In re Pratt

• Decision Date: 03 June 2005
• Docket Number: No. 04-10495.,04-10495.
• Citation: 411 F.3d 561
• Parties: In the Matter of Jack E. PRATT, Jr., Deceased, Debtor. Cadle Company, Appellant, v. Jack E. Pratt, Jr., Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

411 F.3d 561

In the Matter of Jack E. PRATT, Jr., Deceased, Debtor Cadle Company, Appellant, v. Jack E. Pratt, Jr., Appellee.

No. 04-10495.

United States Court of Appeals, Fifth Circuit.

June 3, 2005.

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Bruce William Akerly (argued), Bell, Nunnally & Martin, Dallas, TX, for Appellant.

Richard Bernard Schiro (argued), Law Offices of Richard B. Schiro, Dallas, TX, for Appellee.

Appeal from the United States District Court for the Northern District of Texas.

Before REAVLEY, JOLLY and PRADO, Circuit Judges.

PRADO, Circuit Judge:

In this bankruptcy appeal, a creditor contends that the bankruptcy court should not have granted the debtor a discharge because he failed to schedule certain assets and transferred or concealed some of these assets. The creditor also argues that the bankruptcy court should have admitted its evidence about transactions related to a specific piece of property. Because we find no clear error, we affirm the judgment.

Jack E. Pratt, Jr., a millionaire's son, had drug problems and chronic debt for most of his life. His business dealings were largely unsuccessful, and even as an adult, he consistently received money from his divorced parents. His family agreed that Pratt was a spendthrift, and several family members indicated that he had a tendency to lie.

Pratt filed a bankruptcy petition in August 2000. One of Pratt's bankruptcy creditors was appellant The Cadle Company ("Cadle"), who had purchased two judgments against him. After Pratt filed his petition, Cadle brought an adversary action against Pratt in which it contended that Pratt's discharge in bankruptcy should be denied under 11 U.S.C. § 727 for making false statements in his schedules and Statement of Financial Affairs ("SOFA") and for concealing or removing assets.

In December 2000, four months after filing for bankruptcy, Pratt died of a heart attack. His estate was substituted in his bankruptcy case,¹ and the adversary action proceeded.

The bankruptcy court conducted a two-day trial on the adversary case. The trial evidence included two depositions of Pratt taken before his death as well as the testimony of Pratt's father ("Pratt Sr."), wife, and sister. Pratt Sr.'s administrative secretary also testified. At the conclusion of trial, the bankruptcy court made oral findings of facts and conclusions of law. The court found that Cadle had failed to meet its burden of proof to establish an exception from discharge. In particular, the court found that Cadle had failed to establish that Pratt's omissions of assets from his schedules and SOFA were made with fraudulent intent. The court thought instead that the evidence showed that the omissions were due to Pratt's drug problems and not fraudulent intent: "The concealment and removal of property amounts to a man who had drug problems for many years." Thus, the bankruptcy court granted Pratt a discharge.

Cadle appealed to the district court. The district court determined that the bankruptcy court did not clearly err in making its factual determinations and affirmed the judgment. This appeal followed.

Denial of Discharge

Cadle first argues that Pratt's discharge should have been denied under three subsections of 11 U.S.C. § 727. The relevant parts of § 727 provide,

(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; or

(B) property of the estate, after the date of the filing of the petition;

...

(4) the debtor knowingly and fraudulently, in or in connection with the case —

(A) made a false oath or account;

11 U.S.C. § 727. Cadle contends that discharge should have been denied under §§ (a)(2)(A), (a)(2)(B), and (a)(4)(A). These contentions are based on several different assets Cadle believes should have been included in Pratt's schedules and SOFA. Cadle bears the burden of establishing the elements that would prevent discharge. See Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 177 (5th Cir.1992). Factual findings under this section are reviewed for clear error. See Hibernia Nat'l Bank v. Perez (In re Perez), 954 F.2d 1026, 1028 (5th Cir.1992).

