Manning v. Watkins (In re Watkins)

• Decision Date: 06 July 2012
• Docket Number: Bankruptcy No. 09–21095 JPK.,Adversary No. 10–2042.
• Parties: In re Cecil Allen WATKINS and Debra Tabla Watkins, Debtors. Kenneth A. Manning, Plaintiff, v. Cecil Allen Watkins and Debra Tabla Watkins, Defendants.
• Court: U.S. Bankruptcy Court — Northern District of Indiana

474 B.R. 625

In re Cecil Allen WATKINS and Debra Tabla Watkins, Debtors.

Kenneth A. Manning, Plaintiff,

v.Cecil Allen Watkins and Debra Tabla Watkins, Defendants.

Bankruptcy No. 09–21095 JPK.

Adversary No. 10–2042.

United States Bankruptcy Court,

N.D. Indiana,

Hammond Division.

July 6, 2012.

Kenneth A. Manning, Dyer, IN, pro se.

MEMORANDUM OF DECISION CONCERNING ACTION TO DENY DISCHARGE

J. PHILIP KLINGEBERGER, Bankruptcy Judge.

This adversary proceeding was initiated by the plaintiff Kenneth A. Manning, as Trustee of the Chapter 7 bankruptcy estateof Cecil Allen Watkins and Debra Tabla Watkins [case number 09–21095] (“Trustee”) by a complaint filed on March 30, 2010 to seek to deny discharge to the debtors/defendants (respectively, “Allen” and “Debra”). The Trustee has narrowed his assertions down to the provisions of 11 U.S.C. § 727(a)(2)(A), 11 U.S.C. § 727(a)(2)(B), 11 U.S.C. § 727(a)(4)(A) and 11 U.S.C. § 727(a)(5). The court has jurisdiction of this adversary proceeding pursuant to 28 U.S.C. § 1334(a) and (b), 28 U.S.C. § 157(a) and (b)(1), and N.D.Ind.L.R. 200–1(a). This adversary proceeding is a core proceeding under 28 U.S.C. § 157(b)(2)(J).

The record by which the case will be determined was made by evidence presented at the trial held on two separate days—October 6, 2011 and October 28, 2011—and by the closing arguments presented at a hearing held on November 29, 2011.

At the outset it's worthwhile to note principles which generally apply to an action to deny a debtor's discharge. As this court stated in In re Tauber, 349 B.R. 540, 545–546 (Bankr.N.D.Ind.2006):

The denial of a debtor's discharge is akin to financial capital punishment. It is reserved for the most egregious misconduct by a debtor. As the Seventh Circuit Court of Appeals has stated:

The purpose of the Code is to provide equitable distribution of the debtor's assets to the creditors and “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.” Williams v. United States Fid. & Guar. Co., 236 U.S. 549, 554–55, 35 S.Ct. 289, 59 L.Ed. 713 (1915). We construe the Bankruptcy Code “liberally in favor of the debtor and strictly against the creditor.” Gullickson v. Brown (In re Brown), 108 F.3d 1290, 1292 (10th Cir.1997); In re Reines, 142 F.3d 970, 973 (7th Cir.1998); In re Adlman, 541 F.2d 999, 1003 (2d Cir.1976); 11 U.S.C. § 727(a) (providing that, “the court shall grant the debtor a discharge, unless ...”). Thus, consistent with the Code, bankruptcy protection and discharge may be denied to a debtor who was less than honest. Grogan v. Garner, 498 U.S. 279, 286–87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (“But in the same breath that we have invoked this ‘fresh start’ policy, we have been careful to explain that the Act limits the opportunity for a completely unencumbered new beginning to the ‘honest but unfortunate debtor.’ ”) (quoting Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934)); Mayer v. Spanel Int'l Ltd., 51 F.3d 670, 674 (7th Cir.1995) ( “Congress concluded that preventing fraud is more important than letting defrauders start over with a clean slate, and we must respect that judgment.”). If a creditor demonstrates by a preponderance of the evidence that the debtor actually intended to hinder, delay, or defraud a creditor, the court can deny the discharge. See Keeney v. Smith (In re Keeney), 227 F.3d 679, 683 (6th Cir.2000); Peterson v. Scott (In re Scott), 172 F.3d 959, 966–67 (7th Cir.1999); cf. Grogan, 498 U.S. at 286–87, 111 S.Ct. 654, 112 L.Ed.2d 755. The intent to defraud must be actual and cannot be constructive; however, because it is unlikely that the debtor will admit fraud, intent may be established by circumstantial evidence. See In the Matter of Krehl, 86 F.3d 737, 743–44 (7th Cir.1996); Smiley v. First Nat'l Bank of Belleville (In re Smiley), 864 F.2d 562, 566 (7th Cir.1989).

Village of San Jose v. McWilliams, 284 F.3d 785, 789–790 (7th Cir.2002).

