In re Portner, Bankruptcy No. 89 B 00255 J

CourtUnited States Bankruptcy Courts. Tenth Circuit. U.S. Bankruptcy Court — District of Colorado
Citation109 BR 977
Docket NumberAdv. No. 89C 0448.,Bankruptcy No. 89 B 00255 J
PartiesIn re Ross Arthur PORTNER, Debtor. Richard B. DUVAL, Jane E. Duval, and Bruce A. Duval, Plaintiffs, v. Ross Arthur PORTNER, Defendant.
Decision Date11 November 1989

D.W. Dean, Fort Collins, Colo., for plaintiffs (Duvals).

D.L. Fisher, Auroa, Colo., for Ross A. Portner (debtor).


FRANCIS G. CONRAD*, Bankruptcy Judge.

This matter1 is before us on the complaint filed by Duvals to bar Debtor's discharge under 11 U.S.C. §§ 727(a)(2)(A), (3),2 (4)(A), and (5). Although not specifically enumerated in the complaint and pre-trial briefs, Duvals also placed before us evidence regarding § 727(a)(4)(D). We find Duvals failed to meet their burden of clear and convincing proof, and hold Debtor did not conceal estate property because his contingent vested remainder trust interest is not property of the estate under 11 U.S.C. § 541(c)(2).

The parties stipulated to several facts prior to the taking of testimony. We pen only those general facts necessary for background and make specific factual findings throughout our decision.

Debtor is a contingent vested remainderman under a testamentary trust (Trust) created by his grandfather. He has no present interest in the Trust because a life income beneficiary, his aunt, is still alive.

Debtor omitted his Trust interest from his bankruptcy schedules and statement of affairs. During the § 341(a) meeting, Debtor did not disclose his interest in the Trust, and three times, possibly four, answered that he had listed all of his property in his schedules. Later, amid the same § 341(a) meeting, Debtor stated he had an interest in the Trust. Debtor explained at trial he was not sure what was being asked of him at the § 341(a) meeting. Debtor also testified he felt his interest in the Trust was without present monetary value because the Trust's trustees denied him access to his interest as long as the income beneficiary remained alive. Finally, Debtor stated he told his lawyer about the Trust.

At the trial, Debtor was examined and cross examined at length about his assets and liabilities. In addition to the trust issue, Duvals attempted to show Debtor had an independent business after 1985 and that he failed to keep records of it. The testimony showed Debtor owned several businesses from 1977 to 1983; however, the unrebutted evidence shows he has been a wage-earner since 1985.

Debtor testified there were judgments and collection actions against him. He explained that at some point he began operating on a cash basis and discontinued his practice of depositing his pay check into his bank account to avoid attachment by judgment creditors. Debtor further testified the only financial records he had were his tax returns and prior bank statements and these records had been turned over to the Chapter 7 Trustee.

Absent evidence of the existence of an independent and undisclosed business operated by Debtor post 1985, or of undisclosed records relating to Debtor's financial affairs, Duvals' § 727(a)(4)(D) claim that Debtor withheld such information fails. Moreover, the evidence does not support a § 727(a)(5) judgment against Debtor for failure to explain any loss of assets. Accordingly we also find for the Debtor on this count.

In support of the § 727(a)(4)(A) count, Duvals proved Debtor had answered "no" to paragraph 15(c) of his "Statement of Financial Affairs for Debtors Not Engaged In Business" regarding whether he had agreed to pay or transfer property to his attorney. Upon Debtor's cross examination at trial, we learned Debtor's mother had paid his attorney's fees. Debtor unequivocally testified he had promised to pay his attorney money for his bankruptcy representation. Debtor's promise to pay was corroborated by Debtor's attorney's "Attorney Fee" disclosure filed with the petition.

No evidence was offered that in any way suggests that Debtor filed his petition in bad faith.

The parties raised several contested issues in their joint pre-trial statement, but at oral argument focused on the "false oath" under § 727(a)(4)(A), and the "intent to hinder, delay, or defraud a creditor . . . or concealed property" under § 727(a)(2)(A). The parties also indicated in the pre-trial statement that there were differing degrees of proof for the various § 727 causes of action. With respect to the surviving counts, Duvals claim the burden under § 727(a)(4)(A) is by a preponderance, and under (a)(2) it is by clear and convincing proof.

With the facts before us, we determine the issues to be decided are three:

1. What is Duvals\' measure of proof under § 727?
2. Does Debtor\'s failure to schedule his interest in the Trust and the evasive disclosure during the § 341(a) meeting constitute a §§ 727(a)(2)(A) bar to discharge?
3. And, does the failure to reveal Debtor\'s promise to pay attorney\'s fees in his schedules constitute a false oath under § 727(a)(4)(A)?

