In re Schroff

Decision Date07 May 1993
Docket Number92-4236.,Bankruptcy No. 92-40756,Adv. No. 92-4260
Citation156 BR 250
PartiesIn re William Edward SCHROFF, Jr., Debtor. SUPERIOR NATIONAL BANK, Plaintiff, v. William Edward SCHROFF, Jr., Defendant. Erlene W. KRIGEL, Trustee in Bankruptcy, Plaintiff, v. William Edward SCHROFF, Jr., Defendant.
CourtU.S. Bankruptcy Court — Western District of Missouri


Richard Standridge, Copilevitz, Bryant et al, Kansas City, MO, for Superior Nat. Bank.

Erlene W. Krigel, Krigel & Krigel, P.C., Kansas City, MO, for Trustee in Bankruptcy.

Richard F. Schmidt, Kansas City, MO, for defendant.


ARTHUR B. FEDERMAN, Bankruptcy Judge.

This case involves two adversary proceedings which were consolidated by Order of this Court on October 2, 1992. Plaintiffs are Superior National Bank ("Superior") and Erlene W. Krigel, the Chapter 7 trustee ("Trustee"). Such plaintiffs object to the discharge of defendant. This is a core proceeding under 28 U.S.C. § 157(b)(2)(J) over which the Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(b), 157(a), and 157(b)(1). For the reasons set forth below, I find that debtor/defendant's discharge should be denied.


This Chapter 7 case was filed on March 6, 1992. The debtor is a businessman who has owned a number of companies. The schedules and statements of affairs fail to disclose a number of facts.

First, prior to August 12, 1991, Mr. Schroff was the holder of 100 shares of stock in a company called CBR Coating Specialists Co., Inc. ("CBR"). On that date he transferred such stock to CBR itself, which then issued fifty-one shares of stock to Richard Wiggins and forty-nine shares of CBR stock to Larry Adams. Wiggins and Adams, who were and continue to be Mr. Schroff's business associates, then endorsed the shares in blank and delivered them to Mr. Schroff's prior attorney, who was holding them as of the date the case was filed. At the time of the hearing, the attorney had not caused a transfer of such shares to be made to the debtor or anyone else. No disclosure of debtor's transfer, or of any interest in the shares, was made on the statement of affairs or bankruptcy schedules. Mr. Schroff continues to work for CBR, which has and continues to pay certain of his living expenses. According to employees of CBR, there was no change in CBR's operations after the stock transfer. According to Mr. Schroff, such payments represent loans to him by CBR, not salary or consideration for the stock transfer. If loans, CBR should have been listed as a creditor, which it was not. Additionally, Schedule I, filed under oath with the bankruptcy petitions, lists monthly income, not loans, of $1,000 from CBR.

Secondly, Mr. Schroff failed to disclose his interest in two other corporations still owned by him. One of these is Grand Motor Cars, Inc. ("Grand Cars"), which was incorporated on August 28, 1989. In 1991, Grand Cars had receipts of $26,958. The corporation owns two vehicles, and currently has accounts receivable due and owing for cars sold on credit.1 The other corporation is Byron Scott Development Co., Inc. which was incorporated on May 10, 1991. Mr. Schroff is the sole shareholder of both corporations, and neither was listed as an asset in his bankruptcy filings.

Debtor also failed to disclose a one-half interest in property he holds as a tenant-in-common with his sister, Marlene Porter.

Certain misstatements were made as to vehicles. On Schedule B debtor listed a 1979 Plymouth Valiant Stationwagon, which he now claims he never owned. He failed, however, to list a 1985 Lincoln Town Car which is owned by him, as well as a 1988 Lincoln Town Car which was awarded to him by the Johnson County, Kansas District Court in a divorce proceeding. Nor are the liens against those assets, in favor of Ford Motor Credit and Overland Park State Bank, listed as liabilities. Those liens have been paid off and released since the Chapter 7 case was filed.

In addition, the schedules failed to list a number of debts, including attorneys fees of at least $10,000 due McDowell, Rice & Smith, credit card debts due Amoco, Texaco, and Conoco, and obligations of at least $40,000 due debtor's ex-wife.

Finally, on his Chapter 7 petition, Mr. Schroff listed his address as 1211 West 27th Street, Kansas City, Missouri, 64108. He has maintained that that is his residence during each deposition taken during the pendency of this bankruptcy case. When asked at the hearing where he lives, he answered 6720 West 52nd Place, Mission, Kansas. CBR, which Mr. Schroff no longer owns, pays rent to his roommate at the Mission, Kansas address.


