In re Johnson

• Decision Date: 19 February 1988
• Docket Number: Adv. No. S-87-0152-AP.,Bankruptcy No. 86-02435-SN5
• Parties: In re William H. JOHNSON, Justine J. JOHNSON, Debtors. FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF RALEIGH, Plaintiff, v. William H. JOHNSON and Justine J. Johnson, Defendants.
• Court: U.S. Bankruptcy Court — Eastern District of North Carolina

82 B.R. 801 (1988)

In re William H. JOHNSON, Justine J. JOHNSON, Debtors.

FIRST FEDERAL SAVINGS AND LOAN ASSOCIATION OF RALEIGH, Plaintiff, v. William H. JOHNSON and Justine J. Johnson, Defendants.

Bankruptcy No. 86-02435-SN5, Adv. No. S-87-0152-AP.

United States Bankruptcy Court, E.D. North Carolina.

February 19, 1988.

Donald A. Davis, Raleigh, N.C., for debtors/defendants.

Ronald H. Garber, Raleigh, N.C., for plaintiff.

MEMORANDUM OPINION

A. THOMAS SMALL, Bankruptcy Judge.

The matter before the court is an objection to the debtors' discharge filed on July 28, 1987, by First Federal Savings and Loan Association of Raleigh ("First Federal"), a creditor of the debtors. The trial of this adversary proceeding was held in Raleigh, North Carolina, on February 4, 1988.

FACTS

The debtors filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code on October 27, 1986. The petition, schedules, and statement of financial affairs were all admitted into evidence without objection. The debtors' original schedules showed secured debts totalling $44,000.¹ The schedules showed that United Carolina Bank had a claim of $5,500.00 secured by a 1985 Oldsmobile with a market value of $6,000.00, that GMAC had a claim of $9,600.00 secured by a 1985 Buick with a market value of $9,000.00, and that United Carolina Bank had a second claim in the amount of $28,900 secured by a mobile home with a market value of $30,000.00. The debtors' schedules showed unsecured debt in the amount of $24,707.00; First Federal was listed as the largest unsecured creditor with a claim of $8,676.00. Based on the debtors' original schedule of assets, all of the debtors' property appears to either be encumbered or to qualify for exemption.

One of the allegations in the plaintiff's objection to discharge is that the debtors had overstated the amount of their secured debt. In August of 1987, after the objection to discharge had been filed, the debtors amended their schedule of secured debts both with respect to the amount owed and the value of the collateral. The debtors' amended schedules stated that $4,476.00 (rather than $5,500.00) was owed on the Oldsmobile which was shown to have a value of $6,175.00 (rather than $6,000.00), that $7,907.00 (rather than $9,600.00) was owed on the Buick which was shown to have a value of $7,875.00 (rather than $9,000.00), and that $11,802.00 (rather than the $28,900.00) was owed on the mobile home which was shown to have a value of $23,997.00 (rather than $30,000.00).

The male debtor testified that he had calculated the secured debts listed on the original schedules by including all the interest he was expected to pay under the terms of the sales contracts. The amended schedules showed the "payoff" figures as of the date the petition was filed. Mr. Johnson also testified that the values given for the mobile home and the two automobiles in the original schedules had been estimates; Mr. Johnson indicated that the lower figures in the amended schedules represented what he believed at the time the amended schedules were filed to be a more accurate reflection of the value of the collateral. A sales representative from the company which sold the debtors their mobile home testified at the adversary proceeding that the NADA base value of the debtors' mobile home was $23,000.00 in October of 1986, but that the total value as of that date was approximately $30,000.00 when the value of optional equipment which came with the debtors' home was added. The male debtor indicated at the adversary proceeding that he did not question the $30,000.00 value assigned to the mobile home by the sales representative.

On their statement of financial affairs, the debtors answered "N/A" to the question of whether they had transferred any real property during the year immediately preceding the filing of the debtors' bankruptcy petition. (The male debtor indicated at trial that "N/A" stood for not applicable.) In fact, on November 29, 1985, a sale was closed on a house which had belonged to Mrs. Johnson prior to her marriage to Mr. Johnson for $67,900.00. After deductions for a mortgage and sale costs, the debtors received over $17,000.00 from this sale.² When Mrs. Johnson was cross-examined about the failure to disclose this transaction in the debtors' statement of financial affairs, she testified that it was her husband, not she, who had been involved in the preparation of the bankruptcy papers. Mr. Johnson never offered any testimony as to why the transfer of this property was not disclosed; however, the debtors did introduce into evidence the sales contract which was dated October 21, 1985, several days more than a year prior to the bankruptcy filing. The debtors did not deny that title was not actually transferred until November 29, 1985, less than a year prior to the debtors' bankruptcy filing.