Transfer of Assets

To establish that discharge should be denied under § 727(a)(2)(A), a creditor must show four elements: "(1) a transfer [or concealment] of property; (2) belonging to the debtor; (3) within one year of the filing of the petition; [and] (4) with intent to hinder, delay, or defraud a creditor or officer of the estate." Pavy v. Chastant (In re Chastant), 873 F.2d 89, 90 (5th Cir.1989). The intent to defraud must be actual, not constructive. Id. at 91. Nevertheless, "[a]ctual intent ... may be inferred from the actions of the debtor and may be proven by circumstantial evidence." Id. In Pavy v. Chastant (In re Chastant), we listed the factors that show actual intent to defraud:

(1) [T]he lack or inadequacy of consideration; (2) the family, friendship or close associate relationship between the parties; (3) the retention of possession, benefit or use of the property in question; (4) the financial condition of the party sought to be charged both before and after the transaction in question; (5) the existence or cumulative effect of the pattern or series of transactions or course of conduct after the incurring of debt, onset of financial difficulties, or pendency or threat of suits by creditors; and (6) the general chronology of the events and transactions under inquiry.

Id. (quoting In re Schmit, 71 B.R. 587, 590 (Bankr.D.Minn.1987)). There is, moreover, a presumption of fraudulent intent when a debtor transfers property to relatives. Id. (citing In re Butler, 38 B.R. 884, 888 (Bankr.D.Kan.1984)). This court has indicated that once this presumption attaches, the burden shifts to the debtor "[to demonstrate] that he lacked fraudulent intent." Id.

False Oath

Discharge may also be denied if the debtor makes a false oath in connection with his bankruptcy filings. 11 U.S.C. § 727(a)(4)(A). A false oath has this effect since,

Full disclosure of assets and liabilities in the schedules required to be filed by one seeking relief under Chapter 7 is essential, because the schedules "serve the important purpose of insuring that adequate information is available for the Trustee and creditors without need for investigation to determine whether the information provided is true."

Beaubouef, 966 F.2d at 179 (quoting In re Urban, 130 B.R. 340, 344 (Bankr.M.D.Fla.1991)). To establish a false oath under this section, the creditor must show that "(1) [the debtor] made a statement under oath; (2) the statement was false; (3) [the debtor] knew the statement was false; (4) [the debtor] made the statement with fraudulent intent; and (5) the statement related materially to the bankruptcy case." Id. at 178. An omission of an asset can constitute a false oath. Id.

Bank Accounts

Cadle argues that Pratt failed to disclose two separate bank accounts: first, an account he held with his son and second, his wife's bank account, which Cadle contends Pratt used. Cadle also argues that Pratt's use of his wife's account amounted to concealment.

In 1997, Pratt opened an account at Texas Community Bank & Trust under two names — his own and that of his son, Jack Pratt III. Pratt used this account for household expenses. His son never deposited any money in the account. Pratt's estate now concedes that he should have disclosed this account in his bankruptcy filings. At the same time, he also contends that his failure to disclose was immaterial because the account had no money in it and had been entirely inactive for almost a year. He further argues that his failure to disclose the account was unintentional. The bankruptcy court concluded that although Pratt's failure to disclose the account was troubling, it was neither material nor intentional.

Cadle first challenges the bankruptcy court's materiality finding, contending that the court focused too much on the account's zero balance. As Cadle points out, we noted in Beaubouef that materiality does not depend on the asset's value: "In determining whether or not an omission is material, the issue is not merely the value of the omitted assets or whether the omission was detrimental to creditors." Beaubouef, 966 F.2d at 178 (quoting 4 COLLIER ON BANKRUPTCY, ¶ 727.04[1], at 727-59).

In fact, the Beaubouef debtor failed to list, among other things, his ownership of a worthless company. Id. The debtor argued that the worthlessness of the interest made it immaterial. Id. The court disagreed, stating "[t]he subject matter of a false oath is `material' and thus sufficient to bar discharge, if it bears a relationship to the bankrupt's business transactions or estate, or concerns the discovery of assets, business dealings, or the existence and disposition of his property." Id. (quoting In re Chalik, 748 F.2d 616, 618 (11th Cir.1984)). The court explained, "The recalcitrant debtor may not escape a section 727(a)(4)(A) denial of discharge by asserting that the admittedly omitted or falsely stated information concerned a worthless business relationship or holding; such a defense is specious." Id. (quoting Chalik, 748 F.2d at 618). Similarly, in Johnson v. Baldridge (In re Baldridge), the bankruptcy court concluded that omission of bank accounts was material, even if the accounts had little or no balance: "Few, if any, assets are more material to a consumer debtor's financial affairs than a bank account, for it is from that kind of asset that the creditors can discern not only an overall picture of the debtor's financial affairs, but also the details of the...