In re Sumpter

Decision Date03 September 1991
Docket NumberAdv. No. 89-9090.,Bankruptcy No. 89-09791
Citation136 BR 690
PartiesIn re Jerry L. SUMPTER and Santina M. Sumpter, Debtors. UNITED STATES of America, Plaintiff, v. Jerry L. SUMPTER and Santina M. Sumpter, Defendants.
CourtU.S. Bankruptcy Court — Eastern District of Michigan


Thomas J. Clark, Washington, D.C., for plaintiff.

Donald F. Cadotte, Birmingham, Mich., for defendants.


ARTHUR J. SPECTOR, Bankruptcy Judge.

The United States of America (the government) sued for an order denying Jerry L. Sumpter (Mr. Sumpter) and Santina M. Sumpter (Mrs. Sumpter) their bankruptcy discharge or, alternatively, for an order determining that their debt to the Internal Revenue Service (IRS) is excepted from the discharge. The following constitute my findings of fact and conclusions of law pursuant to Bankruptcy Rule 7052.

Statement of the Case

On September 27, 1989, the Sumpters filed their voluntary petition for relief under chapter 7 of the Bankruptcy Code. They scheduled a debt to the IRS in the total amount of $251,255.68 for unpaid income taxes, interest and penalties for the years 1981, 1982, 1984 and 1985. On December 26, 1989, the government filed a four-count complaint against the Sumpters. In Count I, the government alleged that the Sumpters should be denied a discharge pursuant to § 727(a)(4)1 because of numerous false oaths on their bankruptcy schedules and statement of financial affairs. Count III2 requested denial of discharge because the Sumpters allegedly failed to satisfactorily explain the loss of assets or deficiency of assets to meet their liabilities. § 727(a)(5). Count IV alleged that the debt due the IRS is not dischargeable because the Sumpters had willfully attempted to evade or defeat the tax. § 523(a)(1)(C). On December 6, 1990, the Court granted the government's motion for summary judgment as against Mr. Sumpter only on the § 523 count.3 Because the government thereby received all the relief that it sought with respect to Mr. Sumpter, the various § 727 counts against him were not tried.4 The trial of this action thus involved only the allegations made against Mrs. Sumpter.

Preliminary Conclusions of Law

1. The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334.

2. This is a core proceeding. 28 U.S.C. § 157(b)(2)(I), (J).

3. The government has the burden of proving the elements of the different causes of action pled. Bankruptcy Rule 4005 (§ 727 counts); Grogan v. Garner, ___ U.S. ___, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (§ 523 count).

Standard of Proof on the § 727 Counts

In Grogan, supra, the Supreme Court held that a party seeking an exception to the bankruptcy discharge of the debtor must establish the elements for such an exception by a preponderance of the evidence. With respect to an objection to the general discharge under § 727, however, there remains a split of authority among the courts as to whether the appropriate standard is a preponderance of the evidence or the higher standard of clear and convincing evidence. Compare Farmers Co-op Assoc. v. Strunk, 671 F.2d 391 (10th Cir.1982); In re Shults, 28 B.R. 395, 10 B.C.D. 405 (9th Cir.B.A.P.1983); In re Stowell, 113 B.R. 322 (Bankr.W.D.Tex. 1990); In re Weber, 99 B.R. 1001, 19 B.C.D. 205 (Bankr.D.Utah 1989); In re Parker, 85 B.R. 384, 17 B.C.D. 570 (Bankr.E.D.Va. 1988), aff'd, 879 F.2d 863 (1989); In re Clausen, 44 B.R. 41, 45, 12 B.C.D. 584 (Bankr.D.Minn.1984); In re LaBonte, 13 B.R. 887, 5 C.B.C.2d 181, 188 (Bankr. D.Kan.1981) (preponderance of the evidence); with In re Bogstad, 779 F.2d 370 (7th Cir.1985); First Federated Life Ins. Co. v. Martin, 698 F.2d 883 (7th Cir.1983); Camacho v. Martin, 88 B.R. 319 (D.Colo. 1988); In re Overmyer, 121 B.R. 272 (Bankr.S.D.N.Y.1990); In re Mayo, 94 B.R. 315, 18 B.C.D. 931, 20 C.B.C.2d 641 (Bankr. D.Vt.1988); In re Booth, 70 B.R. 391 (Bankr.D.Colo.1987); In re Lineberry, 55 B.R. 510 (Bankr.W.D.Ky.1985); In re Cohen, 47 B.R. 871, 874, 12 B.C.D. 1210 (Bankr.S.D.Fla.1985) (clear and convincing evidence). The logical question is whether the rationale of Grogan should be extended to § 727(a) proceedings. For the reasons discussed below, I think that it should.