The debtors also answered "N/A" to the question on their statement of financial affairs of what proceedings they had previously brought under the Bankruptcy Code. In fact, Mr. Johnson had previously filed a bankruptcy petition on March 5, 1980. Mr. Johnson's only explanation for his failure to respond accurately to the question concerning prior bankruptcy filings on his statement of financial affairs was that he did not remember answering that question.

The debtors were also asked the following question on their statement of financial affairs: "What amount of income have you received from your trade or profession during each of the 2 calendar years immediately preceding the filing of the original petition herein?" The debtors' response was that Mr. Johnson had received $12,000.00 and Mrs. Johnson had received $11,000.00. The debtors were also asked what amount of income they had received from other sources during each of those two years and their response was "N/A". In fact, the debtors' 1985 North Carolina income tax return showed that Mr. Johnson earned $11,986 from wages, salaries, and tips, and that he received income from other sources such as dividends, interests, pensions, and business income in an additional amount of $3,599.00 for a total gross income of $15,585.00. The 1985 tax return showed that Mrs. Johnson received $15,143.00 in wages, salaries, and tips, and that she received additional income of $2,210.00 from interest and other sources for a total gross income of $17,353.00. Similarly, the debtors' 1986 North Carolina income tax return showed that Mr. Johnson had a total income of $16,008.00 and that Mrs. Johnson had a total income of $17,040.00.

Mrs. Johnson testified that her husband had been involved in the preparation of the tax returns and the bankruptcy petition, and that she did not know what was in them. Although Mrs. Johnson's signature does not appear on the copies of the tax returns which were admitted into evidence, her signature does appear at the end of the schedules and the statement of financial affairs. Mr. Johnson testified that the income figures that were provided on that statement were for net income, rather than gross income, and that he had deducted expenses he incurred in his job as a traveling salesman which were not reimbursable by his employer.

At the February 4th trial, the attorney for First Federal examined both debtors as to the disposition of approximately $46,000.00 they received from two sales of residential property, one in June of 1985, and the other in November of 1985. The debtors purchased their mobile home in November of 1985; the total price was $33,100.00, and the debtors made a cash down payment of $21,100.00. The debtors also purchased one of their automobiles after the sales of their real property. Both debtors testified that they used the remainder of the proceeds to pay bills.

Based on the above evidence, the court finds by clear and convincing evidence that the debtors made false oaths with respect to material matters in their schedules and statement of financial affairs by understating both of their incomes, by failing to disclose Mr. Johnson's prior bankruptcy filing, by failing to disclose the transfer of Mrs. Johnson's house on November 25, 1985, and by undervaluing their assets and overstating the amount of their secured debt. The court also finds that the debtors acted knowingly and fraudulently within the meaning of 11 U.S.C. § 727(a)(4).

The court also finds that the plaintiff has not shown by clear and convincing evidence that the debtors transferred or concealed property with the intent to defraud creditors within the meaning of 11 U.S.C. § 727(a)(2) or that the debtors concealed, destroyed, or failed to keep or preserve financial records within the meaning of 11 U.S.C. § 727(a)(3).

DISCUSSION AND CONCLUSIONS

One of the primary purposes of the bankruptcy act is to "relieve the honest debtor from the weight of oppressive indebtedness, and permit him to start afresh free from the obligations and responsibilities consequent upon business misfortunes." This purpose of the act has been again and again emphasized by the courts as being a public as well as private interest, in that it gives to the honest but unfortunate debtor who surrenders for distribution the property which he owns . . . a new opportunity in life and a clear field for future effort. . . .

Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 699, 78 L.Ed. 1230 (1934) (citations omitted). The discharge provided in 11 U.S.C. § 727 "is the heart of the fresh start provisions of the bankruptcy law." H.R.Rep. No. 595, 95th Cong., 1st Sess. 384 (1977), U.S.Code Cong. & Admin.News 1978, p. 5787.

The solicitude of Congress, however, stops at the debtor who does not measure up to that appealing image "honest but unfortunate debtor" and who has engaged in grossly irresponsible or fraudulent conduct, has been recalcitrant during the case or has overutilized the privilege.

Riesenfeld, Creditors' Remedies and Debtors' Protection 729 (3rd ed. 1979).

The burden of proof in any complaint...