McDermott v. Petersen (In re Petersen), BKY 15–60568–MER

• Decision Date: 10 March 2017
• Docket Number: Adv. No. 16–06010–MER,BKY 15–60568–MER
• Citation: 564 B.R. 636
• Parties: IN RE: Kathy Lynn PETERSEN, Debtor. Daniel M. McDermott, United States Trustee, Plaintiff, v. Kathy Lynn Petersen, Defendant.
• Court: U.S. Bankruptcy Court — District of Minnesota

564 B.R. 636

IN RE: Kathy Lynn PETERSEN, Debtor.Daniel M. McDermott, United States Trustee, Plaintiff,

v.Kathy Lynn Petersen, Defendant.

BKY 15–60568–MER

Adv. No. 16–06010–MER

United States Bankruptcy Court, D. Minnesota.

Signed March 10, 2017

Colin Kreuziger, US Trustee Office, Minneapolis, MN, for Plaintiff.

Kip M. Kaler, Kaler Doeling PLLP, Fargo, ND, for Defendant.

MEMORANDUM DECISION

Michael E. Ridgway United States Bankruptcy Judge

At Fergus Falls, Minnesota, March 10, 2017.

The matter before the Court strikes the heart of bankruptcy relief for an individual debtor: the debtor's discharge. The United States Trustee ("UST") commenced an adversary proceeding against the debtor, Ms. Kathy Lynn Petersen ("Ms. Petersen" or the "Debtor"), seeking the denial of her discharge on three grounds: 11 U.S.C. § 727(a)(2)(A), (a)(2)(B), and (a)(4)(A). Colin Kreuziger represents the UST. Kip Kaler represents Ms. Petersen. For the reasons set forth below, the claims of the UST fail; therefore, the Debtor is entitled to a discharge.

This memorandum decision constitutes the Court's findings of facts and conclusions of law under FED. R. BANKR. P. 7052. The Court has jurisdiction here through 28 U.S.C. §§ 1334 and 157. This matter qualifies as a core proceeding under 28 U.S.C. § 157(b)(2)(J).

THE FACTUAL OVERVIEW

On November 18, 2015, Ms. Petersen filed for bankruptcy relief under chapter 7 of the Bankruptcy Code.¹ Stip. Facts ¶ 2. She did so in an attempt to extricate herself from the clenching grasp of creditors. Trial Tr. at 201. But a release from creditors required her life–from her divorce to criminal prosecution against her–to become exposed.

On May 14, 2013, more than two years before Ms. Petersen filed for bankruptcy, she and her former husband, Chad Petersen, divorced. Stip. Facts ¶ 3; Pl.'s Ex. 5. Through their Judgment and Decree for Marriage Dissolution ("divorce decree"), she was awarded a number of assets, including a 1993 Sylvan Sea Troller 16–foot boat ("Sea Troller"), a 2004 Honda Rubicon ATV ("ATV"), and a 500 Arctic Cat snowmobile ("snowmobile"). Id. These assets, though ostensibly given to Ms. Petersen, were intended for her children, an intention that, in certain respects, was realized. Trial Tr. at 62–63, 75, 106, 159, 160, 173, 176–79.

Kodi Ysen ("Kodi"), Ms. Petersen's son, dictated, in large part, the fate of the Sea Troller, ATV, and the snowmobile. On January 7, 2014, Ms. Petersen transferred the Sea Troller to Kodi. Stip. Facts ¶ 5. The Sea Troller stayed on the property of Mr. Ysen, Kodi's father. Trial Tr. at 75, 158. As for the ATV, sometime in January or February of 2014, Kodi wrecked it. Trial Tr. at 143. He sold the ATV's parts, and testified that he did not tell "everything" about the ATV to his mother until after the sale. Trial Tr. at 144, 146. As for the snowmobile, its engine blew up on a lake during a family Christmas vacation in 2013. Trial Tr. at 147. So, between the time that Ms. Petersen's divorce decree was entered, on May 14, 2013, and the time she filed for bankruptcy, on November 18, 2015, Kodi changed, in large part, the disposition of these assets.

Against this backdrop, certain seismic events unfolded in Ms. Petersen's life: she lost her job, thereby losing substantial income, and she became a defendant in both a civil suit and a criminal prosecution. From 2007 through December of 2013, she worked for John P. Bailey, of the Bailey Law Offices, Ltd.² Stip. Facts ¶ 4. While employed there, she earned $68,314.00 a year.³ Trial Tr. at 182. That all ended in December of 2013. Id. John P. Bailey fired her. Id. He alleged that Ms. Petersen embezzled money from him and Bailey Law Offices, Ltd. Id. The next month, on January 13, 2014, John P. Bailey commenced a civil suit against her. Id. Fast forward to February 3, 2016, less than a year after Ms. Petersen filed for bankruptcy. The Beltrami County Attorney charged Ms. Petersen with two felony counts of theft, alleging that, between 2007 and 2013, Ms. Petersen embezzled over $250,000.00 from the Bailey Law Offices, Ltd. Pl.'s Ex. 4 at 1–2. These events were unraveled at trial.

PRELIMINARY ISSUE: AMENDING THE PLEADINGS TO CONFORM TO THE EVIDENCE

At trial, the UST moved, under FED. R. BANKR. P. 7015, to conform his pleadings to the evidence. He wants the snowmobile—property absent from his complaint but brought to ever-growing light through the course of this litigation—to carry force in his pleaded and tried claims under 11 U.S.C § 727(a)(2)(B) and (a)(4)(A). The UST can do so, because the Debtor's conduct formed implied consent, as detailed below.