This Court does not take lightly a creditor's, or for that matter a Trustee's, request for the outright denial of a discharge. In fact, it is within the discretion of a bankruptcy court to grant a discharge even when grounds exist for the denial of a discharge. Union Planters Bank, N.A. v. Connors, 283 F.3d 896, 901 (7th Cir.2002) ( citing, In re Hacker, 90 B.R. 994, 997 (Bankr.W.D.Mo.1987)). But, although a denial of a discharge “should be construed liberally in favor of a debtor,” a discharge is a privilege and not a right; In re Juzwiak, 89 F.3d 424, 427 (7th Cir.1996).

In the context of an adversary proceeding in which denial of discharge was asserted under 11 U.S.C. § 727(a)(2) and (a)(4), the following was stated in In re Rule, 2011 WL 841505 (Bankr.E.D.Ky.2011):

A bankruptcy discharge is grounded upon the public policy of freeing the honest, but unfortunate, debtor from the financial burdens of prepetition debts. See e.g., Williams v. United States Fidelity & Guar., Co., 236 U.S. 549, 554–55, 35 S.Ct. 289, 59 L.Ed. 713 (1915); Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934). Denial of a discharge is a harsh outcome; therefore the requirements of 11 U.S.C. § 727(a) are precise, encompassing only those individual debtors who are not honest and forthcoming about their assets and financial affairs. See, e.g., Buckeye Retirement Properties v. Tauber (In re Tauber), 349 B.R. 540, 545 (Bankr.N.D.Ind.2006) (“The denial of a debtor's discharge is akin to financial capital punishment. It is reserved for the most egregious misconduct by a debtor.”).

Indeed, the denial of a general discharge can work a serious deprivation upon a debtor, and there are many circumstances where a debtor's acts and omissions may have been inadvertent or otherwise excusable. Thus, the provisions of § 727(a) are to be construed liberally in favor of granting debtors the fresh financial start contemplated by the Bankruptcy Code and the Supreme Court, and construed strictly against parties seeking to deny the granting of a debtor's discharge. See, among others, Meyers v. Internal Revenue Service (In re Meyers), 196 F.3d 622, 624 (6th Cir.1999) (quoting Grogan v. Garner, 498 U.S. 279, 286–87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991)). As the party seeking the denial of the debtors' general discharges, the United States trustee, as plaintiff, bears the burden of proving that the debtors are not entitled to discharges under § 727(a). SeeFed. R. Bankr.P. 4005. The standard of proof for allegations under § 727(a) is by a preponderance of the evidence. See Grogan, 498 U.S. at 286–87, 111 S.Ct. 654.

Clippard v. Jarrett (In re Jarrett), 417 B.R. 896, 901 (Bankr.W.D.Tenn.2009).

To find the requisite degree of fraudulent intent, the court must find the debtor knowingly intended to defraud the trustee, or engaged in such reckless behavior as to justify the finding of fraud. In re Puente, 49 B.R. at 969. The trustee may prove the debtor's fraud by evidence of the debtor's awareness of the omitted asset and by showing that the debtor knew that failure to list the asset could seriously mislead the trustee or that the debtor acted so recklessly in not reporting the asset that fraud is implied. 4 Collier on Bankruptcy ¶ 727.15[4] (1992).

Matter of Yonikus, 974 F.2d 901, 905 (7th Cir.1992).

The grounds for denial of discharge under any provision of 11 U.S.C. § 727(a) must be established by a preponderance of the evidence: In re Scott, 172 F.3d 959, 966–67 (7th Cir.1999). “Denying a chapter 7 debtor his discharge is an extraordinary remedy that is only available when the objecting party supports its claim with evidence that meets the elements of a strictly-construed statute”, In re Weddington, 457 B.R. 102, 110 (Bankr.D.Kansas 2011).

The Trustee advances his contentions concerning denial of discharge first under 11 U.S.C. § 727(a)(2), which states:

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;

The elements of establishing a case under the foregoing provision were stated as follows in In re Kontrick, 295 F.3d 724, 736 (7th Cir.2002) (Rehearing En Banc denied August 27, 2002):

The bankruptcy court granted summary judgment on Count I of Dr. Ryan's complaint, which alleged that discharge should be denied because Dr. Kontrick had violated 11 U.S.C. § 727(a)(2)(A). Section 727(a)(2)(A) provides, in relevant part, that “the court shall grant the debtor a discharge unless ... the debtor, with intent to hinder, delay, or defraud a creditor ... has transferred ... property of the debtor, within one year before the date of the filing of the petition.” 11 U.S.C. § 727(a)(2)(A). To prevail, Dr. Ryan must prove that (1) the debtor, Dr. Kontrick, (2) transferred (3) the debtor's property, (4) with the intent to hinder, delay, or defraud a creditor (5) within one year of bankruptcy. See id. The exception to discharge in § 727(a)(2)(A) essentially “consists of two components: an act (i.e., a transfer or a concealment of property) and an improper intent (i.e., a subjective intent to hinder, delay, or defraud a creditor).” Rosen v. Bezner, 996 F.2d 1527, 1531 (3d Cir.1993). “The party seeking to bar discharge must prove that both these components were present during the one year before bankruptcy; anything occurring before that one year period is forgiven.” Id. (emphasis in original). In bankruptcy, “exceptions to discharge are to be construed strictly against a creditor and...