Plaintiffs object to Mr. Schroff's discharge on four specific grounds: (1) transfer of property within one year prior to the bankruptcy with the intent to hinder, delay, or defraud a creditor of the estate pursuant to 11 U.S.C. § 727(a)(2)(A); (2) failure to keep or preserve records from which the debtor's financial condition could be ascertained pursuant to 11 U.S.C. § 727(a)(3); (3) the knowing and fraudulent making of false oaths in his schedules and statements of affairs, at Rule 2004 Examinations, in his deposition, and at the hearing pursuant to 11 U.S.C. § 727(a)(4); and (4) failure to satisfactorily explain the loss of assets and deficiency of assets in this case pursuant to 11 U.S.C. § 727(a)(5).2

Bankruptcy relief is an equitable doctrine and bankruptcy courts are courts of equity. In re Global W. Development Corp., 759 F.2d 724, 727 (9th Cir.1985). As such, the relief afforded by a discharge of debts enables the honest debtor to make a "fresh start." The emphasis here is on the honesty of the debtor. It only takes a showing that a debtor intended to defraud one creditor in order for the Court to deny the discharge. In re Adeeb, 787 F.2d 1339, 1343 (9th Cir.1986).

The standard of proof in 11 U.S.C. § 523 dischargeability proceedings is a preponderance of evidence standard. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). The same is true in a proceeding under 11 U.S.C. § 727. See In re Lightfoot, 152 B.R. 141, 145-46 (Bankr. S.D.Tex.1993) citing First National Bank v. Serafini (In re Serafini), 938 F.2d 1156, 1157 (10th Cir.1991); In re Cook, 126 B.R. 261, 265 (Bankr.E.D.Tex.1991).

Denial of Discharge Pursuant to 11 U.S.C. § 727(a)(2)(A)

In order to prove that debtor transferred assets within one year of the bankruptcy filing with intent to hinder, delay or defraud a creditor, plaintiffs must prove the following elements:

(1) That the transfer of property occurred;
(2) That the property transferred was owned by the debtor;
(3) That the transfer occurred within one year before the date the bankruptcy petition was filed; and
(4) That the debtor had, at the time of the transfer, the intent to defraud a creditor.

In re Cook, 126 B.R. 261, 266 (Bankr. E.D.Tex.1991). Mr. Schroff transferred all of the stock of CBR which was owned by him back to the corporation within one year before the bankruptcy petition was filed. The corporation then transferred such stock to Mr. Schroff's business associates. Thus, the first three elements are met.

As to the final element, intent is rarely subject to direct proof. In re Essres, 122 B.R. 422, 426 (Bankr.D.Colo. 1990). Rather it is established by circumstantial evidence. McCormick v. Security State Bank, 822 F.2d 806, 808 (8th Cir. 1987). See also Lightfoot, 152 B.R. at 146-47. Fraudulent intent is presumed in cases in which a debtor has gratuitously conveyed valuable property to another. Abbott Bank-Hemingford v. Armstrong (In re Armstrong), 931 F.2d 1233, 1239, reh'g denied (8th Cir.1991). Once such a transaction has been shown by the plaintiff, the burden then shifts to the debtor to prove that his intent was not to hinder, delay, or defraud. Id. Some factors to consider when determining if a debtor intended to defraud creditors are:

(1) lack or inadequacy of consideration;
(2) family, friendship, or other close relationship between transferor and transferee;
(3) retention of possession, benefit, or use of the property in question;
(4) financial condition of the transferor prior to and after transaction;
(5) conveyance of all of debtor\'s property;
(6) secrecy of the conveyance;
(7) existence of trust or trust relationship;
(8) existence or cumulative effect of pattern or series of transactions or course of conduct after pendency or threat of suit;
(9) instrument effecting the transfer suspiciously states it is in fact bona fide (10) debtor makes voluntary gift to family member; and
(11) general chronology of events and transactions under inquiry.

Lightfoot, 152 B.R. at 146-47 (citations omitted). Courts have found that any one of these factors can be a sufficient basis on which to find the requisite intent, and that the presence of more than one strongly indicates that the debtor did, in fact, possess the requisite intent. Id. citing In re Titus, 75 B.R. 256, 259-60 (Bankr.W.D.Mo. 1985). I find that at least five of these factors are present in this case.

Mr. Schroff received no consideration for the stock he transferred to CBR. He contends that at the time the stock was worthless, as the corporation had only liabilities and no assets, and the consideration he received was relief from the liabilities assumed by the new owners. Though the business records of this corporation are less than complete, it appears the company was able to pay a salary to Kay Dreiling, the bookkeeper, and to make payments to Mr. Schroff after the stock transfer. Further, the few records provided indicate that approximately $212,899 in cash flowed through the corporation for the period in question. Pl.Ex. # 34 at 25. Richard Wiggins stated in his 2004 Exam that at the time he acquired CBR it had the following assets: three desks, a 1969 truck, three calculators, two compressors, a two gallon paint pot, a one cup paint gun, and a fax machine. See Pl.Ex. # 32 at 21-23. CBR transferred the...

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