Incorporated in FED. R. BANKR. P. 7015 by reference, FED. R. CIV. P. 15(b)(2) sets a procedure for a party to amend pleadings to conform to the evidence:

When an issue not raised by the pleadings is tried by the parties' express or implied consent , it must be treated in all respects as if raised in the pleadings. A party may move—at any time, even after judgment—to amend the pleadings to conform them to the evidence and to raise an unpleaded issue. But failure to amend does not affect the result of the trial of that issue.

FED. R. CIV. P. 15 (emphasis added). Rule 15(b) aims "to promote the objective of deciding cases on the merits rather than on the relative pleading skills of counsel." Am. Family Mut. Ins. Co. v. Hollander, 705 F.3d 339, 348 (8th Cir. 2013) (citation omitted). "Thus, amendments under the rule are to be liberally granted where necessary to bring about the furtherance of justice and where the adverse party will not be prejudiced." Id.(citation and internal quotation marks omitted).

By implied consent, a party may amend its pleadings to conform to the evidence. FED. R. CIV. P. 15. Implied consent may take many forms. "[W]here a party has ‘actual notice of an unpleaded issue and ha[s] been given an adequate opportunity to cure any surprise resulting from the change in the pleadings[,]’ " implied consent exists. Id. at 348 (quoting Kim v. Nash Finch Co., 123 F.3d 1046, 1063 (8th Cir. 1997) (citation and internal quotations marks omitted)). "When facts probative of claims actually alleged in the pleading came into evidence at trial without objection, the factual issues (i.e. the factual allegations that would have saved the complaint from being deficient) were tried by implied consent of the parties." Yadidi v. Herzlich (In re Yadidi), 274 B.R. 843, 851–52 (9th Cir. BAP 2002) ; see also Modern Leasing, Inc. of Iowa v. Falcon Mfg. of Cal. Inc., 888 F.2d 59, 63 (8th Cir. 1989) ; NLRB v. Merrill, 388 F.2d 514, 519 (10th Cir. 1968) (employing FED. R. CIV. P. 15(b) to correct facts misstated in pleadings). The Eighth Circuit has held that "a party will be deemed to have acquiesced in trying an unpleaded issue when the issue is ‘not inconsistent with’ the position taken by the non-moving party earlier in the proceedings." Hollander, 705 F.3d at 348 (citations omitted).

The Debtor's conduct throughout the course of this matter constituted implied consent. The UST's complaint collapsed the description of the ATV and the snowmobile into: "2004 Honda Arctic Cat ATV." ECF No. 1. A collapsed description likewise appeared in the Debtor's amended statement of financial affairs, as well as correspondence from the Debtor's attorney to the UST. See Def.'s Ex. C at 16 (describing property as "Arctic Cat 4–wheeler" in the Debtor's amended statement of financial affairs); Def.'s Ex. I (correspondence). The snowmobile appeared as "500 Arctic Cat snowmobile" in the Debtor's and UST's stipulation of facts. Stip. Facts ¶ 3. The UST's trial brief discussed the snowmobile. Pl.'s Trial Br. at 2–4, 9–13, 17. At trial, the Debtor remained silent during the UST's case-in-chief as to the snowmobile. Only after implied consent formed–through, among other things, awareness of the snowmobile in relation to the UST's claims, and failure to object to facts probative of claims– did the Debtor disrupt her pervasive silence about the snowmobile when she sought judgment on partial findings.⁴ Trial Tr. at 108. Therefore, the Debtor impliedly consented here, without prejudice.

The Debtor contradicts her own argument that the amendment would cause prejudice to her. At trial, the Debtor's attorney argued, "There is prejudice. You're bringing another thing at the last minute. That's inappropriate." Trial Tr. at 131. Later, however, the concern for "bringing another thing at the last minute" seemed to vanish, when the Debtor's attorney said, "I'm not concerned about the amendment. I mean you heard what happened with the snowmobile, and so to the extent that they want to amend it's kind of pointless ...." Trial Tr. at 219–20 (emphasis added). Not only was the snowmobile not brought in at the "last minute," the Debtor contradicted herself in terms of showing prejudice. Therefore, she has not established that she has been prejudiced.

For those reasons, the UST's motion to conform his pleadings to the evidence, under FED. R. CIV. P. 15, is GRANTED .

ISSUES

Is the Debtor entitled to a general discharge of her debt?

I. The UST's cause of action under § 727(a)(2)(A).

II. The UST's cause of action under § 727(a)(2)(B).

III. The UST's cause of action under § 727(a)(4)(A).

DENIAL OF DISCHARGE, GENERALLY

For individuals, "The principal purpose of the Bankruptcy Code is to grant a ‘fresh start’ to the ‘honest but unfortunate debtor.’ " Marrama v. Citizens Bank of Mass., 549 U.S. 365, 367, 127 S.Ct. 1105, 166 L.Ed.2d 956 (2007) (citing Grogan v. Garner, 498 U.S. 279, 286, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) ); see also Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S.Ct. 695, 78 L.Ed. 1230 (1934). The discharge of a debtor's pre-petition indebtedness brings about in large part the "fresh start." See McDermott v. Crabtree (In re Crabtree), 554 B.R. 174, 191 (Bankr. D. Minn. 2016) (citations omitted), rev'd in part, remanded in part on other grounds , 562 B.R. 749 (8th Cir. BAP 2017). Congress has described this powerful relief as "the heart of...