerstone was experiencing, Mr. Jarrett could not keep the company in operation as an ongoing business concern. Cornerstone ceased conducting business in June 2007. Cornerstone had held a certificate of deposit in the amount of $25,000 from funds advanced by Terry Jarrett's mother-in-law. On June 30, 2007, one of Cornerstone's last operating actions was to cash out the certificate of deposit and remit the proceeds to Terry Jarrett's mother-in-law. Shortly thereafter, Mr. and Mrs. Jarrett filed this joint chapter 7 case.
It is generally noted that the legal effect of a bankruptcy discharge is grounded upon the public policy of freeing the honest, but unfortunate, debtor from the financial burdens of prepetition debts. See, e.g., Williams v. United States Fidelity & Guar. Co., 236 U.S. 549, 554-55, 35 S.Ct. 289, 59 L.Ed. 713 (1915); Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934). The bankruptcy discharge serves, in essence, to release an individual debtor's in personam dischargeable obligations and to permanently enjoin creditors from collecting discharged debts from the debtor. See 11 U.S.C. § 524(a).
Significantly, the denial of a debtor's discharge is a harsh outcome; therefore, the provisions set forth in 11 U.S.C. § 727(a) are precisely drawn so as to encompass only those individual debtors who have not been honest and forthcoming about their financial affairs. See, e.g., Buckeye Retirement Properties v. Tauber (In re Tauber), 349 B.R. 540, 545 (Bankr. N.D.Ind.2006) ( ). Indeed, the denial of a general discharge can work a serious deprivation upon a debtor, and there are many circumstances where a debtor's acts and omissions may have been inadvertent or otherwise excusable. Thus, the provisions of § 727(a) are to be construed liberally in favor of granting debtors the fresh financial start contemplated by the Bankruptcy Code and the Supreme Court, and construed strictly against parties seeking to deny the granting of a debtor's discharge. See, among others, Meyers v. Internal Revenue Service (In re Meyers), 196 F.3d 622, 624 (6th Cir.1999) (quoting Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)). As the party seeking the denial of the debtors' general discharges, the United States trustee, as plaintiff, bears the burden of proving that the debtors are not entitled to discharges under § 727(a). See Fed. R. Bankr.P. 4005. The standard of proof for allegations under § 727(a) is by a preponderance of the evidence. See Grogan, 498 U.S. at 286-87, 111 S.Ct. 654.
In this case, the plaintiff now advances three separate subsections of § 727(a) as asserted grounds for denying discharges to the debtors. First, the plaintiff submits that the debtors did not produce adequate records as required by § 727(a)(3). Second, the plaintiff submits that the debtors made false oaths in their statements and schedules in violation of § 727(a)(4). Finally, the plaintiff submits that the debtors failed to explain satisfactorily the loss of assets or the deficiency of assets in violation of § 727(a)(5).
In objecting to the debtors' general discharges, the plaintiff first alleges that the debtors failed to keep or preserve financial records in violation of 11 U.S.C. § 727(a)(3). Under this subsection, the debtor will be denied a discharge where:
the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor's financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all the circumstances of the case.
This subsection does not require absolute completeness in making or keeping records. Rhoades v. Wikle, 453 F.2d 51, 53 (9th Cir.1971). Rather, the debtors must "present sufficient written evidence" which will enable the trustee or creditors to reasonably ascertain the debtor's present financial condition and to track the debtor's financial dealings with substantial completeness and accuracy for a reasonable period past to present. Id. Plaintiff bears the initial burden of proving that the debtor's financial records are inadequate and that this failure prevented the plaintiff from ascertaining the debtor's financial condition. Turoczy Bonding Co. v. Strbac (In re Strbac), 235 B.R. 880, 882 (6th Cir. BAP 1999) (citing Wazeter v. Michigan Nat'l Bank (In re Wazeter), 209 B.R. 222, 227 (W.D.Mich.1997)). The adequacy of records is determined on a case-by-case basis, considering the totality of the particular facts and circumstances (e.g., "debtor's occupation, financial...
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