In holding that § 523(a) actions should be tried under the preponderance standard, the Supreme Court relied on several theories, each of which would call for the same conclusion in the context of § 727(a). First, the Court noted that neither § 523 nor its legislative history specified the appropriate evidentiary standard. The Court characterized this "silence" as being "inconsistent with the view that Congress intended to require a special, heightened standard of proof." ___ U.S. at ___, 111 S.Ct. at 659, 112 L.Ed.2d at 764. As with § 523(a), the Bankruptcy Code itself contains no provision regarding the appropriate standard of proof in connection with denial of a general discharge under § 727(a). Applying the Supreme Court's rationale in Grogan, this statutory silence suggests that a preponderance standard should govern § 727(a) actions.

In contrast to § 523(a), however, the legislative history pertaining to § 727(a) is not silent. The House and Senate Reports accompanying § 727(a) state as follows:

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.

H.R.Rep. No. 595, 95th Cong., 1st Sess. 384 (1977); S.Rep. No. 989, 95th Cong., 2d Sess. 98-99 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5884, 5885, 6340 (emphasis added). Grogan cited a portion of the foregoing passage in support of its observation that "Congress chose the preponderance standard to govern determinations under 11 U.S.C. § 724(a)(4)." ___ U.S. at ___, 111 S.Ct. at 660, 112 L.Ed.2d at 766.

Given the fact that the conduct described in § 727(a)(4) constitutes a crime, see L. King, 4 Collier on Bankruptcy, ¶ 727.041 (15th ed. 1990), this passage from the legislative history was presumably designed to remove any doubt with regard to the applicable standard of proof in a § 727(a)(4) proceeding. Since the lower preponderance standard is to be applied even where criminal conduct is alleged, it is logical to assume that Congress did not contemplate a higher standard in cases involving other kinds of conduct enumerated under § 727(a) which may not be defined as criminal under federal or state law, and which in any event are no more unsavory than the conduct described in § 727(a)(4). Thus, the legislative history supports the conclusion that a preponderance standard applies under § 727(a). Cf. In re Cook, 126 B.R. 261, 265 (Bankr.E.D.Tex.1991).

A second ground advanced by Grogan is that the right to discharge of a particular debt challenged under § 523(a) is not "sufficient to require a heightened standard of proof." ___ U.S. at ___, 111 S.Ct. at 659, 112 L.Ed.2d at 764. Although denial of a general discharge under § 727(a) would often have a much greater economic impact on the debtor than would the granting of an exception to discharge under § 523(a), Grogan gives no hint that such a distinction is significant. Indeed, Grogan relied on United States v. Kras, 409 U.S. 434, 93 S.Ct. 631, 34 L.Ed.2d 626 (1973), which held that a right to obtain a general discharge of debts in bankruptcy did not constitute a "fundamental interest." Id. at 445, 93 S.Ct. at 637. Moreover, the right to discharge of all debts and the right to discharge of a particular debt are qualitatively indistinguishable; actions under § 523(a) and § 727(a) are essentially monetary in nature, and there is accordingly no principled basis for requiring an elevated standard of proof where denial of a general discharge is sought. See In re Watkins, 90 B.R. 848, 856, 18 B.C.D. 311, 19 C.B.C.2d 678 (Bankr.E.D.Mich.1988) (suggesting that the preponderance standard should generally govern where the defendant's "economic rights," rather than his "liberty rights," are at stake); see also In re Bidlofsky, 57 B.R. 883, 893 (Bankr.E.D.Mich. 1985) (implicitly assuming that the distinction between denying a discharge and granting an exception to discharge is irrelevant for purposes of determining the appropriate evidentiary standard).

The Court in Grogan also observed that Congress evidently concluded that the creditors\' interests in recovering full payment of debts in these categories i.e., those enumerated under § 523(a) outweighed the debtors\' interest in a complete fresh start. We think it unlikely that Congress, in fashioning the standard of proof that governs the applicability of these provisions, would have favored the interest in giving perpetrators of fraud a fresh start over the interest in protecting victims of fraud.

___ U.S. at ___, 111 S.Ct. at 659, 112 L.Ed.2d at 765. This skepticism regarding Congress' enthusiasm for granting a fresh start to dishonest debtors would of course be equally applicable in the context of § 727(a).5 Cf. Cook, 126 B.R. at 266 (opining that Grogan's reasoning "may be even more appropriate in the context of § 727" because "the majority of § 727 causes of action deal with upholding the integrity of the bankruptcy process rather than serving as a protective device for wronged creditors").

Using the "holistic" approach of statutory interpretation, Grogan also reasoned that, "because it seems clear that a preponderance of the evidence is sufficient to establish the nondischargeability of some of the types of claims covered by § 523(a) footnote omitted, it is fair to infer that Con...

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