We discuss these issues in sequence.

Section 727 provides that the Court shall grant the debtor a discharge, unless 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 11 U.S.C. §§ 101, et seq. has transferred, removed, destroyed, mutilated, or concealed property of the debtor, within one year before the date of the filing of the petition; or the debtor knowingly and fraudulently, in or in connection with the case, made a false oath or account. 11 U.S.C. §§ 727(a)(2)(A) and (4)(A) (brackets supplied).

The party objecting to a debtor's discharge "has the burden of proving the objection" under Rules of Practice and Procedure in Bankruptcy Rule 4005. The 1983 Advisory Committee to Rule 4005 explained that a § 727 objector has the ultimate burden of persuasion. The evidentiary degree, i.e., preponderance or clear and convincing, an objector must establish to sustain its burden of proof under the respective subdivisions of § 727 was left undefined by Rule 4005.

Section 727's legislative history expresses a preference for the preponderance standard only where the ground for denial of discharge is the commission of a "bankruptcy crime" under § 727(a)(4):

This section is the heart of the fresh start provisions of the bankruptcy law. Subsection (a) requires the court to grant a debtor a discharge unless one of eight ten conditions is met . . .
Three grounds for denial of discharge center on the debtor\'s wrongdoing in or in connection with the bankruptcy case. They are derived from Bankruptcy Act section 14c.3 If the debtor, with intent to hinder, delay, or defraud his creditors or an officer of the estate, has transferred, removed, destroyed, mutilated, or concealed, or has permitted any such action with respect to, property of the debtor within the year preceding the case, or property of the estate after the commencement of the case, then the debtor is denied discharge. § 727(a)(2). The debtor is also denied discharge if he has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any books and records from which his financial condition might be ascertained, unless the act or failure to act was justified under all the circumstances of the case. § 727(a)(3).
The fourth ground for denial of discharge is the commission of a bankruptcy crime, though the standard of proof is preponderance of the evidence rather than proof beyond a reasonable doubt. These crimes include the making of a false oath or account, the use or presentation of a false claim, the giving or receiving of money for acting or forbearing to act, and the withholding from an officer of the estate entitled to possession of books and records relating to the debtor\'s financial affairs. § 727(a)(4). The fifth ground for denial of discharge is the failure of the debtor to explain satisfactorily any loss of assets or deficiency of assets to meet the debtor\'s liabilities. § 727(a)(5) . . .

House Report No. 95-595, 95th Cong., 1st Sess. 384 (1977); Senate Report No. 95-989, 95th Cong., 2d Sess. 98 (1978), U.S. Code Cong. & Admin.News 1978, pp. 5787, 5884, 6340; reprinted in 4 Norton Bankr. Code L. & Prac.Pamphlet, 1987-1988 Ed., pages 529-530. (Brackets, footnote, and emphasis ours).

We believe, however, this legislative history speaks not of setting a standard of proof, but instead, apprises us that a false oath case, although akin to perjury, need not be tested by the traditional criminal standard of proof beyond a reasonable doubt. Thus, we conclude the legislative history, like the advisory note to Rule 4005, leaves the decision about what burden to apply to the Court.

The Tenth Circuit applied a preponderance standard under former Section 14(c) of the Bankruptcy Act holding that "proof of fraudulent concealment, in order to bar discharge, need be shown only by a preponderance of the evidence." Farmers Co-op Ass'n. of Talmage, Kansas v. Strunk, 671 F.2d 391, 395 (10th Cir. 1982). Accord, In re Robinson, 506 F.2d 1184, 1185 (2d Cir.1974) (proof by a preponderance is all that is required to establish the making of a false oath and rejected the bankrupt's and dissenting Circuit Judge Oakes' arguments about immateriality); Union Bank v. Blum, 460 F.2d 197, 200-01 (9th Cir.1972); In re Merritt, 28 F.2d 679, 680 (9th Cir.1928) ("Objections to discharge need not be proved beyond a reasonable doubt. A fair preponderance as in civil trials is sufficient."); In the Matter of Mascolo, 505 F.2d 274, 276 (1st Cir.1974) citing, Troeder v. Lorsch (In re Troeder), 150 F. 710, 713-14 (1st Cir.1906) (held that even though a false oath is analogous to criminal perjury, the creditor may prove his case by a preponderance.); Gabrielli v. Shults (In re Shults), 28 B.R. 395, 396 (9th Cir. BAP 1983) (mere preponderance was sufficient under either §§ 727(a)(2) or 727(a)(4)(A)).

Chief Judge Finesilver, United States District...

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